Serial Numbered Goods | PMSI | Trusts | Description of Goods | Timeframes for Registration against Companies | Lien | Banking Covenants | Tidying up your own House
The Personal Property Securities Act 2009 (Cth) ("PPSA") has been in force for over a year now and many businesses are just starting to realise the significant effect it has on the way business is transacted. In this Alert, we have outlined a number of areas where the PPSA impacts on clients in a variety of industries.
Serial Numbered Goods
Motor vehicles, boats, trade marks and patents are some of the assets that MAY be described by serial number in a PPSA Registration. Does this mean you have to register by serial number? The answer is an emphatic Yes! Under the PPSA a purchaser will take free of any security interest if a search by serial number alone will not disclose a registration. That means where assets MAY be described by serial number (basically any type of vehicle or towable machine and a number of intellectual property rights) registering against the owner of that asset is not enough.
We also note that registrations migrated to the PPSR from REVs often do not link back to the owner and are recorded only by their VIN. This is another reason why searching and registering against both the owner and the serial number is essential.
If you supply goods on credit or hire goods you need to register a Purchase Money Security Interest ("PMSI") to protect your interests. If you don't, you risk losing your goods.
PMSIs must be registered in strict timeframes (before delivery of the goods if your customer will use the goods as inventory and otherwise 15 business days). If you miss these deadlines don't just register anyway as you may make the position worse if you have an incorrect registration.
A trust is not a legal entity. However, under the PPSA, where assets are owned by a trust, a security interest must be registered against the trust. This means that if a company or an individual owns assets as trustee, then you are only obliged to search against or register against the ABN of the trust, not the ACN of the corporate trustee or the individual trustee.
It is therefore essential when dealing with another party to ascertain whether there is a trust involved and make appropriate searches and/or register against any trust. We would, however, recommend also registering against the corporate or individual trustee as well.
Be Specific with your Description of Goods
Make sure you clearly describe the property over which you are taking a security interest.
This point was highlighted in the Australian Federal Court in Carson, in the matter of Hastie Group Limited (No 3)  FCA 719. In this case, the PPSR included 995 secured interests noted against the company. Following these registrations, the company went into administration. Many of the security interests were simply recorded as the collateral class "Other Goods" without the optional field being completed in the PPSR under which the collateral can be described. The Administrators took reasonable steps to attempt to identify the security interests, including writing to each creditor requesting specific details of their security interests. Response to the requests was low resulting in 77% of the assets remaining unclaimed. Ongoing costs of renting premises to hold the assets lead the Administrators to apply to the Court allowing them to sell the assets at auction, and after certain conditions were met, to apply the sale proceeds to Hastie's administration.
The Court allowed the Administrators to sell the assets and use the proceeds to pay creditors after a three month escrow period. This case shows how critical it is for PPSR interests to be recorded in sufficient detail.
Register within 20 Business Days
If you take a security interest against a company, you should record your interest on the PPSR as soon as possible, and no later than 20 business days after entering into the security agreement.
Section 588FL of the Corporations Act 2001 (Cth) provides that if you do not register your interest within 20 business days and the company is wound up or an administrator is appointed within six months of you entering into the security agreement, your security interest will probably be unenforceable.
Note also that when registering your interest as a PMSI stricter timeframes apply.
Be Aware of Liens
Even if you register a security interest under the PPSA, there is still a chance you can lose your goods in certain situations. The PPSA will give priority to someone who has possession of and makes improvements to your goods if they do not have notice of an earlier registered security interest.
The New Zealand case of StockCo v Walker addressed this issue. StockCo provided the purchase price for a herd of cattle. The cattle were leased to Capehorn. Capehorn entered into a Grazing Agreement with Walker that required Walker to maintain the leased cattle on her land for the purpose of improving the cattle. She did this by feeding and caring for them in such a way as to increase their body weight at a stipulated rate.
Capehorn went into receivership and Walker served a notice of general lien in respect of the cattle on Caphorn's receivers and StockCo. The Court ruled that Walker had a common law lien over the cattle which had priority over StockCo's registered security interest. This is because Walker's priority interest arose in the ordinary course of her business (taking care of and increasing the value of cattle on her land) and also, because she had no knowledge of the prior registered security agreement.
If your goods are going to be in someone else's possession, make sure they are made aware of your security interest and that the creation of a lien in those goods constitutes a breach under your security agreement.
It is becoming common practice for financiers to include PPSA covenants in their financing and banking documentation, requiring a borrower to register all security interests granted to it by its customers, associated entities and other parties. Importantly, these provisions usually apply so as to require a borrower to register any retention of title interests. Borrowers risk being in default under their facilities if they do not comply with the PPSA. This could have significant consequences for listed entities that may need to disclose such default to the market.
Tidying up your own House
Managing your own registrations should be considered good house-keeping. There are a lot of 'old' registrations that have been migrated to the PPSR that are no longer relevant.
A PPSR search is now an ordinary part of any due diligence on a refinance or sale transaction. Do a search now so you can deal with any registrations that should not be there or you may encounter delays later when timing of a refinance or sale transaction is critical.
ClarkeKann provides specialist advice on all PPSA related issues. We are also able to provide implementation programmes, seminars and staff training sessions to assist clients and their staff in better understanding the legislation and the practical implications it has for their business.
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.