- Practical Guide to PPS - Key concepts
- Overview of the PPS regime
The Personal Properties Securities reform is scheduled to commence in October 2011.
The PPS regime completely replaces the existing schemes for registering security over most types of personal property except real estate. An interest registered on the PPS register is called a security interest.
The PPS register is not like the Torrens Title system – it does not record ownership, and does not guarantee title. It is a register of security interests.
Following the introduction of the PPS regime, a traditional fixed and floating charge over a company's assets will be registered on the PPS register instead of being registered at ASIC. Similarly, most types of non-real estate security taken from individuals will be registered on the PPS register.
What will change in practice?
Real estate financing will generally continue unchanged with mortgages being registered at the relevant Land Titles Office.
Most common security documents will only need minor changes to operate under PPS. Loan settlement and registration processes will remain largely unchanged except that lenders or their lawyers or registration agents will register securities other than real property mortgages on the PPS register instead of at ASIC or the other registers.
The big change is for businesses which enter into:
- operating leases (other than short term leases such as car rentals);
- finance leases;
- hire purchase agreements (commercial hire purchase only – hire purchase agreements with consumers are converted by the National Credit Code to loans secured by mortgages);
- sale agreements under which possession is given to the purchaser before payment (often called Romalpa clauses).
Currently, these interests are not necessarily recorded (except sometimes at REVS in respect of motor vehicles and boats). From PPS commencement, these interests should be registered on the PPS register.
If your business undertakes any of the above activities, contact us now so we can advise you on the most effective way forward.
How does the PPS register work?
Unlike the ASIC register, the PPS register is not a document register and no documents will be lodged at the PPS register. Instead, the PPS register works similarly to REVS – ie it comprises online notification of security interests, not of documents.
Accuracy in registering an interest is essential, as a defective notification may invalidate the registration. There are special rules for registering interests in relation to goods with serial numbers or relating to unpaid purchase money – see below.
If a security interest relates to consumer property (property held by a natural person not used for carrying on an enterprise to which an ABN has been allocated), the property must be described by serial number:
- motor vehicles;
- watercrafts; and
- certain intangible property (ie a design patent; plant breeder's right; trade mark or any licences over these properties).
Registration by serial numbers is optional for commercial property (except for aircraft), but serial numbers should be stated where possible. This is because a buyer or lessee takes this kind of property free of any security interest if no registration is found after conducting a serial number search only.
Purchase Money Security Interest (PMSI)
A PMSI is an interest claimed by an unpaid seller of goods. Interests classified as PMSIs are given a 'super-priority'– as long as the PMSI is registered within 15 business days of the purchaser taking possession or security interest attaching, and the security interest is defined as a PMSI on the financing statement.
What is a Secured Party Group (SPG)?
SPGs are a new concept. An SPG can comprise one or more secured parties, but normally it will comprise only one.
Big Bank establishes an SPG of which the only member is Big Bank. The SPG is allocated an SPG number and an SPG access code which only Big Bank and its agent know. The SPG number must be kept secure.
PPS register users who know the SPG number can notify security interests for the SPG. The users could include employees of the lender, law firms, and law stationers.
On registration a security interest is allocated:
- a registration number (publicly available) – like registration numbers under existing registration schemes;
- a change number (publicly available) – the change number indicates the order in which security interests are created and changed, which is relevant to establishing priorities;
- a registration token (private).
A verification statement (VS) which includes the registration number, and the registration token details are sent to the SPG's address for service (AFS) in two separate e-mails from the PPS register. Each SPG can have only one address for service, and so if there are a number of users in a single SPG, the user (eg a panel lawyer) will not receive the VS unless it is the AFS. However, once payment of the registration fee is made, the system confirms that the registration has been submitted and displays the registration number.
Anyone knowing the registration number and token for a security interest can deal with that security interest (eg discharge the interest). As the registration number is public, the token must be kept secure.
Anyone knowing the SPG number and access code for the SPG could transfer everything from that SPG to another SPG. Accordingly, the SPG number and the access code need to be kept secure.
Lenders may therefore decide to establish a separate SPG for each lodging party; for example an SPG with law firm A and separate SPG with law firm B. This will ensure that law firm A cannot deal with registrations made by law firm B. However, currently law firms often hold powers of attorney to sign discharges, and so there is arguably no new risk being created by law firms having access to a broad range of securities through the PPS.
On discharge (release) of a security interest, lenders or their agents may want to record the discharge rather than provide the registration number and token (which is all you need to deal with a security interest) to the chargor to allow the chargor to register the discharge. This is because lenders are required to ensure the PPS register is kept up to date, and there is a risk that the chargor may not notify the release. The practice may emerge of notifying releases at the time of settlement using an internet connection at settlement rooms.
