Tractors, crops, livestock, wool, and plant breeder's rights. What do they have in common? All are farm related and are also "personal property" under the new Personal Property Securities Act 2009 (Cth) (PPSA), which commenced on 30 January 2012. Just about all property other than land is covered by the PPSA: some important exceptions for agribusiness are fixtures (personal property affixed to land) and certain water entitlements.
The PPSA has created a single, national scheme for regulating interests in personal property given as security for payment or other obligations. It replaced a patchwork of over 80 previous state and federal laws, including many laws specific to agricultural property, like those for stock, wool and crop liens or mortgages.
In the current economic environment, where the agribusiness sector is facing the combined stressors of increasingly expensive financing and an extremely strong Australian dollar, primary producers and their suppliers would be well advised to ensure they establish their security interests under this new regime.
How does the new PPSA work?
Instead of multiple registers for different kinds of property, we now have the Personal Property Securities Register (PPSR) for all of them. Registrations on many of the old registers have been migrated across to the PPSR, and many transactions that would not have been considered a security interest in the past can now be registered.
A farmer leasing a tractor may now find that the lessor has registered a security interest in it on the PPSR. Under the pre-PPSA law, an interest of a lessor under a lease would not be considered a security interest, because the lessor owns the goods. Under the PPSA, ownership of the goods is not relevant.
Primary producers may also be surprised to see security interests registered against them on the PPSR by suppliers. A sale of goods on retention of title terms, where title does not pass until full payment is made, is also a security interest under the PPSA.
When farmers supply their produce for processing, they should think about their security interests in the goods: supplying on bailment terms for an indefinite period is also deemed to be a security interest.
While there is no obligation to register a security interest on the PPSR, the benefit of doing so is that it preserves your security interest and rights against third parties. In the terminology of the PPSA, this "perfection" of the security interest means that it will have priority over unperfected security interests, which is often crucial if there is a default or insolvency.
Both the tractor lease and the retention of title security interest may be a special kind of security interest known as a purchase money security interest or PMSI. When registered it has a super-priority over a non-PMSI perfected security interest.
Mostly the PPSA applies in the same way for all types of personal property, but some special rules affect agribusiness.
There is a variant of the PMSI for crops and livestock - an "agri-PMSI". If a farmer gives a security interest over his crops while they are growing (or within 6 months before planting) to enable them to be produced – eg, to a farming supplier to buy fertiliser – the supplier's perfected security interest in the crops will take priority over any other security interest. A similar rule applies to livestock. But a prior mortgage over the land that includes the crop will not be prejudiced if the mortgagee has not consented to the supplier's security interest.
These special priorities for PMSIs and agri-PMSIs may help free up access to finance in the rural sector by allowing suppliers of equipment and materials to take security that ranks above "all assets" securities taken by banks].
The PPSA has specific rules about how interests in comingled property (eg, grain stored in silos) are shared between the holders of security interests. There are also special rights that apply to crops and livestock when a security interest is being enforced: for example, a right to enter on land where crops are growing, to the same extent as the grantor's rights.
PPSA impacts on contracts
The PPSA is about form over substance. The old distinctions between mortgage and charge, legal and equitable, fixed and floating have all gone out the window, for PPSA property at least.
Farmers will notice their banks using new style loan security documents that reflect this change. The "General Security Agreement" replaces the old Fixed and Floating Charge over all assets, and the "Specific Security Agreement" will now be used instead of a Chattel Mortgage or Bill of Sale over specific property. The documents work much like the old ones, but use new PPSA terminology: the "grantor" grants a "security interest" over the "collateral" to the "secured party".
Following the commencement of the new PPSA regime, agribusiness operators and their lawyers should consider:
- Reviewing arrangements that were not security interests in the past, such as leases and bailments and retention of title sales. As security interests under the new regime, registration on the PPSR will generally be advisable to protect the secured party.
- Conducting a periodic review of the PPSR to see if security interests have been registered against you.
- Evaluating whether the new PPSA security interests provide an opportunity to obtain alternative sources of finance.
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.