As a credit manager you will often need to consider taking security over customers in order to protect outstanding exposure.

As we all know, when you take security (like a bank mortgage over your house to secure your home loan), you have a better chance to recovery from an insolvent debtor than you would if you were an unsecured creditor.

But the security landscape is complex; there are a variety of types of security interests open to trade suppliers and these security interests extend beyond the stock that’s been supplied.

Since the PPSA regime came into effect seven years ago, there have been a number of legal updates regarding the security interests of trade suppliers.

In this article, we look at the best way to deal with insolvency practitioners in the event that your customer does go into insolvency and how to properly enforce your security claim; putting your position forward so that you’re dealt with on a priority basis by the administrator or liquidator.

We will also look at recent case law with regards to securities available to trade suppliers and how this case law has helped suppliers to navigate this complex environment.

Security Claims

When an administrator or liquidator is appointed to a company, one of the first things they do is work out what the company assets are and who their creditors are, both secured and unsecured.

Secured creditors are generally given preference over unsecured creditors. As a secured creditor not only do you have a better chance of recovering your debt or part thereof in the event that there are assets that you have security over, but you’ve also got a better chance of avoiding other issues such as unfair preference claims filed by liquidators.

The range of securities available to a trade supplier or a supplier of goods on credit includes retention of title (ROT) security or even a general security over all the assets of the company. To put you in the best position to recover your debt, it is possible to have all of these securities; that is ROT and a general charge type of security in your terms of trade with your customers.

However, you must have these securities written down. This can be in your credit application or even on your invoices provided your customer has agreed to them. You must register your security interest on the PPSA. But be careful, there are different types of registrations for a ROT interest and a general security interest. Getting it wrong can often mean a loss of security.

So how do you deal with recoveries over the various different types of assets as a secured creditor? Let’s start with Stock.

Enforcing Claims over Stock

Paid and unpaid stock

A trade supplier with ROT security over a customer’s assets who  is in an insolvency administration is entitled to get unpaid stock back in priority to any other secured creditors over the same stock. The usual competing secured party to a ROT supplier over its stock is a creditor such as a bank with a general security over all company assets.

A ROT clause or security can also be drafted to claim stock already paid for but still with the customer in order to secure any residual unpaid debt from the sake of other products. However, in the case of paid stock, this can be claimed back providing there’s no other creditor who’s got security over that stock, such as a bank with a general security, who registered their interest on the PPSA earlier than you did. Sometimes the earlier interest has no debt or there is no earlier interest. While rare, this can and does happen resulting in an even better recovery for the ROT supplier.

Mixed stock

Many businesses supply goods that are used by their customer to make a different product or mixed product, for example plastic resin supplied to a plastic chair manufacturer.

Under the PPSA, if you have supplied goods that become part of another product then your security interests extend to that mixed product, so if you provide your customer with the plastic, you get security over the whole chair.

On the appointment of an administrator, where goods are made up of different products from different suppliers, the administrator must first work out what the relevant shares are for each of those suppliers to account properly on the security. If there aren’t enough funds to do this, the administrator might ask for funding from suppliers to go through this process. The creditor may also be asked to prove that their unpaid product is in the final product.

In this instance, it is important to inform the administrator that you have a security interest over the final manufactured product, and the administrator needs to account for this. By making this clear from the beginning, you ensure you aren’t placed at the bottom of the pile, or worse still, forgotten entirely.

Proceeds claims

Beyond taking security over your stock, another aspect of recoveries for claims is unpaid debtor proceeds.

If a customer on sells your goods or a product made with your goods to a third party the debtor receipt that they receive forms part of your security interest. The recovery can be substantial where the customer has third party customers on credit terms, particularly if a buying entity on sells the goods to its subsidiaries.

On the appointment of an administrator you should ask for a stock list, a list of unpaid invoices and a list of unpaid debtor receipts from the sale of its stock. 

Invoice Finance S64 notices

Section 64 notices; can they be used to your advantage?

A section 64 notice is a notice served upon a party with security over the invoices financed by the invoice financier. So a supplier with ROT has a security interest in the stock supplied in addition to the invoices issued by its customer for the on sale of its stock. When those invoices are financed then the financier issues the notice. The financier obtains priority to the invoice receivables over the earlier ROT supplier’s interest in the receivables.

However, what many ROT creditors don’t realise is that they have a claim to the finance monies. That is where an invoice financier pays your customer in relation to financing of its third party debtor invoices, any finance that is received by your customer in relation to invoices forms part of the ROT supplier’s security interest.

While financing that occurred weeks before the administration can be difficult to trace, finance received just prior to administration or finance received by the administrator can be claimed.

Enforcing against an administrator

There is a moratorium on secured ROT suppliers collecting their goods during the administration period. To collect their goods creditors must have the administrator’s consent or the Court’s leave. A Court application for leave to collect goods can be costly.

The administrator can deal with the creditor’s stock in the ordinary course of business of the debtor company. The Administrator is under a duty when selling the ROT stock to act reasonably and is legally bound to account to the unpaid stock for the cost price.

Dealing with insolvency practitioners

Secured creditors should get in touch with the administrator immediately upon their appointment to advise of your security interest and the information you need.

Give the administrator as much information as possible, including materials such as:

your credit application

  • your PPSA registration
  • your latest monthly statement of unpaid invoices

 

As a minimum you should request stock lists and a list of unpaid debtor invoices in relation to the on sale of your goods. New Insolvency Practice Rules ensure that insolvency practitioners provide particular information and records within five days of the request by a creditor.

The first meeting of the creditors is a good opportunity to find out when the administrator will be sending the stock lists to creditors. Be sure to work with the administrator; offering assistance to prepare the stock list; making an onsite visit to identify your stock; providing records as requested and participating in the creditor meetings. 

Once you have the materials creditors can assess the value of the claim and ensure the administrator properly accounts to you.

Creditor Tips: 

Get in touch with the administrator immediately upon their appointment to advise of your claim and the items you need, including a stock list, a list of unpaid invoices and a list of debtor receipts in relation to the sale of your stock.

Work with the administrator:

    • Offer assistance to draft the stock list.
    • Make an onsite visit to identify your stock on the administrator’s behalf.
    • Provide records as requested.
    • Attend the first creditors’ meeting to find out when the administrator will be sending the stock lists and other information claims to the secured creditors.
      • Participate in creditor meetings.

Give the administrator as much information as possible, including materials such as:

    • your credit application.
    • your PPSA registration.
    • your latest monthly statement of unpaid invoices.

 

For more information, please contact:

 

Daniel Turk

Partner

T:  02 8257 5727

M: 0408 667 220

Daniel. Turk@turkslegal.com.au

December 2018

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