All forms of security interests over property other than land and certain limited categories of assets such as water rights will be governed by the new personal property securities regime.
The Personal Property Securities Bill 2009 (PPS Bill) will, when it becomes law, create a comprehensive national regime for personal property securities. These securities range from fixed and floating charges over the assets of companies, to share mortgages, to security interests over cars to finance leases of plant and equipment and cover many other interests. All forms of security interests over property other than land and certain limited categories of assets such as water rights will be governed by the new regime.
Timing for introduction
It is currently anticipated that the implementation date for the PPS Bill will be May 2011.
The first State to pass legislation referring power to the Commonwealth to pass the PPS Bill was New South Wales, in June 2009. All other States are in the process of passing equivalent referral legislation, as agreed via a Council of Australian Governments agreement.
The PPS Bill was referred by the Commonwealth Senate to the Senate Standing Committee on Legal and Constitutional Affairs for a second time in June 2009. The Committee handed down its report on 20 August 2009. Although that report recommended a further consultation period with stakeholders, which will result in further amendments to the proposed legislation, there was no recommendation that the implementation date be extended beyond May 2011.
Major changes introduced by the new regime
Given that the PPS Bill will result in a number of fundamental changes to the law governing personal property securities in Australia, it is important to have an understanding of the PPS Bill and its significant provisions.
The following considers the PPS Bill as it currently stands though, as noted above, it is likely that further changes will be incorporated before the PPS Bill is adopted.
In summary, the new legislation will govern the following:
(a) the creation of security interests, including attachment and perfection;
(b) the priority regime applicable to a competition between two or more security interests;
(c) the priority regime applicable to a competition between a security interest and another type of interest;
(d) specific rules for security interests over certain types of property (namely, agricultural interests, accessions, processed or commingled goods and intellectual property);
(e) enforcement rules for security interests; and
(f) conflicts of law rules applicable to security interests.
Further comments on these areas are provided below.
Security interests: the "functional" approach
The new legislation will apply to any interests which are categorised as "security interests". A "functional" approach has been adopted in defining security interests. Subject to limited exceptions, the new regime will apply to transactions which have the effect of securing any payment or performance of an obligation, regardless of the form of the transaction. Accordingly, the new legislation will apply to a number of different types of interests that are not traditionally seen as security interests, such as finance leases, factoring arrangements and title retention arrangements.
Security interests will also include particular categories of transactions irrespective of whether these secure payment or performance of an obligation. Those include transfers of "accounts" (the definition of which includes book debts but also other forms of monetary obligations), particular types of leases and commercial consignments.
An interesting result of the adoption of this functional approach is that fixed and floating charges will be re-characterised as security interests over "non-circulating assets" (equivalent to a fixed charge) and security interests over "circulating assets" (equivalent to a floating charge).
Attachment, enforceability against third parties and perfection
The legislation creates a new regime for determining when an effective security interest has been created over personal property. In order for a security interest to be enforceable against the grantor of that security interest, the security interest will need to "attach" to the relevant personal property. Attachment occurs when the grantor has rights in the personal property (or the power to transfer rights in the personal property) and either value is given for the security interest or the grantor does an act which creates the security interest (such as signing a security agreement).
For a security interest to be enforceable against third parties the security interest must attach to the personal property and one of the following conditions must be satisfied:
(a) The secured party must "possess" the relevant personal property. Possession is defined in the PPS Bill in certain circumstances but generally requires that physical possession is obtained; or
(b) The secured party must "control" the relevant personal property. It is only possible to have control of certain types of personal property. For example, where an authorised deposit-taking institution (an ADI) has a security interest over an account held with that ADI, it will be considered to have control of the account. Whether control has been obtained will be determined in accordance with rules in the PPS Bill; or
(c) The secured party must have entered into a security agreement with the grantor in relation to the relevant security interest.
Finally, for the security interest to be perfected, which will allow the secured party to obtain priority against third parties in relevant circumstances, this will typically require that the security interest has attached to the relevant personal property and that either the security interest has been registered on the PPS register, the secured party has possession of the personal property or, in relation to limited categories of personal property, the secured party has control of that personal property. It is likely that registration on the PPS register will be the most common manner in which perfection is completed. Further details of the PPS register are provided below. Temporary perfection is also possible in limited circumstances.
Perfection is important in the context of the insolvency of the grantor of a security interest. In almost all cases, security interests which are not perfected at the time of the grantor's winding up or bankruptcy will vest in the grantor. For example, if a transfer of book debts occurred that was not perfected as at the time the transferor became insolvent, those book debts would vest in the transferor as if the transfer had not occurred (even if the transferor had received full consideration for the transfer).
Priorities between security interests
The legislation sets out a new priority regime to determine priority when the same personal property is subject to two or more security interests. The default priority rules will be as follows:
(a) Priority between unperfected security interests will be determined by the order in which attachment of the security interests occurred.
