The recent case of In the matter of Psyche Holdings Pty Limited  NSWSC 1254 shows the importance of not only ensuring that registrations of security interests on the PPS Register are effective at the time of registration, but ensuring that those registrations continue to remain effective, particularly where the grantor in question is a trust.
The case shows pitfalls in the way the PPS Register has been designed to require trustee grantors to be identified by a trust ABN, a marker which does not identify any legal person and may disappear (or arise) with potentially fatal consequences for a PPSA registration.
Psyche Holdings case - Background
In June 2013, Ridgeway Finance Pty Ltd (Ridgeway) entered into a General Security Deed with Psyche Holdings Pty Ltd (Psyche) in connection with the extension of credit from Ridgeway to Psyche.
Ridgeway lodged a financing statement on the PPS Register in respect of its security interest, which referred to Psyche by its ACN. At the time of that registration, Psyche was acting as trustee of a trust (Trust), but the Trust had not yet been assigned an ABN. Accordingly, the registration against Psyche's ACN was, in those circumstances, correct and appropriate to perfect its security interest.
The Trust was subsequently assigned an ABN, the registration date of which was backdated for taxation purposes.
The PPS Regulations require that if a corporate entity is trading as trustee of a trust, the secured party must register its security interest by reference to the trust's ABN, rather than the corporate trustee's ACN.
Under section 166 of the PPSA, where a registration is correct at the time of lodgement, but subsequently becomes incorrect, the secured party must amend the financing statement in respect of that registration within 5 business days of acquiring knowledge of the defect, failing which the registration becomes ineffective.
It was not until some 5 years after the date of Ridgeway's original registration, when a director of Ridgeway recognised the significance of the Trust's ABN registration on the enforceability of the security interest, that Ridgeway took steps to lodge a new financing statement on the PPS Register, identifying the grantor by reference to the ABN of the Trust.
Ridgeway also made an application to the court under section 588FM of the Corporations Act to fix a later time for the registration of its interest, on the basis that its failure to register its interest earlier was accidental or due to inadvertence. The Court was satisfied in this case, that such inadvertence had been established and granted the extension. Implicit in the decision is that the Court considered the registration to be defective.
In this case the problem arose because a trust obtained an ABN and that changed the way Ridgeway needed to register against Psyche. But it seems a similar issue could arise when a trust has an ABN but it is cancelled. In each case the assumptions underlying a correct registration change.
Should one always register against both the trustee ACN and trust ABN?
There have been suggestions by commentators that where the grantor is a corporate trustee of a trust, that the secured party should, as a matter of practice, make registrations against both the ACN of the corporate trustee, and the ABN of the trust. It may even be prudent to include in the commercial terms between the parties, a requirement for the trust to apply for and obtain an ABN if it is eligible for one and does not have one, to guard against the kind of problem that arose in the Psyche Holdings case.
The following benefits flow from making dual registrations:
- The grantor customer may be dealing in dual capacities. This is commonly the case where for example a general 'all assets' bank-style security is taken, as those are virtually always expressed to be granted by the customer 'in its own right and as trustee';
- There may be a change of circumstance (as in the Psyche Holdings case or a case where a trust ABN exists at the outset but is later cancelled) which could mean that the registration starts to be invalid. The scheme of the PPSA is that perfection by registration is judged at particular times. We can find nothing in the legislation that allows subsequent events to be disregarded just because the registration was correct at its outset and as noted above the Court in Psyche Holdings clearly saw the registration as having become defective.
- A secured party's customer may start dealing in its own right in such a way that the change or its PPSA implications are not immediately obvious to the secured party. For example, purchase orders start bearing the corporate ABN instead of the trust one; and
- The 'extra' registration might also prevent other potentially wrongful dealings where the customer (eg a company as trustee of an ABN trust) tries to sell an asset and the innocent buyer only searches the ACN. Because there is no ACN registration, the buyer proceeds where otherwise it might not have.
However, the making of dual registrations also gives rise to some issues. Where the grantor is a company acting as trustee of a trust which has been assigned an ABN, the only registration that is strictly necessary is against the ABN of the trust. An additional registration against the trustee's ACN is not required in order to make a registration effective. A second and arguably unjustified registration perhaps exposes the secured party to civil penalties under section 151(1) of the PPSA. Some may think that is a risk worth running. There will of course also be extra registration costs.
In March 2015 the Government tabled the Whittaker Report on the PPSA which identified the following difficulties arising from the requirement for a financing statement to be registered against a trust's ABN:
- A secured party may not be able to tell whether the grantor holds property in its own right or as trustee of a trust with an ABN. This can force the secured party to make multiple registrations, adding to the cost and clutter on the PPS Register;
- A grantor may initially hold collateral in its own right, but then declare that it holds such collateral on trust, and obtain an ABN for the trust; and
- A grantor may initially hold collateral on trust for a trust that does not have an ABN, but later obtain an ABN for the trust (as was the case in the matter of Psyche Holdings discussed above).
The recommendation arising from the Whittaker Report was that a registration to perfect a security interest over trust assets should be made against the relevant details for the trustee, rather than the ABN or other identifying details for the trust.
If the above recommendation is enacted, this would certainly alleviate the various issues flowing from the requirement to register against a trust's identifying details. But what will this mean for secured parties who have existing registrations against trusts on the PPS Register?
- Will they be granted transitional validity? And if so, for how long?
- How will the PMSI priority of existing registrations be preserved?
- Will secured parties with existing registrations be required to make fresh registrations?
- If existing registrations against trusts remain effective (and the Whittaker recommendation to do away with registration against trusts is enacted), this will necessitate searches against not only the trustee, but also against the trust in order to reveal 'historical registrations'. Such a situation would be completely contrary to any stated objectives of making searches of the PPS Register more user friendly.
The answers to the above questions cannot be known until the Government determines firstly, to enact the above recommendation contained in the Whittaker Report, and secondly, when the transitional provisions are released. Nearly four years after the Report was tabled there is still no legislation in sight.
Reform is needed
There is no doubt that the PPS register suffers from excess complexity, as the Whittaker Report has found in this and many other respects also. The problem highlighted in Psyche Holdings shows a further dimension to the overcomplication of the register.
The same issues would appear to apply to other 'non-entity' grantors such as partnerships where the registration is against the ABN of the partnership and not the legal entities who are the partners.
The ABN came into the law as part of the Howard Government's 'New Tax System' changes in 2000. It was designed as a marker for tax purposes. An ABN can identify a tax partnership or trust estate which that tax legislation has chosen (confusingly) to label as an 'entity'. These structures are not legal entities but have a role in identifying the way in which tax law applies – for example in calculating the net income of a trust under tax law.
The existence or non-existence of an ABN is not correlated to the existence or non-existence of any identifiable legal person. In our view the ABN never had any place in the PPSA, particularly when one considers the unforgiving and draconian effects of incorrect registration on personal property interests.
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.