Companies operating in the resources sector will need to consider the implications of the Personal Property Securities Act as the end of the transitional protection period fast approaches.
This briefing considers the impact these changes have had on the resources sector and, in particular, joint venture operations and what you need to know to be ready for the deadline.
What you need to know
It is important for parties to a joint venture to be aware of the consequences and effect that the PPSA has had on their projects. As the deadline for the registration of transitional security interests fast approaches, businesses should:
- register their existing, unregistered, security interests;
- review their current JVAs and identify whether they contain security interests which require registration under the PPSA but did not before;
- ensure that new and existing JVAs, cross securities and priority deeds reflect the language, security concepts and priority rules that were introduced by the PPSA (which may require amendment to existing documentation); and
- consider whether joint venture property in the possession of contractors needs to be protected by registering a security interest.
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.
The Personal Property Securities Act 2009 (Cth) (PPSA) came into force at the registration commencement time on 30 January 2012. This regime represented a major reform to the way that securities are taken and enforced over personal property. It also considerably extended the concept of a security interest.
What is a "security interest"?
The PPSA looks at the substance of the transaction rather than the form, without regard to who has title to the personal property.
A security interest under the PPSA is an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation ("in substance security interests"). Certain other arrangements will also give rise to security interests under the PPSA, whether or not they in substance secure payment or performance of an obligation ("deemed security interests"). These include the interest of a lessor or bailor under a PPS lease.
A PPS lease includes leases or bailments of goods for an indefinite term or for an effective term of 90 days or more for motor vehicles or one year or more for other goods. It should also be noted that a motor vehicle is defined widely and includes anything designed to be propelled on land by a motor with certain power or speed. This is considered in further detail in a joint venture context below.
Because the PPSA looks at the substance of the transaction without regard to title, a security interest under the PPSA covers not only conventional security interests such as charges, mortgages and pledges, but also interests that were not previously considered to be security interests, such as retention of title arrangements and other arrangements under which exclusive possession of equipment owned by one party is given to another.
In Joint Venture Agreements (JVAs), not only cross securities but also other rights given to one joint venturer on the default of the other may be security interests and will fall within the scope of the PPSA. In addition, arrangements under a JVA, such as those relating to use of equipment and ownership of product, will also need to be checked to determine whether they now constitute a security interest and fall within the scope of the PPSA.
While most mining tenements and petroleum licences under the various state and federal regimes have been excluded from the definition of personal property, it is important to note that this is not a blanket exclusion and there are variations from state to state. When dealing with this type of property, businesses should check whether a particular mining tenement or petroleum licence has in fact been excluded.
What to do if there is a security interest
All security interests over personal property arising under agreements entered into since 30 January 2012 must be registered on the Personal Property Securities Register (PPSR) or otherwise perfected, in order to:
- retain the best possible priority position;
- preserve the security interest on insolvency of the entity granting the security interest; and
- protect against a buyer or lessee of the personal property taking free of the security interest (although in some cases a buyer or lessee will also take free of a perfected security interest).
While perfection can in some cases be achieved in other ways (eg by possession), perfection will normally be by registration on the PPSR.
Registration is a simple and inexpensive process. However, accurate and prompt registration of a financing statement within the specified time limit is essential as:
- certain defects may make the registration ineffective; and
- failure to register promptly may have adverse effects on priority or if the grantor becomes insolvent.
Application of the PPSA to pre-30 January 2012 security interests
The PPSA affects not only security interests entered into after 30 January 2012 but also security interests that were in existence at that date ('transitional security interests").
The PPSA deals with these transitional security interests differently depending upon whether they were required to be registered on certain registers under the previous regime.
Migrated transitional security interests
Security interests that were registered under the previous regime on certain specified registers (eg charges registered with ASIC) have now been "migrated" from those registers to the PPSR.
No further registration is required for those transitional security interests that were successfully migrated. 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. Where a transitional security interest has been migrated, it is still necessary for the secured party to set up a "secured party group" on the PPSR and to "find and claim" that security to enable further dealings with the security.
Non migrated transitional security interests
Security interests that did not require registration under the old regime, or that were on registers that were not migrated to the PPSR, have been afforded "transitional" perfection. This transitional perfection continues until the end of the transition period or earlier perfection by registration on the PPSR or otherwise.
