PPSA: If ever a form is worth filling in, it has to be this one.
Since the Act became law last year its fundamentals have become widely known and their operation generally appreciated. Readily understood is one of the new law’s basic propositions that can be roughly translated thus: you can have a so-called “security interest” in property, but if you don’t register it there are situations in which you can lose it.
Here’s an interesting yet common case study of the specifics of such a situation, illustrating how this important form comes into play after the enactment of the PPSA.
The common structure
Consider a common business structure. It’s employed to protect assets and for tax purposes. The business owner establishes two companies, one to own all the business’ assets and to licence them to the second company, which will use them to operate the business.
The former is typically referred to as the holding company, the latter as the trading, or contracting, or operating, company. It does all the trading, enters into contracts with customers and suppliers, rents premises, hires employees and so on. For this hypothetical case study we’ll call these two entities AAA Holdings Pty Ltd and BBB Trading Pty Ltd.
They’ve been established for a manufacturing business in Adelaide. AAA owns about $5m of plant and equipment that it licences BBB to use in manufacturing gummits.
Consequences in insolvency
Things go badly. Gummits are being produced in other countries where labour is cheaper, and the high Australian dollar is eroding export markets. In its desperate fight for survival BBB overbids disastrously for a major supply contract, becomes hopelessly insolvent, and a liquidator is appointed.
With an eye on the $5m of unencumbered plant and machinery being used by the business, the liquidator initially expects creditors will get a worthwhile dividend – until he realises that AAA Holdings Pty Ltd owns all the equipment, not BBB Trading Pty Ltd.
And while the liquidator has been coming to this realisation and conveying the sad news to creditors, owners of AAA Holdings Pty Ltd have been busy setting up for incorporation in Sydney another trading company BBB2 Trading Pty Ltd. It’s soon functioning very similarly to its predecessor and operating successfully by avoiding the initial company’s mistakes.
So what of the new regime?
Under the PPSA as it’s now enacted, the above events could have played out very differently.
Under sections 12 and 13 of the Act a “lease or bailment of goods” for “an indefinite term” is deemed to be a “security interest”. This means that as far as the PPSA is concerned, AAA Holdings merely has a “security interest” in the plant and machinery being used by BBB Trading. The fact that AAA actually owns the equipment is irrelevant under the Act.
The vital consideration here is that under section 267 of the PPSA, an unregistered security interest in goods is lost if the company in possession of the goods is placed into liquidation or administration. In this case therefore, the liquidator, on behalf of creditors, would be able to take total control of any of AAA Holdings’ equipment being used by BBB Trading at the time of his appointment. In other words this equipment would be irretrievably lost to the former owner. (Note: the situation might not always be as simple as outlined above – for example there’s a difference between an “unperfected” and an “unregistered” “security interest”.
How to prevent asset loss
To avoid losing its assets to the liquidator, all AAA Holdings needed to do was to register its interest in all plant and equipment that it licenced BBB Trading to use. Management should have done this by listing all these items on the Personal Property Securities Register (PPSR). That done, AAA’s interest in the equipment would have been “perfected” under the PPSA, and consequently therefore placed out of the liquidator’s reach.
And what does the registering process involve? No more than the $7.40 fee and 10 minutes online to fill in the form, mentioned at the beginning of this article assuming all other paperwork is in order.
The lesson to be learned
The PPSA is applicable to closely related entities like AAA Holdings and BBB Trading, no less than it is to relationships between parties at arm’s length.
Accountants and other business advisers should bear in mind that in recommending to clients the structure used in our case study, they should also emphasise the importance of listing on the PPSR every item of equipment likely to find its way into the possession of a business’s trading, operating or contracting company.
Otherwise, the PPSA could render useless the prime purpose of such a structure, should the company using the equipment become insolvent. Worse, in these circumstances business advisers could find themselves facing a claim of professional negligence.
Australian small businesses alone currently owe the Commissioner of Taxation more than $6bn.
For this reason alone the Australian Tax Office may eventually be forced to initiate proceedings against companies like BBB Trading Pty Ltd which are teetering on the edge of insolvency, that are lagging behind in meeting their tax obligations and have tried to survive by overbidding for contracts or otherwise attempting to undercut profitable competitors who have been doing the right thing. (All the more reason therefore for business advisers to ensure that clients doing it tough have their “security interests” properly registered.)
It perhaps comes as no surprise then that the ATO is increasing its efforts to lessen that debt, especially given that new tax laws being applied from the beginning of the current financial year make it easier to do so.
