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LPLC: The big PPS questions

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Cite as: July 2012 86 (07) LIJ, p.75

Are you trying to protect a client’s interest in property or are you trying to ensure that your client is taking property free of other security interests?

Putting the complexities of the personal property securities (PPS) reform aside, there are two important questions to consider. This article examines two fundamentals that many practitioners will need to consider from time to time: why should someone register a security interest and why might someone search the register?

Why register a security interest?

The new regime encourages registration of security interests by providing both a carrot and a stick. The stick is that if a secured party does not perfect/register their security interest and the grantor is wound up or becomes a bankrupt, then that security interest vests in the grantor. Accordingly, the person we would traditionally consider to be the owner of personal property (e.g. a lessor under a PPS lease, a supplier on retention of title (ROT), a seller of goods on consignment) can now lose their ownership rights over that personal property in a way that never existed before. Furthermore, a person who does not own personal property (e.g. a lessee under a PPS lease) is now able to pass ownership (or title) to that property to a third person, and thereby defeat the rights of the traditional “owner”.

Another stick is that some businesses may have business structures in place believing that they provide some form of asset protection. However, such businesses may need to consider registration even between their related entities. Otherwise, they might find that if they are ever tested, the business structures don’t fully operate as intended.

Unfortunately it can be difficult to persuade the necessary stakeholders that this brand new risk to business is actually real. They might remain sceptical, might adopt a wait and see approach, or even mistakenly expect the legislation to be repealed. Perhaps these people will remain unconvinced until they are directly affected, or a high profile loss hits the media.

In such cases the carrot may be a more effective motivation. The Personal Property Securities Act 2009 (Cth) (PPSA) gives many businesses a new, practical and cost-effective way to reduce their incidence of bad debts. Virtually anyone who has been in business for any length of time will have experienced the frustration of not being able to recover a business debt. Some might have experienced the even greater frustration of receiving payment only to later be forced to disgorge it in response to an unfair preference claim. The PPS reform significantly increases everyone’s ability to take effective security for any credit provided. The ability to trace security interests into proceeds, accessions and co-mingled goods means retention of title clauses or other forms of security become much more effective. Registering a security interest also reduces the risk of an unfair preference claim.

For example, businesses in the construction industry now have a far greater opportunity to reduce the incidence of bad debts that they suffer by using the PPS system. Agricultural businesses that provide goods or services that enable crops to be produced or livestock to be “fed or developed” have the opportunity to take a security interest in the crop or livestock (or proceeds thereof). Even law firms might consider taking a charge over their (corporate or individual) clients’ property to secure payment of fees and registering that interest on the PPS register.

There are good reasons to take security and register it, and all businesses should at least consider the cost-benefit analysis.

Why search the register?

Whenever someone is acquiring property, they will want to make sure that they are taking the property free of any security interests. Part 2.5 of the PPSA provides several ways in which buyers or lessees of property can “take free”.

A buyer or lessee of personal property for value will take it free of any unperfected security interests. They will also generally take personal property free of perfected security interests:

  • when buying a motor vehicle from a licensed motor vehicle trader; or
  • if the personal property was sold or leased in the ordinary course of the seller’s or lessor’s business of selling or leasing personal property of that kind; or
  • if the buyer or lessee intends to use the property for personal, domestic or household purposes and the price paid is not more than $5000.

Each of these provisions is subject to various exceptions, including that the buyer or lessee does not have actual or (in some cases) constructive knowledge that the sale or lease is in breach of a security agreement. However, s300 confirms that you don’t have constructive notice just because you could have searched the register and found the data. So if the transaction falls within one of the provisions in Part 2.5, then the purchaser has no need to search the PPS register.

If the transaction does not fall within one of the provisions in Part 2.5, then to ensure that you “take free”, you will need to do a search of the PPS register and obtain a release (and perhaps also an undertaking to amend the register) from each and every secured party.

The LPLC’s third PPS Bulletin (http://tinyurl.com/cratntk) provides further information about the form of the release that a purchaser might require.

Conclusion

When considering any particular provision of the PPSA, it is important to keep in mind the big picture question: are you trying to protect a client’s exiting interest in property (and therefore looking at registering an interest), or are you trying to ensure that your client is taking property free of other security interests (and therefore looking at searching for other interests)?

Keeping that in mind will go a long way to avoiding confusion.

This column is provided by the Legal Practitioners’ Liability Committee. For further information ph 9672 3800 or visit www.lplc.com.au.

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