Register those Security Interests!

On 30 January 2012 the Personal Property Securities Act 2009 (PPSA) commenced.  The PPSA governs security transactions in personal property (not land) throughout Australia.

Central to the PPSA is the PPS Register (PPSR) which is where security interests are registered, whether the interest relates to a company or an individual.

At first glance, it may appear the PPSA is only relevant to business transactions.  However, certain transactions between trustees of SMSFs and third parties may also be captured under the PPSA.

For example, if the trustee of a SMSF owns machinery and regularly leases it to a manufacturing company for a period of more than 1 year, the lease may be captured by the PPSA.  This is referred to under the PPSA as a “PPS Lease”. Interests created by PPS Leases need to be registered on the PPSR to maximise protection for the person who wishes to rely on the security, in this case, the trustee of the SMSF.

Registering a PPS Lease (if captured by the PPSA) will maximise the priority of the security interest the trustee has in the machinery.

If the trustee does not register the PPS Lease, priority may be lost.  

If the manufacturing company subsequently borrows money from a financier and the financier registers its general security interest over the company’s assets and undertakings (formerly a fixed and floating charge) then the financier’s interest may take priority.  Even worse, if the manufacturing company defaults on the loan and the financier appoints a receiver, the trustee may not, in certain circumstances, be entitled to enforce its security interest over the machinery, even though it owns the machinery.

If a PPS Lease was created and it was not registered, the trustees may have lost the fund asset thereby exposing themselves to a claim by the members for breaching either or both of their common law duties or statutory duties imposed by the Superannuation Industry (Supervision) Act 1993.

Any trustee which leases or rents out assets of the SMSF fund (other than land and interests in land) must consider if the security interest is a PPS Lease and whether it needs to be registered on the PPSR. This is not an area for the faint-hearted, as the PPSA, while simple in theory, is quite complicated in practice. Each particular case needs to be considered carefully and advice sought.