Perfecting a Security Interest Over Corporate Property

By October 17, 2017Blog
Wheels & Gears

Understanding The PPSR Act

In some way, shape or form just about every business comes in to contact with PPSR act. A concern of ours for some time has been exactly what this article highlights, people just do not understand this legislation although it has been around for several years.  Please read the article below and take note and come along to our November seminar where we help you understand the legislation but more importantly be showing you how to use this legislation to protect your business assets, investment in the business and make the legislation work for you.

Super Fund Trustees

The Federal Court has held that a self-managed super fund (SMSF) trustee was merely an unsecured creditor in relation to a commercial loan to a company after finding that its security interest had not been registered in time on the Personal Property Securities Register (PPSR) to avoid the interest vesting in the company (in liquidation). The case suggests that some Australian businesses are still coming to terms with the conceptual challenges and risks arising from the Personal Property Securities regime, which went live on 30 January 2012.

In Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (2014) 225 FCR 305 (Pozzebon), the trustees of an SMSF (the applicants) had agreed to lend $250,000 to a Perth-based public company (Australian Gaming and Entertainment Ltd). The terms of the loan included a security agreement created on 24 December 2013, under which the company agreed to mortgage personal property in favour of the applicants. Some five months later, on 19 May 2014, the applicants registered their security interest on the PPSR pursuant to the Personal Property Securities Act 2009 (PPSA). The company was placed into voluntary administration on 26 May 2014 with a single asset, $860,000 in a bank account.

The Court held that the applicants’ security interest was not valid and enforceable against the company. It followed that the security interest vested in the company (in liquidation) pursuant to s 588FL of the Corporations Act 2001 with the result that the trustees of the SMSF were unsecured creditors in relation to the outstanding $348,713 debt. Because of the time at which the security interest was registered relative to the commencement of the voluntary administration of the company (ie within six months), the Court ruled that the security interest would vest in the company pursuant to s 588FL of the Corporations Act, unless the applicants could establish that the security interest was not perfected only by means of registration. However, the Court rejected the applicants’ submission that the method of perfection was not by registration alone, and ruled that the security interest was not valid and enforceable against the company.

Registration of security interests – time limits

The decision in Pozzebon highlights that a failure to register a security interest on the PPSR within 20 business days of the creation of a security agreement over corporate property leaves the lender/mortgagor in the hands of the gods in terms of later perfecting the security.

While there is no statutory obligation to register a security interest on the PPSR, it is necessary to perfect a security interest within certain time limits in order to obtain priority. Unperfected security interests vest in the grantor upon insolvency. Registration of a security interest before the grantor becomes bankrupt, or goes into liquidation or administration, will protect the security interest from the vesting rule. However, a security interest in corporate property must be registered on the PPSR within 20 business days of the creation of the security interest, or not more than six months before the administration or winding up of the grantor company. Otherwise, the unperfected security interest will vest in the grantor company in liquidation. It follows that a failure to register within 20 business days means that the security interest must have been registered at least six months before the administration or winding up of the grantor company. Given that things tend to happen very quickly when companies start to go pear-shaped, leaving the registration of a security interest until the first signs of trouble would typically make it difficult to satisfy the six-month test in s 588FL(2)(b)(i) of the Corporations Act.

As the priority for security interests perfected by registration starts from the time the security interests became available for searching on the PPSR, it is imperative to register security interests as soon as possible. Indeed, it is even possible to register prospective security interests before the grantor and the secured party enter into a security agreement. Comprehensive details on the PPSA regime are explained by Dr James O’Donovan in Personal Property Securities Law In Australia (Thomson Reuters).