Since its establishment in January 2012 under the Australian Personal Property Securities Act 2009 (“PPSA”), the Personal Property Securities Register (“PPSR”) has transformed the way most security interests are registered and identified.
It not only replaced a number of existing registers but also created a new platform to capture interests that previously were only recorded in contracts, like retention of title clauses on supply agreements and invoices.
The PPSR is a critical function for you to protect your interest in a customer and preserve your priority claim over other creditors. However, through our travels, we have seen a number of creditors falter with their registrations and lose all rights as a result.
The last thing you want to hear is that your registration is defective and this article will outline some of the PPSR pitfalls to watch out for.
1. Customer identification
The PPSR and case law developed through years of testing the PPSA has set foundations as to how registrations should be recorded.
For example, you may find yourself on the wrong side of the defective registration discussion if you register against the incorrect identifier for the customer, i.e. its ABN or ACN.
If your customer transacts with you as a corporate trustee or on behalf of a partnership, the identifier needs to be the trust/partnership ABN. If your customer transacts with you in its corporate capacity, the registration needs to be over its ACN.
This became a real problem for Alleasing in the Arrium administration, where Alleasing leased equipment to an Arrium subsidiary, Onesteel.
Alleasing registered its interest against Onesteel’s ABN, rather than its ACN. This was a $23m problem that found its way to Court, where the Court determined Alleasing’s registration was defective and ineffective.
Now Alleasing attempted to amend their registrations after the appointment of Administrators to Arrium and Onesteel. As Onesteel was in administration, all post-appointment registrations and amendments were rejected.
2. Identifying assets – serial numbers
A transposition error can also cause you problems when trying to enforce your PPSR registration and security rights. An error in an asset’s serial number or VIN can again result in your dwelling in the world of defective registrations.
Using a vehicle as an example, the PPSA prescribes that the same must be described in your PPSR registration by serial number in addition to the customer identifier for the registration to be effective and enforceable.
Now the serial number can be the VIN, chassis number or the manufacturer’s number. If the serial number is not 100% accurate, registration is ineffective and you could lose rights to the vehicle if your customer is wound up in liquidation or through a sale process.
In this regard, if the serial number is not accurate, a buyer or lessor could take an asset free of security as the security interest would not be discoverable in a serial number based PPSR search.
3. What is a motor vehicle?
The PPSA defines a motor vehicle as a property that is capable of travelling at more than 10km/hr and has total motor power greater than 200W.
This extends to some types of property that are built to be towed at more than 10km/hr, including trailers. Therefore, if you lend, rent or lease any equipment that meets this definition it is important that you register against both the entity and the serial number to perfect your interest in the goods.
4. Subcontractors with goods on site
If you subcontract to other contractors and principals and they become insolvent during the project, the goods left on-site including plant and equipment vest in the insolvency practitioner if you have failed to register a PPSR in favour of those goods.
As such before entering into a contract, subcontractors should identify all high-value capital equipment and other identifiable materials which may be delivered, installed and/or kept on-site and register a security interest in those goods on the PPSR.
5. PMSI problems
The purchase money security interest (“PMSI”) is a type of security interest which gives you a super-priority over other creditors for specific assets. PMSIs normally are created from the following:
- Loan funds for a specific asset purchase, like the purchase of a vehicle or equipment;
- Assets supplied to your customer which are subject to retention of title conditions; and,
- Assets leased or on consignment.
If you fail to register as a PMSI on the PPSR, you will lose the super-priority over other registrations, which is normally based on who registers first. However, if you register as a PMSI and there is none, your registration will be ineffective.
As a general rule, if you are providing finance/credit for a specific good rather than general business finance you would be entitled to register a PMSI.
6. Registration errors
Together with the above pitfalls, we have seen administrative errors cause registrations to be deemed defective.
If you register your security interest as transitional when it isn’t, your registration will be defective. If you select the wrong collateral class, your registration will be defective.
A common error is a registration outside of the prescribed period of time. You are afforded 20 business days to register your security after the security agreement was created. If you register outside this period and your customer becomes insolvent within six months for the date of registration, your registration will be defective and set aside.
At RSM, we have the experience and expertise in PPSR registration issues and remedies that could help protect you and your business. Get in touch with your local RSM office today.