What is the PPSR?
Largely, the role of the PPSR is to protect suppliers and lenders when a customer experiences an insolvency event.
The PPSR was established under the Personal Properties Securities Act 2009 (Cth) (the Act). In essence, the PPSR allows parties to ‘perfect’ their priority as creditors by registering their security interests. The PPSR allows entities to confirm their rights to compensation regarding defaulted loans. Properly registering securities on the PPSR establishes a creditor’s priority and entitlements to the assets within a debtor company.
It is important to be aware that the Act applies equally to individuals and companies as well as to both consumer and commercial property.
Any transaction that has the effect of providing an interest in personal property as security for the payment or performance of obligations is treated as a security interest under the the Act. Some transactions are also deemed to be a security interest even if they do not secure any obligations (eg. an absolute assignment of a book debt and a PPS lease).
The consequences of failing to perfect a security interest are discussed further below – the main risk being that a secured party’s interest in the relevant property may be lost if they have not perfected their interest.
Who Does This Apply to?
The critical point that companies need to be aware of is that simple ownership rights in personal property are no longer sufficient to protect the owner’s interests in that property where the company is relying on its ownership to secure the performance of an obligation by another party. The result is that companies will need to put in place mechanisms to ensure that their interests are protected, including registering their security interests on the PPSR before any personal property/goods are supplied. We have listed some common examples of typical operational situations that require an understanding and the use of the PPSR to protect business assets.
Retention of title terms
Retention of title clauses are common in procurement and supply contracts. In essence, these clauses provide that ownership of the relevant goods remains with the supplier until they have been paid for in full by the customer. Under the the Act, a security interest includes an interest in personal property provided by way of a conditional sale agreement (including an agreement to sell subject to retention of title).
Consignment stock is, broadly, goods that are provided to a customer which are typically held in a warehouse arrangement until they are sold by that customer. Ownership of the consignment stock is generally not passed from the supplier until the stock is sold or issued by the customer. This type of arrangement will generally fall within the scope of the Act as the Act provides that a security interest includes an interest in personal property provided by way of a consignment transaction.
Sale and Purchase Due Diligence
The Act also has practical implications for due diligence enquiries in the context of the sale and purchase of a business. Previously, a typical due diligence process would simply involve a search of the Australian Securities and Investments Commission’s (ASIC’s) database to ascertain whether any charges had been registered against the target company.
However, since the implementation of the PPSR, due diligence should now involve a search of the PPSR to confirm whether any registrations exist. A search of the PPSR may also reveal registrations relating to interests which previously were not captured on ASIC’s register. For example: security interests over certain assets arising as a result of a retention of title clause in a commercial contract.
Ramifications of Not Using The PPSR
C&D Restructure and Taxation Advisory recently assisted a client who loaned commercial equipment to customers of his wholesale supply business. One of his customers recently went into administration and held onto a number of machines that belonged to our client.
Problem 1 – there was no PPSR. Without a PPSR, proving ownership of the equipment was problematic and meant that the administrator claimed ownership of the items upon liquidation.
Problem 2 – there was no right to entry to re-claim the items, which meant that the landlord refused to permit our client to enter the premises to remove the items.
Problem 3 – despite being unable to access their items, the administrator claimed that recent payments should be considered as preferential payments, they received a claim back for these payments.
This headline case was an expensive lesson involving equipment valued at around $44 million.
In this case, the lessor of four gas turbine generators did not register its security interest over the equipment. The court held that the interest of the lessor was a PPS Lease under the Act and so it was an unperfected security interest.
The lessee appointed voluntary administrators and the security interest vested (ie. was extinguished) with the turbines becoming part of the lessee’s property.
In this case, a landlord loaned $460,000 to its tenant and took a charge over the plant and equipment acquired with the loan funds. The landlord did not register its security interest.
When the lessee appointed a voluntary administrator, the security interest in those assets vested in the lessee (ie. it was extinguished).
Solution – a small fee and utilising the PPSR could have solved the majority of the problems listed. Setting up structure that considers the PPSR for a business is a simple process and one that any wholesale supplier should be using. One of the biggest risks for small businesses is getting paid, and without having the appropriate structure in place the chances of this diminish.
The team at C&D Restructure and Taxation Advisory have a range of business solutions to help businesses register and renew their security interests on the PPSR on-time and error-free. For the right advice and to access a wealth of expertise on the PPSR, email us at email@example.com or call 1300 023 782.