The Personal Property and Securities Act (PPSA) establishes a single national law and a single online register for security interests in personal property. It will replace current State and Federal legislation that regulates interests in personal property.
Most importantly, the PPSA sets out new rules for determining who has priority in respect of security interests in personal property. The PPS regime adopts a ‘functional approach’ meaning that it treats all security transactions concerning personal property in the same way.
The PPSA legislation and regulations have been passed but have not yet commenced operation. The PPSA is currently scheduled to come into force on 30 January 2012.
The PPSA introduces a number of new terms and concepts. It is important to understand what these mean to ensure that you take proper steps to protect your interests. Some of these concepts include:
- Security Interest – an interest in personal property provided for by a transaction that secures payment or performance of an obligation. Security interests include what is currently known as fixed and floating charges, rights under a hire purchase agreement, rights under a lease of goods and retention of title arrangements.
- Personal Property – all tangible and intangible property that is not ‘real property’ such as plant and equipment, inventory, motor vehicles, intellectual property (e.g. trademarks and patents), book debts, receivables and other contractual rights.
- Security Agreement – agreement or act by which a security interest is created.
- Perfection – to secure the priority of your security interest, you need to “perfect” it. This can be done by registration of the interest on the PPS register, by possession or by control.
- Attachment – the security interest must attach to collateral/personal property in order for the interest to be enforceable.
- Purchase money security interests (PMSIs) – PMSIs are a form of security interest that arise where a person has provided finance or financial accommodation to another person to acquire a specific item of personal property. If a PMSI holder registers its interest, that holder will have higher priority in that item of personal property than persons holding a general security interest.
Implications of the PPSA for Franchises
The PPSA will have significant implications for franchisors where:
There is a deferral of payment terms for the franchise system (e.g. franchise fee, royalties);
- A franchisee leases plant and equipment from the franchisor;
- A franchisor sells plant and equipment to the franchisee on deferred payment terms;
- The franchisee acquires goods from the franchisor on credit, lease or similar basis;
- A franchisor provides goods on credit to a franchisee;
- A director of a franchisee company provides a personal guarantee to the franchisor to secure the franchisee’s obligations; and
- A franchisor leases goods to a franchisee.1
Any of these arrangements may give rise to a security interest in favour of the franchisor. In order to protect their security interests, franchisors should register their interest on the PPS register.
There may also be implications for a franchisor where there are intergroup finance arrangements or facilities in place.
Registration of security interests under the PPSA
Any delay in registering a security interest under the PPSA may result in the loss of priority and a failure to register may result in the loss of title to goods (or, if they have been sold, the proceeds of sale) if a franchisee defaults. To register a security interest you must have a “belief on reasonable grounds that you are, or will be, a secured party in relation to the personal property”. In addition, sufficient information to complete the online registration is required.
Most importantly, if you have a security interest that can be registered on a current register (e.g. ASIC Register of Charges), you should take steps to register prior to commencement of the PPSA. This will ensure that you receive special transitional treatment under the PPSA.
Priority rules under the PPSA
The default priority rules in the table here will apply.
The major exception to the default priority rules is for purchase money security interests (PMSIs), which have a “super” priority.
Case study #1: Retention of Title Arrangements
Hair Everywhere (a franchisor) leases shelving to Curl Up and Dye for its products. Under the terms of the agreement Hair Everywhere retains title to those shelves until it receives payment from Curl Up and Dye. Hair Everywhere does not register its interest in the shelving on the PPS register. Eastpac (Curl Up and Dye’s bank) registers a security interest over all assets of Curl Up and Dye. Curl Up and Dye becomes insolvent.
The PPS regime treats a retention of title (ROT) holder as no more than an unsecured creditor. Therefore ROT holders must register their interests in the property in order to secure its interests. As Hair Everywhere has not registered its interest in the shelving, Eastpac takes priority in respect of the shelving.
An ROT gives rise to a PMSI. On registration of the PMSI the ROT holder will have first priority in respect of the goods. Had Hair Everywhere registered its PMSI in the shelving, it would have had priority and been entitled to take possession of the shelving on Curl Up and Dye’s insolvency.
Case Study # 2: Deferred Payment Terms (e.g. Franchise Fees)
Caffeine Addict (franchisee) enters into a franchise agreement with Wide Awake (franchisor) but is unable to pay the franchisee fee when due. Wide Awake agrees to permit Caffeine Addict to pay the franchise fee by installments. The arrangement to pay by installments is not documented by Wide Awake and Caffeine Addict. Caffeine Addict fails to make the payment and becomes insolvent.
Whether or not a security interest is created depends on the terms of the agreement between Wide Awake and Caffeine Addict. In order to constitute a security interest the agreement must create an interest in Caffeine Addict’s personal property in favour of Wide Awake. There is no particular form of words that the security agreement needs to take in order for it to create a security interest under the PPSA.
In order to secure the payment of the franchise fee by Caffeine Addict, Wide Awake should either vary the terms of its franchise agreements to provide for the deferred payment or payment by installments for the franchise fee or provide for entrance into separate agreements across its system, if this is intended, and provide for Caffeine Addict to grant Wide Awake an interest in its property to secure the payment of the fee.
- Know when you have or will have a security interest.
- Make sure that the security interest is enforceable.
- Register the security interest.
- Maintain your registration.