The introduction of the Personal Property Securities Act 2009 (Cth) (PPSA) represents a fundamental change in respect of laws governing security over personal property in Australia. The PPSA is now well into its fourth year of operation, and with the period of transitional protection now expired, an understanding of the PPSA is now a strongly advisable prerequisite for doing business in Australia or with Australian-based companies.
Non-Australian TAGLaw® members
It has been our experience in assisting lawyers representing clients in overseas jurisdictions (from both TAGLaw® member firms and non-member firms), that there is a general lack of understanding, and in some cases a complete unawareness, of the requirements of the PPSA and the severe and costly consequences of non-compliance.
This newsletter has been specifically written for members of TAGLaw® who may act for clients who have entered into, or are proposing to enter into, commercial arrangements with Australian entities involving ‘personal property’ or otherwise deal with personal property located in Australia. This article does not provide an in-depth commentary on the operation of the more complex provisions of the PPSA, but rather focuses on the broad concepts and consequences of this legislation with the aim of increasing awareness of the existence and implications of the PPSA.
Background to the PPSA
The PPSA is the response to a long held recognition in Australia of the need for law reform in respect of the use of personal property as security in the context of commercial transactions and other arrangements. Prior to the enactment of the PPSA, personal property security in Australia was subject to over 70 acts of Federal and State parliament with differing registration, priority and enforcement provisions.
The PPSA is based on security reform in New Zealand and Canada and is intended to harmonise the law on personal property securities in Australia through a single piece of legislation. The legislation also establishes a single system of online registration, operated by the Australian Government, known as the Personal Property Securities Register (Register).
Basic terminology and concepts
The definition of personal property under the PPSA is exceptionally wide, and captures virtually any property that is not an interest in land or a statutory licence or right. This means that the obligations in the PPSA will apply in respect of not only physical or tangible property but also intangible property – such as intellectual property rights, accounts, negotiable instruments and investment instruments (shares, bonds, units, etc).
A security interest is defined in the PPSA as an ‘interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation’ and is to that extent synonymous to the earlier concepts of mortgages, charges or encumbrances. However, the concept of a security interest is broader than typical property encumbrances, and includes:
- the interest of a supplier of goods with the benefit of a retention of title clause (which typically provides that the supplier remains the owner of the goods until they are paid for in full); or
- certain ‘deemed security interests’.
Deemed security interest
There is a sub-class of security interests that differ from a standard security interest in that they arise and are registrable regardless of whether the interest secures payment or performance of an obligation. These are known as ‘deemed security interests’.
Broadly, there are four categories of deemed security interests:
- the interest of a transferee of an account (for example, an account receivable);
- the interest of a transferee of a chattel paper (for example, a lease of personal property or a supply contract which contains retention of title terms);
- the interest of a lessor or bailor of goods under a ‘PPS lease’ (see more below); and
- the interest of a consignor who delivers goods to a consignee under a commercial consignment.
A PPS lease is a deemed security interest and will automatically arise in certain circumstances where there is a lease or bailment of personal property. The most common of these circumstances are those where personal property is leased or bailed for:
- an indefinite period;
- a term of more than one year; or
- in the case of personal property that must be described and registered by serial number (for example, vehicles, some kinds of commercial machinery and aircraft equipment) in accordance with the PPSA:
a. a term of 90 days or more;
b. for a term of less than 90 days but is automatically renewable, or is renewable at the option of one of the parties to the arrangement, for one or more terms where the cumulative total of the terms might be 90 days or more; or
c. a term of less than 90 days, in additional circumstances where the lessee or bailee (with the lessor or bailer’s consent) retains uninterrupted possession of the personal property for a period of 90 days or more after the day the lessee or bailee first acquired possession of the personal property.
However, PPS leases do not apply in the case where the lessor or bailor of the personal property is not regularly engaged in the business of leasing or bailing goods.
Secured party, grantor and collateral
The entity that holds the benefit of the security interest is referred to under the PPSA as the secured party. A secured party will commonly be acting as a financier, mortgagee, lesser, lender or supplier in the arrangement.
On the other side of the transaction is the grantor – the counterparty in the arrangement who will often be in control or possession of the personal property (referred to under the PPSA as collateral) that has granted a security interest in that property to the secured party.
Attachment and perfection
Once a security interest arises and has ‘attached’ to personal property, the secured party must then ‘perfect’ (another concept introduced under the PPSA) that interest in order to optimally protect themselves and establish their priority in the property. Perfection can be achieved in a number of methods, including in some cases by being in control of the collateral or being in possession of the collateral, but by far the most common and reliable form of perfection is the valid registration of a security interest in respect of that collateral on the Register.
Interacting with the Register
The Register is easily accessible by both consumers and businesses, and it can be used to create new security interest registrations or to modify, discharge or search for existing security interest registrations.
Registration of security interests is a relatively straight forward process, although a number of mandatory fields which much be completed require a working knowledge of the PPSA. In some instances, an error in certain fields will invalidate the registration and render the security interest ‘unperfected’.
