Is Your Business Exposed to Risk?

Renewals are not a two-minute task, so the key is to start planning now to avoid a bottleneck at the end of January. Failing to renew existing registrations will expose your business to risk.  It’s that simple.

Dragging your heels

The problem with dragging your heels with renewals is that it’s not a quick job for the last minute. As with any process, steps must be taken to plan and establish it within your workflow.

The rules around the PPS register are quite clear. Renewing late by as little as one day will result in your registrations expiring, which exposes your business to risk. You lose what's called 'continuity of perfection'. In other words: to the bottom of the class you go.
The consequences can be serious:

• Your registrations will cease to exist
• You will have no choice but to create new registrations
• Your priority status will be down the drain. So, when a customer goes bust, and you’re trying to get your goods or money back, you are way down the pecking order. Other security holders may now have priority if they have general security agreements.  

There’s another lesser known consequence under section 588 of the Corporations Act. That is, your registration will become ineffective if you register on the PPSR more than 20 business days after the creation of a security agreement and your customer becomes insolvent within six months of registration.

Keep in mind that a ‘security agreement’ is the agreement that creates your security interest. Usually, this is a specific rental/lease agreement or terms and conditions of trade signed way back with the credit application.

If you miss the renewal date and have to process a new registration, you will face a further six months of risk.

Two birds, one stone

The most cost-effective way to correct any errors in your PPS registrations is to fix them at the same time as you renew.

Errors are a big deal on the PPSR.

Any error or omission in a registration will reduce its validity or void it entirely. That means your registration may be worthless, including your claims to goods or money – which could be millions of dollars in assets or collateral.

It’s alarmingly easy to make an error. One company lost a $1.3 million drilling rig when a customer became insolvent because it had registered an 8 instead of a B in a VIN.

Here are the top 8 most common errors:

1. Claiming a security interest is transitional when it is not
2. Claiming a Purchase Money Security Interest (PMSI) when there is none
3. Failure to declare a PMSI when the security interest is a PMSI
4. Registering PMSIs outside of allowed time limits
5. Registering a security interest more than 20 business days after the creation of the security agreement
6. Typo in the serial number of a serial numbered good
7. Selecting the wrong collateral class 
8. Wrongly identifying the grantor

The questions asked of you during the registration process can be challenging to answer. There’s terminology you’ve probably never heard of before. Then there’s the fear of getting it wrong. It might make sense to leave fields blank because you don’t understand the question, but this will only make matters worse. Omitting information or incorrectly registering is pretty much the same thing as not registering at all.

The renewals process gives you an excellent opportunity to do a health check on your registrations to get them right.

A sticky question

Transitional vs Non-Transitional. Should you renew both or choose one?

We’ve saved this topic until towards the end of the post because it takes some warming up. Explaining the intricacies of transitional and non-transitional security interests could drag us into a mire. One thousand words later and we could still be untangling it.

So, we’re sticking to an overview. Read these five dot points to find out the most critical information. To join the dots, speak to a PPSR expert about the best course of action for your particular circumstance.

• If you had a security agreement entered into before the commencement of the PPSR (30 January 2012) the security interest registered on the PPSR was called a transitional security interest.
• At the time there was a substantial legal debate about what constitutes a security agreement. Businesses became worried about whether they were registering correctly. To cover themselves many decided to take out a dual registration – one transitional to protect any goods or equipment supplied before 30 January 2012 and one non-transitional to protect their future supplies.
• Since then there has been a court case – Central Cleaning Supplies – which states that the security agreement is the terms and conditions attached to the credit application and they come into force with the placing of the first order.
• The court case has led many to believe that it’s okay to renew your transitional registration and let the non-transitional registration lapse – no one wants to pay twice for renewal. Yet, relying on the outcome of one court case might be a risky approach.
• Much of the uncertainty is around the terms of trade. The latest advice is to make sure your terms of trade are rock solid – that they undoubtedly create a new security agreement. When issuing terms of trade, use phrases such as “these terms supersede or replace earlier terms” rather than “update”.  A conservative approach enables a more certain outcome.

What follows is our conservative renewal approach. Every business is different so be sure to seek specialist PPSR advice first.

1. Issue new terms of trade to all customers ASAP to intentionally create a new security agreement.
2. At the same time, register a new non-transitional registration. Make sure you do this within 20 business days of issuing the new terms of trade to avoid falling foul of section 588 of the Corporations Act.
3. Do a review early in 2019 to see if there are debtors (businesses that owe you money) outstanding from the period before this registration. If there are, you need to make a commercial assessment and renew the transitional as well.
4. Allow other transitional registrations to expire.

What’s in it for you?

Registering on the PPSR might seem like a lot of hassle, but the reality is that it has compelling benefits. Not least of which is that it protects your business from bad debt. Writing off bad debt as a cost of doing business is now an outdated concept.

A valid PPS registration gives you an enforceable security interest over the goods you’ve sold on payment terms or leased to a customer.

If your PPS registration is on time and error-free, it places you on the pedestal of a secured creditor. Rather than ignoring you completely, you will suddenly become visible to insolvency practitioners.

The benefits are even greater if you have an effective Purchase Money Security Interest (PMSI). It means your security interest may have ‘super-priority’ that defeats other registered security interests in those goods (e.g. a bank’s general security agreement).

If your customer goes bust before paying for your goods, you will be granted a seat at the negotiating table with a considerably higher chance of recovering your debts. Your interests are even protected if your goods or assets are sold on or installed onto other goods.

The PPSR also gives credit managers a secret weapon against Preferential Payment claims (or Unfair Preferences) from liquidators. By registering on the PPSR, you become a secured creditor and insolvency practitioners are less likely to come knocking at your door when a customer goes bust. You can continue doing a great job of collecting money from delinquent debtors and slow paying customers without the fear that it will be all taken from you under the Unfair Preference regime.

To sum it up, using the PPSR is an effective way to reduce your risk of loss.

For purpose-fit guidance and exceptional support in validating, updating and renewing PPS registrations, contact our PPSR specialists at EDX by Equifax. With 40 years of combined experience in insolvency and credit management, they make it their mission to help businesses like yours use the PPSR to insulate against risk, including negotiating with insolvency practitioners to protect your rights as a creditor.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.