PPSR – PERFECT AND PROTECT YOUR INTEREST.
Published on Jul 31, 2021 by Nicholas Pavouris and Charmian Holmes
In this two-part series we will look at the Personal Property Securities Register (PPSR) and how it can be utilised in various ways for your business.
The PPSR was designed to simplify the recording of security interests in Australia. A security interest is an interest in personal property to secure future payments or obligations. For simplicity almost all tangible and intangible assets (other than land) are personal property. This includes intellectual property, client records and data, advice strategies, servicing rights which lead to the payment of revenue or cash and goodwill which vests in financial services business including client portfolios. These assets can be intangible personal property capable of having an interest registered against them.
This first blog will look at when and why you should consider registering an interest on the PPSR when selling your business assets. The second blog in this series will focus on what to be mindful of when buying a client portfolio or business assets from a person who is, or whose business is, subject to a registration on the PPSR.
Selling your business
One of the things that we see when assisting clients with the purchase or sale of a client portfolio is that the purchase price is almost always made by instalments or on a deferred payment basis. This means a deposit or initial payment is made on signing or on completion, followed by a later payment which is made 12 – 18 months later. The point of this is to ensure that the clients and revenue earned from the portfolio will be retained by the buyer. This also exposes the seller to a risk that there could be a default in payment of the next instalment of the purchase price given they no longer hold title in their asset and have not received full payment.
Instalment payments are often standard practice for financial advisory and wealth management businesses because they incentivise the seller to assist with the transfer to maximise client retention.
What happens though, if the buyer cannot pay the final instalments?
If you are selling your client portfolio with deferred payment, you can secure any subsequent instalment payments.
There are four common methods of securing payment:
- Bank Guarantee – having a guarantee from the bank that the seller will make the deferred payment;
- Personal Guarantee – where the directors or shareholders of the seller personally guarantee the deferred payment;
- Using an Escrow Account – where the funds for the deferred payment are held in a separate bank account managed by both parties until all instalments are paid; and
- Having a registered security interest on the PPSR – the seller obtains a registrable interest over the buyer’s assets including the portfolio assets transferred to the buyer.
More details about these 4 options are in our blog on managing financial risk in transactions.
When we discuss these options with our clients, overwhelmingly we see them interested in having a registered security interest over the intangible assets of the portfolio and the buyer’s other business assets. This does mean that, if enforced, the assets could be seized by the seller for them to either start servicing again, or sell to another party, or the seller can claim the revenue earned from those assets. This option has some challenges if the buyer has significant debt over the business already from financial institutions like banks and lenders. If the buyer’s business is largely debt free, however, it is a good security option.
What does a security interest do?
Used in this way, a registered security interest protects the seller if there is a financial default in paying an instalment of the purchase price – for example, if the buyer is declared bankrupt, becomes insolvent or has their financial services authorisation revoked. There are many other default events that should be built into the seller’s rights to enforce their security.
How does it work?
A security interest should also prevent the buyer from selling the portfolio to a third party if a default event occurs. A registered security interest means that the assets cannot be transferred to someone else with clear title. This is helpful to protect the seller’s interests.
How do you do it?
Prior to completing the sale transaction, a separate Deed of Grant of Security Interest should be signed by the parties. This is the formal legal document where the parties agree to the terms and conditions surrounding the grant of the security interest and describes the property which is the subject of the security interest.
Registering the interest
Once the deed has been executed, you will need to register your security interest on the PPSR. This is a critical step in ensuring that your interest is enforceable. Registering your interest ‘perfects’ your claim, giving you priority. This process is done through the PPSR website . The process is a simple online form.
How do you enforce the interest?
If all instalments are paid by the buyer, you can cancel the security interest registration or allow it to expire. However, if the buyer defaults on their repayment, the Deed of Grant of Security Interest specifies what will occur. This often means taking back control of the secured assets (including the portfolio assets).
The PPSR is a powerful tool in ensuring that sellers are protected against the risk of a default from a buyer where the purchase price is paid via deferred instalments.
If you require any assistance buying or selling a business or discussing security interests, get in touch – we’d be happy to assist.