Personal Property Securities Act 2009 (Cth) - Charges, Mortgages, Indemnities

On Monday 30 January 2012, the Personal Property Securities Act 2009 (Cth) came into force in Australia.

In our opinion it is one of the biggest reforms affecting businesses in Australia since the GST. This Act radically changes the law relating to securities over property other than land. Company charges, bills of sale, the Register of Encumbered Vehicles; these and many other things are being replaced by new forms of security and a new system of registration. Retention of Title clauses and some long-term leasing arrangements relating to goods will have to be registered to be effective and enforceable against third parties. Even if this does not directly affect you, it is likely to affect your customers or clients.

In this article, we attempt the daunting task of providing a summary of this extraordinarily significant piece of legislation in practical terms, without being overly technical or simplistic.

Essential Points about the Act

The Personal Property Securities Act was designed to enable the efficient and widespread securitisation of personal assets in Australia. It allows almost anyone to obtain secured finance on any personal property they own or possess.

The Act will achieve this aim through a fundamentally new system of PPS regulation. The central concept of the new regime is the adoption of a "perfection-by-registration" requirement. This reflects a move away from a cluttered assortment of individual State and Commonwealth registers towards a single national online securities portal, the Personal Property Securities Register (the Register).

The Register will provide a public register of all security interests. It will enable the instant retrieval of information for prospective creditors and purchasers alike via online searches of the Register. It will allow the immediate registration of all newly-created security interests through a single, instantly accessible location, providing immediate notice of such registrations to any interested party.

The Act will apply whenever a transaction provides security over personal property for the payment of a debt or the performance of an obligation. Any mortgage, debenture, loan, charge or pledge involving personal property will now be regulated under the Act. Things like Bills of Sale, fixed and floating charges and crop liens are now effectively obsolete and will be replaced by the General Security Agreement (GSA), which will create security interests in a debtor's present and after-acquired property (thereby mimicking the operation of the old floating charge), and the Specific Security Agreement (SSA), which will create an interest in certain specified assets.

Of equal significance is that other transactions which were not previously the subject of any registration requirement, such as long-term equipment leases, commercial consignment and retention of title (ROT) sales, will now fall within the new PPS regime.

'Personal property' comprises any property that is neither land or an interest in land (such as easements or water rights). It includes virtually all tangible objects like goods, chattels, vehicles, boats, aircraft, crops, moveable plant equipment and machinery, but extends equally to intangible objects such as intellectual property rights, negotiable and financial instruments, shares and debts.

Consequently, the new regime will have an extraordinarily wide-ranging impact. It will unquestionably affect many arrangements which have already been entered into between debtors (or grantors) and their secured creditors. It will require creditors to be diligent and proactive in protecting their interests. Creditors who fail to do so may find their rights severely compromised, or even extinguished in their entirety, by the new legislation.

The Act will have a two-year transition period beginning on Monday 30 January 2012. This transition period will afford creditors some time to take steps to 'perfect' their existing interests (the Act will provide a temporary form of 'perfection' to most existing interests until the two-year transition period expires). However, any new interests created on or after 30 January 2012 will immediately become subject to the new regime's requirements.

The Act requires security interests to be 'perfected' before they become enforceable against third parties, including other secured creditors with interests in the same asset. In most cases, perfection will occur by way of an "effective" (in other words, accurately recorded) online registration of the security interest on the Register.

The idea is that lenders can access the Register and instantly obtain information on prospective borrowers offering security over personal property. With access to this information, creditors can obtain an accurate picture of the risk involved in granting secured finance to a prospective borrower. They can use the PPSR to register security interests immediately, once a new interest has been created, thus giving all subsequent parties immediate notice of that interest, and avoiding many of the potential risks and uncertainties for creditors in using personal assets for security under the previous system.

Despite the simplicity of this new approach, the Act is likely to create some significant compliance headaches for creditors, debtors and third parties alike. The established common law rules are being re-written by what is a new and unique regime, punctuated by terminology and concepts never encountered before in Australia. The Act emulates similar reforms which have been enacted in New Zealand, the United States and Canada. It represents the product of approximately 20 years of PPS reform in Australia.

Central Concept - The "Security Interest"

The Act will create a new and fundamentally different form of property right, known as the 'security interest', which will vest in the secured property itself.

"Security interests" in personal property will be created by transactions which in substance secure either payment or performance of an obligation, regardless of whatever label or form is attributed to them.

