GSA Holders – A false sense of security?

Lenders can be forgiven for thinking that once they have registered a General Security Agreement on the Personal Property Securities Register , covering  all of a borrower’s present and after acquired property, they can rest easy.  Unfortunately, despite the “all present and after acquired property” description, if serial numbered assets (vehicles or aeroplanes) are involved, things can get messy!.  If serial numbered assets are not correctly described in the PPSR registration, the lender can discover the assets it thought were secured are no longer owned by a borrower, or even worse the assets are secured by another more recent GSA holder whose security prevails.


It is commonplace for lenders (including banks, other financiers and shareholders), to secure their lending to a borrower through a security agreement.


Depending on the type and purpose for lending, a security agreement can be specific to a certain asset or assets or a General Security Agreement (“GSA”) intended to be a blanket security over all of the borrower’s assets.


Holders of securities over personal property need to ensure they register their interests correctly in accordance with the Personal Properties Securities Act and the Personal Property Securities Regulations (the PPSA) on the Personal Property Securities Register (PPSR).  Registration is a relatively straight forward process, and is an important step to ensure that a security interest is perfected.  Perfection of a security interest, and more significantly the timing of that perfection, establishes a lenders place in the pecking order with other secured parties who have an interest in the assets of a borrower.


Care must be taken when registering a security on the PPSR to ensure it is correct.   While there is some degree of leniency for minor errors in registration, this does not extend to errors in correctly recording serial numbered assets.  The PPSA requires that a security registered on the PPSR that relates to serial numbered assets must have an accurate description of the assets, including the relevant serial numbers.


A GSA which includes serial numbered goods which are not correctly described on the PPSR registration will be an unperfected security in those assets.  This leaves open the possibility for those assets to be sold by the borrower without the security interest passing.  If this happens, a GSA holder may need to assert its rights over the proceeds of the disposition.  On the face of it, this may seem satisfactory, but the proceeds may prove difficult to trace and, in the event of insolvency,  be used to meet preferential claims if the proceeds are accounts receivable (which includes bank account balances) rather than repaying a GSA holder.


Typically, the first to register a GSA on the PPSR will have priority in the event of insolvency.  However, if a GSA holder has registered their security but not correctly described serial number assets, it may find that a subsequent registered security interest who correctly specifies the serial numbered assets in their registration will prevail.


Problems also arise for secured lenders when serial numbered assets are purchased by a borrower after a GSA is registered on the PPSR.  While a GSA may have originally been correctly registered on the PPSR by a lender, subsequent assets purchased by the borrower could mean that not all of the company’s assets are available to the GSA holder to repay its debts in the event of insolvency.   A GSA holder may be able to prove that serial numbered assets purchased after the GSA registration were acquired using assets (bank funds for example), or proceeds of other assets, which were covered by the original GSA registration.  However, this can prove difficult, particularly if a significant period of time and a large number of transactions have passed since the original GSA registration.


Having your General Security interest potentially subordinated to others because you were not aware of any specific serial numbered assets acquired after you first registered on the PPSR can seem unfair.  Arguably, the registration of a GSA over all present and after acquired property, without the need to keep track of individual assets where they are serial numbered goods,  should be sufficient warning  to others who may provide subsequent finance of your secured interest in the borrowers assets.    Be that as it may, getting your security interest registered correctly on the PPSR from the outset,  and then ensuring you maintain and update your registration is important to preserve your position as a secured lender.


As liquidators, we deal with security interest issues and the application of the PPSA on a daily basis and are happy to discuss concerns or issues you may have.  However, if you have specific PPSA issues, it may be worthwhile also seeking appropriate legal advice.


Matt Kemp