Australia: Personal Property Securities Act 2009 (Cth)

Last Updated: 28 February 2012
Article by Robert Ross

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

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions