Most people have heard the term Caveat Emptor or“buyer beware”, but what about Seller Beware? While purchasers are often reminded to conduct due diligence before making a purchase, sellers, too, must navigate specific risks and responsibilities – especially when it comes to selling shares or assets.
Here’s what you should know to ensure a smooth transaction as a vendor.
Selling without encumbrance: Why it matters.
The concept of seller beware emphasizes the need for Vendors selling shares or assets free of encumbrance. Encumbrances refer to the right another person or entity has over that share or asset. This may include mortgage, lien, easement, restriction, option and security interests of any kinds.
For example, in a sale of shares, before the Vendor sells their shares in a company, the Vendor must ensure they sell free of any encumbrances. This does not mean the Vendor cannot offer their shares for sale if there are existing encumbrances; rather vendors have to ensure that all security interests are formally and properly released and discharged before the settlement date.
Navigating Security Interests on the PPSR
One of the most common encumbrance is a registered security interest on the Personal Properties and Securities Register (PPSR). The PPSR is managed by the Australian Financial and Security Authority records security interests over personal property.
Security interests on the PPSR arise when a Grantor (the party giving the security interest) gives the Secured Party (the party owed money) a secured interest and that Secured Party registers their interest against the Grantor’s property which may include:
- the specific personal property subject to an agreement (e.g. purchase-hire agreement); and
- all present and after acquired property (commonly known as ‘All PAAP’).
A PPSR Interest gives the Secured Party the rights to claim or repossess property if the Grantor defaults in repayment of their debt. This can pose significant challenges for a sale.
Most purchasers are unwilling to absorb the risks associated with encumbered shares or assets. It is crucial that the Vendor conducts a thorough PPSR search, arrange finances and prepare all necessary documents to discharge any security interests well before the settlement date.
Vendor Warranties: A Key Component of the Sale
Purchasers often require Vendors to provide a warranty that the sale are made without any encumbrance or that those encumbrances will be discharged before the title of the shares or assets are transferred to the Purchaser. This warranty serves as a contractual assurance that the Vendor has taken all necessary steps to deliver a clean title, providing peace of mind to the buyer.
– Jennie Siow
