The consultation draft of the Personal Property Securities Bill, released by the Attorney-General on 16 May 2008, will radically change the way in which security is taken over personal property in Australia.
Not only will a broader range of security interests require registration or perfection by other means but also the manner in which security is taken will change. Although the proposed transition period will mean that the new regime will not take effect until 2010 banks, financial institutions and others that take or grant personal property securities will need to start considering the impact of this legislation on their businesses now.
There has already been an extensive consultation process, so although this is an exposure draft, it is unlikely that the final form of the legislation will vary that much from the draft Bill.
The draft Bill is the culmination of the work undertaken by the Attorney-General's Department to implement a simpler system for personal property securities registration throughout Australia. Its primary aim is to replace the 70 or so personal property securities registration systems currently existing under Commonwealth, State and Territory legislation with one registration system, applicable to both bodies corporate and individuals. The Bill adopts as its model the New Zealand personal property securities legislation and has only deviated from that legislation when there have been compelling reasons to do so, arising from Australia's different economic environment and the like.
The new registration regime will be an online system. It will no longer be possible to physically lodge a security with the relevant registration office as, for example, is currently the case with the registration of charges granted by companies at the Australian Securities and Investments Commission.
The Bill does more than simply introduce a new registration regime. A few of the other key changes that will be effected by the Bill, once it becomes law, are:
1. Functional approach
The legislation involves a shift to a "functional" approach to securities. The legislation will apply not only to security interests in the "traditional sense" but also to leases (other than of real property and only where the term extends for more than one year), title retention arrangements, factoring arrangements and other transactions which are intended to secure the repayment of debt, irrespective of the form the transaction takes.
One of the outcomes of adopting this approach will be that fixed and floating charges will be replaced with, in the case of a fixed charge, security over "non-circulating assets" and in the case of a floating charge, security over "circulating assets".
2. When does the security attach?
A new regime for determining when an effective security interest has been created over personal property will be adopted. The general rule is that a security interest "attaches" to personal property when the security holder has given value, the grantor has rights in the personal property and, to ensure the interest is enforceable against third parties, the security holder has possession and/or control of the property or the security interest is created in writing in a manner that properly describes the relevant property.
Even if a security interest attaches to personal property there will still be some circumstances, as set out in the legislation, where a third party dealing with the security provider will be able to take a transfer of that property free of the security interest.
3. A question of priorities
There will be a new priorities regime, reflecting at least in part the broad range of security interests that are covered by the legislation. To determine priority, the key issues to consider will be the nature of the security interest, whether or not perfection of the security interest has occurred and how perfection occurred. Perfection will occur in one of three ways. Once the security interest attaches to property perfection will be completed by either control, possession or registration on the PPS register. Unsurprisingly, a perfected security interest will take priority over an unperfected security interest but there are a number of subsidiary rules that will apply when both interests have been perfected.
There are also special priority rules that affect different types of property (such as negotiable instruments and crops and livestock) and different types of security interests. For example, the legislation introduces the concept of a "PMSI" or purchase money security interest which will have super-priority over other security interests.
There will also be a new enforcement regime. This will not be an exclusive regime, as any Consumer Credit Code requirements would still need to be complied with and, on the whole, it will be possible to contract out of this regime.
There are some areas that the legislation will not affect. In particular, there will be no impact on the real property mortgage regimes in each Australian jurisdiction and no changes to the Consumer Credit Codes.
The Attorney-General's Department will be running comprehensive seminars in Sydney, Melbourne, Brisbane and Perth to discuss the Bill at the end of May. To enrol for one of these seminars, please here.
If you would like to discuss the legislation and its implications for your business please contact Angela Flannery.