Creditors have rights too

Business as usual – understand the Personal Property Securities Act (PPSA):

Get a security agreement:

A security agreement is an agreement that creates or provides for a security interest – e.g. retention of title (ROT) provisions – and can enable you to look directly to certain assets of the customer (or the proceeds of sale of those assets) for payment in priority to other creditors. Your standard terms of trade, or credit application form which includes your terms of trade, can comprise the security agreement.

Make sure the security agreement is in writing and signed by the debtor:

A security agreement will only be enforceable against a third party if it is in writing and signed (or assented to in writing) by the debtor.

Know when you have a security agreement:

Under the PPSA, arrangements can be deemed to constitute a security agreement even when you own the goods in question (e.g. where goods are leased for more than one year or a commercial consignment). Without effective registration of that security agreement, a customer’s possession of goods can give its other secured creditors a better claim to those goods than your claim based on ownership.

Ensure that all security interests created are registered on the Personal Property Securities Register (PPSR):

A security interest will only give you priority against other (later registered) secured creditors if it has been registered on the PPSR. Including ROT provisions in your terms of trade without registering the security interest created by them is not sufficient to protect you.

Make sure the registration takes place in time:

An ROT should constitute a purchase money security interest (PMSI) under the Act. A PMSI can have “super priority” – it can trump even a prior registered general security agreement (GSA) – but only if it is registered within the relevant time limit. Where it relates to inventory (or intangibles), the PMSI must be registered before or at the time the goods are delivered. Make sure that if someone else is delivering the goods for you, you register your PMSI before you authorise the delivery. For items other than inventory or intangibles, the PMSI must be registered within 10 working days of delivery to your customer.

If you have failed to register in time, still register:

Even if you are out of time and lose priority to prior-registered GSA creditors, still register. A late registration should be effective against unregistered (or later registered) security interests.

Make sure the registration is accurate:

Registration can be invalid if there is a misleading defect, and any defect (even if of only one letter or digit) in the name of the debtor or any serial number can be enough to invalidate the registration.


  • where the debtor is a company, make sure you check the name of the debtor on the Companies Office website ( prior to registration;
  • include (correct) serial numbers on financing statements when relevant (i.e. in the case of motor vehicles and aircraft); and
  • err by describing collateral in the registration too broadly rather than too narrowly.

If it is not practical to register all security interests:

Have processes in place to identify customers where non-registration is a particular risk, e.g. customers with a high credit limit, customers who make up a high proportion of turnover, or habitually slow payers.

Make sure your goods can be identified:

Ensure your customer is under an obligation to (and does) store your goods in a manner in which they can be identified.

Administrator appointed before you are paid – suppliers of goods for resale:

Know your contract:

All terms of trade with ROT provisions contain a provision that allows the customer to sell goods in the ordinary course of its business. A sale of goods by an administrator (in the course of trading the business), is likely to be in the ordinary course of business and therefore (in the absence of express provisions to the contrary), the goods can be sold by an administrator notwithstanding the existence of the ROT.

However, many such provisions automatically revoke the customer’s rights to sell the goods supplied, or allow suppliers to revoke that right, in just those circumstances.

Know your rights:

Where your terms of trade contain these provisions (and the associated PMSI has been registered), then if you demand that the customer cease selling or return your goods, the administrator cannot continue to sell them without your consent or the leave of the court.

A typical arrangement might involve the supplier receiving a proportion of the sale price for each item sold (e.g. cost price).

But remember…:

If the PMSI is not registered (or is registered out of time), then another security interest registered prior to registration of the PSMI, for example a GSA from the customer’s bank, will have priority.

Customer in financial difficulties:

When getting paid is only temporary:

Although your accounts team may obtain payment from a customer under pressure, that money is not necessarily safe.

Payments made by a company prior to its liquidation (and at a time when it was unable to pay its due debts) are at risk of reversal where they result in a creditor receiving more in satisfaction of their debt than they would have received in a liquidation.

Previously, there was an exception for payments made in the ordinary course of business. However, since November 2007 this defence has gone.

Instead, where the transaction is part of a continuing business relationship (e.g. a running account), transactions over the two years prior to the liquidation are treated as a single transaction. This means that payments made by a corporate debtor during that two-year period may be reversed (even when made in the ordinary course of business) to the extent that they exceed the amount payable for goods and services supplied during the same period.

Although the point is not entirely clear, a liquidator may even have the flexibility to choose the date (within the two-year period) to be used as the start date of the running account, i.e. a liquidator might be free to choose the point of time at which the customer’s indebtedness to you was at its highest level, and hence maximise the claw-back.

When ignorance is bliss?

There is an exception where the recipient did not have reasonable grounds for suspecting (and a reasonable person would not have suspected) that the company was or was becoming insolvent. But given the objective elements and an additional requirement of good faith, this will not protect anyone who closes their eyes to the problem.

This note briefly highlights just a few of the issues that can arise where customers default. If you would like detailed advice on any of these matters then please contact your usual Chapman Tripp advisor.voi

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Related topics: Restructuring & insolvency; Personal Property Securities / PPSA; Personal Property Securities Register / PPSR; Purchase Money Security Interest; Voidable transactions; Security interest; Creditors

Corporate & commercial; Restructuring & insolvency

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