The PPSA for Dummies – Asset Protection Structures may not be achieving their purpose.
Simon Read, founder of PPSAdvisory, is helping unravel the mystery of the PPSA and why it’s so critical you appreciate its application to your or your client’s business.
It’s a big topic so we’re breaking it down into “bite sized” pieces, identifying the five principle ways in which the PPSA is likely to have application to your business:
- Business loans;
- Selling goods/materials on credit to your customers
- Leasing or renting equipment to customers
- Asset protection structures
- Buying/selling businesses
Remember, the PPSA is all about security; if you have security you better register it on the PPS Register if you ever want to rely on it.
A very common means of protecting your assets/equipment is the use of an Asset Holding company and a related Trading company. The PPSA now puts at risk business structures supposed to protect assets.
Asset Co (the owner of the equipment) simply enters a long term lease of the equipment for its use by the related Trading entity.
The use of these structures is widespread and for good reason, they are a very sound means of protecting your equipment from the insolvency of your business. You hope it never happens, but you prepare for it, just in case.
The idea is to have Trading Co incur all the external trading liabilities of the business and in the event of insolvency, Asset Co can recover its equipment because it is the owner. But, as we learnt in the last post, it’s not about ownership, it’s all about possession.
The lease between Asset Co and Trading Co will almost certainly be a PPS Lease and accordingly, Asset Co should be complying with the PPSA. If it’s not (which is usually the case), the equipment may well be retained by the insolvent Trading Co, completely undermining the whole purpose of creating this structure in the first place.
Once again, the answer is simple, comply with the PPSA. The agreement between the parties must make it clear Asset Co is the owner of the equipment, Trading Co grants Asset Co security over the equipment and the security is to be registered on the PPS Register.
Because Asset Co has security over the equipment, it must register the security on the PPS register if it intends to rely on it.
Please, if you currently use such an asset protection structure, speak with your accountant or contact one of the PPSAdvisory team to determine the next steps.
Please remember this is not legal advice, we are not lawyers and the information is provided for general guidance only. Readers should obtain confirming legal advice before acting.