PPSR - Audit and amend your apparent credit risk profile

The Personal Properties Securities Register (PPSR) established under the Personal Properties Securities Act 2009 (Cth) (PPSA) records security interests held by creditors over certain personal property of debtors.

A consequence of registration of security interests over the assets of a debtor, is that registration may also provide an indication of the apparent credit risk of the debtor to the world at large. For example, numerous PPSR registrations over a company is likely to indicate that the company may be indebted to numerous creditors. This may have an impact on that company’s ability to raise necessary finance.

However, not all registrations of security interests on the PPSR may be current or legitimate.  It’s common with some debtors that their PPSR registration profiles may contain registrations which no longer apply, or worse, were improperly recorded on the PPSR.

We have been advising clients that if they wish to improve their apparent credit risk profile on the PPSR, they should seek to have the non-current and improperly registered security interests removed from the PPSR.

The PPSA sets out a process for dealing with those registrations, which involves:

• written demands by the debtor to the secured parties to remove or amend the registrations on the basis that the registrations no longer (or never did) secure any obligation from the debtor to the secured parties, including the payment of monies owed (e.g. in circumstances where the debtor has paid the creditor/secured party all amounts owed); and
• if the secured parties do not remove or amend the registrations within 5 business days of service of those written demands, the debtor may apply to the Registrar under PPSA and seek assistance to have the registrations amended or removed.

If you would like assistance with the removal or amendment of registered security interests on the PPSR, please contact Andrew Bini.

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Why do we need terms and conditions of trade?

Many of our clients who are suppliers of goods and services operate under formal written terms and conditions of trade.

Prudent clients usually have their terms and conditions periodically reviewed to ensure they provide the best available protection.

For example, in recent years many suppliers of goods have amended their terms and conditions to include new provisions under which the customer grants a security interest over the goods supplied in favour of the supplier, to support the customer’s payment obligations. The grant of the security interest enables the supplier to register that security interest on the register created under the Personal Properties Security Act 2009 (Cth) (PPSR).  Without registration of a security interest, a supplier might not have the ability to recover the goods, or amounts owed with respect to the goods, if the customer goes into liquidation or declares bankruptcy.

However, it is evident to us that there are many suppliers who trade without proper terms and conditions or with outdated terms and conditions which do not entitle the supplier to register security interests on the PPSR.

The simple answer to the question as to why terms and conditions of trade are necessary is twofold:

• to clearly set out the terms of the sale of goods and/or services arrangement (ie the contractual relationship) between the supplier and the customer; and
• to provide the some protection a supplier of goods may need in the event of non-payment.

Typically, when a supplier is dealing with a new customer the supplier will provide the new customer a credit application, usually accompanied by a director’s guarantee.  At this point we recommend the supplier also provide its terms and conditions of trade to the new customer and arrange to have the credit application, the director’s guarantee  and the terms and conditions of trade signed by the new customer.

Apart from the usual mechanical provisions regarding ordering of goods and/or services, price, delivery, price variation and variation and cancellation of orders, terms and conditions should clearly set out:

• the terms of payment;
• an obligation on the customer to pay interest on outstanding amounts at a specified rate if payment is not received on the relevant due date;
• a right in the supplier to charge the customer all costs (including legal costs) incurred by the supplier in pursuing and recovering unpaid amounts;
• retention of title (whereby title to the goods is not provided to the customer until such time as payment for the goods delivered have been received by the supplier) and the right for the supplier  to access the customer’s premises to recover the goods; and
• PPSR provisions enabling the supplier to register a security interest on the PPSR.

Of course, there may be other specific or unique provisions depending upon the nature of the goods and services to be provided.

We have experience in preparing and amending terms and conditions of trade for suppliers of goods and services of various types.

If you would like more information on terms and conditions of trade please contact Andrew Bini, senior commercial lawyer, Nevett Ford Melbourne.

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Buying a business? Do your due diligence first!

