Using the PPSR to Protect Your Deposit

How PPSR usually works

The most common use of the Personal Properties Securities Act 2009 (“PPSA”) is for entities to register a ‘security interest’ in property over which they have taken security for repayment of a debt. It may also be used to register an interest in property which has been sold, importantly, where the seller has a retention of title until payment for the property has been made (a purchase money security interest or “PMSI”). In either case, properly registering the security interest will ensure notice of the security and, for a PMSI, give priority should a borrower or customer not pay or go broke.

The register can be searched by would-be purchasers, so they can ensure any valuable goods they are to purchase are free from registered security interests and therefore not likely to be repossessed after their purchase.

Purchaser is usually an unsecured creditor

If you are a purchaser of goods who has paid a deposit to a supplier of goods or services and this supplier, before delivering your goods or services, is put into liquidation, in the usual course you will be an unsecured creditor for your deposit, required to line up behind all the secured creditors, employees and payment of the liquidator’s own costs. If there are insufficient funds left to pay all the unsecured creditors after this, you will be paid on a pro-rata basis and not receive back the full amount of your deposit, or may not receive anything.

A search of the Personal Properties Securities Register before you pay a deposit will assist by showing if, any and how many, secured creditors currently claim interests in the property of the supplier. What a search will not indicate is whether the seller is close to or in default with those creditors, so you will not know whether the asset you are about to purchase is at a real risk of repossession. Indeed, there may not be a specific asset in existence, but you may enter into a contract requiring payment of a deposit, a contract for services or an agreement to manufacture and supply goods. Often such arrangements require a substantial deposit to be paid before the goods are to be delivered or the services received.

Thus, whilst searching remains something to consider doing before making any large purchases, there may be a unique way of using the PPSA to better secure your position where you have paid a deposit to a supplier.

Obtaining a ‘security interest’

If you can procure a charge from the supplier you can obtain a ‘security interest’ in its property.

The definition of ‘security interest’ under the PPSA is quite broad and means:

“an interest in relation to personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).”

The property charged by the supplier could be specific to the cash comprised in the deposit paid and when appropriated to the contract, the goods being purchased. However, this will not be effective where a contract for services is involved, as there are no specific goods to be charged. A better approach would be to obtain a security interest by procuring a charge over all present and after-acquired property of a supplier (Supplier’s Property) as security for performance of the contract and delivery of goods ordered or receipt of services or, in default, return of the deposit. The charge can subsist until such time as the goods are delivered free and unencumbered or the services have been satisfactorily provided.

Obtaining a charge will ensure that there is an interest in personal property (the Supplier’s Property) securing performance of an obligation (supply of the goods or services) or payment of money (return of the deposit).

Enforcing and perfecting your ‘security interest’

Once you have a security interest it needs to be perfected and able to be enforced. In order to enforce your security interest against third parties[1] there needs to be:

  1. Attachment of the security interest to collateral (i.e. the Supplier’s Property), which will in part be satisfied by the supplier having the power to transfer rights in such collateral to a secured party as current owner. Attachment also requires either: [2]
  2. value to be given for the security interest; or
  3. the supplier to do an act by which the interest arises.

Arguably, if a deposit is paid, this will constitute value given for the security interest. However, to be certain that attachment of the security interest to collateral is achieved we recommend having the supplier sign the purchase order containing the charge, or provide a signed acceptance of the purchase order (or the General Security Deed, if this is preferred); and

  • A security agreement that provides for the security interest covering the collateral which is evidenced in writing and that is signed by the supplier.[3] This could be a specific contract or agreement for the sale of goods or supply of services which contains a charge over the Supplier’s Property. If there is no written contract, this requirement can be satisfied by having a charge over the Supplier’s Property in terms and conditions for your purchase of goods or engagement of services contained in a purchase order you provide the supplier, which is signed or accepted by the Supplier. Alternatively, where you have an ongoing relationship with a supplier, a General Security Deed could be entered into to cover each contract for the supply of goods or services and each payment of a deposit.

If you satisfy paragraphs 1 and 2 above, you can perfect your security interest in the Supplier’s Property by registering it on the Personal Properties Securities Register for a small fee. Where a General Security Deed has been entered to cover ongoing supplies of goods or services only one registration would be required on the Personal Properties Securities Register.

When the goods are delivered or the services are provided the registration of the security interest will need to be discharged (unless this is a General Security Deed for further transactions).

Improved position

A perfected security interest will mean you are a secured creditor of the supplier. There may, however, be other creditors of a supplier with prior security interests which cover the Supplier’s Property and which may be PMSIs and have a greater priority to the other secured creditors.

Even though you may not have priority over these interests, you will still be a secured creditor, as opposed to an unsecured creditor. Accordingly, you will be ahead of any unsecured creditors and have a greater chance of recovery in the event of a liquidation of a supplier.

So, if you do pay deposits, or make part payments, for the supply of goods or services, you may want to consider taking security for the return of your deposits or payments if the goods or services are not delivered.

[1] Section 20 of the PPSA;

[2] Section 19 of the PPSA;

[3] Instead of signing, the security agreement is able to be adopted or accepted by the grantor by an act, or omission, that reasonably appears to be done with the intention of adopting or accepting the writing, but the safer course is to have it signed.

For more information, please contact:
Amy Bishop

Amy Bishop
Senior Associate
p.  +61 8 8124 1827
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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