You hire equipment to a mining company which goes into administration. The Administrator then sells your equipment and uses the proceeds to pay the mining company’s creditors. Can they really do this? The answer is yes, unless you have fully complied with the Personal Property Securities Act (PPSA).
What is the PPSA?
The PPSA introduces legislation enabling business’ to take security over the equipment you hire out or the goods you sell on credit terms with the ultimate goal of protecting your interest in your goods and equipment in the event your customer becomes insolvent. Your customers and your equipment will then be listed on the Personal Property Securities Register (PPS Register). Similar to how a bank registers a mortgage on a title to a property that they have lent money for.
Why do I need to register?
The main question is, “Why do I need to register my ‘equipment on hire’ or the customers who I have sold goods to”? The answer is to retain ownership in your property and protect your property from forming part of the pool of assets which may be lost in the event your customer becomes insolvent.
If liquidators are brought in, they would salvage what they can and pay the debts first to people and entities with priority and finally to unsecured creditors. If you have not registered under the PPSA you will be an unsecured creditor. If you have registered you’ll be one of the priority creditors.
For example a business hiring equipment is critically exposed to the PPSA and faces the loss of its equipment on the insolvency of the customer. The solution is simple, comply with the PPSA.
A business selling goods on credit terms can now take security over the goods.
Who does this apply to?
This can be relevant to potentially anyone who is in business and sells goods, has hire arrangements, has equipment loan arrangements or even businesses who provide equipment as part of a service.
Unfortunately the PPSA has changed the concept of ownership to one where possession will often trump ownership.
The most vulnerable are businesses who hire equipment out beyond one year or in an open ended agreement. For such businesses the PPSA creates a high degree of risk. A failure to comply with the PPSA when you should will result in the loss of your equipment, even though you own it. If your customer collapses whilst in possession of your equipment it becomes their property.
Whilst the PPSA is bad news for hirers it is fantastic news for anyone selling goods on credit. The PPSA has given legislative backing to the historical ‘retention of title’. Suppliers complying with the PPSA significantly improve the likelihood of recovering goods or their value on the insolvency of a customer.
Any of these types of businesses who have customers in vulnerable industries are particularly at risk. At the moment the natural resource sector is generally unstable. Similarly, the construction industry is having its own challenges. The scary thing is that, most of us do not know what types of business will be in trouble tomorrow. Simple law changes can decimate an industry. The downfall of the mining industry can have flow on effects in other industries that are heavily reliant on the mining sector. On that basis I would consider the business that makes the machinery that supplies the equipment to the mining entities vulnerable.
In my next blog I’ll discuss equipment hired to related parties, what happens when a client becomes insolvent and how to register.
Author: Adrian Wardlaw
Email: Adrian@faj.com.au
