Franchisors need to be proactive to take steps to
protect their interests under the Personal Property Securities Act
Where a franchise business is involved in the activities set out
provides goods on credit to a franchisee;
leases goods to a franchisee;
wishes to sell a franchise business to a franchisee on a
deferred payment basis and protect its interest in capital
equipment provided to the franchisee; or
acquires goods from suppliers on a credit, lease or similar
then the franchisor needs to consider the following:
how to ensure that your interest in goods that you provide on a
credit or lease basis is enforceable;
reviewing your security documentation and terms of trade to
ensure that they will continue to be enforceable after the PPSA
the implications of your security interests being made public
on the new public electronic register.
If a franchisor provides goods to a franchisee on credit or
lease basis but does not register its security interest in the
goods there may consequences to the franchisor, namely
if the franchisee's financier does register its security
interest in the franchisee's assets, then if the franchisee
defaults, the financier's security interest will take priority
over the interest of the franchisor;
if the franchisee becomes insolvent or enters into
administration, title to assets leased by the franchisor to the
franchisee will transfer to the franchisee; and
if the franchisee were to deal with the leased assets or assets
provided on credit, in certain circumstances the third party
transferee of the assets may take them free of the franchisor's
interest in the asset.
To avoid such adverse consequences, the franchisor should
register its security interest.
Franchisor leases plant and equipment to a franchisee but does
not register its security interest in its plant and equipment. The
franchisee's bank registers a general security interest over
the assets of the franchisee. The franchisee becomes insolvent.
Can the franchisor repossess the plant and equipment? No. The
franchisor must claim amounts owed to it. The franchisor's
claim ranks alongside other unsecured creditors.
Can the bank take possession of the plant and equipment? Yes. It
is not relevant that the franchisor had legal title to the plant
and equipment. This will be the case even if:
the bank registered its security interest after the
franchisor's own (unregistered) security interest was created;
the franchisor had an attached but unperfected security
interest (since a perfected security interests outranks an
unperfected security interest).
Similar principles apply where a franchisor sells a franchise
business to a franchisee and the franchisee is only required to pay
the purchase price by instalments.
The franchisor will need to consider registering a security
interest over the capital equipment and assets of a business in
order to ensure that if the franchisee defaults in its payment
obligations (or becomes insolvent or enters into administration),
the franchisor will prevail over the franchisee's bank or its
liquidator or administrator. While the usual commercial
considerations will apply, the arrangements will need to comply
with the PPSA.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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