PPSA - why the Aussies will eventually copy us
I had the interesting experience the other day of trying to explain the New Zealand Personal Properties Security Act to a meeting of senior Australian credit managers at an organisation called the Australian Credit Forum. I was given 15 minutes plus time for questions, which didn't seem quite enough. On the other hand, the shorter the time, the less chance they had of asking questions that I would be unable to answer. (As it turned out, they had more than enough time to ask those questions.)
Interestingly the thing that left the audience that particularly stunned was the fact that registering a security on our Personal Properties Security Register costs only $3. "It would never be that cheap if the Australian government ran it," I was told.
The trigger for this talk was the fact that Australia is reviewing their law on personal property securities. Australian politicians and academics have been talking half-heartedly about this type of legislation for over 20 years. Why have they shown more interest now? Well, in a nutshell, they've seen that it appears to be working over here, and thought that it might be a good thing for them too. The press release on the Attorney-General's website dated 11 April 2006 says:
"New Zealand is currently experiencing the benefits of their recent reform. The Properties Securities Act 1999 (NZ) came into effect in 2002 and established a single procedure for the registration of security interests in personal property, as well as a centralised electronic register. New Zealand has reported that its reforms have resulted in increased certainty and confidence to the parties in commercial transactions where personal property is used as a security interest and clarity where competing security interest is an issue. Any steps to harmonise Australian laws with New Zealand would clearly benefit Trans-Tasman business opportunities."
The credit managers attending were mainly from large trade creditors. They were an experienced bunch and would generally have contracts with appropriate retention of title clauses. Retention of title (ROT) clauses say, in essence, these goods are ours till they're paid for, and if they're not paid for, we can take them back (unless they're sold first). ROTs, under our PPSA, are a security interest and require registration on the Personal Properties Security Register in order to take priority ahead of a general security.
For anyone out there who's not familiar with all this, let me give an example of how this works now in New Zealand. General Widgets Ltd provides widgets to Pete's Widgetaria Ltd and registers a security over the widgets they supply. Pete's also has an overdraft with a bank, arranged some years ago, which registers a general security over all the personal property (that is, pretty much everything except land) owned at the time the overdraft was taken out or acquired since then by Pete's. The bank's security is also registered on the PPSR. The bank isn't paid so it puts a receiver into Pete's to sell the assets. Because General Widgets have a registered security over the widgets it supplied, the receiver can't touch those goods.
One of the Australian credit managers, after I'd explained how the system worked, suggested that she wouldn't be any better off, so she didn't see any benefit in it for her company. She had a good reliable ROT clause which served her well so why bother changing the law? Well, there are a few extra benefits for her situation. One is that she would avoid the problems of clawback of unfair preferences. A fundamental principle of insolvency law is that all unsecured creditors are supposed to suffer equally. If an effective credit manager forces a problem customer to pay shortly (up to 6 months and in some cases up to 2 years) before that customer goes into liquidation, it's likely that the liquidator will "claw back" the money to spread amongst all the unsecured creditors. However, the PPSA turns ROT creditors into secured creditors, so the rules that apply to unsecured creditors no longer apply. No more clawback if you have a security.
However, having said that, the big benefit of a PPSA for Australian creditors is not for businesses which have worked out how to work around the inefficiencies and user-unfriendliness of the current system. For those businesses, it's probably an inconvenience. But overall, a personal property security regime with cheap, easy, on-line access will make doing business in Australia an easier process. And that's the point. In New Zealand the pre-PPSA law was an ugly mess, with some securities registered at the Companies Office (if the borrower was a company), some on the Motor Vehicle Securities Register (if the security was a car), some at the High Court (broadly, non-companies and non-cars), and some were not registered (if the form of security was "customary" hire purchase or retention of title. Mercantile Gazette and Baycorp had teams of people checking records in each High Court around the country, and there were inevitable delays in getting correct information from those courts. Australia, of course, is in a much worse position with 7 states, all with their own rules. They have even more opportunity to benefit. This Internet is made to solve this sort of problem. Combine everything into one on-line database that anyone can check and suddenly everyone has the ability to see where they stand - what goods are secured and what goods another creditor can get at.
At least one of the Australian credit managers at the meeting who had responsibility for New Zealand accounts wasn't registering anything on the PPSR. He'd been told by his credit insurer that it wasn't necessary, so the insurer didn't understand either! Our experience with Australian creditors is that they struggle with the NZ PPSA because it's so different to their current system. Under the current Australian system, for example, a trade creditor using a ROT agreement doesn't need the agreement signed. But under the New Zealand PPSA, the security agreement must be signed to give the trade creditor priority ahead of the bank. For credit managers who aren't used to this, it all looks too hard even if registration does only cost $3 and is done online over the Internet. To be fair, there are also plenty of New Zealand creditors who still haven't come to grips with our PPSA.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting. This article appeared in the New Zealand Mercantile Gazette in July 2006.