If you don’t work with the PPSA on a daily basis, you may feel like the PPS legislation is written in a foreign language.
Not only is the law difficult to understand, it’s even more difficult to execute. Time and again, businesses across Australia think their security interests are protected, only to find out they have not completed the correct paperwork or worse, filled it out incorrectly.
The first step to understanding the PPSA is understanding the language. Like most people, you may not know the difference between PPSA, PPSR and PSMI. To help you better understand this highly complicated legislation, we’ve put together the following user guide.
What is the PPSA?
PPSA stands for Personal Property Securities Act. Let’s break it down.
Personal Property – a business’s or individual’s assets, whether tangible or intangible. This can include equipment, stock, debtors, goodwill, vehicles etc. (this doesn’t include land).
Securities – whenever a security is created over personal property.
Act – a piece of Federal legislation, applicable throughout Australia.
Essentially, the PPSA refers to the legislation which requires all securities over personal property to be registered.
If you have security over personal property, you’ll need to register it. This means, should your counterparty become insolvent by law, you can rely on the security. Let’s look at the following examples.
Example one:
A bank lends $250k to a business. The bank takes security over all the businesses personal property. The bank then registers its security.
Example two:
A supplier secures payment from its customers by retaining title to the personal property it sells until it receives payment. The supplier then registers its security.
The security is registered on the PPSR.
What is the PPSR?
PPSR stands for the Personal Property Securities Register.
This is the digital online register of securities created by the Commonwealth Government. Any party with a security (the Secured Party) must register the security on the PPSR. This creates a public record of the Secured Party’s security over the Personal Property of the counterparty (called the Grantor).
It works like this. The Grantor grants to the Secured Party, security over Personal Property. The Secured Party then registers the security to ensure it can use it in the event the Grantor collapses into insolvency.
Fail to register and the Secured Party loses its security when the Grantor collapses.
Now, there are several types of securities, some better than others. What makes them better? Their priority for payment – and the ‘king’ of them all is the PMSI.
What is PMSI?
PMSI stands for Purchase Money Securities Interest.
If you were playing cards, this is the hand you want to be dealt. The PMSI ‘trumps’ all other securities; it has the highest priority in the event your security is challenged by another Secured Party’s security.
You get the priority of a PMSI most commonly, where you are:
- The supplier of personal property on credit terms
- The lessor of personal property under a PPS Lease
- A financier funding the purchase of personal property
What about a real-life scenario?
As we mentioned earlier, it can be hard to understand how the PPSA affects your business. For most, the understanding and importance of the PPSA doesn’t sink in until after it’s too late.
Let’s look at a real-life scenario.
ABC Bank provides a bank overdraft of $250k to Arrow Transport. ABC takes security over all of Arrow’s personal property and registers its security on the PPSR.
Focus Fuel sells diesel to Arrow Transport and also rents a fuel storage tank to them. Focus Fuels retains title to the fuel until Arrow Transport has paid for it. As Focus Fuels has security in the fuel, it registers it on the PPSR.
Total Tyres sells tyres to Arrow Transport and whilst it has security in the tyres (because it retains title in the tyres until Arrow has paid for them), it does not register its security on the PPSR.
Times are tough and Arrow Transport collapses and appoints a voluntary administrator. At the time of appointment:
Arrow Transport has personal property worth $300k.
ABC Bank is owed $225k.
Focus Fuels is owed $260k and there is $190k of fuel still in the tank owned by Focus. The tank is worth $80k.
Total Tyres is owed $70k and Arrow holds $50k of tyres in its possession.
How does the voluntary administrator allocate the available assets to the creditors? In what priority are the assets distributed:
First priority – who has registered their security? ABC Bank and Focus Fuels have, but Total Tyres has not.
Total Tyres loses its security and is unable to recover the $50k in tyres still in the possession of Arrow.
But what about the storage tank Focus Fuel rents to Arrow? Focus did not register the security it has in the tank itself. Focus loses its security over the tank and the tank becomes the property of Arrow.
Second priority – who has a PMSI? Focus Fuels has a PMSI because it retains title to the fuel until it is paid for. Focus fuels, therefore, has priority over the $190k in fuel still in the possession of Arrow. It can take back its fuel or sell it to the Administrator.
Third priority – who gets what’s left of Arrows personal property? ABC Bank. And the personal property of Arrow now includes the tyres supplied by Total Tyres and the fuel tank rented to Arrow by Focus Fuel.
It’s easy to see who lost out:
Focus Fuels lost its storage tank worth $80k because it failed to register its security in the tank.
Total Tyres lost its ability to recover $50k of tyres still in the possession of Arrow because it failed to register its security in them.
Both will now rank as unsecured creditors in the administration of Arrow and will likely see a return of $0.
Who are the winners? ABC Bank gains an $80k storage tank and $50k of tyres.
Even when the PPSA is broken down into real-life situations, it’s still a very complex subject. If you want to ensure you don’t lose your assets when a customer’s business collapses, you need to appoint a PPSA specialist.
PPSAdvisory is regarded as Australia’s leading expert on the PPSA and works with both large and small businesses. If you’re a business that hires/rents or leases out equipment , loans money or sells goods on credit you need to contact the team at PPSAdvisory.
Any advice or commentary provided in this blog is general in nature only. The team at PPSAdvisory are not lawyers, this is not legal advice and you should obtain legal advice before acting.