The Personal Property Securities Act (PPSA) legislation is important for business owners generally and in particular, anyone that supplies goods on account and owns assets located at the premises of another business. The concept of 'ownership' has fundamentally changed since the introduction of the PPSA. Understanding and utilising is therefore necessary to protect your business in the event your customer or trading partner can't pay its debts.
Because of its complexities many businesses and individuals have ignored the PPSA or incorrectly used it, losing money as a result. However, over four years since its 2012 introduction, it is crucial for businesses to understand the potential risks and also the available benefits. The PPSA provides a greater level of protection for businesses in the event of a corporate liquidation or voluntary administration, particularly where their assets are used at other locations and where they supply goods on retention of title terms. So, how does it work?
Understanding the PPSA and PPSR
The PPSA legislation was introduced to replace over 70 existing national and state asset security registers with a single central register. That register is known as the PPSR – the Personal Property Security Register. This is a register of security interests over any kind of property, except land and real estate. This means it can include:
- Plant and equipment
- Vehicles and boats
- Trading stock and items on consignment
- Crops and livestock
- Financial and intangible property (eg. shares, bank account balances and debtors)
- Intellectual property
When your assets are leased sold or even used without a written agreement by a company that subsequently enters a formal insolvency appointment, the voluntary administrator or liquidator can claim title to your property unless it is subject to a valid security interest registered on the PPSR. Your property could then be sold for the benefit of the company and its creditors. The PPSR provides a central location for people dealing with a company, such as banks and trade suppliers, to identify what property it owns, and what property it holds subject to security interests on the PPSR.
By understanding whether you need to register your interest in your assets on the PPSR, you can protect your property.
The PPSR is also useful to protect your own business. By understanding whether you need to register an interest on the PPSR, you can protect your property. This means that in the event that someone in possession of goods bought or leased from you goes into liquidation, the Liquidator will be required to notify you and return them to you. So what's the practical application of this?
Three examples of how using the PPSR may help your business
A common example of where the PPSR can provide real value is if your business supplies goods to customers on account. When you ship the orders off, you expect customers to pay their invoices. But with record numbers of insolvencies across all industries in recent years, there have been a lot of bad debts. It's especially infuriating if you deliver an order to a customer just days before they go into liquidation. You don't get paid and the liquidator sells your items and pockets the proceeds. Worse still, it can affect the viability of your own business.
If you supply goods on credit you have various options available to avoid bad debts. Besides a reliable credit assessment process, incorporating personal guarantees and retention of title terms into your credit application can improve your confidence in getting paid. If you supply on retention of title terms, you must register your agreement on the PPSR for the terms to be valid. Once registered on the PPSR and retention of title is established, ownership of goods supplied does not pass to the customer until they are paid for in full.
Understanding how to apply protection the PPSR offers makes it a very powerful tool to give your business confidence.
Another relevant example is a common asset protection structure where a director may have one company that owns the assets and another company that trades the business. Previously, if the trading entity fell into financial difficulty and liquidation, the assets in the asset holding company would be protected. Following the onset of the PPSA, this structure was picked apart by the Court in the Maiden Civil case. Here, the asset holding company did not hold a PPSR security interest over its assets used in the trading company which entered liquidation. The liquidator took possession of the holding company's assets and sold them for the benefit of the company and its creditors.
Lastly, company directors often loan money to their company to support a struggling business or prop-up cashflow when it's tight. Often borrowing personally, their family home can be put at risk if the business falls over. But just like a bank, directors can enter into a loan agreement and take security over the company's assets which they register on the PPSR. In the event that the company enters liquidation, directors would then have priority for payment from the company's assets ahead of other creditors.
When first looking at the PPSR, it can seem an overwhelming system to grasp. But understanding how to apply protection the PPSR offers makes it a very powerful tool to give your business confidence.
How can Cactus Consulting help you utilise the PPSA?
By ignoring the PPSA or not taking appropriate measures, you run the risk of losing important assets during the corporate insolvency process of a customer or related entity. The Cactus Consulting team can assist by reviewing your business structure and dealings, identifying risks and potential benefits and assisting with implementation of PPSR registrations to bulletproof your business. This forms part of any pre-insolvency advice we give.
Additionally, we can assist with a review of strengthening your credit terms to minimise your exposure to bad debts. Insolvency has been at its highest levels in recent years, and no one is immune to it. Having your security interests registered under the PPSA can help you engage with trading partners confidently. You'll be able to recover some or all of your money if your trading partner enters an insolvency appointment such as receivership, voluntary administration or liquidation. Get in touch with Cactus Consulting to work out if your assets are protected.