In order to maintain protection beyond this transitional period, businesses need to register their security interests on the PPSR before the end of the transition period.
Transitional security interests that were not migrated and have not otherwise been registered by the end of the transition period will cease to be perfected with the same outcomes as new security interests that have not been perfected.
In a joint venture context, businesses should consider the provisions of JVAs that were in existence at 30 January 2012 to determine whether any security interest exists which should be registered on the PPSR before the end of the transition period. This is considered in further detail below.
How this affects joint venturers
The broad definition of a security interest under the PPSA means that some contractual rights traditionally included in JVAs may now constitute security interests. This could have far-reaching effects for joint venturers, particularly regarding priority, cross security and default clauses.
The PPSA has detailed provisions in relation to the priority of security interests. The general rules are that, unless otherwise provided:
- a perfected security interest has priority over an unperfected security interest; and
- priority between perfected security interests is determined on a first in time basis.
However, there are a range of other complex rules relating to priorities for specific circumstances and specific assets. The parties themselves can also agree to other priority arrangements.
Most joint ventures require each party to enter into a deed of cross security (or cross charge, before the PPSA) in order to secure each party's obligations under the JVA, with the most common being the obligation to contribute to joint venture expenditure. Typically the secured property under this cross security will include each party's participating interest in the joint venture assets as well as its share in the final product.
Cross securities are clearly caught by the PPSA as they fall within the definition of a security interest because they create an interest in personal property that, in substance, secures payment or performance of an obligation.
However, other rights under the joint venture may also give rise to a security interest, and these are considered below.
Under the previous regime the joint venturers often agreed that a cross security and joint venturer's rights under a joint venture were to take priority over other securities, including security granted to financiers. This priority was usually established under a priority deed. Under the PPSA regime, joint venturers are still encouraged to enter into a priority deed with other secured parties rather than relying on the PPSA's priority rules because they may not reflect the agreed arrangements and are complex and untested.
Joint venture agreements often contain provisions that apply in the event of a default by a party to the joint venture. These provisions may give the non-defaulting venturer a right to acquire, or deal with, the interest of a defaulting venturer. Whether a particular default clause gives rise to a PPSA security interest will depend on the type of provision used - in effect, does it, in substance, give an interest in personal property that secures payment or performance of an obligation.
Some common default provisions that may give rise to a security interest are dilution, forfeiture, compulsory sale and loss of right to take product.
In forfeiture, dilution and compulsory sale clauses, the non-defaulting joint venturer is given the right to deal in various ways with the defaulting joint venturer's interest in the joint venture assets, its contractual rights under the joint venture agreement and, if applicable, its right to its share of product. However, it is only when these clauses secure the payment of money or the performance of an obligation (eg unpaid contributions by the defaulting joint venturer) that a security interest will arise.
By way of example, in our view:
- a default clause that merely triggers a pre-emptive purchase right in the non-defaulting joint venturer, with the proceeds of the purchase being paid to the defaulting party, may not give rise to a security interest; but
- a default clause that gives the non-defaulting joint venturer a right to take and sell the defaulting venturer's share of product to recover outstanding moneys, would be a security interest.
In the recent New Zealand decision of McCloy v Manukau Institute of Technology  NZHC 936, it was held that step-in rights entitling a non-defaulting party to retain and deal with the property of the defaulting party may give rise to a security interest. Whilst the New Zealand case dealt with the rights of a principal under a construction contract to retain property of the defaulting builder that was on the principal's site, the decision has implications not only for construction contracts that companies in the resources sector enter into, but also for other step-in rights that may arise under joint venture agreements. Since the Australian PPSA is similar to the New Zealand legislation, it is possible that the New Zealand case law may be followed in Australia.
Use of joint venture property by others
Parties to a joint venture also need to consider the impact of the PPSA on their operational contracts. For example, services contracts may sometimes provide for contractors to use the equipment and facilities of the joint venture. Such arrangements may - depending on their term and the type of equipment - give rise to a PPS lease. PPS leases are "deemed security interests" that require registration. Failure to register a PPS lease would mean that, if the contractor became insolvent, the joint venture would no longer be able to rely on its title to the equipment in a priority dispute with other creditors of the contractor.
It will be important for parties to a joint venture to consider the new PPSA rules prior to 29 January 2014. For more information or assistance in reviewing your company's position please contact Liz Allnutt or Sarah Lilly.
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.