The regime established under the Personal Property Securities Act 2009 (Cth) (PPSA) commenced on 30 January 2012. It applies to security interests arising both before and after that date. Security interests arising under agreements entered into prior to 30 January 2012 are called "transitional security interests".
Transitional security interests have been enjoying the benefit of certain temporary protections under the transitional provisions of the PPSA. Some of those temporary protections, which include temporary perfection, will cease at the end of the transition period. Due to uncertain drafting in the relevant parts of the PPSA, there is some debate about precisely when the transition period ends. Our position is that it ends at midnight (Canberra time) on 29 January 2014 but we are aware that views differ; some say it is midnight on 30 January 2014 and others at midnight on 31 January 2014. Prudence dictates that parties should assume the earliest date. There is a separate discussion of this issue below.
Here are five key things you should be thinking about in the lead up to the end of the transition period.
1. Perfect any unperfected transitional security interests
Transitional security interests which have not been perfected under the PPSA (other than under the transitional provisions) should be perfected before midnight (Canberra time) on 29 January 2014. Failure to do so will result in the transitional security interest becoming unperfected after that date.
Perfection will most commonly be achieved by making a registration on the online register established under the PPSA (PPS Register). Registration is a relatively simple and inexpensive process. A transitional security interest which is perfected at any time before the end of the transition period will be treated as if it had been perfected prior to 30 January 2012 (preserving its pre-PPSA priority position, with some exceptions).
If a transitional security interest remains unperfected after the end of the transition period:
- subsequent purchasers or lessees of the secured property (described as "collateral" under the PPSA) may acquire or lease the collateral free of the security interest (although this can sometimes happen even with perfected interests);
- the security interest will lose in any priority contest with another security interest over the same collateral which has been perfected, even if given later in time; and
- the security interest may be lost on the insolvency of the grantor (this will include loss of title to the collateral if the secured party had title, e.g. as a lessor, hirer, bailor, consignor or supplier on retention of title terms).
A transitional security interest can still be perfected after the end of the transition period. However, it will rank behind all other security interests perfected before it, even if those interests were granted after the transitional security interest.
2. Migrated security interests may need to be re-registered
Some transitional security interests were automatically migrated from an existing security register to the PPS Register, including charges registered on the ASIC register of company charges. However, the migration process resulted in errors and deficiencies in some migrated registrations. In addition, a security interest which was registered on a migrated register but was not legally required to be on that register, may not in fact be perfected (even though it has been migrated). For those reasons, it is preferable to re-register migrated security interests before the end of the transition period.
3. Transitional security interests over property with a serial number will need to be registered by reference to the serial number in order to gain the best possible protection
One of the "taking free" rules in the PPSA allows certain purchasers and lessees of collateral with a serial number (including motor vehicles, watercraft, aircraft and certain kinds of intellectual property) to acquire or lease that collateral free of an existing security interest if the security interest has not been registered by reference to the correct serial number.
At present, some transitional security interests over collateral which has a serial number are excluded from the application of this taking free rule. The exception currently benefits transitional security interests over the following kinds of collateral (if it has a serial number):
- intellectual property;
- aircraft assets; and
- motor vehicles and watercraft (if the security interest was not migrated).
This protection will be lost after the end of the transition period with the result that all transitional security interests over collateral with a serial number will be vulnerable to the taking free rule unless they have been registered on the PPS Register by reference to the relevant serial number. Even if a security interest was migrated to the PPS Register, the migrated registration will not necessarily include the required serial number.
Registration by reference to a serial number is not always necessary to achieve perfection (other than for aircraft assets) but will always be necessary to avoid the potential application of the above taking free rule.
4. Interests which are at risk may not, at first glance, appear to be security interests
Arrangements which have not traditionally been thought of as security interests may be security interests under the PPSA. In addition, rights under contracts relating to land and other property which is not personal property for the purposes of the PPSA may constitute security interests for PPSA purposes. This issue applies to both transitional and non-transitional security interests.
