On 23 February 2011, the Personal Property Security (Corporations and Other Amendments) Bill 2011 (Amendment Bill) was tabled in the Federal Parliament. Although the Amendment Bill deals with a number of concerns that have previously been raised (see below), it also raises some additional questions. In addition, it does not deal with a number of issues associated with enforcement of security interests.
In this edition, we highlight the main changes contained in the Amendment Bill, including:
- amendments to the Corporations Act
- amendments to the Personal Property Securities Act 2009 (Cth) (PPSA), including control of ADI accounts.
We also discuss some issues that have not been focused on previously and which, in our view, require further consideration. These include:
- enforcement of security interests
- GST and PPS.
We'll also look at a recent High Court case that may have a significant impact on the scope of PPSA in project financing.
The Amendment Bill will amend both the Corporations Act and the PPSA. The Amendment Bill deals with a number of concerns that have previously been raised by finance industry participants and their advisers, as well as a number of other matters that are more administrative in nature. In addition, changes have been made to the provisions dealing with control of an ADI account, which seem to operate against the interest of financiers (other than ADIs).
Some of the more significant matters dealt with by the Amendment Bill are as follows:
CORPORATIONS ACT AMENDMENTS
Liability of receivers and administrators
Amendments have been made so as to reinstate the liability of receivers and administrators in respect of retention of title property and their ability to disclaim such transactions to the same extent as they can for other property (as provided for in the current law).
Enforcement of charges during administration of grantor company
The Amendment Bill provides that PPS retention of title property is to be disregarded in determining the ability of a financier to enforce an all assets charge in existence prior to the registration commencement time of the PPSA for the purposes of the administration provisions of the Corporations Act.
As mentioned below, we believe that notwithstanding this amendment, problems may still exist for financiers in respect of enforcement of general security agreements entered into subsequent to the registration commencement time of the PPSA.
Previous concerns have been raised in relation to the operation of section 44 of the PPSA. Under this section, a buyer or lessee of personal property is able to take the personal property free of a security interest in the property if the property is of the kind that may or must be described by serial number on a registration and a search of the register, immediately before the time of the sale by reference only to the serial number of the property, would not disclose a registration that perfected the security interest.
As there are a number of registers on which security interests are currently registered that do not show serial numbers for property (which under PPSA do require serial numbers to be shown), concerns were raised that transitional security interests would be able to be extinguished under section 44.
The Amendment Bill amends section 44 so that it does not apply in the transitional period of 24 months, other than in respect of a migrated security interest in a motor vehicle or a watercraft (as defined in the Regulations). The Explanatory Memorandum indicates that such goods are already described by serial number under existing registration schemes and therefore the identified risk is not applicable to them.
Similar concerns are raised about section 52 of the PPSA, which previously provided that a buyer or lessee for new value of certain types of personal property (including goods) would be able to take such personal property free of a security interest that was perfected under the transitional provisions and was not otherwise perfected under the PPSA. This raised a significant concern for lessors and other secured parties relying on retention of title arrangements, which were not previously required to be registered.
If such secured parties were to rely solely on the transitional provisions (and not register such security interests under the PPSA), section 52 would have the effect of potentially allowing a buyer or lessee to take such goods free of the secured party's lease or retention of title arrangement. To avoid this outcome, such secured parties would have had to register their leases and retention of title arrangements on or immediately after the registration commencement time of the PPSA.
The Amendment Bill amends section 52 so that the ability of a buyer or lessee to take goods free of security interest under that section does not apply to a transitional security interest.
Control of ADI accounts
The PPSA previously provided that control of an ADI account could be given to a secured party (other than the ADI) where such secured party was either able to direct the disposition of the funds from the account without further consent by the grantor of the security interest or became the ADI's customers in respect of the account.
This provision was particularly important as financiers other than ADIs often wish to take control of ADI accounts as part of their security.
The Amendment Bill has amended the PPSA so as to provide that the only party that can have control of an ADI account is the ADI itself. In our view, this will have an adverse impact on non- ADI secured parties. The Explanatory Memorandum does not indicate why this amendment was made.
A new section (322A) is to be inserted in the PPSA, which will make it clear that a transitional security interest that has been continuously perfected since the registration commencement time of the PPSA has priority over a security interest in the same collateral (other than another transitional security interest) that is currently perfected by control.
The Amendment Bill makes it clear that the term intermediated security includes CHESS securities.
A number of other provisions are to be inserted in the PPSA by the Amendment Bill relating to the powers of the PPS Registrar and access to data on the PPS register.
ENFORCEMENT OF SECURITY INTERESTS
Two issues that have not been addressed by the Amendment Bill revolve around the enforcement of security over retention of title or leased property (PPS retention of title property). In the absence of legislative change, secured parties may be substantially disadvantaged in relation to such enforcement relative to their position under current laws.