Both grantors and secured parties can take a number of entity forms, including individuals, companies, and trusts. Importantly the PPSA provides that the registration of a security interest may be invalidated if it is registered against a grantor using an incorrect entity identifier.
Searches can be refined to a specific grantor to show all of the security interests and details of the personal property in which those security interests have attached, or conversely, can be refined to specific items of personal property that are required to be registered by serial or other identifying number (for example, vehicle identification numbers (VINs), chassis numbers and manufacturer numbers).
Consequences of failing to perfect a security interest
In the event that a security interest has not been perfected by registration on the Register (or another method of perfection permitted under the PPSA) within the required time period (which can be as little as 14 days), the security interest will be considered ‘unperfected’. The holder of an unperfected security interest:
- will rank behind any other third party with a competing perfected security interest over the same collateral, as the default priority rules prescribed in the PPSA state that a perfected security interest enjoys priority over an unperfected security interest, even where the perfected security interest was created later in time; and
- risks being treated as an unsecured creditor of the grantor in the event of insolvency of the grantor, as the PPSA provides that unperfected security interests vest in the grantor immediately prior to administration or liquidation of that entity (commonly known as the ‘vesting rule’), which means that the personal property the subject of the unperfected security interest becomes available to satisfy the claims of creditors generally. A similar position to above applies to trustees in bankruptcy in the event of property being held by an individual that becomes bankrupt.
Are your clients affected by the PPSA?
If your client is doing business with an Australian entity that involves dealings with personal property (whether it be in the form of taking traditional security over personal property, supplying goods on a retention of title basis or leasing goods), it is very likely that they will be subject to the PPSA.
Since the introduction of the PPSA, Carter Newell have been involved in a number of matters involving foreign entities whose business activities are impacted by the PPSA. The following scenarios are examples of arrangements that give rise to registrable security interests under the PPSA:
- a hire agreement in which a foreign company leases vessels, cranes, shipping containers and/or associated equipment to an Australian company;
- a supply agreement between a foreign supplier and an Australian distributor in which the supplier is paid only once the distributor has sold the goods; and
- a supply agreement between a foreign vendor and an Australian purchaser which includes retention of title clauses which provide that the vendor retains title to the property until it has received full payment from the purchaser.
While the above are generic examples, clients involved in manufacturing, shipping, transport or logistics operations as well as financiers taking security over assets located in Australia are parties most likely to be involved in arrangements with Australian counterparties that require careful consideration of the PPSA. It is also these clients that have an even greater vulnerability to loss in the event that they fail to take active steps to adequately protect themselves and their interests in personal property.
Judicial consideration of the PPSA
As the legislation is still in its infancy, Australian courts have had limited opportunity to provide judicial consideration of the PPSA.
However the decisions that have been delivered by Australian courts to date have been more than sufficient to illustrate just how serious the implications are of failing to properly comply with the PPSA.
Carter Newell has prepared articles which include case summaries and commentary on two of these cases: the ‘Maiden Civil’ case in 2013 (discussed in the January 2014 newsletter ‘Landmark Decision on Priority Disputes Under PPSA’), and more recently the ‘White v Spiers’ case in mid 2014 (discussed in the June 2014 newsletter ‘Another hard lesson learnt courtesy of the PPSA’).
Particularly relevant to foreign entities, there is a provision in the PPSA dealing with security interests arising under contracts governed by foreign laws (found in s 268(1)(aa)). In the absence of judicial consideration of this section, there still remains uncertainty as to the application of this provision of security interests, the perfection of which (and the effect of perfection or non-perfection) is ‘governed by the law of a foreign jurisdiction’. Until such time as the operation of this provision is clarified, it is prudent for transactions with Australian counterparties, and even those expressed to be governed by the laws of a foreign jurisdiction, to be carefully analysed to determine whether registration is required or prudent to protect or safeguard the priority and enforceability of security interests in personal property.
Closing comments for TAGLaw® members
While the PPSA was enacted in response to a need to alleviate uncertainty around personal property securities in Australia, the PPSA has been, and will continue to be, a challenging hurdle for Australian businesses to adapt to and comply with. Based on our experience to date, the same challenges exist for foreign entities who deal with Australian counterparties in transactions which give rise to either traditional or deemed security interests.
A formal statutory review of the PPSA is currently underway in Australia, and a report was tabled in Federal Parliament on 18 March 2015 which highlights proposed areas for further reform. Relevantly, the report also notes the need for greater education amongst the business community in relation to the application and impact of the new regime of securing and protecting property securities.
While the report has flagged certain aspects of the legislation for review or improvement, there has been no suggestion raised that the PPSA will be substantially amended or repealed.
If you represent clients who deal with Australian counterparties in transactions including personal property, Carter Newell strongly suggest that steps are taken to develop an understanding of, or at the very least a familiarity with, the PPSA, the Register and key concepts of the PPSA regime. A failure to do so may result in an inadequately protected client losing interest in potentially highly valuable property to a third party who has taken such steps.