Enforceability of PPS registrations where the secured party is the same entity as the grantor

Many vehicle and equipment hire companies have in-house staff register security interests on the Personal Properties and Securities Register (‘PPSR’). Doing this in-house makes sense for it saves money. However, doing this incorrectly may result in a defective registration that does not assist in protecting the hire company’s interest in the vehicle or equipment that was hired out.

It is not uncommon to see security interests registered on the PPSR over assets (including motor vehicles) where the secured party is the same entity (usually the hire company) as the grantor. For this article, we will refer to these registrations as One-Party Registrations.

Such One-Party Registrations can give companies a false sense of security and, in particular for hire companies with large fleets, create significant unnecessary costs.

An instance where a One-Party Registration may be valid is where the entity is acting in different capacities. For example, the secured party is Company A in its capacity as trustee and the trust does not have an ABN and the grantor is Company A in its own capacity (or vice versa).

We have advised many hire companies over the years and, from our discussions with them, understand that it is common practice for such companies to complete One-Party Registrations on the mistaken belief that it will give them priority over any other security interests as their registration is first in time.

Such One-Party Registrations are defective, unenforceable and ultimately useless for the following reasons:

1. In most circumstances, for a security interest to be registered on the PPSR there must be a security agreement that is in writing and signed by the grantor. It is uncommon for companies that have created One-Party Registrations to have a security agreement, in writing, with themselves;

2. Even if such a security agreement existed, it would be invalid and unenforceable because an entity cannot transact with itself nor grant a security interest in favour of itself;

3. Pursuant to section 164 of the Personal Property and Securities Act 2009 (Cth) (‘Act’) a defective registration on the PPSR is ineffective. One-Party Registrations would be regarded as defective because they contain a seriously misleading defect in the data being that the registration does not support any security interest;

4. If a third-party interested person (as defined in section 275(9) of the Act) wishes to have the One-Party Registration removed, it can make a request to you (as the secured party and grantor) pursuant to section 275 of the Act, requiring you to provide documents supporting the security interest. As no valid security interest exists, you would not be able to provide documents to satisfy such request. The third-party making the request could then apply to the Court to have the One-Party Registration removed. In such application the third-party is entitled to seek damages for loss or damage it has suffered because you could not provide the documents to support the existence of the security interest.

A third-party with an interest in the collateral could also give you an amendment demand pursuant to section 178 of the Act. This amendment demand would require you to remove the One-Party Registration on the basis that the collateral described in the One-Party Registration does not secure any obligation owed by a debtor to a secured party because an entity cannot owe obligations to itself. If you do not comply with an amendment demand the third-party can rely on the same to have the PPS Registrar remove the One-Party Registration, or apply to Court to have the One-Party Registration removed.

A common third-party making such request or demand would be the liquidator of a third-party hirer (where the hire is over 2 years) because the One-Party Registration would be defective which means the underlying asset hired out will now vest in the liquidator of the hirer, not the owner (e.g. secured party).

In summary, a One-Party Registration is ineffective as a security interest because it cannot be granted in favour of oneself and may be giving you a false sense of security which ultimately may jeopardise your assets.

If your PPSR registrations are being completed in-house it is highly recommended that you seek legal advice to:

1.  Audit existing PPS registrations to ensure they are valid and enforceable; and

2. Prepare a set of guidelines and educate in-house staff on best practices for completing PPS registrations.

Obtaining such advice can eliminate the time and cost associated with unnecessary PPS registrations and ensure existing and future PPS registrations will protect your interests.

We recently participated in the Government’s public consultation process for the statutory review of the PPSA and its framework in light of the 394 recommendations issued under the Whittaker Review. Further, legal and practical changes are expected in light of such review and consultation, highlighting the need to keep abreast of PPS developments.