In May 2011, the Personal Property Securities Act 2009 (Cth) (PPSA) will commence operation. It will dramatically change the way in which security interests in personal property are dealt with across Australia. The traditional understanding of the concept of ownership will change.
Registration of security interests
The PPSA will affect all interests in personal property, both tangible and intangible, including motor vehicles, equipment, business and retail stock, crops and livestock, intellectual property, licenses, household items and financial instruments such as shares.
The PPSA does not cover interests in land, buildings or water rights.
Under the PPSA, secured parties will be required to register their security interests in the Personal Property Securities Register, an online register controlled by the Insolvency and Trustee Service Australia.
While the registration does not create a legal interest in the collateral, it does reflect a priority claim to the collateral. Registration is one method of 'perfection', by which notice is given to the world of the security holder's claim to the collateral. Possession or control of the collateral is another method of perfection.
Enforceability of security interests
A successfully created security interest is enforceable against the grantor of the interest.
A security interest is only enforceable against a third party in respect of particular collateral if the security interest has 'attached' against the collateral. That is, there is a proper security agreement and one of the following applies:
- The secured party possesses the collateral
- The secured party has perfected the security interest by exercising control over the collateral (this only applies where property is considered "controllable property", such as bank accounts etc)
- The security agreement is signed by the grantor and includes a description of the specific collateral or a statement that the interest is to include all present and after acquired property.
Perfection is not essential to enable a secured party to enforce a security interest, but any such claim will be subject to a higher priority interest, including any other security interests that are in fact perfected.
The typical order of priority of security interests is as follows:
- Perfected security interests perfected by control (where the property is controllable property)
- Perfected security interests perfected by means other than control
- Unperfected security interests
There are exceptions to these priority rules and care should be taken to obtain legal advice when creating security interests to ensure the highest possible priority. One such exception includes Purchase Money Security Interests (PMSI) which can, in effect, give a secured party a super priority to specific collateral above all other interests.
Upon default of a security agreement by a grantor, and amongst other available remedies, a secured party will be entitled to seize and dispose of collateral, subject to some requirements under the PPSA. The enforcement provisions do not disturb the remedies available to secured parties under their security agreement but provide effective and efficient mechanisms for enforcement.
Upon the commencement of the Act in May 2011, security interests created from that point forward should be registered.
All existing security interests created prior to the commencement of the PPSA and for which registration was not required will require registration within 24 months.
The above summary is intended as a brief overview of the more salient provisions of the PPSA. As the PPSA will have a major impact on most, if not all, Australian businesses, we strongly recommend you seek early detailed legal advice on how best to prepare.
The PPSA is based on successful legislation in longstanding operation in Canada. It contains new terminology which will take some getting used to.
Collateral - personal property that is subject to a security interest
Secured party - a party that receives a security interest in collateral, for example, a bank or hire purchase company
Grantor - a party that provides a security interest in collateral
Security interest - an interest in personal property that secures payment or the performance of an obligation. Security interests include fixed and floating charges, conditional sale agreements, hire purchase agreements, chattel mortgages, transfers of title and agreements relating to the lease or assignment of goods
Attachment - successful creation of a security interest in collateral
Perfection - a situation where a security interest has attached to collateral and public notice of the security interest is communicated by registration in an online register or by taking possession or control of the collateral
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.