Terms of trade and how registering your security interest can assist your business

The Personal Property Securities Act 1999 (“the Act”) has become a significant part of New Zealand commercial law. The Act created a publicly available record of security interests over ‘personal property’ and has become a tool by which businesses can protect their interests in the event of a debtor becoming insolvent.

Personal property is all types of property except land. For example, stock in trade, livestock, crops and vehicles; along with intangible property such as hire purchase agreements, company shares, money, trademarks and patents; and all presently owned property and property purchased in the future. If your business supplies ‘personal property’ on credit, then you need to understand how the security regime works, and that you have terms of trade in place to protect your position.

When introduced, the Act established the concept of ‘priority’ over the traditional concepts of ‘ownership’ or ‘title’. The Act created the Personal Property Securities Register (“PPSR”) which acts as a notice board to the public of a party claiming a security interest in certain assets. Generally, if a debtor has granted a security interest to more than one creditor, then the creditor who registered on the PPSR first, and not the creditor who entered into the security agreement first, has the priority security interest.

If your business supplies equipment, goods or materials to a customer on credit, then this will give rise to a PMSI. PMSI stands for ‘purchase money security interest’ which is a seller’s interest in assets that have been supplied to another party but for which the full purchase price is yet to be paid. While registration in order of time on the PPSR is key, a PMSI has a super priority over earlier registered security interests as long as the PMSI has been created and registered correctly.

It is important to understand the implications of not correctly creating and registering your PMSI security interest – if done correctly you can avoid the mistake of falling into a pool of unsecured creditors.

To be able to register your claim on the PPSR, you need to have obtained agreement in writing from the debtor. This agreement takes the form of terms of trade, being the document which sets out the terms on which you will supply goods on credit. These terms need to contain a retention of title clause and they need to be given to the customer before the goods are supplied. The terms of trade need to clearly indicate that a security interest will arise in the goods being supplied on credit and the customer must accept these terms of trade.

The next step in securing your security interest over the goods supplied, is to register your PMSI security on the PPSR within certain timeframes. Ensuring you have correctly followed the registration process and timeframe guidelines are critical steps in ensuring that you have a validly registered PMSI.

The significance of being able to claim a PMSI over your unpaid goods, is that in the event of a creditor’s business falling over, as the holder of a PMSI, you will have priority over other secured creditors in the unpaid goods. For example, if the creditor’s bank holds a General Security Agreement (“GSA”) over all the creditor’s personal property and assets, then your PMSI over the goods you have supplied on credit, will take priority over the bank’s GSA security. You will be able to extract the unpaid goods before the bank claims everything under their GSA.

The Personal Property Securities Act is a technical area of law, and as such you should seek advice from your solicitor. The team at Bramwell Bate will help put in place your business terms of trade ensuring that a security interest is created to protect the goods supplied on credit. We will also help you register your security interest in these goods on the PPSR.

There is minimal time and cost involved in protecting your interest in goods supplied to customers, however if the process is not followed correctly, then the economic loss suffered could have a significant impact on your business.

By taking action, your business will avoid the reality that the majority of suppliers face when a customer falls over, that of being owed money but never seeing a cent as one of many unsecured creditors.