Whilst the Personal Property Securities Act 2009 (Cth) (PPSA) is presently in force, it is not scheduled to become operational until October 2011. The new Personal Property Securities (PPS) regime will completely change the laws regulating security over most forms of personal property. Interests not previously classed as "security interests" will be treated as such under the new regime, for example, equipment leases and retention of title arrangements. The new regime will affect not only the financing arrangements of information technology (IT) businesses, but also the arrangements for the supply of goods and services by, and to, such businesses.
How will the PPS regime affect the IT industry?
Given the far reaching scope of the PPSA, Australian IT businesses that:
- supply hardware and equipment under retention of title arrangements
- provide finance or leases of equipment
- develop software
are advised to review their operating procedures and contractual terms and make relevant changes to ensure they are protected under the new PPS regime. Such businesses may need to redraft their contractual terms or register security interests granted in their favour by customers.
Conversely, IT businesses that receive the supply of goods must be aware they may be subject to the registration of security interests against them by their own suppliers.
One of the key risks that the new regime creates for IT businesses is the potential loss of priority of an interest they may have in certain property (including by way of retention of title) to others who may hold better rights in the same property.
Under the new regime, you supply IT equipment to a customer on terms that have reserved title in those goods until payment is made in full, you have not registered your retention of title "security interest" on the PPS register and that customer is then placed in liquidation. In these circumstances, any secured party holding a registered security interest against that same equipment will have a priority claim over your title to the equipment.
These risks arise for IT businesses in two main areas - the supply of IT equipment and the development of custom built software.
IT equipment suppliers
Under the current law, where an IT business supplies hardware or other equipment to its customers under a retention of title clause or a long term lease, the customer takes no title in the relevant property and therefore there is presently no need (or ability) to register such arrangements to retain a level of priority over others with competing claims.
However, under the new PPS regime, the owner of personal property that is subject to leasing, hire purchase or retention of title arrangements is treated merely as a secured creditor. If you lease IT equipment to customers for 90 days or more (serial numbered goods) or for more than one year (non-serial numbered goods), the lease is deemed to create a security interest under the PPSA. There are various other circumstances detailed in the PPSA that may give rise to a deemed security interest.
Likewise, if you supply IT equipment on terms which contain a retention of title clause, the retention of title clause constitutes a security interest under the PPSA. We therefore recommend that your contractual arrangements with customers should contain provisions that protect your position in light of the new PPS regime and obliges your customer to provide any information and assistance necessary to do so, including enabling you to obtain an effective registered security interest in the relevant personal property.
Under the PPSA, you will need to "perfect" any security interest held in order to preserve that interest in the event of an insolvency of the customer and to avoid losing priority to others who may hold security interests in respect of the same property.
Under the PPSA, "personal property" includes intangible property such as certain intellectual property rights and transferable licences (by the licensee). Consequently, a non-transferable software programme licence is not personal property and in a straight licence situation you do not need to be concerned with the PPSA.
However, if you are a software developer that custom develops software for customers on the basis that the software will not be owned by the customer until you are paid in full, then you would effectively create a retention of title clause that would constitute a security interest under the PPSA.
Whatever the nature of your IT business, it is critical that you take steps now to prepare yourself for the impact that the new PPS regime will have on your business.
We recommend that you:
- review your contractual terms (including any equipment lease or retention of title provisions) with customers, and do each of the following:
- ensure that these are set out in writing and signed by the customer
- consider redrafting these in light of the new PPS regime
- ascertain existing interests which may become a security interest under the new PPS regime and existing security interests which may need to be registered under the new PPS regime.
- review your contractual terms with suppliers and identify where a security interest may be created by your business that may be registered against you and, in light of this, you review your finance arrangements, in particular, to identify any negative pledge provisions
- consider developing internal procedures and records/registers to manage existing interests that were not previously registrable as well as future security interests
- consider, as a matter of general practice, whether you will seek to "perfect" any such security interests in order to preserve your priority and, if so, you consider providing staff training on the new PPS registration procedures.
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.