Protecting your business from the insolvency of your customers
Are you ensuring your business is doing all it can to protect against insolvent customers?
Many are predicting a significant increase in business insolvency in 2021. With the Covid19 protections for insolvent trading having ended, there is heightened risk there may be more insolvent trading activity in 2021 affecting our clients.
In fact, the Federal Government has enacted new Insolvency legislation to deal with the expected increase.
Make sure compliance with the Personal Property Security Act 2009 (PPSA) is part of your general risk mitigation strategy. The principal of the PPSA is simple – if you have security for payment you must register it on the PPS Register if you ever wish to use your security on the insolvency of your customers. Unregistered security is lost.
So, at the very point in time (the insolvency of your customer) you'd like to enforce your security, you're unable to do so unless you're complying with the PPSA and correctly registering your security.
Many businesses unknowingly have security for payment provisions already included in their terms of trade (for example retention of title) but because they are not registering this security they are unable to enforce it when a customer collapses into insolvency.
And unfortunately, many businesses who think they are complying with the PPSA are not doing so correctly, only to find their registration and their security is rejected by the Insolvency Practitioner appointed to their insolvent customer. It's critical your registrations are correctly performed.
Aspen Corporate have a dedicated, reliable and affordable external PPSA specialist that we can refer you to in order to advise you of the correct process.
If you're considering compliance, they will review your security and provide a cost/benefit analysis of PPSA compliance, enabling you to make an informed decision on whether the PPSA makes sense for your business.
If you're already complying, they will review all of your PPS registrations to ensure you are complying correctly, the vast majority are not compliant. A great 'health check' for your business.
The cost for these services is a very reasonable $170.
Please see below some examples of how the PPS legislation can protect your interests:
Client A – Sells machinery parts:
In 2019 Client A suffered a loss of $800k when their customer collapsed into insolvency.Client A's terms of trade include a common retention of title clause, providing Client A with security for payment.Unfortunately, Client A had not registered this security and accordingly were unable to exercise it to recover the unpaid goods still in the possession of their now insolvent customer.
Learning from this mistake, Client A complied with the PPSA and registered its security against all of its customers.The cost was minimal, the $6 Government charge for each registration against each customer protects Client A for 7 years of sales to their customer.
In 2020 another of Client A's customers collapsed.This time their security was protected by their PPS registration, enabling them to recover $1.2 million in unpaid goods.Had they not performed a PPS registration against this customer they would have had no right of recovery.
Client B – Loaned money to their business:
Like many business owners, Client B had loaned money to her business.Although the loan had been documented and Client B had security over the assets of the business, the security had not been registered.
When the business collapsed, Client B's failure to register her security meant she had no priority claim over the assets of the company and ranked only as an unsecured creditor along with many others.
The registration of her security would have enabled her to rank as a secured creditor.
Client C – Equipment Hire:
Client C hires equipment to its customers.The nature of their hires often meets the definition of a PPS Lease. This means Client C has a security interest in the equipment they rent and like all security interests, it should be registered on the PPS Register.Unfortunately Client C was not complying with the PPSA and were not registering their interest in their equipment.
When one of Client C's long term customers collapsed into insolvency they not only lost their security in their equipment but they lost their equipment as well!Yes, their failure to register their security means their equipment vests in the insolvent customer, it simply becomes the property of the customer.
There really is no choice, if you hire equipment which meets the definition of a PPS Lease (which is broad) you really must comply with the PPSA.