REMINDER - The Personal Property Securities Register Deadline Draws Near - Charges, Mortgages, Indemnities

The Australian Personal Property Securities Register (PPS Register) now commences in October 2011, previously 1 May 2011. It replaces most existing personal property security registers including the ASIC charges register and REVS (vehicles). Financiers, lessors and suppliers must take action to ensure that they don't lose their rights over assets or securities.

The Personal Property Securities Act 2009 (PPSA) provides for creation of the PPS Register as well as effecting sweeping changes to the law relating to personal property securities. It covers both traditional securities such as charges along with other transactions including retention of title arrangements and leases of goods.

This article focuses on issues arising under the PPSA that are relevant to intellectual property (IP). However, most points are relevant to security interests over all forms of personal property.

THE PPS REGISTER - WHAT SHOULD YOU DO?

Financiers, lessors of goods and suppliers of goods on consignment/retention of title:

Undertake an audit of all security interests you hold over personal property including IP and security over IP licences
From October 2011, for security interests that will not be automatically migrated to the PPS Register (eg securities over IP registered with IP Australia), arrange for existing registered security interests to be recorded on the PPS Register
From October 2011, for security interests that will be automatically migrated to the PPS Register (eg ASIC charges), check the migrated data
From October 2011, arrange for any previously unregisterable security interests that must now be registered (leases, retention of title arrangements etc), to be recorded on the PPS Register
Ensure security interests over patent applications recorded on the PPS Register are updated with the registered patent number once the patent is registered
Renew the PPS Register record every 7 years for consumer goods and serially numbered goods (including IP with serial numbers) or 25 years for other types of personal property (unless a shorter registration period is specified on lodgement)

Intellectual property owners:

If you are giving security over personal property (eg machinery) which is interconnected with related IP, ensure that you have not granted a security interest over the IP to another financier
If you assign IP on terms that provide for a transfer (reversion) back to you after a time or on certain conditions, ensure that your reversionary right is registered on the PPS Register from October 2011 – common in the music and film industries
If you grant IP licences, ensure the licence agreement prohibits the licensee from granting a security interest over the licence

What is the PPS Register and when does it come into force?

The PPSA establishes a new national system for registration and regulation of "security interests" in "personal property". The new securities register will be known as the PPS Register and will begin in October 2011 (previously 1 May 2011). The PPS Register replaces numerous existing Federal and State registers. Importantly, certain interests that were not previously registerable (or even considered to be security interests) will now require registration as a security interest on the PPS Register to ensure priority against third parties. See the discussion on security interests below.

What is personal property under the PPSA?

Personal property is any type of property except real property (land/buildings) and limited types of statutory rights such as water rights. It includes intangible property such as patents, designs, trade marks, copyright, plant breeders rights, circuit layout rights and similar. A licence of IP is also personal property under the PPSA. Personal property that is subject to a security interest is known as "collateral" under the Act.

What is a security interest under the PPSA?

Under the PPSA, a "security interest" includes the usual security types such as mortgages and charges. But it also covers many other arrangements not traditionally considered to be a security interest including:

retention of title provisions – where the seller sells goods but retains title pending payment;
consignments – where the owner places goods for sale with a third party but retains title;
leases of goods with a term exceeding one year (or less than one year but renewable including 90 day leases for goods with serial numbers such as motor vehicles, aircraft etc) – unless the lessor/owner is not regularly engaged in leasing;
conditional sales, hire purchase, bailments and pledges; and
a partial or total assignment of IP which provides for a reversion (transfer) of ownership back to the seller in some situations (eg on non-payment of royalties). Such assignments are common in the music and film industries.

Under the PPSA, the person granting the security interest is known as the "grantor" and the person receiving the security interest is known as the "secured party".

Various interests which previously did not need to be registered must now be registered. Failure to register will mean that the interest is ineffective against certain third parties such as another security holder who does register, a buyer or an insolvency administrator.

