Personal Property Securities Question & Answer Sheet for the Grain Industry

Prepared by Fleur Gibson, M+ K Lawyers for Grain Trade Australia Limited Disclaimer You should obtain your own independent advice as to the applicability of the information contained in this briefing paper for your needs. Nothing contained in this briefing paper should be construed as advice.

Personal Property Securities Question & Answer Sheet for the Grain Industry

For the purposes of this paper we attach as an Annexure, two diagrams with scenarios relevant to the grain industry. We refer to these scenarios throughout the paper.

Diagram 1

The scenario proposed in diagram 1 is as follows:

• In June 2012, Party A enters into a track contract with Party B, pursuant to which Party A agrees to sell 500 tonnes of grain to Party B. The grain is to be delivered to Party B by way of title-transfer, in-store in August 2012. The contract between the parties contains a standard retention of title clause.

• Party B enters into a similar contract with Party C for the sale and delivery of 500 tonnes of grain.

• Party C enters into a similar contact with Party D for the sale and delivery of 500 tonnes of grain.

• Party D enters into a similar contact with Party A for the sale and delivery of 500 tonnes of grain.

• Each of parties A, B, C and D have a storage contract with BulkHandler, pursuant to which each of the parties agree to store grain at sites owned by BulkHandler.

• In effect, the 500 tonnes of grain may be sold from party to party whilst it remains in storage owned by BulkHandler, comingled with grain from other parties.

Diagram 2

The scenario proposed in diagram 2 is as follows:

• Party A enters into a contract with Party B, pursuant to which Party A agrees to sell 500 tonnes of grain to Party B. The contract between the parties has a standard retention of title clause.

• Party B enters into a contract with Party C, pursuant to which Party B agrees to sell the grain it has purchased from Party A to Party C. Party C pays Party B for the grain.

• Party B requests that Party A deliver the grain directly to Party C. • Party B defaults under its agreement with Party A by failing to pay Party A for the grain.

1. Background Information

1.1 The Personal Property Securities Act 2009 ("PPS Act") is a law about security interests in property other than real estate. A security interest is an interest in personal property that in substance secures payment of a debt or other obligation. You might think of it like a mortgage over property which is not land.

1.2 In order for the PPS Act to apply to an arrangement, a security interest in personal property (known as "collateral" and which would include grain) is required. The term "security interest" is defined in section 12 of the PPS Act, and means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction, or the identity of the person who has title to the property).

1.3 This definition incorporates standard forms of security such as crop liens, chattel mortgages and charges. It also covers some transactions not formerly considered a form of security, and in particular:

1.3.1 retention of title clauses in contracts whereby a purchaser has possession of property, however does not acquire title from the vendor until the full purchase price is paid;

1.3.2 financing or operational leases of personal property for a term exceeding 12 months (or 90 days for motor vehicles, boats or aircraft); and

1.3.3 hire purchase agreements and consignment agreements.

1.4 Under the PPS Act, suppliers using retention of title clauses become secured parties with a security interest in the collateral, and will have a purchase money security interest ("PMSI"). This is a certain type of security interest which elevates the interest of the secured party to a higher status relative to other interests (such as those held by a bank, for example).

1.5 Under the PPS Act, arrangements under which growers supply produce and retain ownership of it pending payment are likely to create security interests. Goods such as crops supplied or purchased on retention of title terms are considered "security interests" under the PPS Act.

1.6 Suppliers may continue to include the retention of title clauses in their standard terms, orders and invoices. However, to be enforceable against third parties, the purchaser must have signed or otherwise accepted the documents which incorporate the retention of title, and title holders (suppliers) must have registered their interest on the PPS Register.

1.7 A person can make a registration on the PPS Register if that person believes on reasonable grounds that the person described as the secured party is, or will become, a secured party in relation to the collateral. Accordingly, registration can and should occur as soon as the grantor agrees to grant the interest.

1.8 Section 151 of the PPS Act provides that a person must not make a registration 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. Fines of up to $27,500 for a body corporate and $5,500 for an individual may apply for breaches of section 151.

Question 1

How does the PPS Act relate to circular contracts (where same goods and tonnage sold through several parties and end up being repurchased by us?) - where we could have more than 3 parties involved? do we need to lodge a security against all involved parties?

Assumptions

In answering question 1, we have made the following assumptions:

Circular contract refers to a "Track Contract" situation, whereby a party contracts with another party for the sale and delivery of grain at some time in the future. The purchaser then contracts with another party for the sale and delivery of grain etc (similar to the scenario depicted in diagram 1).

Each contract has some form of retention of title ("ROT") clause, pursuant to which the seller retains title in the grain until such time as the purchaser pays the seller for the grain. We assume that the ROT provisions contained within the contracts are adequate.

Where the question refers to "same goods and tonnage", this means similar goods ie same tonnage and specification.

We have used the scenario reflected in diagram 1 to answer question 1.

Answer to Question 1

1.9 Party A has a security interest in the grain it has agreed to sell to Party B (by way of its ROT clause).

1.10 Party A (the secured party) could make a registration on the PPS Register, in respect to the grain it has agreed to sell to Party B (the grantor). The security interest would be a PMSI.

1.11 Party A does not have a contract with Party C, or Party D. For this reason Party A would not have a security interest over the grain provided for in the contracts with Party C or Party D. Party A would not make a registration over the grain being sold to Party C or Party D.

1.12 When making a registration, Party A could register its interests in the grain and any proceeds (eg the funds Party B may be paid for the grain). In this scenario, if Party B has not yet paid Party A for the grain, but Party C has paid Party B for the grain, Party A would have an interest in the funds Party B receives from Party C for the sale of the grain. Proceeds and enforcement issues are discussed in section 8 of this paper.

