The PPSR is a national register of “security interests” over assets and it has now commenced operation as from 31 January 2012.
It has been introduced to replace more than 70 pieces of legislation across Australia affecting consumer interests in assets.
It has taken a long time in the drafting. Its intention is to be a one-stop shop for consumers to search for any “security interests” in an asset. It replaces the Australian Securities & Investments Commission (ASIC) Register of Company Charges and also the Queensland Government Register of Encumbered Vehicles (“REVS”).
The new Act is very broad in its application and can have adverse ramifications for many businesses unknowingly caught up in its operation.
It now applies to many assets that were not previously required to be registered under any previous law. The concept of “title” now becomes less relevant and possession and control of assets becomes far more important.
The PPSR can apply to:
- Charges, mortgages and pledges;
- Conditional sale agreements (including an agreement to sell, subject to a retention of title);
- Hire purchase agreements;
- Leases of goods; and
- Flawed asset arrangements.
In certain cases, the PPSR adopts a “form over substance” approach and deems some transactions, even though they do not secure anything, to be security interests. These include:
- Transfers of accounts (receivables for goods and services);
- Documentation governing certain monetary obligations and security interests and goods or intellectual property – lease or hire purchase agreements;
- A consignor’s interest in commercial consignment; and
- A lessor or bailor’s interest in goods under a PPS lease.
A PPS lease is a lease or bailment of goods for more than one year or an indefinite term. A PPS lease covers many operating leases as well as finance leases and would include arrangements under which the equipment or goods, (for example scaffolding, mining equipment or the like) are provided as part of the service and the customer obtains possession of the equipment.
Registration is now paramount to preserve the security interests in the event of insolvency or receivership of the party in possession. It occurs when there is one of:
- registration of the security interest;
- possession of the collateral by the secured party; or
- in the case of certain financial assets, controlled by the secured party.
Most logically and usually, parties will perfect their security interest by ensuring it is in writing and having it registered.
Impacts of Insolvency
Perfection of the security interest is paramount in the event of insolvency because on appointment of a liquidator, bankruptcy trustee or voluntary administrator, unperfected security interests are lost. The secured creditor loses its security and becomes unsecured.
Reservation of title clauses in contracts do not necessarily have any application. The results can be quite severe.
A similar system was introduced in New Zealand a decade ago. Experience there illustrates many of the dangers. In one particular case, Portacom leased portable toilets to NDG Pine but did not register its lease. Unbeknown to Portacom, NDG Pine also borrowed money from HSBC who secured a fixed and floating charge which was registered on the PPSR. When NDG Pine then became insolvent and a receiver was appointed, the courts decided that the receiver was entitled to sell the Portacom toilets and pay the proceeds to HSBC even though everyone involved acknowledged that Portacom was the legal owner of the assets. A very unfortunate and unfair result.
Examples that may impact upon clients
- An equipment leasing business owns a generator worth upwards of $100,000. It leases the equipment to GenX under a contract for 12 months, with the usual retention of title clauses inserted into the leasing contract. It does not register its interest in the generator on the PPSR. Subsequently GenX goes into receivership whilst still in possession of the generator. The receiver of GenX gathers all assets including the generator to realise surplus funds to repay creditors. The leasing company, because it has not registered the interest under the PPSR will be unlikely to rely upon the retention of title clauses to stop a receiver from selling the generator. The leasing company will then be in the normal unsecured creditor’s position along with each and every other unsecured creditor.
- Fosters sells wine and spirits to a bottle shop. Fosters has previously used a retention of title clause in its invoices to enable it to secure stock should the bottle shop fail to pay its invoices or be placed into receivership. Under the new PPSR provisions, retention of title clauses by themselves will be of no benefit to Fosters. It will have to register its interest in the stock held by the bottle shop on the PPSR and will need to implement other documentation as well.
Many businesses that have assets that may potentially be affected, including where assets become or are placed in the possession of others, may need to review their contracts and ensure they register a relevant interest in an asset providing secured goods to their client. Registration is not compulsory but should be strongly considered.
How to Register Security Interest
Registration is to occur online and has been indicated to involve only a nominal cost. Similarly, searching the Register can be conducted online and will be available instantly.
It is anticipated that many banks and finance organisations which provide funding to affected businesses, will ensure that their security interests are registered. The result would be that many businesses may receive notices from these organisations in relation to existing assets or arrangements.
Group Entities and Arrangements
It would also be necessary for businesses that have multiple group entities where inter-company loans have been made, to consider arrangements between those entities to ensure their interests are suitably protected in the event of one entity being placed into receivership.
All businesses must now consider their standard terms of trade and credit terms, to ensure their operations affected by the PPSR are covered.
In many situations it will be time consuming and difficult for many businesses to work
out what PPSR means, for them and whether the PPSR applies to their operations.
Walsh Halligan Douglas can assist in undertaking an evaluation for your business of its standard contract terms and conditions to determine what, if any, priority interests may need to be addressed and, if necessary, registered.
For further information contact us at firstname.lastname@example.org, 07 3232 5700 or visit our website.