An IP licence is not a security interest but an IP licence is personal property over which a security interest can be taken. Therefore, there is no requirement to register IP licences on the PPS Register but a security interest over an IP licence should be recorded. Of course, licences should be recorded in the specific IP registers maintained by the relevant Registrar in relation to patents, trade marks and designs.

What are the features of the PPS Register?

The PPS Register will be an online, internet-based register accessible 24 hours a day. It will replace numerous other Federal and State systems to provide the sole system for recordal of security interests over personal property. The PPS Register will also be accessible by other physical and electronic means (eg attendance at the Register's office and by fax and SMS).

The register will be operated by Insolvency and Trustee Services Australia, an existing Federal Government body. Security interests will be lodged online using a process set out in the associated regulations. Unlike with existing registers, a copy of the document creating the security interest does not need to be deposited on the PPS Register. The security holder's interest is notified by completing and lodging a "financing statement" which provides details of the security interest. An incorrectly completed financing statement may jeopardise registration.

It is intended that the new register will be fully searchable. A careful description of the relevant collateral will be required to ensure that the item is properly identified to facilitate future searching.

New security interests granted by companies must be registered within 20 business days after creation, otherwise, the interest will be invalid against a liquidator appointed within 6 months after the creation of the security interest by the company. There are some exceptions relating to the automatic migration of certain existing security interests and grace periods applying to other security interests not previously registrable.

The maximum permissible registration period is 7 years for consumer property and for property with a serial number including certain IP and 25 years for all other personal property. The registration can be renewed.

The PPSA provides that defects in registration may result in the security interest being unperfected (and therefore subject to loss of priority) or invalid. A particular issue for registration of security interests over patents is the need to update the registration number if the security interest covers a patent application which then proceeds to grant as it is given a different registration number from its application number. Failure to update the PPS Register details with the registration number will result in the security interest being unperfected. The time period for updating an incorrect entry is 5 business days after the security holder acquires actual or constructive notice of the defect (and after 5 years, the interest becomes unperfected in any event). So, prompt action to update the PPS Register details on registration of the patent is required.

Creation, priority and enforcement of security interests

In addition to establishing the PPS Register, the PPSA sets out complex rules in relation to the creation, priority and enforcement of security interests. The Act introduces the following new terms/concepts:

security over a circulating asset (replacing a floating charge);
attachment (the effective creation of a security interest which is enforceable against the owner of the personal property); and
perfection (the process a security holder must follow to ensure that its security interest takes priority over other security interests and is effective against an insolvency administrator). A security interest can be perfected by various means including acquiring control of the property or, more usually, registering the interest on the PPS Register.

A creditor with an unperfected security interest loses priority to a creditor with a perfected security interest and becomes an unsecured creditor on insolvency of the debtor. Certain categories of security interests are given a "super' priority under the PPSA.

A security interest can be registered before its creation to prevent a gap between the date when the relevant security interest is created and the date on which registration is effected. This was a problem under the previous regime.

Securities over personal property necessarily involving exercise of rights over IP

Section 105 of the PPSA is an unusual and important provision in the Act for IP holders and financiers. It provides that a registered security interest over specific personal property also attaches to IP integrally associated with the personal property. The security holder does not have to record its interest in that IP on the PPS Register. The section applies where:

exercising the security holder's rights necessarily involves an exercise of associated IP; and
the secured obligation is secured by a security interest attached to the IP.

The above wording comes from the Act. It is not a model of clarity. The explanatory memorandum to the Act gives the following example:

Grant A owns a factory that produces car parts using robots whose only function is to manufacture those particular car parts. The process used to manufacture the car parts was patented by Grant A. Grant A obtains a loan from Bank A and received value for a security interest. The security agreement refers to "the robots". Bank A registers the security interest.

Grant A defaults under the security agreement. Bank A enforces the security agreement. The security agreement only refers to a security interest over the robots, but the court determines that the security interest extends to the patent to the extent required to permit the robots to operate. The exercise of Bank A's rights to the robots under the security agreement necessarily involves the use of the patent rights exploited in the robots. Bank A's security interest will therefore be enforceable against both the robots and the patent.

