Supplying Goods in Australia: PPSR Considerations

Introduction

If you supply or lease goods to businesses in Australia, you may be familiar with the Australian Personal Property Securities Act 2009 (Cth) (PPSA) and its digital register, the Personal Property Securities Register (PPSR). The PPSR is a vital tool for suppliers and lessors looking to safeguard their interests when dealing with personal property transactions in Australia. Established under the PPSR, the PPSR serves as a centralised, online register where security interests in personal property can be recorded and searched.

For international businesses, understanding how the PPSR functions, is crucial for mitigating risks, securing credit, and ensuring priority over other creditors in the event of a debtor's insolvency. This article aims to provide a comprehensive overview of the PPSR, outlining its importance, the pitfalls associated with it, and what steps international suppliers and lessors should take to protect their assets effectively.

The Purpose of the PPSR

One of the key objectives of establishing the PPSR was to provide a streamlined, unified system for recording and managing security interests that individuals and companies may have in personal property across Australia. Prior to the introduction of the PPSA, there were a complex and fragmented array of commonwealth, state, and territory-based registers, each with its own rules and procedures. This made it difficult for creditors to ensure that their security interests were properly protected and enforceable.

As such, a centralised PPSR does the following:

1. Protects businesses that sell on terms such as retention of title or consignment.
2. Gives the secured party the priority of payment over unsecured creditors.  
3. Makes it easier for everyone to search for secured interests, which can be crucial when a business is being bought or sold; or when an insolvency practitioner is in the process of identifying creditors.

Find out more about What is a Personal Property? and What is a Security Interest? under the PPSA.

What happens if you fail to register your Security Interests?

Registration of a security interest on the PPSR will usually allow a business to utlise the PPSR's priority system to obtain better ranking than other parties, as a secured creditor. On the flip side, failing to consider the PPSR when supplying goods or leasing them, can have serious consequences.

For instance, under s267 of the PPSA, if a grantor of a security interest, (i.e., the entity against whom a security interest is obtained), goes into voluntary administration, bankruptcy or liquidation, most unperfected security interests would automatically vest in that grantor. The practical effect of this provision is that if a supplier who has provided goods on a retention of title basis or leased the goods to a business which enters a formal insolvency-related administration:

1. The supplier's security interest in the goods would extinguish and pass to the liquidator or trustee - giving them the discretion to deal with the property as they see fit; and
2. The supplier's priority in the security interest is lost to other secured creditors who have perfected their interest in the property by registering it on the PPSR.

Accordingly, the PPSA regime makes most unperfected security interests particularly vulnerable in the event of an insolvency.

This was demonstrated in the case of Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc. [2016] NSWSC 52. In this case, Forge Group Pty Ltd (Forge) had entered a lease agreement with General Electric (GE) under which GE leased a number of turbine generators to Forge. When Forge entered administration and subsequently liquidation, the liquidators for Forge asked the court to declare that the security interests in the turbines vested in Forge as GE had failed to register their interest in the turbines as a PPS lease.

GE argued that the turbines could not be characterised as a PPS lease and were therefore, not a security interest under the PPSA as:

1. GE was not regularly engaged in the business of leasing goods; and
2. The turbines had become fixtures on the land, to which the PPSA does not apply.

The court rejected both these arguments as it determined that the leasing activity formed a proper component of GE’s business, and the turbines were not fixtures as they could be removed from the land without damaging the land or the items. As such, the court found the turbines to be a PPS lease for the purposes of the PPSA, and accordingly Forge was found to have a superior security interest in the Turbines to GE. This meant that the turbines were treated as part of Forge’s asset pool and GE completely lost its interest in the Turbines and their ability to recover them.

Although such an outcome may seem harsh, it is consistent with the court’s findings in situations where a party fails to register their security interest on the PPSR against a grantor who commences a formal insolvency-related administration.

Steps to take

In order to ensure that your business takes advantage of Australian PPSR regime and is not caught by the adverse consequences of failing to register, you should consider taking the following steps:

1. Identify the PPSA security interest that arise as a result of the transactions you enter. For example, you may be leasing out products on a short-term basis and that may not be caught under the definition of a PPS Lease.
2. Review your trading terms and conditions; and ensure that they contain appropriate clauses for the registration of security interests. The terms and conditions should clearly specific what security interests are being granted and each party’s rights and obligations with respect to those security interests.
3. Incorporate strict internal processes for ensuring that the security interests are registered on the PPSR in a compliant and timely manner. These processes should ensure that the registration comply with the various rules about the use of correct identifiers, the collateral class and the strict timings imposed by the PPSA.

How Sharrock Pitman Legal can assist?

Whether you are a business owner, or a supplier or lessee of goods, the importance of the PPSR should not be overlooked as a tool to protect your interests. As Accredited Specialist Commercial Law our Commercial Law team assists business owners safeguard their commercial interests. If we can assist you, please do not hesitate to contact us on 1300 205 506 or email sp@sharrockpitman.com.au.

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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