We’ve covered this topic in the past but it is something that a lot of businesses are unaware, and we want to again highlight the importance of this little known and very complicated legislation.

This Act affects those businesses that rent, hire or lease equipment or sell goods on credit.

To better understand the impact of the PPSA, the following is a basic example:

• * ABC Pty Ltd hires a truck to XYZ Pty Ltd.
• * XYZ experiences financial difficulties and calls in the liquidator.
• * The liquidator seizes ABC’s truck and sells it as part of XYZ’s assets.
• * ABC argues that it’s their truck and how can this happen?
• * Unfortunately, ABC didn’t register a security interest over XYZ, so the Act says the truck belongs to XYZ and the liquidator can transact on it.
• * ABC has lost their $200,000 truck!
• * Furthermore, ABC had finance on the truck. It still owes the bank for the remainder of the finance.

The above could have been avoided if ABC had registered a security interest on the PPSR. The registration lasts 7 years and covers all subsequent transactions with XYZ. The liquidator would have had no choice but to return the truck to ABC.

As can be seen, the above illustrates the extremities of the Act. However, there are more and more cases of this becoming a reality. With the downturn in the mining and construction industries, never before have we seen such activity.

It’s not all doom and gloom however, as there are some significant benefits the PPSA provides for any business selling goods and products on credit terms.

Supply of goods on credit terms

Many businesses use retention of title clauses in their terms of trade, so that they can repossess stock in the hands of an insolvent debtor. This is allowed under the PPSA – but it does create a security interest that is required to be registered on the PPSR.

The Act introduces some significant new benefits:

* If your goods have been on sold, you may have security in the book debt arising.

* If your goods have been used in the manufacturing process, you may have security in the manufactured product.

* There are new rules for preserving your security in mixed (commingled) goods.

* If your goods have been fixed to something else, you may have rights of removal to retrieve those goods.

Always bear in mind that in most cases you do not actually want the goods back. The important point is that you may be able to secure a financial settlement with the liquidator.

A simple example of the above is:

• DEF Pty Ltd supplies steel to TUV Pty Ltd, a steel fabricator.
• TUV cuts, welds and bolts the steel to form trusses that are on sold to a customer.
• TUV experiences financial difficulty and calls in the liquidator.
• DEF stands to lose the steel that has been supplied.
• However, if DEF had registered a security interest on the PPSR, it now has a claim on the debt that is owed to TUV from TUV’s customer. The liquidator would claim the debt from the customer and settle DEF’s claim, as DEF is considered a secured creditor. A great result for DEF.

The registration process is quite involved and should be done by a professional. Recent surveys of registrations show a significant number of incorrect securities. We can assist you with this process and guide you in the right direction.

There are a number of instances where the PPSA will apply. Following is a non exhaustive list. We stress that you speak with us or seek legal advice to determine whether you’re affected:

* Supply of stock on consignment.

* Corporate Structure – the use of asset holding entities.

* Loan equipment.

* Equipment rental, including lease, hire and bailment.

* Motor vehicles/watercraft/aircraft.

* Patterns or dies provided to suppliers.

* Leased Premises.

The Landlord and Tenant Relationship

There is continuing debate on the impact the PPSA has on the relationship between Landlord and Tenant.

What is reasonably clear is a Landlord will need to protect any property provided to the tenant as part of the lease agreement. For example, the provision of fitout, furniture and any other physical chattels are all situations requiring a PPSA response from the Landlord.

Where title to the fitout/chattels remains with the Landlord and the term of the lease is either open ended or greater than 12 months a PPS Lease arises. The Landlord will need to register its interest in the fitout/chattels or it may lose them on the insolvency of the tenant.

Where title to the fitout/chattels passes to the tenant the Landlord is entitled to take security over them for the due payment of rent.

A Security Interest also arises if the Landlord takes a Security Bond from the tenant. Accordingly the Landlord will need to register its interest in the bond (even then this may not be enough and the tenant’s financier may well have a better claim to the deposit).

Use your equipment to provide a service

An agreement under which your property is used to conduct a service is not generally considered to have PPSA application. The property is ancillary to the provision of your services (for example civil earthworks, mining services, drilling and so on).

Accordingly, service agreements do not ordinarily attract the attention of the PPSA and your property should not be at risk of loss. However, an exposure to the PPSA can arise during the actual performance of the service agreement and will often go unrecognised, usually as variations. For this reason it may be prudent to treat your service agreements as if they expose you to the PPSA.

We stress that you review your business to determine whether the PPSA applies to your business. If you’re not sure, please contact us to discuss.

Link to the Personal Properties Securities Act

Enrico De Pietro

DIRECTOR – OPTIMA PARTNERS