BY KIRK CHEESMAN (GROUP MANAGING DIRECTOR, NCI)
I’m finding myself increasingly being asked to address questions along the lines of: If I have a Purchase Money Security Interest (PMSI) registered on the Personal Property Securities Register (PPSR), do I really need to worry about credit insurance? And, its alternative: If I have credit insurance in place, do I really need to worry about registering my PMSI? In return for payment of premium, credit insurance can provide trade credit suppliers with protection of around 90% of any loss suffered should their buyer go insolvent, or otherwise default on their payment obligations. However, if you have sold your goods subject to a Retention of Title (ROT) clause and your customer collapses before they can make payment, a timely $6 registration on the PPSR of that ROT will ensure the return of your goods (or their cash equivalent). If this is the case, do you really need to pay substantially more in credit insurance premiums for bad debt protection? Unfortunately, registration of a ROT will NOT ensure the return of your goods (or their cash equivalent). Registration might result in the return of goods, and registration certainly won’t hurt recovery prospects, but it isn’t a miracle cure. Goods that remain unpaid may have been on-sold, consumed or ‘mislaid’ by the time a liquidator is appointed and what goods can be recovered may no longer be worth their original invoice value, either through
use, damage, or merely by the passage of time. Because the Personal Property Securities Act 2009 focuses on property being used as collateral in a security interest, its effectiveness is wholly dependent upon the continued presence of that particular property and the value of the property continuing to be sufficient to cover the value of the outstanding debt for which it acts as security. Credit insurance, however, focuses on what is actually owed, what has been invoiced and what remains outstanding. It doesn’t concern itself with any fluctuating value relating to the goods supplied nor with their continued presence postdelivery, only with what is owed under the invoices issued. If someone goes bust owing you money, a credit insurance policy will, invariably, pay you the lion’s share of your loss, regardless of what happened to the goods you supplied. Does this mean that credit insurance is the miracle cure and PPSR registration of ROT/PMSI rights is not necessary? Well… While I’m an enthusiastic advocate for trade credit insurance, it is nonsense to suggest that other risk mitigation strategies should be ignored merely because there’s an insurance policy in place. You wouldn’t decide against having window locks in your house just because you have a home and contents insurance policy, nor would you be casual with your car’s security because it’s insured against theft.
Not only do credit insurers require that the policyholder (the ‘supplier’ in our context) maintain a financial interest in the underlying transaction (the supplier will usually have to bear at least 10% of any loss), they also set their premium rates based (in some part) on the supplier’s history of bad debts and the claims they’ve already had to pay. Just as a car insurer will take note of whether the insured vehicle is garaged overnight or parked on the street, so a credit insurer will look at the extent to which suppliers mitigate the potential for losses by including security rights in their trading terms and perfecting those rights by registration on the PPSR.
INDUSTRY INSIGHTS | STEEL AUSTRALIA | AUTUMN 2022
PPSR REGISTRATION VERSUS CREDIT INSURANCE
Who would a credit insurer be happier with as a policyholder? A supplier who suffers a loss but is able to recover half its value by exercising their PPSR registered security rights, or a supplier who is unable to offset any of their loss because they weren’t prepared to spend $6 on a PPSR registration? While both suppliers will get their claims paid, one will likely find their premium rates ‘adjusted’ far more than the other. So while a credit insurance policy is more likely to keep your business afloat when beset by bad debts, a PPSR registration will likely help keep the cost of that insurance policy as low as possible. This article was supplied as part of a paid advertising package.
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