Why the PPSR is Crucial for Businesses in Australia: Protecting Your Interests in Liquidation and Administration

Understanding the significance of the PPSR, the priority of secured creditors in insolvency proceedings, and the importance of correct contractual terms can make all the difference in the financial stability and longevity of your business.

What is the PPSR?

As a business owner or manager, safeguarding your business assets and ensuring your interests are protected in the event of a liquidation or administration is paramount.

One of the most important tools at your disposal in achieving this protection is the Personal Property Securities Register (PPSR), an essential part of Australia’s legal framework for securing transactions.

The PPSR is an online registry that allows businesses to register security interests in personal property. This system enables secured creditors to publicly register their claims against the property of another person or company who owe them money.

In essence, the PPSR provides businesses with a way to establish priority over other creditors when it comes to claims on personal property (that is, other then real property, or land).

By registering a security interest, you make your claim known to other parties and help ensure that you are recognized as a secured creditor in the event of a debtor’s financial distress.

The Importance of Correct Contractual Terms

In order to have a right to register a security interest on the PPSR, you must have a right to do so. Typically, this is in the form of a clause in your contracts. The effectiveness of the PPSR in protecting your interests is only as good as the clarity and precision of your contractual terms. Having well-drafted contracts that clearly specify the terms under which a security interest is granted is crucial. Your business needs to ensure that:

• Security interests are properly documented: Contracts must clearly define the assets being secured and outline the terms of the security arrangement. Without proper documentation, you risk not having an enforceable claim.
• A registration of the security interest occurs on the PPSR: Securing a financial interest in an asset is just the first step. If the security interest is not registered properly on the PPSR and within the required timeframe, your position as a secured creditor may be compromised, and you could find yourself relegated to an unsecured creditor status.
• Correct legal terminology is used: Failure to properly identify the nature of the security interest or to use incorrect language in your contracts or the registration itself may result in disputes or challenges to the validity of your registration.

Additionally, it is important that businesses review their credit terms regularly to ensure they are up to date with current laws and best practices. A well-maintained set of contract terms will protect your business and strengthen your bargaining position in the event of default.

Secured vs Unsecured Creditors: Why Priority Matters in Liquidation or Administration

In the event of a debtor company entering liquidation or administration, or debtor individual entering into Bankruptcy, the treatment of creditors is governed by a clear hierarchy.

Secured creditors, who have registered their security interests on the PPSR, are entitled to be paid before unsecured creditors.

This is an essential concept to grasp when considering the financial risks your business might face when dealing with insolvent entities.

Secured creditors are those who have a legal claim to specific assets that act as collateral for their loans or credit. These creditors could include banks, financiers, and suppliers who have taken out a formal agreement for security interests.

When a company enters insolvency, secured creditors are paid from the liquidation of the assets that were specifically pledged as security.

On the other hand, unsecured creditors—including suppliers, contractors, and service providers who did not require collateral—are placed lower in the priority order. In most cases, these creditors will only receive payment if there are remaining funds after secured creditors are paid, and in many instances, they may receive little to no compensation.

Another significant benefit of being a secured creditor in a liquidation, administration or bankruptcy is that secured creditors are typically not subject to the claw-back provisions contained in the bankruptcy or insolvency laws in Australia.

For example, preference payments, which are payments made by a company to a creditor before it enters into liquidation or administration. If a liquidator finds that a creditor received a preference payment, that payment could be “clawed back” by the liquidator to be redistributed among all creditors. This risk is generally not applicable to secured creditors.

Thus, the ability to register a security interests on the PPSR can significantly enhance your chances of recovering debts, especially in cases where the debtor’s assets are limited or otherwise insufficient to meet obligations.

The Impact of “Superpriority” Claims

While the priority system typically puts secured creditors ahead of unsecured creditors, certain claims may still rank above standard secured creditors. For example:

• Employees’ claims: Certain employee entitlements, such as unpaid wages, can sometimes take priority over secured creditors in specific circumstances. This is something to consider if you’re a secured creditor dealing with a business that owes employee entitlements.
• Retention of title clauses: Some suppliers include retention of title (RoT) clauses in their contracts, which state that ownership of goods remains with the supplier until full payment is made. However, these clauses can sometimes be challenged if they aren’t properly registered on the PPSR, particularly if the goods are sold or transferred without payment being made.

Regular Monitoring of the PPSR

Once you have registered your security interest, it’s not a “set and forget” process. It’s essential to monitor your registered interests regularly for:

• Lapsing registrations: PPSA security interests typically last for a period of 7 years unless renewed. If you fail to renew your registration, it will lapse, and your interest may no longer be enforceable.
• Adverse registrations: Keeping an eye on your own security interests (and those of your business partners or clients) can help you identify any changes that may affect your claim or your risk exposure, such as new registrations that might impact your priority.

Enforcement of Security Interests

If a debtor defaults, businesses can take steps to enforce their security interest, but this can be a complex process. Secured creditors may take possession of the secured property, sell it, and use the proceeds to pay down the outstanding debt. However, enforcement actions must be carried out in accordance with the relevant legislation and contractual rights, and improper action can lead to significant legal consequences.

Conclusion

Navigating the landscape of secured lending and creditor rights in Australia is complex, but with proper attention to the PPSR, well-drafted contracts, and an understanding of the priority structure in insolvency, businesses can significantly enhance their position in the event of a debtor’s financial collapse.

Ensuring that your business registers its security interests correctly, reviews its contracts periodically, and keeps abreast of any legal changes will go a long way toward mitigating risks and protecting its financial future.

All businesses that supply goods or services on credit for any amount that they are not prepared to write off, should use standard form contracts to make effective every day contracts creating security interests and personal guarantees, and implement procedures to promptly register security interests after contracts are entered into.

For more information on personal guarantees see our article here.