Many business owners are unaware that the asset protection
outcomes they sought to achieve by implementing a particular
corporate structure may have been rendered ineffective by the
introduction of the Personal Property Securities Act 2009
In this factsheet, senior associate Tim Scanlan discusses the
impact of the PPSA on certain business structures, and outlines
what business owners should do to ensure that structures designed
for asset protection remain effective.
What effect does the PPSA have?
The PPSA establishes one Australian register, the Personal
Property Security Register ('PPSR'), which records all
security interests in personal property, including assets that are
used in businesses. The security interests that are regulated by
the PPSA include:
traditional security arrangements such as charges and mortgages
(excluding in relation to land); and
many arrangements not previously considered security interests,
such as retention of title arrangements, hiring arrangements, and
other arrangements where the party that owns the property no longer
Example: structuring for asset protection
A business owner might establish two separate entities so
one entity holds all of the assets; and
the other entity ('the trading entity') uses those
assets (under a formal or informal lease or hire arrangement) to
conduct a business.
The trading entity is exposed to the risks inherent in running a
business. The asset holder, on the other hand, is simply a passive
owner (and hirer) of assets, and is therefore not exposed to a
large amount of risk.
If the trading entity went into some form of insolvent
administration, the lease or hire arrangement could be terminated,
and the asset holder would be entitled to retake possession of the
assets as the owner. The assets could then be leased or hired to a
new entity that might be established to operate a new business
Commonly, the trading entity has possession of the assets, while
the asset holder retains ownership of those assets.
What is the impact of the PPSA?
Before the introduction of the PPSA, the arrangement outlined
above would have been an effective way to insulate the assets from
the risks of running a business, provided the arrangement was
properly documented. The asset holder's interests in the assets
(as owner) would have been recognised at law.
This position changes under the PPSA. To protect its interest in
the assets, the asset holder must register that interest (now a
security interest under the PPSA) on the PPSR. The registration is
against the trading entity as 'grantor' of the security
interest in favour of the asset holder, and it must take place
within certain timeframes and before any insolvency event occurs to
the trading entity. Registration 'perfects' the asset
owner's interest in the assets and means that interest will be
protected if the trading entity becomes subject to any form of
What are the consequences of not registering a security
If the asset holder fails to register its interest in the assets
under the PPSA, there is a risk that those assets will be available
to the creditors of the trading entity if the trading entity
becomes insolvent. The fact that the asset holder is the owner of
the assets is irrelevant if its interest is not recorded on the
PPSR or perfected in some other way allowed by the PPSA (though
registration is the easiest and most common).
What should you do now?
This is just one example of how the PPSA may reduce the
effectiveness of a structure that has been put in place with asset
protection in mind. Business owners concerned about asset
protection should seek advice on the operation of the PPSA, and
ensure that interests are registered on the PPSR.
In the example above, this would involve:
putting a formal agreement in place between the asset holder
and the trading entity to establish the relationship between the
parties in relation to the assets; and
registering the asset holder's interest as a security
interest on the PPSR.
This legal update is an overview of existing eligible project activities and new project types proposed to be developed.
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