“Where there is a will, there is a relative. Where there isn’t a will there is chaos” (Anonymous)
It is very common for businesses of all types to take advantage of internal leases. Text book asset protection advice usually recommends holding all assets in one entity (a “holding entity”) and leasing those assets to another entity (an “operating” entity) for use in a business. Is this how you operate? Does your business otherwise allow assets to be placed into the possession of others (through leases, licenses or just by giving those assets to others to use)? If so, you should probably read on…
Since its inception in 2012, the Personal Properties Securities Act (“PPSA”) has governed the creation, priority and enforcement of security interests in personal property throughout Australia.
I remember in 2012 (and in fact in late 2011) engaging in bulk information releases and presenting seminars to various sectors of the business community, together with many of my colleagues, on the tricks and traps embedded within this legislation. Unfortunately, many of those bulk information releases, presentations and seminars had not been acted upon by those who really need to understand the nature and effect of the PPSA.
Recently, it was reported (by The Age) that the receivers of Forge Group (a mining services firm) were intending on taking a matter to the Supreme Court of New South Wales to gain control of $50 million worth of assets that were leased to the Forge Group by a US company, APR Energy.
To be clear, these assets are owned by APR Energy and merely leased to Forge Group. It is reported that APR Energy failed to register the lease of those assets on the Personal Property Securities Register (“PPSR”). The cost of registering the lease would have been less than $20. That failure to register could likely result in the provisions of the PPSA and the Corporations Act applying to vest title in those assets in Forge Group (through its receivers). Very little public information in relation to this matter has been released, but if the facts are as clear as outlined above, it is likely that the Supreme Court of New South Wales will follow its 2013 decision (Maiden Civil (P & E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors) and allow the receivers of Forge Group to retain the $50 million worth of assets otherwise owned by APR Energy.
Whilst the sums of money involved in the APR Energy and Forge Group matter seem fairly extravagant the basic principles apply to even then most common and simplistic leases of personal property between parties, including “related” entities.
For example, if a party owns and leases earthmoving equipment to another party under a lease arrangement, and the owner of that earthmoving equipment fails to register the lease on the PPSR, then if the Lessee of that earthmoving equipment becomes insolvent, the Corporations Act clearly stipulates that the earthmoving equipment will become the property of the insolvent Lessee (through its controller).
The easiest and most effective way to protect against a situation like this occurring (and to significantly improve the asset protection position of structures utilising internal leases) is to have appropriate documentation prepared and registered within the statutory time frames prescribed by the PPSA. At a registration cost of less than $20 it really will be the cheapest insurance policy that you will probably ever purchase.
If you would like to discuss the operation of the PPSA further, or understand how you may be exposed to a loss of your assets please do not hesitate to contact Michael Sobey.