The new lending security laws that will change the way businesses operate: Gottliebsen

Very quietly, with almost no announcements, the politicians and public servants have made a fundamental change in the way a vast number of businesses will operate from May next year. Apart from the banks, very few people understand what is going to happen.

The reasoning behind the change makes a lot of sense, but because Canberra is remote from the business community a vast number of businesses will face a tougher time than is necessary. Some will lose their shirt.

In essence Australia is going to follow New Zealand and Canada and institute a system of registering non-land mortgages and the states have referred their powers in this area to the Commonwealth.

It sounds simple, but as Blake Dawson banking and finance partner Bruce Whittaker explains this new law covers a vast area of transactions. And so if you supply goods to a customer on the basis that you retain ownership of the goods on the shelf, you will need to register a charge in the new central Australian registry.

Registration is also required to charges over all forms of goodwill, good intellectual property, all floating charges and a myriad of transactions where previously people have never thought about registering charges.

Banks must re-examine the detail of almost every commercial arrangement they have with a business to see where they will need to register a charge. And they don’t have to seek permission from their client although the client has a right to appeal.

In New Zealand they closely followed Canada’s legislation but even with the Canadian precedents New Zealand business had a tough time during the interim because so many commercial relationships had to be defined differently. However, it now works well and surveys show New Zealand businesses think it was worth the pain. The Rudd Government tried to ‘improve’ the New Zealand and Canadian legislation.

What first emerged from Canberra was totally unworkable and the legal and banking community has spent countless hours trying to gain workable legislation. They have come a long way, but given that it started as a morass, the Australian legislation is still more complicated that it needs to be and businesses will need to determine whether what they do as a matter of routine needs to come under the Act.

Existing arrangements will be given a two years moratorium from May 2011. In other words your old security holds even though you may not have been registered. But transactions after May 2011 must be registered and if they are not registered and the client fails then the security holder will be an unsecured creditor. There will be much weeping a from those groups that incur losses this way.

My guess is that banks will register charges all over the place. This may cause problems to the trading of enterprises that have other arrangements where the supplier will also want to register charges.

Longer term, the legislation will alert businesses that in some circumstances their assets can be charged twice. It will also mean that accountants will have to consider recording these charges in the balance sheet. For a great many smaller enterprises this represents another round of paperwork and complexity which they will be ill-equipped to handle. But handle it they must. And when a company goes into liquidation there will be a variety of these charges to be sorted out by the courts to determine which are valid. Until precedents are set there will be period of uncertainty.

This article first appeared on Business Spectator.