Consumers want to walk away with goods on the promise to pay later. Are you offering your customers that luxury?
If so, you may be at risk of non-payment for those goods, in addition to the loss of those goods.
For example; in Blenheim, a shipment of wine is sent to a purchaser in Auckland on the basis that payment is to be made later. When those goods arrive the purchaser is declared bankrupt. Those goods are now in the possession of the receiver and go into the general asset pool of the purchaser to be divided among creditors. You know you aren’t the first in the creditor queue and it is likely you will have to walk away from the goods and absorb the loss.
The question then is how do you protect yourself when goods have been supplied but not paid for?
Reserving title in goods
Having terms of trade for the sale of goods is important. A ‘Romalpa’ or reservation of title clause in your terms of trade can provide a seller with a safeguard for goods that have been provided to a debtor who has not paid for those goods in full. Under a Romalpa clause the seller retains ownership of the goods until they are paid for in full, but the buyer is allowed to take delivery of the goods.
Applying this to the above example, on arrival the shipment of goods would still be owned by you and, other relevant aspects of creditor law aside, would be required to be returned to you if payment could not be made.
The addition of a Romalpa clause to your terms of trade may be a relatively low cost solution to a big problem.
Some of the provisions of the Consumer Guarantees Act 1993 cannot be avoided by contracting out. Those mandatory obligations may limit the effectiveness of a Romalpa clause in some situations. You should discuss this with your solicitor to see whether a Romalpa clause is suitable for your business terms of trade.
Romalpa clauses and the PPSA
The Personal Property Securities Act 1999 (‘PPSA’) offers protection and enforceability for creditors who have an interest in personal property, which is created to secure an obligation. This is a ‘security interest’.
A Romalpa clause is recognised as a security interest. Using the above example, the seller has a security interest in the shipped goods.
A Romalpa clause has limited effect against other creditors.
In order to benefit from the retention of title and gain priority over other creditors, the seller needs to register his/her security interest on the Personal Property Securities Register (‘PPSR’). As a general rule, registered security interests have priority over unregistered interests. Priority between registered interests is usually determined chronologically, with the first registered interest gaining priority.
You have a registered Security Interest, what next?
You need to ensure that the security interest has ‘attached’ to the purchaser’s personal property (‘collateral’). Attachment occurs when value has been given by the seller (‘the secured party’), the debtor/purchaser has rights in the collateral, and the security agreement between the parties is enforceable against a third party (a standard set out in the PPSA which encompasses the enforceability points set out above). Where there is a Romalpa clause, attachment occurs no later than when the debtor/purchaser obtains possession of the goods.
Perfection of a security interest requires the security interest to be attached (as above) and either a financing statement has been registered on the PPSR or the secured party has possession of the collateral. In the above example, the wine has left the seller’s winery so the seller does not have possession. Registration of the security interest on the PPSR is therefore essential for protection to occur.
Note that there is an exception for goods under $2,000.
If there is no other way of determining priority of security interests in the same collateral, the PPSA sets out basic priority rules. In summary:
- A perfected security interest has priority over an unperfected security interest.
- Priority between perfected security interests will be given to the first secured party who had either registered a financing statement, taken possession of the collateral or had achieved temporary perfection.
- Priority between unperfected security interests will be determined by the order of attachment of the security interests.
4. But what about the Bank?
A customer’s bank may have a registered financing statement over all of a customer’s present and after-acquired property. This could be called a ‘general security’.
Does the bank’s general security interest trump other security interests? Not always.
Under the PPSA a Purchase Money Security Interest (‘PMSI’), may have priority over other registered security holders.
A PMSI is a security interest taken in the goods that are sold by a seller (collateral) by a seller to the extent that it secures the obligation to pay all or part of the collateral’s purchase price – for example, if credit is provided to the debtor so they can purchase the item, as is the case in our example.
A PMSI has priority over a non-purchase money security interest in the same collateral if the PMSI is perfected not later than 10 days after the day on which the debtor, or another person at the request of the debtor, obtained possession of the collateral.
In our example, the purchaser’s bank has a general security over all of his/her present and after-acquired property. The purchaser bought his/her wine from you on credit. If you have registered a financing statement in the right time frames, your security interest in the wine (collateral) has priority over the bank’s security interest and you can recover your shipment of wine.
A PMSI offers you, as creditor, the greatest protection.
- Are your terms of trade up to date?
- Do you register financing statements against debtors who have possession of goods they haven’t paid for?
- Are you giving yourself the most protection possible against other creditors?
If the answer is ‘no’, or ‘I don’t know’, contact your solicitor today.