Using the PPSR to protect your interests

By Chris Burnett

Typically, when small business owner’s startup their operations via a company they personally loan money or startup capital to the operating entity so that the business can go and buy equipment, motor vehicles or even trading stock.  What a lot of people don’t know is that they can protect their initial loan from other future potential creditors by simply registering their debt or interest in those goods/assets on the Personal Property Securities Register (PPSR).  By registering the interest on the PPSR the business owners personally have first rights over those goods/assets if the company is unable to pay back their loan and other creditors.

Case study – Scott and his landscaping company

Scott decides to start a landscaping company.  To get the operations off the ground Scott lends his company $50,000 of his savings – $30,000 for a utility vehicle and $20,000 for a small escalator.  Scott doesn’t register this loan or take an interest in the vehicle and equipment on the PPSR.  After two years of trading, Scott’s company runs into significant cash flow difficulties and financial pressures due to increased market competition from service providers like Airtasker.  Scott’s company now has significant debts to other creditors including a $30,000 debt to the ATO for GST, a $15,000 debt to a local landscape supplies company and a $5,000 bank overdraft that is fully drawn.  Scott decides to put the company into voluntary liquidation as it can’t pay back these debts.

 The company’s assets and liabilities can be summarized as follows:

Assets Liabilities
Vehicle: $25,000 Directors loan: $50,000
Equipment: $15,000 ATO Debt: $30,000
  Accounts Payable: $15,000
  Bank Overdraft: $5,000
Total Assets: $40,000 Total Liabilities: $100,000

In liquidation the Scott’s company would have to sell the assets for $40,000 and then distribute that money between all of the creditors on a proportional basis.  As there is only $40,000 of assets but $100,000 in creditors – all the creditors (including Scott’s director loan) would only get back 40% of the amount they are owed by the company.  Scott would only get $20,000 back from his initial director’s loan.

What changes if Scott used the PPSR to register his interest?

If Scott registered his director’s loan and interest in the vehicle and equipment on the PPSR when he lent the money to the company, Scott would be able to repossess the vehicle and equipment from his company making these assets unavailable for the liquidator to sell and partially repay debts owing to the other creditors (ATO, bank etc.).  As Scott has control of the vehicle and equipment, he can then sell these items for $40,000 – and is $20,000 better off.     

Registration periods and costs?

PeriodCurrent charges
Any period up to 7 years$6.80
Any period up to 25 years$34
An indefinite period$119

This publication is for information only and is not advice. You should obtain advice that is specific to your circumstances and not rely on this publication as advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.