Providing credit can take many forms, all of which create risk to financial security.
A coffee company might allow cafes to use its espresso machines as long as they buy a certain amount of bean. Groups of companies may see one entity using equipment purchased by another. Mortgages, indefinite leases and other arrangements all involve agreements where one party has a security interest in an asset that's being used by a separate entity.
In these cases, the ownership of the asset - as well as obligations for payment - can come into question if the entity utilising it defaults, such as through liquidation. To protect your financial position, you need to ensure your credit policies clearly maintain your rights over your property.
For Australian business, the Personal Property Securities (PPS) Act is a key component of this process, and one that many companies struggle to follow effectively.
Understanding the PPS Act and Register
The PPS Act was created in 2009, with significant amendments taking effect on 30 January 2012. These changes rewrote how security interests are treated in Australia, moving away from the old individual registers and bringing a unified national approach.
With some exceptions (such as real property, water rights, common law liens), the PPS Act defines the rules for security interests, which are basically rights over property to secure monies or other obligations. It addresses ownership concerns in cases like mortgages, equipment leases and the permission to use an asset belonging to another company.
To create clarity in these transactions, the PPS Act created the Personal Property Securities Register (PPS Register), a national notice board used to alert the public of a security interest over an entity or specific asset. Just because there is a registered security interest does not mean it is enforceable, but taking this step can help companies better recover their debt if their borrowers default or fall into administration.
Falling short on compliance
At BDO, we've seen that the PPS Act can be quite confusing for many of our clients. Some business leaders may not fully understand the impact of the law on their operations. And failure to register a security interest can have far-reaching financial consequences.
Some non-compliance consequences are:
- Asset ownership may take secondary importance to other security interests for the item in question
- Other organisations may obtain the client's asset, such as if the operating company is acquired
- Property the client ‘owned’ or supplied may be lost.
As a whole, clients might believe they have sufficient asset protection using traditional accounting structures for asset-holding entities and separate operating entities. However, with the rules outlined in the PPS Act, this approach leaves them vulnerable to lose rights to their property.
Importantly, the ‘ownership’ of an asset does guarantee entitlement to it. Companies must register their property and define the security arrangement to avoid losing rights in cases such as when the operating entity enters into administration.
Taking a proactive approach
Any company that provides goods or services to customers on credit can benefit from understanding exactly what their risk is and where they stand with regards to protecting their assets.
BDO's approach seeks to do just that. With our Credit Control Scorecard, we assess each client's strengths and weaknesses when it comes to credit policy - including whether they've correctly registered assets on the PPS Register.
What does the scorecard cover? We review specific areas of the client's business, including:
- Whether its credit terms provide a sufficient level of asset protection
- How effectively it monitors and maintains its credit policies
- How well the client understands the PPS Act
- Where a client's assets are potentially at risk because of the PPS Act
- Which debtor recovery mechanisms are in use.
With these insights, we can help clients identify ways to better adhere to PPS Act requirements and guidelines, ultimately strengthening their asset protection positions.