PPSR: What a Lender Reads on the Register

Before these registers existed, a lender could not easily tell whether the stock or machines in front of it were already promised elsewhere. The New Zealand and Australian personal property securities Acts answer that by providing one searchable register for security interests over assets other than land. The Acts look at substance over form, so a supplier's retention of title, a lease of sufficient length and a bank's general security are all treated as security interests and all belong on it.

It works as a notice register. The secured party files a short statement; the security agreement itself is not lodged, and a registration is only as good as the agreement behind it. Filing is what perfects most interests, and the date generally fixes where the interest ranks. New Zealand's register can be searched by debtor, motor vehicle, aircraft or financing statement number, and the searcher must have a lawful reason. Australia's can be searched by grantor or by the serial number of goods.

The word that matters most to a new lender is earliest. Whatever is already on the register when it files will generally rank ahead of it unless the earlier interest is released or the holder agrees otherwise. The UK has no equivalent. A company's charges are delivered to Companies House, and a simple retention of title or a lease is not recorded there, so a UK lender builds the same picture from the charges register, the accounts and the borrower's contracts.

A vineyard-supplies distributor in New Zealand, constructed for this page like every figure in it, asks a new bank for a US$3.0m facility secured by a general security agreement. Its directors say only the current bank has security. The search returns five registrations.

Each line becomes a question. The forklift was paid off last year and the financier did not discharge its statement, so the bank asks that it be cleared. The current bank's payout and release become a condition of drawdown. The vehicles are financed nearly to their resale value, so they are taken out of the count. The importer holds US$0.6m of unpaid stock. The family trust is the surprise: it lent US$0.8m last year, the loan is in the accounts under related parties, and nobody mentioned the security. Filed before the new bank, it ranks ahead unless the trust signs a deed of priority or releases it.

These are book values, which a lender would discount further. Even so, the search has taken US$2.4m off the asset figure and produced a list of things to clear before a dollar is lent. A clean search would not have ended the work either, because a purchase money interest over equipment can be filed after delivery, within the periods shown above. A bank therefore files its own statement early and searches again before it advances.

The search gives no balance owing and no asset values, and it does not prove that the interest described exists. It does not cover land, which has its own title system; a first mortgage is on the title and not on the PPSR. It will not show claims the law creates without registration, such as employee entitlements ranking ahead of a general security over certain assets. Nor does it show suppliers who have retention of title terms but have not registered, though the bank should still ask: in New Zealand the interest remains valid against the company, even though it ranks behind a registered one.

The register is also easy to read too quickly. A broad description may be an overstatement of what is actually secured, and a specific one can hide a much larger arrangement. Perfection is the neighbouring concept: it is what the registration achieves for the party that filed, while the search is what everyone else reads.

DEFINED IN ONE PARAGRAPH → · PERFECTION OF SECURITY → · PURCHASE MONEY SECURITY INTEREST →

The search sits in three places. At application it tests what the borrower has said; a registration no one disclosed is a credit question as well as a legal one. At drawdown it is a condition: the bank's own statement is on the register against the correct details, and the expected releases have gone through. During the loan, a repeat search at annual review shows new financiers, which is sometimes the earliest sign that a business is short of cash or has begun borrowing elsewhere despite a negative pledge.

Borrowers can use it too. Searching your own company shows what a new lender will see, and allows old registrations to be cleared before they slow a refinance. Lenders also diarise their own expiry dates, since a registration that lapses leaves the interest unperfected.

WHAT YOUR BANK HOLDS AS SECURITY → · GENERAL SECURITY AGREEMENT → · RETENTION OF TITLE →