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Liquidation redux: security against customer default

Liquidation redux: security against customer default

Marketing Brief

Last month I wrote about the importance of making sure that your terms of trade with your customers include a security interest enforceable over the goods you have supplied to your customers, and that you have registered a financing statement describing that security interest on the Personal Property Securities Register (PPSR).

This is essential if your customer goes into liquidation or receivership and you want to repossess any goods that haven't been paid for. I'm continuing this theme with further comments and a few cautionary tales.

With a properly drafted security interest, assented to in writing and registered on the PPSR, you gain a super-priority purchase money security interest (PMSI) over all the goods that you supply in future – well, actually starting with deliveries made up to 10 working days before registration. You must describe the collateral which is covered by the security interest, so that any liquidator has a pretty good idea of what they are, and it is prudent to include reference to the proceeds of those goods – though if there’s no money, you’ll all lose out. Your PMSI will have a super-priority over any general security interest, such as a bank's general security interest over all present and after-acquired property, where the goods are not paid for.

So what happens if the goods in your late customer's stock have been paid for but they owe you lots of money for stock that has been sold? This is a pretty common situation when your customer suddenly goes broke. Well, your PMSI will convert to a general security interest at that stage. And the priority rule for general security interests is: the one who registered first will win. So if your registration predates the bank's, you will win. If it doesn't, you lose. Time improves your situation.

Fine, you say. All of my security interests have financing statements registered over the relevant customer and have been for years. Now, when did you last check that? Because the financing statement stays on the register for five years only, you have to renew it to keep your priority. That's pretty easy. If everything is set up correctly, you'll get a timely email from the registrar reminding you that your financing statement is about to expire, and asking if you want to extend its registration for a further five years for a ridiculously small fee. Now, I've heard a few horror stories of late, of people who thought everything was hunky dory, then found out too late that their registrations had expired – and if they expire you can’t reinstate them back to the original date. The most common reason that financing statements fall off the register is that your email address on the register belongs to a long-departed staff member. The Registrar's reminder email falls into a black hole or is redirected to someone else who has no idea what it means, and deletes it. Always register a generic email address like ppsr@yourdomain.co.nz so that the person in that job for the time being gets the reminder.

And as a plan B check, make it a regular practice to get a report off the PPSR setting out all of the financing statements that your business has registered over customers and other debtors. Check it against your customer list, starting with the customers who run up the biggest debts. If there is no currently registered financing statement, register one straight away so that as time goes on you have a fighting chance of being able to repossess goods that you supply. Constant vigilance is the message!

Rae Nield is a solicitor specialising in marketing law. This article is intended for general information, and should not be relied on as specific legal advice. You should consult a lawyer for advice relating to your own specific legal problems. Rae Nield can be contacted at raenield@marketinglaw.co.nz.


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