What steps are you taking to protect your business when it comes to debtors?

The COVID-19 measures have forced the closure of many businesses and placed businesses in precarious financial positions. Major retailers including Kathmandu, Peter Alexander and Myer (in major shopping centres) have closed physical stores and moved to online trading. If COVID-19 escalates further then the impact to the economy will worsen and the introduction of Stage 4 measures may result in the closure of businesses who are already on the brink of insolvency.

While many businesses are restructuring their employee arrangements in order to manage their overheads, there are other steps businesses should take in order to preserve their cash flow. One simple step is managing debtors and ensuring your business will be in a secure position to recover your goods and payment in the event any debtors become insolvent.

The Personal Property and Securities Act (Cth) 2009 (PPS Act)

When the PPS Act was introduced, suppliers with retention of title clauses in their terms and conditions of trade were no longer ‘first in line’ to recover their goods where customers fell into insolvency.

Under the PPS Act, a supplier must have registered a security interest in their goods on the Personal Property Security Register (PPSR) in order to have first priority over all other creditors to recover their goods from an insolvent customer.  Failure to have a properly registered security interest results in the supplier’s goods vesting in the customer meaning the goods become the customer’s property and form part of the ‘pool of assets’ available to other creditors of that customer. The impact on you, the supplier is:

• you will be unable to recover your goods; and
• you will be treated as an unsecured creditor of the customer with respect to recovering your goods to satisfy outstanding payments due by the customer.

Registering a security interest on the PPSR against some or all of your customers is one way you can protect your interest in goods that have been sold on credit as it ensures that you can recover the goods in the event your customer defaults in payment.

Should I register a security interest against every customer?

You should complete a risk assessment of your major customers and cover off on factors such as payment history and purchasing levels. This process should include discussions with the customer to determine if its business is impacted by COVID-19 and if so, the extent of the impact on its ability to continue buying goods from you.

In the current economic climate, a conservative approach is recommended.  For instance, you may have customers who usually pay on time and you decided not to obtain security. Given the current economic climate, you should reconsider that decision if you’re aware those customers are presently experiencing challenges.

However, if the customer becomes insolvent within 6 months of registering the security interest then your registration would be ineffective, and you will not be entitled to recover your goods. Therefore it is critical that you do the risk assessment now and take steps to register on the PPSR sooner rather than later.

How do I register a security interest?

A security interest can be registered on the PPSR for $6.00 and only needs to be registered once for ongoing supply arrangements. However, in order for the registration to be effective the following steps must be taken:

• There needs to be a security agreement between the supplier and the customer.  Terms and conditions of trade that grant the supplier the right to register a security interest against the customer is a security agreement under the PPS Act.
• The security interest must be registered on the PPSR within 20 days after the transaction.
• The registration must be made in respect of a Grantor (the customer granting the security interest) using the specific details such as ABN or ACN (depending on whether the customer is a company or a trustee) and identify the correct class of goods.

It is critical to note that incorrectly using the ABN of a customer instead of the ACN will cause the registration to be ineffective and unenforceable.  For example In the matter of OneSteel Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21 the registered security interest should have referred to the ABN of the customer instead of the ACN. As a result, the supplier was unable to recover its goods which was worth $23 million.

What should I do next?

Do a risk assessment to determine which customers are at a reasonable risk of defaulting in payment in the next 6 months.  For these customers you should take steps to mitigate the risk by doing any one or more of the following:

• Consider restructuring your payment terms by requesting part payment upfront and the balance on credit terms.
• Staggering customer orders and delivery of the goods over a period of time to limit your exposure in the event the customer defaults in payment.
• Review your terms and conditions to see if you are entitled to register a security interest on the PPSR against the customer and if so, register on the PPSR.
• If your terms and conditions do not allow you to register on the PPSR then update your terms and conditions and notify all of your customers of the updated terms and conditions confirming that all future orders will be subject to the updated terms.
• Obtaining other forms of security such as a guarantee from directors or related companies of the customer to support the customer’s payment obligations.

For assistance with updating your terms and conditions or to discuss other ways to protecting your commercial interests, please contact  Sotheary Bryant.