The Personal Property Securities Act 2009 (Cth) (PPSA) is widely regarded as the most significant change to the law in Australia since the introduction of the GST and has the potential to materially reduce the effectiveness of existing asset protection structures. Corporate groups, advisers and accountants should consider the impact of the PPSA, particularly in a tough economic market and where clients seek to separate asset ownership from business risks.

What’s the big deal with the PPSA?

The intent behind the PPSA is to create a single register known as the Personal Property Securities Register (PPSR) where all forms of ‘security interests’ in respect of ‘personal property’ must be registered.  Failure to register a security interest on the PPSR may mean that the interest is lost through a subsequent transaction involving the ‘personal property’.

Under the PPSA there are two key concepts:

  • ‘personal property’ which is defined as all property (including a licence) but excluding land, interests in land and certain other excluded assets, and
  • ‘security interests’ which is broadly defined as an interest in personal property arising from a transaction that, in substance, secures payment of money or the performance of an obligation.

Critically, transactions that have not typically given rise to security interests such as rental, leasing and hire arrangements may constitute security interests that require registration on the PPSR to be enforceable against third parties (including receivers or other creditors).

What’s the impact of the PPSA on asset protection structures?

One of the most common business structures adopted in Australia for asset protection involves separating the ownership of business assets from business risk.  Typically this involves:

  • carrying on trading and business activities in a company or an operating trust (i.e. theTrading Entity), and
  • having all assets related to the business (motor vehicles, inventory, plant and equipment etc) owned by another company or trust (i.e. the Asset Owner).

The Asset Owner provides the assets to the Trading Entity by way of lease, rental or hire arrangements.  The rationale is that the Asset Owner is insulated from business risks, with the Trading Entity conducting all business activities and bearing all risk.  If the Trading Entity gets into financial difficulty, the Asset Owner could terminate the lease or hire and retake possession of its assets.

The PPSA has the potential to materially undo the benefits of this structure.

Under the PPSA, leasing, hiring and rental arrangements will often constitute security interests and will not be effective against third parties unless the Asset Owner perfects its security interest.  Generally this will involve the Asset Owner registering a security interest on the PPSR against the Trading Entity.

What are the consequences of not registering a security interest?

If the Asset Owner’s security interests are not perfected, asset protection structures may be ineffective in the event of the Trading Entity becoming insolvent or a third party otherwise enforcing a claim against the assets in the possession of the Trading Entity.  There is a risk that those assets will be available to the creditors and secured parties of the Trading Entity, notwithstanding that the Asset Owner is the legal owner.

Having legal title means the asset owner is protected, right?

One of the most challenging new concepts in the PPSA is that ownership of an asset is irrelevant.

Even though the Asset Owner is the owner of the personal property, if it does not register a security interest on the PPSR in respect of the lease, rental or hire arrangements where registration is necessary under the PPSA, its title can be defeated by others, e.g. third party creditors, in situations where it does not have possession of the goods.

The lease, hire or rental of the business assets to the Trading Entity will usually require registration on the PPSR to ensure the Asset Owner’s interest is protected.

What should you be doing?

If your corporate group or clients have asset protection structures in place, then these must be documented in writing and registered on the PPSR if they give rise to security interests.Typically, asset protection structures such as leases and hires were not formally documented, however to enjoy the protection afforded by the PPSA formal arrangements should be entered into to ensure they are enforceable against third parties.