1.13 For the reasons set out in sections 1.9 and 1.10, Party B could register its security interest in the grain it has agreed to supply to Party C. Similarly Party C could register its security interest in the grain it has agreed to sell to Party D.

2. Background Information

2.1 Part 3.2 of the PPS Act deals with agricultural interest. Agriculture is defined in Regulation 1.3 of the PPS Regulations as "personal property that is crops or livestock".

2.2 Crops are defined in section 10 of the PPS Act, as crops (whether matured or not and whether naturally grown or planted) that have not been harvested, including:

(a) the products of agriculture or aquaculture, if the products have not been harvested; and

(b) trees (but only if they are personal property), if the trees have not been harvested.

2.3 The PPS Act provides special priority for financiers who provide funds which allow the crops to be produced. These are known as "agricultural personal money security interests". The special priority created will only apply if the security is given whilst the crops are growing, or the crops are planted within 6 months of the security agreement being made.

2.4 Precisely when funds "allow the crops to be produced" is not entirely clear. While on the one hand it may be clear where a fertiliser supplier takes a security interest in return for supplying fertiliser on credit, and similarly clear on the other where a bank takes a security interest over a crop to secure an overdraft for one of the grower's children, it may be less clear where the security interest secures an extension of the grower's overdraft, for example.

2.4 Collateral is the personal property to which the security interest is attached. The class of collateral, and a description of the collateral are required each time a registration is made on the PPS Register.

2.5 A registration can be made over collateral and the proceeds of that collateral. The definition of "proceeds" in respect to crops is defined in section 31(4) of the PPS Act, and includes the harvested produce of the crops, if the produce is identifiable or traceable. For this reason it is important to take care when drafting a security interest over crops to ensure that the interest covered is clearly identifiable and traceable.

2.6 There are a number of ways registrations can be made in respect to crops.

2.7 Where the collateral or its proceeds consist of crops, the financing statement requires the description "agriculture" to be applied, unless the secured party instead uses the description "all present and after-acquired property".

2.8 The description "all present and after-acquired property" would be applied when a security interest is being granted over all assets of the Grantor (ie not just crops).

2.9 The register will enable a secured party to specifically identify the property of the grantor to which the security interest relates. This means that when making a registration a particular crop could be identified as "the wheat crop planted by the Grantor on or around April 2012". Alternatively a more general description such as "all crops owned by the grantor" may be used in circumstances where the grantor agrees to grant a security interest over all its crops.

2.10 Where collateral the subject of a security interest includes crops as part of a security interest over "all present and after-acquired property", without any reference to an agricultural interest, to separately identify a security interest in collateral as within the agricultural class, there must be a separate registration of such interest in addition to the registration specifying it being a security interest over all present and after-acquired property. This is not required but is an option for a secured party.

2.11 Seed prior to planting would not constitute a crop but a crop would be the proceeds of the seed. A security agreement could be made over the crops but in this case attachment would not occur until such time as the crops are in the ground. The ability to register a financing statement on account of the security interest prior to attachment means that on attachment the security interest will be perfected.

2.12 If the security interest is classified as an "agricultural personal money security interests", when making a registration on the PPS Register it is important to tick the "Personal Money Securities Interest" box.

2.13 If you are supplying "inventory" to your customer, then you must register your retention of title PMSI prior to the goods being delivered to your customer.

2.14 "Inventory" is defined as personal property in a business that:

• is held by the business for sale or lease to others;

• is held by the business to be provided to others under a contract for services;

• is held by the business as raw materials or as work in progress; or

• is held, used or consumed by the business, as materials.

2.15 For all other goods (not being inventory), your retention of title PMSI must be registered within 15 Business Days of the goods being delivered to the customer.

2.16 If you are wanting to claim an interest in the personal property (ie the crops) and the proceeds of those crops (ie in the case the crops are harvested and sold), then the "Proceeds" box needs to be ticked when making a registration.

Question 2

When creating the registration, the collateral type to select is “crop” but what words are to be put into the description box – is this where we simply state “coarse grain” or do we have to put each contract number, relevant tonnage and commodity type?

Answer to Question 2

2.17 If you want to register a security interest over grain following harvesting of crops, then the collateral type to select would be "other goods" (as opposed to "crops").

2.18 "Crops" would be the appropriate collateral type to use when taking a security over crops that have not yet been harvested (for example when taking a lien over crops).

2.19 In the scenario set out in diagram 1, Party A would usually register an interest over the grain it sells to Party B. The collateral type in this case could be "other goods".

2.20 When entering the description of the collateral, it is not necessary to provide contract numbers, relevant tonnage and commodity type. The grain could be described as:

"all grain now and in the future, supplied by the secured party to the grantor"; or

"all goods, now and in future, supplied by the secured party to the grantor including but not limited to all grain."

2.21 Alternatively if grain is being supplied pursuant to a one-off contract, the grain could be described as something like:

"all grain supplied by the secured party to the grantor pursuant to a contract entered into by the parties on or around 1 April 2012."

2.22 If grain is being supplied on a ROT arrangement (as would be the case in scenario depicted in diagram 1), then it is important to tick the "Personal Money Securities Interest" box when making a registration.

2.23 In the scenario set out in Diagram 1, the grain being sold by Party A to Party B would be considered "inventory", as Party B would hold the grain for sale to Party C. For this reason Party A must register its ROT PMSI prior to the grain being delivered to Party A.

2.24 If you want to claim an interest in the grain and its proceeds, which would be the case in the scenario depicted in Diagram A, then the "Proceeds" box needs to be ticked when making a registration.

Question 3

If we have to be as specific as in (2), can we amend each registration as each contract is added and/or paid for, or do we have to register each contract individually?

