Insolvency and Personal Property Securities

By Pinar Acay

For Australian businesses that supply goods on credit, lease equipment, or provide finance, the Personal Property Securities Act 2009 (Cth) (PPSA) is central to protecting their position if a customer becomes insolvent. A common and costly mistake is failing to properly register a security interest on the Personal Property Securities Register (PPSR). When a grantor enters liquidation, that failure can result in the complete loss of otherwise enforceable rights.

What is a Security Interest under the PPSA?

A “security interest” under the PPSA is broadly defined and extends well beyond traditional fixed and floating charges. It includes arrangements such as:

• Retention of title (ROT) clauses in supply agreements.
• Equipment hire or lease arrangements.
• Consignment stock.
• Charges or mortgages over personal property.

If a transaction, in substance, secures payment or performance of an obligation, it is likely to be a security interest for PPSA purposes—regardless of how it is described in the contract.

Why Registration Matters

To protect a security interest against third parties, it must be perfected, most commonly by registration on the PPSR. Registration serves two critical functions:

• Priority: It determines where you rank against other secured creditors.
• Enforceability on insolvency: It preserves your rights if the grantor becomes insolvent.

Failing to register (or registering incorrectly) can mean your interest is unperfected, leaving you exposed.

The Insolvency Risk: Vesting on Liquidation

The most significant risk arises under section 267 of the PPSA. If a company enters liquidation while a security interest is unperfected, the interest may vest in the grantor immediately before the liquidation.

In practical terms, this means:

• You lose ownership or priority rights in the secured property.
• The asset becomes part of the insolvent company’s pool of assets.
• You are treated as an unsecured creditor, often recovering little or nothing.

For example, a supplier relying on a retention of title clause who has not registered on the PPSR may lose title to goods supplied but not yet paid for if the customer goes into liquidation.

Common Scenarios Where Risk Arises

Australian businesses frequently encounter PPSA risks in situations such as:

• Supplying goods on credit under standard terms with an ROT clause.
• Leasing or hiring out equipment without PPSR registration.
• Failing to register within required timeframes (particularly for company grantors).
• Errors in registration details (e.g. incorrect ACN or grantor name).

Even where a business believes it “owns” the goods, the PPSA may treat the arrangement as a security interest requiring registration.

Timing is Critical

For company grantors, strict timeframes apply. In many cases, a security interest must be registered:

• Within 20 business days of the security agreement coming into force, or
• Before the grantor enters insolvency, whichever occurs first.

Additional timing rules apply where a party seeks purchase money security interest (PMSI) super-priority. To obtain PMSI priority:

• For inventory, the PMSI must be registered before the grantor obtains possession of the inventory.
• For non-inventory, the PMSI must be registered within 15 business days of the grantor obtaining possession of the collateral.

Late registration can be ineffective against a liquidator or administrator, even if the interest is otherwise valid between the parties.

Practical Steps to Manage PPSA Risk

Businesses can take several steps to mitigate PPSA-related risks:

• Identify security interests early: Review trading terms and commercial arrangements to determine whether the PPSA applies.
• Register promptly and accurately: Ensure registrations are completed within required timeframes and with correct details.
• Review existing registrations: Periodically check that registrations remain valid and effective.
• Align documentation: Ensure contracts clearly support the intended security interest.
• Train staff: Those responsible for credit and contracts should understand when PPSA registration is required.

Proactive compliance is far less costly than attempting to recover losses after an insolvency event.

Need Advice?

If your business supplies goods on credit, leases equipment, or otherwise relies on security interests, it is essential to ensure your PPSA position is properly protected. We regularly advise Australian businesses on PPSA compliance, registrations, and insolvency risk management. Please contact Pinar Acay or Richard Mackenzie at either of our Melbourne or Essendon offices to discuss your arrangements and ensure your interests are secured before issues arise.