We have previously written about the Personal Property Securities Register (‘PPSR’) as a “defensive” mechanism to protect interests where, inter alia, assets are provided and/or credit is extended. However, there are many complexities that can render a registration ineffective. In a recent decision a PPSR registration of a security interest over the corporate trustee of a trust was not registered over the A.C.N of the trustee but only over the A.B.N. of the trust and was subsequently deemed unenforceable.
Such complexities and nuances may lead some parties to question the effectiveness or purpose of their registrations. However if the PPSR is searched before credit or supply is provided, the PPSR can be utilised as an “offensive” tool for determining credit worthiness, risk and/or determining the underlying asset position of a company.
In the example of a recent appointment, a company had been trading for in excess of thirteen years, the director drove a new prestige car and a credit reporting agency ranked the company in their top band out of six for credit-worthiness! A creditor could be forgiven for thinking this company was a “safe bet”; and yet, by the end of that week, the company was in liquidation with a net asset deficiency well in excess of seven figures. What is a creditor to do?
In addition to a credit check (which can still yield valuable information), a search of security registrations can be done of Personal Property & Securities Register. In this instance, three searches (over the name, the A.C.N. and the A.B.N.) costing $25.50 showed there were 28 registered security interests against the company. The information disclosed:
- All fixed assets of value such as motor vehicles were subject to chattel lease or hire-purchase arrangements.
- Major suppliers of stock held Purchase Money Security Interests (PMSI) meaning if the company did carry stock, it was subject to security interests registered by the suppliers.
- Additionally there was a security interest registered by a bank over all the assets, which is suggestive of the provision of significant credit facilities such as an overdraft or other bank borrowings.
While it is a commercial reality of business that credit may be required to be extended, it is best to do so with eyes open and in this instance with the knowledge that the assets that could be seen if one walked through the workplace were not available to the general body of creditors. And that nice car was the finance company’s, not the director’s.
It is likely not practical to implement this type of search for every customer, but at the point of approving, extending or continuing a credit limit that is significant to a business, it can be worthwhile to assess the underlying value of a debtor’s available business assets.
This particular example comes from the building industry where suppliers of stock had issues identifying stock for their security interest to attach to because generic building materials were delivered directly to third-party sites and installed. One major supplier decided to forego any registration on the PPSR for their supplies and instead included a clause in their supply agreement which gave them the right to register a caveat on the director’s personal property in the event of default. The director was apparently unaware of the term. There are two additional lessons to come out of this also:
- For the creditor, it was wise to consider the risks particular to the industry and the customer and design a security position which best afforded protection.
- For the director, it is best when signing contracts to pay attention to the finer print.
The PPSR was introduced so that creditors could conduct these kinds of searches and make better-informed decisions. The Courts assume creditors are conducting these searches and that is why in the case referred to at the beginning of this blog, the registration that wasn’t over the company A.C.N. was unenforceable: the decision highlighted that the defect was unfair on searchers who would not discover the registration. The decision protects creditors who rely on what is disclosed on the PPSR.
The PPSR remains our most requested speaker and training topic. if you would like one of our directors to speak at your discussion group or provide in-house training to your staff or clients, do not hesitate to contact us.