Registration of security interests
Security interests granted by companies must be registered within 20 business days from the date of the agreement (ie a shorter period than currently) otherwise the security interest will be defective against a liquidator or administrator or a company appointed within the next six months.
Security interests granted by natural persons must be registered before the date of bankruptcy failing which it could be set aside by the grantor's bankruptcy trustee.
Registration needs to be renewed:
for consumer property (property held by a natural person not used for carrying on an enterprise to which an ABN has been allocated) every seven years; and
- for non-consumer property every 25 years.
In addition to making their own arrangements for PPS compliance, lenders will want to ensure that their business customers have appropriate arrangements in place.
If financing a company, consider whether it has its PPS procedures in order (ie if it is involved in terms sales, hire purchase, leasing, parting with possession of goods before payment).
If purchasing a company or business, consider whether the target business leases or sells on goods on delayed payment in which case ensure that there is appropriate notification of the security interests on the PPS register.
Existing security interests
The most frequent security interests (security interests recorded at ASIC and REVS) will be automatically migrated onto the PPSR.
Lessors, hirers, and sellers of goods on terms may need to record their interest on the PPSR. There is a two year transition period from October 2011 for finalising new registrations, but secured parties should complete registration as soon as practicable.
By Jon Denovan and Umniyat Choudhury
Overview of the PPS regime
What does PPS cover?
The PPS regime completely replaces the existing scheme for taking security over everything except:
- real estate and fixtures
- liquor licences in WA, Qld, NT andACT (this may change)
- gaming licences (in Qld, Vic, SA, WA, and NT (this may change)
- race course licences and betting permits located in Victoria
- set-offs (although there are special issues to be considered in
relation to set-offs)
- water rights
- minerals licences
- exploration licences
It establishes a register for recording interests in virtually all forms of other properties including:
- goods eg cars, ships, planes, mining equipment, farm machinery
- growing crops
- contractual and other rights
- shares, units, debt securities
- mining tenements
Classes of collateral
A financing statement must specify the class of collateral to which the security interest relates. The classes of collateral are:
- all present and after-acquired property [migrated fixed and floating charges will have this class]
- all present and after acquired property except [blank for
information to be inserted]
- financial property (defined as chattel paper [writings which evidence a monetary obligation in a security interest in, or lease of goods, or intellectual property], currency, a document of title, an investment instrument, a negotiable instrument)
- intangible property
- motor vehicles
- other goods
- water craft.
You can lodge more than one financing statement in respect of a single security interest or a single charge document so as to cover more than one class of goods.
Under current law, legal title cannot be conveyed by someone who does own the legal title (sometimes referred to as the 'nemo dat' rule). Under PPS, if an interest is not registered, a person who has possession of the goods can validly sell legal title to a bona fide purchaser without notice for value.
The priority rules are complex, but at the end of the day not significantly more complex than existing priority rules. From a practical perspective, financiers and businesses can protect themselves by ensuring that properly and promptly register their security interests.
The new priority rules vary depending on the nature of the business, the nature of the secured property, and how the interest was perfected. For example, a security interest can be extinguished automatically by buying from a car trader, s45, or purchasing on market shares, s49.
To perfect a fixed and floating charge, you may need to register an interest in specific title of property such as motor vehicles, and take further action with circulating assets.
By Jon Denovan and Umniyat Choudhury
PPSA = Personal Properties Securities Act 2009
PPSR = Personal Properties Securities Register
SPG = Secured Party Group
SP = Secured Party
FS = Financing Statement (this is filled out in order to register an interest)
AFS = Address for Service
VS = Verification Statement
VIN = Vehicle Identification Number
PMSI = Purchase Money Security Interest
B2G = Business to Government (used by large volume bulk lodgers)
attachment - a security interest created by lending or other activity
circulating assets – instead of a floating charge but with similar rules. For example, you would need control over book debts in order to establish a security interest which is less likely to be defeated. A fixed and floating charge may come to be called a General Security Agreement.
collateral - the security property
financing statement – a document registered to notify a security interest
GSA or General Security Agreement – may become the new name for fixed and floating charges over the whole of an entity's assets
grantor - mortgagor/chargor
perfection - registration or possession or control
PMSI – purchase money security interest (includes a PPS lease and a sale financed by a loan from the vendor – similar to retention of title)
PPS lease – a lease or bailment of goods for more than a year or, or for more than 90 days for goods that may or must be described by serial number
security interest – a charge, but under PPS a security interest can be created irrespective of who owns the collateral
By Jon Denovan and Umniyat Choudhury
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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.