The PPS Register established under the PPSA went live on 30 January 2012. Despite significant delays in the commencement of the PPSA to ensure a seamless transition to the new regime, a number of issues (both technical and practical) have come to light since commencement. The purpose of this update is to highlight the main issues that have arisen and indicate some ways in which the potential adverse consequences of such issues can be minimised.
ISSUES WITH THE PPS REGISTER
One of the greatest risks associated with the change of law effected by the PPSA was the possibility that the information to be transferred from registers in existence prior to 30 January 2012 to the PPS Register would not be transferred in a timely and/or accurate manner. As commercial parties rely on the accuracy of the PPS Register when settling financing or other transactions affected by the PPSA, any errors associated with the Register can have significant consequences.
A number of issues came to light very soon after the commencement of the operation of the PPS Register that could adversely affect the accuracy of the Register. Although some of these issues have been resolved, there are still a number of significant issues which remain to be dealt with. The main matters are outlined below.
The PPS Register was to operate so that in reference to corporate entities, the only search criteria was the Australian Company Number (ACN) or, in the absence of an ACN, the Australian Business Number (ABN) of the company.
In some cases the migration of the company charges from the Australian Securities and Investments Commission (ASIC) Charges Register was done by reference to the company's ACN, but in the majority of cases it was by reference to the company's ABN. In addition, some migration occurred without reference to either ACN or ABN and was done by name. As a result, searching the PPS Register by only the ACN does not provide an accurate result as to all the security interests registered against the relevant grantor.
Although this issue is being worked on and a resolution is likely by the end of March, the Insolvency and Trustee Service Australia recommends that searches be done by reference to each of ACN, ABN and grantor name to ensure accurate results.
Multiple secured parties
Where ASIC registrations were in favour of multiple secured parties, after migration only one secured party is shown as the secured party on the PPS Register for the relevant transitional security interest. We understand that approximately 25,000 registrations have been affected in this manner.
ASIC has produced an options paper setting out five options that could be used to address the consequences of this issue. ASIC has suggested that the most cost-effective and timely manner in which to correct this issue is to add text to the giving of notice identifier field of each relevant registration indicating that the registration belongs to multiple secured parties. ASIC suggests that the addition of such wording will put secured parties on notice and enable secured parties (seeking to ascertain whether or not the registration is relevant to them) to check the attachment. They will only need to search attachments where the suggested wording has been added into the giving of notice identifier free text box, thereby reducing the number of registrations that will need to be checked.
The attachments, being either the Form 309 under which the charge was originally lodged at ASIC or a copy of the charge itself, should indicate who the relevant secured parties are.
Charges not migrated
Some 6,000 charges registered in the ASIC Charges Register were not migrated to the PPS Register. We understand ASIC has notified the lodging parties in relation to 4,000 of the affected charges and is in the process of notifying the remaining lodging parties. The affected secured parties are being requested to re-register the relevant charges on the PPS Register and should do so no later than 31 January 2014. As they are transitional security interests they will, if registered on the PPS Register before 30 January 2014, still obtain the priority time applicable to transitional security interests (being immediately before the commencement of the PPSA).
Some charges that were previously shown as released or discharged in the ASIC Charges Register have been migrated to the PPS Register and are shown as existing security interests. In our experience, in circumstances where a Form 312 was previously lodged with ASIC, on doing a PPS Register search against the relevant transitional security interest, a copy of the Form 312 is included as an attachment. This should provide sufficient evidence to incoming financiers that the transitional security interest was in fact discharged (notwithstanding that it is showing as a registered security interest on the PPS Register).
We understand that solutions are being developed by the Attorney-General's Department to remove the relevant registrations from the PPS Register and that the Registrar will provide a verification statement relating to the discharges of the relevant transitional security interests under section 158 of the PPSA. By doing so, the relevant secured parties will not have to provide a copy of the verification statement to the relevant grantors.
PRIORITY ISSUES RELATING TO TRANSITIONAL SECURITY INTERESTS
Priority cannot be determined by searching alone
When doing a search of the PPS Register, the registration start time applicable to a transitional security interest (which has been registered on the PPS Register) is the same for all such transitional security interests. It is therefore impossible to determine, by reference to the PPS Register itself, the priority applicable as between such transitional security interests.
Under the PPSA, certain priority rules relating to transitional security interests are set out in section 320. These rules do not however apply in relation to determining priorities between two perfected transitional security interests. In that circumstance, the PPSA (in section 323) provides that the priorities are to be determined by the law that applied immediately before the commencement of the PPSA (as if the PPSA had not been enacted).
In our experience a number of lessors (who previously did not have registrations against companies on the ASIC Charges Register), hire companies (who also did not previously have registrations against companies on the ASIC Charges Register) and security holders who previously had a fixed charge (over specific assets rather than a fixed and floating charge over all assets) are registering security interests specifying the collateral class as being all present and after acquired property. This adds to the complexity in determining the priorities between the transitional security interests that are registered on the PPS Register.
