Many family and privately owned businesses use a similar structure to hold valuable assets. A holding company owns the vehicles, machinery or equipment, while a separate operating company uses those assets to run the business.
It can seem like a sensible way to separate the family's wealth from trading risk. If the operating business ever runs into financial trouble, the equipment sits safely in the holding company, untouched by creditors. At least, that is the theory.
But there is a step that is often missed. If the operating company leases equipment from the holding company, the arrangement may need to be registered under the Personal Property Securities Act 2009 (PPSA).
If it is not, the holding company could lose the equipment if the operating company enters administration or liquidation.
The Intra-Group Structure Many Business Owners Use
A common group structure looks like this:
- The holding company owns the vehicles, machinery or equipment.
- The operating company uses those assets to run the business.
- The operating company pays rent or another form of fee to the holding company.
Sometimes the arrangement is documented in a formal lease. Sometimes it is handled informally because the companies have the same owners or directors.
Either way, there is a real risk if the arrangement is not registered on the Personal Property Securities Register (PPSR).
When an Intra-Group Lease Becomes a PPS Lease
The PPSA covers security interests in personal property. It can apply to more than traditional lending arrangements.
Some leases, hire arrangements, bailments and consignments can also be treated as security interests. These are known as PPS Leases. An intra-group arrangement can be caught by this even if the family never intended for that outcome.
Broadly, a lease may be a PPS Lease where:
- the lessor regularly leases or hires out goods (which is generally the case in this structural scenario); and
- the arrangement lasts for more than two years, can be extended beyond two years, has no fixed end date, or the goods remain with the lessee for at least two years.
So, for example, a holding company may buy a fleet of vehicles and allow the operating company to use them undocumented indefinitely. If the operating company has had possession for more than two years, the arrangement will likely fall within the PPSA.
Why Legal Ownership May Not Protect Business Assets
The holding company may still be the legal owner of the vehicles or equipment. That does not necessarily mean it will get them back if the operating company fails.
If the arrangement is a PPS Lease, the holding company needs to properly register its interest on the PPSR.
If it has not done so before an administrator or liquidator is appointed, the security interest will vest in the operating company. In simple terms, the asset will become part of the failed company's property, even though another group company legally owns it. The liquidator will sell those assets and the holding company will just be an unsecured creditor for the value along with all the other creditors (and behind any secured creditors).
For a family business, this could mean losing vehicles, plant or machinery that took years to acquire for no return.
Why the Risk is Easy to Miss
The PPSA has been around for more than 15 years, but these arrangements are still easy to overlook.
There are a few reasons why:
- The companies are related: owners may not treat the arrangement like a commercial lease.
- The documents are informal: equipment may have been used by the related entity without a written agreement.
- The arrangement changes over time: a short-term hire arrangement may continue for several years.
- The business structure evolves: assets may move between entities after a restructure without the PPSR position being reviewed.
- Ownership feels protective: the holding company may assume that title to the asset is enough.
What Business Owners Should Check
If one entity in your group owns assets used by another, start with the basics:
- Who owns the asset?
- Which entity has possession and control?
- Is there a written lease, hire or bailment agreement?
- How long has the arrangement been in place?
- Can the agreement be renewed or extended?
- Was the arrangement reviewed under the PPSA?
- Is a PPSR registration required?
- Is the registration made against the correct entity?
- Does it reflect the correct capacity, such as trustee or corporate entity?
- Is the registration still current?
These questions are particularly important for vehicles, machinery, plant and other equipment that would be difficult or expensive to replace.
What if the Business is Already Under Pressure?
The safest time to review an intra-group leasing arrangement is before there is financial pressure.
If the issue is discovered after a business starts experiencing difficulties, the options may be limited. Registering the PPS Lease interest on the PPSR at that time is unlikely to be sufficient. Depending on the circumstances, terminating the arrangement and retaking possession before an external administrator is appointed may protect the asset owner's position.
Legal advice should be sought urgently to ensure the holding company’s assets are adequately protected (and all other risks arising from potential insolvency are minimised).
Once an administrator or liquidator has been appointed, it is too late to fix an unregistered PPS Lease. Ownership of the leased assets will be lost.
A Group Structure Alone May Not Protect Assets
Separating valuable assets from the operating business can be a sensible part of a broader business structure. It does not, on its own, protect those assets.
The arrangements between the entities need to be documented, reviewed and registered where required. This is especially important where the operating company has held the assets for a long period.
Get Advice Before Your Business Structure is Tested
A review before anything goes wrong can help confirm whether the structure is working as intended and whether the right protections are in place.
If your group owns equipment or other assets used by a related operating company, BlueRock Law can help review the arrangements and identify any PPSA issues before they become more difficult to resolve. Get in touch via the form below.
Disclaimer: This article is a general commentary on a topical issue and does not constitute legal advice. If you're concerned about any topics covered in this article, we recommend that you seek legal advice.
