Many business owners may be not be aware that they run the risk of falling afoul on asset loans if they fail to register their security interests. Rob Murphy provides some guidance.
The Personal Property Security Act (PPSA) came into effect in January 2012 and effectively abolishes ownership (title) of an asset as the right to recover it from a customer or client in liquidation. The requirement is not widely known by business owners, but it can cause significant delays when financing equipment or selling existing equipment.
The Personal Property Security Register (PPSR) allows lenders and businesses to register their security interests. Secured parties, buyers and other interested parties can search the PPSR to determine whether a security interest is registered over the personal property.
Examples of personal property include:
- Art
- Cars, boats and caravans
- Crops and livestock
- Inventory
- Plant and machinery
- Shares
Non-material items included
- Accounts
- Intellectual property
- Investment instruments
- Licences
Business owners purchasing second-hand equipment need to establish if a security interest is registered over the personal property prior to taking on the additional equipment. If assets are to be sold and they are not de-registered when finance is repaid, there can be settlement delays during application processing.
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Financing asset purchases
Registration of a security interest (i.e. a charge, mortgage or debenture over business assets) on the PPSR is the only way that parties with an interest in an asset, such as plant or equipment, can ensure that they are able to recover it.
In many transactions there are two separate relationships: one between the lender and the owner; the second between the owner and the customer. There is no relationship or ‘privity of contract’ between the lender and the customer. Lenders are generally very efficient at registering their security interests, but if the owner does not register its security interest in the asset against the customer and the customer faces liquidation, the owner will lose the asset.
Having lost the asset the owner may potentially be unable to repay the lender and face liquidation or bankruptcy themselves, leaving the lender out of pocket even with a valid security registration over the asset.
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Lender risk mitigation
Lenders have ways to minimise their risk. The first is the inclusion of provisions within their loan agreements prohibiting the sale or hire of the financed asset without the lender’s prior written consent. This means that the owner must notify the lender before it parts with possession of the asset, otherwise it would be in breach of the loan agreement. The lender would then be allowed to terminate the agreement and immediately recover the asset, with the owner usually liable for any possible lender recovery costs, including legal costs.
A requirement for owners who are in the business of leasing or selling assets is for the owner to provide proof of a valid security interest registration against the entity leasing or purchasing the assets before providing the purchase funds. This adds another layer of complexity to the asset transaction. Failure to comply with the lender’s requirements may result in significant delays and costs to the owner.
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What about vehicles?
For vehicles, watercraft and aircraft, a chain of registrations from lender to owner and from owner to end-user may not be required. Vehicles are registered through their ‘serial number’ and serial number registration may be found by searching the serial number alone (VIN, chassis or manufacturer’s number).
Many lenders take a conservative approach in assuming that the serial number registrations alone are not sufficient to protect their secured asset. Some liquidators return these assets, while others retain them based on the lack of privity of contract argument mentioned above – this is an untested area of law in Australia.
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Conclusion
The PPSA has been around for seven years and is here to stay; moreover, lender compliance requirements may well become even stricter. Business owners need to be aware of the potential for the PPSA to disrupt and delay financed equipment purchases, and should equip themselves with the skills and knowledge to comply with lender requirements. Professional legal advice goes a long way in avoiding finance problems.
Rob Murphy is a Business Adviser with the Commonwealth Government’s Entrepreneurs’ Programme (EP). AMTIL is a partner organisation working with the Department of Industry in the delivery of the EP.