In a recent decision of the Victorian Supreme Court, a machinery company lost over $1 million of equipment that they had leased because they did not have a properly registered security interest on the Personal Property Securities Register.
A construction company leased formwork equipment from the machinery company, and then went into liquidation.
The machinery company sought to recover the formwork equipment, but the liquidators of the construction company successfully claimed that they had the right to retain title to the formwork equipment as the machinery company was not a secured creditor.
What is the Personal Property Securities Register?
The Personal Property Securities Register, commonly referred to as the PPSR, is a national online register for security interests that came into existence in 2012. It replaced a number of separate schemes, including fixed and floating charges, and expanded the types of security interests that can be registered.
It has also introduced a number of new terms, including:
- Personal property – Essentially, any property other than land;
- Security interest – An interest in personal property providing security for payment or performance of an obligation;
- Grantor – The party receiving credit and granting a security interest;
- Secured party – The party supplying credit and receiving the benefit of the security interest;
- Collateral – Personal property that has, or may have, a security interest attached to it. This may be specific property, or all present and after acquired property of a grantor;
- Attachment – Value has been given for the security interest and the grantor has rights in the collateral; and
- Perfection – The security interest has attached to the collateral, is enforceable against a third party and either the registration is effective or the secured party has possession or control of the collateral.
Why are registered security interests important?
A properly documented and registered security interest is the difference between being a secured creditor and an unsecured creditor. If a grantor defaults on your agreement with them, or if they go into liquidation, you will be in a far better position if you are secured.
When can security interests be registered?
Security interests can only be registered when there is a security agreement in place between the grantor and the secured party which satisfies certain requirements.
Security agreements can take a number of different forms, depending on the type of credit that is being provided to a grantor. For example, if you are providing a loan to someone, the creation of a security interest would form part of the loan documentation.
If you have existing terms and conditions, creating a security agreement may be as simple as inserting clauses stating that you retain title in the goods and have the right to register a security interest.
However, a large number of businesses do not have any written terms and conditions in place at all, which causes significant and costly problems when customers default or go into liquidation.
It is cost effective and quick to put in place a standard set of terms and conditions for your business that can be used each time that you supply credit, particularly when viewed against the losses that can be sustained if a customer goes into liquidation.
How are security interests registered?
Security interests are registered online through the federal government’s PPSR portal. This is a relatively quick process, and registrations are effective as soon as they are completed.
It is important that security interests are registered quickly as the first in time registration has priority. There are also time frames that must be adhered to in order to protect yourself from preference claims in the event that the grantor becomes insolvent, and for registration of certain types of interests.
Need help registering?
If you require assistance documenting or registering your security interest call us today to make an appointment with Michelle or one of our other Commercial Lawyers.