Customer Gone Insolvent? Your PPSR Registration Could Be Critical

When a customer enters voluntary administration or liquidation, one of the first questions creditors ask is:

“Can I get my property back?”

The answer often depends on whether you have properly registered, and perfected, your security interest on the Personal Property Securities Register (PPSR).

Many businesses rely on credit applications, terms and conditions, or retention of title clauses to protect their position. However, if your customer becomes insolvent, those protections may not be enough unless your security interest has also been properly documented and registered.

Why Does a PPSR Registration Matter During Insolvency?

A PPSR registration gives notice to the world that you have a security interest in particular a property.

If you supply goods on credit, hire equipment, lease assets or retain ownership of goods until payment is made, a PPSR registration is the most effective method to help protect your rights if your customer experiences financial difficulties.

Without a valid registration, you may find yourself in the same position as other unsecured creditors, competing for a share of whatever assets remain after distribution to secured creditors.

In many insolvencies, unsecured creditors recover only a fraction of what they are owed if any.

What Happens During Voluntary Administration?

Voluntary administration is often the first formal insolvency process a business enters.

Once administrators are appointed, they take control of the company’s affairs while investigating its financial position and considering options such as a restructure, deed of company arrangement or liquidation.

At this stage, creditors are generally restricted from taking enforcement action without consent or Court approval.

If you have a PPSR registration, you should promptly:

• review your registration details;
• gather your security agreement and supporting documents;
• notify the administrator of your claim; and
• seek advice regarding your enforcement rights.

A properly registered security interest will typically place you in a stronger position than unsecured creditors when administrators assess competing claims to company assets.

What If the Company Goes Into Liquidation?

If the company enters liquidation, the liquidator takes control of the company’s assets and distributes available funds according to the priority rules set out in the law.

Generally speaking, secured creditors are better positioned than unsecured creditors because they may have rights in specific assets that are subject to their security interest.

For example, if you supplied equipment under a retention of title arrangement and correctly registered your interest on the PPSR, you may be able to assert rights to that equipment ahead of unsecured creditors.

The position becomes much more difficult if your security interest was never registered or was registered incorrectly.

What Is a Vesting Risk?

One of the most common PPSR mistakes businesses make is assuming that a signed contract alone will protect them in the event of a customer’s insolvency.

Under the PPSA, if a security interest has not been properly perfected and the customer becomes insolvent, the property may be treated as belonging to the customer for the purpose of distribution by its liquidator.

In simple terms, this can mean that property you believed was protected becomes available to the liquidator for the benefit of the company’s creditors.

This risk can arise where:

• no PPSR registration was made;
• the registration was made too late;
• the registration contains critical errors; or
• the supporting security agreement is defective.

By the time insolvency occurs, it is often too late to fix these issues.

Who Gets Paid First?

Many people assume that whoever owns the goods automatically wins.  Unfortunately, it is not always that simple.

The PPSA contains detailed priority rules that determine which secured party has the strongest claim to particular assets.  As a general rule, the first perfected security interest in the property takes priority over the interests perfected after it.

These priority rules are particularly important where a customer has granted security over all of its present and future property (AllPAAP) to another creditor, such as a bank. In that situation, you should consider whether the goods you supply can be protected by a purchase money security interest (PMSI). If properly registered and perfected, a PMSI may give you priority in those specific goods over earlier general security interests registered against the customer.

Priority can be affected by:

• whether the security interest was perfected;
• when the registration occurred;
• whether the interest qualifies as a PMSI; and
• whether registration requirements were met.

This means that two parties with competing claims to the same asset may have very different outcomes depending on their PPSR position. 

Can You Recover Your Goods?

Whether you can recover your goods will depend on the circumstances.

A correctly perfected PPSR registration will assist you to:

• recover goods supplied under retention of title arrangements;
• reclaim leased or hired equipment;
• assert rights over sale proceeds; and
• negotiate from a stronger position with administrators and liquidators.

However, each matter is subject to its specific facts. The type of asset, competing security interests and the wording of the underlying security agreement can all affect the outcome.

If you would like to discuss options for protecting your business, the Corporate & Commercial team at Coulter Legal can assist by reviewing your terms of trade, security arrangements and PPSR registrations to help ensure they operate as intended if a customer becomes insolvent.