Are you affected by the Personal Properties and Securities Act?
During September 2010 we published an Alert regarding the Personal Property and Securities Act 2009 (Commonwealth) ("the Act"). The Act is now likely to commence in early 2012 and will affect a wide range of businesses. Does the Act affect your business?
The Act will consolidate the different Commonwealth, state and territory legislation into one national law regarding personal property security interests and introduce a single, national Personal Property Securities ("PPS") Register to deal with them. It would be prudent for all business owners or directors to understand just how the legislation may affect their business.Personal property
is all property excluding land and certain statutory licenses. Personal property security interests are all interests that secure a payment or performance of an obligation in relation to personal property.
- The individual, company or entity that holds a security interest is called a secured party?. The term encompasses anybody who was formerly known as a financier, mortgagee, chargee, lender or lessor etc.
- The individual, company or entity that grants a security interest over their personal property is a 'grantor'. 'Grantor' replaces the equivalent terms of borrower, mortgagor or chargor.
- Secured property is now called 'collateral'.
For example: Company X is a manufacturer of widgets. Company X borrows money from Financier Y by mortgaging its widget-manufacturing machines. In this scenario, Company X is has granted Financier Y a security interest. Company X is the grantor, Financier Y is the secured party and the widget-manufacturing machines are the collateral.
There are currently several different laws, codes and registries in the various jurisdictions, many of which overlap. Registering securities can, therefore, be very difficult. The upshot of this is that registration is confusing and costly, and businesses are prevented from using all of their personal property to raise capital. The reform will reduce costs and complex paperwork, increase consistency and generally make personal property securities more attractive to lenders.
'Security interests' include charges, mortgages and pledges; and purchase money security interests ("PMSI") such as:
- Funds provided to a grantor for purchase of personal property;
- Retention of title;
- Personal Property and Security Leases of goods.
The creation of a legally binding contract that creates a security interest is called 'attachment'. A security interest attaches to collateral when a person gives value to acquire the security.
So, in our example, the security interest given by the Company X to Financier Y attaches to the collateral when the agreement between the parties is executed.
The Act disregards the form of the transaction and looks at its substance to determine whether it passes the functional test of being a security interest; i.e. whether a payment or obligation is secured. However, some interests will be expressly deemed security interests under the Act; for example: hire purchase agreements, chattel mortgages of specific goods, interests of a consignor under consignment and interests of lessors or bailors of goods under a lease. Other interests will be expressly excluded from the Act.
Under the Act, the former term 'floating charge'; referring to a general interest in the creditor's property, will now be described as a 'circulating asset'. These are assets that could be used or transferred in the ordinary course of the grantor's business. A 'fixed charge' is a security interest that has attached to an item of personal property that is not a circulating asset.
Registration 'perfects' the security interest. In other words, it makes the PPS interest enforceable against third parties and thus protects the secured party's 'priority' rights. Failure to register can lead to a loss of priority, meaning that in the event of the liquidation of the grantor another secured party is further ahead in the line of creditors.
The Register will require financing statements to be registered as the form of notice of the security interest, rather than the agreement itself. The financing statements will contain details of the interest such as the secured party, the grantor, how notices are given, the collateral and proceeds, the nature of the interest etc as well as other requirements to be outlined in the Personal Property Security Regulations ("Regulations"). Interested parties will, however, be able to request a copy of a security agreement from secured parties. Confidentiality provisions may come into force here.
Upon registration of the financing statement, the Registrar will issue a verification statement to the secured party. The secured party must give a notice of the verification statement to the grantor. The verification statement can be relied upon as proof of registration.
As mentioned above, priority is the status of a security interest relative to other interests on the collateral. The order of priority is:
- A perfected security interest takes priority over an unperfected security interest.
- Where there are two or more perfected security interests; priority is given in order from earliest to latest perfected.
- Priority between two or more unperfected security interests is given to the earlier attached interest.
- In some circumstances, a PMSI may have super priority?, even over previously registered interests.
These are the default rules. There are additional specific priority rules contained in the Act.
To return to our example, let's say Company X took out a second mortgage over the widget-manufacturing machines with Registered Creditor C. If Company X became insolvent and its assets were sold, and Financier Y had not registered its prior interest, Registered Creditor C's security interest would have priority and would be the first to be repaid.
Once the Act commences, it will undergo a two year transition period to allow security interests to be transferred to the Register. All current security interests that are on the different Commonwealth, state and territory registers will be migrated to the Register in the month before the planned Registration Commencement Time (RCT) of 30 January 2012.
Transitional Security Interests ("TSI") are those interests that exist at the RCT. They will be deemed to have attached? to the collateral immediately before the RCT. Transitional security interests that cannot be migrated to the Register will be temporarily perfected for the transitional period. If the interests have not been registered by the end of the period, the secured party will lose their priority. In the transitional period, a perfected TSI will have priority over both an unperfected security interest and a perfected security interest that is not a TSI. An unperfected TSI will have priority over an unperfected security interest that is not a TSI.
If you are currently a secured party, you will need to make arrangements to have your interest registered as soon as possible. There will be no fee payable for the registration of a security interest during the transitional period.
If you are interested in becoming a secured party or grantor, you need to be aware of the changes to the legislation and what it requires of you. Secured parties of PMSI?s in particular should be aware of specific timing requirements for registration of the interest in order to protect their super-priority. The reforms will also affect consumers, second-hand retailers and other purchasers of certain goods such as used motor vehicles, second-hand boats and other valuables. One may have to check the Register to see whether there is any form of encumbrance on the item they are purchasing. If an item is encumbered, it can be repossessed by the secured party.
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.