Anyone can register a ‘security interest’ on the PPSR for a small fee. This is done by registering a ‘financing statement’ on the PPSR, which identifies the debtor (the party giving security), the secured party (creditor), and the collateral (the assets to which the ‘security interest’ applies).
The priority of competing ‘security interests’ depends on when the ‘security interest’ was registered. Generally, priority relates to the date of registration of the ‘financing statement’, even if the underlying security agreement was completed much earlier. If a ‘financing statement’ is not registered, registered ‘security interests’ take priority. Therefore prompt registration is key.
Before the PPSR, it was common for a supplier’s ‘Terms of Trade’ to include a clause recording that ownership of the goods remains with the seller until payment for the goods is made in full (commonly known as a ‘Romalpa’ or ‘Retention of Title’ clause). However, the Terms of Trade alone will not protect against parties who have a registered ‘security interest’. To obtain priority over other registered creditors, a ‘financing statement’ must be registered on the PPSR.
When a business goes into liquidation, the assets of the business are realised to repay as much of the debt as possible. Where there are competing creditors, the order in which they receive their share of any proceeds is determined by their ‘priority’. Secured creditors have priority over unsecured creditors, but even amongst secured creditors there is a pecking order. A creditor with a registered ‘security interest’ takes priority over a creditor with an unregistered ‘security interest’. Furthermore, a creditor with an earlier registered ‘security interest’ takes priority over a later one.
Since it is common for a bank to have a registered ‘security interest’ over a trading company’s present and future property, a supplier of goods or services on credit with an unregistered ‘security interest’ takes a big risk.
Fortunately, there is an exception to the normal priority rule. A ‘purchase money security interest’ (‘PMSI’) is possible when personal property is taken as collateral to ensure the payment of the purchase price for that property, and can apply to Terms of Trade type situations. A PMSI can take priority over an earlier general ‘security interest’.
In order to ensure the priority of a PMSI, the supplier needs to ensure that:
A supplier is not required to register a separate ‘financing statement’ every time it supplies goods, but rather can register a ‘financing statement’ to secure goods supplied from time to time on credit.
‘Financing statements’ expire after 5 years. Once they expire, the original registration date is lost, and with it priority is lost. Prior notice of a pending expiry is not given by the PPSR. It is up to the secured party to monitor their registered ‘security interests’ to ensure they are renewed before they expire.