There are two matters that need to be considered:
Can the holder of a general security interest over all assets of a grantor, being the PPS equivalent of a fixed and floating charge under current laws (GSA), enforce the GSA (if the grantor of the security goes into administration) if a large proportion of the assets in the possession of the grantor of the security is PPS retention of title property?
It would appear that in the absence of the lessor/bailor/supplier of the PPS retention of title property failing to perfect its security interest prior to administration, the holder of the GSA would not be able to enforce its charge during administration (although this will only apply to GSAs entered into after commencement of the PPSA).
Does a receiver appointed by the secured party that holds a GSA have the power deal with PPS retention of title property of the grantor company?
Other than in the circumstance where the enforcement is due to the administration or winding up of the grantor and the lessor/bailor/supplier of the PPS retention of title property failed to perfect its security interest prior to the administration or winding up, a receiver does not have the power to dispose of or otherwise deal with an ownership interest in the PPS retention of title property.
Enforcement in administration
For a GSA to extend to PPS retention of title property, it must be drafted so as to expressly include such property. If as a matter of contractual interpretation, the GSA does not include the interest of the grantor in the PPS retention of title property, a receiver appointed by the secured party will not have the power to dispose of or otherwise deal with ownership interests in such property. The secured party may not be entitled to enforce its GSA while the grantor is in administration as its security may not extend to all or substantially all of the property of the grantor. Although the Amending Bill overcomes this latter outcome for charges entered into prior to the commencement of the PPSA, the issue also needs to be addressed in respect of GSAs entered into after commencement of the PPSA.
- In the circumstance where:
the GSA has been enforced as a result of the administration of the grantor of the security; and
- the security interest created by the relevant lease, bailment or retention of title arrangement has not been perfected,
the PPSA results in the relevant asset vesting in the grantor company. Therefore that asset would fall within the meaning of 'property of the corporation' under general principles, entitling the receiver appointed under the GSA to deal with the property and enabling the secured party to enforce its GSA while the grantor is in administration – because its security will then extend to all or substantially all of the assets of the grantor.
Power of receiver to deal with PPS retention of title property
Under the PPSA, lessors, bailors and suppliers of property on retention of title terms are treated as if they were the holders of a security interest over the property rather than having security through their title/ownership of the property. As a result, if such parties do not 'perfect' their security interest by registration on the PPS Register, the holder of a GSA that has been perfected by registration and which extends to the PPS retention of title property will take priority over the interest of the lessor, bailor or supplier of the property.
However, in the circumstance where the holder of the GSA enforces the same by appointment of a receiver, there currently appears to be no process by which the receiver appointed would be entitled to dispose of the relevant asset, as title to the asset will remain with the supplier/lessor/bailor.
Although the enforcement provisions of the PPSA give a secured party a number of options as to enforcement against the collateral and authorise the secured party to transfer the collateral to purchasers or transferees of the collateral free of other parties' interests in it (including the interest of a secured party that holds a security interest in the collateral, or which has a priority lower than that of the secured party disposing of the collateral), the enforcement provisions of the PPSA do not apply when a receiver is appointed over secured property of a company. In those circumstances, a receiver would need to rely upon the powers provided to it in the Corporations Act (Part 5.2) and the charge (or GSA) under which he/she has been appointed.
Part 5.2 of the Corporations Act (as amended after commencement of the PPSA) does not include PPS retention of title property in the meaning of property of the company referred to in that part. As a result, the powers of a receiver contained in Part 5.2 do not extend to PPS retention of title property other than in the circumstance where the GSA has been enforced as a result of the administration of the grantor of the security and the security interest created by the relevant lease, bailment or retention of title arrangement has not been perfected. As mentioned above, in that situation the PPSA results in the relevant asset vesting in the grantor company and therefore would fall within the meaning of property of the corporation under general principles, entitling the receiver appointed under the GSA to deal with the property.
If the secured party that has the benefit of the GSA enforces the same other than in circumstance referred to above, there is currently no power or mechanism by which a receiver can deal with ownership interests in such assets, as title to the asset will remain with the supplier/lessor/bailor.
Although section 19(5) of the PPSA provides that a grantor has rights in respect of PPS retention of title property once it obtains possession of such property, it does not give the grantor title or ownership and thus under general law principles a receiver can only deal with the rights the grantor has.
