10 years of the Personal Property Securities Act (PPSA)

10 Years of PPSA

10 years of the Personal Property Securities Act (PPSA)

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The Personal Property Securities Act (PPSA) came into effect on 30 January 2012. For those not aware, the PPSA brings into effect the Personal Properties Securities Register (PPSR) which serves as a notice board for entities with interests in property in the possession of another entity. This includes suppliers of goods, financiers etc.

The PPSA and the PPSR have been around for almost 10 years now. Over that time, we have seen many unintended consequences of the legislation from an insolvency perspective which demonstrate that many people don’t fully understand the intricacies of the PPSA and implications for their clients.

Some examples are:

Group structures

For asset protection purposes, when establishing a business, it is common for the trading operations to be undertaken in one company whilst the assets (plant/motor vehicles etc) are owned in another company. The asset owning company then leases the assets to the trading business.

That lease needs to be in writing and registered against the trading company on the PPSR. If that does not occur and the trading company later finds itself in external administration, the PPSA deems that the assets in the possession of the trading company at the commencement of the external administration vest in the trading company. This defeats the purpose of establishing the group structure.

 

Purchase Money Security Interest (PMSI)

A PMSI can relate to either:

    • Funds used to purchase an asset (eg. a lease/hire purchase agreement);
    • Supply of goods on the condition that title doesn’t pass until the goods are paid for (Retention of Title).

A registration on the PPSR as a PMSI provides that creditor with a super priority over registrations by other creditors in the event that the debtor becomes insolvent. In such a case, the creditor with the PMSI registration over specific assets will have the first right to recover the equipment or goods supplied.

In the event that a security interest is registered as a PMSI, but it actually isn’t, the registration will likely be invalid in an external administration.

 

Retention of Title (ROT)

With the implementation of the PPSA, ROT clauses that were previously unregistered were formally recognised as a security and required registration on the PPSR. Whilst much of the law prior to the PPSA still applies to ROT clauses, the intricacies of the PPSA means that for traditional “All Monies” clauses (that is, a clause that incorporates both goods that have not been paid for and any goods that have been paid for up to the value of the creditors outstanding debt), two registrations are required on the PPSR.

Failure to correctly register on the PPSR may result in only a portion of the ROT claim succeeding in an external administration. More information can be found here.

 

Provision of Equipment Without a Formal Agreement

The provision of equipment to an entity (related or not) where no formal lease agreement exists may require a registration on the PPSR, especially if the “borrowing” entity retains uninterrupted possession of the property for more than 2 years.

 

Identity of Grantor

The PPSA contains specific provisions as to how a registration must identify the grantor despite the PPSR allowing a number of different methods to identify the grantor. These provisions are quite specific and failure to follow these may result in the equipment vesting in the insolvency practitioner despite the grantor being “identified” via another method.

Examples that we have previously encountered include major banks losing their interest in equipment for incorrectly registering against the company’s ABN and not its ACN and not registering against an individual’s name as it appears on their driver’s licence for commercial property.

 

Trusts and PPSA

Trust law is complicated at the best of times, however, where the grantor is an entity acting in its capacity as Trustee of a Trust, the registration on the PPSR can be more difficult. This difficulty usually occurs where the grantor entity is not familiar as to the capacity in which it is acting (e.g. the credit application submitted is in the grantor’s own name (with no mention of the Trust), however the ABN quoted is that of the Trust).

Advisors should carefully consider which entity the registration should be recorded against as a failure to register against the correct entity may result in the loss of the goods supplied.

 

The above is not intended to be legal advice and we recommend that prior to entering into any agreement, advice is sought from a suitably qualified solicitor or advisor. Failing to do so may result in any registration (or lack thereof) being unperfected and the goods vesting in an insolvency practitioner in a worst-case scenario.

 

Article Written by Travis Olsen, Associate Director – SV Partners Adelaide

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