- PPSA - Ensuring our clients' assets' are protected and secured
The Personal Property Security Act came into force in January 2012 and as a consequence of the sheer complexity of the legislation and the register itself (the PPSR), we continue to witness suppliers and financiers from both the small and big end of town unintentionally ‘donating’ their assets to insolvent companies as a consequence of unenforceable security interests.
PPSR background for the unfamiliar
The PPSR replaced a number of previous registers including REVS, ASIC and the Bills of Sale Register with a single register (the PPSR) which conceptually provided a single, national online noticeboard (the register) that shows you whether someone is claiming an interest against goods or assets in your possession, and others know when you have retained an interest in goods you are supplying.
From a credit control perspective, the focus of the PPSR is therefore to ensure that if your customer becomes insolvent, you are in the best position to get your goods, or their value, back.
Why are so many businesses (big and small) unable to enforce their security against external administrators?
Registering a security interest on the PPSR is a process that requires the registrant to select from a number of options regarding the profile of the registration (eg. “PMSI” or “not PMSI”, collateral class is “other goods” or “motor vehicles”) and enter various details to identify the grantor (the customer) (eg. the “ACN” in the case of companies trading in their own right, and the “ABN” in the case of trading trusts).
Five years on and we have a growing number of court decisions that have tested the PPSA. Generally, the courts have supported a ‘black letter’ interpretation of the PPSA where any defects in the form of a security registration that could (whether in theory or practice) result in an inquiring party not being made aware of the security interest, are considered fatal and not enforceable in circumstances of the customer’s insolvency.
A good example of this is the recent judgement, In the matter of OneSteel Manufacturing Pty Limited (administrators appointed) which confirmed that as a consequence of using the customer’s ABN rather than ACN as the identifier on the PPSR, Alleasing lost its interest in $23m worth of assets rented to OneSteel Manufacturing upon the appointment of Administrators. This may seem unfair given the difference between the ACN and the ABN used in the registrations was two digits! But inquiring parties correctly searching the register by ACN would not have identified the security interest and may therefore have acted to their detriment (eg. advanced further goods or capital based on an erroneous understanding of security interests).
We frequently come across matters where as a consequence of failing to properly document security agreements and register on the PPSR, businesses have forfeited significant interests in:
- Goods supplied on credit (ie Retention of Title)
- Plant and equipment, motor vehicles or other leased assets
- Goods provided on consignment
Enough of the bad news, as the PPSA has also provided creditors with the following benefits for correctly registered security interests:
- a statutory right to trace into proceeds of sale (eg. debtors from the sale of ROT stock) or commingled goods (eg. steel into a half completed boat);
- creditors with valid security interests registered on the PPSR may be afforded a degree of protection from ‘preferential payment’ recovery actions brought by the Liquidators of insolvent customers.
Every day you may be putting your business at risk when buying, selling, leasing or hiring out goods, or selling valuable goods on consignment. If you think this is relevant to you, speak to our Restructuring Advisory Team. In a brief conversation, we can gain a high level review of the business’ risk and assist you to develop a strategy to ensure your risk of loss is minimised when customers fail.