Understanding your rights as a secured creditor has become necessary as the number of companies entering administration or other insolvency appointments increases. Data released by ASIC at the time of writing (19 Sept 2023) shows a rise in overall insolvencies of 7.4% in August compared to the previous month, with Accommodation (+20%), Retail trade (+31%) and Information services (+39%) the hardest hit.

When a customer becomes insolvent and an insolvency practitioner (Receiver, Liquidator or Voluntary Administrator, etc) is appointed, your chances of safeguarding your interests are substantially enhanced if you:

  • Have registered your security interests on the PPSR
  • Know your rights as a secured creditor
  • Act immediately to protect your interests

Your rights as a secured creditor

Provided you have correctly registered your security interests in equipment and goods (‘personal property’) on the PPSR, you’re now a secured creditor over your property and its proceeds. This means you have legal rights well beyond just getting your goods back. Here’s what you’re entitled to:

  • Repossess goods held by your customer
  • Claim your share of the finished product if your customer used your goods in a manufacturing process 
  • Claim your share in commingled products
  • Claim your share of any outstanding book debts if your customer on-sold your goods and is yet to be paid
  • Have a defence against a preference claim from a liquidator.

Don’t wait for the insolvency practitioner to inform you of these rights; they are not there to just look after your interest. Their role is to look after all the business’s creditors. They take possession of all the assets, satisfy secured creditors as outlined in the Personal Property Securities Act, realise other assets and then distribute the proceeds to the company’s creditors following the process outlined in the Corporations Act. 

Move quickly to protect your interests

When your customer enters an insolvency event, the first days can be chaotic as the insolvency practitioner seeks to understand the business, takes control and makes decisions affecting customers, staff, owners, contractors and suppliers. They may cease operations or may want to continue trading with the intention to sell the business as a going concern.     

Standard practice for the insolvency practitioner is to search the PPSR and extract a list of secured creditors, then send them a standard letter advising of their appointment and requesting details supporting your claims. Often, an insolvency practitioner gets as little as 24 hours’ notice before being appointed and has minimal time to get to know the nuances of the business and understand each type of stock item and its likely supplier. You are the best person to identify your goods and the amount owed, but you must act quickly. We recommend these actions:

  • Contact the insolvency practitioner

Immediately after the insolvency practitioner is appointed, contact them to provide:

- A copy of your verification statement confirming your PPSR registration
- Evidence that you have registered your hire equipment agreement (on the basis it falls in scope of a PPS Lease) 
- Copies of your sales or equipment hire documents
- A clear description of your goods
- The last known location of your goods or hire equipment (you may, for example, have manufactured it for a specific customer or delivered it directly to a site or customer) 
- Notification that they are not to sell any of your goods without your authorisation 
- A request for access to the premises to achieve the tasks outlined below 
- A request for access to the premises to return your property

  • Visit the premises promptly

Timing is of the essence. Within 48 to 72 hours of the insolvency practitioner’s appointment, they should have completed their stocktake and identified all the goods and assets of the business. Before or at that time, you want to visit the site to identify your goods. Wait any longer, and your goods or hire equipment could be gone, especially if the business continues to trade. 

A fast sale is considered a good sale in insolvency proceedings, so it’s rare for the practitioner to trade a business for longer than 4 to 6 weeks. After that, the business will be sold or closed, and the company’s records will be boxed and warehoused. Sometimes, there will be hundreds of boxes. You may be granted access to them to quantify/confirm your claim, but it will most likely be impractical by then.

Ideally, negotiate an acceptable settlement with the insolvency practitioner for your goods. If a settlement cannot be reached, then collect your goods.

Sometimes goods or hire equipment may not be able to be moved for safety reasons (e.g., scaffolding or fencing on a construction site), but be proactive and request the insolvency practitioner to advise you as soon as it’s no longer required. In some instances, you may be able to negotiate the payment of ongoing hire charges.

  • Prepare documentation

If your goods or hire equipment are still on site, identify and count them. Document what you find and take photos. Don’t rely on the insolvency practitioner to do all the work of listing, matching your claim to invoices and then calculating the value of the goods available for you. 

If your goods have become affixed to other goods – such as a gearbox installed in a vehicle, identify the finished product as you have the right to take possession of your goods, known as ‘accessions’. More often than not, the insolvency practitioner will want to negotiate with you. For example, a truck without a gearbox is of limited value to them.

If your goods are being used in a manufacturing process, identify and quantify the finished products, as you are entitled to your share from the sale of those products up to the value of your goods.  

If your goods have been commingled with similar goods, such as fuel in a storage tank, identify and quantify the goods as you’re entitled to your share from the sale of those products in proportion to the amount you supplied.

If your goods are already sold, you’re entitled to the proceeds of the sale. This is more often than not book debts where the goods supplied have been on-sold, and the end user has yet to pay for them. Request an extract of the outstanding debtors to see if you can trace your goods to the outstandings. You may have manufactured or delivered goods for specific customers.

Case Study: Equipment manufacturer stands up for their PPSR rights

To illustrate the effectiveness of these proactive measures, let’s consider this case study based on a recent insolvency event we are assisting a client with:
A company supplying winches and gearboxes for heavy machinery and industrial applications received this notification from the insolvency practitioner appointed to a customer that collapsed into voluntary administration:
‘We will check if your goods supplied are still in the warehouse. If not, your claim will be considered unsecured’.

The equipment manufacturer knew PPSR compliance extended beyond safeguarding only warehoused goods. They had the right to recover the goods still in the warehouse. They were also entitled to do the same for any of their winches and gearboxes fitted to equipment and vehicles (accessions). Additionally, they were entitled to claim the proceeds from the outstanding debts related to on-sold items.

To assist the manufacturer, we advised sending a representative promptly to the customer’s site. This representative’s primary tasks were identifying and quantifying their goods and requesting access to the customer’s debtors’ ledger and bank accounts, facilitating the determination and identification of any claims on the proceeds.

The inventory assessment successfully identified the company’s unpaid goods and goods sold to an end customer. A mutually agreeable settlement was achieved that encompassed:

  • goods retrieval
  • negotiated settlement for accessions
  • negotiated settlement for goods sold that remained unpaid by end-customers at the time of the insolvency.

For more information on navigating your PPSR rights, go to: www.edxppsr.com.au

Disclaimer: This article covers general matters. There may be special and unique circumstances where other considerations apply. The PPS Act is complex; different provisions may apply in different insolvencies. You may not always achieve 100% success.    
 

Navigating Your PPSR Rights: Action Steps When a Customer Goes Bust

Related Posts

Data analytics can help retailers make better decisions, fight fraud and drive profitability

Data analytics to retailers is like a microscope to a scientist – revealing details and patterns in consumer behaviour that otherwise remain unseen. For online retailers, data analytics can mean the difference between guesswork and precise knowledge about what works. Between maintaining the status quo and adapting to dynamic market changes. Between losing revenue to fraudsters and safeguarding profits.

Read more