By Kent Vuong
You know about PPSR registration. You might have done a few already. But what can go wrong?
Many mistakes are only identified when something goes wrong. Some mistakes, even large ones, may never be identified when everything goes smoothly. This has been apparent with the introduction of the Personal Property Securities Register ("PPSR") and the Personal Property Securities Act 2009 ("PPSA"). As you will appreciate, the insolvency industry is largely based on something gone wrong. Most commonly, that people have run out of funds to pay their debts. It is only in this situation that everyone starts fighting over ownership and entitlement to the limited assets and the mistakes that have made become apparent.
As a result, we in the insolvency industry are in the best position to experience the variety of mistakes commonly made by secured parties, grantors and other interest holders. From our experience, we make the following suggestions to our readers regarding the new PPSA legislation:
- Register your Purchase Money Security Interest ("PMSI") within the specified timeframe (section 62)
- A sale and leaseback can never be a PMSI (section 14(2)(a))
- Make sure your PMSI is registered as a PMSI (section 62)
- Don't register a PMSI if it's not a PMSI (section 165(c))
- Don't inadvertently invalidate your perfection (section 165(c) and 164(1)(b))
- If there is a General Security Interest over all present and after-acquired property, there is no point registering a late PMSI, you probably have already lost your interest (section 55(3) and (4))
- Ensure that you correctly describe your collateral (section 164)
For examples and a further explanation regarding the above points, please see below.
It has been over nine months since the PPSR came into operation and many readers will no doubt have attended seminars and reviewed articles about the overall concepts of the PPSA and familiarised themselves with some of the potential issues that may arise in competing interest disputes. We wish to take this opportunity to place a practical perspective on potential PPSR issues by highlighting particular sections of the Act that have led to actual security interest disputes we have encountered.
1. A Purchase Money Security Interest ("PMSI") must be registered within the specified timeframe (section 62)
For stock, the security interest must be registered at the time that the grantor receives possession of those items (or for stock that is not goods, at the time that the security interest attaches to the asset).
For all other assets, this will be within 15 business days from the time that the grantor receives possession of the property.
We have come across a secured creditor who was in the business of leasing assets but failed to register their interest within the 15 days after the introduction of the PPSR. That secured creditor is expected to lose their interest in those assets to a pre-existing fixed and floating charge or General Security Agreement over all present and after-acquired property in the new PPSA terminology.
2. A sale and leaseback can never be a PMSI (section 14(2)(a))
Sale and leaseback facilities previously provided businesses with options to restructure their operations or free up some cash flow for other purposes. Any such transactions entered into after the 31 January 2012 will not receive the benefit of a PMSI priority. It appears that many companies have yet to realise the effect of the Act and are continuing to offer and enter into such arrangements with the belief that their interests will rank in priority to other security interests.
If you or your clients are currently in, or are expecting to enter into any such transactions, we would strongly suggest that you review the impact of the Act on the transactions particularly if there are existing security interests over the debtor entity's assets. It may be that the interest in the collateral has already been lost as discussed at points 4 and 5 below.
3. A PMSI must be registered as a PMSI (section 62)
If you don't tick the box that says the interest is a PMSI, you are not entitled to PMSI priority in the event of a dispute.
4. Don't register a PMSI if it's not a PMSI (section 165(c))
Although it may be tempting to register all security interests as PMSI's to prevent the loss of a PMSI priority, the misrepresentation that your interest is a PMSI when it isn't a PMSI actually has the effect of rendering your registration ineffective.
This means that anyone who registers a security interest after your registration will be deemed to have perfected their security first.
5. Inadvertently invalidating the perfection entirely (section 165(c) and 164(1)(b))
As noted above, a security interest that is registered late or is part of a sale and leaseback transaction cannot be a PMSI. If you inadvertently register such an interest as a PMSI the registration will be rendered invalid in its entirety even if you would have otherwise been entitled to some level of priority.
We've encountered a situation where the secured creditor did not realise that they had an invalid PMSI or sought to register their security interest as a PMSI anyway. This had the unintended effect of invalidating their registration entirely and reducing them to the subordinated priority of an unperfected security interest. This simple mistake is expected to have a seriously detrimental effect for the secured party.
6. If there is a General Security Interest over all present and after-acquired property, there is no point registering a late PMSI, you probably have already lost your interest (section 55(3) and (4))
Failing to register your PMSI on time has a significant effect that many have not realised.
In the previous scenario, the secured creditor ("lessor") leased assets to the debtor company ("grantor") but failed to register their interest within the 15 day period. The grantor had already provided a general security interest over all of its present and after-acquired property to another secured creditor ("chargor") at an earlier date.
Pursuant to the Act, the lessor lost their PMSI priority and the chargor's interest was deemed to have been perfected prior to the lessor's. Therefore the chargor is entitled to recover and realise the security asset in satisfaction of their debt leaving the lessor with nothing to recover. A subsequent registration by the lessor of a normal security interest would not have affected this position.
7. Incorrectly described collateral (section 164)
Pursuant to section 164, insufficient detail about a collateral asset may be considered a seriously misleading defect which renders the registration ineffective. However, despite the strong emphasis on making sure businesses are aware of the registration requirements of the PPSA, we have still seen registrations that do not correctly describe the collateral to which it relates.
We've also encountered a situation where multiple registrations were lodged for a number of leases to the same grantor company. Due to human error (possibly because of the repetitiveness of the task), the collateral was incorrectly described for one of the registrations. This error is expected to cost the secured creditor over $400,000 for that single asset.
This may have been avoided if the registrations had been reviewed by a second person for any errors. Given the values of the leased assets and risks involved, we're surprised that such an inexpensive verification process was not introduced as a standard procedure. If you are responsible for registering interests for your clients or for your organisation, we would encourage you to assess what controls are currently in place to prevent a similar costly mistake.
Errors and transitional oversights are expected from the introduction of any changes in legislation. It was apparent that the primary reason for the errors encountered above was that the secured parties did not fully appreciate the effect of the introduction of the PPSR and/or incorrectly believed that they had two years during the transitional period to adjust their processes and procedures. The transitional period only applies to transactions entered into prior to 30 January 2012. By now all businesses should have reviewed their internal processes and procedures and adjusted them to the very strict requirements and timeframes of the Act.
We hope that the above illustrates some of the mistakes that can easily be made and yet be potentially very costly to your clients and/or your organisation and that these examples may therefore assist you or your clients to avoid those same mistakes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.