The Personal Property Securities Act (the Act) commenced operation on 30 January 2012. The Act is a new national register of security interests in a wide range of different kinds of property, and replaces a multitude of different registers around the country. The Act also sets out the rules for priority of interests between secured parties and purchasers.
Who is affected?
- If you fall into any of the following categories you need to know about the new regime and take steps to protect your existing interests, and ensure that new security interests granted from now on are in the proper form and properly registered:
- you are a business that sells goods on deferred payment terms
- you lease goods to another, or place goods with third parties on bailement or consignment
- you have contractual rights or entitlements that are secured over assets
- you are a financier, and take security over goods and other assets in addition to land
- you are otherwise owed money which is secured (by way of a fixed and/or floating charge) or for which you will take security over any or all of the assets or undertaking of an Australian company
What has changed?
Previously, security interests in different kinds of property were registered on various different registers in the states and territories – for example, company charges (registered with ASIC), motor vehicle security registers, crop lien registers and bills of sale registers. These registers have all been closed and all interests must now be registered on the new PPS Register. In addition, interests which could not previously be registered anywhere, must now be registered on the PPS Register in order to protect those interests. Two examples are:
- retention of title arrangements – where goods are "sold" on deferred payment terms but the seller retains title until the price is paid in full – that interest needs to be registered
- the owner of goods in the possession of others (under lease, bailement or consignment) needs to register their interest
Parties who do not register their interest have no rights in an insolvency situation, and lose priority to parties who are registered or to purchasers. These new rules override prior common law.
How does the Act work?
A security interest over property that is covered by the Act must be "perfected" in order to ensure that interest has priority over others interests and over liquidators and purchasers.
A security interest is an interest that secures the payment of money or the performance of obligations.
There are three ways a security interest can be "perfected":
- physical possession
- control (only applies to certain kinds of property)
- registration on the PPS Register.
The Act sets out what types of security interest have priority over others. Essentially, interests perfected by possession or control have priority over other interests. Where two or more interests are perfected by registration, earlier registrations have priority over later registrations.
A national register allows interests to be registered "on-line" 24/7. Interested parties can also search the register to determine what interests are registered over certain assets. So the PPS Register will become vital for protecting interests in the future, and for determining what other interests exist and therefore what the priority rights are.
What property is covered?
The Act covers a wide range of property including motor vehicles, boats, aircraft and other goods, crops and livestock, intellectual property and financial property. It also includes contractual rights and other intangible property. The property covered by the Act (which is called "collateral") is divided into 9 collateral classes. Security interests on the PPS Register are sorted by these classes which makes searching easier.
Land and fixtures are excluded from the Act. However in many cases there are other assets that are dealt with as part of land – e.g. goods and in the case of development properties, designs and contractual arrangements. These will still need to be protected by registration under the Act.
There are significant differences in how commercial property and consumer property are treated under the Act.
What happens to pre-existing interests on registers that are closed?
These are automatically "migrated" to the PPS Register. However, these interests must be matched with the correct secured parties and checked for accuracy, as the data which has been electronically migrated may often not match the data required for a proper registration on the PPS Register.
Not all old registers have been migrated to the PPS Register
What happens to pre-existing interests that were not registered anywhere?
These interests are called "transitional security interests". They are given temporary protection under the Act for 24 months – ie until 29 January 2014. Before that protection expires, the interests must be properly registered on the PPS Register, otherwise they will lose protection under the Act.
What do you need to do?
New security interests
- Any new security interest from now on needs to be recorded in the right format and registered on the PPS Register.
- You must have a clear understanding of what types of interests
qualify for registration and how to register. Some important points
- company charges (formerly called fixed charges and fixed & floating charges) will no longer be registered with ASIC. Instead, the parties will enter into a "general security agreement" (or GSA) over "all present and after-acquired property", or a specific security agreement (or SSA) over specified property
- although security interests can be registered at any time after they are granted, it is important to note that:
- priority is determined by the time of registration – so late registration may mean priority is lost to another party who was granted an interest later than yours, but registered before you. There is a significant difference in the case of company charges, where priority was previously determined by Chapter 2K of the Corporations Act. Where secured parties previously had 45 days in which to register their charges and priority was determined by the date of the charge rather than the date of registration, under the new Act, priority is determined by the date of registration. Therefore, it is critical that secured parties register their security interests as soon as the Act permits (which, in some cases, may even be prior to the execution of the security interest); and
- if the interest is not registered within 20 business days then it will not be binding if the grantor becomes insolvent within 6 months of grant
- there is a special kind of security interest called a purchase money security interest (or PMSI). These kinds of interests secure any unpaid purchase price for property, or moneys advanced and used for the purpose of purchasing the property. PMSI's have "super priority" – which means they rank ahead of all other interests, even those registered before the PMSI. However to qualify, the PMSI must be registered within 15 business days of the grantor taking possession of the relevant property (but in the case of inventory, the PMSI must be registered before the grantor is given possession of the inventory)
- if you give possession of goods to a third party under a lease, bailment or consignment arrangement, this may constitute a "PPS Lease" which is a form of PMSI. This needs to be registered within 15 business days or a third party may be able to acquire clear title to these goods even though you are the legal owner
- In order to register interests, you must first be registered as a secured party group (or SPG). All future security interests are then linked to that SPG
Pre-existing security interests not registered
- If you have a pre-existing security interest that was not registered on any of the registers adopted by the new Act prior to 30 January 2012, you have 24 months interim protection. During that period you should register the interest. This registration has to show the interest as a "transitional security interest". The registration will be linked to your SPG number, which must be registered first. Although 2 years interim protection is provided, we recommend you register these interests as soon as possible, as notification on the register is likely to avoid arguments later with another party that has registered, if you have to establish that your unregistered interest is protected against their registered interest.
- You should carry out an audit of your records and existing security interests to identify any of these "transitional security interests" and then proceed to register them.
Pre-existing security interests that have been migrated to the PPS Register
- You need to create an SPG on the PPS Register. Then you need to undertake a process to "find and claim" migrated interests. This is a transitional process set up by the Registrar to allow parties that are properly entered onto the PPS Register with an SPG to identify the electronic data that has been electronically migrated and "claim" it as their security interest migrated from another register.
- You then need to review the data/particulars contained in each migrated file/registration to ensure it is correct and complete. Any errors on the PPS Register can be corrected as part of this process.
How we can help
The best approach for addressing these issues will differ from client to client.
Holding Redlich can assist clients to:
- assess what needs to be done in their particular circumstances
- develop a program for carrying out the tasks above – customised to suit the needs and circumstances of the particular client
- arrange or undertake registrations on behalf of clients.
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.