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If you are a supplier, you may have contractual arrangements with businesses to provide goods in exchange for payment. In these cases, you may be concerned if a business you are contracting with becomes insolvent before you get paid. If such an event occurs, can you retrieve your supplied goods? If this is a concern, you may wish to take a security interest in your supplies. A security interest ensures you have a right to get back your goods if your customer does not fulfil their contractual obligations. This article outlines what a security interest is and when you can register one over the goods you have supplied.
What Does Taking a Security Interest Mean?
As a supplier, you might take a security interest in the personal property you provide. This means you have the right to take back your property if the person who has granted you security does not perform their obligations under the contract, including paying you. If you take security over another person’s assets, you have priority over other creditors regarding those assets. Therefore, you can take them back before anyone else gets paid or gains access to them.
You might wish to take security over the other party’s personal property. In this case, you must document this security interest in a separate agreement. Importantly, it will not be enough to include this interest in the master contract.
Depending on what you are taking security over, you will need one of the following security agreements:
- general security agreement – when the business has granted security over all of their assets (except their land); or
- specific security agreement – when the business has granted security over some of its assets or a specific asset.
Example
Bricks 4 U Pty Ltd supplies bricks to Best Home Builders Pty Ltd. In the master contract, the parties agree that Best Home Builders will pay after 90 days. Bricks 4 U is worried that Best Home Builders will not pay the invoice. Hence, the parties enter into a specific security agreement whereby Best Home Builders grants Bricks 4 U security over their supplied bricks. Accordingly, if Best Home Builders does not pay the invoice after 90 days, Bricks 4 U can take the bricks back.
What Can I Take Security Over?
As a supplier, you are not limited to taking security over the goods you have supplied. The business you are contracting with can grant security for any of the personal property they have in their possession, including other equipment or stock. This also extends to intangible assets, such as shares, sale agreements and rent payments. The business can also grant you security in any real property (land) they own, which would take the form of a mortgage rather than a security agreement.
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How Can I Perfect My Security Interest?
If you take security over personal property, including the goods you have supplied, it is not enough to have a security agreement. You must also perfect the interest, making it enforceable against third parties. Such third parties include a liquidator if the grantor’s business has gone insolvent. If a security interest is not perfected:
- other perfected security interests in the same personal property will take priority over it; and
- the secured party will be treated as an unsecured creditor on the insolvency of the grantor.
The easiest and most common way to perfect a security interest is to register it on the Personal Property Securities Register (‘PPSR’). The PPSR is a national register of securities. They inform the public whether a piece of personal property has a security interest registered against it.
Before entering into any security agreement, it is important to do a PPSR search to see if someone has already registered a security interest against the same piece of property. If you are the first to register your security, you will have priority over:
- all unsecured creditors; and
- any other secured creditors who register their security over the same piece of property after you.
You can also perfect a security interest by taking:
- possession of the personal property; or
- control of the personal property.
The Importance of Registering Security Interests
A common problem for suppliers is when their goods are blended or combined with other ingredients and become a finished product. This combination of different goods can make taking a security interest over their own supplied goods challenging.
For example, Grapest Vines Pty Ltd supplies wine grapes to Booziest Bottle Pty Ltd, a wine producer. The parties enter into a specific security agreement which gives Grapest Vines a security interest over the grapes. After Booziest Bottle produces the wine, Grapest Vines’s grapes have now been blended with the other ingredients. They can no longer be separated, identified or restored to their original state. Booziest Bottle goes insolvent before they can pay the invoice. Likewise, Grapest Vines’s grapes no longer exist in their original form. Does Grapest Vines have a right over the whole wine itself?
In the past, Grapest Vines would have no rights over the finished bottle of wine, even if they had a security interest over their grapes. However, this has changed with the introduction of the PPSR. Now, Grapest Vines will have an interest in the finished bottle of wine up to their supplied value. Likewise, their interest is proportional to those of other suppliers who properly registered interests for other ingredients that went into producing the wine.
Key Takeaways
As a supplier, you want to ensure you will get paid for your goods, especially if there is a risk the business you supply may not pay their invoices. A way to do this is by taking security over the goods you supply, which involves entering into a separate security agreement with the business you supply. You must then perfect the interest by registering it on the PPSR. Registration is vital if the goods you supply will be blended with other goods to become a different product, as it will give you an interest in that final product. Before registering any security, it is best practice to do a PPSR search to ensure the business you have supplied has not already granted someone else security over your goods.
If you have any questions regarding how to get paid as a supplier, your supply agreements or how to register a security interest, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
Frequently Asked Questions
As a supplier, there is a risk that the business you are supplying goods to will become unable to pay after receiving your goods. For example, a business might become insolvent after receiving your goods but before paying your invoice. To protect your business and get paid, it is useful to take a security interest over the personal property you provide.
When entering into a contract to supply goods in exchange for payment, you can also enter into a security agreement. In a security agreement, the business you are supplying goods to will likewise grant you a security interest in your goods. Hence, if the business does not pay for your goods, you still maintain security over them.
Perfection creates a priority interest enforceable against third parties, including the liquidator or administrator of the grantor of the security interest. The most common way to perfect your security interest is through registration on the PPSR.
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