While our recent blogs focused on the PPSA’s impact for hire/rental businesses and for suppliers wishing to retain title, the PPSA also simplifies the ability to create security.
At its most basic level, the PPSA is all about security. Hire businesses can obtain security over the equipment they hire, suppliers can obtain security for payment over the goods they supply and lenders can obtain security over the money they lend.
Historically this involved the creation of a charge over assets which was lodged with ASIC – often a daunting task. With the commencement of the PPSA, the registration of a security is as simple as any of your other PPS registrations.
How does the PPSA help secure loans?
The business owner, their family or other related corporate entities, will often support businesses financially. Why shouldn’t they take security when providing financial support? After all, a bank would?
Just like any other security interest under the PPSA, you will need a loan agreement documenting the loan details and the granting of security over the Collateral, and a PPS registration on the PPS Register.
Remember, if you don’t register your security, you’ll lose it on the insolvency of the borrower. So, at the very point in time when you want to use your security, you’ll lose it unless you’ve correctly registered it!
Security can be taken in just about anything, from specific property to all current property and any property acquired in the future (the equivalent of the old ‘fixed and floating charge’).
It doesn’t matter if security has already been granted, as the PPSA will determine the priority of each secured creditor and any security is usually better than none.
How does it work in a real-life example?
Let’s imagine a new business start-up borrows $200k unsecured from its owners (whether individuals, related entity, parent company or whatever). Six months later the Bank lends a further $250k for working capital as the business expands. The Bank takes security over the business. Eighteen months later the business collapses with total assets of $500k and supplier liabilities of $1m.
The Bank’s OK as they have security and they’ll get their $250k back, leaving only $250k for everyone else. The owners now rank equally with other unsecured creditors and will get only cents in the dollar back. Had the lenders taken security at the time of their advances they would rank as a secured creditor, recovering all their money.
And if you should have done this some time ago then now is the time to do something about it!
A client recently enquired about registering their security. They had loaned their business a significant amount of money years ago. They documented the loan and had taken security over their business’s assets; they just hadn’t bothered to register their security. Now the business looks likely to collapse, but of course they’ve left it too late and whilst the registration can be performed, it won’t be effective for 6 months (that’s the penalty for a late registration).
So, if the business collapses into insolvency in the next 6 months, the registration is not effective and they’ll lose their security. Plus, they’ll have to line up with all the other creditors as an unsecured creditor.
It doesn’t take much to save yourself a world of headaches and heartache. All in all it’s a very simple process; document your loan, secure it and register the security.
If you’re considering loaning money – secure it and register your security. Contact PPSAdvisory today and let us help you protect your money.
Any advice provided in this article is general in nature only. PPSAdvisory advises on all matters to do with the PPSA and are not lawyers or accountants. This is not legal or accounting advice and you should obtain confirming legal and accounting advice before acting.