Over the years we have seen many company directors or business owners lend their personal savings or redraw from equity in property to start or fund their business. However the biggest mistake is lending the money unsecured.
This poses a big risk to these directors and business owners especially in insolvency where they cannot recover the original money lent to the business and remain an unsecured creditor or worse yet lose their security for assets being used by third parties such as plant and equipment.
What is the PPSA?
A borrower’s personal property may be secured to a lender by way of a security agreement which creates a security interest(s) under the Personal Property Security Act 2009 (Cth) (PPSA). The definition of ‘Security Interest(s)’ under section 12 of the PPSA includes:
“an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person has title to the property)”.
Notably, a security interest under the PPSA only recognises security interests in personal property such Intellectual property, Plant & Equipment, Trade Goods, Motor Vehicles and not real property such as Land Titles.
Since its commencement in 2012, the PPSA changed the way security interests in personal property assets were governed. A major development that came with the PPSA was that it introduced the Personal Properties Security Register (PPSR), an official government register that shows security interests in personal property. The PPSR acts as a national noticeboard showing all registered security interests in the personal property of grantors which is incredibly valuable as it creates transparency and consistency nationally.
What types of security interests can be taken
Usually security interests arise when a lender and a grantor enter into a security agreement giving rise to a lender’s (secured party) interest in the personal property of a borrower or guarantor (grantor). There are three different types of security interests, which are:
- all-PAAP – this security interest is granted over all of the grantor’s personal property (both present and future);
- specific Security – this security interest is granted over specific personal property of the grantor; and
- PMSI – this security interest is granted to a person who facilitates the acquisition of personal property.
If an event of default occurs, the lender may enforce its security interest under the PPSA and sell the asset and recover any amounts owing. Although the PPSA does not recognise security interests in real property, typically security agreements contain a charging clause over any present and future real property to address any administration risk that a lender may be exposed to in the provision of the loan to a borrower.
The PPSA does not prescribe a form or document for the creation or registration of a security interest on the PPS register, unlike the prescribed National Mortgage Form in respect of a Torrens title mortgage. However, a registration on the PPSR must be made within 20 business days after the signing of the security agreement, otherwise the lender will lose priority on its security interest for 6 months.
PPSR Scenarios
Below is an outline of past matters where the PPSR can provide security and protect commercial interests.
- A director lends funds to his company to purchase a Franchise. Over time the franchise is not performing as well as initially thought but the business has a cash position equal to the initial capital lent by the director. Should this company enter into liquidation and if the director has a perfected security and AllPAAP registration over the company the director would be the main secured creditor, if there are no other first ranking creditors such as a bank.
- A multinational enters into a licence agreement for the use of their trademarks, patents and other technical IP with another company to manufacture and distribute goods. The multinational can take a security registration under the PPSA in order to secure the agreement for royalties paid by the licensor, should the licensor default on this arrangement the multinational could take action under the PPSA to recover royalty payments.
- A company has equipment and scaffolding being used on site by a builder and registers an PMSI registration over the builder under the PPSR for the use and rental of the equipment and scaffolding. Suddenly the builder enters into liquidation however the company can recover their equipment under the PPSR from the liquidator who will disclaim these assets based on the security agreement and perfected PMSI registration.
What can happen if you fail to register your security
If the secured party (e.g. lessor, chargee) has a security interest but has not made a registration on the PPSR (and not “perfected” by other means) there can be a number of serious problems.
Registration on the PPSR is the most common and available method of “perfecting” security interests under the PPSA.
Where a security interest over a company is not perfected and one of the following occurs:
- an order is made, or a resolution is passed, for the winding up of the company;
- an administrator is appointed to the company; or
- the company executes a deed of company arrangement,
then the security interests will “vest” in the grantor and be extinguished. A security interest over an individual that is not perfected will also vest if a sequestration order is made against the individual or the individual becomes bankrupt.
This will mean, for example, that the assets of the grantor will cease to be subject to the security interest or leased assets will become assets of the grantor free and clear of the security interest. The secured party/lessor will then be an unsecured creditor.
Get the right advice with Corson Fiske
Our commercial legal team have extensive expertise in the PPSA and perfecting registrations on the PPSR.
We can advise and assist on all types of PPSA registrations commonly securing funds lent by directors to their companies and various financial, rental and royalty licence agreements. Its critical that to protect your interests you have an expert that can protect your rights and security interests by getting it right the first time.