Setting up a Secured Party Group on the PPSR

Every business that lodges a registration on the PPSR will have established themselves as a Secured Party Group (SPG) but, although the Register has provided some guidance as to which buttons to click and which fields to complete when setting up an SPG, I have been unable to find any guidance whatsoever when it comes to deciding upon the membership of an SPG.

A big part of the problem is that the SPG is an administrative rather than a legislative invention.  The Personal Property Securities Act makes absolutely no reference to secured party groups; it only talks in terms of secured parties.  The idea that secured parties needed to be members of a group came from those charged with designing the Register, although, to be fair it should be pointed out that the ‘group’ concept had already been introduced in the New Zealand PPSR almost a decade earlier.

When should an SPG comprise more than one Secured Party?

The vast majority of SPGs that I’ve helped set up have been made up of just one secured party and for most of those there was no question of adding any other body to the SPG, so, in what circumstances should multiple secured parties be considered in the formation of an SPG?

One obvious circumstance would be where one secured party operates in some form of partnership with another and both are party to the same credit/security agreement with the grantor. 

However, if such a partnership had its own ABN then the PPSA’s rules for identifying secured parties would require identification by the partnership’s ABN; each partner could only be identified as a secured party in its own right if their partnership did not have an ABN.

It is quite conceivable though, that a small group of related companies might, effectively, share the same credit/security agreement – one legal entity providing equipment, another providing spare parts, while a third provides maintenance services.  If each entity shared in the same collateral class, if a joint registration would have the same appearance as individual registrations, then it is easy to see the sense (both administratively and financially) in lodging one registration on behalf of the group rather than one for each individual member.

Drawbacks in secured parties grouping together in a single SPG

Fixed Membership

One of the first things to consider is that, once set up, the membership of an SPG cannot be changed.  If you already have an SPG in place and then later wish to add another secured party to it your only recourse is to establish a brand new SPG and transfer your existing registrations to that new SPG.  Similarly, if a secured party needs to be removed from an SPG, a new SPG needs to be created and existing registrations transferred across.

Fortunately, the PPSR’s process for transferring registrations can be relatively straightforward and inexpensive – providing you want to transfer all an SPG’s registrations or only one or two, otherwise, if you want to transfer, say, 400 out of 1000 registrations, it can be a very tiresome exercise indeed!

Challenges under the Act

Section 151 of the PPSA requires that secured parties not lodge a registration against a grantor unless they believe, on reasonable grounds, that the security interest they are attempting to perfect will materialise. 

Well, if secured party 1 (SP1) and secured party 2 (SP2) are both members of a Secured Party Group together and yet only SP1 has a trading relationship with the Grantor any registration lodged by the SPG against the Grantor would open SP2 up to the challenge that they did not have sufficient justification to identify as a secured party of the Grantor.

It is important to note that there are significant civil penalties for lodging a registration in breach of section 151.

Similarly, the Grantor could use section 178 of the PPSA to demand removal of the registration.  Section 178 allows for an amendment demand to be issued where:

 no collateral described in the registration secures any obligation (including a payment) owed by a debtor to the secured party.

While the registration might be quite valid in as much as it relates to the trading relationship between SP1 and the Grantor, its validity would be quite questionable as far as SP2 is concerned.

In order to resolve the situation in such a scenario, SP1 would need to establish a fresh SPG solely for its own use and transfer the disputed registration to that new SPG.  They could lodge a fresh registration under the new SPG and discharge the earlier registration but they would lose the effective start date of that registration (a significant loss if the registration concerned a transitional security interest).

Ownership changes

In addition to falling foul of aspects of the PPSA itself, unwise SPG groupings could also cause some commercial problems in the event that ownership changes take place within the group.

What if the business represented by SP2 is sold to new owners?  What if the sale is conducted in such a manner that the legal entity represented by SP2 (their ACN, for example) remains intact and only its shareholding and possibly its directors change?

There are no longer any common ties between SP1 and SP2 and yet both are members of the same SPG.  Clearly there will need to be new SPGs established for each of the secured parties but what transfers need to take place?  It might be fairly clear-cut in a number of instances where the customer bases of SP1 and SP2 do not overlap but what about those registrations where there is an overlap?  

A registration cannot be transferred to more than one SPG.  Either SP1 or SP2 will lose their registration and, while a fresh registration may only cost a few dollars, the loss of that registration also means a loss in the priority afforded by its registration start date – no small thing, particularly where transitional registrations are concerned!

Conclusion

It might sound from the foregoing that setting up an SPG with more than one secured party is more trouble than it’s worth but that need not be the case - and it should be pointed out that we’ve not exactly been inundated with s151 and s178 demands for removal of registrations based on the presence of an extraneous SPG member.

If SP1 and SP2 are both identified on your credit documentation; if your customer is signing an agreement with both parties; if SP1 and SP2 would each be lodging separate identical registrations against the same grantor had they not been members of the same SPG then there may be significant administrative and financial savings to be made by having both as members of the same SPG.

 And don’t forget that secured parties may be members of a number of different SPGs, therefore, SP1 could happily be a member of one SPG alongside SP2 while also being the sole member of its own SPG used to lodge registrations where there is no common agreement with SP2.

However, where each secured party has its own documentation; where there will be separate credit agreements even though there may be an overlap in customer base; where the nature of the collateral or the security interest might necessitate different registration needs; where it is not inconceivable that one of the secured parties might be sold off at some point in the future then it would be sensible for each secured party to establish its own SPG.

I’d suggest that the default position should be for each secured party to be the sole member of its own SPG and, only if a strong case can be made for a shared SPG, should a multiple membership arrangement be considered.