There has been significant activity over the last two months in relation to the upcoming Personal Property Security (PPS) laws to be introduced in Australia.
This update provides an indication of the status of the reforms and highlights some of the more significant issues arising from the recent activity. Personal Property Securities Bill 2009 pass ed by Federal Parliament - but when will it start?
Personal Property Securities Bill 2009 passed by Federal Parliament - but when will it start?
The Personal Property Securities Bill 2009 together with the Personal Property Securities (Consequential Amendments) Bill 2009 both received Royal Assent on 14 December 2009. As a result, the Personal Property Securities Bill is now an Act (PPSA).
The majority of State parliaments have passed referral legislation to facilitate the national operation of the PPSA.
Although releases from the Attorney-General's Department indicate that the Federal Government is still aiming for the PPSA to commence in May 2011, section 306 of the PPSA provides that the registration commencement time (being essentially the time on which the PPSA will commence) is to be in the month being 26 months after the PPSA received Royal Assent unless the Minister brings such date forward.
Under section 306, in the absence of the Minister bringing forward the commencement date for PPSA, the new Personal Property Securities reforms will commence on 1 February 2012. It will be interesting to see if the Federal Government brings forward the commencement of the operation of the PPSA to May 2011 (as originally envisaged) on the basis that the commercial community has had sufficient time to prepare for the commencement of the regime or whether it allows the additional seven months for participants in the industry to put in place all necessary processes and procedures to ensure a smooth transition to the new regime.
Significant amendments to the Corporations Act
As mentioned in our last Update, the Personal Property Securities (Consequential Amendments) Bill 2009 did not deal with the amendments necessary to be made to the Corporations Act in order for the Personal Property Securities regime to operate as intended. In early December, the Attorney-General's Department released the Personal Property Securities (Corporations and Other Amendments) Bill 2009 (Bill) for comment. This Bill deals with the substantial changes required to be effected to the Corporations Act (including the repeal of the charges provisions) in order for the PPSA to be the sole piece of legislation to apply to security over personal property (whether given by a corporate entity or an individual).
On releasing the Bill, stakeholders were invited to comment on the Bill by 22 January 2010. We have lodged our submission on the Bill and await with interest the response of the Attorney-General's Department to the comments made. We highlight below some of the more significant issues identified in our review of the Bill.
Impact on insolvency practitioners
The changes to the Corporations Act contemplated by the Bill are significant. Not only will these changes impact upon the amount of security that financiers will obtain from their clients, the nature of that security and their processes and procedures, they will also impact upon how insolvency practitioners deal with assets of companies subject to administration or liquidation.
- Liquidators and administrators will need to determine whether or not security interests have been perfected under the PPSA. If a security interest is not perfected under the PPSA, the collateral the subject of the security interest will vest in the grantor company (subject to administration or liquidation) and thereby improve the opportunities available to insolvency practitioners to sell the business as a going concern, trade out of difficulties or determine some other strategy to restructure the business in a viable way. Although the PPSA reverses the onus of proof so that a secured party bears the onus of proving that its security interest has been perfected by registration, we believe that in order to minimise the risk of litigation by secured parties, administrators and liquidators will need to put in place processes in order to verify whether or not security interests are perfected.
- Administrators and liquidators will need to consider whether or not they have the ability to deal with assets subject to retention of title, hire purchase, consignment and leasing arrangements. Whereas under the current law, title to such assets rests with the seller, hirer, consignor or lessor, (and therefore the asset is not an asset of the company in administration or liquidation), under the proposed amendments to the Corporations Act, such assets are, in certain circumstances, deemed to be property of the company and will therefore be able to be dealt with by administrators and liquidators.
- Where a large part of the assets of a company which is in
administrations consists of PPSA retention of title property,
secured parties with security over all assets of the company may
now have difficulties in taking advantage of the ability to enforce
their security during the decision period. Under the proposed
changes to the Corporations Act, the property over which they must
hold security will include the retention of title property. As
title to such property will continue to be held by the seller,
hirer, consignor or lessor, it may be difficult for the holder of
the all assets security to be able to demonstrate it has security
over the whole or substantially the whole of the assets of the
The proposed amendments to section 435B of the Corporations Act will result in administrators being able (in certain circumstances) to deal with personal property, title to which is retained by third parties. In keeping with the functional approach adopted in PPSA, the property of a company for the purposes of Part 5.3A of the Corporations Act will now include any PPSA retention of title property of the company. In other words, assets which are leased, hired, subject to consignment arrangements or retention of title arrangements will be deemed to be property of the company and would therefore fall within the powers of the administrator under section 437D of the Corporations Act. In our view, this should not apply unless the security interest created by the lease, commercial consignment arrangement, hiring arrangement or retention of title arrangement has not been perfected under the PPSA (see our comments below).
