Sale of goods on credit terms
One of the principle reasons the PPSA was introduced was to help suppliers protect themselves from the insolvency of their customers. For far too long suppliers of goods have been treated as unsecured creditors on the insolvency of their customer, resulting in a return of only cents in the dollar or nothing at all!
If you’re supplying goods on credit, you should now incorporate retention of title in your terms (you probably already do), comply with the PPSA and register your customers on the PPS Register.
Suppliers complying with the PPSA can now obtain security over the goods you supply and the proceeds arising from your customer’s use of those goods. And the Government charge is only $6.80 for each registration. In most cases only one PPS registration over your customer is required, providing protection for 7 years of ongoing sales to them, less than $1/year for each customer!
These examples will help:
Spare Parts Co.
- Spare Parts Co sells automotive parts and one of its biggest customers is Transport Co
- Transport Co went into Voluntary Administration, owing Spare Parts Co more than $1m.
- Spare Parts Co incorporates retention of title in its terms of trade and is complying with PPSA
- Spare Parts Co is now a secured creditor over the unpaid parts it supplied Transport Co, even though many of them have been fitted to Transport Co’s vehicles.
- Spare Parts Co has the legal right to recover the parts from the vehicles.
- Of course the Administrators don’t want Spare Parts Co to remove their parts (to do so would ruin their ability to trade the business on) and so they negotiate a commercial settlement with Spare Parts.
- Spare Parts received a payment from the Administrators of 98 cents in the dollar whilst unsecured creditors received less than 5 cents.
- The only difference between unsecured creditors and Spare Parts Co was the $6.80 PPS registration.
- Asphalt Co supplied Roads R Us with asphalt and road base.
- Roads R Us constructed roads for the Main Roads Department.
- Asphalt Co incorporates retention of title in their terms of trade and had registered their interest over Roads R Us on the PPS Register.
- Asphalt Co was owed more than $600k when Roads R Us collapsed.
- What can Asphalt Co do? It can’t recover the road base and asphalt already supplied, so what’s the point of their compliance with the PPSA? The PPSA provides another level of security – in the proceeds from Roads R Us use of the asphalt and road base.
- When the liquidator was appointed to Roads R Us, the DMR owed them millions of dollars for work they had performed. Of course in performing the work, Roads R Us had used Asphalt Co’s materials. Under the PPSA, Asphalt Co has a secured claim over the monies owing by the DMR to Roads R Us as the debt is the ‘proceeds’ from Roads R Us use of Asphalt Co’s materials.
- The liquidator paid Asphalt Co all its debt and the only reason for doing so was Asphalt Co’s compliance with the PPSA.
Remember in most cases you don’t want your goods/materials back. The important point is you now have a seat at the negotiating table with the Insolvency Practitioner.
Given the low cost and the significance of the many benefits of compliance, you really should consider adopting the PPSA. You’d be crazy not to!
If you’d like further information contact PPSAdvisory by clicking here.