In our recent webinar, “An Essential PPS Update”, we looked at new cases, their key learnings and why businesses must conduct a PPS health check.
30 January 2019 marks the seventh anniversary of the PPS Act. Here are some key insights from the webinar.
Tip 1: A security interest can be registered before the security agreement is signed
Our webinar poll results revealed that 95% of attendees believed a security interest should be registered as soon as the security agreement is signed, leading to the secured party receiving the best protection.
In fact, it is possible to register a security interest before any formal agreement to create that security interest is executed. This is because the operation of section 161 of the PPS Act enables registration “before or after a security agreement is made covering the property”. All that is required for registration is that the person undertaking the registration forms the belief, on reasonable grounds, that the security interest will be created. The legislation does not specify what may constitute “reasonable grounds”, but the burden of proof is on the secured party.
This is key information because early registration helps a secured party avoid the potentially serious consequences of failure to register, including losing its priority, and facing a 'vesting risk' (discussed below). However, do remember that if the expectation of becoming a secured party proves to be unfounded, there is only a five business-day period to end the registration, or a civil penalty applies. We explained the PPS Act five business-day period rule in more detail in a prior blog post.
While early registration has its benefits, it also has risks. For example, in M&A transactions, when one company is negotiating to acquire another, parties must take care to manage confidentiality obligations, as pre-signing registrations could disclose that a deal may be imminent before the parties are ready to make the transaction public.
Tip 2: The importance of observing 'the 20 business day rule'
Due to section 588FL of the Corporations Act, where the grantor is a company, secured parties must be diligent to ensure that a PPS registration is in place within 20 business days - this is 20 business days of the date of the security agreement that “gives rise to the security interest”.
With limited exceptions, failure to register by that time can mean the security interest vests in the company on its insolvency. This means that the holder of the security interest will lose its interest in the property. If a registration is made after this time, the security interest remains subject to this 'vesting risk' for six months after registration.
The PPS Registrar has provided some commentary on the 20 business day rule in Registrar's Practice Statement No 8. The PPS Registrar noted that relief may be available to an affected secured party under section 588FM. We explained this in an earlier blog, “Personal Property Securities 'extension of time' cases - what can we learn from them?” For example, before a court would 'cure' the secured interest by extending the time for registration, it must be satisfied that the failure to register the security interest earlier was accidental, due to inadvertence, due to some other sufficient cause, or the failure is not of such a nature as to prejudice the position of creditors or shareholders. Click here to view the blog.
Tip 3: Renew registrations before expiry or risk losing protection
In January 2019, when the PPSR will have been operating for seven years, the Australian Financial Security Authority (AFSA) reported that a staggering 118,422 registrations are due to expire. AFSA statistics show that a further 120,657 are due to expire in February and March 2019. This is because a large number of registrations were recorded on the PPSR when it commenced in January 2012. This may be by choice (and the most common registration has a duration of seven years) or by migration from another register, such as ASIC's Register of Company Charges, the Australian Maritime Safety Authority's Australian Shipping Register, and the various state-based Register of Encumbered Vehicles (commonly known as REVS).
Businesses should renew their registrations before they expire to make sure the protection afforded by the PPSR is continuous. This is known as “continuous perfection”. We explained this in a recent blog, “To All Business Operators - It's Time for a PPSR Health Check to Avoid Peril”. You can read it here. A security interest that is perfected and continuously perfected generally will take priority over a security interest in the same property but perfected later in time.
A secured party (such as a lender or a supplier) can renew a registration by extending the duration of that registration. This can be done online by logging on to the PPSR, or via SAI Global's Search Manager. By extending the expiry date, the original date of the registration will stand, and the initial priority in the security interest can be maintained.
However, secured parties must act on this at a time that is prior to the registration's expiry, and a fee must be paid. Currently, extending a registration where the duration is seven years or less has a fee of $6. Current PPSR fees are available here. Businesses with a number of renewals to make should plan and budget for this.
If you'd like to find out how SAI Global can make PPS registrations and searches easy for you, contact us at email@example.com.