The Personal Property Securities Act 2009 (C’th) (PPSA) is a new law about security interests in personal property which will apply Australia wide.
When does PPSA start?
The PPSA is already law, but will start on the “registration commencement time”, which is expected to be 1 or 2 May 2011. After that, new security interests over personal property will be notified on the Personal Property Securities Register. A new PPS Register will act as a “noticeboard” of security interests – it will not be a register of documents. A person may notify a security interest on the PPS Register by lodging a Financing Statement that sets out certain details required by the PPSA.
Why do we need the PPSA?
The new PPS system is designed to replace a complex system of more than 70 existing Commonwealth, State and Territory laws administered by more than 30 different agencies. Currently some security interests must be registered in more than one jurisdiction or on multiple registers to be effective. In other instances, there is currently no registration scheme available.
What will the PPSA do?
The PPSA will fundamentally change the law about security interests over personal property, and priorities between competing security interests. Personal property is basically all property except land and fixtures, but some things are excluded such as water rights. It covers not only tangible property (like motor vehicles, plant and equipment, inventory, crops and livestock), but also intangibles (such as intellectual property, contractual rights and shares).
The PPSA takes a functional approach to security interests. A security interest is an interest in relation to personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).
It covers security interests that we already recognise such as charges and mortgages. However, it also covers some arrangements which are not currently considered to be security interests, for example, conditional sale agreements, retention of title clauses and leases of goods. Importantly, possession of personal property (i.e. without legal ownership) is sufficient to grant a security interest over the property. A bank may even be able to take a security interest over an account held with itself.
Other transactions are deemed to be security interests for some purposes of the PPSA, whether or not they secure debts or obligations. For example, a commercial consignment is deemed to be a security interest, and so is a PPS Lease (broadly, a PPS Lease is a lease or bailment that can exceed one year, or can exceed 90 days for goods described by serial number).
The PPSA will discard the current notion of a fixed and floating charge in favour of a charge over circulating and non-circulating assets. The concept of crystallisation relevant to floating charges will also be abolished.
The security interest must attach to property for the secured party to have enforceable rights against the collateral. Attachment requires that:
- the grantor has rights in the property (e.g. the grantor obtains possession) or the power to transfer rights in the property to the secured party (even if that power is subject to limitations such as a requirement for consent), and
- the secured party provides value, or the grantor confers a security interest through their actions.
To be enforceable against third parties further requires either possession or control by the secured party or a written agreement signed or accepted by the grantor.
A question of priorities
The PPSA introduces new priority rules for competing security interests, based on the concept of perfection. Registration is one means of perfecting a security interest. The other ways to perfect a security interest are by possession or control.
Priorities are most important in a case of insolvency of a grantor of a security interest. The PPSA gives a super-priority for perfected purchase money security interests (PMSI’s). A PMSI is a security interest in collateral that secures the purchase price for goods provided, or secures the finance enabling the acquisition of a particular asset.
Most importantly, a security interest may be lost if it is not attached to the collateral or properly protected by being registered on the PPS Register or otherwise perfected.
Migration of existing security interests
Most existing security interests that are registered on existing registers (such as a charge registered on the Register of Charges maintained by the Australian Securities and Investments Commission) are to be migrated across to the new PPS Register with effect from the registration commencement time. The migration of data will commence from the migration commencement time, which will be at least 28 days before the registration commencement time.
Transitional security interests
Some transactions are not currently registrable security interests, but will become so after the registration commencement time. Those interests are temporarily perfected under PPSA, and security holders will have 24 months (temporary perfection period) to perfect their security interests (e.g. by registration on the PPS Register), unless the security interest is otherwise defeated prior to perfection. However, secured parties should be encouraged to perfect transitional security interests with effect from the registration commencement date, rather than rely on the temporary perfection period.
What should you be doing now?
Even though the registration commencement time for PPSA is likely to be May 2011, you must have regard to the impact of the PPSA now. These are examples of things you should consider doing:
- Existing security interests: Consider whether you are a secured party under any existing arrangements that will become registrable security interests under PPSA, for example an equipment lease. You will need to register or otherwise perfect your security interests under PPSA within the temporary perfection period.
- Financing documents: You will need to check negative pledge clauses in your existing financing documents. Are you likely to breach them in a PPSA setting, for example, simply by acquiring goods on retention of title terms? Do you need to renegotiate financing terms with your financier in light of the PPSA?
- Leases of personal property: If you are entering into leases of personal property now, that will comprise a security interest under the PPSA as from the registration commencement time, you will need to make sure that the drafting of the agreement deals with registration of your interest on the PPS Register with effect from the registration commencement time. The agreement should oblige the lessee to do all things required for you to register your security interest.
- Terms of trade: Consider retention of title clauses in your terms of trade. These will constitute security interests under PPSA and will need to be registered if the goods are supplied under a contract that is made on or after the registration commencement time. The date that the contract is made will depend on the particular terms of trade. For example, if the terms of trade provide that a new contract is entered into each time a delivery is made, then registration under the PPSA will be required to protect your security interest in deliveries made on or after the registration commencement time. Otherwise, your rights can be lost in the event of the purchaser’s insolvency, or defeated by another registered interest. As part of the terms of trade, you will need to include an obligation on the person to whom goods are supplied to do all things required to ensure that you can register your security interest on the PPS Register.
- Charges and mortgages: If you are a banking client, you will need to review the adequacy of your standard charge and mortgage documents to ensure you cover and properly identify all intended collateral, and consider what permitted security interests will be appropriate. You will also need to make sure your further assurances clause is adequate to oblige the grantor to do all things required for you to register your security interest.
- Contracting out: The PPSA permits the parties to contract out of certain non-mandatory notice requirements under the PPSA. Appropriate provisions should be included in agreements that will give rise to security interests.