The Personal Property Securities Register is a great tool for parties who lend money, supply goods on account or enter into asset leases. However, one common problem is the laziness of lenders or suppliers in perfecting their security interest.
Perfecting is the process of registering the interest. Let’s say for instance that directors of a new company inject $50,000 each to start the company. What they should do is enter into a loan agreement and security agreement to become a first ranking secured creditor over the company. This would mean that they have many more tools if the company is not doing so well and secured their personal investment in the company.
The process above includes the preparation, execution and registration of the documents and then the interest. This is a 3-step process and it is very common for people to forget about the 3rd step until it is too late.
For example, if the company was suffering a cashflow problem and it was likely to become insolvent in the near future, the director could either appoint an administrator or a receiver over the property secured against the loan. This may include machinery, cash or even simply contacts and client lists.
If, however the security interest was not perfected then this would leave the director in a position where the interest in the property (collateral) vests into the company (grantor), because he was an unsecured creditor.
This is a common scenario which commonly leaves secured creditors high and dry. There is however a provision under the Corporations Act 2001 (Cth) which can assist.
Section 588FL(2)(b) and 588FM allow for a court to grant an extension of time to perfect the security. The key case in this respect is Appleyard Capital Pty Ltd; 123 Sweden AB v Appleyard Capital Pty Ltd (2014) 101 ACSR 629 which makes it clear that the court has the power to grant an extension, however the court will consider the following factors:
- Whether the failure to register was by accident or inadvertence;
- Whether the failure was not of such a nature as to prejudice the position of creditors or shareholders; and
- Whether there is a just and equitable ground.
Furthermore, the examination as to whether the failure will prejudice a creditor is on the basis of the registration not on the return to creditors should the company go into liquidation. One consideration is whether the registration, if known, would have resulted in the other creditors changing their terms of engagement with the grantor company.
What is critical about the application of this section is whether the company that is granting the security interest is solvent, insolvent or in administration/liquidation.
Even if the company is insolvent, in administration or in liquidation, the court may still grant the order on the basis that at the time of the granting the grantor company was solvent and the orders would not prejudice the other creditors.
The PPSR is a great regime to secure obligations from grantors. It does require attention to detail and for the process to be followed through.
If you or your advisor miss that window of opportunity and do not perfect the interest there are still options.
If you would like to know more about the PPSR or about how your clients could use the PPSR to benefit them, contact James Frank at jfrank@franklaw.com.au.
This is not legal advice.
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