The PPSA (or Personal Property Securities Act) was introduced into New Zealand in 2002 as the most wide-ranging and fundamental change to securities law perhaps ever undertaken. Given that most businesses rely on some form of security as a financial risk mitigation, whether that be through guarantees, fixed charges or retentions of title, you would probably have been willing to bet good money that businesses would have been all over this new law like a rash.
Well if you did you’d probably be out of pocket. While it’s true the big end of town (eventually) got their collective acts together (mostly) it is a rather different story for small and medium-sized businesses. Here, knowledge of what the new law is and how it works is spotty to say the least. Insolvency practitioners tell me that business owners still come to them on the liquidation of a customer attempting to take goods back under a retention of title clause without having taken any of the steps required under the PPSA to give them that right. Needless to say, they lose their unpaid for goods.
Now, of course, this is nothing to laugh about. SME’s tend to be disproportionately affected by a customer insolvency as they are more likely to rely on just a handful of bigger customers and will tend to have less financial resilience than larger businesses. So, it is arguably more important for SME’s to be across the PPSA in good detail. That they aren’t points to a possible failure somewhere in the system, whether that be access to good advice at reasonable cost, appropriate communications to businesses highlighting the importance of the PPSA, or just that the imposition in recent years on smaller businesses of rafts of new law & regulations has created a “compliance fatigue”.
Whatever the reason it is imperative that smaller businesses do get advice as to how the PPSA affects their current security positions and what they need to do to ensure their required positions are maintained in light of the new law.
Here are 5 things that SME businesses should consider right away:
1. Contracts & Terms of Trade – do you get your customers to sign a contract that contains your terms of trade? Terms of trade are generally only enforceable against a party if they have been agreed in advance and under the PPSA terms relating to security interests generally need to be agreed in writing.
2. Retention of Title & Ownership – if you rely on a retention of title clause because you deliver goods to customers who are yet to pay for them then you need to be aware that the concept of title and ownership have changed under the PPSA. Although you may believe that you still own goods that haven’t been paid for the PPSA treats this situation as a security interest and your customer can give other parties a security interest in those same goods even if they haven’t paid you for them.
3. Personal Property Securities Register – a new centralised register that records the creation of security interests. If you aren’t aware of this then you need to find out about it because you will lose any security interest priority that you may have if you haven’t registered.
4. Business circumstances – although retentions of title are common security interests, depending upon your specific business practices you may have more that you aren’t aware of. For instance, if you allow customers the use of some of your assets (even for free) and these are held by your customer you may need to register this in order to prevent a third party (for example a bank) taking possession ahead of you in the case of insolvency.
5. Credit risk – quite how you prioritise what security interests you need to protect if you can’t do all will depend on how risky each of your customers are. You should be able to identify which are your riskiest customers and have specific plans in place to deal with them should they start missing payments.
The above list is not exhaustive but is merely a starter to demonstrate the scope of the PPSA and how fundamental it should be to your day to day business activities. If you haven’t already done so it is highly recommended that specialist advice is sought, especially if any of the above applies to your business.