Protection for payment becomes a ‘must-have’

01-03-2010 | Richard Rennie

The likelihood of future lending being as straightforward as previously enjoyed in the sector is distant.

The fallout from those heady days of soaring land values and generous farm loans has included the biggest rural failure in New Zealand history, with the Crafar brothers' enterprise being placed in receivership last October.

While banks are shy about acknowledging publicly what went wrong, and what has been learned, the episode provides some salient lessons for those servicing the rural sector and concerned about payment certainty. Bank debt of $200 million aside, the Crafar case has also left $10 million worth of unsecured creditors wondering if they will ever get anything back. This figure does include $5 million to one party relating to a land deal, but the remainder includes many small to medium rural service businesses, including vets and contractors.

The Crafar case has already seen the disputed removal of 1000 head of leased dairy cows from properties due to registered claims put in place by a stock leasing company.

Legal and financial experts believe the Crafar case may mark a shift in the previously benevolent world of supplier-farmer relationships, where business was often done on a handshake and a cheque on the 20th of the month. The unwinding of maize silage "contracts" (verbal agreements over the phone) as the milk price plummeted a year ago accompanies such a shift. Contract cancellations were marked by a level of bitterness between maize growers and dairy farmer clients.

Hamilton based rural law expert Neil Davidson, of McCaw Lewis Chapman, says rural suppliers can put several safeguards in place to protect themselves as creditors."For many urban-focused businesses these instruments are common, but increasingly we are recommending rural companies get up to speed with them, too. Many businesses are experiencing an increase in debtors with payments taking longer to come through, affecting cashflow."

A good start for suppliers is to have terms of trade clearly laying out payment terms and conditions. "These should be signed by customers. Written and signed terms of trade provide good evidence of arrangements should liquidation or court proceedings occur."

One condition of terms of trade should be that a security interest in the goods (and proceeds if sold) should remain with the supplier until payment is received in full.

A key part of the terms of trade is provision to register a financing statement recording your interest via the Personal Property Securities Register (PPSR). The PPSR came into being in 2002 under the Personal Property Securities Act (PPS Act). Before it existed, suppliers would have obtained agreement from customers that the supplier retained ownership of goods supplied on credit until they were paid for. If the business went broke and the customer could not pay, the supplier could seek to reclaim the goods. If they had been sold or used, the supplier could claim the identifiable proceeds of those goods, under a "retention of title" agreement. However, the rules varied for different kinds of supply and financing transactions.

In simplifying the law relating to charges over goods, the PPS Act removed the ability for suppliers to retain title to the goods in the same way. Now, handing over the goods effectively means losing ownership rights and the concept of "title" becomes largely irrelevant. No matter what kind of transaction, if a supplier parts with possession of goods, it is necessary for the supplier to obtain agreement from their customer that a "security interest" in the goods is retained, and to register a financing statement.

Getting a customer's agreement that a supplier retains a security interest, even verbally, is enforceable against that customer if it can be proved. To make the security claim enforceable against third parties, suppliers have to get customers to sign in writing that this is in place.

"Banks will register a charge on the PPSR when they lend your client money. If you are as smart as the bank you will do the same as the bank," Davidson says.

This involves getting a signed acknowledgement from the customer that as supplier you hold a security interest in the goods and you will be registering the details of this security interest on the PPSR, as a financing statement. This can be done simply on the PPSR website www.ppsr.govt.nz for only $3. In most circumstances, this should be done before supplying the goods, though there is some leeway in some cases. On registering through the website, the type of charge must be entered. Options can include "all present and after acquired personal property" of the debtor, a catch-all that banks use.

The charge can be quite specific: For example if products from a veterinary service, then it may state "animal health products supplied by XY Veterinarians and the proceeds of such materials". The terms of trade might set out that a charge is retained over any intermingled goods, such as maize silage transformed into milk, or provide for a charge to be taken over certain goods even if services rather than goods have been supplied. The terms of trade should also include a term permitting the supplier to enter the customer's premises to reclaim the goods.

"While registering a charge is simple," Davidson says, "many of the rules about enforcing payment and your interest in the goods are not. It is essential to get good advice on your terms of trade".

The PPSR registration generally "super charges" a supplier's claim and puts them at the front of a creditors' queue."If the creditor goes into liquidation the supplier would, if the terms of trade and registration are right, be able to reclaim any goods supplied to that creditor, or their proceeds in priority over unsecured creditors and the bank."

This is known as a purchase money security interest (PMSI). Davidson emphasises it is critical to get terms of trade written down and signed. Failing to have them signed by the creditor means they cannot be enforced against other parties, such as end customers the product may have been on-sold to.

  Printable View