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Don't lose your income

• By Scott Whitaker, Associate

First published in Rural News, 5 February 2008

Bill is a sheep and beef farmer who sells stock to other farmers and to the local meat processing company. He agrees to sell some sheep to another farmer. They agree on a price and the purchaser sends a truck to collect the stock. That evening, Bill goes into his office and produces an invoice, asking for payment by the 20^th of the following month.

Bill also sells 100 head of prime beef to the local freezing works. The works collect the cattle, promising to pay within 14 days. Bill is a farmer who considers that his word is his bond and, in his experience, other farmers have a similar outlook. He has dealt with the freezing works for several years and they have always paid roughly on time, give or take the odd late payment.

A fortnight later, Bill learns that the freezing works has been placed in receivership. The receiver is not expecting much, if anything to be paid to unsecured creditors.

Two days later he receives a call from the farmer, who bought the sheep. The farmer says he is owed a significant sum by the freezing works (which he is unlikely to receive) and his bank is not waiting any longer. The bank is winding up the farm and has taken the stock. There is unlikely to be anything left over after the bank has sold the farm and the stock, and the bank has been repaid.

Bill consults his solicitor, pointing out a clause in his standing agreement with the freezing works, which says that until Bill is paid for his stock, the title in the stock remains with Bill and that this retention of title constitutes a security interest.

The bad news is, though, that he will be unlikely to receive any money from the farmer or the freezing works. The effect of the Personal Property Securities Act 1999 means that because Bill did not register his security interests on the Personal Property Securities Register, the bank ranks ahead of Bill and the bank will be paid in full (including its overdue interest and all the costs the bank has incurred in engaging solicitors and accountants to conduct the receivership of the meat company) before Bill will see any money.

What could Bill have done to protect himself? In both cases, he should make sure that both parties sign an agreement, which states that Bill owns the stock until they have been paid for in full. His solicitor could provide a brief document that Bill could use each time he sold some stock on credit. Next, he should register on the Personal Property Securities Register.

In the case of the freezing works, he may only need to register once, covering all stock now and in the future supplied by Bill to the meat company. However, if the stock have distinctive numbers, Bill may be especially careful and enter those numbers in the system each time he makes a sale. For an additional five minutes work, Bill would rank ahead of the bank in relation to the stock he has sold and would, in the above cases, stand a better chance of getting his money (or at least some of his money) before the bank is paid.

In the case of the freezing works, Bill’s stock may have been butchered and mixed with other stock or sold, but he would stand a chance of claiming some proceeds from the sale of his stock by the freezing works if he had registered a security interest. In the case of the sale to the farmer, Bill could register a security interest and remove it when he gets paid. Ideally, Bill should get the required information and register his security interest before letting the stock go. When he is paid by the farmer, Bill can take a couple of minutes to release the registered security.

How easy is it? After some initial guidance from the solicitor, Bill (or in Bill’s case, his wife who looks after the books), will be able to do all registrations over the internet from home. The first registrations may take half an hour or more to get familiar with the system, but after one or two registrations, the time spent will only be a few minutes every once in a while.

What does it cost? To register a financing statement costs $3. A discharge does not cost. It can cost a lot more not to register.