When you supply goods on credit, a retention of title clause in your terms and conditions can feel like a safety net. If the customer doesn’t pay, you still own the stock, so you can take it back.
Unfortunately, it’s rarely that simple.
If a customer enters administration or liquidation, your ability to recover unpaid goods can come down to the fine print in your trading terms, the details in your Personal Property Securities Register (PPSR) registration, and whether you can show which goods are actually yours.
How retention of title works under the PPSA
Retention of title means you keep ownership of goods until your customer pays for them. It is common for wholesalers, manufacturers and trade suppliers.
Under the Personal Property Securities Act 2009 (PPSA) a retention of title arrangement is treated as a security interest. To protect that interest against other creditors, you need to register it on the PPSR.
Without that registration, you will not be in the position you expected when a customer fails.
If your interest has not been properly perfected by a PPSR registration before the time an administrator or liquidator is appointed, it will vest in the customer’s business. In plain English, you will lose title to your goods and your secured creditor status and become another unsecured creditor.
A PMSI can put you ahead, if you register on time
A retention of title arrangement will often be a Purchase Money Security Interest, usually called a PMSI.
A properly registered PMSI can give a supplier priority over an earlier all-assets security holder, such as the customer's bank, for the relevant unpaid goods. That is a big advantage, but timing matters.
For inventory, you need to register before the customer takes possession of the goods. If you register after supplying stock, your registration may protect future deliveries, but not the goods already delivered.
For other goods, registration needs to happen within 15 business days after the customer takes possession.
The best time to get this right is when you set up a new credit account, not when the customer has started missing payments.
Common PPSR registration errors to avoid
A PPSR registration is not a set-and-forget task. The details need to be right.
Common issues include:
- Wrong entity details: The registration may use the wrong ACN or ABN, or be made against a company in the wrong capacity. This often comes up where a company acts as trustee of a trust.
- Wrong customer name: For individuals, the registration needs to match the relevant identification requirements. A small variation can matter.
- Weak trading terms: Your terms need to clearly grant a security interest. Using PPSA language without an actual security clause may not be enough.
- Wrong asset category: The property being secured needs to be described in the right collateral class.
- Incorrect serial numbers: If a serial number is required and entered incorrectly, the registration will not protect the asset.
- Late registration: A late registration can affect your priority and, in some situations, expose the security interest to challenge.
Some of these errors can be deemed a seriously misleading error, which can make a registration ineffective. That means a registration may be treated as if it was never made.
Can you prove the stock is yours?
Even with a correctly registered PMSI, you may need to prove that the stock held by the customer:
- was supplied by you,
- has not been paid for, and
- is still in the customer's possession.
That is easy enough when you have supplied a distinct piece of equipment with a serial number. It is much harder when stock is interchangeable with another supplier’s stock, mixed with goods from other suppliers or used to make another product.
For example, several suppliers may provide components used to build caravans. If the business fails, each supplier may need to show which components went into which finished caravan, whether those components remain unpaid, and what value they represent.
Clear records can make a real difference. Keep invoices, delivery dockets, purchase orders and stock records that help you identify what you supplied and what remains unpaid.
What if the customer has already sold the goods?
A security interest will extend to the proceeds from a sale. So, if your customer sells goods that you supplied, you may have an interest in the money it receives.
In reality, tracing those proceeds can be difficult. The customer may pay the money into its trading account with other receipts, then use the funds to pay wages, rent and suppliers. If the account balance drops or the funds are mixed, it can become harder to identify what is yours.
This does not mean you need to track every dollar. It does mean your credit controls, stock records and payment processes should support your legal position.
Make sure your trading terms and registration work together
A PMSI protects the credit you have provided for particular goods that remain unpaid. It does not automatically cover every amount owing on a customer's account.
If your terms say ownership does not pass until all amounts are paid, you may also need a separate non-PMSI registration to support that broader position. Your trading terms and PPSR registration should be reviewed together, rather than treated as separate exercises.
It is also worth checking whether your PPSR registration remains current (and knowing when it expires). If you change your terms, restructure the business, begin dealing with a different entity or remove and re-register an interest, your position may change.
A quick check before you extend credit
Before supplying goods on credit, ask:
- Do our terms clearly grant a security interest?
- Are we dealing with the correct legal entity? Is the customer acting as a trustee or in its own capacity?
- Have we registered on the PPSR before supplying inventory?
- Does the registration accurately describe the goods and select the correct category?
- Can we identify unpaid stock in our records?
- Do our terms and registration cover the level of protection we expect?
Retention of title can be a useful protection for suppliers. But it is not a substitute for accurate paperwork, timely PPSR registration and good records.
Check your protection before it’s tested
If you sell goods on credit and want to check that your trading terms and PPSR registrations are doing what you expect, BlueRock Law can help. Get in touch via the form below today.
Disclaimer: This article provides general information and commentary. It isn’t legal advice and shouldn’t be relied on as such. Laws and circumstances can change, and the information may not apply to your situation. If you have questions or concerns about anything covered in this article, we recommend that you seek advice specific to your circumstances. To the extent permitted by law, BlueRock Law isn’t liable for any loss or damage arising from reliance on the information in this article.