New Zealand precedent exists for the proposition that a lessee's interest in goods is reconceptualised by equivalent provisions to that contained in section 19(5) of the PPSA, so the lessee is treated as the owner of the goods to which the security interest (such as a GSA) can attach. However, the New Zealand PPSA does not contain the vesting provisions on insolvency contained in the PPSA and so it is not necessarily the case that this precedent will be followed in Australia. In addition, the changes to the Corporations Act dealing with PPS retention of title property seem to indicate that the New Zealand conclusion would not apply in Australia. Clearly this is a matter that should be clarified by legislation.
Given the consequences flowing from the above matters, in our view it would be preferable for further legislative amendment to be made either in the PPSA and/or the Corporations Act so that:
For the purposes of enforcement by a receiver, he/she has express power to deal with PPS retention of title property where the security interest created by the lease/bailment/title retention arrangement has not been perfected under the PPSA.
- The holders of security interests over all or substantially all of the assets of the grantor will be deemed to have security over PPS retention of title property for the purposes of determining their entitlement to enforce their security during the decision period.
In this way, secured parties will not be substantially disadvantaged relative to their position under current law.
HIGH COURT DECISION MAY EXTEND AMBIT OF PPSA
In the recent High Court decision of TEC Desert Pty Ltd v Commissioner of State Revenue, the High Court held that certain assets (previously thought to be fixtures and therefore part of the land in the context of mining operations) were to be regarded as personal property.
The High Court was of the view that due to the interpretation of the Western Australian Mining Act 1978 and as a mining tenement is generally regarded as personal property rather than an instrument creating an interest in land, the general law relating to the meaning of 'fixtures' did not apply as the Act contained provisions dealing with the rehabilitation and removal of assets affixed to the land the subject of the relevant mining tenements. To the extent that other statutory licences or leases can be regarded as being personal property rather than creating an estate or interest in land, a similar interpretation may apply to other assets affixed to property the subject of such relevant statutory tenure.
The term 'fixtures' is defined in the PPSA as meaning 'goods, other than crops, that are affixed to land'. Presumably, the definition relates to the general meaning of the words 'affixed to land', however the High Court decision indicates that the term 'land' will not necessarily extend to mining tenements or other forms of statutory tenure. On that basis, assets affixed to land the subject of such tenure may be regarded as personal property and therefore, in taking security over such assets, the provisions of the PPSA will need to be considered (rather than relying on a mortgage of the 'relevant land').
Clearly this is a matter that requires clarification as it will have a significant impact of the nature of security taken by financers in respect of such projects.
GST AND PPS
The GST law contains a number of special rules that are intended to cover transactions involving the disposal of collateral by secured parties (in Division 58 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)) and external administrators under Part 5 of the Corporations Act (in Division 105 of the GST Act).
The policy underlying these provisions is to ensure that the external administrator/secured party is personally liable for GST on supplies of collateral and that the GST consequences of transactions entered into by the external administrator/secured party should be the same as if they were entered into by the distressed company/grantor.
The introduction of the PPS regime raises interesting GST questions about whether the GST rules effectively execute this policy. Three issues are raised and discussed below.
Which set of GST rules should apply where a secured party seizes and deals with collateral where the grantor is a company?
Under the current GST rules, this scenario is covered by both the GST provisions dealing with external administrators, as well as the GST provisions dealing with secured parties. This creates a conflict and hence uncertainty for secured parties, which can only be resolved by legislative amendments.
Do the relevant Divisions of the GST law concerning insolvency (including Divisions 58 and 105) contemplate and appropriately deal with the various priority scenarios that can arise under the PPSA?
Under the PPSA, the concept of title becomes less important, since lessors of goods and vendors under conditional sale agreements and retention of title arrangements are effectively treated as secured parties holding security interests in the collateral. Further, the PPSA gives the secured parties more options in relation to seized collateral (such as disposing of collateral to itself or retaining the collateral). These novel concepts and options are not contemplated by the current specific GST rules applying to supplies of collateral by secured parties, which often leads to inappropriate outcomes. In particular, this creates uncertainty as to which party has the GST liability on sale or disposal of collateral.
In the context of receivers appointed under Part 5.2 of the Corporations Act, the absence of statutory provisions allowing receivers to deal with retention of title property (discussed above) makes it difficult to determine whether the correct GST outcomes arise and hence creates uncertainties for receivers as to how they should account for GST on their sale or disposal of retention of title property.
The resolution of these issues would require the provisions of the GST law dealing with insolvency to be redrafted to take account of the relevant provisions of the Corporations Act and PPSA and to ensure the policy underlying the GST insolvency provisions is properly executed. Further, the redrafting of the GST insolvency rules should be delayed until the deficiency in Part 5.2 of the Corporations Act highlighted above is resolved.
The PPS regime appears to create interesting issues in relation to the ability of secured parties to claim input tax credits on expenses associated with the seizure and disposal/retention of collateral.
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