In an environment of interest rate pressure, a cooling economy and global economic uncertainty, corporate insolvencies are a stark reality. The failure of construction companies has become regular news and ASIC recently released insolvency data that shows a marked uptick in Australian insolvencies in general.
The Personal Property Securities Register (PPSR) established under the Personal Property Securities Act 2009 (Cth) is a crucial tool for businesses to protect their interests and prioritise their claims over other creditors. This is particularly pertinent when a debtor enters insolvency.
What is the PPSR?
In short, the PPSR is a public register of security interests in personal property. A ‘security interest’ is an interest in personal property that secures payment or performance of an obligation. A correct registration on the PPSR puts all other parties on notice of the existence of a security interest, and provides a creditor with priority over other creditors.
Correct and timely registration is very important, as an incorrect registration can result in the security interest being ineffective or unenforceable, or the creditor’s priority being lost.
Common registration mistakes
In the paragraphs below, we have highlighted a few common mistakes and pitfalls with regard to PPSR registrations.
1. Not realising that a PPSR registration is required
Some security interests are obvious. As an example, a loan advanced by a lender to a borrower and secured over the borrower’s assets, will give rise to a security interest in favour of the lender.
There are however circumstances which are less obvious, but nonetheless require a PPSR registration for a creditor’s interests to be protected.
An example is an equipment lease with a term of more than 2 years (including where a shorter lease is extended with the effect that the equipment is actually leased for more than 2 years). If the lessor fails to register its interest and the lessee becomes insolvent, the equipment may form part of the lessee’s insolvent estate, despite the lessor being the owner of the equipment.
Another example is a supplier that sells and delivers goods to its customers under retention of title. As in the first example, if the supplier fails to register its interest in the goods (and therefore fails to put the public on notice of its ownership) and the customer becomes insolvent, the goods may form part of the customer’s insolvent estate.
2. Not identifying the security interest as a Purchase Money Security Interest (PMSI)
A PMSI is a special type of security interest that gives a creditor super priority, in respect of the specific assets to which the PMSI relates. Both examples in point 1 above are PMSIs. A PMSI will have super priority, even where a prior (non-PMSI) creditor had registered an interest over all of the assets of the debtor.
If a security interest is not identified as a PMSI in the PPSR registration, the super priority is lost and the security interest will not be effective against prior creditors with a PPSR registration that covers the goods.
3. Being out of time with your registration
A creditor generally has 20 business days after a security interest was created, to register the security interest on the PPSR.
However, different timing rules apply with respect to PMSIs. To achieve the PMSI super-priority, the following shorter time periods apply:
- If the goods supplied will be part of the grantor’s inventory: the PMSI must be registered before the grantor obtains possession of the goods.
- If the goods supplied won’t be part of the grantor’s inventory: the PMSI must be registered within 15 business days from when the grantor obtains possession of the goods.
If registration is outside of these periods, it does not provide protection against the debtor’s insolvency, for a period of 6 months from the date of the registration.
4. Registering against the wrong business identifier
Whilst the ABN and ACN are closely related, a registration against the wrong number can have dire consequences.
If a debtor transacts in a corporate capacity, the registration usually needs to be over the debtor company’s ACN. However, if the debtor is acting as a corporate trustee or on behalf of a partnership, the relevant identifier is usually the ABN of the trust or partnership.
5. Getting serial numbers wrong
Certain assets require an identifying serial number to be included in the PPSR registration. For example, in the case of a vehicle, this could be the chassis number, the VIN or the manufacturer’s number.
A simple error in recording the serial number will render a registration ineffective, as a buyer of the vehicle would not be on notice of the prior security interest.
The above list is by no means exhaustive and the contents of this paper are only in the nature of general commentary. Given the technical nature of the PPSR, you should obtain legal advice for your specific circumstances.
The bottom line is that these (and other) PPSR mistakes can easily be made, and a simple mistake can have significant consequences. With a wave of insolvencies potentially on the way, it is a good time to consider your PPSR registrations and make sure that your interests are properly protected.
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