With the commencement date fast approaching (on or about 10 October), it is time for businesses to ensure that they are ready for the introduction of the Personal Properties Securities Act 2009 (Cth) (PPSA). In particular, the PPSA will create new rules applicable to the supply of personal property on credit terms and to leases of goods which are not widely understood.

The new legislation fundamentally alters existing laws relating to priorities in respect of insolvent entities. In many cases, owners of goods supplied or leased to insolvent customers will need to take additional steps under the PPSA to perfect their interest in those goods. Failure to take these steps to appropriately protect security interests under the new laws may result in liquidators of insolvent customers seizing and disposing assets leased or supplied to the customers. Liquidators are generally unable to do this under laws currently in place.

Supply of personal property on credit terms

Contracts for the supply of personal property containing retention of title clauses will need to be reviewed and amended. Suppliers under such contracts will need to ensure that their interests are registered or otherwise perfected under the PPSA. Although there are some transitional protections in the PPSA relevant to retention of title arrangements, after the new regime takes effect unregistered retention of title interests will generally no longer give priority to their holders over secured creditors of a customer in the event that customer becomes insolvent.

Once registered, a 'security interest' in a retention of title arrangement will be referred to as a 'purchase money security interest' (PMSI). A PMSI is given super priority over other security interests that are registered before the PMSI (with the exception of other PMSIs).

In order to be given priority in the event of insolvency, it is vital that a PMSI is registered to ensure that a party is not treated as an unsecured creditor. Without the registration of the PMSI, assets subject to retention of title clauses may be generally available to liquidators of insolvent customers for realisation and the reimbursement of secured creditors.

PPS Leases

PPS leases will also be significantly affected by the PPSA and need to be reviewed and amended. A PPS lease will include a lease or bailment of goods for an automatically renewable term of one year or more, for a term of one year, for an indefinite term or a lease of 90 days or more (or automatically renewable for 90 days or more) for goods that can be described by a serial number.

The PPSA provides that a lessor may register an interest over the leased property to secure payment in relation to a PPS lease. A PPS lease interest will also be a PMSI and have super priority.

Again, subject to certain transitional arrangements contained in the PPSA, businesses should be aware that failure to register or otherwise perfect the interest of the lessor under a PPS lease may result in loss of priority and liquidators of an insolvent lessee seizing and disposing of leased assets in the event that a lessee becomes insolvent.

Preparing for PPS

Accordingly, businesses who lease goods or supply them on credit terms should begin reviewing and amending their contractual arrangements prior to October 2011 and prepare for the introduction of the new laws to ensure that they are appropriately protected when the PPS regime takes effect.

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.