The Federal Government has released the Personal Property Securities (Corporations and Other Amendments) Bill 2010 (Cth) (2010 Bill) in an effort to finalise all legislative arrangements necessary for the effective operation of the new Personal Property Securities Regime.
The 2010 Bill has been referred to the Legal and Constitutional Affairs Committee for inquiry and report by 12 May 2010. The Committee has called for submissions on the Bill, which will be accepted up to 16 April 2010.
This update summarises the major changes under the 2010 Bill and the challenges and benefits these changes are likely to provide.
What is the 2010 Bill?
The 2010 Bill was introduced into the Commonwealth Parliament on 9 March 2010.
As mentioned in our last Update, there were a number of significant amendments proposed to the Corporations Act 2001 (Cth) (Corporations Act) by the previously released Personal Property Securities (Corporations and Other Amendments) Bill 2009 (Cth) (2009 Bill).
The 2009 Bill was open for submissions up to 22 January 2010.
The 2010 Bill is an update of the 2009 Bill and deals with some of the issues that were raised in submissions made to the Attorney-General's department on the 2009 Bill.
The 2010 Bill comprises three schedules, the first dealing with the amendments to the Corporations Act, the second dealing with further amendments to the Personal Property Securities Act 2009 (Cth) (PPSA), and the third dealing with various miscellaneous amendments to other pieces of Commonwealth legislation.
Main matters arising from 2010 Bill
Schedule 1 – Amendments to the Corporations Act
The main difference between the 2010 Bill and the 2009 Bill relates to amendments to the proposed provisions relating to the vesting, in the grantor of the security interest, of collateral (the subject of a PPSA security interest) in the event of the grantor's insolvency and where the security interest is not perfected.
Under the PPSA, a security interest must be perfected prior to the administration, liquidation or bankruptcy of the grantor to avoid the vesting of the collateral in the grantor and essentially the lapsing of the security interest. However the amendments to the Corporations Act will now provide the holders of personal property security interests granted by corporations a period of 20 business days in which to register their security interest. This 'grace period' will work as follows:
- A security interest (granted by a corporation) will vest in the grantor if the security interest is not registered by the later of:
- Six months before the 'critical time' (being the commencement of the relevant external administration or insolvency); or
- The end of 20 business days after the security agreement (that gives rise to the security interest) came into force, or the critical time, whichever time is earlier.
- In the case of security agreements which are governed by foreign law but then become enforceable against third parties under Australian law six months before the critical time, the end of 56 days after the security interest becomes enforceable, or the critical time, whichever is the earlier.
The above 'grace period' regime replaces the 45 day period under which company charges must currently be registered and provides financiers with some breathing space to take steps to avoid the vesting of collateral in the grantor. This will be of particular comfort to lessors who face the risk of losing their ownership interest in assets if they do not register their lease (being the relevant security interest) under the PPSA. It will also be of particular benefit to suppliers of goods on retention of title terms.
It is important to note that even with this 'grace period', failure to register a security interest either before or immediately after it is granted will still affect the priority position of the security holder. It will also continue to be relevant to determine whether or not a third party can take an interest in the collateral free of the security interest (the extinguishment rules).
In most other respects, the issues previously identified in relation to the proposed amendments of the Corporations Act (as mentioned in our last Update) continue to apply to the 2010 Bill.
Schedule 2 – Amendments to the PPSA
Schedule 2 contains a number of significant changes to the PPSA. Each is aimed at streamlining and clarifying the operation of the PPSA. We highlight these changes below:
The amendments provide that the PPSA is to start on 1 February 2012 or an earlier time determined by the Minister. As mentioned in our previous Update, given the time which has elapsed since the Personal Property Securities Bill was first introduced, we would be surprised if the Minister does not, in fact, determine that the PPSA will commence in May 2011. Hopefully the Minister will indicate a commencement schedule in the near future to provide businesses with some certainty in preparing for the changes. In any event, we recommend that you proceed to update your processes and procedures on the basis that the start date will be sometime in May 2011.
