Let’s begin with a quick refresher for those who are not familiar with the Personal Property Securities Register (PPSR). Commencing on 30 January 2012, this national online Register governs the priority of charges (security interests) registered against assets (personal property) of a party (grantor) in favour of a third party (secured party).
To water it down, it can be likened to a mortgage registered against land, but it is a security interest registered against personal property which secures payment of a debt or obligation.
People are sometimes confused by the term ‘personal’ and assume that it relates to consumer and not business transactions. Personal property is essentially all property other than land.
A security interest can be registered against both tangible assets, such as serial numbered goods, livestock, crops, machinery or equipment and against intangible assets, such as cash, goodwill or shares.
Security interests arising pursuant to the PPSA can be registered for:
-seven years or less,
-more than seven years but less than 25 years, or
-have no stated end time.
What does that mean for you if you are in the business of providing goods or services ahead of receiving payment? Good question. If a normal component of your business is leasing goods, then you should register on the PPSR your security interest arising under each leasing arrangement that constitutes a ‘PPS lease’ (more on that another day) or gives rise to a security interest.
Businesses that supply goods and maintain their ownership of the goods until payment is made, may find their retention of title in the goods is no longer enforceable if their security interest has not been registered.
Your company has leased four diggers to XYZ Construction Ltd. As you intend to remain the owner of those diggers, you do not register them on the PPSR. XYZ later approaches a bank for a loan. The bank checks all XYZ’s assets (including your diggers), does not see them registered on the PPSR and reasonably concludes they are the property of XYZ. The bank then lends XYZ $1 million. Subsequently, XYZ goes into liquidation and your diggers are seized by the liquidators as assets to be sold to pay back the company’s bank debt. Even though you are the true owner of the diggers, the bank had the first registered interest on the PPSR and defeated your ownership.
However, if you had registered the lease on the PPSR, then the bank (and subsequently the liquidator) would have been on notice that the diggers were not the property of XYZ and would not be entitled to take your diggers to recover their losses.
There is, however, practical issues with the PPSR and that is the Federal Government does not provide a reminder service for registrations on the PPSR. Unless a security interest is registered for an indefinite period, the registration will automatically fall off the national noticeboard, unless the secured party carries out a renewal of their registration before the expiry date.
For example, registrations over serial-numbered goods (including motor vehicles, watercraft and certain items of plant and machinery) have a maximum period of seven years.
This means that 7 year registrations will begin to expire from 30 January 2019 (for those who got in early as soon as the legislation commenced) and moving forward.
This very problem arose in New Zealand when the equivalent legislation had commenced 5 years earlier and the government did not provide a reminder service to the secured parties for the 400,000 registrations that automatically expired at that time. That spelt disaster for big time players like the major banks and large companies who overnight lost their security (and priority) against the grantors.
What does that mean if you are a secured party and you lose the benefit of your security interest registered against a Grantor’s property? To put it simply, if the renewal of the registration is not carried out before the expiry date, the secured party would lose priority and be forced to the back of the queue of both secured and unsecured creditors. That could mean that it is no longer worthwhile to register a new security interest against the Grantor’s property (if there are secured creditors with a prior claim) and more importantly, no longer possible to obtain payment from the Grantor for that matter.
But do not panic yet. We are here to help. Whether that means reviewing your previous security interests registered on the PPSR to determine if a renewal or new registration is required, through to assisting first time players to ensure they are receiving the maximum benefit and protection that the PPSR affords.
Now is also a good time to look at your terms of trade, supply agreements, leases or other commercial arrangements to ensure that you do have a contractual right to register a security interest against your client or customer (Grantor) in favour of your business. Yes, you need a contractual right with the Grantor before you can register your security interest and if you do not have one, we can assist with that as well.