As detailed in the previous section (Securing Equipment Rentals), the PPSA has changed forever the idea of ‘ownership’. It’s now all about ‘possession’ and now, if someone (even a related entity) in possession of your equipment becomes insolvent, you can lose your equipment. Possession is now, more than ever, “9/10ths of the law”.
Remember, the PPSA is all about security; if you have security you better register it on the PPS Register if you ever want to use it on the insolvency of your customer.
But what’s the PPSA got to do with the equipment you hire or lease between related entities? You own the equipment and the various business entities are all of the one group, so what’s the issue?
Well, in some situations (almost certainly when equipment is hired ‘internally’), the PPSA deems you have a ‘security interest’ in your equipment, so, are you registering it? And if not, what happens on the insolvency of a related party when they are in possession of your equipment?
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 newsletter, 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. Our Introductory Services will review your structure, lease agreement and advise on how to comply with your PPSA obligations.