The new Personal Property Securities (PPS) regime, which was established in Australia under the Personal Property Securities Act 2009 (Cth) (PPSA), has been in operation for over three months now. Many affected by the PPSA have come to terms with the requirement to register security interests on the Personal Property Securities Register (PPSR) and a substantial number of registrations have been made. But the PPSA also has some practical implications that will impact on the day-to-day operations of many companies, including joint venture arrangements, business sale and purchase agreements, and even the requirements of a company to maintain a register of charges. In addition, companies need to appreciate the broad meaning of security interest under the PPSA in the context of their commercial arrangements, including dealings with consignment stock and the retention of title of goods. Whilst you may have received one of our other publications on the more technical aspects of the PPSA, this article is aimed at some of the practical implications for companies.
Quick recap of the PPSA
The introduction of the PPSA saw the replacement of a number of federal, state and territory laws. In essence, the position now under the PPSA is that a party with a security interest in personal property bears the responsibility of ensuring that its interest is perfected, usually by registration on the PPSR. It is important to be aware that the PPSA applies equally to individuals and companies as well as to both consumer and commercial property.
Any transaction that in substance has the effect of providing an interest in personal property as security for the payment or performance of any obligations will now be treated as a security interest under the PPSA. Some transactions are also deemed to be a security interest even if they do not secure any obligations (eg an absolute assignment of a book debt and a PPS lease).
In very broad terms, personal property means any asset other than real property and, subject to certain exceptions, covers all forms of moveable goods as well as intangible property (such as intellectual property, financial products and accounts DLA Piper 2 receivable). However, goods that are affixed to land are excluded.
The PPSA also introduced new terminology, which companies need to understand. In particular, the personal property over which a security interest is granted is called collateral. The entity giving the security interest is called the grantor, the entity liable for the secured obligation is the debtor and the holder of the security interest is the secured party.
The consequences of failing to perfect a security interest are discussed further below - the main risk being that a secured party's interest in the relevant property may be lost if they have not perfected their interest.
Some practical implications
Some of the matters which a company will need to consider following the implementation of the PPS regime are set out below.
Are companies required to maintain a register of charges?
The old section 271 of the Corporations Act 2011 (Cth) (Act) required a company to keep a copy of all documents relating to registrable charges on its property and to keep a register of charges affecting its property (both those it created and those on property that it acquired). From the introduction of the PPSA, the position changed so that the requirement to maintain a register of charges ceased to apply in relation to registrable charges on 30 January 2012. However, companies are still required to maintain a register of charges in respect of charges arising prior to 30 January 2012.
Is the PPSA relevant to company constitutions?
Generally speaking, most constitutions will contain provisions that have the effect of creating a security interest under the PPSA. For example, provisions that impose a lien over shares where monies are owed to the company or provide that a shareholder will forfeit their shares if they fail to pay a call will typically create a security interest over the relevant shares the subject of the lien or call. This is because shares are personal property and, in these cases, such provisions would usually be considered to be securing the performance of an obligation. Other types of provisions of constitutions that might give rise to the creation of security interests include provisions which require the compulsory transfer of shares in circumstances where a shareholder is in default of certain of its obligations. By contrast, it is unlikely that standard pre-emptive provisions in a constitution would create a security interest in the relevant shares as these provisions typically do not secure the performance of any obligation.
Companies should consider the terms of their constitutions to determine whether any of its provisions has the effect of creating any security interests and, if so, whether as a result, such interests should be registered on the PPSR. For companies with a large number of shareholders, registration on the PPSR is likely to be impractical.
Companies should also consider whether their Constitutions should be updated in any event, having regard to the introduction of the PPSA.
Shareholder and joint venture arrangements
An obvious example of the creation of a security interest in a shareholder/joint venture arrangement is where the relevant agreement contains cross charges between shareholders over their respective shareholdings in the joint venture company to secure their respective obligations under the agreement. This is because, as mentioned above, shares are personal property and they are being used to secure the performance of the obligations of shareholders under the agreement.
Similarly, where a shareholder or joint venture agreement contains a right to acquire the shares of another party, for example, on the occurrence of an event of default or forfeiture event, this could potentially create a security interest capable of registration. Similar issues may also arise where a put/call option is granted over shares to secure the performance of obligations of a party.
Due diligence in the sale and purchase context
The PPSA also has some practical implications for due diligence enquiries in the context of a sale and purchase of a business. Previously, a typical due diligence process would involve a search of the Australian Securities and Investments Commission's (ASIC's) database to ascertain whether any charges had been registered against the target company. A copy of the relevant instrument creating the charge could also be obtained from ASIC and it was therefore a relatively straightforward process.
Now, however, due diligence should involve a search of the PPSR (currently by the Australian Company Number, Australian Business Number and name of the target entity) to confirm whether any registrations exist. A search of the PPSR may also reveal registrations relating to interests which previously were not captured on ASIC's register, including security interests over particular assets arising as a result of a retention of title clause in a commercial contract, for example.
The information provided in respect of security interests on the PPSR is fairly limited and a thorough due diligence process should involve considering each of the security interests registered against the target company, with queries likely to be required to be made of the secured party (via the target company) if this is possible. However, it is unlikely that queries will be able to be raised in a hostile acquisition context and therefore only the limited information provided on the PPSR may be available to a proposed purchaser.
It is also prudent to carry out an ASIC company search in a due diligence process. This is because there were some issues with the migration of charges from the ASIC register to the PPSR and there are instances where charges have been incorrectly migrated or not migrated at all.