Concerns have recently been raised over the impact of the PPSA on premium funders. Premium funders fund a large amount of insurance premiums payable by corporates. Generally, the premium funder will take, as security for repayment of the funding, some or all of the rights of the insured in respect of its insurance policy. The PPSA currently provides that the legislation does not apply to 'a transfer of an interest or claim in, or under, a contract of annuity or policy of insurance'.
However, under the proposed amendments, this exclusion will not apply to 'a transfer of a right to an insurance payment or other payment as indemnity or compensation for loss of, or damage to, collateral (or proceeds of collateral)'. This may add more clarity as to whether or not the security arrangements associated with premium funding will be subject to the PPSA.
A security interest granted to a pawnbroker will not be subject to the PPSA provided that certain terms and conditions are met. These include that the market value of the payment or obligation secured by the security interest is less than or equal to $5,000.
The concepts of 'investment entitlement', 'investment entitlement account' and 'investment entitlement intermediary' are proposed to be deleted from the PPSA to be replaced by the concepts of an 'intermediated security' and an 'intermediary'. This will help clarify the operation of the relevant provisions of the PPSA.
Possible Unintended Consequence
A new section 252B is to be included in the PPSA which is to read as follows:
The inclusion of this provision appears to be to ensure that the PPSA is consistent with the Constitution. Nonetheless, the current wording of this provision leaves it open to interpretation and it may be used in a way which had not been intended by those drafting the Bill. For example, it may be used adversely on financiers seeking to exercise their rights to retain collateral on enforcement or sell collateral on enforcement to third parties. Other secured parties may seek to use these provisions to dispute the entitlement of a third party purchaser of collateral who would otherwise have the benefit of the extinguishment rules.
No Grace Period
Some minor amendments have been made in relation to the vesting provisions (referred to above in the context of the Corporations Act). Unlike the proposed amendments to the Corporations Act, there is no grace period in which the security interests must be registered in order to avoid vesting on insolvency.
Inconsistency with Corporations Act
There is no inconsistency provision in the 2010 Bill which expressly provides that the Corporations Act provisions regarding vesting will override the PPSA provisions where the grantor of the security is a corporation.
Improved Transitional Provisions
The transitional provisions as well as the priority rules applicable between transitional securities and between transitional securities and new securities have been simplified and now provide clear guidelines in this regard.
Schedule 3 – Amendments to other Acts
Generally, the purpose of the amendments to various other Acts referred to in Schedule 3 are to ensure that the priority rules to apply will be those contained in the various Acts rather than the PPSA. Such provisions are intended to be incorporated in the following pieces of Commonwealth legislation by Schedule 3:
- Designs Act 2003.
- Fisheries Management Act 1991.
- Mutual Assistance in Criminal Matters Act 1987.
- Navigation Act 1912.
- Patents Act 1990.
- Proceeds of Crime Act 2002.
- Torres Strait Fisheries Act 1984.
- Trademarks Act 1995.
What do you need to know to fully understand how the new regime will work?
To date, in order to fully understand the operation of the new Personal Property Securities Regime (PPSR), it will be necessary to consider:
- The PPSA.
- The Personal Property Securities (Consequential Amendments) Act 2009.
- The 2010 Bill.
The regulations will also need to be considered once they are released.
The Attorney-General's department has previously prepared an unofficial version of the Corporations Act marked up to indicate the amendments which would apply to it under the 2009 Bill. We expect that once the 2010 Bill is finalised that a similar mark up will be prepared. An unofficial consolidated version of the PPSA, including all variations contained in the 2010 Bill, has been prepared by the Attorney-General's department to assist businesses in their understanding of the operation of the PPSR in its totality.
Guidance Note Compilation
We have compiled all of the Guidance Notes to the operation of the PPSA found in the Act and the 2010 Bill to help our clients understand and prepare for the changes ( click here to view our Unofficial Guide to the PPSA). Please feel free to contact a member of our PPS Team if you would like to discuss any aspect of the PPSR.
We will be lodging a submission to the Legal and Constitutional Affairs Committee on the 2010 Bill and will keep you informed in future Updates. If you would like assistance with a submission of your own, please contact a member of our PPS team.
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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.