Answer to Question 3

3.1 As indicated in our response to question 2, there is no requirement to provide specific descriptions of collateral when making registrations on the PPS Register. General descriptions of collateral can be used.

3.2 A registration does not need to made in respect to each individual contract, and for this reason you are not required to amend registrations when additional contracts are entered into. If an amendment to the description of collateral is made to an existing registration, a new registration fee is payable.

3.3 ROT claims are treated differently on the PPS Register, as opposed to PPS Leases or other general security interests. If it is a retention of title PMSI that you are claiming, then you only have to register once for each customer, and not for every invoice you send to that customer, or every contract you sign with that customer. One registration can be used to cover more than one contract entered into by the parties.

3.4 For example, in scenario 1, Party A may enter into numerous contracts with Party B pursuant to which Party A agrees to supply grain to Party B at different times on a retention of title basis. In this case Party A could make one registration to cover all grain supply contracts entered into with Party B.

Question 4

If we don’t have to be specific, is it correct that if a client has several or many contracts with us over some months for varying commodities and tonnages, all we are required to do is register a security over their assets on the register for “coarse grain sold”. Seems very unspecific and careless yet two different solicitors at two different seminars have told me this is correct?

Answer to Question 4

4.1 As mentioned in our responses to questions 2 and 3 above, if it is a retention of title PMSI that you are claiming, then you only have to register once for each customer and not for every contract you enter into with that customer.

4.2 You must ensure that you have described your collateral on the PPS Register "up front" and broadly enough to cover any goods that you subsequently supply to that customer. For example, if you are supplying coarse grain to a customer on an ongoing basis, then one registration could be made which covers all grain supplied to that customer. A suitable description that could be used when making a registration in respect to that customer is set out below:

"All grain, now and in future, supplied by the secured party to the grantor."

4.3 Alternatively, if other items are also supplied to the customer you could use a description, such as:

"All goods, now and in future, supplied by the secured party to the grantor including but not limited to all grain."

4.4 If however you supply grain to a customer on a very rare basis, or if the grain you are supplying is particularly valuable, then you may wish to make a separate registration each time you enter into a contract with that party. In this case you may use a more specific description such as "all grain supplied by the secured party to the grantor pursuant to a contract entered into by the parties on or around 1 April 2012."

5. Background Information

5.1 There are different rules that apply depending upon whether you are selling your grain, or simply storing your grain until such time as it is sold or used.

5.2 Sale of Grain

5.2.1 If you enter into a security agreement with a third party for the sale of your grain and you have a retention of tile over the grain, then you will have a security interest in the grain regardless of where it is stored, and whether it is comingled with other grain.

5.2.2 Whether you will be able to enforce your security interest in the grain is determined by the enforcement and extinguishment rules.

5.3 Storage of Grain

5.3.1 If you have a short term arrangement with a storage company for the storage of your grain (ie a contract between Party A and BulkHandler), then this type of arrangement would not be registrable on the PPS Register, unless the arrangement is considered a PPS Lease under the PPS Act (described in point 5.3.2 below).

5.3.2 A PPS Lease in respect to non serially numbered goods such as grain, is a lease or bailment of goods for more than one year, or for a term of up to one year that is renewable at the option of one of the parties (which in total would be for more than 12 months). A PPS lease is considered to be a security interest regardless of whether it secures payment or performance of an obligation.

5.3.3 A storage agreement with a third party to store grain which is or could be for a period of more than 12 months would be considered a PPS lease which could be registered on the PPS Register.

5.4 Commingling

Issues as to commingling will commonly arise in relation to crops and their delivery into storage with third parties' grain. The general rule is that a security interest in goods that are so manufactured, processed, assembled or commingled that they lose their identity in a product or mass continue in the product or mass: PPS Act s 99(1). “Commingled” is defined in section 10 of the PPS Act to include a mixing of goods with goods of the same kind.

For example:

• Financier A lends money to Grower A to grow a wheat crop. Financier A takes a perfected security interest in the crop and proceeds ie wheat.

• The crop is harvested and Grower A delivers it to a site operated by BulkHandler. The grain is received at the site and commingled with other grain from other growers in the district. For all practical purposes, the grain is indistinguishable from grain supplied by others.

• The security interest in Grower A's grain continues in the grain pool. However any priority that Grower A's security interest has in the grain is limited to the value of the grain on the day on which the grain was received and commingled with other grower's grain.

• Financier B also lent money to Grower B to grow a wheat crop and took a perfected security interest in Wheat Farmer B's crop and proceeds. Grower B delivered its grain into storage on the same day as Grower A, such that each grower's grain became part of the same grain pool.

• The security interest in Grower B's grain also continues in the grain pool and is also limited to the value of the grain on the day on which the grain was received and commingled with other grower's grain.

• On the day that the grain was delivered, Grower A's grain was worth $1000 and Grower B's grain was worth $1500. Because of an oversupply in grain, the combined value of the comingled grain is worth $2000. On enforcement of their security interests, Financier A is entitled to recover $800 ($2000 x 1000/2500) and Financier B is entitled to recover $1200 ($2000 x 1500/2500).

5.5 Enforcement of security interests

5.5.1 Chapter 4 of the PPS Act contains rights and remedies of enforcement of security interests on the default under a security agreement. All rights, duties and obligations that arise under chapter 4 must be exercised or discharged honestly and in a commercially reasonable manner.

5.5.2 The Chapter 4 enforcement provisions complement other rights and remedies available. Such additional rights may be contained in statute law, common law or equity.

5.5.3 The enforcement provisions do not apply where a receiver or controller has been appointed to deal with property under Part 5.2 of the Corporations Act 2001 (Cth).