One of the most extraordinary changes introduced by the Act is that, in some circumstances, ownership becomes merely a type of security interest, thereby capable of being defeated by a higher priority interest. Before 30 January 2012, goods which were sold on consignment, or subject to a ROT clause, remained the property of the owner, who could simply demand the return of the goods if the purchaser or consignee became insolvent. Under the new regime, the owner of the goods might lose their entitlement to the goods if their interest is not registered.

Certain long term leasing arrangements are also caught by the Act. An owner of goods who is in the business of leasing those goods is said to have a security interest known as a "PPS Lease", where the goods are in the possession of another person. If the owner fails to register or otherwise perfect that security interest when leasing those goods under a PPS Lease, it is open for the owner's rights to be defeated by the registered security interest of another party.

Attachment, Perfection and Priority

The central concepts of the Act lie in the system of "attachment" and "perfection" of security interests.

"Attachment" determines when a security interest becomes enforceable between a secured party and a debtor. Usually this will occur when a secured party provides 'value' (in most cases, finance) for a secured asset and the debtor (or grantor) becomes entitled to deal with it.

"Perfection", far more critically, determines whether a secured party can enforce its interest against third parties (such as other secured creditors having a security interest in the same asset). Perfection may occur through either:

Registration on the Register;
Possession of the secured asset (other than through enforcement proceedings); or,
For certain types of intangible assets, 'controlling' the asset by having the authority to deal with it. Tangible assets, however, cannot be 'controlled' under the Act and must be perfected either by registration or possession.

To illustrate with an example, if Mr McQueen wished to purchase a motorcycle using loan finance from SwissBank Ltd, Mr McQueen would sign a security agreement 'granting' SwissBank a security interest in the motorcycle, in exchange for their providing him with the finance to acquire it. The interest would "attach" to the motorcycle when SwissBank provides 'value' or finance for the secured asset.

SwissBank would then 'perfect' their interest in the motorcycle by entering it on the Register to preserve its priority and enforceability against other interests. Let's say Mr McQueen signs the security agreement on 1 March, finance goes through and SwissBank enters their interest on the Register on 5 March. SwissBank then has a validly perfected security interest in the motorcycle.

"Priority" then determines the hierarchy among secured parties with interests in the same asset:

Perfected security interests will enjoy priority over unperfected interests.
Security interests perfected by control will enjoy priority over interests perfected by other means.
Purchase Money Security Interests (PMSIs) will enjoy priority over non-PMSI interests (see "Purchase Money Security Interests" below).
Between perfected security interests, the first perfected in time will enjoy priority over interests perfected later in time.

The level of priority enjoyed by a secured party's interest will determine the extent of a secured party's ability to seize and sell the asset. When there are multiple secured parties, the level of priority will determine, among other things, who is first entitled to the sale proceeds when a secured asset is sold.

Let's say Mr McQueen obtains further finance by granting a GSA over all his present and after-acquired personal property to LeapOver Finance Ltd (remember a GSA is similar to, and has now replaced, a fixed and floating charge). He does this by signing another security agreement on 8 March. Because it forms part of all his present and after-acquired property, this GSA will create another security interest in his motorcycle. LeapOver's interest in the motorcycle now competes for priority with SwissBank's interest. LeapOver registers their interest in the motorcycle on the Register on 12 March.

Whose interest would have priority? SwissBank's or LeapOver's? In this case, because SwissBank perfected its interest earlier in time (and there is no other reason why LeapOver's interest would enjoy priority), SwissBank's interest in the motorcycle will have priority over LeapOver's.

What if SwissBank failed to register their interest on the Register? In that case, their interest would remain 'unperfected'. Providing LeapOver had perfected their interest on 12 March then SwissBank's interest would rank lower in priority to LeapOver's. This is because perfected interests have priority over any unperfected interests.

The Significance of Having Validly Perfected Interests

It can be seen from the above example that the date of perfection will usually determine which of the two competing security interests in an asset will be satisfied first.

Perfection is also essential for protecting security interests against the debtor's insolvency. All unperfected interests will vest in the debtor on the debtor's insolvency. This means that any creditor with an unperfected interest (for example, one that has not been registered) would simply lose their security and will be no better off than unsecured creditors. They will be left only with their right to lodge a proof of debt in the debtor's bankruptcy or insolvency.

