Care Needed in Asset Protection

Posted 24-04-2015
Written by admin 101

For asset protection purposes, many accountants, lawyers and business advisors recommend the establishment of an asset-holding entity and operating (trading) entity.

Assets are purchased by the asset-holding entity and employed by the operating entity for the purpose of generating income.

Generally, a licence or management fee is paid by the operating entity to the asset-holding entity to cover the costs of the assets employed. Should the operating entity incur financial difficulty, the assets owned by the asset-holding entity are generally not at risk.

This widely accepted form of asset protection has changed since the implementation of the Personal Property Securities Act 2009 (Cth) (PPSA).

Under the PPSA, the above arrangement would constitute a PPS lease. The impact on such arrangements is that unless the asset-holding entity registers the interest in the assets employed by the operating entity on the Personal Property Securities Register ("the Register"), those assets may vest (belong) in the operating entity upon liquidation or bankruptcy.

An example of this is that matter of Forge Group, a mining service company that was placed into receivership in February 2014.

The Forge Group had been leasing two power generators worth $50 million from APR Energy on a long-term basis. Once Forge was placed into receivership, the lease was deemed to be a security interest under the PPSA and because it had not been registered on the Register it was considered that the power generators vested in Forge for the receivers to realise the assets.

This obviously had major financial consequences for APR Energy, which effectively lost its two valuable power generators. On the other hand, it meant that the receivers were able to realise considerably more assets for creditors of the Forge Group.

It is also of utmost importance that the registration of the asset(s) on the Register are correct. An incorrect or defective registration can result in the assets vesting in the grantor upon liquidation or bankruptcy.

There have been instances where the incorrect serial identification numbers have been registered in the PPSR resulting in those assets not being properly identifiable and hence vesting in the grantor.

If you, your family or friends wish to enquire about a similar circumstance, please email us on our "Ask Us a Question" feature or call (02) 4228 8288 to speak to one of our specialist compensation lawyers.