In our view, the only way to determine the priority between such multiple transitional security interests is for enquiries to be made of the grantor and the beneficiaries of such security interests to ascertain exactly what their security interests relate to and the nature of their security interests. This will add significantly to the time and costs involved in settling transactions. Without such further investigation, priorities between the various secured parties will be very difficult to determine and it will be unclear as to who should be party to any priority deed to be put in place between the relevant secured parties.
Prior to the commencement of the PPSA, a search of the ASIC Charges Register would indicate the different registration times, who holds what form of security and the assets over which the security extended. With the registration of all present and after acquired property security interest by not only the holders of pre-PPS fixed and floating charges but also the holders of pre-PPS fixed charges, lessors and hire companies all indicating the same start time, determining who has what security over what asset and with what priority is a much more complex exercise.
Possibility of differing priorities for the same security interes
A further issue relating to priorities arises in the circumstances where the holder of a registered transitional security interest is involved in a priority dispute (where such transitional security interest is a fixed and floating charge entered into prior to the commencement of the PPSA). Under the Corporations Act 2001 (Cth), it was necessary for the Form 309 used to register the security interest to specify a maximum prospective liability. Generally, the amount specified limited the priority of the holder of such security interest. Under the PPSA, all security interests secure all present and future advances and so the amount of their priority is not limited.
In circumstances where the holder of a migrated transitional security interest (in the form of a fixed and floating charge previously registered on the ASIC Charges Register) wishes to increase the amount secured beyond the maximum prospective liability, its priority may differ depending upon whether the dispute relating to priority is with the holder of another migrated transitional security interest or the holder of a security interest registered after the commencement of the PPSA.
In the case of a dispute with the holder of a migrated security interest, the secured party's priority is likely to be limited to the maximum prospective liability previously nominated on the ASIC Charges Register. In the case of a dispute with a secured party that has registered its security interest post-PPSA, the amount of the secured party's priority will not be so limited.
DEEDS OF SUBORDINATION/PRIORITY
In order for secured parties to be subject to the priorities they want rather than those specified under the PPSA (which is generally by reference to the time of registration of their security interest), the secured parties need to enter into a deed of subordination (being the PPS equivalent of a deed of priority).
Although there is no official template for such deed of subordination, the Australian Bankers' Association (ABA) and the Australian Finance Conference (AFC) have jointly prepared a draft model template for such document. This document contemplates a number of options as to the priorities between the parties. One of the options deals with bailment and similar arrangements where the bailment provider/lessor can be given priority ahead of the holder of a general security agreement over all assets in relation to the goods (and proceeds relating to the goods) the subject of the bailment/lease arrangements. This is necessary to place the bailment/provider/lessor in the same position it was in prior to the commencement of the PPSA.
Prior to the commencement of the PPSA, the title to the property the subject of the arrangements held by the bailment provider/lessor meant that the holder of the general security agreement or fixed and floating charge had no rights in relation to such assets. As the PPSA does not distinguish between a secured party's interest by reference to title, to maintain this status quo it is necessary for such deed of subordination to be entered into.
You will find the ABA/AFC model template here.
DEEDS OF RELEASE
In addition to a draft model template for the deed of subordination, the ABA and AFC have also prepared a drafted form of deed of release, which may be used in lieu of the previous ASIC Form 312.
On settlement of a transaction, the incoming financier will require evidence that the assets that it is financing are released from the security interest held by the existing financiers. Although market practise is still being developed, it would appear that the document to be provided will be a shortform deed of release (such as that proposed by the ABA/AFC). We note that a number of financial institutions are using a similar document and the only variable that differs relates to the willingness of the releasing secured party to undertake to lodge a financing change statement on the PPS Register to expressly exclude the property being released from the relevant registration.
Some financiers are not willing to provide such undertaking unless the whole of their security interest is being released or if their security interest specifically refers to an asset described by serial number, which is the subject of the refinancing.
STANDARD CONTRACTS FOR SALE OF LAND
In a sale of land transaction, inclusions are often part of the property being sold. These inclusions may constitute personal property for the purposes of the PPSA, in which case the purchaser will require a release of such property from security interests registered on the PPSA.
The Law Institute of Victoria has developed a standard special condition dealing with this situation and it is likely that similar clauses will be incorporated in standard Contracts for Sale of Land in other jurisdictions.
HOW WE CAN HELP
Although the PPSA has started, there are clearly issues arising from its implementation. In addition, due to the complexity of the PPSA, it is likely that a large number of technical issues will need to be considered by parties (particularly where there is a priority dispute). Ideally, parties will consider such issues prior to entering into transactions thereby avoiding possible negative consequences when a priority dispute arises.
If you would like to discuss any matters arising from this Update or the PPSA generally, please do not hesitate to contact a member of the PPS team.
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