Supplier of Goods

WHAT PPSA MEANS FOR YOUR BUSINESS

The PPSA is new law for Australia, expected to come in to force in early 2012. It will have a major impact on nearly every type of business.

If you sell goods or equipment on credit terms – you need to read this paper.

It is common practice for businesses to have a “retention of title” or “Romalpa” clause in their terms of trade to give some protection if a customer becomes insolvent. The supplier is essentially saying “We will sell you these goods, but we own them until you have paid us”.

The major benefit under current law is that if the customer becomes insolvent the supplier can repossess goods in the customers hands because the supplier still owns those goods and they do not form part of the insolvent estate.

PPSA changes this idea and although retention of title is recognised, the Act states that in substance the arrangement is one where the supplier is taking security over goods supplied. This creates what is called a “security interest” in the goods – the importance being that the creditor with the highest ranking security interest (under rules set down in PPSA) gets to keep the goods – irrespective of who owns them.

This creates a “winner takes all” environment. Businesses that know how to use PPSA to their advantage get powerful protection whilst others lose out. Before we consider the consequences of not embracing PPSA we would like to look at the protection which can be achieved.

If a customer defaults (normally by becoming insolvent) a “retention of title” supplier who has fully complied with the provisions of PPSA can:

  • Seize goods that remain in the hands of the debtor
  • Remove goods supplied which have been fixed to other goods i.e. replacement gearbox in a car. These are termed accessions.
  • Get security in manufactured product where the good supplied have been used in the manufacturing process – this is new law
  • Get security in the product of commingled or mixed goods, where (say) a  chemical has been supplied which has been mixed in to a solution to produce paint, The supplier would have security in the paint, which again is new law.
  • Get security in the proceeds, where the goods supplied have been on sold. The right is of limited practical use where the goods have been sold for cash, since you cannot trace in to an overdrawn bank account (and most insolvent companies are overdrawn!). The right can however be enormously powerful where there is an outstanding book debt arising from the on sale of your goods. You get security in the debt which again is new law.


So, in summary there is some real benefit to be gained from PPSA. There are two further benefits which do not come directly from the Act, but which may be very important for some businesses:

  • If you have a problem with (generally smaller) debtors selling their businesses and “shooting through” without paying you, registration on PPSR can put a stop to this. The solicitor acting for the purchaser will normally complete a PPSR search to check that the assets being purchased are unencumbered. The deal will not proceed until the debtor approaches you for a discharge – which will only happen when you get paid.
  • If a liquidator has ever demanded the return of a “preference payment” from you, you may well have felt that you were being penalised for good debt collection techniques. If you have registered on PPSR the argument runs that the payment cannot be a preference since it is simply settlement of a secured debt. This may be tested in the Australian courts, but there is considerable consensus that this is the case in NZ – which has a similar preference regime.

 

We have now summarised the positive side of PPSA. What are the consequences of doing nothing or not getting it right?

  • If you do not attend to all compliance issues your security may be invalid and you will lose your goods.
  • If you do not register on PPSR and there is a competing creditor with security over your goods, then providing they have complied with PPS rules – they will get your goods.
  • If you do not register on PPSR, there is no competing creditor and the debtor goes in to liquidation – your security vests in the debtor. In other words, you lose your goods.
  • If you register when you are not entitled to – you may face Civil Penalty points and be liable for up to $27,500 for each instance!


This is why we say “Winner takes all”.

 

Why doesn’t everyone register?

The main thing that will hold businesses back is that they do not know what to do, to take full advantage of the Act. We have been advising companies in New Zealand since 2001 where there is a very similar regime in place. Based on this experience we have designed a comprehensive service to:

  • Assess your business and make sure the Act is of significant benefit
  • Guide you on the compliance issues
  • Help you gather the required data to be able to register your existing debtors on PPSR
  • Provide methods of ongoing registration and registry maintenance, tailored to the volume of debtors you need to manage
  • Help desk support
  • Enforcement advice


The key is to start planning your approach to PPSA now and not to leave it to the last minute. Contact us now for more information:

E-mail – enquiries @edxservices.com.au

Call – 03 9866 4559

We guarantee to return your call no later than the next business day.

 

Disclaimer

This document is intended to give a general indication of how PPSA may apply in Australia, drawing from New Zealand experience since 2002. It is not legal advice and the reader is not entitled to rely on it for an purpose. Neither EDX Australia Pty Ltd, its officers and employees accept any liability to any person, on any account whatsoever.