5.5.4 On the default of a grantor under a security agreement, the secured party can commence enforcement action.

5.5.5 The first step in enforcement is for the secured party to seize the collateral. A secured party may seize collateral, by any method permitted by law, if the debtor is in default under the security agreement.

5.5.6 If a secured party has a security interest that is subordinate to another security interest in the collateral, the secured party with the higher priority security interest is entitled to seize the collateral from the subordinate secured party. Having seized and obtained possession of the collateral, the secured party may either dispose of or retain the collateral.

5.6 Special Rules for Seizure of Crops

5.6.1 Section 138B of the PPS Act provides that for the purposes of seizing collateral that is crops, or the proceeds of crops, the secured party may:

(a) take possession of the crops or the proceeds; or

(b) cut, gather or harvest the crops or the proceeds.

5.6.2 The secured party may:

(a) dispose of, or retain, collateral that is crops, or the proceeds of crops, after they have been taken, cut, gathered or harvested; and

(b) enter the land on which, or the water source in which, the crops are, or were, growing to seize the crops or the proceeds of the crops.

5.7 Extinguishment Rules

5.7.1 The PPS Act sets out a number of rules under which a person can acquire collateral free of an existing security interest in the collateral.

5.7.2 Section 46 of the PPS Act provides that a buyer of personal property takes the personal property free of a security interest given by the seller, if the personal property was sold in the ordinary course of the seller's business of selling personal property of that kind. This provision does not apply if the purchaser has actual knowledge that the sale constitutes a breach of the security agreement that provides for the security interest.

Question 5

Will we be able to rely on the PMSI (ROT) in the following storage scenarios?

a. Where stored in a public silo (BulkHandler)

b. Where stored in a commercial silo (Bache etc)

c. Where stored on farm and farmer owns silo

d. Where stored on farm and farmer leases farm and owner of farm (not farmer) owns silo where grain stored.

e. Where stored on neighbouring farm and customer has rented storage space in neighbours silo

f. Where delivered to port and could be on dock waiting to be shipped.

Assumptions

In answering question 5, we refer to the scenarios depicted in diagram 1 (scenario 1) and diagram 2 (scenario 2), and we have made the following assumptions.

The contracts between Party A & Party B, Party B & Party C and Party C & Party D each have some form of ROT clause, pursuant to which the seller retains title in the grain until such time as the purchaser pays the seller for the grain. We cannot advise upon the adequacy of the ROT provisions contained within the contracts.

Each of Parties, A, B, C and D have registered their ROT arrangements on the PPS Register.

Each of Parties, A, B, C and D have separate contracts with BulkHandler which provide for grain to be stored in a silo owned and operated by BulkHandler. These contracts do not provide for the sale of grain by each party to BulkHandler and are not security agreements which provide for the granting of security interests in the grain.

Answers to Question 5(a) - grain stored in a public silo (BulkHandler)

5.8 In the scenario depicted in diagram 1, if Party A has agreed to sell 500 tonnes of grain to Party B, Party A will have a ROT in the 500 tonnes of grain until such time as Party B pays Party A for the grain.

5.9 If Party B defaults under the terms of the contract (ie it does not pay Party A for the grain), then Party A can commence enforcement action to seize the grain from the Grain Corp silo.

5.10 As the facility owned by BulkHandler stores grain from many different growers, Party A will have a security interest in the comingled grain contained in the GrainCorp site. The priority that Party A's security interest has in the comingled grain is limited to the value of the grain on the day on which the grain was commingled with other grower's grain.

5.11 However, if Party B has already sold the grain to Party C, and Party C has paid Party B for the grain, then the extinguishment rules would apply. This would mean that Party C would take Party A's grain free of Party A's security interest. Party A would not have a right to seize the grain from the BulkHandler or from Party C.

5.12 In this case, Party A would have an interest in the proceeds obtained by Party B for the sale of the grain to Party C. However if Party B is insolvent and the cash proceeds are paid into a bank account over which a bank controls, then the bank's priority over the cash would rank in priority to Party A's interest in the proceeds. Refer to section 8 of this paper for a further discussion as to proceeds.

Answers to Question 5(b) - grain stored in a commercial silo (Bache etc)

5.13 Our comments in section 5(a) above will apply to this scenario.

5.14 Set out below is another example of how the PPS Act would apply.

5.14.1 In the scenario depicted in diagram 2, Party A has agreed to sell 500 tonnes of grain to Party B, Party A will have a ROT in the 500 tonnes of grain until such time as Party B pays Party A for the grain.

5.14.2 Party B enters into a contract with Party C (Bache) to sell the same 500 tonnes of grain. The contract is entered into in the ordinary course of Party B's business, and Party C (Bache) has no knowledge that the sale constitutes a breach of the contract between Party A and Party B. Party C (Bache) pays Party B for the grain.

5.14.3 Party B requests that Party A deliver the grain directly to Party C (Bache), which it does.

5.14.4 Party B defaults under the terms of its contract with Party A (ie it does not pay Party A for the grain).

5.14.5 In this case:

(a) Bache takes the grain fee of Party A's security interest.

(b) Party A cannot commence enforcement action to seize the grain from the Bache's silo, as the extinguishment rules would apply, and Bache would take the grain free of Party A's security interest.

(c) Party A would have a right to the proceeds that Party B obtained from Bache.

(d) However if Party B is insolvent and the cash proceeds are paid into a bank account over which a bank controls, then the bank's priority over the cash would rank in priority to Party A's interest in the proceeds.

