The PPSA and the PPS Register have now been in effect for six months.
Anyone who has been involved in the searching of the PPS Register or undertaking registrations on it will be aware that there have been significant teething problems associated with the Register. Although the main problems have now been largely resolved, issues still remain.
In addition, a number of issues or scenarios have been identified by businesses impacted by the PPSA which have required considerable analysis of the PPSA and the PPS Regulations to determine their consequences. It is clear that despite the significant detail contained in the PPSA (and the intention to have it provide a comprehensive and complete code that can be used to determine the outcome of a multitude of different circumstances involving security over personal property), the number of issues that continue to remain unclear highlight the difficulty of such an approach.
The purpose of this update is to summarise the main issues that have been identified in the operation of the PPS Register and the means by which such issues have been resolved, and also to highlight some of the circumstances we have come across that are not easily dealt with by the PPSA. We also touch upon some of the benefits arising from the PPSA.
ISSUES ARISING FROM THE PPS REGISTER: ARE THEY RESOLVED?
In our previous update, we mentioned several significant issues with the operation of the PPS Register. Although significant work has been done to resolve these issues, it is too soon to say that the problems have been solved.
A majority of Australian Securities and Investments Commission (ASIC) charges were incorrectly migrated with reference to the company's Australian Business Number (ABN) rather than the Australian Company Number (ACN). This led to the Insolvency and Trustee Service Australia (ITSA) recommending that three searches be conducted (on ABN, ACN and grantor name) rather than the single ACN search that should have been definitive.
By mid-June, ITSA announced that 885,238 registrations migrated from the ASIC Register of Company Charges had been amended by replacing grantors identified by ABN with the corresponding ACN. Unfortunately, almost 500 of the amended registrations were registrations that should be against the grantor's Australian Registered Body Number (ARBN) rather than the ACN. Most of the affected grantors are foreign entities, however a number of Australian entities are also affected.
ITSA will be amending the data for these incorrect registrations, but has yet to indicate a time frame. Until the issue has been fixed, ITSA recommends that when searching against a grantor entity that has an ARBN, two searches should be conducted, one against the ARBN and one against the ACN search field.
This issue, together with the B2G issues referred to below, means that we are still a way off from being able to rely on a single search on the appropriate grantor identifier as providing the complete picture of all security interests registered against the grantor.
Charges not migrated
Approximately 6,000 charges registered in the ASIC Register of Company Charges were not migrated to the PPS Register. The affected secured parties have until 31 January 2014 to register their security interest on the PPS Register as transitional security interests. As there is a fee involved in registering a security interest, ITSA has a process in place for secured parties to claim reimbursement in certain circumstances.
To assist in identifying the charges that weren't migrated, ASIC has published a list of the affected charges on the ASIC website.
Released security interests
A number of charges and other security interests that were discharged prior to the PPS Register commencing were incorrectly migrated to that register.
ITSA has commenced the process of discharging the affected registrations. Registrations migrated from the Queensland Register of Encumbered Vehicles (REVs) and Bills of Sale Registers and the Tasmanian REVs have been discharged. ITSA was to commence processing the approximately 38,000 affected registrations migrated from the ASIC Register of Company Charges during the week commencing 23 July 2012.
Where the secured party had claimed the registrations, verification statements will be issued, however ITSA advises that there will be no requirement for the secured parties to give notice of the statements to grantors.
PPS Register software upgrade
ITSA is conducting testing on the proposed "C4 Code Release", which addresses a number of issues that have arisen with the PPS Register together with the remaining requirements not met in the original software release. Most of these changes will impact on users accessing the PPS Register via the web user interface, improving the search experience and allowing the generation of an increased range of reports. Although originally scheduled for early 2012, there is currently no estimated commencement date for these changes.
CIRCUMSTANCES NOT CONTEMPLATED
Multitude of registrations
On commencement of the PPS Register, data in relation to existing registrations appearing on the ASIC Charges Register, the numerous state-based REVs Registers and some other registers was transferred to the PPS Register.
In addition, a number of the larger financiers, including asset financiers who previously did not register their interests (due to the "security" previously provided to them by their title to the asset), pre-loaded data onto the PPS Register before its commencement date.
As a result, on searching a grantor the search results will often identify a large number of registrations, all of which are showing the same registration start time. By having the same registration start time, there is no way to determine the priority position of each secured party without undertaking further analysis of the information and, often, by having to contact the relevant secured parties to get more information as to the nature of their security interest.
After commencement of the PPS Register, due to the broad meaning of security interest under the PPSA, there are substantially more registrations against a grantor than would have been the case prior to the commencement of the PPSA.
In addition to the number of registrations, a lot of the registrations do not correctly specify the class of collateral to which they relate or, although technically correct, do not provide sufficient information to allow a searcher to determine what the security interest relates to.
As a consequence, the costs involved in advising incoming secured parties as to the priority of their securities and the nature of the security held by existing secured parties has increased, in some cases significantly. In addition, grantors (particularly public companies), are seeking advice as to whether any of these registrations can be removed or how they can minimise the adverse impact of the multitude of registrations showing against them in the PPS Register on their ability to finance or refinance their operations.
