DON’T LET YOUR ASSETS ‘TRANSITION’ INTO THE HANDS OF A LIQUIDATOR! THE IMPORTANCE OF DOCUMENTATION AND REGISTRATION

With 6 months left before the Personal Property Securities Act 2009 (Cth) (PPSA) transitional provisions end on 30 January 2014, clients should consider whether any of their assets will be at risk should they fail to take appropriate documentation and registration steps.

Background

The Personal Property Securities Register (PPSR), a single national register for the registration of security interests in personal property (i.e. all personal property excluding land and some other property excluded by statute), commenced on 30 January 2012.

From its inception, data relating to the then registrable security interests on all Commonwealth, State and Territory based registers was migrated to the PPSR. In most cases these security interests were ‘perfected’ immediately (note: the PPSR experienced some migration issues).

Other security interests, such as formerly unregistrable retention of title arrangements and some leases (see discussion below) were instead deemed to be ‘perfected’ for 2 years after the PPSR’s inception, under the transitional provisions contained in the PPSA.

PPSA Leases and other temporarily perfected security interests

A security interest of particular note, which was unregistrable prior to the introduction of the PPSR, is a lease of personal property for a term of greater than 12 months, otherwise referred to as a PPSA Lease.

PPSA Lease arrangements are extremely common to many clients’ businesses (whether formally documented or not). An example of such an arrangement would be where:

  • a holding company owns assets (for example, motor vehicles); and
  • it leases (i.e. grants a right to use for consideration) those assets for a term of greater than 12 months to a trading company which uses the assets in conducting its business.

Other security interests under temporary ‘perfection’ include:

  • retention of title supplies;
  • share and unit mortgages over property (except land); and
  • chattel mortgages. 

Consequences of failing to document and register

Failure to take action prior to the transitional provisions ceasing may have significant consequences for clients, especially those whose business structures involve PPSA Lease arrangements.

For example, an undocumented and unregistered PPSA Lease interest will rank behind other creditors holding registered security interests in insolvency (even if it was created first and ownership of the asset is retained).

Moreover, in relation to the example above, if the trading company is in physical possession of the goods (i.e. the motor vehicles) pursuant to an undocumented and unregistered PPSA Lease arrangement, and it becomes insolvent, then a liquidator will be in a position to assert ownership over the goods to the exclusion of the ownership rights of the true owner (i.e. the holding company).

If the above occurred, then the holding company would have no rights as against the trading company and / or the liquidator other than to prove in the liquidation together with unsecured creditors.

What to do next? 

In order to mitigate the risks discussed above, clients should:

  • identify all security interests held by their businesses and, in particular, consider whether any of their commercial arrangements would be considered PPSA Lease arrangements under the PPSA;
  • formally document each security interest (i.e. the terms on which assets belonging to one entity are provided to another entity for use); and
  • implement steps to ‘perfect’ (i.e. register) their security interests prior to the end of the transitional provisions (i.e. 30 June 2014).

We recommend that clients to whom the above may apply contact us as soon as possible to discuss the PPSA, its formalities and their specific circumstances.

For further information, or if you have any queries relating to the above or the PPSA, please contact Anthony Pointon, Laszlo Konya or Michael Bishop of our office on 03 9614 7707.

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