To register or not to register: The consequences of misunderstanding the Personal Property Securities Act

The Personal Property Securities Act 2009 (PPSA) has imposed upon businesses a new and complex regime that is laden with very technical terms and concepts that can be difficult to fully understand.

The PPSA does not discriminate between large and small businesses and failure to adopt the regime can be fatal to an otherwise thriving business.  Therefore, if you are a business owner, in order to properly protect your commercial interests, it is essential that you have an understanding of the PPSA regime and an appreciation of when it should be used and how.

It is likely that because of a lack of a proper understanding of the PPSA regime that a mindset seems to have developed of “if in doubt, register”. However, while the PPSA impacts on most Australian businesses, a security interest in personal property may not always be registrable under the PPSA regime.  We have seen a number of cases which shed light on the operation of the PPSA and provide businesses with guidance on what not to do and the following cases are examples of why businesses should exercise caution when deciding whether or not to register a security interest.

These cases demonstrate some of the potential adverse consequences of getting it wrong, such as:

• unenforceable registered security interests;
• awards of damages and costs against businesses who have registered security interests, but had no basis to do so; and
• registrations on the Personal Property Securities Register (Register) that do not achieve protection.

1.   Take the case of Macquarie Leasing Pty Ltd v DEQMO Pty Ltd (2014), which is a good illustration of a futile attempt to obtain protection by registration due to the absence of a ground for registration and the incorrect completion of the registration process.

In this case the court considered competing registered security interests over a truck worth several thousands of dollars.  Details of the security interests were as follows:

• A security interest registered in September 2014 by DEQMO as the secured party, naming DEQMO as the grantor of the security interest; and
   
• A registered security interest held by Macquarie as the secured party financier against another party with an interest in the truck. This registration had lapsed for a period of approximately 2 years but was re-registered sometime after DEQMO registered its interest.

The court concluded that the re-registration of Macquarie’s security interest took priority even though it was registered after DEQMO’s registration.

Importantly, the court stated that for a registered security interest to be enforceable, the secured party must either:

• be a party to a security agreement that relates to the goods; or
   
• possess or control the goods .

DEQMO’s security interest was not valid as neither of the above criteria was met.

DEQM could not provide any evidence that it had a security agreement in place with another party and, in any event, a person or company cannot give a security interest to itself.

Macquarie, by comparison, had a security interest over the truck at the date that DEQMO’s unenforceable security interest was registered. Macquarie had possession of the truck at that stage and continued to retain possession thereafter.

2.   Canada has a similar regime to the PPSA.  Given the similarity between the Canadian and Australian regimes, we have seen Australian courts observing decisions originating in the Canadian jurisdiction.

In the Canadian case of Myers v Blackman (2014), Myers sought damages and costs in relation to a security interest registered against it that had no basis. The court awarded damages and costs against the party that wrongly registered the interest.

It is not beyond possibility that going forward Australian courts will take a similar position in relation to unjustifiable registrations. It is therefore important for businesses to ensure that they actually have a right to register a security interest. If businesses lodge registrations that have no basis for such registration, businesses risk being subject to penalties and may also be required to pay the costs incurred by the affected party in having the registration removed. These costs can be quite substantial.

 3.   Even people who deal with the PPSA every day, for example, liquidators, find the regime difficult to navigate.

In the case of Re Renovation Boys Pty Ltd (administrators appointed) (2014), the administrator sought direction from the court in relation to how it should deal with certain goods that were subject to registered security interests. This is not an isolated case. Liquidators and administrators appear inclined to look to the court for guidance and clarity regarding the practical effect of the PPSA.

This is indicative of the complexity of the regime and the difficulties faced by professionals and businesses alike.

As demonstrated by the above cases, it is clear that the PPSA remains a complex beast. The unenforceability of a registered security interest can have a dramatic effect on a business. It is therefore crucial for businesses to properly understand the PPSA regime to ensure that their use of the Register is not in vain.

For more information contact:

Joanne D'Andrea
Principal
Harwood Andrews
T: 03 5226 8567
E: jdandrea@harwoodandrews.com.au

Nicole Stornebrink
Lawyer
Harwood Andrews
T: 03 5225 5209
E: nstornebrink@harwoodandrews.com.au