The legislative and regulatory pieces necessary for the Personal Property Securities (PPS) reforms to become operative are now nearly complete, with the reforms still scheduled to take effect in May 2011. Despite the passing of the necessary legislation and regulations, concerns still exist about a number of significant matters.
To give effect to the reforms, the following legislation and regulations have been passed:
- Personal Property Securities Act 2009 (Cth) (PPSA)
- Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth)
- Personal Property Securities Regulations 2010 (by way of legislative instrument issued on 24 November 2010), registered on 26 November 2010
- various state-based referring legislation (passed by all states other than Western Australia).
Despite the above Acts and Regulations, concerns still exist about a number of significant matters and continue to be the subject of discussions within industry forums and with the Federal Attorney-General.
Will changes be made to the PPSA to deal with concerns?
The federal government has agreed to pass one more piece of amending legislation in relation to PPSA to deal with some of the more significant concerns, a number of which were mentioned in our June update. In particular, the following concerns should be addressed in further amending legislation.
Section 44 allows a person to take personal property free of a security interest if the serial number, which must or may be registered on the PPS register in respect of the personal property the subject of the security interest, is either incorrect or not contained on the register. This creates difficulties for security interests that will be migrated to the PPS register from existing registers (such as the ASIC register) where serial numbers may not have been noted. If this matter is not dealt with it may be necessary for new registrations under the PPSA to be made for such existing security interests (rather than rely on the transitional provisions contained in the PPSA).
The further amending legislation may provide that parties with security interests in property that are not currently described by reference to their serial number on existing registers will have two years to amend their registration to refer to the serial number without the risk of such security interest being extinguished under section 44.
Section 52 allows a buyer or lessee for new value of certain types of personal property (including goods) to take the property free of a security interest which, amongst other things, is perfected as a result of the transitional provisions. In other words, a security interest such as a lease or hire purchase agreement that does not currently appear on a register but would nonetheless be a transitional security interest, may not provide the lessor or hirer with protection where a person buys or leases the goods the subject of such lease or hire purchase agreement for new value. As a result, it would be necessary for the lessor or hirer to register such security interest on the PPS register as soon as possible after commencement of the PPSA (if the lessor or hirer could not preload such security interest onto the register before commencement).
This may be addressed in the further amending legislation to ensure that transitional security interests will not be subject to extinguishment by a buyer or lessee for new value. This should avoid the need for the lessor or hirer to register such lease (provided that if the term of such arrangement is to extend beyond two years from the commencement date of the PPSA, such registration will need to occur prior to the expiry of the two-year transitional period).
Changes to the Corporations Act provide uncertainty as to whether or not the holder of a fixed and floating charge (which existed prior to commencement of the PPSA) would, after commencement of the PPSA, extend to all or substantially all of the assets of the chargor company (given that under the amendments to the Corporations Act, such property now includes PPSA retention of title property). Under existing fixed and floating charges, PPSA retention of title property (being property owned by another party such as a lessor or hirer) is not an asset of the chargor company and therefore is not covered by the financier's charge.
Due to the changes to the Corporations Act, it is unclear whether after commencement of the PPSA regime, such charge will be deemed to extend to such property or whether it needs to be expressly stated in the charge in order for it to do so. Without clarification, the holders of fixed and floating charges in existence prior to commencement of the PPSA may never be able to take advantage of the provisions allowing the holder of such charge to take enforcement action within 13 business days of the commencement of the administration of the chargor company.
The further amending legislation may include a new provision that will disregard PPSA retention of title property for the purposes of determining whether or not an existing charge covers all or substantially all of a company's property when considering the application of the administration provisions.
Other concerns not dealt with
There is a multitude of other issues regarding the operation of the PPSA that have been raised by various industry participants. Notwithstanding the significance of these concerns, it appears that the proposed amending legislation will not deal with such matters.
This may have the effect of financiers having to attend to multiple registrations in respect of the one security interest in order to avoid potential adverse consequences of the operation of the PPSA (in its current form).
The Regulations registered on 26 November 2010 contain a number of amendments relative to the previous draft Regulations on which comments were provided earlier this Year.
The Regulations provide that mortgage-backed securities and real property mortgage loans that are transferred to a person in connection with the issue by the person of mortgaged-backed securities are covered by the Act. It appears from the Attorney-General's commentary that this amendment has the result that mortgage-backed securities are to be treated as investment instruments for the purposes of the Act; and that the transfer of the loans secured by the mortgages in the context of a securitisation of mortgage-backed loans is to be treated as a transfer of an account and therefore deemed to be a security interest.
