The End of Transitional Protections
Many companies doing business in Australia have been caught unaware of an impending impact of the Personal Property Securities Act 2009 (Cth) (PPSA). In considering the effect of the PPSA on your business, it is critical that you act now to assess whether you have any transitional security interests which may lose their temporary perfection at midnight on 31 January 2014.1
The transitional provisions of the PPSA preserved the priority of transitional security interests by providing for automatic statutory perfection. Expiry of the transitional provisions is an important milestone for parties whose security interests are classified as 'transitional security interests' because the priority of their security interests could be compromised by failing to ensure that:
- any errors in data migrated to the Personal Property Securities Register (PPS Register) are corrected or
- previously un-registrable security interests (such as rights under retention of title clauses or certain leases of personal property) are perfected under the PPSA.
What is a Transitional Security Interest?
A transitional security interest is a security interest arising before 30 January 2012 (Registration Commencement Time) that the PPSA would have applied to, had the PPSA been in force at the time of the creation of the security interest.
It has been widely discussed that the PPSA has introduced a broad, form over substance, definition of 'security interest' which includes interests which were not previously registrable on any register. For example, under the PPSA, retention of title clauses in sale contracts, certain leases and even dilution or default clauses in joint venture agreements can all be considered security interests that require registration to preserve their optimum priority.
Effectively, this means that transitional security interests include both:
- traditionally registrable security interests (that is, security interests that were registrable on one of the 23 transitional registers that were subsumed by the PPS Register – such as fixed and floating charges which were registered on the Australian Securities and Investments Commission (ASIC) website)
- newly registrable security interests (that is, security interests that were not previously required to be registered on a register, but must now be perfected under the PPSA by registration to maintain their optimum priority, for example, the registration of a security interest created by a retention of title clause in a contract of sale or certain leases).
The Transitional Provisions
While the PPSA required perfection of security interests,, some temporary protection was provided for transitional security interests pursuant to section 322(1) of the PPSA, in order to preserve their priority and enforceability in insolvency from the Registration Commencement Time.
Section 322(1) provides that transitional security interests in collateral are taken to be perfected from immediately before the Registration Commencement Time. This automatic statutory perfection under the PPSA ends when that transitional security interest:
- is migrated to the PPS Register
- is perfected by being registered on the PPS Register (either through the effective migration of data to the PPS Register, effective preparatory registration prior to the Registration Commencement Time or amending a migrated registration on the PPS Register to correct migrated data)
- is perfected in another way (for example control) or
- remains unperfected at midnight on 31 January 2014 (because the transitional security interest remains unregistered and has not been perfected in another way provided for under the PPSA).
Traditionally Registrable Security Interests
In the case of traditionally registrable security interests that were registered on a register prior to the commencement of the PPSA, this data was, in theory, migrated to the PPS Register.
The process of migration of data from the pre-PPSA registers required the registrar to determine the class of personal property which the financing statement for the migrated security interest would be registered against. However, if the migrated data is registered in the incorrect class, the incorrectly registered data is taken to have never been registered on the PPSA.
Further, when data was migrated from the ASIC Register of Company Charges to the PPS Register, technical issues resulted in approximately 6000 charges which were registered on the ASIC Register of Company Charges not being migrated to the PPS Register. These securities are now at risk of losing their priority as a transitional security interest that was registrable on a pre-PPSA register but was not in fact registered does not have the benefit of the transitional provisions. For a list of the affected charges, click here.
The transitional period provides temporary perfection through the migration process allowing secured parties time to confirm that their security interests have been properly migrated to the PPS Register. Where an error in migration is a result of the Registrar's determination (rather than the quality of the data on the pre-PPSA register) or a technical issue in relation to the migration of data, the optimum priority for that security interest may still be able to be preserved where the registration is amended before midnight on 31 January 2014.
To avoid losing priority at midnight on 31 January 2014, it is important that secured parties of migrated security interests review the PPS Register to confirm that:
- traditionally registrable security interests have been migrated to the PPS Register
- the content of those registrations is correct and complies with the PPSA.
The consequences of failing to do this can potentially cause significant harm, as unlike under the Torrens registration system for registering interests in land, there is no public fund to provide compensation where a person suffers loss as a result of an error by the Registrar of the PPSA.
Newly Registrable Security Interests
In the case of newly registrable security interests, the position is much simpler – from midnight on 31 January 2014 if the security interest is not perfected (which in most cases will require registration on the PPS Register), the security interest will lose its optimum priority.
For example, a lease of personal property for more than one year which was created before the Registration Commencement Time, and which was not previously registrable, is likely to constitute a transitional security interest under the PPSA under which the lessor is in the position of a secured party. The transitional security interest will have the benefit of section 322(1) which presumes that the transitional security interest is taken to be perfected from immediately before the Registration. However, to continue to be perfected under the PPSA this transitional security interest must be correctly registered on the PPS Register before midnight on 31 January 2014.
If the transitional security interest is not correctly registered before midnight on 31 January 2014 (when the temporary perfection ceases):
- a later registered security interest will have priority over the unregistered transitional security interest in insolvency because it has been perfected under the PPSA
- the lessor may find that it loses its rights of ownership of the collateral on the insolvency of the lessee.
Whether intentionally or not, many secured parties of transitional security interests have been relying on the transitional PPSA provisions which provide temporary perfection for some time but the deadline for taking action is fast approaching.
Before midnight on 31 January 2014 every secured party (which includes suppliers under retention of title clauses and lessors under certain leases of personal property) needs to consider its PPSA exposure under existing contracts by:
- reviewing contracts to determine whether the secured party has the benefit of any transitional security interests
- in relation to traditionally registrable transitional security interests, confirming that:
- they have been migrated to the PPS Register
- the content of those registrations is correct and complies with the PPSA (and to the extent there are any errors, amending the registration appropriately).
- perfecting any newly registrable transitional security interests (such as retention of title rights).
Importantly, action must be taken well before midnight on 31 January 2014 (Canberra time) so that the necessary steps to preserve the optimum priority of your security interests under the PPSA can be implemented.
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.