Answers to Question 5(c) - grain stored on a farm and the farmer owns the silo

5.15 Using part of the scenario depicted in diagram 1, if Party A agrees to sell 500 tonnes of grain to Party B (a farmer), Party A has a ROT in the 500 tonnes of grain until such time as Party B pays Party A for the grain.

5.16 The grain is delivered to Party B. Party B stores the grain on-farm.

5.17 If Party B defaults under the terms of the contract (ie it does not pay Party A for the grain), then Party A can rely upon his ROT in the grain and commence enforcement action to seize the grain from the farmer's storage.

Answers to Question 5(d) - grain stored on a farm, farmer leases farm, owner of farm (not farmer) owns silo where grain stored.

5.18 Our comments in questions 5(c) would apply in this scenario.

5.19 If there is a default under the security agreement (ie payment for the grain is not made), then Party A could rely upon his ROT in the grain. In this case Party A could commence enforcement action to seize the grain from the storage located on the leased farm. The seizure must be conducted in manner that is permitted by law, and in accordance with Chapter 4 of the PPS Act.

Answers to Question 5(e) - grain stored on neighbouring farm and customer has rented storage space in a neighbour's silo

5.20 Our comments in questions 5(c) would apply in this scenario.

5.21 If there is a default under the security agreement (ie payment for the grain is not made), then Party A could rely upon his ROT in the grain. In this case Party A could commence enforcement action to seize the grain from the storage located on the neighbour's property. The seizure must be conducted in manner that is permitted by law, and in accordance with Chapter 4 of the PPS Act.

Answers to Question 5(f) - Where delivered to port and could be on dock waiting to be shipped.

5.22 Using part of the scenario depicted in diagram 1, if Party A agrees to sell 500 tonnes of grain to Party B, Party A has a ROT in the 500 tonnes of grain until such time as Party B pays Party A for the grain.

5.23 The grain is delivered to port and is on the dock waiting to be shipped to Party B.

5.24 If Party B defaults under the terms of the contract, then Party A can rely upon its ROT, and commence enforcement action to seize the grain from the dock.

Question 6

What wording is required in the contract and terms and conditions to cover the fact we are going to register a security on the PPS Register if they deal with us?

Assumption

In answering question 6, we have assumed that you are referring to a contract or terms and conditions relating to the sale of grain from one party to another.

Answer to Question 6

6.1 Your contract must have a retention of title clause indicating that you retain title in the grain until such time as you are paid for the grain.

6.2 To the extent the traditional state-based statutory lien mandated a form, such requirements no longer persist and financiers will be free to craft the security interest and the enforcement remedies as they see fit.

6.3 We set out below a list of items that should be dealt with in a Security Agreement / Contract. We are able to provide you with appropriate wording in respect to specific contracts if you require.

6.3.1 The fact that the Agreement is a "Security Agreement".

6.3.2 The fact that the interest being granted is a "Security Interest".

6.3.3 The manner of applying payments made:

- parties can determine order of application of payments; or

- if none specified, falls back to the order specified in the PPS Act (section 14).

6.3.4 The time of attachment:

- parties can specify that the security interest attaches at a later date; or

- otherwise, falls back to the time of attachment specified in the PPS Act (section 19).

6.3.5 Whether transfer of the collateral is prohibited (or declaring the transfer to be a default).

6.3.6 Whether the parties agree to contract out of some of the enforcement provisions (section 115):

- this applies to commercial property only;

- Note, this does not apply to / cannot be used for collateral that is used predominantly for personal, domestic or household purposes;

- if predominantly for personal, domestic or household purposes you can only contract out of section 126.

6.3.7 Whether the party agrees to a waiver of right to be served certain notices.

6.3.8 The timeframe for deciding what to "do" with seized collateral:

- parties can determine timeframe to secure, store, value and deal with the collateral; or

- if none specified, the secured party is entitled to a "reasonable period" (section 125).

6.3.9 The manner in which seized property can be dealt with.

6.3.10 Whether the commercial party waives the right to receive the verification statement (section 157).

6.4 Particular considerations for Security Agreement

6.4.1 A security agreement must be signed by the grantor OR adopted /accepted by an act specified in writing.

6.4.2 A security agreement must

- describe the collateral; OR

- indicate that the "security interest is taken in all of the grantor's present and after-acquired property"; OR

- indicate that the "security interest is taken in all of the grantor's present and after-acquired property except [xxx]".

6.5 Commercially sensitive information

6.5.1 Caution will need to be exercised when including clauses creating a security interest in documents that contain commercially sensitive information.

6.5.2 While the PPS Register is a notice rather than document filing register, secured parties can be required to provide a copy of a security agreement that provides for a security interest (or certain information related to it) to certain interested persons. If a secured party receives such a request it must comply with that request unless the secured party and the grantor have agreed in writing that they would not disclose such information.

6.5.3 For this reason consideration should be given to including a confidentiality clause in any document creating a security interest or, alternatively, having the security interest provisions in a document separate from the commercially sensitive information.

6.6 Sample Wording

6.6.1 In addition to a retention of title clause, each set of terms of trade may include wording similar to that set out below which specifically deals with the PPS Act.

1. Personal Property Securities Act

1.1 Notwithstanding anything to the contrary contained in these Terms, the Personal Property Securities Act 2009 (Cth) as amended ("PPSA") applies to these Terms.

1.2 For the purposes of the PPSA:

(a) terms used in this clause 1 that are defined in the PPSA have the same meaning as in the PPSA;

(b) these Terms are a security agreement and the Supplier has a Purchase Money Security Interest in all present and future goods supplied by the Supplier to the Customer and the proceeds of the goods;

(c) The security interest is a continuing interest irrespective of whether there are monies or obligations owing by the Customer at any particular time; and

(d) the Customer must do whatever is necessary in order to give a valid security interest over the goods and their proceeds which is able to be registered by the Supplier on the Personal Property Securities Register.

