PPSA Concepts

Following on from last weeks introduction to the Personal Property Securities Act (2009), here are some of the underlying principles you need to be aware of when considering whether or not to register your interest on the PPSR.

Possession is 9/10ths of the Law

One of the most difficult concepts of PPSA that Lawyers and clients struggle with are the radical changes to the law relating to ownership. The PPSA overrides rights of ownership in certain circumstances.

Under PPSA when your goods come into possession of another party under an “arrangement” covered by the Act then that party can deal with them as if they owned them, even though they do not. For example, say you leased a truck to a removalist firm but they go broke and call in the liquidators before the term of the lease has expired. If that truck is on the removalist firm’s property, and you don’t have a registered interest over it, then the truck becomes the property of the liquidator regardless of what the lease says.

This principle is supposed to cover situations which are essentially finance or credit arrangements such as retention of title or equipment finance arrangements. However, in certain circumstances it also extends to leasing, consignment and other arrangements even where those arrangements are operational rather than finance driven.

The biggest risk for businesses here are fixed and floating charges (now called general security agreements) granted by the parties that they deal with. According to the Law Society of NSW This can include traditional forms of security interests, such as charges, chattel mortgages and bills of sale, as well as “in substance” security interests, such as retention of title, conditional sale and hire purchase arrangements, and “deemed” security interests, such as PPS Leases and commercial consignment arrangements. What can happen is that the other party’s bank can take priority in respect of all assets in possession of your customer, even if your customer doesn’t own them (eg a leased asset).

You should therefore look at whether you need to register on the PPSR before any of your “stuff” gets in to the hands of another party.

The PPSR is just a notice board, so make sure you register your interest correctly.

Don’t forget though that the PPSR is really just a notice board where the existence of security interests is to be recorded. It does not make up for deficiencies in your processes.

Security interests must be properly created. It is not enough to just register. In fact, the Act requires that the security interest is in writing and accepted or adopted by the Grantor (the entity providing the security interest – previously, most commonly referred to as the chargor).

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If your security interest comes under scrutiny your documentation will be just as important, if not more important than registration on the PPSR.

Conversely, if you are caught in a situation where another party is asserting a security interest over your rights you should always look at their documentation rather than just relying on PPSR registrations.

The PPSA is all about insolvency

The PPSA deals with priority between creditors on insolvency. If a company is not insolvent then the PPSA will have no practical impact as the company will be able to pay its debts as and when they fall due.

This is probably the most relevant commercial consideration to take into account when deciding when to and when not to register on the PPSR. For example, Woolworths standard terms and conditions prohibit any registrations on the PPSR. Does this really matter as Woolies are highly unlikely to go bust?

Commercially, you should always be looking at insolvency risk and the impact that will have on your business when transacting with other parties. If there is actual or potential risk of insolvency in your counterparties then PPSR should be front of mind in your considerations.

The PPSA is there to protect other creditors, not the Secured Party or the Grantor.

The PPSA doesn’t affect the rights as between the Grantor and the Secured Party. The parties are still free to negotiate terms between themselves.

Importantly the PPSA does not give a Secured Party any protections against the Grantor. For example, if a Secured Party wants to repossess its goods then it has to have a right to do so under its documentation or another law. The PPSA does not give them this right.

What the PPSA does, particularly in the way that security interests are created and in relation to an enforcement by a Secured Party, is to seek to ensure that a Secured Party does not act in a way that is going to prejudice other creditors, whether secured or unsecured.

Liquidators and Receivers will be looking very closely at what Secured Parties are doing when they take action to recover their assets.

Certainty is the key driver of PPSA.

There is no room for error. In handing down decisions the Courts have applied black letter law, regardless of whether it is the “morally” or “commercially” right decision and regardless of whether it means a windfall to a party.

The integrity of the register is paramount. The intention is that parties should be able to search the register and rely on the results of that search. They should also be able to rely on any registrations that they lodge. The Courts therefore are loath to set precedents that are contrary to this fundamental principle.

When looking at a potential PPSA issue, do not assume that justice is on your side. Always look at how an innocent third party may be affected if you do not have a proper registration, rather than your counterparty, as that is how the Courts will look at it.

Next week: What this means for the SME.