Section 151 of the PPSA allows for
registration of a security interest where the Secured Party has a reasonable
belief that the collateral identified in the registration will become the
subject of a valid security interest in their favour.
Because of the requirement under the Act
for security interests taken in inventory to be registered in advance of the
debtor/grantor taking possession there will inevitably be circumstances where a
registration is in place but not yet applying to specific collateral held by
the debtor/grantor.
This is particularly the case in
circumstances involving on-going supply, or the reasonable expectation of
on-going supply.
If a supplier is approached to open a
credit account for a new customer then, provided that credit account includes a
provision for a security interest (such as a Retention of Title clause), the
opening of that account should be deemed to create a sufficiently reasonable
belief in the likelihood of a security interest attaching to collateral thus
satisfying the requirements of Section 151.
Similarly, unless it has been specifically
stated that the sole purpose of that new credit account is to accommodate a
one-off purchase, it would not be unreasonable for that supplier to anticipate
a measure of continued/repeat business once the initial purchase under the
account has been completed.
However, where there are no longer any
reasonable grounds for anticipating on-going business/orders (and there are
no monies outstanding on the account) then the registration should be
discharged within 5 business days from the point at which there stopped being
reasonable grounds for anticipating on-going business.
A clear and unambiguous point at which it
could be determined that ‘reasonable grounds’ ceased to exist would be the date
the Secured Party received confirmation from the debtor/grantor that no further
purchasing was anticipated, possibly accompanied by a request to discharge the
registration. At such point the Secured Party would have 5 business days
to discharge the registration.
Unfortunately, real life often does not
present us with ‘clear and unambiguous’ events and it is quite likely that many
suppliers will have open credit accounts on their books that have been inactive
for some time. At what point does it no
longer become reasonable to sustain a belief in the likelihood of further trade
(and thus the imminent attachment of their security interest)? Disappointingly, the PPSA provides no guidance
in this and legal precedents have yet to be set so we may well be entering ‘how
long is a piece of string’ territory.
However, before suppliers relax too much
they should note that part 4 of Section 151 places the burden of proof firmly
on the shoulders of the Secured Party (supplier) in establishing the
reasonableness of maintaining a registration in the absence of any current
trading!
While this shifting of the burden of proof
to require the ‘accused’ to prove their ‘innocence’ may come as a rude
awakening to those whose legal expertise comes from watching episodes of ‘Law
& Order’, those who have to deal regularly with liquidators or the Taxman
will simply see this as par for the course.
Although I appreciate that it is much more
easily said than done, suppliers’ primary defence against claims of
unreasonable registrations will be tight and efficient credit control
procedures, regular monitoring of accounts and good communication with customers.
At a bare minimum credit departments should
make sure they have “Discharge PPSR Registration” as a priority item on their check-list whenever an account is closed.
The relevant portions of Section 151 referred
to above are reproduced below:
Requirements for collateral to secure obligation etc.
(1) A person must not apply to register a financing statement, or a
financing change statement, that describes collateral, unless the person
believes on reasonable grounds that the person described in the statement as
the secured party is, or will become, a secured party in relation to the
collateral (otherwise than by virtue of the registration itself).
Civil penalty:
(a) for an individual—50 penalty units;
(b) for a body corporate—250 penalty units.
(2) If a financing statement, or a financing change statement, that
describes collateral has been registered on the application of a person, the
person must, within the period covered by subsection (3), apply to
register a financing change statement to amend the registration to end its
effect with respect to the collateral, if:
(a) the person described in the statement as the secured party has never,
since the statement was registered, been a secured party in relation to the
collateral (other than by virtue of the registration itself); and
(b) there are no reasonable grounds (or there are no longer any
reasonable grounds) for the belief mentioned in subsection (1).
Civil penalty:
(a) for an individual—50 penalty units;
(b) for a body corporate—250 penalty units.
(3) The period covered by this subsection is as soon as practicable, or 5
business days, whichever is earlier, after:
(a) if there never have been, since the statement was registered,
reasonable grounds for the belief mentioned in subsection (1)—the day of
the registration time, or the amendment time, for the financing statement or
financing change statement; or
(b) if there are no longer any reasonable grounds for that belief—the day
when there stopped being reasonable grounds for the belief.
(4) A person who wishes to establish that there were reasonable grounds
for the belief mentioned in subsection (1) (at any particular time) bears
an evidential burden in relation to the matter.
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