The old saying that “possession is nine-tenths of the law” appears to be more relevant now than ever, with a recent case confirming that even if you can prove beyond any doubt that you own a particular asset, it can still be sold to satisfy debts of another person. Not only is this concerning for clients, but also for accountants who are potentially advising clients to structure their affairs in a particular manner on the basis of anticipated asset protection benefits (which may no longer be available).
Many of the asset protection and structuring strategies which were commonly implemented in the past now require re-consideration as a result of the introduction of the Personal Property Securities Act 2009 (“PPSA”) with effect from 30 January 2012.
What is the PPSA?
Under the PPSA laws, interests in property are required to be registered on a central register (the “PPS register”). The PPS register is found at www.ppsr.gov.au.
Under the PPSA laws, if your asset is in the possession of another entity, it is necessary to register your interest in the asset on the PPS register in order to have an enforceable right over the asset in the event of bankruptcy or liquidation of the other entity. The PPS register is used to determine those entities which have an entitlement to assets, and the priority in which creditors are paid, in an insolvency event.
The PPSA system harmonises and replaces various pre-existing systems, including fixed and floating charges over company assets (which were registered with the Australian Securities and Investments Commission) and the Register of Encumbered Vehicles (“REVS”). The main exclusion from the PPS is interests in land and buildings, which continue to be registered in the existing systems.
Further information regarding the PPSA laws can be found at www.ppsr.gov.au.
Recent Court decision
The first significant Australian case in relation to the PPSA laws was handed down by the Supreme Court of NSW on 27 June 2013 (Maiden Civil (P&E) Pty Ltd and Ors v Queensland Excavation Services Pty Ltd and Ors  NSWSC 852).
Queensland Excavation Services Pty Ltd (“QES”) obtained finance from Westpac and Esanda to acquire construction equipment. The equipment was leased by QES to Maiden Civil (P&E) Pty Ltd (“Maiden”) for civil construction work in the Northern Territory. QES did not register its interest in the construction equipment on the PPS register.
Maiden subsequently obtained finance from another entity, Fast Financial Solutions Pty Ltd (“FFS”), which registered a general security interest over the assets of Maiden on the PPS register.
When Maiden defaulted on its finance obligations, receivers were appointed and Maiden was subsequently placed into creditors’ voluntary liquidation.
In determining the manner in which Maiden’s creditors would be paid, FFS’s registered security over the company’s assets was given priority over the company’s other (unregistered) creditors.
Even though QES was the true owner of the construction equipment (a point which was accepted by the Court and not disputed by any of the parties), the liquidators were required to satisfy FFS’s registered interest in priority. Maiden’s assets (including the construction equipment owned by QES) could be sold by the liquidators in order to discharge these secured interests.
Relevance for Accountants and Advisors
As accountants and advisors, it is essential to have a good working knowledge of the PPSA provisions. In particular, it is important to have a good understanding of when a security interest needs to be registered.
If an entity carries on a business and its assets are in the possession of another entity, it will be important to register the interest in those assets on the PPS register. Failure to register your interest may mean that, if the other entity goes into insolvency (or bankruptcy), your assets may be sold to satisfy the debts owing to other parties who have registered their interests on the PPS register. This is the case even if you can prove, beyond any doubt, that you are the legal owner of the asset.
Common circumstances where registration of interests on the PPSR register should be considered include:
- Where another entity holds your goods on consignment;
- Where you have sold goods on credit (even if your sale contract has a ‘retention of title’ clause); and
- Where an ‘asset holding’ company leases its equipment to another entity that carries on a business (this can often be a common arrangement between related parties).
- Many historical asset protection structures, for example by carrying on the business through one company and owning valuable plant and equipment in another company, will provide little asset protection in the event of insolvency unless the interest in those assets is registered on the PPS Register.
It is important to recognise that advice about the PPSA provisions is likely to be considered of a ‘legal’ nature and thus accountants and advisors may be restricted in the advice that they can provide on this topic. Your local William Buck advisor can direct you to a lawyer who specialises in the PPSA laws.