Much has been said about the impact of the PPSA on leases, consignments and conditional sale arrangements (such as retention of title). However, there are other arrangements which may also be caught. These include:
- rights under a contract which allow one party to acquire, use or sell property of another party if that other party is in default under the contract, sometimes referred to as "step-in rights" or "take-out rights" and particularly common in construction contracts and related tripartite agreements;
- deposit arrangements which are not part payment of a purchase price;
- retention of monies otherwise payable to a vendor (e.g. pending expiry of a warranty period);
- options, forfeitures and pre-emptive rights concerning shares or interests in joint venture arrangements; and
- rights in relation to personal property which arise under contracts relating to land, such as rights under a lease to seize chattels and in respect of related insurance proceeds.
When identifying potential security interests (both transitional and non-transitional), businesses should give careful consideration to any arrangement under which:
- it gives (or has given) exclusive possession of its property to a third party in return for payment or some other consideration or value (particularly if done as part of its regular business);
- it has, or is given, rights to deal with property of another entity for the purpose of ensuring that entity (or another person) performs its obligations, even if the right to access the property is contingent on the other entity or person defaulting.
If in doubt, seek advice as to whether an interest constitutes a security interest. A person must not make a registration on the PPS Register unless the person believes, on reasonable grounds, that the party named as the "secured party" in the registration holds or will hold a security interest in the relevant property.
5. Activities of your customers or security providers could affect your title to leased or hired property or the value of your security
Businesses which lease or hire personal property should check whether their lessees or hirers are in turn sub-leasing or sub-hiring the property. If they are, it may be necessary to ensure that those parties are registering their own security interests arising from the sub-lease or sub-hire on the PPS Register. Failure to do so could adversely impact on the position of the head lessor or entity that made the original hire (including its title to the relevant property), even if that party has perfected its own security interest.
If an entity has taken security over the assets of another entity to support a loan or payment of a deferred purchase price, the value of that security could be adversely affected if the security provider holds security interests of its own which have not been perfected. For example, if the security provider's business involves leasing equipment or supplying goods on retention of title terms and one of its major customers becomes insolvent, the security provider could lose title to the property which is the subject of any lease or retention of title arrangement with that major customer (to the extent it is unperfected). Risks such as this have a flow-on effect to the value of the security over that property.
Before the end of the PPSA transition period, take the opportunity to re-visit the potential impact of the PPSA on your business. In conducting your review, consider:
- the adequacy of current policies and practices for identifying and perfecting security interests (including by reference to serial numbers where applicable);
- whether PPSA policies and practices take into account the broad range of transactions which could give rise to security interests; and
- the nature of arrangements entered into with customers, suppliers and other contract counterparties (both pre-and post-30 January 2012) with a view to:
- identifying any unperfected security interests in your favour; and
- identifying any security interests in favour of your customers or contract counterparties which, if unperfected, could adversely impact on your property or business (most likely to arise in the context of your property being sub-leased or sub-hired), and in each case arrange for those interests to be perfected.
Note – why is there debate as to when the PPSA transition period ends? The PPSA states that the end of the transition period is "the end of the month which is 24 months after the registration commencement time". The registration commencement time was 30 January 2012. One interpretation of that statement (which is supported by information on the website for the PPS Register) is that the end of the transition period is 31 January 2014. However, that interpretation assumes that the reference to "month" is a reference to a "calendar month". The Acts Interpretation Act 1901 (Cth) (AIA) defines "month" and a period of 2 or more "months" for the purposes of the PPSA. Applying those definitions, the transition period would run from the beginning of 30 January 2012 to midnight (Canberra time) on 29 January 2014. The AIA separately defines "calendar month", but that expression is not used in the PPSA. It is therefore arguable that the AIA definition of "month" applies, making the end of the transition period midnight (Canberra time) on 29 January 2014.
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.