PPS Alert: Improper registration of security interests (IRS) under the PPSA

15 September 2014

Publications

The Register created under the Personal Property Securities Act 2009 (Cth) (PPSA) is normally used to register and protect the rights of secured creditors.

This article is intended to inform credit managers, CFO’s, accountants and SME owners of the possible harm of improperly registered security interests (IRS), and how to address that risk.

IRS – what are they and what effect might they have?

IRS can be the result of innocent errors (such as by former suppliers), failure to remove a previously valid security interest, or even malicious registrations (such as by disgruntled employees) under the PPSA.

IRS can:

  •  affect the credit risk profile of the entity registered against;
  •  indicate a breach of contractual obligations owed to others;
  •  impact on terms offered by credit providers and suppliers to the customer;
  •  impair the ability of a business to secure credit or finance; and
  •  prevent the sale of assets until removal.

24/7 Online register – anytime/anywhere in the world

Any person in the world with internet access is able to register a security interest at any time if they have an individual’s (full name and date of birth) or business’ (ACN or ABN) details. The PPSA registration process does not require a copy of the underlying transaction agreement. For example, to register a charge over all of an entity’s personal property (now called an “AllPAAP – no exceptions” registration) takes only a few minutes and costs $8.

IRS will make it appear that an entity may have a substantial liability to those who register against it.

Offences and Compensation for IRS

Under the PPSA, there are offences for effecting or maintaining IRS, with fines of up to $27,500 per offence. The parties affected may be entitled to uncapped compensation, although the right to compensation may be of little comfort if the offender cannot be located or is not worth suing. The PPSA online process, including bulk lodgements by suppliers tends to result in IRS being lodged. This is a growing problem, as many businesses remain unaware of what is properly required before and after registration under the PPSA.

Often, we see IRS by parties unaware of what, when and how to register. We call them “typos”, however they are of no less concern than malicious IRS, as they can still have the same initial adverse impact.

Recent examples of IRS

  • In Australia, a person repeatedly registered IRS against a company which owned a golf course project, despite the person not having any PPS security interest. Court orders had to be obtained to stop all and any future IRS.
  • In the United States, which has laws similar to the PPSA, Ms Phillips of Chicago was upset that she  was barred from the courtroom during her brother’s trial on drug charges. She maliciously registered tens of billions of dollars of false IRS against a number of federal judges, prosecutors and court officials as apparent revenge.
  • Typos have become common in building & construction (by head contractors and principals), transport (by licensees registering against a licensor) and by goods and material suppliers (who claim interests over that to which they are not entitled).
  • When a business owner was selling one of its businesses, the contract to sell the business was signed before checking for IRS. Former suppliers (including some who had not provided any goods for many years) had lodged IRS. The buyer of the business refused to settle until the IRS were removed with the result that the sale was delayed and the sale price was (substantially) adjusted to compensate the buyer for the delay.

Managing your own PPSA profile

Many businesses do not regularly monitor the Register to check for registrations against them. It is often the case that IRS will only come to their attention at a time when finance is being sought or a sale of substantial assets is occurring.

Responding to the problem then may be difficult and the dealings may be put at risk.

So, what now?

Businesses should consider setting up suitable protocols and systems so that they are automatically notified of any and all registrations, as well as conduct regular audits to make sure that there are no IRS.

A party who has IRS lodged against them typically has three options:

  1. Issue a notice under the PPSA to the other asking them to correct or remove the IRS.This commonly occurs on innocent “typos” and they are often quickly removed;
  2. If option 1 is not successful, issue a notice under the PPSA to obtain correction/ removal by the PPSA Registrar without needing to go to court; or
  3. When it is urgent (e.g. a buyer of your assets will not pay, and might terminate the sale contract and sue for damages; or a person persistently registers sham financing statements), the affected party may need to take court action.

If you would like further information, please do not hesitate to contact us.

Written by:
Peter Mills | Special Counsel | +61 7 3338 7921 | pmills@tglaw.com.au
Emily Dinsey | Lawyer | +61 3338 7924 | edinsey@tglaw.com.au