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PPSR and PMSI: Registered charges over property

Introduction

The Personal Properties Securities Register (PPSR) is an electronic register which allows a secured party to register the details of property that they have an interest in. For example, if a Bank (the secured party) lends money to a company, the Bank will take a charge over the company’s property, creating a security interest, until the debt is repaid. The Bank will then register its interest on the PPSR which gives notice to other parties that the Bank has an interest against the company’s property.

The purpose of the PPSR is to provide an avenue for individuals or companies who lend money or provide goods on credit to register their interest against the borrowers property as security. Dependent on what the parties agree, the secured party may register an interest against all the borrower’s assets or against specific assets e.g. a laptop, a car or a computer.

It is important to be aware of when the PPSR may be relevant as it acts as a notice board for both secured parties and purchasers (debtors).

Secured parties

Common situations where a security interest will be registered against property is when individuals or companies purchase property on hire purchase, or borrow money to purchase property such as a car. The secured party may register its interest against the car alone, or they may negotiate to register their interest against all of the borrower’s current and future acquired property, which is known as a ‘general security agreement’. A general security agreement most commonly arises when a company borrows from a finance provider and in return the financier will take a charge over all assets currently held by the company, and any future assets that are purchased.

Purchasing property

It is important for consumers to be aware that when they purchase second hand property, a secured party may have a security interest registered against property that relates to money borrowed from the previous owner. Irrespective if the property is bought in good faith and at market value, if a security interest is registered against the property and there is still an outstanding debt, the secured party has the right to repossess the property. For example, if John borrows money from the bank to purchase IT equipment, the bank would take security over the IT equipment until the debt was repaid. If the IT equipment was on sold to Jim and John’s debt was not repaid in full, the Bank would be entitled to repossess the IT equipment from Jim to repay John’s debt.

The PPSR is an imperative tool to notify prospective purchasers of any interests against property they intend to purchase, which may still have money owing, and can be repossessed.

Securing property

In situations where you are a secured party the Personal Property Securities Act 1999 (PPSA), sets out how to register your security interest against the borrowers property. The priority of your interest in the property is determined by the date you register your interest on the PPSR and not that date the parties signed the agreement. When registering your interest (registering your financing statement) you want to ‘perfect’ your interest. Perfecting your interest is the term used to determine whether you followed the right process to give you the first claim to the property, meaning you are the first to be repaid if the borrower defaults. There are two ways to ‘perfect’ your interest; you can ‘perfect by registration’ which gives you first priority if you are the first to register or ‘perfection by possession’. Although the PPSA does not define what actions must be taken for ‘possession’, leaving the property with the debtor after they have defaulted does not constitute possession. Therefore, as a minimum you must be seen to go through the appropriate channels to try and repossess the property.

Exception - PMSI

It is important to note there are exceptions to the ‘perfection’ rule. A common and very important exception to the priority rule is the Purchase Money Security Interest (PMSI). A PMSI is a security interest which gives superior priority over all other interests, even if there has been a financing statement registered against the same property at an earlier date. The requirement to claim a PSMI status will occur where the secured party has loaned funds to the borrower to purchase property, and the funds can be traced to show the property purchased was what the secured party intended to be purchased. This is an important requirement and is why the secured party will often pay the owner of the property directly to ensure the loan funds are used to purchase the agreed property. The second PSMI requirement is for the secured party to register their interest on the PPSR within 10 working days (perfection by registration) from the date the debtor takes possession of the asset (e.g., picks up the new car).

Another common example of a PMSI is where a secured party supplies inventory to their customers and retains ownership of the property until full payment is received. However, in most situations ownership is irrelevant when it comes to the PPSR as ownership will not protect either party if the correct perfection rules have not been adhered to.

If a secured party correctly complies with the registration requirements, a PMSI will take priority over all other security interests, including all interests that were registered prior to the PMSI.

In practical terms, it is important when purchasing second hand goods to check the PPSR register to ensure there are no interests registered against the property and run the risk of the property being repossessed. However, there are strict privacy conditions that determine who can search the register, they are as follows:

  • You must have the consent of the individual/company who you are searching;
  • The search is required to help you decide whether to lend or invest with the individual or company; or
  • The search is required to establish whether there is a security interest over the property you intend to purchase.

You can check the PPSR by going online at www.ppsr.govt.nz or using your mobile phone (TXTB4UBUY).

If you would like further information please contact Laura Monahan on 07 958 7479.


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