This may have significant consequences for the securitisation industry if registration of the transfers of such loans requires registration on the PPS register to perfect that transfer.
It was previously unclear whether a security interest over all present and after-acquired property or all present and after-acquired property (except certain items or classes of collateral) could be treated as purchase money security interests for the purposes of the Act. In particular, the draft Regulations provided that in respect of commercial property, certain types of collateral could not be the subject of a purchase money security interest. The Regulations have been amended so that any property in a prescribed class of collateral (being the classes of collateral prescribed in the Regulations) that can be subject to a purchase money security interest under section 14 of the Act can be described as a purchase money security interest.
If this is the intention of the Regulations, this may reduce the number of registrations that a financier may need to effect on the PPS Register where it wishes to take security over all of the assets of the grantor, notwithstanding that acquisition financing is only applicable to some of those assets.
Are you PPSA-ready?
It is clear from the issues that have been raised throughout the reform process that the PPSA is likely to lead to a large number of unintended consequences. It will extend to a variety of arrangements, the parties to which may be unaware that the arrangements constitute security interests for the purposes of the PPSA.
As an initial step to determine whether or not business activities fall within the scope of PPSA, we have developed a client checklist. If you answer yes to any of the questions on the checklist below, the PPSA is likely to apply to your business and we strongly recommend that you contact your advisers to help you determine the impact of the PPSA on your activities.
|In the course of your business :||Yes||No|
|1. Do you include charging clauses or other clauses in your standard documents or other documents that are intended to give you some form of security over non-real estate assets?|
|2. Do you supply credit or vendor finance secured by non-real estate assets?|
|3. Do you lease or otherwise provide goods to other entities for a period of more than one year or for an indefinite term?|
|4. Do any of your customers factor their debts?|
|5. Are you party to any commercial consignment arrangements?|
|6. Do you provide hire purchase finance?|
|7. Do you take security over goods by way of pledge?|
|8. Do you supply goods on credit, either on retention of title terms or on the basis of receiving some form of security over the goods?|
|9. Do you licence intellectual property and take security for the licensee's obligations to you?|
|10. Do you acquire debts or are you involved in receivables financing?|
|11. Do you provide floor plan arrangements to dealers in your goods?|
|12. Do you take control of any bank accounts of your customers or other persons as security for obligations owing to you?|
|13. Do you currently take any form of security over non-real estate assets from other parties to secure the performance of any of their obligations to you, eg under franchise arrangements, shareholder agreements or joint ventures?|
What are the consequences of not registering your security interest on the PPSA register?
- If another person holds a registered security interest in the assets over which you have taken security (but have not registered), that other person will take priority over your interest and may be able to deal with such assets without reference to your security or your interest in the asset.
- If your counterparty deals with the asset over which you are seeking to take security in the ordinary course of their business, those assets will be able to be disposed of and your interest in the asset will be extinguished (even if you hold title to the asset).
- In circumstances of insolvency or administration of your counterparty, you may cease to be a secured creditor (or have security by way of ownership of the asset) and end up being only an unsecured creditor of the counterparty.
- Once the PPS regime commences in May 2011, existing security arrangements may not provide you with the advantages they currently do.
Ownership of/title to an asset will not provide you with protection against unauthorised dealings with the asset. The registers on which you may currently register your security interests will be replaced by the PPS register The new PPS regime may have significant negative consequences for the value of your business, with potentially adverse flow-on effects in relation to profitability and relationships with your own financiers.
What should you do to avoid these consequences?
- Identify a key executive or team to take responsibility for consideration of how the PPSA affects your business.
- Seek expert advice on the operation of PPSA and how it will impact on your processes, procedures and documentation.
- Determine what changes should be made to your processes, procedures and documentation to ensure your security and ownership rights are protected under PPSA.
- Implement appropriate changes, including education of all relevant staff on the operation of PPSA, and ensure that appropriate processes, procedures and documents are used from commencement of the PPSA regime in May 2011.
- Don't forget to consider how PPSA will impact existing security arrangements.
DLA Phillips Fox has been a significant participant in the development of the personal property securities laws (both in Australia and New Zealand). Please do not hesitate to contact any of our PPS team to discuss how we can assist you in dealing with this challenging and significant change of law.
We wish you a very enjoyable festive season and a healthy and successful new year.
© DLA Phillips Fox
DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.