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Fraud alert - safeguarding against misuse of the Australian Personal Property Securities Register

In this article we will be considering the Personal Property Securities Register (PPSR) in Australia and in particular the registration of fraudulent interests and the ramifications of such registrations. We delve into the misuse and fraudulent exploitation of the PPSR, the potential penalties for those who engage in such behaviour and the remedies available to those aggrieved by such behaviour.

Penalties for fraudulent use of the PPSR

The PPSR is established under the Personal Property Securities Act 2009 (Cth) (PPSA) and its function is to act as a public noticeboard in respect of security interests claimed against the personal property of others. In the PPSA, the person claiming the security interest over the relevant personal property is referred to as the ‘secured party’, whilst the party against whom the registration is made is referred to as the ‘grantor’. Each of the secured party and grantor may be an individual, a company or other entity (such as a partnership or a trading trust).

The relevant provisions of the PPSA in the context of fraudulent registrations are:

  • section 151(1) which provides that a person must not make an application to register a security interest unless the person believes on reasonable grounds that the secured party described in the financing statement is in fact the secured party or will become the secured party in relation to the relevant personal property; and

  • section 151(2) which sets out the circumstances in which a person is required to remove a registration, including in circumstances where the secured party named in the financing statement does not in fact have any reasonable grounds (or no longer has any reasonable grounds) for the belief referred to in section 151(1).

Despite the provisions referred to above, as recent cases demonstrate, the effectiveness of these provisions to prevent fraudulent registrations, and the sufficiency of potential penalties as an effective deterrent, is called into question.

Security interests over personal property are effected by the registration of a financing statement on the PPSR. However, the ease with which a financing statement can be registered against the personal property of others arguably creates a ripe landscape for the making of fraudulent registrations, particularly given that the registration of a security interest does not require the supporting consent of the grantor named in the financing statement. In circumstances where a company is named as a grantor in a fraudulent registration, the impact of that registration can result in commercial and financial difficulties for the company, including adverse effects on the company’s operations and performance.

Concerningly, section 151(6) of the PPSA provides that even if a registration is made without basis in contravention of section 151(1), the contravention does not affect the validity or effectiveness of the registration.

This leaves a company in the unenviable position of either having to ‘negotiate’ a discharge of the registration with the party who made the fraudulent registration, or seek to have the registration discharged by invoking the amendment demand provisions of the PPSA.

This is best illustrated in the recent landmark decision of Registrar of Personal Property Securities v Brookfield [2024] FCA 29. In this case, Derrington J determined that Brookfield had registered fraudulent financial statements on the register and invoked, for the first time ever, the civil penalty provisions pursuant to section 151 of the PPSA in the sum of $30,000.

The case centered on Mr Brookfield, who was found to:

  • have registered a financial statement for collateral to which Mr Brookfield was not a secured party; and

  • have done so without reasonable belief that he would become the secured party of the collateral. 

The Registrar of Personal Property Securities brought the case to court with the intention of rectifying the allegations and safeguarding the integrity of the register.

The court deliberated on the extent of Mr Brookfield’s responsibility in facilitating the fraudulent registrations on the register by thoroughly considering whether he had a reasonable belief that he was, or would become, the secured party in relation to the personal property identified in the registrations. Mr Brookfield gave evidence that he was the secured party pursuant to a signed sale and purchase agreement and two judgments in previous matters.

Ultimately, the court determined that Mr Brookfield had a reasonable belief that he was owed a debt by the relevant company, but there was no evidence that Mr Brookfield reasonably believed that that debt was a secured debt. Accordingly, the registration on the PPSR was unsustainable and it was removed. In addition, Mr Brookfield was exposed to civil penalties for the fraudulent conduct.

Ultimately, the court’s decision emphasises the importance of maintaining the integrity of the PPSR and the need to hold parties accountable where they were involved in fraudulent activities by knowingly registering financing statements without a valid security interest in the collateral described. The case also highlights the preparedness of the regulator of the PPSR to take action to prevent misuse and maintain the integrity of the PPSR, given that parties rely on it as the ‘source of truth’ in respect of personal property securities.

Misuse of the PPSR

The most extreme example of blatant misuse and fraudulent exploitation of the PPSR can be found in the case of Rubis v Garrett as Trustee of the Andrew Garrett Family Trust Trading as Dynamic Commercial Workforce Solutions (No 2) [2018] FCA 201. Mr Garrett, a bankrupt vexatious litigant, made 46 false registrations against 24 separate parties. They all applied to the court to have those registrations removed. Mr Garrett then sought to join a large number of parties to the proceedings, including, “to name but a few, her Majesty the Queen, as the two hundred and fifty first cross-respondent, using the description “Regina”; the High Court of Australia; all of the Members and Senators of the Commonwealth Parliament; this Court; the Chief Justice and other judges of the Court, including myself; together with a number of law societies and statutory legal profession regulatory bodies …”

In this case, the court determined that the Registrar should have acted to remove the false registrations before the matter proceeded to court, on the basis that the registrations were clearly vexatious. The court made note that the Registrar should have taken his public function into greater account, namely, to protect both the PPSR and the public from vexatious registrations. 

As noted above, the ease with which registrations may be made, and the fact that there are over 10 million registrations on the PPSR, demonstrates that the system may be open to abuse as it allows for the registration of a security interest by mere assertion.

There are often instances of improper use of the PPSR. Whilst the system is not perfect, cases such as the Brookfield case referred to above are helpful for parties to clearly demonstrate that there will be serious ramifications if such conduct is engaged in or where fraudulent PPS registrations already exist on the register and need to be removed. Strategies deployed with these principles in mind regularly enable our clients to avoid costly and unnecessary court proceedings and achieve their commercial objectives much more quickly.

Upcoming reforms

In light of the issues raised above, it is welcome news that the Government is proposing significant reforms to the PPSA, including reforms to the amendment demand process.

Under the current provisions, if an aggrieved grantor submits an amendment demand to a secured party to discharge their registration (on the basis that the secured party does not have a security interest in the grantor’s personal property), and the secured party either ignores or does not comply with the demand to discharge their registration, the grantor can invoke the involvement of the Registrar to have the registration discharged. However, the current process can be a lengthy one as it requires the Registrar to assess the merits of the grantor’s application, which invariably involves each of the grantor and the secured party making submissions to the Registrar.

Under the proposed reforms, the Registrar will simply be required to ask the secured party to show cause as to why the Registrar should not give effect to the demand to remove the contested registration. This clearly shifts the onus of establishing the existence of a valid security interest on the secured party, resulting in a much more streamlined amendment demand process.

Assuming the proposed reforms are enacted, the instances of cases such as Rubis v Garrett and Brookfield, and the opportunity for persons to make fraudulent registrations on the PPSR, should be diminished.

Despite the statutory provisions aimed at preventing fraudulent conduct, recent cases demonstrate the necessity for reform of the regime. The proposed reforms offer promise in streamlining processes, reducing opportunities for fraudulent registrations and a step toward better safeguarding of the integrity of the PPSR.

Authors: Gavin Stuart, Karen Wong & Emma Boyce