Ppsr Update
The Personal Property Security Register (“PPSR”) has been operational for the last 3 ½ years, however we are still seeing many trade suppliers, financiers and business operators failing to seek and act on appropriate advice in relation to the operation of the Register.
We recently were appointed to a franchise retailer with approximately 66 unpaid suppliers, most with retention of title clauses but only 7 PPSR registrations. Without a PPSR registration, ROT clauses have no effect.
Retention of Title
Section 588FL of the Corporations Act 2001 provides that to be effective security interests are required to be registered on the PPSR:
- Six months before the critical time,
- 20 business days after the security was granted, or the critical date, whichever is earlier.
The critical time is defined as the commencement of the winding up.
Quite simply a creditor that does not register its retention of title clause on the PPSR, has no valid claim to retain unpaid goods. If registered, the threshold issues of ensuring that the ROT claim is valid are still required to be established, however at least you’re in the game.
Where the customer acts as trustee of a trust which trades, ensure that registration is over the ABN to avoid a claim that registration over the ACN is insufficient because the trust, not the company is the trading entity.
The decision of Brereton J In the matter of Appleyard Capital Pty Ltd; 123 Sweden AB v Appleyard Capital Pty Limited [2014] NSWSC 782 casts doubt on the veracity of simply lodging against an ACN.
Holding Companies
Often accountants structure clients to have business asset holding entities which provide its equipment to a trading entity on a hire or rental basis. The purpose of such a structure can include to quarantine assets from trade creditors. Under the PPSA, even if your client owns the asset, they can lose it upon the insolvency of their customer if they did not perfect their interest in accordance with the PPSA.
It is important to remember that any lease / rental agreement of plant & equipment from the holding entity to the trading entity is required to be registered on the PPSR. If not, and a liquidator is appointed to the trading entity, if the plant & equipment is on the trading entity’s premises, whilst ownership is with the holding company, because the security interest was not perfected prior to the appointment of the liquidator, the liquidator has the right to those assets and sell the plant & equipment for the benefit of the trading entity creditors.
Under PPSR even if there is no formal rental or hire agreement, if the conduct is such that it has the effect of a rental or hire arrangement exceeding 12 months it requires registration otherwise on insolvency the assets can be retained by a Liquidator.
Related Party Funding
Nearly all business at some point in time requires funding from related parties. As part of an overall asset protection strategy, it is important to consider securing an advance of funds by having in place a loan agreement to support the advance and the registration of a security interest on the PPSR. Even if past advances have not been secured, fresh advances can always be subject to new loan agreements and valid PPSR registrations if lodged within the requisite timeframes. Quite often the need to advance more funds to feed working capital is a good time to take a step back and critically assess the performance and prospects for a small business.
A recent case highlights how the PPSR operates within a group of companies that involves inter-company sale transaction. Warehouse Sales Pty Ltd (In Liquidation) and Lewis and Templeton v LG Electronics Australia Pty Ltd (In Liquidation) [2014] VSC644 dealt with claims in the main from suppliers where stock was sold to a related company and then onsold to other parties.
The Warehouse Sales case is another illustration of the pitfalls of suppliers failing to hold and enforce trading terms that are properly supported by valid registrations of security interests. It is a timely reminder that suppliers need to understand how their customers conduct transactions so that the registration of security interests is effective.
The key message is to ensure that in any circumstance where credit is extended, whether in the form of goods or money, proper consideration should be given to a properly thought out security document which is validly registered on the PPSR.
It is on old banking axiom that the work of recovering money is best done at the lending stage. The importance of registering on the PPSR holds true to this axiom.