PPSA Risks – Subleasing Equipment
PPSA Risks - Subleasing Equipment
The team at COG Aggregation has seen increasing issues amongst our network regarding understanding and complying with the PPSA (Personal Properties Security Act) in order to protect customers and meet lenders’ requirements.
To support our brokers, we’ve partnered with PPS Advisory to bring you informative articles that dive into common PPSA issues.
We’re excited to kick things off with this insightful blog from PPS Advisory on risks when subleasing equipment. Happy reading!
Leasing, particularly subleasing equipment, has been an unspoken issue for financiers ever since the introduction of the PPSA. And a bit like the bogeyman, if you close your eyes and try not to think about it, you hope it goes away. Well, it hasn’t, and unfortunately it looks like it’s back to haunt not only financiers but finance brokers as well.
Just what you need, something else to delay a settlement.
Imagine this scenario:
> Truck Hire Co rents out trucks to its clients, with ABC Credit providing the original equipment finance. Both ABC Credit and Truck Hire comply with the PPSA, registering their interests in the trucks when they are financed and when they go out on long term hire.
> So far, so good. This is what should happen in any situation involving equipment finance and long-term equipment hire. But let’s throw a curveball into the mix.
> Truck Hire’s PPSR officer is on maternity leave. ABC Credit finances a new prime mover and registers its interest, but Truck Hire forgets to register its interest before hiring it to Bull Transport on a 36-month term. Four months later, Bull Transport goes belly up.
The question is who gets to keep the prime mover?
Well, it won’t be Truck Hire. The PPSA is clear, if the PPSA requires you to register your interest and you don’t, you’ll lose your interest and the equipment, on the insolvency of your customer. In this case, the prime mover simply vests in Bull Transport, it becomes Bull Transport’s property, now subject to the Administrator’s control.
Can the financier reclaim the asset?
Now, some may think ABC Credit can swoop in and reclaim the prime mover, but current interpretations of the PPSA suggest it’s not this simple.
We know of no successful court direction on this issue, but we know of several situations where financiers have attempted to gain possession but failed and others where the financiers have refused to act and simply walked away. After all, Truck Hire is still obligated to repay ABC Credit, irrespective of the fact they’ve lost the truck.
Prepare for Tighter Financier Requirements
This isn’t just a hypothetical scenario – it’s a grim reality for many businesses. The real facts in the above example were even more dramatic as the equipment involved was worth over $1m.
So, what’s the takeaway here? Prepare for tighter requirements from financiers, who may ask for proof of PPSA compliance before settling deals. You might also face requests for evidence of compliance in asset protection structures, (where an Asset Holding Co leases equipment to a related Trading Co).
If you haven’t experienced these extra stipulations yet, we think you will. We have experienced a considerable increase in requests from brokers to perform ‘last minute’ PPSR registrations to ensure a deal settles.
We’ve also had increased requests to properly establish asset protection structures, ensuring a documented lease exists and the Asset Holding Co is complying with the PPSA by registering its interests against its related Trading Co.
But these requests all take time and will further delay your settlement.
Protect your Clients with PPSA Compliance
We’ve also had discussions with several financiers reconsidering their requirements when it comes to customers who lease or sublease equipment. We know of one major financier who will make compliance with the PPSA a condition for any client leasing or subleasing equipment.
Don’t be caught off guard – be proactive about ensuring your clients are PPSA-compliant. It’s not just about ticking boxes for your financiers; it’s about protecting your clients’ equipment from loss to potential insolvent customers.
Bottom Line
Stay ahead of the game, and make sure they are correctly complying with the PPSA if it applies. It’s not just a box-ticking exercise; it’s about safeguarding your clients’ assets in case of insolvency.
If your clients are wondering whether the PPSA applies, a PPS Advisory Impact Assessment will provide clarity. And if they’re already complying, an Assurance Review will tell them if they really are (spoiler alert: most aren’t). Both of these PPS Advisory services are great value at just $220 each.
COG Aggregation has a strong partnership with PPS Advisory and we recommend their services to brokers with PPSA concerns. Please reach out to their consultants to protect your clients or contact your COG BDM for guidance.