Many business owners are unaware that the asset protection outcomes they sought to achieve by implementing a particular corporate structure may have been rendered ineffective by the introduction of the Personal Property Securities Act 2009 (Cth) (PPSA)
In this factsheet, senior associate Tim Scanlan discusses the impact of the PPSA on certain business structures, and outlines what business owners should do to ensure that structures designed for asset protection remain effective.
What effect does the PPSA have?
The PPSA establishes one Australian register, the Personal Property Security Register ('PPSR'), which records all security interests in personal property, including assets that are used in businesses. The security interests that are regulated by the PPSA include:
- traditional security arrangements such as charges and mortgages (excluding in relation to land); and
- many arrangements not previously considered security interests, such as retention of title arrangements, hiring arrangements, and other arrangements where the party that owns the property no longer possesses it.
Example: structuring for asset protection purposes
A business owner might establish two separate entities so that:
- one entity holds all of the assets; and
- the other entity ('the trading entity') uses those assets (under a formal or informal lease or hire arrangement) to conduct a business.
The trading entity is exposed to the risks inherent in running a business. The asset holder, on the other hand, is simply a passive owner (and hirer) of assets, and is therefore not exposed to a large amount of risk.
If the trading entity went into some form of insolvent administration, the lease or hire arrangement could be terminated, and the asset holder would be entitled to retake possession of the assets as the owner. The assets could then be leased or hired to a new entity that might be established to operate a new business going forward.
Commonly, the trading entity has possession of the assets, while the asset holder retains ownership of those assets.
What is the impact of the PPSA?
Before the introduction of the PPSA, the arrangement outlined above would have been an effective way to insulate the assets from the risks of running a business, provided the arrangement was properly documented. The asset holder's interests in the assets (as owner) would have been recognised at law.
This position changes under the PPSA. To protect its interest in the assets, the asset holder must register that interest (now a security interest under the PPSA) on the PPSR. The registration is against the trading entity as 'grantor' of the security interest in favour of the asset holder, and it must take place within certain timeframes and before any insolvency event occurs to the trading entity. Registration 'perfects' the asset owner's interest in the assets and means that interest will be protected if the trading entity becomes subject to any form of insolvency administration.
What are the consequences of not registering a security interest?
If the asset holder fails to register its interest in the assets under the PPSA, there is a risk that those assets will be available to the creditors of the trading entity if the trading entity becomes insolvent. The fact that the asset holder is the owner of the assets is irrelevant if its interest is not recorded on the PPSR or perfected in some other way allowed by the PPSA (though registration is the easiest and most common).
What should you do now?
This is just one example of how the PPSA may reduce the effectiveness of a structure that has been put in place with asset protection in mind. Business owners concerned about asset protection should seek advice on the operation of the PPSA, and ensure that interests are registered on the PPSR.
In the example above, this would involve:
- putting a formal agreement in place between the asset holder and the trading entity to establish the relationship between the parties in relation to the assets; and
- registering the asset holder's interest as a security interest on the PPSR.
The asset protection advantages of particular structures are discussed in more detail in our factsheet Common structures used in private businesses.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
