04/06/2012

In our article last month on the Personal Property Securities Act 2010 (PPSA), we discussed briefly the need for businesses to ensure that they do NOT agree to provisions under the PPSA  which do not apply to their particular case and which could cause future potential problems.

The example we gave was a credit application which required our client to acknowledge that the agreement was a security interest under the PPSA and to allow the supplier to "register any security interest" when in fact there was no security interest under the PPSA. 

In this article, we look at a business which doesn’t yet have any proper procedures or agreements in place but decides to go onto the PPSR and register a security interest with a potential or future client. Perhaps there have been some introductory discussions but nothing final has been agreed. We don’t think any of our clients would be tempted to act in such a manner but such actions should not be taken and it is important to know why.  

Section 151(1) of the PPSA provides that a person must not apply to register a financing statement or a financing change statement that describes collateral (ie secured goods), unless the person believes on reasonable grounds that the secured party described in the statement is, or will become, a secured party in relation to the collateral otherwise than by registration under the PPSA.

This section is designed to stop frivolous, mischievous or even incorrect registrations taking place. The reasons for this include the problems such registrations may cause the grantor.

For example, imagine two businesses have had preliminary discussions concerning supply of goods but nothing final has been agreed. The party which hopes to supply the goods is confident it can "do the deal," so proceeds to register a security interest in the goods in relation to the company it hopes will purchase the goods (ie the grantor). While this may not be a frivolous registration (it certainly would be if there had been no discussions at all!), it is not one which should be made at this stage, without further discussions and agreement between the parties.

One can imagine the problems if the grantor had previously agreed with its bank not to enter into certain transactions without the bank’s consent, and a secured interest was registered in this case!

There are civil penalties under section 151(1)(a) and (b) for individuals and companies who register security interests without reasonable grounds. 

Similarly, section 151(2) of the PPSA requires a person to register a financing change statement if, in the circumstances set out above, the person described as a secured party has in fact never been a secured party in relation to the specific goods and there are no longer reasonable grounds for believing it would be. This must be done as soon as practicable, or five business days, after:

• the day of registration or
• when there stopped being reasonable grounds for the belief,

whichever is earlier.

Again, there are civil penalties for individuals and companies who contravene section 151(2).

If you have any questions in relation to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.