31/08/2012

• Recently, one of our clients received a notice from a financier concerning a company which was a customer of our client. The financier was providing some form of factoring-style balance sheet financing to our client's customer.

• The client had registered a Financing Statement against the customer under the new Personal Property Securities Act ('PPSA').

• The notice from the financier was given after our client had registered its security interest under the PPSA over the customer's goods.  The notice was given to the client pursuant to section 64 of the PPSA and stated that, after 15 days from the date of the Notice, the financier would take a security interest in certain accounts of the customer. Section 64 is difficult to set aside. 

• So the customer's financier was purporting to get priority over our client's security interest even though that financier was registering after our client had registered.

• After reviewing the PPSA, we confirmed to our client that it could lose some priority over collateral (such as the goods it supplied to the customer under a retention of title agreement), where the financier had complied with section 64(2) of PPSA. The way that section 64 operates and the client's rights, as opposed to those of financiers, are as follows.  Concentrate because this gets tricky.

• The client sells goods to the customer under certain conditions of sale which include a retention of title clause. That arrangement is called a Purchase Money Security Interest (or PMSI).  The client registers the PMSI on the PPSR. That PMSI protects the goods the client sold to the customer against other security interests. So, despite the financier’s notice to the client, the client’s PMSI still allows it priority over the goods sold to the customer while the customer has possession of the goods and has not on-sold them to its customers.

• Once the goods the client supplied to the customer are on-sold to its buyer, as a result of the notice from the financier to the client the financier takes priority over the proceeds of that sale to the customer’s buyer. The client's PMSI does not give it priority over those proceeds.

• By paying its customer part of the debt owing for the goods by the buyer who bought the goods, the financier has paid what is called "new value" direct to the financier's customer to enable the financier to take security over 100% of the sale proceeds. Normally the "new value" will be a percentage of the sale proceeds. For example, the financier may pay its customer 65% upfront of the value of the goods which had been purchased from our client and on-sold to the customer's buyer. In return, the financier gets 100% of the sale proceeds.

• The financier's notice enables it to secure 100% of the sale proceeds for the client's goods sold by the customer and gives the financier a higher priority to those sale proceeds than our client.

• However, any existing PMSI which was in place before the financier served their notice secures  the client's rights over the "new value" which the financier paid to the customer for the client's goods. In other words, the client has priority over the 65% paid to the customer by the financier.

• Of course, 65% does not equal 100%.  In these circumstances, the client needs to have strategies to protect its loss of priority in respect of the balance of the proceeds ie the remaining 35% of value which is not secured by the client's PMSI.

• Three steps which may be appropriate could be:

1. COD for the total price of the goods sold (of course, if the client could get COD it would already have done so);
2. upfront payment prior to delivery for the relevant unpaid balance which loses priority to the financier eg if the new value is 65% then Client wants the 35% remaining paid upfront;
3. payment at the time the customer sells the client’s goods.

• We recommend that if you are selling to a customer who wants to do debt financing or factoring you should consider carefully whether your unpaid invoices will be protected by your PMSI. You should discuss these issues directly with the customer. Subject to any commercial relationships with customers, it may also be prudent to have any outstanding moneys currently owing by relevant customers paid before expiry of the 15 business days in the notice. Such an obligation could be inserted into your terms of trade.
  

As you can see the PPSA is not simple or straightforward. It is easy to make mistakes and lose valuable priority as a secured creditor. We can help you in this difficult area.
If you have any questions in relation to this article, please contact Gareth Johnson or David Nicoll at TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.