1.3 The security interest arising under this clause 1 attaches to the goods when the goods are collected or dispatched from the Supplier's premises and not at any later time.

1.4 Where permitted by the PPSA, the Customer waives any rights to receive the notifications, verifications, disclosures or other documentation specified under sections 95, 118, 121(4), 130, 132(3)(d), 132(4), 135 and 157 of the PPSA.

1.5 The Supplier and the Customer agree to contract out of and nothing in the provisions of sections 96, 125, 129, 142 and 143 of the PPSA will apply to these Terms.

1.6 To the extent permitted by the PPSA, the Customer agrees that:

(a) the provisions of Chapter 4 of the PPSA which are for the benefit of the Customer or which place obligations on the Supplier will apply only to the extent that they are mandatory or the Supplier agrees to their application in writing; and

(b) where the Supplier has rights in addition to those in Chapter 4 of the PPSA, those rights will continue to apply.

1.7 The Customer must immediately upon the Supplier's request:

(a) do all things and execute all documents necessary to give effect to the security interest created under this Agreement; and

(b) procure from any person considered by the Supplier to be relevant to its security position such agreements and waivers (including as equivalent to those above) as the Supplier may at any time require.

1.8 The Supplier may allocate amounts received from the Customer in any manner the Supplier determines, including in any manner required to preserve any Purchase Money Security Interest it has in goods supplied by the Supplier.

7. Background Information

7.1 Section 170 of the PPS Act provides that a person may apply to the Registrar for access to the register to search for data in relation to a security interest or personal property (or both). The search must be authorised under sections 171 and 172 of the PPS Act.

7.2 Searches of the PPS Register can only be undertaken by reference to certain criteria.

Section 171 (1) of the PPS Act provides that a person may access the register to search for data by reference to the following criteria:

(a) a grantor’s details;

(b) a serial number by which collateral may (or must) be described in the register;

(c) the time of the search;

(d) an earlier nominated time, but only with the consent of the Registrar;

(da) a unique identifier allocated by the Registrar to a registered financing statement;

(e) any other criteria prescribed by the regulations.

7.3 Section 172 of the PPS Act provides that a person may access the PPS register to search for data, only if the search is undertaken for specific purpose (a "PPS purpose") set out in the table below.

Individual grantor details--permitted searches

Item Searchers PPS Purpose

1 A person (the first person ), or another person with the first person's consent

To disclose any registration in which the first person is registered as a grantor or a secured party.

2 A secured party in relation to a registration

A purpose that relates to a security interest attached to collateral described in the registration.

3 A grantor in relation to a registration

A purpose that relates to a security interest attached to the collateral described in the registration.

4 A person To disclose any registration in which the person is registered as a secured party.

5 A person To disclose whether collateral to which a security interest is attached is described in a registration.

Individual grantor details--permitted searches

Item Searchers PPS Purpose

6 A person To disclose whether or not personal property is described in a registration, if:

(a) the property is to be purchased or dealt with by the person; or

(b) the person has an interest in the property.

7 A person To establish whether to provide credit to, or obtain a guarantee or an indemnity from, a person named in the search application or a person with an interest in the personal property described in the application.

8 A person To establish whether to provide credit to, or obtain a personal guarantee or an indemnity from an associate (within the meaning of section 11 or subsection 12(2) of the Corporations Act 2001 ) of a body corporate named in the search application or of a body corporate with an interest in the personal property described in the application.

9 A person To establish whether to invest in, with, or through, a person named in the search application.

10 A person To establish whether to invest in, with, or through, an associate (within the meaning of section 11 or subsection 12(2) of the Corporations Act 2001 ) of a body corporate named in the search application or of a body corporate with an interest in the personal property described in the application.

11 The Registrar A purpose that relates to the administration of this Act.

12 A person who has taken control of the property of an individual who is insolvent under administration, within the meaning of the Corporations Act 2001

A purpose that relates to the searcher's control of the property.

13 An Official Receiver in Bankruptcy within the meaning of the Bankruptcy Act 1966

A purpose that relates to the exercise of a power, or the performance of a function, of that Official Receiver in Bankruptcy.

Individual grantor details--permitted searches

Item Searchers PPS Purpose

14 The legal personal representative of an individual (including a deceased individual)

A purpose that relates to the exercise of a power, or the performance of a function, as legal personal representative.

15 A government entity within the meaning of the A New Tax System (Australian Business Number) Act 1999

A purpose that relates to the exercise of a power, or the performance of a function, of that entity, unless the purpose is covered by another purpose listed in this table.

16 A government entity within the meaning of the A New Tax System (Australian Business Number) Act 1999

A purpose that relates to the maintenance of the law, including the prevention, detection, investigation or prosecution of contraventions of laws (whether the penalty for contravention is criminal or civil).

17 The holder of a lien or charge, or a creditor

A purpose that relates to the enforcement of the lien or charge, or the creditor's rights, as the case may be.

18 A bailiff, or sheriff, of a court of the Commonwealth, a State or a Territory

A purpose that relates to the enforcement of a court order or warrant.

19 A person To advise another person in connection with any of the purposes referred to in this table.

7.4 A civil penalty applies in respect of unauthorised searches, and damages may be available in respect to unauthorised searches. Civil penalties may involve a fine of up to $5,500 for an individual, or $27,500 for a body corporate. In addition, an unauthoirsed search may be investigated under the Privacy Act 1988.

7.5 Qualifying as an ‘interested party’ for the purposes of conducting a search does not require the satisfaction of onerous requirements.

Question 7

Do we need to include in our terms and conditions that we have the right to search the PPS Register to see if a registration has been registered on them? ie as we do when obtaining confidential credit information about a customer.

