Why PPSR Guidance is Needed During Insolvency Surge

Why PPSR Guidance is Needed During Insolvency Surge

By Malcolm Poslinsky, PPSR Specialist, EDX from Equifax

86% of credit professionals responding to a Credit Pulse survey conducted by Equifax say the greatest benefit of the PPSR is the increased likelihood of recovering goods or payments when customers become insolvent.

With insolvency rates rising 46% in the second quarter of this year compared with the same period the previous year, there is a new urgency to registering on the Personal Property Securities Register (PPSR). For trade creditors or those leasing, hiring or financing equipment, PPS registrations are vital for securing your business interests during an insolvency. Without it, businesses risk losing millions to untraceable and unrecoverable assets or money during an insolvency claim. 

This article explores case studies demonstrating how businesses have successfully used the PPSR to recover goods or money when a customer goes bust. We simplify the process which ensures compliance with key PPSR timing requirements because let’s be honest, if it takes too long it will be too late or forgotten.

But first let’s look at the most recent insolvency trends, which are at their highest levels since the Covid-19 pandemic.

Insolvency trends

Increased operating costs, shrinking consumer spending and a tougher lending market has contributed to 5,961 insolvencies in the first half of 2024.

The construction and hospitality sectors remain the hardest hit, with insolvencies up 35% and 59% respectively in Q2 2024 compared to the same period the previous year. Insolvency rates for these sectors have grown faster than any other industry over the past four quarters. 

These insolvency figures align with credit demand data, which shows that asset finance demand was particularly low in Victoria and Queensland. This was due to lower enquiries from borrowers across a number of sectors - including hospitality and construction. 

In Victoria, tight competition, decreasing demand and higher operating costs have contributed to major feasibility challenges. Queensland is dealing with an increasingly tight labour market, partially driven by large infrastructure projects, which again is putting pressure on some operators. These are not factors that can be resolved quickly and the construction industry is likely to remain highly impacted by insolvencies for the foreseeable future. 

The following case studies illustrate how EDX, a subsidiary of Equifax, has assisted companies in protecting their security interests when interacting with insolvency practitioners to safeguard creditor rights.

 Case study #1: Air Conditioning supplier and insolvency practitioner align interests for optimal debt recovery

An EDX from Equifax client is facing a situation where they are owed over $600k by a customer who has recently become insolvent. Initially, the management team thought they would be writing off the debt. However, after a review of  the relevant documentation and invoices, we identified approximately $180k worth of supplies that are likely to be classified as accessions. These items can be repossessed even though they are currently attached to the property. Our client installed various components, including air conditioners, ducts, and compressors. Notably, four large compressors are secured to the site with bolts, making them relatively easy to remove.

If a satisfactory negotiated payment isn't achieved, nearly all items—except for the ducts—could be repossessed. Additionally, our client may be able to claim for the value of work completed, although this will depend on further discussions between the developer and the insolvency practitioner. It’s quite possible that will result in our client getting a payment for the ‘proceeds’ of what they have delivered at full value. 

The good news is that both the insolvency practitioner and creditors are aligned in their interests. If the insolvency practitioner can successfully argue that the developer owes for the work done, our client could receive a significantly higher payment.

Our client's senior leadership team initially underestimated the benefits of PPSR compliance. Fortunately, their credit team had been diligent about registering for PPSR over the years. This foresight could prove invaluable; just one PPSR registration by the accounts receivable team could potentially save them hundreds of thousands.

Case study #2: Equipment finance company fixes 2,000 invalid registrations

An equipment finance company engaged EDX from Equifax to review their 5,000 PPSR registrations. The review uncovered over 2,000 errors, many involving incorrect grantor information, which could lead to substantial financial losses in the event of customer defaults.

EDX conducted a thorough assurance review of the company's PPSR registrations and provided a detailed report with recommendations for enhancing policies and procedures to better protect their interests. Although the company initially attempted to rectify the errors manually, a subsequent review a couple of years later revealed an additional 1,700 potentially invalid registrations.

To address these persistent issues, EDX advised the company to undertake a bulk remediation process, excluding low-value, low-risk accounts to manage costs effectively. EDX recommended adopting the ESIS software for accurate new registrations, leading the company to use this tool to process remediation files and align them with internal records.

The EDX review also identified strategies to reduce costs related to registration duration and the number of listings per customer, which will enhance financial protection and operational efficiency.

Case Study #3: Materials handling company recovers all equipment

A materials handling company encountered significant difficulties reclaiming rented equipment when two customers became insolvent, revealing errors in their PPSR registrations. Prior to reaching out to EDX from Equifax, this company completed 2,617 PPSR registrations on their own accord, many of which contained mistakes. When their customers went into administration, these errors prevented the recovery of equipment worth up to $800,000 each.

Realising the need for expert intervention, the company enlisted EDX for comprehensive PPSR support that included policy advice, managing bulk registrations and implementing ongoing processing using ESIS software to minimise errors and simplify operations.

An assurance review identified numerous mistakes in existing registrations, including incorrect selections and identifiers. EDX remediated these issues through a bulk upload of amendments and new registrations.

EDX established new processes to ensure all registrations were handled correctly and the materials handling company now manages hundreds of registrations, amendments, and discharges each month with ESIS software.. 

PPSR Survey results

Here are the key takeaways from the Equifax July Credit Pulse survey, which asked credit professionals to share their opinions on the PPSR.

The majority of survey respondents (85%) regularly register on the PPSR, with a small minority doing so occasionally or not at all.

Two-thirds of respondents (66%) value third party assistance for optimising PPSR use and making it easier to integrate with other products and services, simplifying their workloads. 34% prefer to manage the PPSR themselves.

Sale of goods on credit is the predominant use of the PPSR by respondents (85%). Other transactions include secured loans, asset protection, personal or corporate guarantees, equipment on hire/lease and equipment finance.

The majority of respondents (86%) believe the No.1 benefit of the PPSR is to increase the likelihood of getting their goods back or getting paid when customers become insolvent. In second place (73%) is the opportunity to negotiate with insolvency practitioners as a secured creditor when customers go bust. Protection against unfair preferences is in third place at 59%.

Other benefits include the opportunity to achieve the number one ranking over other creditor’s claims (45%), protection over the business assets on lease/hire/bailment (25%) and preventing the sale of assets registered by serial number (16%).

The majority of respondents (74%) believe that the PPSR has taken on greater importance in this climate of rising insolvencies. Only 26% report their view as unchanged and none of the respondents reported that PPSR as less important.

It’s vital to know your company is using the PPSR correctly when searching the register or generating, amending or discharging registrations. Yet with the above chart showing ‘1’ as very confident and ‘5’ as very unconfident, it’s evident that most respondents were not confident this was the case.

Timing may be a problem which can render your registrations on the PPSR largely worthless (see The Importance of Timing for the PPSR in the July AICM newsletter), so it is interesting to note that only 77% of respondents were confident in understanding timing requirements. A greater number were confident of other prerequisites like registration details (91%), documentation containing a security interest (84%) and grantor identification requirements (77%).

About EDX

EDX, an Equifax subsidiary, simplifies PPS registrations for businesses. With deep expertise in insolvency and credit management, EDX helps companies protect their security interests and negotiate with insolvency practitioners to safeguard creditor rights.

Learn more at www.edxppsr.com.au

M: 0401 991 917

E: malcolmp@edxppsr.com.au

DISCLAIMER:  This communication is provided for general guidance only and should not be construed as legal advice. As we are not lawyers this is not legal advice and we take no responsibility for any policy decisions.