Protecting your interests in the event of insolvency

Your client/debtor company has been placed in receivership or liquidation – what happens to the stock/assets/leased items that you “own” that are unpaid for?

Despite being law in New Zealand for well over a decade, the Personal Property Securities Act 1993 (“PPSA”) remains a mystery to some and misunderstood by many.

In our experience as insolvency practitioners we have found that often the first interaction that many businesses have with the PPSA is when a debtor company has gone into liquidation or receivership and your business is subsequently refused the return of unpaid goods supplied.Despite being law in New Zealand for well over a decade, the Personal Property Securities Act 1993 (“PPSA”) remains a mystery to some and misunderstood by many.

The minimal time and costs involved in protecting your interests under the PPSA can make a significant impact when compared to the economic loss you could potentially suffer when the correct procedures have not been followed.


A Brief Background to the PPSA

The PPSA overhauled the pre-existing laws and numerous registers in relation to personal property. It introduced an entirely new set of rules relating to security interests in personal property. One of the most fundamental changes has been that the former key concepts of “ownership” and “title”  have been replaced with that of “priority”.

Underpinning the PPSA is the Personal Property Securities Register (“PPSR”). This serves as a public notice board that a party is claiming a security interest in certain assets. This register is online and, being accessible 24/7, it provides real time information about any security registered against an entity.

The definition of ‘personal property’ under the PPSA is broad and essentially includes anything that is capable of being owned, excluding land.

Is the PPSA applicable to me?

Generally, if a business is supplying goods to customers on credit, the PPSA is going to be applicable and the business should be familiar with how it operates.

Terms of trade should include language that reflects the PPSA. At the very least, there should be a clause in the terms of sale that grants a security interest in any goods supplied for the purpose of the PPSA.

The granting of a security interest should be viewed as the first step that a creditor takes to protect its interest. Although not compulsory, in order to provide any meaningful protection, the next step should then be to register that interest on the PPSR as soon as possible. This process is completed online, is quick, and at present costs $16.10. Failure to register your security interest may result in a secured party losing priority to other creditors who have registered on the PPSR.


Internal PPSA Processes

Preparing and Understanding Financing Statements

A secured party registers what is known as a financing statement on the PPSR. Certain information about the debtor is required in order to effect the registration. Ensure that you have correctly identified the legal entity you are dealing with. If this is a company, a search of the Companies Register will confirm the correct legal entity.  Mistakes made in this respect when registering on the PPSR have the potential of rendering a financing statement invalid or ineffective.

Goods subject to the security interest are termed ‘collateral’. If a secured party is supplying goods on an ongoing basis, it is generally only necessary to register one financing statement, however, be sure that the description of the collateral is broad enough to cover all likely future supplies. 

Financing statements are valid for five years after which time (if they have not been renewed) they expire and become invalid. Prior to the expiry of a financing statement reminders are sent. Ensure that if security is still required, that the financing statement is renewed before its expiry to ensure continued protection. 

Correctly Executed Documents

Ensure that terms and conditions of sale or credit applications are filled in correctly and signed by your customer. It is not uncommon for businesses to provide us with copies of terms of sale that have not been signed or otherwise assented to by the client.

Easily Accessible Documents

In the event of a receivership or liquidation, the receiver or liquidator will request to review these documents to ensure the validity of any security interests. It is prudent to store all signed terms and conditions in a secure and easily accessible location.

Dedicated Generic PPSR Email Address

In the event of liquidation or receivership, legislation imposes strict timeframes for secured creditors to respond and to make an election in respect of their security. As email is usually the primary mode of communication, it is a good idea to use a generic PPSR email address and to ensure that this address is monitored by more than one person. We have found that often the email address on the PPSR is for an individual. Often this individual is no longer an employee or may be on extended leave.  A secured creditor who fails to respond to a notice made by a liquidator within the requisite timeframe runs the risk of having their security surrendered by default and becoming an unsecured creditor. 


What should you do now?

The PPSA has revolutionised the law relating to personal property. It is important for all businesses, especially those supplying goods on credit to be aware of the provisions of the PPSA and the effect this has. Failure to register a security interest can have a dramatic consequence as to who finally benefits from the sale of an asset in an insolvent estate.

BDO are able to undertake a risk review to ensure that you are adequately covered in the event that a client or customer is placed in receivership or liquidation. Some simple and inexpensive checks could save you thousands of dollars.

For more information, please contact your local BDO representative.

DISCLAIMER: this article is intended to provide general information about the Personal Property Securities Act 1993. It is not meant to be construed as specific legal, accounting, or insolvency advice.