(b) A perfected security interest will have priority over an unperfected security interest.
(c) Priority between perfected security interests will generally be determined by the order in which perfection occurs.
These general rules are subject to a numerous exceptions. For example, a security interest that is perfected by control will generally have priority over all other security interests perfected in another manner, even if those other security interests were perfected first. Also, perfected purchase money security interests (known as "PMSIs") will generally have priority over other perfected security interests even if those other security interests were perfected first (other than where perfection of another security interest occurs by control). Purchase money security interests include certain types of leases and security interests taken in personal property to secure payment of all or part of the purchase price for that personal property.
Priorities between security interests and other types of interest
In addition to determining priorities between security interests, the PPS Bill sets out a regime to determine priorities between security interests and other types of interests, namely, the interests of purchasers and lessees. In this regard the PPS Bill differs from a number of existing Australian statutory personal property securities regimes (for example, Chapter 2K of the Corporations Act) which regulate priority disputes only between competing security interests.
The rules regulate priority between a secured party and a buyer or lessor in a number of circumstances including, for example, where the security interest is unperfected, where the relevant personal property is "personal, domestic or household property" or property sold in the ordinary course of business and the like.
Special rules for special property
There are policy reasons for the special rules contained in the PPS Bill for agricultural property, accessions, processed or commingled goods and intellectual property.
The provisions dealing with agricultural property are intended to assist farmers in obtaining financing by providing for special forms of security interests to be granted over crops and livestock.
Accessions are personal property that is attached to other personal property, such as a new engine in a piece of machinery. Accessions differ from processed or commingled goods in that when personal property is processed or commingled, there is no possibility of separating the relevant component parts. Examples include wheat from different farmers mixed in a silo or wood, metal and paint used to make a table. Special rules are clearly needed in the case of each of these types of property to govern priority and enforcement issues.
There are also limited special intellectual property rules that will apply regulating ancillary intellectual property rights and licences of intellectual property.
Chapter 4 of the PPS Bill contains an enforcement regime. The primary aim of this Chapter is to allow parties to rely on that regime rather than include detailed enforcement provisions in their security documents. Whether this aim has been achieved is questionable, as the provisions do not apply in cases where a receiver, receiver and manager or other form of controller is appointed to enforce a security interest and therefore the scope for the application of the provisions is limited.
Where Chapter 4 does have application, it is possible to contract out of a number of the provisions except where the security interest is over personal property that is used predominantly for personal, domestic or household purposes (Household Property). Consumer protection policy has dictated that where the security interest is over Household Property certain sections of Chapter 4 cannot apply and the remaining provisions cannot be contracted out of. Chapter 4 does not replace the Consumer Credit Code, which will continue to apply to regulated transactions.
Conflict of laws
The PPS Bill contains rules to determine the law applicable to the validity, perfection and effect of perfection and non-perfection of a security interest. These provisions have been included in the PPS Bill to provide for a simple set of rules which can be applied in all circumstances in replacement of the more complex general law that currently governs these issues. The regime in the PPS Bill is not intended to detract from the ability of parties to select the governing law for contractual obligations.
The rules that will apply to determine these questions will depend on the type of personal property over which the security interest is held and, in certain cases, whether either the grantor of the security interest, or the personal property itself, is relocated after the date the security interest first attaches to the personal property.
As noted above, the most common perfection method is likely to be registration on the PPS register. Registration occurs via financing statements. Financing statements are required to contain certain details, for example, details of the grantor and the secured party, a description of the collateral and (if relevant) the period of registration. Although it will be possible to physically lodge financing statements, registration of a security interest on the PPS register will generally occur online.
Under the PPS Bill it will be possible to register a security interest before any formal agreement to create that security interest is entered into. All that is required for registration is that the secured party forms the belief, on reasonable grounds, that the security interest will be created. This is an important protection for secured parties as it will mean that a secured party will be able to ensure that attachment and perfection occur simultaneously.
The transitional provisions contained in the PPS Bill are complex, reflecting the constitutional constraints that are imposed on the Commonwealth. In particular, under section 51(xxxi) of the Constitution the Commonwealth can only make laws acquiring property on just terms (including just compensation). These constitutional restraints will mean that the relative priority of security interests in existence at the time of commencement of the new regime cannot be altered by the new regime except where:
(a) questions of priority are required to be determined on the insolvency or bankruptcy of the grantor of the security interest; or
(b) a secured party has consented to the new regime applying, by voluntarily registering under it.
The transitional provisions provide for the migration by the Commonwealth Government (with the assistance of the States and Territories) of data from existing securities registers to the PPS register. Of course, in the case of security interests which are not currently on a register (such as would be the case for equipment finance leases), the secured party will need to arrange registration itself.