The Personal Property Securities Act (the PPSA) celebrates its 1st birthday on 30 January 2013. Over the course of the year, businesses have become more familiar with how the PPSA affects their dealings with third parties. However, the way the PPSA applies to internal business structures is frequently overlooked.
Businesses often separate their ‘asset holding’ from their ‘day-to-day operations’; a structure which is designed to protect the assets from the risks associated with carrying on the business.
Under this structure, the asset holding entity will typically acquire all of the assets needed for the operation of a business, such as land and plant and equipment. These are then made available to the operating entity , which uses the assets in the day-to-day running of the business.
In most instances, the use of the assets by the operating company will create a ‘security interest’ in those assets under the PPSA. This is because, unless there are specific measures in place, the operating company will generally have possession of the assets under an indefinite lease or bailment. This is a ‘deemed PPS lease’ under the PPSA, which in turn is a ‘security interest’. If the appropriate steps under the PPSA are not taken, then the asset holding entity could lose the assets (despite its legal ownership), which defeats the whole point of having a separate asset owner.
For example, if a successful legal claim is made against the operating company which results in a liquidator being appointed, then the effect of the PPSA is that the operating company is taken to own all of the property in its possession at the date of the liquidator’s appointment.
This means that if the operating company is in possession of the asset holding entity’s property when the liquidator is appointed, and the appropriate steps have not been taken under the PPSA, then the asset holding entity cannot recover possession of its legally owned assets and instead, would be treated as an unsecured creditor.
This does not have to be the case. There are a few simple steps that can be taken to protect the assets:
First, put in place a written ‘security agreement’. This is the first requirement under the PPSA and should be tailored for the particular arrangement. For example, you may require a lease facility agreement, which will cover all future acquired property and avoids the need for a new agreement each time a new asset is purchased for use by the operating company.
Second, register the security interest on the PPS Register. This should be done within the time frames specified in the PPSA to ensure maximum protection.
By taking these steps, the assets can be recovered from the operating company after the liquidator is appointed, and the asset protection objectives of the business structure can be maintained.
If you would like to discuss the impact of the PPSA on your internal business structure, please call us on 1300 654 590.