If you’re about to purchase an already established business, you’re in luck; there’s going to be a lot of previously existing structures and procedures in place as well as the physical location. However, don’t let this lull you into a false sense of security because this isn’t going to be a walk in the park.
The importance of understanding the risks involved with the transfer of a business can’t be understated. In order to minimise these risks, it's vital to ensure the assets of the business are adequately protected.
What is the Personal Property Securities Register?
The Personal Property Securities Register (PPSR) is a national regime for registering security interests in personal property, where priority is generally given to registrations that occur first in time, the early bird gets the worm! This is important information to have, because if the property you’re considering buying has a security interest attached to it, it could be repossessed later down the track.
One of the exceptions to the first-in-time rule (I guess sometimes the early bird doesn’t get the worm, maybe it gets a snail or something instead) is when a specific type of interest is registered, called a purchase money security interest (PMSI). A PMSI is a security interest arising where credit advanced by the security holder is used to purchase the collateral; hence a ‘purchase money’ security interest. Examples include retention of title stock and specific asset finance. PMSIs give the security holder a ‘super priority’ over other general security interests.
For a PMSI to be effective or ‘perfected’ it must be registered correctly and within the prescribed timeframes set out in the Personal Property Securities Act 2009 (Cth) (PPSA).
How to determine which PPSR registration takes priority?
Making sense of the priority rules, specifically the provisions which allow a PMSI to take priority over other registrations can often be difficult.
Section 55 of the PPSA sets out how to determine priority.
- A ‘perfected’ security interest will always take priority over an ‘unperfected’ security interest.
- Priority between ‘unperfected’ security interests over the same collateral is determined by the order in which the parties registered their interests.
- The priority between two or more ‘perfected’ security interests is determined by which party ‘perfects’ their security first.
Why is an understanding of the PPSR important when purchasing a business?
When conducting due diligence of a business, consideration must be given to the assets of that business and whether they are subject to any security interests.
It is important to ensure that any assets sold with the business are being transferred with a clear title. For assets that were financed through a loan facility, steps need to be taken to settle the loan in exchange for a security interest release.
Equally, in situations where the business is engaged in the sale or leasing of valuable goods (e.g. motor vehicles or equipment) it is critical to ensure that PPSR registrations over the relevant business goods are registered correctly and within the prescribed time frame.