Answer to Question 7

7.6 There is no requirement to include in your terms and conditions a clause pursuant to which the customer provides a right to the supplier to search the PPS Register. The PPS Act provides for searching the PPS Register. A search can however only be undertaken for an authorised purpose (as set out in the PPS Act).

8. Background Information

Proceeds

8.1 A person with personal property can turn that personal property to account in a variety of ways. They may sell the property, or exchange it for other property; in the case of goods, they may rent the property out; in the case of intellectual property, they may license it; and in the case of a financial asset, they may receive dividends or interest, or cash in return of their invested capital.

8.2 The PPS Act recognises that a security interest in personal property that generates or is converted into other personal property should continue into the other personal property. The PPS Act also contains some special priority and extinguishment rules as a consequence of this.

8.3 In the context of the PPS Act, “proceeds” of collateral means identifiable or traceable personal property of the following types (PPS Act s 31(1)):

8.3.1 personal property that is derived directly or indirectly from a dealing with the collateral;

Example - John borrows money from his bank and buys a car. The bank takes security over the car. Shortly afterwards, John has a midlife crisis and decides he wants to circumnavigate Australia. In preparation for this, he exchanges his car for a neighbour's campervan. The campervan will be proceeds of John's car.

8.3.2 a right to an insurance or other payment as indemnity or compensation for loss of or damage to the collateral;

8.3.3 payment made toward discharge or redemption of the collateral, if the collateral is chattel paper, intangible property, an investment instrument, an intermediated security or a negotiable instrument;

8.3.4 if the collateral is intellectual property or an intellectual property licence, the licensor’s rights to receive payments under a licence agreement; or

8.3.5 if the collateral is an investment instrument or intermediated security, any rights arising out of it or property collected on or distributed on account of it.

8.4 However, personal property will only be proceeds if the grantor has an interest in the property, or the power to transfer rights in the proceeds to the secured party or its nominee: PPS Act s 31(3).

In the example given in clause 8.3.1 above, “Proceeds derived from dealing with collateral”, the campervan will not be proceeds of the car if John instead transfers his car to his neighbour in return for his neighbour transferring the neighbour's campervan to John's cousin.

8.5 Section 31(4) of the PPS Act has an extended concept of proceeds as it applies to crops. The definition of the "proceeds" of collateral that is crops is extended to “include the harvested produce of the crops, if the produce is identifiable or traceable”. Thus, the PPS Act distinguishes between crops still on the land and the harvested proceeds of that collateral.

8.6 The general law has developed a substantial body of case law regarding the extent to which a person can trace an interest in their property into proceeds, or into other property that is substituted for their property.

8.7 Under the PPS Act proceeds are traceable whether or not there is a fiduciary relationship between the person who has a security interest in proceeds and the person who has rights in or has dealt with them: PPS Act s 31(2). It is not clear to what extent Australian courts will continue to apply traditional tracing principles to the tracing of proceeds under the PPS Act.

8.8 Registration should cover proceeds

8.8.1 When making a registration on the PPS Register you should tick the "Proceeds" box in order to have an enforceable security interest in proceeds.

8.8.2 When you make a registration, the description of the proceeds is set to default to "all present and after acquired property". This will give you a claim to all proceeds. If you wish to only claim specific proceeds (e.g. from the sale of the collateral), then you will need to amend this default setting. However, as a general rule, we recommend leaving the default setting "as is".

8.9 Cash Proceeds paid into a Bank Account

8.9.1 If a customer on-sells your grain to a third party prior to paying you for the grain, then you can claim an interest in the proceeds of the sale (ie, claim an interest in the money received by your customer for the grain).

8.9.2 However, if your customer is insolvent, your priority ranking can be altered depending on "who" are the competing creditors, and "where" those proceeds have been paid. For example:

(a) if a bank holds a general security interest over the assets of the customer, and the proceeds have been paid into a bank account, then the bank will take priority over your claim (by virtue of "controlling" the bank account).

(b) however, if there is no bank involved, or if the proceeds have been paid into an account that is not controlled by the bank, then your claim to the proceeds will take priority.

Question 8

The PPS Register allows both Crops and their “Proceeds” to be recovered – proceeds being the product the crop has been turned into.

(a) Does this mean that if the wheat crop has been turned into flour we can recover from the 3rd party miller?

(b) I understand we have to register a security against both the customer and the subsequent 3rd party.

(c) What if the sorghum had been turned into ethanol – are we entitled to the “Proceeds”?

Assumption

In answering question 8, we have assumed that:

the questions are in reference to a contract or terms and conditions relating to the sale of grain from one party to another;

the party supplying the grain has:

- registered a ROT PMSI on the PPS Register; and

- the registration covers the grain being sold and any proceeds.

Answer to Question 8(a) - if the wheat crop has been turned into flour we can recover from the 3rd party miller?

8.10 For the purpose of answering question 8(a), we refer to the scenario set out in diagram 2.

8.11 Scenario 2A

8.11.1 Party A enters into a contract with Party B for the sale of 500 tonnes of grain.

8.11.2 Party B then enters into a contacts to sell the same grain to Party C.

8.11.3 Party A delivers the grain directly to Party C.

8.11.4 Party C pays Party B for the grain.

8.11.5 Party B defaults under its contract with Party A by failing to pay for the grain.

In this Scenario:

(a) Party A would have an interest in the proceeds Party B received for the sale of the grain to Party C. However if Party B is insolvent and the cash proceeds are paid into a bank account over which a bank controls, then the bank's priority over the cash would rank in priority to Party A's interest in the proceeds.

(b) You may have other legal remedies against Party A (which fall outside the PPS Act).

