How The PPSA Helps Suppliers Of Raw Materials

Raw Materials Processed

For many businesses, understanding the benefits of the Personal Property Securities Act (PPSA) can come a little too late. A good portion of the people who contact us are hoping to recover assets, rather than protect them. Our role is to safeguard your business and your assets before your client becomes insolvent. 

Several of the businesses we deal with are suppliers of raw materials for manufacturing. The potential for these businesses to be caught out by a client’s insolvency is quite high. It’s often not a case of if, but when. 

While you should always hope for the best, it’s essential that you prepare for the worst.

Step one – ensure your terms of trade incorporates security for payment provisions. 

Step two – correctly register your security on the Personal Property Securities Register (PPSR).

If you’re a supplier, your terms and conditions may already include a retention of title clause. This means you retain legal title to the materials you sell until those materials have been paid for. Retention of title clauses (also known as a Romalpa clause) are often included in supply terms when selling goods on credit. 

When the Personal Property Securities Act was introduced in 2009, retention of title rights received legislative backing and were strengthened significantly. To obtain these benefits, suppliers simply need to comply with the PPSA and register their security on the PPSR.

To help you further understand the benefits, here are a couple of anonymous (but real) case studies.

Light Plastics Company

Raw Materials Plastic

Light Plastics is an international importer of raw materials used to manufacture plastic products. 

Light Plastics had considered, but dismissed, the idea of compliance with the PPSA.  Their terms of trade included retention of title but the nature of the raw materials they supplied meant they were used very quickly by their customers. Most customers received multiple deliveries each week, which were used within days. They felt there would be little value in any raw materials in the possession of a customer. 

So, why would Light Plastics consider registering their products with the PPSA?

In this case, Light Plastics’ retention of title not only gave them security over the materials they supplied but also the goods manufactured from those materials. 

It made much more sense to Light Plastics to comply with the PPSA. Further to that, Light Plastics could also claim security over any debts owed from past sales of their product. Essentially, Light Plastic would have the highest priority secured claim over these assets – higher than a bank.  

All it took to obtain these benefits was compliance with the PPSA and the registration of Light Plastic’s security over each customer. The cost of doing this was a measly $6 Government charge for each registration. Only one registration was required for each customer, which covered seven years of ongoing transactions with the customer. 

Super Steel Company

Raw Materials Steel

Super Steel is a national distributor of steel, and supplies fabricators around Australia.

One of their interstate fabrication clients, who Super Steel shared a long and successful trading relationship with, collapsed into insolvency owing Super Steel almost $400k.  

Super Steel had a retention of title security over the steel they supply but that steel was on the other side of the country.  

If you’ve ever had to recover goods from a client who has become insolvent, you’ll know your relationship or friendship means little. Now, it’s about negotiating with the administrators for a commercial settlement. In this instance, the administrators wanted to complete several of the planned construction projects which required using steel supplied by Super Steel. 

For starters, there was $36k of Super Steel’s products on hand as raw materials. Then there was a quantity of work in progress items, fabricated from Super Steel’s products sitting on the factory floor. And finally, Super Steel had security over the debts due to their insolvent client from previous sales of fabricated products which had used Super Steels materials.  

Like the case study above, Super Steels registration with the PPSA allowed them to obtain security over their raw materials, the already fabricated products that used their steel and the debts due to the insolvent client from previous sales that used Super Steels materials.

Super Steel now had a strong negotiating position with the administrators. A deal was done, and Super Steel received over 50 cents in the dollar, far better than the unsecured creditors who received nothing. 

The only difference between Super Steel and general unsecured creditors was their registration of their security on the PPSR.  

The lesson in both these case studies is to ensure you have correctly and completely registered your security on the PPSR.  Your terms of trade create your security, your customer agrees to your security when they sign your terms but it’s up to you to ensure you correctly register it. 

If you’d like to give your business a quick health check and see if your assets are correctly registered on the PPSA, ask us about an Assurance Review.

At PPSAdvisory, we can identify the benefits, as well as the costs of compliance, so you can make an informed decision on whether it makes sense for your business. 

To book an Introductory Service, contact our team today.

Remember, if it involves the PPSA, involve us. 

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn

Enquire Now

Be prepared for an uncertain economy

We’ve seen it many times before – when the economy nosedives, many businesses follow. Protect your business from the insolvency of others.

Long-term security

Trying to recover your debt and/or equipment after your client becomes insolvent is too late. Tighten your security to protect future payments and/or hired equipment.

Complicated paperwork done for you

Don't stumble at the final hurdle. We handle all the crucial paperwork to ensure you are correctly registered and your assets protected.