One issue that has recently been identified is that the B2G platform will not necessarily identify certain errors associated with the information that is downloaded in order to register a financing statement. In particular, where secured parties are incorrectly using the ABN of a company rather than its ACN when describing a company grantor, the B2G platform will allow such registration to occur and not highlight that this may not be the correct description of the grantor.
As mentioned above, one of the teething problems associated with the migration of data from the ASIC Charges Register to the PPS Register revolved around the use of ABNs for companies rather than ACNs. Under the PPS Regulations, the appropriate description of a company grantor is its ACN. However, for certain other types of grantors an ABN is acceptable (eg for a partnership).
As prior to the commencement of the PPSA secured parties regularly described company grantors by reference to their ABN, in our view it was reasonably foreseeable that there was a real risk that secured parties would continue to provide that information in the context of registering a financing statement in relation to a security interest granted by a company.
As the description of a grantor by ABN is accurate in certain circumstances, the B2G platform does not raise any issue as to the accuracy of such a description when used in the context of a company grantor. Accordingly, it is possible that a substantial number of incorrect registrations have inadvertently been made on the Register .
This potentially creates issues for secured parties as to the effectiveness of their registrations. Given this issue was worked around by the PPS Registrar and ASIC (in the context of migrated data from the ASIC Charges Register), it may be appropriate if the PPS Registrar considered issuing a determination which avoided such registrations being ineffective where they have occurred prior to the date of the determination.
What constitutes a defective registration
Following on from the matters referred to above, clients have raised concerns about issues which may result in registrations being treated as defective.
The issue has been particularly relevant to those secured parties that preloaded data onto the PPS Register in relation to transitional security interests. In circumstances where ABNs have been used rather than ACNs, or alternatively serial numbers have not been provided or are not those serial numbers that are required by the PPS Regulations to be downloaded onto the PPS Register, questions have been raised as to the consequence to the secured party.
In considering this matter, regard needs to be had not only to those provisions of the PPSA that refer to defective registration but also to the transitional provisions in Chapter 9 of the PPSA. Generally, it is our view that in relation to transitional security interests, their enforceability and priority position should not be adversely affected by the above circumstances during the transitional period.
Nonetheless, for those businesses that did download information or continue to register information which is not technically in accordance with the PPSA and the PPS Regulations, they should seek advice as to the consequences of such registrations and how the potential defects can be remedied.
Assignments of debt
Assignments of debt, whether or not the assignment has the effect of securing the payment or performance of an obligation, are treated as security interests for the purposes of the PPSA. As a result, adverse consequences may apply to an assignee of such debt if it does not register a financing statement in relation to the transaction against the assignor on the PPS Register.
Although the permission of an assignor of debt to an assignee registering such financing statement is not required under the PPSA, commercially some assignors may request that such registration not occur. This then leads to the question as to the impact of non registration on the assignee. The main matters to consider relate to priorities and the impact of insolvency of the assignor.
Happily, in relation to the vesting provisions relating to insolvency, these are expressly stated as not applicable to assignments of debt where the assignment does not secure the payment or performance of an obligation. Accordingly for an absolute assignment of debt, the vesting provision of the PPSA will not be relevant.
No such exclusion applies in relation to assignments of debt that do secure payment or performance of an obligation. In addition, no such exclusion applies to the priority sections of the PPSA. As a result, an assignee that receives a request from an assignor to not register a financing statement in relation to assignment of debt should seek advice as to whether or not such request will have an adverse impact on the assignee.
Assignments of purchase money security interests
In the context of leases (and other arrangements such as retention of title and acquisition financing arrangements), it is important, from the secured party's perspective, that the security interest is not only able to be noted on the register as a purchase money security interest (PMSI), but also that it has the super priority afforded to such security interest if the requirements of section 62 of the PPSA have been satisfied.
Where a transaction contemplates an assignment of lease (or indeed any other security interest that is a PMSI), it is important to ensure that the original priority position of the lease is retained. Procedures exist under the PPSA to effect transfers of registrations of an existing security interest and provided that such procedures are followed (and the security interest is continuously perfected), a transferee of such security interest should be able to retain the priority afforded to the original transaction.
The PPS Register allows for the linking of a registration to an earlier registration where they relate to the same security interest. The earlier registration must be current. However, the effect of such linking is unclear. Indeed, there is nothing in the PPS Regulations or the PPSA itself that deals with such linkage.
BENEFITS OF PPSA
Although the multitude of registrations against a grantor carries with it the costs referred to above, it does provide a degree of transparency which should be seen as beneficial by incoming financiers, who will be aware of more information about a grantor than was previously the case. This should assist in minimising risk and improving the pricing of financing transactions.
A system to cover new forms of personal property
As ongoing innovation in society results in new forms of personal property being developed (such as carbon units), the PPSA assists in providing a system by which security interests over such property can be granted, thereby assisting in the financing of such property and developments.
Over the last six months, the circumstances in respect to which we have had to consider the impact of the PPSA have been substantial in number and diversified.
This has clearly demonstrated the need to have a deep understanding of the operation of not only the PPSA, but also the PPS Regulations in order to determine the position of clients in particular circumstances. Despite the detail contained in the PPSA, it does not deal with all circumstances that may arise.
If we can be of assistance to you in determining the impact of the PPSA on particular transactions in which you are involved, please do not hesitate to contact one of our PPS team.
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