(c) Assuming Party B sold the grain in the ordinary course of its business to Party C, and Party C had no actual knowledge that the sale constituted a breach of the security agreement between Party A and Party B, then Party C would take the grain free from Party A's security interest. In this case Party A would have no rights to seize the grain from Party C.

8.12 Scenario 2B

8.12.1 Party A enters into a contract with Party B for the sale of 500 tonnes of grain.

8.12.2 In this case, Party A delivers the grain directly to Party B.

8.12.3 Party B turns the grain into flour.

8.12.4 Party B defaults under its contract with Party A by failing to pay for the grain.

In this Scenario: (a) Party A would have an interest in the flour. (b) Party A would be able to commence enforcement action. (c) The first step in enforcement is for the secured party to seize the collateral (ie

the flour). (d) If Party A's security interest is subordinate to another security interest in the

flour, the secured party with the higher priority security interest is entitled to seize the flour from Party A.

(e) Having seized and obtained possession of the flour the secured party may either dispose of, or retain the flour. In this case the flour would most likely be sold.

(f) Party A would have the right to trace and receive a proportion of the sale proceeds of the flour, of which Party A's grain forms a part. The proportion that Party A would ultimately receive depends on the value / ratio of its grain when compared to the other ingredients that make up the flour and other existing security interests.

(g) We recommend you obtain specific legal advice if you wish to take enforcement action as there are a number of complex rules and exceptions that apply in respect to enforcement of rights.

8.13 Scenario 2C

8.13.1 Party A enters into a contract with Party B for the sale of 500 tonnes of grain.

8.13.2 Party B then enters into a contacts to sell the same grain to Party C.

8.13.3 Party A delivers the grain directly to Party C. Party C turns the grain into flour.

8.13.4 Party C pays Party B for the grain.

8.13.5 Party B defaults under its contract with Party A by failing to pay for the grain.

In this Scenario:

Assuming the extinguishment rules apply, Party C would take the grain free of Party A's security interest. Party A would have no right to seize the flour from Party C. Party A's rights to the proceeds would be as described in scenario A above.

Answer to Question 8(b) - I understand we have to register a security against both the customer and the subsequent 3rd party.

8.14 Refer to our answer to question 1 (in Part 1 of this paper, on pages 1 and 2).

8.15 In the examples provided for in our answers to question 8(a), Party A would only register its security interest (ROT PMSI) in relation to the sale of its grain to Party B.

8.16 Party A has no contract with Party C and therefore would not make a registration against Party C.

Answer to Question 8(c) - What if the sorghum had been turned into ethanol – are we entitled to the “Proceeds”?

8.17 For the purpose of answering question 8(c), we refer to the scenario set out in diagram 2.

8.18 Scenario 2D

8.18.1 Party A enters into a contract with Party B for the sale of 500 tonnes of grain.

8.18.2 In this case, Party A delivers the grain directly to Party B.

8.18.3 Party B turns the grain into sorghum flour and then into ethanol.

8.18.4 Party B defaults under its contract with Party A by failing to pay for the grain.

In this Scenario: (a) The ethanol may be considered "proceeds" of the grain. If this is the case

then Party A would have an interest in the ethanol. Whether the ethanol is "proceeds" of the grain depends upon whether the ethanol is traceable from the grain. We are uncertain as to how Australian courts will interpret the word "traceable" under PPS Act.

(b) If the ethanol is considered to be proceeds of the grain, then Party A would be able to commence enforcement action.

(c) The first step in enforcement is for the secured party to seize the collateral (ie the ethanol).

(d) If Party A's security interest is subordinate to another security interest in the ethanol, the secured party with the higher priority security interest is entitled to seize the ethanol from Party A.

(e) Having seized and obtained possession of the ethanol, Party A may either dispose of, or retain the ethanol. In this case the ethanol would most likely be sold.

(f) Party A would have the right to trace and receive a proportion of the sale proceeds of the ethanol, of which Party A's grain forms a part. The proportion that Party A would ultimately receive depends on the value / ratio of its grain when compared to the other ingredients that make up the ethanol and other existing security interests.

(g) We recommend you obtain specific legal advice if you wish to take enforcement action as there are a number of complex rules and exceptions that apply in respect to enforcement of rights.

8.19 Scenario 2E

8.19.1 Party A enters into a contract with Party B for the sale of 500 tonnes of grain.

8.19.2 Party B then enters into a contacts to sell the same grain to Party C.

8.19.3 Party A delivers the grain directly to Party C. Party C turns the grain into flour.

8.19.4 Party C then sells the flour to Party D. Party D turns the flour into ethanol.

8.19.5 Party C pays Party B for the grain.

8.19.6 Party D pays Party C for the flour

8.19.7 Party B defaults under its contract with Party A by failing to pay for the grain.

In this Scenario:

Assuming the sale of the grain and flour was in conducted in the ordinary course of business, and the extinguishment rules apply. In this case:

(a) Party C would take the grain free of Party A's security interest.

(b) Party A would have no right to seize the ethanol from Party D.

(c) Party A would have a right to the proceeds Party B received from Party C for the sale of the grain. Refer to our comments in sections 8.11.5 above.

Diagram 1

BulkHandler

Grain Storage

Party A Party D Party A Party B Party C Contract with ROT

Contract with ROT

Contract with ROT

Contract with ROT

Storage Contract

Storage Contract Storage

Contract

Storage Contract

ROT means retention of title clause

Diagram 2

Party

A

ROT means retention of title clause

Party B

Contract for sale of grain with ROT clause

Grain

Party A delivers grain directly to Party C

Party C

Contract for sale of grain with ROT clause

$ Payment for grain