Is Your Business Using the Personal Property Securities Register or are You Swimming with the Naked?
SMEs should use the new Personal Property Securities Register because it gives them the chance to be secured creditors if their customers become insolvent.
Author: Sewell & Kettle Lawyers, Level 1, 299 Elizabeth St, Sydney, NSW 2000, Phone: (02) 8251 0075
E-Mail: [email protected]
“It’s only when the tide goes out that you learn who’s been swimming naked.”
What Warren Buffett means is that when the economic tide is high you can’t see the ‘false wealth’ in the economy and 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. This fact sheet is for small to medium enterprises (SMEs) that provide goods and services on credit to otherSMEs.
SMEs should be using the new Personal Property Securities Register (PPSR) because it gives them the opportunity to become secured creditors in the event their customers become insolvent.
Are you swimming with the naked?
Many SMEs are unaware that on 30 January 2012 the PPSR became the final authority for securities claimed over personal property.
A whole gaggle of registers have been combined on the new Federal PPSR and this includes REVS, the Register of Company Charges and the Bills of Sale Register. 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 and $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 or liquidator was appointed over a customer, you would immediately contact the liquidator or 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 the insolvency practitioners because they had to sift through numerous claims for title to goods. This has all changed under the PPSR because if you, as a supplier of goods, do not have a registered interest, it is likely that your unregistered retention of title clause will be unenforceable against either an insolvency practitioner or another registered secured creditor. By unenforceable I mean that other creditors, such as banks, who register their interest will take priority to your unregistered security claim.
Under the new Personal Property Securities Act (PPSA) you can also require other secured creditors to provide a copy of their security agreement and details of the debt owed. This means that you can assess your potential or current customer’s debts and assets through the PPSR – are you swimming with the naked?
Frequently Asked Questions About the PPSA
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?
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 and it includes motor vehicles, business inventory (i.e. widgets) and company shares.
What is new about the PPSA?
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 liquidation/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 or liquidator you may have the right to trace those funds (Purchase Money Security Interest)
4. You can use the PPSR to assess the unencumbered asset position of BOTH your customer and their directors (go to www.ppsr.gov.au to check out how easy it is to conduct a search)
5. You can increase your security by obtaining further security interests (with agreement) on unencumbered assets owned by delinquent customers (such as their director’s boat!)
6. You have increased rights to claim proceeds of sale where the customer mixes your product or affixes your product to other products.
7. You can now get a registrable security interest pursuant to a charging clause over all present and future assets of director guarantors (Don’t you dare tell me that you don’t have a director’s guarantee from your SME clients!)
If you don’t register your security interest on the PPSR, everyone else will have the right to claim your product (or proceeds of sale) 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
Dominic is the CEO of Lawpath, dedicating his days to making legal easier, faster and more accessible to businesses. Dominic is a recognised thought-leader in Australian legal disruption, and was recognised as a winner of the 2015 Australian Legal Innovation Index.