Insecure title: Don’t forget to register your security interest when supplying content on retention of title terms

A recent judgment from the NSW Supreme Court involving the lease of gas turbines is actually a useful and important reminder to content producers seeking to retain copyright in content provided to customers until those works are paid for.

On the face of it, the decision in Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc & Ors [2016] NSWSC 52, which we summarised here, has nothing to do with intellectual property. But it neatly illustrates the severe consequences of neglecting to register a security interest on the Personal Property Securities Register (“PPSR”). GE had leased gas turbines to Forge but failed to register the lease on the PPSR; the court subsequently found that the lease was a security interest (specifically a “PPS lease”) under the Personal Property Securities Act 2009 (Cth) (“PPSA”). After the lease came into force, voluntary administrators were appointed to Forge; eventually, the company went into liquidation. Since GE did not register its security interest in the turbines on the PPSR, Forge’s liquidators brought proceedings seeking a declaration that, pursuant to s267(2) of the PPSA, GE’s security interest vested in Forge immediately before the appointment of the administrators. GE thus lost its interest in the gas turbines and was left with an unsecured claim against Forge.

So how is this relevant to content creators? First, the PPSA applies to “personal property”, which includes just about all forms of property other than land. Intellectual property (and the rights available therein) is most definitely personal property. Second, the PPSA stipulates that a security interest in personal property arises in favour of the supplier under a conditional sale agreement, which is an agreement pursuant to which personal property is sold subject to retention of title by the supplier. A retention of title clause is a provision in a sale agreement which states that title to property does not transfer to the buyer until the property in question is fully paid for. Third, the PPSA further stipulates that in order to be enforceable, most notably in an insolvency scenario, security interests must be perfected. In order to perfect a security interest in intellectual property, it must be registered on the PPSR.

By virtue of Section 267(2) of the PPSA, if a supplier fails to perfect a security interest (including an interest in personal property) and its customer is wound up, placed into administration, executes a deed of company arrangement, and/or becomes bankrupt, the supplier’s security interest vests in the customer immediately before the applicable event (i.e. in the case of a company being placed into administration, immediately before the appointment of the administrators). In such a scenario, the supplier is left with nothing more than an unsecured claim against its customer, meaning it will likely recover a few cents on the dollar, rather than the full amount owed by the customer.

Section 267(2) gives rise to the same risk for a person who supplies content on retention of title terms as it did for GE in the context of its lease of gas turbines. In other words, whether it’s a photographer taking shots for a fashion company, a musician composing music for an advertising agency, or a copywriter drafting sections of a client’s website, if the content is supplied on retention of title terms (with the transfer of title being subject to payment), and the resulting security interest is not registered on the PPSR, that content and the copyright subsisting within it, can be lost in an insolvency. In these scenarios, the supplier, as an unsecured creditor, is likely to recover only a fraction of the value of the content they created.

This happens in the real world – a content supply agreement with a retention of title clause came across our desk recently. The content supplier’s customer was in administration and the administrator asserted ownership of copyright and would not pay the content supplier’s fee. The content supplier is now left to prove its debt in the insolvency process, as are many other unsecured creditors.

If a security interest in content supplied on retention of title terms is registered, it will be enforceable against the customer in an insolvency scenario. But what about the position vis-à-vis the holder of a prior-registered charge over all of the customer’s assets? It is possible to achieve ‘super’ priority over other secured parties, but in order to do so the security interest (i) must be registered before it attaches to the personal property in question (i.e. prior to delivery of the content to the customer), and (ii) must be noted on the PPSR as a “purchase money security interest”.

Perhaps the best advice to content suppliers is to license their content, rather than supply it on retention of title terms. This may involve dealing with the procurement department of large enterprises, who typically say: “We want to own the content we are paying for.” But most procurement managers are open to a conversation, and to taking a licence if they can be assured that a licence is all they need for their intended use.

Retention of title clauses are of course not the only way a security interest can (unexpectedly) arise in respect of intellectual property rights. As we wrote in 2010 in this post, under the PPSA (which was then not yet in force) a partial assignment of copyright effected by way of an automatic reverter clause (to secure the performance of a primary obligation, such as the obligation to pay royalties to a songwriter) would be characterised as a security interest attached to the copyrights. If the author of the work in question failed to “perfect” that security interest by registering it on the PPSR, a subsequent purchaser of the copyrights would take title free of the author’s interest.