The Personal Property Securities Act (PPSA) presents risks to creditors who do not take steps to protect themselves. These risks are not difficult to circumvent but still seem not to be understood by many.
With Australia scheduled to adopt a PPSA next year, we thought it timely to recap on some PPSA basics, look at what the New Zealand Courts have said and examine the impact of the Australian legislation.
This is the first in a series of three Brief Counsels on this issue.
1. Know when you've got a security interest
- Do you have goods located at someone else's premises which you own or expect to have a claim to?
- If a party you do business with went into receivership or liquidation, is there any asset (goods or intangible) that you would expect to be able to demand from the receivers or liquidators?
These tests are not definitive but are a good starting point. If the answer to either is yes, you may have a security interest. Under the rules in the PPSA, this interest could be vulnerable to another creditor's claim.
The PPSA doesn't apply just to those who take formal security over other's assets. We have seen many cases of businesses losing their rights simply because they didn't think that their particular business arrangements would be caught. Title to the property is no longer the protection it was – instead priority usually depends on registration.
Security interest is broadly defined. You have a security interest when you have any sort of claim to an asset in order to ensure that the person/company you are dealing with will perform on some sort of obligation. For example, if you retain ownership pending payment.
Also, you have a security agreement if you lease goods to someone for more than 12 months, deliver goods on commercial consignment or take an assignment of a debt or a chattel paper (eg, the assignment of a hire purchase agreement).
Many types of transactions will give rise to a security interest. Examples include:
- giving anyone a licence to use an asset (e.g. equipment)
- loaning, leasing or licensing equipment as part of a supply arrangement
- giving another party rights to hold or use equipment or goods, perhaps under a franchise agreement or similar
- selling goods on credit
- selling goods on a retention of title basis
- leasing goods to anyone
- supplying goods to a retailer to be sold on your behalf, and
- taking an assignment of any debt.
2. Make sure it's enforceable
If your business arrangement gives rise to a security interest, the document, or documents, which record those arrangements ("security agreement") must:
- be in writing
- be signed by the customer (or at least be confirmed by some written document from the customer), and
- contain an adequate description of the property to which you have a claim.
Those elements can be contained in multiple documents, for example a signed terms of trade and later invoices.
Usually, it won't be enough that a customer starts transacting with you on the basis of a terms and conditions document which you gave to them. You should ensure that your customer either signs that document, or confirms their agreement in writing.
If you don't register in time, someone else's claim to the same assets could rank ahead of yours. Registration is done online at www.ppsr.govt.nz and is a simple process, costing only $3.
The usual rule is the first creditor to register has first priority. But the creditor who supplied the assets, or provided finance to acquire the assets, can get "super priority" and rank above earlier registrations provided they registered:
- prior to the debtor taking possession in the case of inventory, and
- within 10 working days of possession in other cases.
If you haven't registered in time, you may still be better off registering late than not registering at all.
Accuracy is crucial. The PPSA rules are unforgiving of even tiny errors in searchable fields.
Names must be spelled correctly:
- if your customer is a company, search the Companies Office (www.companies.govt.nz) to ensure that the name and company number are correct
- if the customer is a trust or partnership, register against the name of the trust or partnership as shown on the trust deed or partnership agreement.
Check serial numbers with extreme care (vehicles and aircraft only).
Ensure that the description of the assets is sufficiently broad to cover all assets to which you make claim.
4. Maintain your registration
Financing statements expire five years to the day after they are registered. If you fail to renew your financing statement before it expires, you will lose your priority position on the register. The register does not send reminders, so it is important to have a system in place to ensure that registrations don't lapse unintentionally.
If your business becomes aware that a customer has changed their name, you have 15 days to update your registration or you may lose priority. You should have a system in place to ensure that if a customer asks you to change the name that invoices are addressed to, the PPSR registration is also updated. Similarly, if you know that the asset has been transferred to another party, it is important to add a registration against that party, in order to avoid losing priority.
The PPSA is a powerful tool. The Act gives certainty to creditors who register properly and whose documents are in order. But to make best use of this protection, you should follow the four steps above.
For more information, please contact Chapman Tripp.
Our thanks to Katharine Reynolds, Solicitor, for writing this Brief Counsel.
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.