When the economic tide is high you can’t see the ‘false wealth’ in the economy. It is only when the economy dips that you realise the mistakes you’ve made investing in the wrong businesses. This also applies to extending credit to your customers. SMEs should be using the new Personal Property Securities Register (PPSR). It gives them the opportunity to become secured creditors in the event their customers become insolvent.
This fact sheet is for small to medium enterprises (SMEs) that provide goods and services on credit to other SMEs. If you want to check out how the PPSR can help you during COVID-19 click here. The corporation’s act may also influence this content.
Are you swimming with the naked?
The PPSR is the final authority for securities claimed over personal property.
This includes REVS, the Register of Company Charges and the Bills of Sale Register. In addition, the PPSR is a public noticeboard of various security interests. It is easy to use the website and it costs $3.70 to conduct a search. Furthermore, you only need $7.40 to register an interest (less than 7 years duration).
In the past, if you were a supplier of goods (in a B2B context), and an administrator was appointed over a customer, you would immediately contact the administrator and demand either payment for the goods or return of the goods under a retention of title clause in your terms and conditions of sale.
This scenario would often cause nightmares for insolvency practitioners. Here, they had to sift through numerous claims for the title to goods. This has all changed under the PPSR. Now, if you as a supplier of goods and do not have registered interest, it is likely that your retention of title clause will be unenforceable. By unenforceable it means that other creditors, such as banks, who register their interest will take priority to your unregistered security claim.
Under the Personal Property Securities Act (PPSA) you can also require other secured creditors to provide a copy of their security agreement. Importantly, this means that you can assess your potential or current customer’s debts and assets through the PPSR. So, are you swimming with the naked?
Frequently Asked Questions About the PPSR
What is a security interest under the PPSA?
An interest in personal property to secure payment that includes retention of title clauses, charging clauses and consignment arrangements
What is personal property under the PPSR?
It will be the physical product that your business sells (other than land and some intangibles but including intellectual property). Personal property is broadly any tangible property other than real property. This includes motor vehicles, business inventory (i.e. widgets) and company shares.
What is new about the PPSR?
Under the PPSA a security interest in goods (i.e. collateral) is not just enforceable against the grantor of the security (i.e. your customer) but also against third parties in some circumstances. This represents an increase in protection to goods suppliers. There is also an opportunity for your interest to gain ‘super priority’ because suppliers now have an opportunity to obtain a Purchase Money Security Interest (PMSI) over any goods they have supplied to a customer.
What if my customer is insolvent?
Subject to a few exceptions, if you don’t register your security interest before your customer goes into insolvency (i.e. administration, liquidation or receivership) you will lose your security interest.
This means that business to business (B2B) suppliers that formerly relied on retention of title clauses may now become unsecured creditors and effectively watch their goods being sold to fund liquidator’s or administrator’s fees and also the payment of a secured creditor’s priority claims.
Am I protected by the transitional provisions?
If you have a retention of title agreement arising before the registration commencement date you may be protected by the transitional law for 24 months after commencement (30 January 2012 to 30 January 2014). A transitional security interest is one that was in force immediately before the registration commencement time. The law provides that your pre-registered security interests are perfected from immediately before the registration time until 24 months after the start of the registration time. This is a technical issue that you should discuss with your professional advisor.
How much does it cost to register?
It costs $3.40 each search and $7.40 to register a security interest (less than 7 years duration)
What’s new with the PPSR?
A national online electronic register for personal property interests (i.e. all of your inventory).
Requirements to register a variety of security interests – or your security will be lost to registered parties (i.e. Banks and other creditors).
Issues for a variety of industries to understand and comply with the new law (there is a new language!)
How to get SUPER PRIORITY – Beat the bank!
Have you ever read liquidation/administration reports and felt a bit peeved that the Bank (i.e. the secured creditor) gets paid out in priority to you when the debtor company used/sold your goods in the month leading up to the administration? This is a common occurrence in SME insolvency scenarios.
If you have a registered Purchase Money Security Interest (PMSI) you are given a SUPER PRIORITY in both the goods you supplied and any proceeds received for those goods. This means that you become a secured creditor over your product and it also includes the proceeds of your product being on-sold.
How can you MAKE MONEY out of your registration?
I understand that to justify a change to business processes (such as registration on the PPSR) you need to be able to demonstrate a PAYBACK, or at least a NET PRESENT VALUE today for investing in a better business process.
The potential benefits to your business of registration on the PPSR (assuming it supplies goods on credit to other businesses) are:
1. If your customer sells their business and you’re a registered secured creditor you won’t be “left out in the cold” because the purchaser will want you paid out
2. If your customer goes into administration/liquidation you will not lose your retention of title rights to goods left on site
3. If your customer gets paid for on-selling your goods and then appoints an administrator you may have the right to trace those funds
4. You can use the PPSR to assess the unencumbered asset position of BOTH your customer and their directors
5. You can increase your security by obtaining further security interests on unencumbered assets owned by delinquent customers
6. You have increased rights to claim proceeds of sale where the customer mixes/affixes your product with other products.
7. You can now get a registrable security interest over all present and future assets of director guarantors
If you don’t register your security interest on the PPSR, everyone else will have the right to claim your product in an insolvency scenario!
What should you be doing?
I would suggest that once you have worked out the downside risk of non-compliance that you speak to your accountant or solicitor about the costs of improving your business process by:
1. Upgrading your contractual process; and
2. Implementing a process of registering your customers on the PPSR.
Check out the new register, go to: www.ppsr.gov.au