Much has already been written on the reform of the law of securities in relation to personal property generally. This article briefly identifies the key implications of the Personal Property Securities Act 2009 (Cth) (PPSA) for joint venturers and equipment supply companies in the energy sector.
Implications for joint venture participants and operators
Contractual rights can constitute personal property
Importantly for joint venturers, contractual rights and entitlements that previously did not constitute security (and therefore did not need to be registered) may create ‘security interests’ under the PPSA. This broadening of rights that may constitute security interests will be relevant to many joint venturers or operators of joint ventures who are accustomed to recognising only a deed of cross charge or legal mortgage as a security interest.
Examples of contractual rights and entitlements under joint venture agreements that may create security interests are:
- Default provisions in a joint venture agreement
Where default provisions in a joint venture agreement confer a right on a non-defaulting party to buy the defaulting participant’s interest in the joint venture, a security interest may be created. In this example, the ‘personal property’ is the defaulting participant’s interest in the joint venture and the security interest is the right of the non-defaulting party to purchase the interest. The participants should register such security interests on the Personal Property Securities Register (PPSR) as a means of perfecting that security.1
- Drag-along provisions in a joint venture agreement
A security interest may be created where a pre-emptive rights regime: (a) entitles a majority participant who is transferring its interest to another participant or a third party has a right to cause a minority participant to also sell its interest in the joint venture to the proposed transferee; and (b) enables the majority participant to enforce the right without a court order.
In this example, the ‘personal property’ is the minority participant’s interest in the joint venture and the security interest is the right of the majority participant to purchase the interest.
- Powers of Attorney
Powers of attorney that are granted under a joint venture or shareholder agreement to assist in ensuring that a contractual obligation is performed may constitute a security interest. Such powers of attorney are often in joint venture agreements to allow a party who has the benefit of a call option or drag along right to execute documents on behalf of the party subject to the sale obligation where that party has itself failed to execute the documents necessary to effect the transfer. Powers of attorney that are granted under a joint venture or shareholder agreement to assist in ensuring that a contractual obligation is performed may constitute a security interest. Such powers of attorney are often in joint venture agreements to allow a party who has the benefit of a call option or drag along right to execute documents on behalf of the party subject to the sale obligation where that party has itself failed to execute the documents necessary to effect the transfer.
Freehills recommends that joint venture participants and operators review existing joint venture documents to determine whether contractual rights create security interests in their favour which may need to be registered prior to the end of the two-year transition period.
Mining and petroleum tenements and certain water licences are not ‘personal property’ – State mineral and petroleum registers are unchanged
Although the PPSA definition of personal property is very broad and includes most tangible and intangible property other than land and water rights, States have specifically excluded mining and petroleum titles from the PPS regime2.
This means that, where a financier has taken a traditional charge or mortgage over a mining or petroleum title, this charge or mortgage should still be registered with the applicable State-based authority responsible for the administration of mining and petroleum titles. This should be done in addition to any registration that is required under the PPSA over a security interest in a joint venture agreement that is relevant to the mining or petroleum title in question.
Impact on Deeds of Cross Charge
A deed of cross charge would create a security interest over a participant’s interest in the relevant joint venture as well as the participant’s interest in the mining or petroleum title the subject of the joint venture; and potentially rights to production or offtake and sales proceeds.
As in the case with financiers, joint venture operators and joint venture participants who have rights under a deed of cross charge which creates security interests over the mining or petroleum title as well joint venture rights should register their security interests under the PPSR in relation to ‘personal property’ and under the relevant State register in relation to the mining and petroleum titles.
If a joint venture participant becomes insolvent, it will be important for the joint venture participants and the operator of the joint venture to have perfected security interests created under the joint venture agreement and deed of cross charge to ensure priority and maximise the operator’s ability to be kept in funds as against other creditors.
A mere contractual right to receive a royalty payment is not a security interest in favour of the payee under the PPSA (unless the right is given as security for the payment of money or the performance of an obligation, which would not usually be the case).
However, where the payor has given a charge or other security interest over the royalty, such security interest will constitute a ‘security interest’ under the PPSA. The security interest may also need to be registered under the relevant State register under which interests in mining or petroleum tenements are required to be recorded, if it constitutes a dealing or a mortgage in respect of the tenement under the applicable mineral or petroleum legislation.
Where an entity has a right to receive a royalty stream and that royalty stream is sold or acquired as part of a sale and purchase transaction, the seller and the purchaser should be aware that such transfers may constitute a deemed security interest under the PPSA as a transfer of an account. This may be the case whether all or part of the right to receive the royalty stream is being transferred.
Implications for equipment providers, lessors and lessees
Deemed security interests
Under the PPSA, certain types of arrangements are ‘deemed security interests’ despite an absence of any secured obligation.
Interest of lessor or bailor of goods
Where goods are leased or provided under a bailment arrangement for greater than one year, or more than 90 days for serial numbered goods, a deemed security interest referred to as a ‘PPS lease’ will be created. For example, a PPS lease may be created if a supplier of heavy mining equipment leases the equipment to an oil or gas or mining operation for less than 90 days but the lease can be extended for a period that will exceed 90 days. These interests would need to be registered to protect the supply company’s interest in the leased goods.
Concept of Purchase Money Security Interest (PMSI)
The term PMSI is used to group together interests for the purpose of giving them ‘super priority’. This includes, among other things, a PPS lease and a retention of title arrangement. From a fairness perspective, PMSIs recognise the right of secured parties to retain a claim in assets that they were responsible for adding to the debtor’s overall pool of assets. There is no real effect on other creditors because the debt incurred to pay for the asset is offset by its addition to that pool. In the outcome, this is not materially dissimilar to the positive pre-PPSA. However, under PPSA a secured party must register a PMSI within specified timeframe and must specify the interest to be a PMSI on the financing statement – otherwise it loses its status as a PMSI and therefore its super-priority.
Examples relevant to the hire or provision of equipment to the energy industry include:
Interests in collateral which secures all or part of its purchase price
Where an equipment supply company delivers goods to a customer or customers mine site which secures all or part of the purchase price, the supply company must register a PMSI as it is no longer possible for the supplier to rely on the fact that legal title to goods has not passed to protect its legal interest in the property.
Interests of a consignor under a commercial consignment
A PMSI registration would also be required if the same supply company maintains a supply of equipment under a commercial consignment. A consignment will be a ‘commercial consignment’ under the PPSA if the supply company retains an interest in goods (usually title), delivers the goods to the consignee for the purpose of sale, lease or other disposal and the supply company and the consignee both deal in goods of that kind in the ordinary course of business. In this situation, the supplier must document and register the security interest under the PPSR as it is no longer possible for the supplier to rely on the fact that legal title to goods has not passed to protect its legal interest in the property. (note: a consignment can also be an ‘in substance’ security interest)
Conclusion and recommendations
Freehills recommends the following questions be considered by energy producers or suppliers of goods to the industry:
Is your organisation a party to a joint venture agreement?
Special care should be taken to consider if security interests are created under the agreement. Contractual rights and entitlements are likely to constitute personal property (such as default provisions) and provisions in the joint venture agreement may create security interests in respect of those rights and entitlements.
Going forward, consider ensuring contractual rights that give rise to security interests are in a separate document to protect against a joint venture agreement being publicly available via the PPSR.
Does your organisation act as a lessor, bailor, or supplier of goods?
You must now document and register your security interest by lodging a financing statement as you cannot rely on legal title.
Does your organisation act as a borrower, manufacturer or lessee?
You must be aware of ‘deemed security interests’ as you may be granting security interests unknowingly – potentially in breach of negative pledge obligations in financing documents.