Resellers rattled by new law

Changes to the Personal Property Securities Act, due to come into force at the beginning of May, mean computer vendors may no longer automatically own unpaid goods.

Changes to the Personal Property Securities Act, due to come into force at the beginning of May, mean computer vendors may no longer automatically own unpaid goods.

The modifications to the law could further erode the security of vendors unless specific agreements are entered into and documentation brought up to scratch, lawyers say.

Section 17 of the act abolishes the idea of a vendor having automatic "title" -- rights of ownership -- to computer equipment until the purchaser has paid in full. This was known as the reservation of title or Romalpa clause, after a 1975 Appeal Court case involving two European aluminium companies.

Section 36 of the act says both parties must sign a specific “security agreement” before the vendor can recover the equipment in the event of the buyer going into receivership or liquidation.

“It appears the rights of the supplier over unpaid goods supplied are being eroded,” says one Auckland-based reseller, who declines to be named. “Because of this and in the light of the ever-diminishing margins on product, and the high capital risk involved, we are considering cutting our terms down to seven days on product, and to [cash on delivery] for all product orders over $5000,” he says. Previously the normal schedule for payment was the 20th of the following month.

The reseller will keep the 20th of next month as the payment date for supply of services, which are invoiced separately from goods.

"I know that some suppliers already have seven days as standard terms for product," he says.

Simon McArley, a partner at KPMG Legal, which puts out a regular bulletin on the PPSA, says the signing of the agreement itself would be a little extra trouble - the vendor must ensure documentation is in order to fully describe the property and the customer account in accordance with the new law, rather than relying on a standard unsigned Romalpa clause printed on the back of an invoice. This may entail changes to current record-keeping procedures.

But the old arrangements led sellers and buyers into "grey areas", he says, including the difficulty of tracing the money from items onsold and the title to components which had been incorporated into a multi-sourced assembly. The new procedures provide greater security, he says.

But KPMG Legal warns of intended changes to the preferential creditors regime, in the event of the buyer going into receivership or liquidation. “This will give employees a greater cut of the cake, ahead of some secured creditors,” says the law firm. “This makes it more important than ever to ensure that wherever possible the security taken is a Purchase Money Security Interest or PMSI. A perfected PMSI stands ahead of the preferential creditors. But failure to comply with the formalities of the new act will leave suppliers at the back of the queue.”

More detail from KPMG's point of view is available here.

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