A case study about how a cattle feed supplier uses the PPSR to protect their security interest in agricultural products sold on credit.
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What may be affected?
selling or buying livestock, wool, timber, harvested produce, feed, fertiliser, crops or nursery trees
leasing, bailing or other hiring out of stud or breeding cattle, horses or other animals if leased or hired for period of two or more years
selling, leasing (for two or more years) or purchasing of any farm machinery, irrigation or other equipment
selling of grain or other goods on credit or retention of title terms.
What is not affected?
land, fixtures on land or interests in land (including rentals or other payments coming from the land)
some statutory rights (eg a commercial fishing licence).
How does it benefit my business?
When buying valuable second-hand goods such as farming equipment, you can search the PPSR to find out whether those goods are free from existing financed debt and safe from possible repossession.
A retention of title clause (indicating that title remains with you until goods are paid for in full) in your contract or invoice, no longer protects you on its own.
If you don’t make a registration, your retention of title clause is unlikely to stack up against others when you need to rely on it.
In other words, someone else who has registered an interest is ahead of you in the queue should your customer default or go broke.
Make sure you back up your contracts by registering your interest.
There are other advantages of registration too, such as making it easy to claim your interest in any proceeds of the original goods when dealt with by your buyer or lessee.
An effective registration also helps to ensure your interest continues when you’ve sold goods and are still owed money for them, even after they’ve been mixed with others’ goods (eg grain in silos) or made into something (eg processed food).
Risk - If you don’t make a registration on the PPSR to cover your security interest in those goods or assets, and your customer goes broke before they have fully paid you, your stuff may be sold to pay other creditors. If your interest is not registered, you will be an unsecured creditor in an insolvency and may not recover much, if anything, of what you are owed.
PPSR can help with financing opportunities for farmers and agriculture producers. For example, you may borrow against crops, livestock, farm machinery, agricultural products and other assets (other than land). Benefits may include making it easier to obtain finance to buy seed and to purchase farm machinery.
Crops and livestock are personal property under the PPS Act and may be used as collateral.
PPSR supports a number of financing arrangements which makes lending to agricultural producers an attractive proposition for financiers.
PPSR provides greater transparency within the economy in relation to financial transactions – this transparency helps to reduce the cost of finance as financiers are better able to assess the risk of dealing with a particular individual or business.
If your customer goes broke or is unable to fulfil their obligations, priority rules decide which secured party ranks higher and determines who can be paid out first from the collateral.
The rules are mostly first in time, first in line (an earlier dated registration beats a later one over the same collateral). An exception to this rule is a purchase money security interest (PMSI). If properly registered, a PMSI gives priority over earlier registered security interests over the same collateral, such as a bank with an earlier registered security interest over all of the grantor’s present and after-acquired property.
Even though the bank is first in time, the PMSI holder will jump ahead and still be first in line.
If you are selling on retention of title terms, you may be able to claim this PMSI priority provided you register and claim your PMSI on the PPSR prior to delivery of any goods.
If you don’t claim and register the PMSI on the PPSR in this way, you will lose out to an earlier registered security holder like a bank.
The agricultural industry benefit from an extra priority that applies to security interests (such as retention of title terms) taken when supplying goods which assist with development of livestock (such as feed or hormones for cattle), or improvement and growth of crops (such as seed, fertiliser and pest control) – provided the crops are planted (or the livestock is acquired) within six months from entering into the agreement.
Provided you register this interest, you can get extra priority over other security interests in the resulting crop or livestock.
A PMSI (such as retention of title terms) may give a supplier priority over other security interests in the goods supplied. But in the case of crops or livestock, if a supply made on retention of title terms (such as a supply of fertiliser or animal feed) is used by the purchaser to grow or develop their crops or livestock, the supplier of the fertiliser or feed has a special agricultural priority (ahead of other security interests) in the crop or livestock itself.
A security interest over a crop, registered on the PPSR, will not affect any prior mortgage over the land on which the crop is grown (unless the mortgagee consents to the creation of the security interest). But it will have effect despite future mortgages or dealings with that land.
This means if you are financing crops or goods which help the crops’ improvement –you should first search the land titles register in the State where the land is located, in case there is a land mortgage covering that crop.
Those interested in buying land or taking a mortgage over land, should also search the PPSR (against the grantor’s details), in case there is a registered security interest covering the crop.