Whether you intend on purchasing a small retail business or the business operations of a listed public company, the same fundamental approach should be applied: do your due diligence first!

As advisors to purchasers of businesses of various types and sizes, we are regularly involved in conducting legal due diligence.

However, a purchaser’s pre-contractual due diligence should not be limited to a lawyer’s review of legal matters, but should extend to:

• Inspection of plant and equipment: being a physical investigation by the purchaser (or preferably by qualified contractors on behalf of the purchaser) into the state of plant and equipment and other hard assets sold with the business.  If there are any problems with those assets, then the purchaser’s lawyer should be in a position to negotiate amendments to draft sale contracts requiring the vendor to rectify those problems prior to settlement.  Physical due diligence should also indicate whether the sale price reflects the true value of the physical assets being sold;
• Inspection of the premises including the landlord’s fixtures, fittings and installations.  Again this should be done by a qualified person on behalf of the purchaser and a report provided.  Issues arising out of that report should be dealt with in the sale contract to ensure the vendor rectifies issues prior to the purchaser taking possession of the premises and potentially becoming liable for hidden problems.
• Financial due diligence into the business including a detailed review of the financial statements of the business for at least the last five years.  The purchaser’s accountant should report on the financial status of the business including whether the purchase price is reasonable based on the business’s financial performance in recent years.
• Enquires with the local council and with owners of adjoining businesses as to potential changes to the local environment, such as the construction of roads, the construction of multi-level buildings adjacent to the business premises and other matters which might lead to business disruption in the future. 

Ideally legal due diligence will involve at least the following:

• An investigation into the status of the vendor:  If the vendor is a company, what is its registration status with ASIC?  In this regard, the assets of a deregistered company are vested in ASIC and cannot be dealt with by that company until re-registration, which may be problematic;
• Determining whether the vendor a trustee: If it is, then the sale contract should record the vendor as being the trustee of a trust to ensure the purchaser will acquire both legal and equitable title to the business assets;
• Personal Property Security Register searches to determine the existence security interests which may be registered over the assets of the vendor.  This will identify the parties from which the vendor must obtain releases of those security interests prior to or at settlement;
• An examination of significant contracts held by the vendor including the extent to which plant and equipment is leased by the vendor.  Also, significant customer contracts should be reviewed to determine whether those incomes streams can be assigned to the purchaser at settlement.  If they are not capable of assignment then, the sale price may have to be reduced to reflect the loss of those income streams;
• A review of the premises lease documentation including a determination of the extent of time remaining under the lease and options and, consequently, the amount of time the purchaser will have to obtain a return on its investment.  If there is insufficient time remaining under the lease we suggest the sale contract be made conditional upon the vendor obtaining the landlord’s consent to extending the term of the Lease as part of the transfer of lease documentation;
• A review of the status of all licences and permits held by the vendor to conduct the business which are to be transferred to the purchaser at settlement – thereby enabling the purchaser to lawfully conduct the business at the premises on and from settlement; and.
• Review of employment agreements and liabilities.

Once each area of due diligence has been undertaken and the material issues have been identified, it becomes the purchaser’s lawyer’s role when negotiating the sale contract to have included in the contract specific obligations on the vendor to rectify those issues prior to or at settlement.  Of course, that depends on how willing the vendor is open to bearing the cost of rectifying those issues.

Quite often impatient purchasers pay the price for poorly conducted and/or limited scope due diligence.  Although sale contracts may offer some form of vendor warranties (covering things such as the operational condition of plant and equipment) they can be little comfort to a purchaser when after settlement the vendor has disappeared overseas on vacation or doesn’t have the finances to compensate the purchaser for breach of a vendor warranty.  On that basis, we firmly believe quality pre-contractual due diligence which extends beyond legal due diligence is prudent practice all purchasers should consider adopting.

At Nevett Ford Melbourne we have experienced commercial lawyers with extensive experience in assisting purchasers of all types of businesses.

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