A foreign supplier sells raw materials to an Australian manufacturer on credit. The materials are delivered, used in production and transformed into a finished product before the invoice is paid. By the time the customer defaults, the supplier’s original goods can no longer be identified or physically recovered.
Has the supplier’s security disappeared with the materials?
Not necessarily.
Australian personal property securities law contains a specific regime for this situation. Part 3.4 of the Personal Property Securities Act 2009 (Cth) (PPSA) deals with goods that are processed, manufactured, assembled or commingled so that their original identity is lost. In qualifying circumstances, an existing security interest in the supplied goods can continue in the resulting product or mass.
That can be critical when an Australian customer becomes insolvent and the supplier is competing with a bank and other secured creditors. But the rule does not mean that an unpaid supplier automatically acquires ownership of the finished product. The existence of a security interest, its perfection, the value of the original materials and the priority of competing creditors all remain important.
The materials may disappear, but the security interest may continue
Section 99 of the PPSA addresses what happens when secured goods become part of a new product or a larger mass.
A security interest can continue in the product or mass where the original goods have been manufactured, processed, assembled or commingled in such a way that their identity is lost. The Act specifically recognises that identity can be treated as lost where restoring the goods to their original state is no longer commercially practical.
The rule can apply to very different commercial situations.
Steel may be processed with other materials into fabricated equipment. Chemicals may be combined to create another product. Grain from different suppliers may be mixed in the same bulk storage. Ingredients may be incorporated into manufactured food. Raw material supplied by one business may become an inseparable part of goods manufactured by its customer.
The Australian PPSR expressly identifies materials supplied for use in manufacturing, agriculture and other processes as a situation in which the personal property securities regime may matter. Its guidance also explains that properly protected interests can extend to goods that are mixed, processed or made into something else.
There is, however, an important starting point: non-payment by itself does not create a PPSA security interest.
The supplier must already have a transaction or agreement capable of creating a security interest. For example, appropriately drafted retention-of-title terms may create one. Registration on the PPSR is then used to perfect an interest where registration is the applicable method. The PPSR itself warns that a creditor cannot legitimately register merely because money is owed; there must be an agreement creating a security interest.
Part 3.4 preserves an existing security interest through the transformation of the goods. It does not create security for an ordinary unsecured invoice after the customer has failed to pay.
When are goods considered processed or commingled?
The central question under section 99 is whether the original goods have lost their identity in the resulting product or mass.
This is different from a situation in which a component remains a separately identifiable item after installation.
For example, an engine installed in a machine may remain identifiable and potentially removable. That situation can raise the separate PPSA rules relating to accessions.
By contrast, if resin and other materials are manufactured into a composite product, or identical commodities are mixed into a common bulk mass so that the supplier’s individual goods cannot realistically be separated, Part 3.4 may become relevant.
The distinction matters because the PPSA contains different rules for accessions and for processed or commingled goods. A creditor should therefore determine what physically happened to the supplied property rather than simply assume that every incorporated item is legally treated in the same way.
The treatment of fixtures also requires separate analysis. The PPSR’s official guidance distinguishes personal property covered by the regime from land, buildings and fixtures. Materials incorporated into a building should therefore not automatically be analysed as ordinary commingled goods under Part 3.4.
Perfection can follow the goods into the new product or mass
Continuation of the security interest is only part of the analysis. Priority against competing creditors can be even more important.
Section 100 provides that, for the default priority rules in section 55, perfection of the security interest in the original goods is treated as perfection of the security interest in the resulting product or mass.
This prevents the transformation itself from automatically destroying the relevance of an already perfected interest.
Consider a supplier that has an enforceable security interest over materials supplied on credit and has properly perfected that interest before the materials are used in production. The customer then incorporates the materials into finished inventory.
The supplier does not necessarily have to argue that the original pieces can still be physically located. Part 3.4 allows the security interest to continue into the resulting property.
This is one reason PPSR protection is particularly important before a customer’s financial problems become visible. The official PPSR guidance tells suppliers to register as early as appropriate rather than wait until goods have already been handed over.
The supplier does not automatically get the whole finished product
Continuation of the security interest does not give the supplier unlimited rights over the finished goods.
Section 101 imposes an important value limitation.
Any priority that the continuing security interest has over another security interest in the product or mass is limited to the value of the original goods on the day they became part of the product or mass.
Suppose an overseas supplier provides specialised material worth AUD 80,000. The Australian customer combines it with labour, additional components and other materials and creates finished equipment worth AUD 250,000.
The supplier should not assume that its original AUD 80,000 contribution gives it priority over the entire AUD 250,000 product.
Part 3.4 is designed to preserve the supplier’s secured position without giving it an unjustified claim to all of the additional value created by other inputs.
For a creditor, evidence of value therefore becomes important. Purchase orders, invoices, delivery documents, quantity records, production records and evidence showing when materials entered the manufacturing process may all become relevant to assessing the practical extent of the secured position.
What if several suppliers contributed materials?
Manufacturing disputes become more complicated when different secured suppliers contribute goods to the same final product or mass.
Section 102 establishes specific rules for competing security interests that continue under Part 3.4.
A perfected continuing security interest has priority over an unperfected continuing security interest.
Where several perfected security interests continue in the same product or mass, the PPSA provides for them to share according to the ratio between the obligation secured by each interest and the total obligations secured by all of the perfected continuing interests. For this calculation, the secured obligation attributed to each interest cannot exceed the value of the relevant goods when they became part of the product or mass. Similar proportional rules apply between multiple unperfected continuing interests.
Take a simplified example.