The example does not explain how a security interest has attached to the patent (a requirement for section 105 to operate). The section raises potentially interesting questions where another financier holds a prior registered security interest in relation to the underlying patent.

Other examples of potentially relevant personal property include hardware with embedded software, patented pharmaceuticals/chemicals and items protected with design registration.

Security interest over licence continues despite sale of underlying IP

Section 106 of the PPSA specifies that a registered security interest over an IP licence continues to exist when the underlying IP is transferred. To prevent unnecessary impairment on the value of IP, IP licensors should ensure that the licence agreement expressly prohibits the licensee from granting security over its licence interest. The granting of a security interest should be grounds for terminating the licence.

Transitional arrangements – existing registered security interests

The Act specifies that the PPS Register will begin at the "registration commencement time" which is now scheduled to be October 2011 (previously 1 May 2011).

Existing security interests registered on some registers such as the ASIC charges register, the Register of Encumbered Vehicles (REVS) and bills of sale registers as at the date the new scheme operates will be automatically migrated to the new PPS Register. Migration details should be checked to ensure they are correct.

During the initial 2 year period of the PPS Register, security interests over IP which are recorded on the Registers of Patents, Designs or Trade Marks will continue to be effective as transitional security interests under the PPSA. After the 2 years, the recordals on the Register of Patents, Designs or Trade Marks will be of no further effect from a security perspective. Note that securities registered on the Registers of Patents, Designs and Trade Marks will not be automatically migrated to the new PPS Register. The holder of the relevant security must attend to recordal of the security interest on the PPS Register itself to preserve its security after the 2 year transition period. No government fee applies to this registration.

Security interests created before October 2011 that were not previously registerable (such as assignments with transfer back rights, leases and retention of title arrangements) will continue to be effective for 2 years after the registration commencement time (October 2011) without registration on the PPS Register. After that time, a security interest registered on the PPS Register in relation to the same personal property will defeat the earlier unregistered security. The interests will also be unenforceable against an insolvency administrator. However, the earlier unregistered security will still be effective against the grantor of the security.

Securities and other interests in IP (eg licences) will continue to be registrable with the Registrar of Designs, Registrar of Patents and Registrar of Trade Marks as applicable, but registration on these registers will not affect dealings with the personal property after the new PPS Register commences.

Territorial nexus

The Act contains complex provisions about which country's law applies when considering enforcement of securities in a conflict of laws situation.

A security interest can be registered on the PPS Register even if the property is not located in Australia or if the grantor is not located in Australia, provided there is an Australian connection (eg an Australian company holding a US patent or a US company holding an Australian patent).

The importance of registration

Failure to register a security interest will result in that security interest being postponed to the rights of a later registered security holder or a purchaser or lessee of the personal property in good faith without notice of the unregistered security. The security will also be unenforceable against a liquidator, administrator or trustee in bankruptcy of the entity granting the security. The same applies to a security by a corporate grantor which is not registered within 20 business days and an insolvency administrator is appointed within 6 months. Therefore, all security holders will need to take action to ensure that their security interests are recorded on the new register once it becomes operational (apart from those existing securities which have been automatically migrated such as those on ASIC and REVS registers). This is a particular issue for interests that were not previously required to be registered as security interests such as assignments with a transfer back right, retention of title arrangements and leases.

Concluding remarks

The new PPS Register is an important step forward in providing a one stop solution for searching, recordal and regulation of security interests over personal property including most forms of IP. Persons who are taking security over IP must ensure that they undertake the necessary searches in relation to prior encumbrances and also that they record their security interests. Likewise, investors in companies with significant IP assets should undertake searches to assess the impact of any registered security interests on the net value of the company in which they are investing. Existing holders of security interests must act now to understand what steps they need to take to ensure their interests are properly recorded on the PPS Register or risk losing their rights.

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.

Australia: REMINDER - The Personal Property Securities Register Deadline Draws Near