Perfecting your interests

Why registration under the PPSR is important for manufacturers. Seamus Ryan, Special Counsel, and Sascha Kenny, Associate at Rigby Cooke Lawyers sort it out.

The Personal Property Security Act 2009 (PPSA), which came into effect in 2010, created a uniform regime for parties to register security interests. It replaced over seventy pieces of individual legislation around Australia and aimed to give certainty with respect to the priority of security interests where a grantor enters external administration.

Whether it actually simplified anything remains a topic of rich debate. The cornerstone of the reform was the establishment of the Personal Property Security Register (PPSR); essentially, a public noticeboard of security interests in personal property for the world at large.

Risks for unregistered parties under the PPSA

Under the PPSA, if you have a security interest in personal property, it generally must be registered on the PPSR to be enforceable.

A security interest is an interest in personal property that secures an obligation. Security interests can also arise under certain leases of personal property which continue for two years or more, as well as bailment arrangements. With the exception of buildings and land, the types of property include just about anything eg. vehicles, furniture, jewellery, equipment, specialised machinery, IP etc.

A recent working example which we have been involved in Company A manufactures equipment. It provided proprietary moulds to Company B, who was engaged as a contract manufacturer to make certain parts for Company A using the moulds.

Legally, this agreement between the companies is a ‘bailment’; Company A is bailing the moulds to Company B for the purpose of manufacturing the product on the understanding that the moulds will be returned to Company A. There is no transfer of ownership.

However, if the bailment is considered a ‘PPS Lease’ under the PPSA, Company B will be considered to have granted a security interest in the moulds to Company A. Company A will be required to register that security interest on the PPSA. Company B then encounters financial hardship and voluntary administrators are appointed. Company A hasn’t registered any security interest in the moulds on the PPSR. The external administrators take the view that the bailment of the moulds was the subject of a registerable security interest which should have been registered. Under section 267 of the PPSA, the unregistered security interest held by Company A will ‘vest’ in Company B, meaning Company A loses its rights to the moulds and moulds become available to the administrators of Company B to satisfy creditor claims.

Company A then has to negotiate with the administrators for the return of its own property, an outcome which is not guaranteed.

Defences

In our experience, it is becoming increasingly common for a company to make a claim to goods it owns that are in the possession of another company, only for the second company’s external administrators to assert that there was a security interest in the goods that should have been registered.

That will not necessarily be the end of the matter. In the case of a bailment or other PPS lease, there are exceptions which might apply. While a bailment is a security interest, it does not, for the purposes of the PPSA, include a bailment by a bailor ‘who is not regularly engaged in the business of bailing goods’ or a bailment where there was no consideration for the bailment.

In Boreline Pty Ltd v Romteck Australia Pty Ltd [2] [2023] WADC 33, Boreline (the owner of the goods the subject of a bailment said to constitute a PPS lease) argued that, under section 13 of the PPSA, their bailment of goods to the bailee did not constitute a PPS lease because Boreline was “not regularly engaged in the business of bailing goods.”

The WA Court considered whether Boreline was:

• in the business of bailing the goods, and whether the bailment was a normal proper component of Boreline’s business, and not merely incidental to it; and

• regularly engaged in the business of bailing the equipment.

On balance, the Court was not satisfied that Boreline was engaged in the business of bailing goods, finding that the goods were supplied in support of a project to develop orientation probes and camera equipment. This was of a different character to anything that could constitute the ‘general business of bailing’. That being the case, there was no registrable security interest and the goods remained Boreline’s property.

However, the case highlights the risks for companies engaged in the bailment of their own goods as part of their business – particularly in 2023, where the twin pressures of inflation and rising interest rates are resulting in high numbers of business collapses and insolvencies throughout the country.

Registering your security interest on the PPSR

There are two steps a party with goods that are the subject of a bailment might consider.

One is to leave things as they are and argue that the goods are not the subject of a registerable security interest (as in the Boreline case above). Alternatively, a party can register the bailment on the PPSR. Provided registration is done properly, this will protect the party against a claim to the goods by an external administrator. Ensure you have a binding contract in place with the bailee confirming your ownership rights and interest.

On balance, our view is that the better approach is generally to register the security interest where possible that a bailment may be registrable on the PPSR. The costs to register are minimal and this will put you in a much stronger position to have goods returned to you where the bailee enters insolvency.

How can we assist?

Our experienced Corporate & Commercial and Reconstruction & Insolvency teams can assist with PPSR registrations and negotiations with insolvency practitioners to recover your goods.

For more information, please contact Seamus Ryan, Special Counsel, on (03) 9321 7907 or Sascha Kenny, Associate, on (03) 9321 7803 rigbycooke.com.au