A recent decision of the New South Wales Supreme Court (the Court) illustrates the consequences in which businesses are exposed to in the event they fail to register their security interest on the Personal Property Securities Register (PPSR).
What is the PPSR?
The PPSR is a national online register which is established and governed by the provisions of the Personal Property Securities Act 2009 (Cth) (PPSA). The PPSA allows an entity or an individual to register a security interest on the PPSR in circumstances where an entity or individual is:-
- selling goods on credit;
- providing credit facilities to third parties;
- making loans or advances available to third parties;
- renting, leasing or on-hiring goods to third parties;
- supplying goods on retention of title terms;
- supplying goods on consignment to third parties;
- granting a licence to third parties to use personal property, such as trade marks or other intellectual property;
- receiving a security deposit under a legal document such as a lease;
- entering into an agreement where security is granted over a third party’s assets; or
- receiving a personal guarantee from an individual (such as a company director), guaranteeing the performance of certain obligations under a contract.
It is important to note that the PPSA only applies to personal property as defined under the PPSA. That is, the PPSA does not apply to property such as real property.
Why the PPSR important to your business?
The PPSA is important to your business as, if you fail to register a security interest on the PPSR and the entity or individual in possession of your goods enters into liquidation or is declared bankrupt, the liquidator or trustee in bankruptcy may be able to claim ownership of your goods and on-sell such goods to satisfy the debts of creditors.
Importantly, to have a valid security interest, an individual or entity must:-
- enter in to a written agreement with the other party which sets out certain security provisions;
- register a security interest on the PPSR within the specified time frames as set out in the PPSR; and
- comply with other requirements of the PPSA.
The decision in Forge
The decision in Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers Appointed) v General Electric International Inc NSWSC 52 provides an example of the consequences in which a business may face if they fail to register a security interest on the PPSR.
In this case, General Electric International Inc (GE) leased to Forge Group Power Pty Limited (Forge) two mobile gas turbine generator sets (the Assets).
GE failed to register its security interest in the Assets on the PPSR and shortly thereafter, Forge entered into administration. Despite arguing (amongst other things) that the PPSA did not apply to the current circumstances on the grounds that GE was not regularly engaged in leasing goods in Australia, the Court found that GE’s failure to register their security interest meant that GE lost its interest in the Assets, which were valued in the vicinity of $60 million. This ruling ultimately resulted in some good news for the secured creditors of Forge.
The practical implications in this case serves as a timely reminder on businesses as to why it is essential to ensure compliance with the PPSR as legal ownership of goods can be trumped by those in possession of the goods/assets in question.
For more information regarding PPSA compliance, please contact a member of Beck Legal’s Commercial and Business Law team.
Written by Nicholas McConnell, Commercial and Business Law Solicitor at Beck Legal
nmcconnell@becklegal.com.au