CIB FEATURE ARTICLE – POSSESSION IS 9/10TH OF THE LAW

THE PERSONAL PROPERTY SECURITY ACT

The Personal Property Security Act (PPSA) formed a new nationally based register for all interests in personal property and commenced operation from January 2012. The PPSA system replaces all pre-existing systems of fixed and floating charges that may be held over a company’s assets. The PPSA operates on the underlying assumption that whoever has possession of an asset, owns the asset for insolvency purposes unless it has been registered on the Personal Property Security Register (PPSR). Therefore possession is 9/10th of the law.

WHAT IS PERSONAL PROPERTY?

Personal property is any sort of property other than land, buildings or fixtures that form part of a building, a right, entitlement or authority. For an item to be considered personal property, one person must be able to transfer the ownership of the property to another person. The most common examples of personal property are:

  • Artwork
  • Boats & Caravans
  • Cars
  • Crops
  • Inventory
  • Livestock
  • Plant & Machinery
  • Shares
  • IP

A personal property security is when a business or individual takes an interest in personal property as security for a loan or other obligation, or enters into a transaction that involves the supply of secured finance. For example, an individual borrows money from a bank to buy a car, the car is the personal property provided as security for the loan.

WHY REGISTER?

If you own personal property that is in the possession of another entity, the interest should be registered on the PPSR. Even if legal title can be proved beyond any doubt, if an asset is not listed on the PPSR another entity may have priority to your asset in an insolvency event. This register applies to any personal property held by any type of entity and includes the common business situations of supplying goods on credit, finance security, leasing and consignment stock.

A business can improve the way they manage credit risk by using the PPSR to secure the goods supplied or leased to another business. If the security interest is not registered and a debtor goes into bankruptcy or liquidation, your position will be that of an unsecured creditor. Any secured creditor with PSSR registration will be ahead of you when payments are made or assets distributed. PPSR registration is also very important for related party lease transactions. A common asset protection strategy is having one entity own all the plant and equipment and lease it to another related party entity which holds the business operational risk. If plant & equipment is held at the site of the operational business and is used by its employees on a regular basis, this equipment is at risk of a liquidators claim unless a PPSR registration exists to protect the interests of the asset holding entity. Without correct registration, the asset protection strategy could be ineffective.

WHAT TO REGISTER

Any business that deals with supplying goods on lease, consignment or retention of title arrangements should consider registering the personal property on the PPSR. Assets which can be clearly identified under a serial number or vehicle identification number need to be registered using the specific number for each asset. Generally an asset would not be considered for registration unless the value was greater than $5,000.

SEARCHING THE REGISTER

The central register can be found at www.ppsr.gov.au or by calling the PPSR contact centre. A basic search of the register by grantor, serial number or PPSR registration number will cost $4.00 per search. Once a search has been completed, a search certificate can be requested to provide documentary evidence of the PPSR status.

The PPSR can also be used to provide certainty when purchasing second hand items. A quick search will enable a business to determine if an asset is used as collateral for a finance arrangement. Additionally, a business who has used personal assets as collateral for a loan should search the PPSR register once the debt is settled to ensure that the PPSR claim has been removed.

OTHER CONSIDERATIONS

The use of the PPSR to secure interests in property will involve costs in respect of registration fees and administration burden which can become quite significant when there is a large number of individual assets. When a business is determining whether or not to register its security interests on the PPSR some factors to consider are:

    • Pre-existing client relationships – knowledge of market and solvency risks
    • Current risk profile – what is the likelihood that an agreement will be dishonoured
    • Collateral Value – proportion of the collateral value to the total business assets
    • Supply Nature – frequency and value of supplies to a customer
    • Commerciality of Enforcing – costs for enforcement; likely depreciated value of collateral

WHAT NEXT

All businesses should review their asset protection strategy and determine if any assets are at risk under the PPSA rules, even if legal ownership is clearly documented.

If any assets are at risk, please contact your CIB representative or legal counsel to determine if registrations with the PPSR are required.