December 1, 2014

Asset protection and business structuring

With the introduction of the Personal Property Securities Act (‘PPSA’) in January 2012, it is important that accountants, lawyers and business advisors are aware of the impact of this Legislation upon business transactions and advice provided in the area of asset protection and business structuring.

The Law

At this point in time, it is important to recap the various sections of Legislation that Security Interest holders under the PPSA should be aware of:

Vesting of Security Holders Interest

Section 267(2) and 267A of the PPSA deals with the vesting of security interests in the grantor upon winding up or bankruptcy. A security interest may vest in the grantor where:

  1. The security interest is not perfected
  2. The registration of a security interest to enable perfection is not completed within the relevant time period.

It should be noted that loss of ownership is effectively the outcome in many cases.

Default priority Rules

Security holders ought to be aware of Section 55 of the PPSA which provides default priority rules as set out in the table below:

Has PriorityOver
Perfected SecurityUnperfected security
First to perfectLater perfection
ControlRegistration and possession
First ControlLater control
Unperfected first attachmentUnperfected second attachment






Security holders should also be aware of Section 320 of the PPSA which provides a guide to priority rules for transitioning security interests. The Legislation provided for a transitionary period of 2 years until 29 January 2014 to allow for Security Holders to register their security interest on the Personal Property Securities Register (PPSR). In most circumstances, prior to the introduction to the PPSA, those security interest claims were not required to be registered. Examples of such interests include retention of title claims, leases and consignment stock arrangements.

Surrender of Security Interest

It is important to note that holders of security interests are secured creditors. Section 554E of the Corporations Act and Section 64D and 64ZA of the Bankruptcy Act deals with claims of secured creditors in a liquidation or bankruptcy.

In essence, a secured creditor must estimate the value of their security and should they be owed more than the value estimated, a claim may be made in respect to the difference, i.e. the shortfall.

If a secured creditor fails to value their security and prove for the entire amount owing, a secured creditor can be deemed to have surrendered their security and find themselves in the position of being an ordinary unsecured creditor only.

Business Structuring

Asset Holding v Operating Entities

For asset protection purposes, many accountants, lawyers and business advisors recommend the establishment of asset holding and operating entities. Assets are purchased by the asset holding entity and employed by the operating entity for the purposes of generating income.

Generally, a licence or management fee is paid by the operating entity to the asset holding entity to cover the costs of the assets employed. Should the operating entity incur financial difficulties, the assets owned by the asset holding entity are generally not at risk.

Pursuant to the PPSA, the above arrangement would constitute a PPS Lease. The impact on such arrangements, is that unless the asset holding entity registers its interest in the assets employed by the operating entity, those assets may vest in the operating entity upon liquidation or bankruptcy.

An example of this is the matter of Forge Group, a mining services company that was placed into receivership in February 2014. The Forge Group had been leasing two power generators worth $50M from APR Energy on a long term basis. Once Forge was placed into Receivership, the lease was deemed to be a security interest under the PPSA and because it had not been registered on the Personal Properties Securities Register (‘PPSR’), it was considered that the power generators vested in Forge for the receivers to realise the assets. APR Energy is, understandably, not pleased with this prospect and the argument is to be heard in court.

It is also of the utmost importance that the registration of assets are completed correctly. An incorrect or defective registration can result in the assets vesting in the grantor upon liquidation or bankruptcy. There have been instances where incorrect serial identification numbers have been registered in the PPSR resulting in those assets not being properly identifiable and hence vesting in the grantor.

Investments in Business

Many small to medium size businesses rely upon mortgage finance over the directors’ and/or shareholders’ personal property to provide sufficient working capital. Funds borrowed through mortgage finance, are generally advanced to the business, thus creating a liability loan account.

In few circumstances, we find that the directors and/or shareholders take security over the funds advanced in order to be afforded a priority in the event of financial failure. With the introduction of the PPSA, registration of the security interest on the PPSR is required to ensure that the position of the directors and/or shareholders are protected.

This principal was reinforced in the matter of Pozzebon (Trustee) and Australian Gaming and Entertainment Limited in August 2014, the first case where an investment by a superannuation fund has been caught out. In this case, whilst the Trustee of the superannuation fund obtained the necessary documentation to ensure that a security interest was created, the registration of the security interest did not occur during the timeframe prescribed in accordance Section 588FL of the Corporations Act, namely 20 business days. As such, the court determined the security interest was not valid.

Business Transactions – Sale/Purchase of Business

The PPSR assists in the due diligence process during sale of business transactions. Given the registration requirements, things such as leases, retention of title, stock, consignment stock, licence agreements etc, the PPSR assists in determining what is actually owned by the company, the subject of the sale transaction.

The PPSR can assist with determining to what extent, if any, assets are encumbered. It also assists with determining what stock is actually owned by the company and what stock that has potentially not been paid for. In essence, the PPSR can assist with determining ‘clear title’ of the asset, subject of any sale agreement. If you would like more advice on how SV Partners can assist you with matters in respect to the PPSA or PPSR, please contact one of our expert advisors on
1800 246 801.

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