This article is aimed at holders of security interests in IP – but is also relevant for clients who hold other security interests, such as goods on consignment, retention of title, rights in PPS Leases or a charge over the assets of a related body corporate.
We recommend that clients pass this article on to their accountant, as failure to register may lead to a loss of IP assets to a liquidator.
On 30 January 2012, the Personal Properties Securities Act 2009 (Cth) (PPS Act) established a new system for the creation, priority and enforcement of security interests in personal property.
Intellectual property is personal property for the purpose of the PPS Act. Generally, the PPS Act will apply if secured property is located in Australia, or if the grantor of the security interest is an Australian entity and the security agreement is expressed to be subject to Australian law. There are complex jurisdictional provisions (outside the scope of this article), governing the application of the PPS Act to IP where foreign laws apply.
The Australian Government allowed a two year transitional period for businesses to record any security interest existing before the commencement of the PPS Act. This is a so-called 'transitional security interest', on the Personal Property Security Register (PPSR).
The transitional period ends on 31 January 2014.
Register a transitional security interest before the deadline or lose priority
A transitional security interest is an interest under a security agreement that was entered into before 30 January 2012 (i.e., when the PPSR commenced), and continued after that date. Such interests have the special protection of being enforceable against a third party (having the benefits of being a secured creditor), but only for the first two years of the PPS Act's operation – after which time they must be registered on the PPSR to maintain their priority over later-in-time security interests.
We recommend that businesses:
- Identify any transaction entered into on or before 30 January 2012 which created a security interest
- Identify any security interest recorded as a claimed interest on the patent, trade mark, design, or PBR Register (IP Registers)
- Identify any warranties given that a party will register a security interest in Australia (e.g. financing documents of an overseas parent may require an Australian subsidiary to register the security holders' interest in IP registered in Australia)
- REGISTER the interest on the PPSR by 31 January 2014.
What exactly is a security interest?
A security interest is an interest in personal property "that, in substance, secures payment or performance of an obligation". Prior to the PPS Act coming into force, a security interest would have been known as a charge (such as a fixed and floating charge over a business, a mortgage, a lien – there are many others). There are new interests (such as retention of title in goods, certain leases), that would not previously have been considered as a security interest but that are now security interests under the PPS Act.
Typically, a security interest in IP is a mortgage taken over a patent to secure the repayment of a loan to the patentee's business. If the loan is not repaid, the lender is able under the security agreement to seize the patent (by assignment) and sell or license it to recover the amount of the loan (or part thereof). This right to have the patent assigned to the lender is enforceable against third parties (or for example, other creditors that may have an interest in the assets of the patentee).
Transitional security interests on IP Registers at the commencement of the PPSR were not automatically migrated over to the PPSR. The change must be done manually.
The PPSR is the only register in Australia on which security interests must be registered to be enforceable and have priority over other security interests (subject to the priority rules).
Registration of security interests on the IP Registers is still recommended because the registrant will receive notifications and be able to make submissions about various acts of the owner that might affect the value of the security interest.
Why should you register on the PPSR?
Although transitional security interests can still be registered on the PPSR after 31 January 2014, registering after the deadline will result in the holder losing the benefit of the transitional provisions. This means that:
- The security interest will rank behind other creditors who registered earlier, even if the other creditor's interest was created later; and
- If the company that granted the security interest becomes insolvent before the interest is registered, the secured property can be sold by the liquidator free of the security interest.
There are many other possible scenarios, but the bottom line is that if you are the holder of a transitional security interest, you have a window of opportunity to maintain the priority of your interest from the date before 30 January 2012 when the interest was created. Registration of a transitional security interest is currently free.
Don't delay. Register your interest on the PPSR today.
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.