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Don’t lose your priority

You have approximately one month to register any transitional security interests. If you miss the 31 January 2014 deadline, you’ve lost your priority forever.

Despite it being in force for almost 2 years now, many business owners still don’t understand how the Personal Property Securities Register (“PPSR”) works.

In summary, the PPSR is a database that records all the people who have an interest in a personal  asset, whether the asset is a car, a boat, plant & equipment, trading stock or a trading account. An ‘interest’ might arise if you own goods or equipment that you have leased to someone else, sold on a ‘retention of title’ basis or if you have been given an asset or a right as security for a loan.

Importantly, the legislation that established the PPSR provides that whoever registers their interest first has the first claim on the asset.

Example 1: John borrows money from Westpac to purchase a business and grants them security over his car to cover repayment of the loan. Westpac doesn’t register its interest in the car on the PPSR.

John then borrows additional money from the Commonwealth bank, and grants them security over all his assets to cover repayment of that loan. The CBA registered its interest in John’s assets on the PPSR.

Both Westpac and the Commonwealth Bank have been granted an interest in the car. Even though Westpac had the first interest, the CBA registered its interest on the PPSR and has priority over Westpac to claim the car if John defaults. Even if Westpac later registers their interest, it’s too late.

This “first registered, first served” rule applies even to interests that were given before the PPSR came into existence.

However, to avoid a free-for-all where everyone rushed to register their interests at once when the system was introduced, a 2-year transitional period was included. Interests that arose prior to January 2012 will retain their priority so long as they are registered by 31 January 2014. These pre-January 2012 interests are known as “transitional interests”. If a transitional interest is not registered by 31 January 2014, it will lose its priority forever.

So how does that affect example 1?

Example 2: John borrowed money from Westpac in December 2011 to purchase a business and grants them security over his car to cover repayment of the loan. Westpac didn’t register its interest in the car on the PPSR.

 John then borrowed additional money from the Commonwealth bank in April 2012, and granted them security over all his assets to cover repayment of that loan. The CBA registered its interest in John’s assets on the PPSR.

Westpac realised its mistake in January 2013 and registered its interest on the PPSR.

In this example, even though the Commonwealth Bank registered its interest first, Westpac registered its transitional interest before the deadline and their interest is treated as having been registered in December 2011. They therefore have priority over the CBA and have first right to claim the car if John defaults

The difference between 31 January 2014 and 1 February 2014 can be the difference between getting your money and assets back and getting nothing.

If you:

  • loaned money to someone before January 2012 and took some security over their assets for the loan;
  • sold goods or equipment to someone before January 2012 on a ‘retention of title’ or ‘vendor finance’ basis and still might need to reclaim the assets; or
  • leased or hired equipment to people before January 2012 and need to reclaim the equipment if they default

it’s imperative that any transitional interests be registered before 31 January 2014.

Understanding the PPSR system is important for all business that hand over assets without receiving full payment first. Even if your security interest is not a transitional one, you need to consider whether you should register it now to maintain you priority.

FWO offers loans and security services. If you need assistance with the PPSR or advice on PPSR issues (including whether you have an interest that is registerable, registering your interest or structuring your deals so that you have a registerable interest) please call FWO principal Jay Clowes on (02) 6650 7016.

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