End of ROMALPA did you make the switch?

We examine the impact that the Personal Property and Securities Act 2009  (“the Act”) and the Personal Property Securities Regulations 2010 (“the Regulations”) has had upon the usage and effect of a contractual provision known as the “ROMALPA clause”, also known as a ‘”retention of title clause” or a “ROT clause”. The object of a ROMALPA clause, for example within a sale of goods contract, is to give a seller of goods additional protection in the event that the buyer should become insolvent prior to making payment for the goods.

In brief, a ROMALPA clause is a term of a contract that provides for the legal title to the goods to remain with the seller until the buyer pays the purchase price in full or satisfies some other binding contractual requirement.  Over time several variations of the clause have emerged, for example:

a)            The “all liabilities clause” – where the clause reserves title in the goods until the buyer has paid all monies owing to the seller on any account;

b)            The “purchase monies clause” –where the goods are resold and the clause asserts title to any  sale proceeds while still in the hands of the buyer;

c)            The “end product” clause – where the goods are raw materials to be used in a manufacturing process and the clause asserts a claim to the end product.

Prior to the Act a standard ROMALPA clause within a contract would be legally effective without any further action being required of the seller.  That is, the ROMALPA clause would enable a seller to rely on the clause to give legal title to specified goods with priority for the seller ahead of a competing claim by another creditor. Such a clause could be effective against a liquidator, or another secured creditor.

With the commencement of the Act on 30 January 2012 the law in this area has fundamentally changed.  The area of secured finance over personal property in Australia has been substantially reformed by the Act.

The term “personal property” is defined by the Act to include a wide range of interests such as inventory, livestock, plant and machinery, boats, caravans, cars, crops, shares, art, licenses, investment instruments, intellectual property and accounts.

The term “security interest” is defined by the Act to mean an interest in personal property provided for by a transaction, that in substance, secures payment or performance of an obligation.  Security transactions which are governed by the Act include hire purchase agreements, fixed and floating charges, chattel mortgages, lease of goods, conditional sale agreement, consignment and/or transfer of title.

Since the commencement of the Act, where a creditor seeks to be able to rely upon a ROMALPA clause as an enforceable security with priority against other interests, that security interest now needs to be registered, by the creditor, on the Commonwealth Personal Property Security (PPS) Register.  The register is administered by the Australian Financial Security Authority, and is a record of personal property security interests Australia wide.

The relatively new law in this area that has been created by the Act is very detailed, and deals with a wide variety of matters including (but by no means an exhaustive list) such thing as:

1)            The establishment of the Personal Property Security (PPS) Register;

2)            The point-in-time at which a record of a security interest should be lodged on the register;

3)            A special type of registration, that gives a form of “super priority” to a creditor and that specifically applies to ROMALPA clauses;

4)            That a failure to register, or to follow the statutory procedural registration requirements can affect a creditor’s ability to enforce the security interest;

5)            The powers given to a Court to make a determination in relation to a matter arising under the Act.

These days, for a “ROMALPA clause” to be effective, the security interest must also be compliant with the Act. A failure to comply can have disastrous consequences, and we again point out that the law in this area has changed since the commencement of the Act.

The end result is that care must be taken to ensure that your business’s commercial interests are adequately protected. There have already been several high profile examples of where a creditor has failed to comply with the legislation, and as a result has incurred significant financial losses.

We recommend that you contact ADS Lawyers for assistance in relation to the requirements of the new Act or any other contractual, commercial or related legal matter.