Similarly, any third party purchaser acquiring a secured asset can ignore security interests which have not been registered or perfected in some other way.

Purchase Money Security Interests (PMSI)

The Act also creates a special form of security interest, where finance is provided to buy an item of personal property. This form of security interest is known as a "Purchase Money Security Interests" or PMSIs. If a PMSI is registered within the time period of 15 business days, as a PMSI, it will enjoy priority over other perfected interests in the same asset, even if these have been registered earlier in time, thereby giving PMSIs a 'super-priority' over other perfected interests. PMSIs may also arise in circumstances where the security interest arises from ownership of the property, for example through PPS Leases, as the lessor's interest in the leased property, and in commercial consignments.

Let's take our original example again. Let's say Mr McQueen signed the GSA with LeapOver before acquiring the motorcycle through finance from SwissBank. He signs the GSA to grant interests to LeapOver over all his present and after-acquired property on 1 March. LeapOver then registers their interest under the GSA on 5 March. Mr McQueen then signs the loan security agreement to buy the motorcycle on 15 March.

Because the finance from SwissBank is being provided directly towards the motorcycle's purchase price, the interest created is in fact a PMSI. While LeapOver will also acquire a security interest in the motorcycle through the GSA (which is perfected through their original registration on 5 March), if SwissBank registers its interest as a PMSI on 18 March, its PMSI will have priority over LeapOver's, even though LeapOver's was perfected first in time.

This demonstrates the way in which the 'super-priority' of the PMSI works. However, in order to enjoy this 'super-priority', SwissBank must register the interest in the motorcycle, as a PMSI, within the mandatory 15 working-day period, otherwise it will simply remain an "ordinary" non-PMSI perfected interest. Under the rules, LeapOver's interest would take priority over any non-PMSI interest of SwissBank's, because its interest was perfected first in time.

Serial Numbered Goods

Under the Act, certain types of personal property are required to be described by 'serial number'. Broadly speaking, any vehicle, vessel or piece of machinery with a unique identification number will be required to be described by serial number. Depending on whether goods are 'serial numbered' goods or not can have a radical impact on the way the PPS rules operate, particularly in relation to timing and registration requirements. One example of this is in relation to PPS Leases. For non-serial number goods, the minimum time period for a PPS Lease to arise is a one-year lease. For serial numbered goods, this period is shortened to 90 days.

Transition Period

During the transition phase, the Act will 'migrate' many of the existing security interests registered across Australia's 46 individual State and Commonwealth registers (such as boats, vehicles and company charges) across to the Personal Property Securities Register. However, 'migration' will only occur in relation to certain existing interests. All new interests, created after the commencement date, will be governed by the new regime. 'Migrated' interests will enjoy 'deemed' perfection during the transition period, during which steps will need to be taken to perfect them under the new regime. If no steps are taken to perfect them under the new regime, they will lose their priority at the expiry of the 2-year transition period.

Specific exceptions under the new regime also apply to transactions involving consumer goods intended for either household or domestic use.

Impact

Businesses which are not informed of the effects of these changes could face acute risks. This may particularly be the case among businesses which are used to operating with either ROT clauses, long-term equipment leases or commercial consignments, which will now become subject to the new regime's registration requirements in order to preserve their enforceability against third parties.

Should the Courts interpret the new regime in a similar manner to the New Zealand case of Graham v Portacom New Zealand Ltd, there will be harsh consequences for failing to comply with the new requirements. Portacom involved an equipment lease of pre-fabricated housing components. Portacom, the lessor, failed to register its interest as the owner of the goods. The lessee (through its appointed receivers) claimed the goods through a debenture (or GSA) which had been granted to the lessee's bank over all the lessee's property. The lessee's interest under the GSA had been perfected. In this case, the Court determined that the its perfected interest had priority over the unperfected interest of the goods' actual owner. In basic terms, the owner essentially lost the goods it had leased because it failed to perfect the security interest it had. The lessee's receivers had priority to deal with the goods through the lessee's perfected interest.

This case illustrates the landmark nature of the change to existing personal property law and the crucial importance of achieving a valid perfection of security interests. Critically, in some respects, the holder of a security interest will be treated as the property's actual owner, despite having no traditional rights of ownership. Any parties in doubt as to whether their rights might be affected should seek legal advice sooner rather than later.

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.

Kott Gunning is a proud member of

Australia: Personal Property Securities Act 2009 (Cth)