A business might supply goods to a customer on the premise the customer will pay for the goods later. This process works better for customers because it helps with their cash flow. For example, they can obtain the products from you and then sell the products, providing them with the money to pay you.

However, if you accept this arrangement, you will want to protect your business’ interests by ensuring you get paid for the goods you supply. The best way to do this is to:

This article explains how you can use a retention of title clause and the PPSR to protect yourself and your business.

What is Retention of Title?

Retention of title refers to the arrangement whereby you supply goods to customers. You should include a retention of title clause:

  • in your terms and conditions; and
  • on any invoices or credit applications you provide to your customers.

By having a retention of title clause in your agreement, you assert that you retain the right to possess the goods should the customer fail to sell those goods and pay you the agreed price for them.

You also have control over how the customer deals with the products. Usually, you will affirm this control by setting out in your terms and conditions how the customer should sell the goods. Accordingly, the customer must sell the goods as agreed to at the time of supply. Therefore, even if the customer wrongly sells the goods, they still need to pay you for them.

Having a retention of title clause in your supply terms and conditions is a good step towards protecting your business’ interests. However, you also need to look at registering the security interest on the PPSR.

How Does Retention of Title Relate to the PPSR?

You can register security interests over personal property on the PPSR, which is established by the Personal Properties Security Act (PPSA). The PPSR is available online, 24 hours a day. When you supply goods on credit, with payment to come at a later date, you are supplying personal property. Personal property refers to all physical and intangible property, excluding land or buildings. 

Before supplying the goods, you should provide your customer with the supply terms and conditions. These should include a retention of title clause, which protects your interest in the goods until you receive payment. You should then ensure you retention of title clause is effective by registering your interest in the goods on the PPSR. Registration is key to securing your interest because it gives you priority over unregistered interests.  

Usually, registered security interests prevail over unregistered security interests. For example, if you have a registered security interest, you are more likely to be protected than someone who has an unregistered security interest. If you both have a registered interest, then the first in time registered security interest will prevail over a later registered security interest.

However, under the PPSA, there is a unique security interest called a Purchase Money Security Interest (PMSI). A PMSI has super priority, which means it takes priority over all other security interests. You can achieve a PMSI over the goods you supply by registering your retention of title security interests on the PPSR, in the correct format and within the right time frames. 

Why Register Your Retention of Title on the PPSR?

You do not have to include a retention of title clause in your agreements. Nor do you have to register a security interest on the PPSR. However, you will be better protected against debts and outstanding amounts if you do.

When making the decision, you should consider the following advantages and disadvantages of registering on the PPSR.

 

Advantages Disadvantages
Registering a security interest on the PPSR will give you priority over unregistered interests. PPSR registration has a lot of technical requirements which can be hard to get on top of.
If you do not get paid, registration will make it easier to take back possession of your goods. Errors in describing the collateral in which you have a security interest can mean losing your priority.
If your customer goes into liquidation, the liquidator will seize all assets held by your customer. However, if you have a registered security interest you can protect your interests in the event of your customer’s insolvency. Enforcement of a registered security interest will still carry a cost, so you will need to weigh this against the cost of the goods themselves.
The cost to register on the PPSR is low in comparison to missing out on payment for the goods you have supplied to your customer. Training staff in PPSR practices can be time-consuming and costly.

 

Overall, the benefit of having a retention of title clause and registering your interest on the PPSR is worthwhile. This is especially so if you regularly supply goods which are of high value. Before registering however, you should seek the assistance of a lawyer.

What Steps Does My Business Need to Take?

When using a retention of title clause and securing a security interest, you should take the following steps.

Implement Comprehensive and Consistent Supply Documents

The first step is to give your customer consistent and well-drafted documents. A lawyer can help you prepare:

  • supply terms and conditions, which include a retention of title clause and are tailored to your needs; and
  • a credit application form, which is consistent with your terms and conditions. You should also check your invoices to ensure they are accurate. 

Register Your Security Interest at the Right Time

The next step is to think about registering your security interest. The time at which you register can have a significant impact on the type of security interest you get. You can obtain a PMSI, if you register your interest before you supply the customer with the goods.

Once you register your interest, this registration can cover your ongoing supply to that specific customer. However, this is on the basis that the supply continues under the original terms and conditions, which set out your retention of title security interest.

Be Specific When Registering Your Goods

During the registration process, you should be specific and accurate when entering the details. For example, you need to name the right parties. Therefore, their names need to match the names in the supply terms and conditions you are relying on to establish your interest in the goods you are registering.

You also need to be careful describing the assets you are registering an interest in. It is vital the particular assets can be identified based on this description. Furthermore, it is important to note some goods will need to be registered by their serial number. 

Use a Secured Party Group to Hold Your Security Interest

Before you can register your security interest on the PPSR, you need to set up a Secured Party Group (SPG). To do this, you need to choose a secured party which can be an individual, organisation or both. They will then hold and help you manage your security interest in personal property.

Once you have chosen your secured party, you cannot change the parties in the group. However, if you want to add or remove a selected party, you need to create a new SPG.

Key Takeaways

You may decide to supply goods to your customers and accept payments for the goods at a later date. If so, there are two steps you should consider taking to ensure you receive payment for the goods you have supplied:

  1. include a retention of title clause in your supply terms and conditions; and
  2. register your interest in those goods on the PPSR.

By doing this, you make it clear that you intend to retain ownership of the goods and the right to repossess them until you receive payment for them. A retention of title clause, on its own, does not give you the best protection. Therefore, you should also consider registering your interest on the PPSR. If you have any questions, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

Jacqueline Gibson
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