Week 5. Finance and Security
*Please note this is a general guide only and should not be used in place of obtaining our advice.
If your business will be supplying goods or services on deferred payment or “credit” terms (i.e. you provide the goods or services now and get paid later), have you considered what happens if your client becomes insolvent or doesn’t pay you?
There are steps you can take to protect your interests and increase the chance of you getting paid (or at least getting your goods back).
Supply/Hire of Goods
You may have heard of the Personal Property Security Act (“PPSA”)? In certain circumstances, if you supply goods on deferred payment terms or hire goods for period of more than one year and do not register your ownership/interest in those goods on the Personal Property Securities Register (“PPSR”), you can lose your ownership over those goods in the event the customer becomes insolvent.
For example, lets say you are a tile manufacturer and you sell your tiles to a tile retailer on deferred payment/retention of title terms. The tile retailer then becomes insolvent and cannot pay you for the tiles you provided to them. If you haven’t registered your security interest on the PPSR in the tiles, then you most likely will not get your tiles back, and you may only receive a fraction of what the retailer owed you for them.
If you are engaging in the supply of goods or hire of goods, we recommend you obtain advice as to how to protect your interests to avoid losing your goods on the insolvency of the customer. Whether you do this will be a risk decision for you based on the value of the goods and the likelihood of the customer experiencing financial difficulty.
Supply of Services
If you supply services on deferred payment terms, we recommend you enter into a services contract which gives you a security interest over all or some of the assets of the customer. This is essentially like a mortgage, but over non-land assets. If the customer defaults in paying you, you can seize the assets you have security in.
To ensure you have priority over other creditors who have a security interest in the customer’s assets, this security interest should be registered on the PPSR.
Asset Entities and Trading Entities
A common business structure we see is where a person has one entity which owns all the assets used in a business, and another entity which actually trades the business. This can be an effective asset protection strategy, however what most businesses don’t know is that the lease of assets between the asset owning entity and the trading entity is covered by the PPSA.
This means that if the asset owning entity does not register its security interest in the assets on the PPSR and the business entity becomes insolvent, the asset owning entity will lose its ownership of the goods. By not registering on the PPSR, the whole asset protection strategy can be defeated.
Where to next?
Navigating the PPSA and protecting your interests in supplies you make on deferred payment terms is a complex area, and if not done currently can result in devastating losses for businesses.
We recommend you obtain advise as to what steps, if any, you should take today to better secure your interest. Merton Lawyers are experts in the PPSA and securities advisory and would be happy to assist you with this.
Contact us on (03) 9645 9500 or email our directors Anthony Curtin at anthony.curtin@mertonlawyers.com.au or David Rennex at david.rennex@mertonlawyers.com.au to find out more.
*Please note this is a general guide only and should not be used in place of obtaining our advice.
