The Personal Property Securities Act 2009 was introduced to reduce the uncertainties in creating, registering and searching for security interests held over personal property in Australia. To an extent, the act has achieved this purpose by superseding a number of overlapping legal frameworks and providing a centralised public register of security interests.

However, the Personal Property Securities Act can have surprising consequences for rights holders and IP financiers who may not anticipate when security interests have been created, or the implications of the rules governing priority of security interests in the same assets.

Personal Property Securities Act in use
The Personal Property Securities Act introduced a central, unified system for the registration of security interests in personal property other than land and fixtures in Australia. ‘Personal property’, which is regarded as collateral under the act, includes intellectual property and IP licences. A transitionary period to record existing security interests on the Personal Property Securities Register ended in January 2014 and recordals on IP Australia’s registers of patents, trademarks, designs and plant breeders' rights no longer have legal priority.

In addition to creating a national register of personal property securities, the Personal Property Securities Act sets out rules regarding the creation, enforcement and priority of securities, which are significantly different from the rules under previous legal frameworks.

Notably, the Personal Property Securities Act has broadened the scope of transactions which will create registrable security interests in personal property well beyond traditional arrangements such as charges and mortgages. As a result, security interests may be created no matter whether specifically contemplated by contracting parties, and with potentially serious consequences. In a recent decision the New South Wales Supreme Court found that a lessee of goods could grant a security interest over the leased goods to a financier which, following registration, took priority over the unregistered interest of the rights holder (Maiden Civil (P & E) Pty Ltd v Queensland Excavation Services Pty Ltd [2013] NSWSC 852 – other transactions not traditionally regarded as giving rise to security interests include sale agreements with retention of title clauses and certain bailments of personal property).

In the context of an IP licence, unless specifically prohibited by the terms, the licensee may grant security interests over the licence to third parties without the knowledge or consent of the rights holder or any subsequent assignee.

One of the more unusual provisions of the Personal Property Securities Act, Section 105, provides that a registered security interest held over goods may extend to associated IP rights if the rights are necessary for the exercise of the security interest. Although Section 105 has not yet been considered judicially, it may cover security interests in subject matter such as patent-protected machinery, crops protected by plant breeders' rights and branded clothing.

Another important consideration under the Personal Property Securities Act is the priority of different security interests in the same personal property. Priority is not simply a question of the time at which a party perfects its security interest. Under the Personal Property Securities Act, some kinds of security interest have ‘super priority’ over other interests regardless of the order of registration.  For instance, upon perfection, a purchase money security interest (PMSI) has super priority over other security interests. Thus, potentially, a company that finances the prosecution of a patent and registers a security interest takes priority over all other security interests in the patent. (Despite the terminology used, PMSIs are not limited to interests created by financing the purchase of collateral and may include the interest of a bailor of goods (see Section 14(1)(c) of the act)).

The Personal Property Securities Act also contains special provisions for the priority of certain security interests in crops, the proceeds of crops and livestock. If perfected, these so-called ‘agri-PMSIs’ take priority over all other security interests, including standard PMSIs. Hence, an entity that finances the purchase of fertiliser to enable crop production will have a security interest over the crops that, when perfected, would take priority over any other interest in the crops, potentially including the interests of the owner under a growing services agreement (where the farmer is a bailee). If the crops are also protected by plant breeders' rights, depending on the interpretation of Section 105, it is possible that the financier may be entitled to deal with the crops freely without infringing registered plant breeders' rights.

Comment
The provisions of the Personal Property Securities Act warrant careful consideration of the kinds and priorities of security interests that can be created by a variety of agreements. Ideally, this due diligence should be conducted before any agreements are executed.

Any business contemplating a transaction that will create security interests over IP rights, licences or goods with associated IP rights should also search the Personal Property Securities Register for potentially conflicting interests.

This article first appeared in IAM magazine. For further information please visit www.iam-magazine.com.