Protect your assets - The Personal Property Securities Regime - what it means for your business

It could be argued that not since the introduction of the GST has there been a more urgent need for businesses to review and revise their business practices, procedures and documentation. In January 2012 the Personal Property Securities Act introduced a new Personal Property Securities Regime which, in effect, compels business owners to take proactive steps to formally register their interests in certain assets if they wish to ensure their business and their assets are properly protected.

What is the PPS Regime?

The PPS Regime represents a fundamental change to secured finance in Australia.  It has seen the establishment of the Personal Property Securities Register – a single, national database of all interests (known as security interests) in goods that are defined by the PPS Act to be all personal property other than land buildings and fixtures.

The PPS Regime affects nearly all businesses in Australia, particularly in circumstances where:

1. A business, such as a financial institution, takes an interest in another party’s Goods to secures payment of a debt or other obligation; and
2. A business that loses or hands over possession, but not ownership, of its Goods.  For example:

• manufacturers, wholesalers and retailers who commonly supply Goods to customers on credit and retain ownership until payment in full
• manufacturers, wholesalers and retailers who supply Goods on consignment terms
• suppliers that lease Goods to customers for a term exceeding 12 months, or 90 days in the case of motor vehicles and other serialised Goods
• suppliers who provide hire purchase terms to their customers

Why is the PPS Regime so Important?

The PPS Regime has turned the notions of ownership and entitlement to Goods as we previously knew them upside down.  As of 30 January 2012, mere ownership of Goods doesn’t offer the same protection as it once did. Possession may now trump ownership. Essentially this means that if a business (or individual for that matter) fails to register their security interest in Goods, they could lose their entitlement to those Goods regardless of ownership.

In short, there may be dire consequences for businesses and individuals who do not properly understand and/or fail to adopt and utilise the PPS Regime.

What is the effect of registration?

If completed correctly, registration of a security interest on the PPS Register will have the effect of ‘perfecting’ a secured interest, providing the secured party with a legally enforceable acknowledgement of their interest over the Goods the subject of the registration.

This perfection by registration will improve the priority status that a particular security interest has relative to other security interests in the Goods, and should ensure that, in the case of bankruptcy or insolvency of the grantor, that security interest survives.

The First Victims of the New Regime

The real life consequences of not properly utilising the Register have already been seen. For example:

• The first significant company to go into receivership after the commencement of the PPS Regime resulted in a large number of suppliers unable to reclaim Goods supplied notwithstanding that they had not been paid for those Goods. Those suppliers received a rude awakening to the PPS Regime when the company’s receivers indicated that they would only recognise retention of title arrangements that had been registered on the PPS Register at the date of the receivers’ appointment. All other suppliers were viewed as unsecured creditors of the company and unlikely to recover their Goods or their equivalent value.
   
• A Sydney retailer was placed into voluntary administration. The company’s collapse left more than 100 creditors out of pocket an estimated $850,000. Many creditors who failed to register their security interests on the PPS Register are now being treated as unsecured creditors.

Words of Caution

It is clear that registration is a must.  However, while online registration is available and can appear simple at first, it is not without its dangers. It is vital that anybody wishing to register a security interest is aware that it is very easy to make mistakes which could, at best, severely limit the effectiveness of their registration, and, at worst, render it completely invalid.

Therefore, when registering a security interest, the importance of getting the following aspects right cannot be overestimated:

• correctly specifying the collateral (property) class of the Goods
• providing details that will be sufficient to identify the Goods at a later stage

In addition, strict time periods which apply must be complied with when registering a security interest. The actual period will vary depending on the nature of the transaction. Failure to register within an applicable time frame is another way in which registration can be rendered invalid or of very limited value.

Finally, businesses are strongly advised to review and revise their terms of trade to take into account the PPS Regime.  Failure to do so is likely to result in the PPS Regime being of little value a business, an administrative and costly burden, and, potentially, very detrimental to the profitability and general future success of the business operation.  Accordingly, it is extremely important that businesses revise their terms of trade to:

• recognise the PPS Regime
• formalise contractual procedures that give rise to enforceable security interests in favour of the business
• relieve the business from a number of onerous obligations that the PPS Act otherwise imposes on parties who use the PPS Register

If you would like more information about the PPSA and what it could mean for your business, or if you require your terms of trade revised, contact Joanne D’Andrea at Harwood Andrews on 03 5226 8567 or jdandrea@harwoodandrews.com.au