PPSA: Examples Of Business Situations

When should you register a security interest under the PPSA?
The Personal Property Securities Act (2009) and the associated Personal Property Securities Register (PPSR) has been in place since 30 January 2012 and it affects all businesses. Have you reviewed your business processes to ensure that your interests are protected?

It might refer to “personal property” but this legislation is absolutely about business assets. The word “personal” is simply legalese to distinguish it from “real” property which in legal lingo means land and any structures firmly attached to the land eg buildings, fixtures such as wiring, plumbing, pumps and so on.

At the recent Chartered Secretaries’ Compliance Discussion Group, we had a most interesting discussion about how the Personal Property Securities Act (PPSA) could apply in everyday business situations. Much more useful for non-legal people than going through the provisions of the Act!

The session was chaired by Anthony Seyfort, Partner, with Peter Wilcox, Special Counsel (both of Landers & Rogers Lawyers) leading the discussion.

IMPORTANT: Please note that nothing in this article constitutes legal advice. What you SHOULD do keep the following quote in mind at all times:

As long as you are parting with possession (of any property), think about this Act and get advice. – Anthony Seyfort, Partner, Landers & Rogers Lawyers

Here are my notes about some of the issues that in the group discussion:

Scenario 1: Your Property Left On Third Party’s Premises

  • Business A provides earth digging services.
  • Excavator is left on the customer’s site for a short term job (less than 12 months).

Issue:

Should Business A register its interest in the excavator?

Hire businesses should note the implications of not registering security interests, in particular what happened in the New Zealand 'Portaloo' case
If the customer goes into receivership/liquidation and the bank has security over all the customer’s assets, the contractor could potentially lose the excavator to the receiver unless the business had registered its interest in the excavator in accordance with the PPSA.

In other words, the secured lender/bank could end up with the “bonus” of the excavator as part of its security.

This issue is highlighted in the New Zealand “Portaloo” case, where the hire company did not register its interests under the NZ equivalent of the PPSA when it hired out 5 port-a-loos to a building company.

The building company, which had a secured loan from a bank, collapsed. These port-a-loos became part of the bank’s security even though the building company did not own them. The receivers sold off the port-a-loos for the benefit of the bank.

Scenario 2: Multiple Low Value Stock Items, Large Client Base

  • Business B is sells a wide range of small stationery items to other businesses on credit terms.
  • Its terms include retention of title.

Issue:

How does Business B register its interests as it is supplying multiple quantities of items on on-going basis to a large number of clients?

How do you register security interests if you have many products and large number of customers?

You only need to register your interests against each client once. The Description section of the form doesn’t require precise descriptions. So you just put “goods” and leave it at that. However, it is better to provide a more detailed description of the goods that you typically supply to that client. This stops potential future disputes about what “goods” are actually covered.

Also, whilst you don’t have to ascribe a value to the goods, it’s probably better that you give an indication of the average value supplied to that customer at any time.

There obviously has to be some practical consideration as to whether you register your interests for every single customer or not. Do you really want to spend the time & money to register your interest where you only supply around, say $200 per month worth of stationery or lettuces?

Note that whilst you don’t need permission from the customer to register your interest, someone can object. You must remove the registration if you don’t have reasonable belief that you will continue to have commercial dealings with that party.

There’s word on the grapevine that some companies have been sending “friendly” notices to their suppliers along the lines of “if you register an interest, we’ll take our business elsewhere.”

Some small businesses have taken the approach where if the customer is a large corporate, it’s not worth bothering with registration on the basis that the large corporate is a good credit risk. However, large businesses are not immune from collapse. So, think about that carefully especially if a loss on that one account could threaten the viability of your own business.

Scenario 3: Storage or Bailment

  • Business C stores its goods in warehouses owned by third parties.

Issue:

Should it register its interests in its goods against the warehouse owner?

In general, if you have valuable goods stored in third party premises, you should register them. This is particularly important where someone could mistake the goods in storage as being owned by the owner of the premises.

Scenario 4: Items That Becomes Progressively Form Building Fixtures

  • Business C supplies and installs pipes for construction of manufacturing plants.
  • The pipes are delivered to and held on the construction site during the works.

Issues:

  1. As the pipes are progressively installed, do they form part of “real property” ie excluded from PPSA?
  2. How does Business C secure its interests in the pipes?

Time to speak to your legal advisors!!! Peter Wilcox noted that the law of chattels has been changing: more and more things that used to be fixtures are increasingly becoming classified as chattels. But you may have to start to look at real property legislation in these types of situations.

Other Issues To Think About

  • What happens when a large company has thousands of small suppliers and wants to take out a $10 million loan?

    A bank will insist on clarifying all the registered security interests. The PPSR doesn’t provide the data that used to be available under the old ASIC (Australian Securities & Investment Commission) searches. Instead, you need to get the grantee to get the lender (or supplier who has the registered interest) to send you the data.

    This makes it even more imperative for businesses to have sound cash flow planning so that you leave plenty of time to arrange and finalise any financing requirements.

  • What happens when you want to de-register the business?

    You must make sure that you go through the register, identify and clean up all the registered security interests.

    If you are buying a business, your due diligence must include identifying and clarifying all security interests that have been registered against the business.

Best Practice For Protecting Your Business Under the PPSA

As long as you are parting with possession (of any property), think about this Act and get advice. – Anthony Seyfort, Partner, Landers & Rogers Lawyers

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