Supplier A contributes materials worth AUD 80,000 and Supplier B contributes materials worth AUD 20,000. Both have qualifying perfected security interests that continue into the same manufactured product, and the corresponding secured obligations remain AUD 80,000 and AUD 20,000.
Section 102 provides the statutory framework for allocating their competing continuing interests rather than applying a simple rule that the supplier who delivered first owns the finished product.
The actual result can become more complicated where there are additional security interests over the manufacturer’s assets, PMSI rights, proceeds, transfers to third parties or insolvency issues. The statutory calculation should therefore be applied to the particular transaction rather than treated as a guaranteed recovery formula.
A PMSI can produce a different priority result
The position can change again if the supplier’s security interest qualifies as a purchase money security interest, or PMSI.
Section 103 provides a special priority rule for a perfected PMSI that continues in processed or commingled goods. Despite section 102, such a PMSI has priority over specified non-PMSI interests, including a non-PMSI security interest in the product or mass granted by the same grantor.
This can be extremely important where an Australian manufacturer already has a bank holding a broad security interest over its assets.
But PMSI priority should never be assumed merely because the supplier provided the materials that were later manufactured into another product. The original transaction must satisfy the statutory PMSI requirements and the interest must be properly perfected with the relevant registration and timing requirements.
Those registration rules involve their own risks. In particular, the consequences of incorrectly identifying PMSI status on the PPSR can be substantially different from simply failing to claim PMSI priority. We examine that issue separately in PMSI checkbox errors and invalid PPSR registrations in Australia.
Keeping the issues separate is important. Part 3.4 answers what can happen to a security interest after the original goods lose their identity. PMSI rules determine whether a qualifying perfected interest receives a special priority advantage.
Example: an overseas supplier sells materials to an Australian manufacturer
Assume a European supplier sells AUD 80,000 of specialised raw material to an Australian manufacturer on deferred payment terms.
The contract contains provisions intended to create a security interest, and the supplier has taken the necessary steps to perfect that interest.
The manufacturer uses the material before paying the invoice. It combines the material with other inputs and produces finished goods. The original material can no longer be commercially restored or separately identified.
Two months later, the manufacturer stops paying creditors.
At that point, the supplier’s analysis should not stop with the question: “Where are our goods?”
The more useful questions are:
- Did the contractual arrangement create an enforceable security interest?
- Was that security interest perfected?
- When did the supplied materials become part of the new product or mass?
- What was their value at that time?
- Can the creditor prove which production process or inventory they entered?
- Does the security interest qualify as a PMSI?
- What other registrations exist against the Australian customer?
- Are there competing interests in the resulting product or mass?
- Has the finished product already been sold or transferred?
If the relevant requirements of Part 3.4 are satisfied, the fact that the original materials are no longer physically recoverable does not necessarily end the secured creditor’s position.
Official PPSR material illustrates the same practical principle. Its wholesale guidance explains that registered suppliers can retain an interest when supplied goods are mixed, made or processed into other products, while its agricultural case material addresses retention-of-title goods that become mixed with other produce.
What should a supplier preserve before a dispute starts?
A PPSR registration is important, but a registration alone does not replace the underlying transaction documents.
A supplier expecting to rely on Part 3.4 should be able to reconstruct the commercial history of the supplied goods.
Depending on the transaction, useful evidence can include:
- signed supply agreements and incorporated terms of trade;
- retention-of-title and other security provisions;
- purchase orders and invoices;
- proof of delivery;
- PPSR registration details and verification statements;
- serial, batch or lot information where available;
- production or inventory records identifying how supplied materials were used;
- evidence of the value of the goods when they entered the product or mass;
- communications concerning manufacturing, stock levels or non-payment.
This evidence can become particularly important after insolvency begins, when the creditor may be dealing with an administrator, liquidator, receiver, secured lender and other suppliers at the same time.
Waiting until that stage to determine whether the contract created security, whether a registration was correct and what happened to the supplied goods can materially weaken the creditor’s practical position.
Commingling changes the recovery analysis when a debt becomes overdue
A supplier facing an overdue Australian receivable should therefore distinguish two related questions.
The first is the ordinary debt claim: how much is owed, whether liability is disputed, what evidence supports the debt, whether negotiations or proceedings are appropriate and what assets are realistically available for enforcement.
The second is the secured-creditor analysis: whether supplied goods, their transformed product, identifiable proceeds or other collateral may be subject to a security interest with priority over competing claims.
Those two tracks can lead to a very different recovery strategy.
Our broader guide to debt collection in Australia explains the general recovery process, including pre-litigation work, court proceedings, enforcement and insolvency options. Where the debt arose from goods supplied on credit, the PPSR position should be reviewed alongside that general collection strategy rather than only after court proceedings have started.
The practical lesson for foreign suppliers
Australian law does not necessarily treat the physical disappearance of supplied materials as the disappearance of the supplier’s security.
Sections 99–103 of the PPSA create a specific framework under which a security interest can continue when goods lose their identity through manufacturing, processing, assembly or commingling. The framework also determines how perfection and competing priorities are treated and limits the protected priority to the value attributable to the original goods. A perfected PMSI may have an additional priority advantage.
But Part 3.4 is not a mechanism for converting an ordinary unpaid invoice into secured debt after the event.
For an overseas supplier, the important work usually takes place before the Australian customer defaults: the supply contract must create the appropriate security interest, PPSR protection must be considered at the correct time, and records should allow the supplied goods and their value to be traced into the customer’s production process.
Once payment problems emerge, the creditor should promptly assess the underlying agreement, PPSR registrations, the status of the supplied goods, competing security interests and any developing insolvency process.
