PPSR – Beware of Big Brother!

By Alan Johnston May 01, 2014 Full Credit

I was left speechless the other day and those who know me will attest to the fact this is not a common occurrence.

However I couldn’t help but be gobsmacked by a document that was referred to me for advice. The document was called a PMSI Waiver, and had been sent to one of our clients by one of the “big five” banks for them to sign.

Basically the bank was requesting our client ( “the Creditor” ) to waive their Personal Property Securities Register (PPSR) rights with regard to any proceeds owing on goods the creditor supplied to a particular customer (“the Customer”) of the bank. Not only that, but within the document was a Covenant in relation to proceeds:

“The Bank has priority ahead of the Creditor to the proceeds of sale of the items at any time”.

This was followed up with an even more draconian clause:

“If the Creditor receives at any time any of the proceeds of sale of the items the subject of the Bank’s security interest, the Creditor will hold such proceeds on trust for the Bank and immediately account to the Bank for all proceeds so received.”

Before reviewing the impact of this document, and these clauses in particular, let’s take a step back in time to pre-2002, before the PPSR was introduced. Until then, the only real security available to a supplier of goods was a Retention of Title clause (ROT or “Romalpa” Clause) in their Terms of Trade (assuming they didn’t hold a Personal Guarantee or mortgage security), which stated that the goods supplied remained the property of the supplier until such time as they had been paid for.

This was an unsatisfactory situation from a supplier’s perspective as it only allowed for repossession of the goods in circumstances where they were not co-mingled with other product. The PPSR not only incorporated the Romalpa Clause benefit but, importantly, went much further towards ensuring protection for the supplier, by giving them rights to monies still owed on their goods and even to tracking and recovering proceeds already received by the customer for the suppliers goods, which may have been diverted elsewhere.

So now we have a large corporate bank seeking to take us back in time, and effectively negating the very rights the PPSR was introduced for the purpose of protecting.

But wait, there’s more! The clauses quoted above do not make reference to any “trigger points” (i.e. Events of Default). In other words, it does not require any particular event to set the wheels in motion. In fact the latter of the two clauses above refers to “…receives at any time any of the proceeds of sale of the items…”

One can only interpret this to mean that the proceeds of any goods sold to the Customer belong to the Bank at all times, and must be held on trust for them!

 

WHAT IS ALL THIS ABOUT?

Why are the banks going down this path? (I am assuming that in due course all banks will follow the leader – if they are not already doing so.) The reason, I presume, is as follows.

Banks traditionally provide funding/working capital to their customers’ businesses, based on security in the form of a General Security Agreement (GSA). In its earlier life, prior to the introduction of the PPSR, a GSA was more commonly known as a Debenture.

Basically the bank assesses the value of the unencumbered assets of the business, which generally comprise of stock and debtors (with a few fixed assets such as vehicles and plant thrown in.). It then lends against the net value of the assets and secures the debt with a GSA registered on the PPSR. As the resale value of plant and stock is often very low, a greater reliance is placed on the value of the debtors, which could be more easily be converted to cash if need be.

Since the PPSR allows for suppliers to claim on monies owed to their business by the end user customer, the value of the debtor’s ledger to the bank may not be as high as first appears (particularly if there is a PMSI in place and the supplier hasn’t been paid their money). In this instance, the supplier may have first call on the debt proceeds, diminishing the bank’s perceived value.

Nevertheless, it is very difficult to perceive that suppliers will willingly forego at the behest of the bank a crucial part of the protection the PPSR provides them with. And especially based around a clause that puts at risk monies that have already been paid to the supplier.

Nonetheless, the pressure may well come from the customer to get the supplier to sign the waiver, rather than from the bank itself. After all, it is the customer’s request for funding from the bank that has brought about this situation, so how far will the customer go in applying pressure on the supplier for the modification, or release, of the PPSR charge? Will they consider taking their business to another supplier who doesn’t register on the PPSR?

So watch this space – I suspect we haven’t heard the last of this interesting conundrum.

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Alan Johnston is General Manager, CreditWorks Data Solutions Ltd, and has been involved in credit management for over 35 years. In 2011 he was presented with the NZCFI Credit Professional of the Year Award, for his achievements within the credit industry. Email him at alan.johnston@creditworks.co.nz or call him on 09 520 8133 to find out more.

 

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