We were recently asked about the pitfalls for small businesses helping their associates fund their operations and we identified the issue of when to register an interest in personal property as the number one pitfall for small-scale enterprises. The Personal Property Securities Act 2009 (Cth) (PPSA) is complex as it governs a diverse range of interests in personal property of Australian businesses and individuals alike.
The PPSA is very useful to insolvency practitioners, particularly liquidators and administrators. If you have a security interest that is not registered, is registered incorrectly, or your registration expires, a liquidator of the person giving you the security interest can treat your asset as the liquidator’s.
The PPSA’s complexity makes it a minefield for businesses and practitioners alike. It requires an examination of each interest in each class of personal property to work out if the interest is a security interest that requires registration and if so how it should be registered.
Businesses and their owners often use a larger number of different classes of personal property in their enterprises and may use a class of personal property in different ways. This means that businesses and their owners need to look at each type of personal property they possess or own and how they use it before they can work out if and how they need to register their interest.
A big trap for the unwary is that you as owner of an asset left with someone else can have a security interest and not realise it. It all depends upon whether or not you regularly leave your assets with another entity and get paid for doing so.
Business owners or group companies leaving assets such as tools and equipment with their associated business entities for two or more years may find those assets are subject to a security interest known as a PPS lease. Whether they are depends on the arrangements, if the owner can be said to be “regularly engaged in the business of” leaving the assets with another, and if there is a payment for the use of the asset.
Some of these elements may be satisfied without the owner realising it, for example if the owner’s accountant categorises some of the owner’s drawings as the payment of depreciation charges by the entity using the assets.
A similar issue arises in relation to assets that are leased to the business for periods of more than two years (counting options or arrangements to renew the lease).
Once the asset is subject to a PPS lease, your ownership is a security interest which you must register or risk losing it if the person holding the asset becomes insolvent.
If you sell goods to a business to sell on the basis that you own those goods until they are paid for, you must register your interest in them. In most cases you need to do this before the goods are supplied to the business.
Commercial consignments (such as when artistic works are left for sale on a commission basis) are also security interests that require registration.
The seventh anniversary of the PPSA’s commencement arrives at the end of January 2019. This means transitional security interests registered for seven years will be falling due for re-registration in January. These include all security interests given by an individual over consumer property, i.e. personal property not held in the course of, or furtherance of, an enterprise with an ABN.
Now is a good time to review the registrations of your security interests to check if any of them need to be renewed. If you have not already created a list of your registrations and their expiry dates, now is the time to do so. It is also worth adding a diary entry for each registration to your electronic calendar with reminders set well enough in advance to give you time to re-register your security interest.
Family members that leave assets with their business are particularly at risk of losing the asset to a liquidator if they don’t register their interest as owner of the asset. Examples include:
If you fall into these categories your ownership of the assets may be at risk if the assets are not subject to an agreement to return the asset within two years or you have not registered your interest as owner of the asset.
You should also consider who uses your assets and for what purpose. The maximum registration time and the way you register the security interests in some assets change depending on whether the asset is commercial property (i.e. used in furtherance of an enterprise with an ABN) or it is not (i.e. consumer property).
Cars are a classic example of assets that can be used for commercial or consumer purposes. To be valid, the registration of a security interest in a car owned by a company as commercial property must be against the company’s ACN. If the car is used by the company’s directors as their family car (consumer property), then unless the car is also registered by its serial number (VIN), the registration will not be effective. This is because of the subtle differences in the PPSA relating to the registration of serial numbered property (e.g. motor vehicles, boats, aircraft and some intellectual property).
The second most common trap for small businesses is that they don’t properly document their arrangements or rely on their operating company to keep electronic copies of the relevant records. If the operating company becomes insolvent, they will need to prove the relevant agreements existed. This will be very difficult if the relevant records don’t exist, have been destroyed or can’t be found.
Business owners must consider the following questions:
Remember, it is:
You need to consider these issues and get advice where it is needed while the relevant businesses are healthy, not when the liquidator comes knocking.
We will be very happy to discuss any of the issues raised above if you wish.
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