When purchasing a business, it is important to ensure that any security interests are released prior to or on settlement.
Security interests refer to the right of a creditor to take possession of an asset or property in the event of a default by the borrower. These security interests are commonly used to secure loans or other financial arrangements such as lease hire agreements, which are used to finance equipment often sold with the business.
The Personal Property Securities Act 2009 (Cth) (PPSA) is the primary legislation that governs tangible security interests in Australia. The PPSA established a single national register for security interests (PPSR) and established rules for the priority of security interests. The register allows for the registration of security interests in personal property, which includes most types of property that are not land or buildings.
As the purchaser of a business, you would be most concerned to ensure that such interests are released by the vendor to ensure that there is no third party who can exercise rights against equipment or other assets which form part of the business you are acquiring.
The process is not unlike that of arranging for a discharge of mortgage of property. The vendor must be called upon to contact any third party security interest holders prior to settlement and arrange for their accounts to be closed and payout figures to be provided on the day of settlement.
This process can be complex and time-consuming, as each third party security holder will have their own requirements and processes. Despite this, it is crucial that as the purchaser, you are satisfied that all debts and securities are released before settlement or completion of the purchase occurs.
If it turns out that security interests were not released properly before settlement, this could leave the purchaser in the unenviable position of pursuing the vendor for damages or having to pay out of pocket to prevent the third party security interest holder from exercising their rights on the encumbered asset.
If you require further information please contact a lawyer from our commercial team at Long Saad Woodbridge.
Important Disclaimer: The content of this article is general in nature and for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.