Draft Of Commonwealth Bill For Personal Property Securities To Replace Over 70 Pieces Of Commonwealth, State And Territory Law
On 16 May 2008, the Federal Attorney-General McClelland released a draft of a Commonwealth Bill for personal property securities ("PPS") to replace over 70 pieces of Commonwealth, State and Territory law.
The Personal Property Securities Bill 2008 ("PPS Bill") includes provisions relating to:
- the creation of valid security interests in personal
property and priority of competing security interests in
personal property;
- when a person acquires personal property free of a
security interest; and
- enforcing security agreements upon default by the
debtor.
A national PPS Register is also proposed so that security interests can be searched on a centralised online database.
Increase Certainty And Consistency, Reduce Complexity And Costs
The impetus behind the PPS Bill is to increase certainty and consistency and to reduce complexity and costs. Mr McClelland believes that, "[c]urrently, PPS is regulated by inconsistent and duplicate laws and registers. A streamlined national system will deliver greater certainty and cheaper finance to individuals and business".
The consultation draft of the PPS Bill has been made available for submissions until 15 August 2008. It is proposed that the start of the PPS regime will be in May 2010.
What Are PPS?
Personal property is defined in the PPS Bill as "property (including a licence) other than land". Therefore, the PPS Bill covers all tangible and intangible property other than land and buildings.
In the PPS Bill, "security interest" is defined as "an interest in personal property provided for by a transaction that in substance secures payment or performance of an obligation". Some examples include a charge (fixed or floating), a chattel mortgage, a hire-purchase agreement and a pledge. The PPS Bill goes further to specify that a "security interest" also includes other transactions, whether or not the transaction secures payment or performance of an obligation, including an interest provided for by a transfer of an account or chattel paper, a lease for a term of more than one year and a commercial consignment.
Attachment And Perfection Of Security Interests
The PPS Bill introduces the concepts of "attachment" and "perfection", which are central to the issue of priority of security interests.
A security interest "attaches" to personal property when all of the events necessary for the creation of the security interest have taken place. The "devil is in the detail", however under the PPS Bill, generally, a security interest will "attach" to personal property when:
- the secured party has given value; and
- the debtor has rights in the collateral.
If the security interest is to be enforced against a third party, a security interest will only "attach" if the above events have taken place and the secured party has complied with the "enforceability rules". These "enforceability rules" are, generally speaking, that the security agreement must be evidenced in writing, signed by the debtor and contain a description of the collateral.
The enforceability of security agreement is to be governed by its terms. However, security agreements are only enforceable against third parties when the secured party has possession and/or control of the collateral or where the security agreement is in writing and meets certain requirements.
"Perfection" refers to when a security interest has "attached" to personal property and the secured party has registered it on the PPS Register or taken possession and/or control of the collateral. When a security interest is "perfected", the secured party has protected their security interest from competing security interests.
Priority Rules
The PPS Bill provides general and specific rules for determining priority, for enforcement purposes, among competing security interests. The general rules are set out in the below table:
|
Competing Interests |
Priority |
|
Perfected security v unperfected security |
Perfected security |
|
Security perfected by control v security perfected over other means (including registration on the PPS Register) |
Security perfected by control |
|
Perfected security by control v perfected security by control |
First in time (i.e. priority is determined by the order that the interests were perfected by control) |
|
Security perfected over other means (including registration on the PPS Register) v security perfected over other means (including registration on the PPS Register) |
First in time (i.e. priority is determined by the order of continuous registration and/or possession) |
|
Unperfected security v unperfected security |
First in time (i.e. priority is determined by the order of attachments of the security interests) |
There are also specific priority rules apply to a purchase money security interest ("PMSI") which are discussed generally below.
Purchaser Money Security Interest
PMSI is defined in section 24 of the PPS Bill and is essentially where the secured party has provided the finance required by the grantor to acquire the collateral, but does not a sale and lease back arrangement.
PMSI's have "super-priority" over the same collateral (which has been granted by the same grantor) which has been perfected by registration or possession. However, a security interest which has been perfected by control has priority over a PMSI.
Processes For Enforcement
The PPS Bill sets out the processes for enforcing security agreements following default by the debtor. These provisions are proposed to operate in conjunction with the enforcement provisions in the Consumer Credit Codes and security agreements between the parties.
Parties may contract out of enforcement but the extent of contracting out depends upon whether collateral is consumer property.
If the debtor is in default, the secured party may initiate enforcement action (i.e. seize collateral) regardless of their priority. However, a higher-ranking secured party can obtain the collateral from a lower-ranking secured party who has gained possession of collateral after initiating enforcement action.
The PPS Bill also contains detailed provisions in relation to disposing or retaining of collateral. All remedies are subject to a duty on the enforcing party to act in a commercially reasonable manner.
Extinguishment Rules
Perfection of a security interest in personal property is generally sufficient to ensure that a secured party can enforce their security interest against third parties. However, part 5 of the PPS Bill sets out the circumstances where a security interest, including a perfected security interest, can be extinguished.
A security interest may be extinguished where the transferee (i.e. third party) does not have any knowledge of the security interest or the fact that a particular transaction constitutes a breach of the security interest.
Property Free Of Security Interests
The PPS Bill provides that third parties acquire personal property free of a security interest in a number of different circumstances, including where the:
- security interest in the personal property is
unperfected; or
- personal property is: purchased in the ordinary course of
business; not serial numbered and meets certain requirements;
serial numbered but is not listed in the PPS Register; cash;
an investment instrument; or "temporarily
perfected" (a concept referred to in the PPS Bill and
beyond the scope of this e-alert).
PPS Register
It is proposed that a PPS Register will be established and maintained by a Registrar of PPS. The PPS Register will contain collateral registrations of personal property. The collateral registrations will be made by secured parties that have entered into a security agreement or where a security interest has attached to the property.
The Effect Of The PPS Bill On Industry
The PPS Bill will affect almost all industries including automotive, banking, financial services, agriculture, transport, manufacturing and many commercial arrangements. If you believe that your business will be affected by a specific provision and you would like us to prepare a submission on your behalf, please do not hesitate to contact us. If you have any other concerns or queries please let us know.
We will continue to keep you updated as developments on the PPS Bill unfold.
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.