If, however, an administrator were to dispose of PPSA retention of title property, the proposed amendments require the administrator to apply the net proceeds of sale in accordance with the PPSA.
In addition, the restriction in clause 442C(1) would appear to prevent disposal by an administrator of PPSA retention of title property other than in the ordinary course of the company's business.
- The amendment proposed to section 443D of the Corporations Act (paragraph 163 of the Bill) will result in administrators not being able to be indemnified out of PPSA retention of title property for the debts and liabilities referred to in section 443D. Consistently with the operation of section 267 of the PPSA, we are of the view that if the security interest over the PPSA retention of title property has vested in the company due to the operation of section 267 of the PPSA, administrators should be entitled to be indemnified against the relevant PPSA retention of title property.
Other matters identified in the Bill
- There appears to be a difference of approach in relation to
whether or not property includes PPSA retention of title property
in various chapters of the Corporations Act. The general definition
of PPSA retention of title property (proposed section 51F(2)),
provides that unless otherwise specified, a reference to property
of a corporation does not include a reference to any PPSA retention
of title property of a corporation. In the administration
provisions, the change to Section 435B results in all of the
administration provisions applying to PPSA retention of title
property unless excluded. In relation to voluntary winding up,
receivership and other provisions, a reference to property will
only include PPSA retention of title property if the security
interest created by the retention of title arrangements has not
been perfected. We believe a consistent approach (similar to that
applying in the winding up and receivership provisions) would make
it easier for people to understand the operation of the Bill and
its impact on the Corporations Act.
- Section 267 of the PPSA deals with
when a security interest over personal property securities vests in
a grantor if it is not perfected prior to the beginning of
insolvency, administration or liquidation. The Bill provides that
the Corporations Act will also deal with the same issue in proposed
Section 588FL. There are differences between Section 267 of the
PPSA and proposed Section 588FL. In addition, proposed Section
588FM seems to provide secured creditors with rights which are not
contained in the PPSA. We query why the Corporations Act needs to
deal with the same issue as is dealt with by the PPSA and have
requested the Attorney-General to clarify the policy reason why
this matter is to be dealt with in both pieces of legislation in a
- The structure of the Bill is confusing, as there are references
to section numbers throughout the Bill which are not in numeric
order. Although it is necessary for amendments to be made to a
number of provisions (which apply in a number of chapters,
divisions parts or sections), we have suggested that to the extent
possible, the amendments be shown in the correct numeric
In addition, we have suggested to the Attorney-General that a marked up version of the Corporations Act, including the amendments suggested by the Bill, be produced to allow stakeholders easier review of the impact of the proposed changes.
What should you be doing?
PPSA is now law and will take effect sometime between May 2011 and February 2012.
The regime which is to apply is largely settled and so there is now no reason to delay implementation of the steps necessary to make your business compliant. Whether you are a bank, other financial institution or corporate, if you are involved in any form of financing of personal property (from selling goods on retention of title terms, to leasing of equipment to providing property finance which involves taking security over non-real estate assets) PPSA will impact on your business.
Failure to comply will have dramatic consequences, particularly where your borrower/security provider enters administration or is wound up.
For this reason, we strongly recommend that you seek advice as to how the regime will impact on you and start to implement an appropriate project plan.
For more information, please contact a member of our PPS team:
DLA PHILLIPS FOX PPS TEAM:
David East, Partner
Tel +61 2 9286 8340
Peter Faludi, Special Counsel
Tel +61 2 9286 8159
George Marques, Partner
Tel +61 2 6201 8707
Nigel Stranaghan, Partner
Tel +64 9 300 3821
DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com
- There appears to be a difference of approach in relation to whether or not property includes PPSA retention of title property in various chapters of the Corporations Act. The general definition of PPSA retention of title property (proposed section 51F(2)), provides that unless otherwise specified, a reference to property of a corporation does not include a reference to any PPSA retention of title property of a corporation. In the administration provisions, the change to Section 435B results in all of the administration provisions applying to PPSA retention of title property unless excluded. In relation to voluntary winding up, receivership and other provisions, a reference to property will only include PPSA retention of title property if the security interest created by the retention of title arrangements has not been perfected. We believe a consistent approach (similar to that applying in the winding up and receivership provisions) would make it easier for people to understand the operation of the Bill and its impact on the Corporations Act.