The Personal Property Securities Act and Franchising
With the upcoming introduction of the Personal Property Securities Act 2009 (PPSA), we review some of the specific issues that will be relevant to franchisors when considering what action they may need to take to protect a security interest with franchisees.
The new legislation
The introduction of the PPSA in 2011 will see the launch of new rules that govern how security interests are created and most significantly, how they are enforced.
The PPSA provides a mechanism for franchisors to secure an interest or right that is related to personal property (except land) that secures a payment or performance of an obligation. By perfecting a security interest via online registration, a franchisor will have priority should the franchisee become insolvent.
It is very important to note that failure to register a security interest within the prescribed time limit may have dire financial consequences for a franchisor.
What security interests should franchisors protect?
Franchisors should identify what types of security interests they may need to protect should a franchisee default.
For example, if a franchise agreement provides for a franchisor to provide franchisees with:
- deferred payment terms for the franchise system
- deferred payment terms for the purchase of plant and equipment
- goods on credit and/or
- equipment leases
then a franchisor will need to ensure each security interest is registered in relation to each franchisee.
Additionally, franchisors will need to consider security interests over goods they acquire from suppliers. Preferably, franchisors will want to ensure that they have clear (and unencumbered) title to any goods they acquire from a supplier. It will therefore be important for franchisors to carefully check the retention of title clauses provided to them by suppliers. A franchisor looking to acquire big ticket items (eg equipment) will also need to check the online register to establish whether a prior security interest has been registered in the goods they wish to acquire.
The implementation of the PPSA will require careful planning as it will impact every franchise system.
For further information on the PPSA contact one of our Corporate Advisory lawyers.
Author: Susan Reece Jones