Since our article, "Personal Property Securities Reform in Australia" the start date for the upcoming personal property securities (PPS) reforms has been pushed back to October 2011. The PPS reforms are one of the most significant legislative reforms for Australian business for many years and are based on PPS legislation in the United States, Canada and New Zealand. The changes will not only affect financiers but also commercial entities and individuals that grant or take security interests in personal property.
The PPS reforms essentially change the law relating to how security interests are formed and enforced, how priority disputes are to be resolved where more than one security interest is given over the same property and when a security interest can be extinguished (against the wishes of the secured party).
Overview of the PPS concepts
A new set of terminology is introduced under the Personal Property Securities Act 2009 (Cth) (Act). Some key terms are discussed below.
- A security interest – means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).(1) A person who holds a security interest is a "secured party".
- Grantor – is a person or organisation who owns or has an interest in the property to which a security interest has attached.
- Collateral – is personal property to which a security interest has attached. A security interest is only effective if it is attached to collateral.
- Attachment – is the process by which a security interest fastens on collateral so as to be enforceable. A security interest attaches to collateral when (a) the grantor has rights in the collateral, or the power to transfer rights in the collateral to the secured party and (b) either: (i) value is given for the security interest or (ii) the grantor does an act by which the security interest arises. Most commonly the entering into of a security agreement is the means by which a security interest attaches to collateral.
- Perfection – is the taking of additional steps for giving public notice of the security interest so as to bind third parties. To be perfected a security interest must be attached to collateral. A security interest may be perfected by registration, possession, control or by force of the Act (in the case of temporary perfection).
- Priority – for a brief discussion of the priority rules see "Personal Property Securities Reform in Australia". There are special priority rules for specific transactions including "purchase money security interest" (discussed further below), accounts, ADI accounts, crops, livestock, accessions and commingled goods.
Functional Approach to Security Interests
The Act applies to transactions that have the effect of securing a payment or other obligation regardless of the form of the transaction, the nature of the debtor or the jurisdiction in which the personal property or parties are located, subject to exceptions. As a result of this functional approach, transactions currently structured as fixed charges or floating charges become security interests under the Act.
PPS impact on RoT clauses: manufacturers and suppliers
One important implication of this functional approach is the treatment of retention of title (RoT) or 'Romalpa' clauses. RoT clauses essentially provide that ownership of goods does not pass to the purchaser until the purchase price has been paid. Under current law, RoT clauses do not have to be registered and are not regarded as security interests. However, under the Act a RoT clause is a security interest.
This has obvious implications for manufacturers and suppliers that currently rely on RoT clauses used in sale of goods contracts. A manufacturer or supplier who sells on RoT terms is at risk of losing its ownership interest in goods (regardless of whether the goods have been paid for) if it does not comply with the procedures in the Act.
Despite a manufacturer or supplier under the Act being treated as a secured creditor rather than as an owner of the goods, the Act does afford such parties a preferred priority position which is called a "purchase money security interest" or "PMSI" but only where the manufacturer or supplier registers its security interest under the Act within a specified timeframe. Generally a PMSI over collateral that is registered as a PMSI within the necessary timeframes will have super-priority over any other non-PMSI security interest that is granted by the same grantor in that collateral(2), unless that other security interest is perfected by control.
PLN has experience across the Pacific with similar legislation and can offer important insights as to how best to be prepared come October 2011. It is important that business starts checking and revising documentation now and makes sure that staff are familiar with the process of registering security interests on the PPS register.
1. Section 12(1) of the Act. A security interest also
includes the following interests: (1) the interest of a transferee
under a transfer of an account or chattel paper; (2) the interest
of a consignor who delivers goods to a consignee under a commercial
consignment; and (3) the interest of a lessor or bailor of goods
under a PPS lease.
2. Section 62 of the Act.
Winners of the 2010 Lawyers Weekly e.law Asia Pacific Box Breaker of the Year Award and the 2009 NSW Exporter of the Year Award
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.