Personal Property Securities
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17 April 2020 - Oliver Shtein
COVID 19 and PPSA – not a good combination?
Hire businesses will recall that reforms to the Commonwealth Personal Property Securities Act (PPSA) in May 2017 greatly reduced the scope for that Act to operate in a way that could cause loss of ownership of hired assets.
In summary, from 20 May 2017, hires of an indefinite term have no longer been automatically caught by the PPSA and the PPS lease time threshold for hires became two years.
Further reform to the Act has been stalled in Canberra for more than five years since the Whittaker Review of the Act in 2015.
Now that the COVID 19 pandemic is upon us, hire businesses should take a moment to consider whether they have done what is needed to protect any assets to which the Act applies. The coming months will doubtless see a sharp uptick in corporate and business insolvency.
Customer liquidation, bankruptcy and administration are all critical events in PPSA terms. If the PPSA applies, assets can be lost at that moment if registration is inadequate. You don’t get a second chance. In rare cases, desperate customers may even resort to wrongfully raising money using hired assets, creating a confrontation with an innocent purchaser or financier.
PPSA is complex but here are some things to consider to ensure you don’t get caught out.
If your business has hires that do last or may last more than two years then they need to be registered on the Personal Property Securities Register (PPSR). This registration should ideally take place at least six months before the two year threshold is crossed. Remember that option periods count towards the two years.
Remember that if you offer ‘rent to buy’ or hire purchase or deferred payment transactions, these could well automatically fall into the PPSA, because they are ‘in substance’ security interests. They don’t need to cross the two year threshold for the PPSA to apply to them.
The Act also automatically applies to many ‘commercial consignment’ arrangements where equipment is put with a third party for sale or lease. So if you are selling or hiring equipment through an intermediary this could be a problem if the intermediary goes broke.
The PPSA still applies to ‘intra-group’ transactions. Corporate groups that have an asset protecting holding company that makes equipment available to ‘at risk’ group operating companies need to be aware that those arrangements may also fall into the PPSA, because they may have longer terms or may have been entered into before the 2017 changes. The asset protection strategy will not be effective if the necessary PPSR registrations are not made.
Many hire businesses have decided not to make serial number specific registrations for motor vehicles, watercraft or aircraft. They rely instead on broad general registrations to cover all hires of all goods in the relevant class. Serial number registration does however provide an additional benefit under PPSA in that it prevents a third party taking title to an asset in a wrongful sale or lease by the hiring customer.
If you have any concern at all then it would be wise to have a review of your PPSA registrations and hire documentation by an expert in the area. We know (and the Government agrees) that the system is way too complex. The pitfalls are too numerous to mention here. Even if sound advice was taken when businesses started their PPSA compliance, errors can and often do creep in, become systematic and reproduce (like a virus!). A small error can have very significant consequences.