Common PPS mistakes and how to avoid them

Practitioners should be familiar with the Personal Properties Securities (PPS) register which records security interests in personal property (other than land). LPLC has received claims relating to the PPS regime each year since the PPS Act commenced in 2012 in the context of commercial transactions, business acquisitions and mortgage and loan matters. Mistakes in this area often come to light, and can have severe financial consequences, when parties with security interests are in financial difficulty and lenders, administrators and liquidators attempt to claw back assets. In the current economic climate with insolvencies predicted to rise in 2023, PPS errors are a potential area of high risk for clients and their practitioners.

The requirements for registration and searching are both technical and strict. A PPS register search provides a basic check for financial interests. The search will only return results with exact matches to information entered from financing statements, so attention to detail and caution is required.

The timing of registration of security interests is also critical. If you fail to register or incorrectly register a security interest, and another party registers an interest in the meantime, that party can leapfrog ahead in priority and the client will be unable to enforce its interest or lose it entirely. For companies, if a security interest is registered more than 20 business days after the security agreement is signed, or within six months of the grantor company entering administration or liquidation, the registration will be invalid.

In certain cases, parties can apply to the court for an extension of time to register a security interest, and lodge a fresh, correct registration. However, this option is unlikely to be available where the grantor of the security interest is insolvent. Further, any fresh registrations will be set aside (and any security interests therefore extinguished) if, within six months of the date of the new registration the grantor of the interest enters liquidation, administration, or bankruptcy.

The top eight recurring mistakes LPLC sees by practitioners in connection with the PPS regime are:

• failure to identify and advise the client of a potential security interest and the need to register
• incorrectly recording a company’s ABN instead of the required ACN on the financing statement, or incorrectly recording a corporate trustee's ACN instead of the required ABN of the trust
• registering the wrong entity or failing to register the complete name
• failing to register or update interests in time or overlooking soon to expire registrations
• failing to advise clients about PPS risks and obligations, including the consequences of not perfecting security interests and what steps need to be taken to protect the client
• failing to search the PPS register or deficient searches – for example, searching for a partial name instead of the full name of an individual
• failing to secure releases of security interests
• lodging the wrong forms so a security interest is released instead of assigned or partially released.

Given the potential for loss of security interests, practitioners should have in place robust processes and procedures and focus on good file management. Given current economic conditions, extra risk management focus on this practice area now will be worth the effort. Here are some tips to get you started.

• Have processes in place to ensure the PPS Act is considered in every relevant transaction and confirm in your engagement letter when PPS issues will and will not be addressed.
• Use checklists and reminder systems to identify and diarise registration deadlines and confirm they have been made.
• Attention to detail and close checking of work is important to ensure that registrations and searches have been done correctly.
• Make thorough inquiries with clients and undertake searches as necessary to understand the relevant entities and manner in which security interests should be registered. For example, consider whether the relevant entity is a trustee of any trusts.
• When searching, obtain the necessary information and documents from the client to enable you to do so correctly. For example, when dealing with an individual, request a copy of the driver’s licence with the relevant full name and date of birth.
• Close supervision by a principal experienced in PPS is important. In some costly claims made to LPLC, security interests were not recognised because the PPS was not in the practitioner’s “wheelhouse” and they did not consult or properly collaborate with the specialist within their firm.

LPLC has a PPS Checklist for practitioners that covers practice management basics that may help you develop your approach.