Consideration should also be given as to whether any of the terms of the sale and purchase agreement have the effect of creating a security interest for the purposes of the PPSA. For example, provisions such as a party agreeing to hold the benefit of a material contract on trust for another party for a period of time may create a security interest capable of registration.
As an aside, it would be prudent for a company to carry out a search of the PPSR on itself to crosscheck the registrations entered against it in order to ensure that any errors in the PPSR migration or any other incorrect registrations can be addressed as soon as possible.
Other commercial arrangements
The critical point that companies need to be aware of is that simple ownership rights in personal property are no longer sufficient to protect the owner's interests in that property where the company is relying on its ownership to secure the performance of an obligation by another party. The result is that companies will need to put in place mechanisms to ensure that their interests are protected, including registering their security interests on the PPSR before any personal property/goods are supplied. This is important even if a company's standard terms of business specifically restrict the manner in which a customer is able to deal with the property as regards third parties because the PPSA makes it clear that notwithstanding such restrictions, dealings with third parties can occur and in the absence of perfection by registration by the secured party, such dealings will be effective. Some examples of commercial arrangements where the PPSA may be relevant are described below.
Retention of title terms
Retention of title clauses are common in procurement and supply contracts. In essence, these clauses provide that ownership of the relevant goods remains with the supplier until they have been paid for in full by the customer. Under the PPSA, a security interest includes an interest in personal property provided by way of a conditional sale agreement (including an agreement to sell subject to retention of title ) (see section 12(2)(d) of the PPSA).
Generally, if a company supplies goods on retention of title terms, their interest in the goods will be a Purchase Money Security Interest (PMSI). Provided that the company registers the PMSI on the PPSR within strict timeframes, the company will have the benefit of a superior priority (which prevails over most other competing security interests) and their position under the PPSA will largely be the same as the pre-PPSA law position. However, if the PMSI is not registered on the PPSR, the company's ownership of the goods may be lost because of subsequent dealings with the goods by the customer (see further below).
Consignment stock is, broadly, goods that are provided to a customer which are typically held in a warehouse arrangement until they are sold by that customer. Ownership of the consignment stock is generally not passed from the supplier until the stock is sold or issued by the customer. This type of arrangement will generally fall within the scope of the PPSA as the PPSA provides that a security interest includes an interest in personal property provided by way of a consignment transaction DLA Piper 4 (whether or not a commercial consignment) (see section 12(2)(h) of the PPSA).
Similar to retention of title clauses, provisions relating to the interests of a consignor who delivers goods to a consignee under a commercial consignment will also be a PMSI and will therefore have a super priority provided that the interest is perfected by registration on the PPSR within the required timeframes.
The PPSA deems certain contractual arrangements to be security interests. These include a PPS Lease, which extends to a lease or bailment of goods for a term of more than one year or an indefinite period, or, for serial numbered goods (ie motor vehicles, watercraft or aircraft), for a term of 90 days or more or for an indefinite term. In addition, if the customer retains uninterrupted possession of the goods for any of these periods, a PPS Lease will arise, which is deemed to be a security interest.
A PMSI also arises in respect of the interest of a lessor or bailor of goods under a PPS Lease. Again, this will mean that upon proper registration on the PPSR, the owner of the goods will have a super priority interest in the goods.
Other examples where a security interest may arise in this context include demonstrator stock (ie stock that is provided to a customer for the purposes of display or demonstration to its customers) and other equipment (such as display stands or cabinets) made available but not sold to customers.
It will be necessary to weigh up the benefits of registration of the security interest on the PPSR against other potential issues. For example, under the PPSA, an interested person (which includes a person with another security interest in the collateral) may request a secured party to make available a copy of the security agreement that provides for a security interest. There are exceptions to this rule where, for example, the secured party and the debtor have agreed in writing (at or before the time that the security agreement is entered into) that the underlying agreement should not be disclosed.
The right of an interested person to request such information applies in respect of all security interests (not just those that have been registered on the PPSR). However, when considering whether to register a security interest on the PPSR, it will be important to keep in mind that the registration of a security interest may bring attention to, or highlight the existence of, a particular security interest, which may prompt an interested person to request further information.
In the context of a transaction, consideration should also be given as to whether the parties should enter into confidentiality arrangements early on in respect of security interests that may be created in the future. For example, it may be worthwhile including specific confidentiality obligations in a letter of intent or heads of agreement entered into by the parties at the start of a transaction.
What happens if a company as a secured party does not register its security interests on the PPSR?
Key to the PPS regime is the concept of the perfection of a security interest. Perfection can generally be achieved by:
- Registration of the security interest on the PPSR
- The secured party taking possession of the relevant property
- The secured party taking control of the relevant property, although this is limited to certain financial assets.
The general rules for determining the priority of security interests are set out in section 55 of the PPSA. In summary, the rules are that:
- A perfected security interest has priority over an unperfected interest
- Priority between perfected security interests is determined by the order of perfection (except in the case of perfection by control which has priority over any other form of perfected security interest)
- Priority between unperfected interests is determined by the order of attachment (as defined in the PPSA).
The above rules are also affected by the priority rules relating to PMSIs (as mentioned above).
There are also other consequences of not perfecting a security interest, including for example:
- That generally a buyer or lessee of personal property, for value, takes the personal property free of an unperfected security interest in the property
- In circumstances of a winding up or other specified external administration, most security interests that are unperfected will vest in the grantor.
As a result, whilst registration of a security interest on the PPSR is not compulsory, if a secured party does not register a security interest (or otherwise perfect the interest), its interest in the relevant property (including ownership interests) may be lost.
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