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Impact Of The PPS Act On Small Businesses That Provide Products On Terms

Impact of the PPS Act
If your business supplies goods sold on credit you should take steps to protect your interests under the PPS Act.

The Personal Property Securities Act 2009 (“the PPS Act”) has now been in existence for about three years and many a cautionary tale is coming to fore about the dangers of not registering security interests in the PPSR and not having robust supply agreements to cover supply of good sold on credit.

Registration of a security interest on the PPSR (Personal Property Securities Register) enhances the secured parties’ priority interests under the default priority rules in the PPS Act.

If the security interests in goods that have been supplied on terms are not registered, then the supplier will not be able to enforce his/her rights against third parties, for example administrators/liquidators, and other people competing against the supplier for a payout.

By "perfecting" the security interest (which will occur most commonly by registration on the PPSR), the security interest will:

  • have priority over an "unperfected" security interest or general security interest;
  • survive the grantor’s insolvency/bankruptcy (whereas an unperfected security interest will not);
  • in some cases, survive the sale of the collateral (whereas an unperfected security interest will not); and
  • if the supplier elects, it may cover the proceeds of sale of the collateral.

The supply contract or the security agreement / Credit Application is an essential document by which the rights and obligations of the parties can be understood. The supply contract creates a security interest which is legally binding upon parties and therefore, it is important to have a supply contract / credit application that includes provisions which clearly state that the interest of the supplier will be in priority compared to other interests.

Consequences of not registering your interest or putting a valid agreement in place.

Failure to register the security interest and not having a properly drafted supply contract or security agreement for business supplying goods on terms can potentially result in severe consequences for a supplier and these may include:

  • the inability to enforce contractual arrangements; and
  • loss of the goods

The recent case, Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors [2013] NSWSC 852, Queensland Excavation Services Pty Ltd (“QES”), registration trumped ownership highlighting the dangers of not registering a security interest at the time it is created.

It is also a warning of what happens if the supply contract provisions are not worded properly. The case confirms that Australia’s position is now aligned with international standards and other countries that have implemented a register for personal property.

Related Articles

Types of Transactions that are affected by PPS Legislation

When does the PPSA apply?

 

 

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