The Personal Property Securities Act 2009 (PPSA) commenced operation on 30 January 2012. It has introduced a number of new considerations for vendors and purchasers of businesses.
The PPSA provides a national system of registration for 'security interests' in personal property (which does not include land). It also provides default rules for determining priority between competing security interests in the same property.
The concept of a 'security interest' is very broad and generally encompasses any transaction that, in substance, secures payment of money or performance of an obligation. Interest holders must 'perfect' their security interest in order to obtain protection under the PPSA. 'Perfection' is achieved by registration of the interest on the new national PPS register, or by the interest holder obtaining possession or control of the secured property.
Before entering into a contract for the purchase of a business, purchasers should include the following in their usual due diligence investigations:
- conducting a search of the PPS register in respect of assets included in the sale; and
- enquiring of the vendor if any third party is in possession or control ofany assets of the vendor (which amounts to 'perfection' without need for registration).
Purchasers should also consider negotiating appropriate warranties from the vendor for inclusion in the contract, to the effect that no third party has an interest in any assets and that any registered interests will be discharged.
Vendors should ensure that they are aware of any security interests registered over property owned by the business, so as to enable them to: answer enquiries by prospective purchasers, negotiate the terms of the contract for sale, and arrange for the discharge of the security interests at completion of the sale.
Security holders should consider that they bear the responsibility for 'perfecting' a security interest. The new rules in the PPSA will generally work in favour of the purchaser of a business, as the purchaser will take the assets of the business free of any security interest which the interest holder failed to 'perfect'.
In summary, vendors, purchasers and security holders all need to be aware of the effect of the PPSA on their interests during the course of sale or purchase of a business, particularly during the preliminary stage of due diligence investigations.
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