The Personal Property Securities Act 2009 (Cth) (“PPSA“) is one of the most significant pieces of legislative reform to Australian consumer and commercial law, and the changes being made will have considerable consequences for many Australian businesses.
The single national online register of security interests in personal property is operational from 30 January 2012.
Pps Act – An Overview
The intent of the PPSA is to replace a number of existing registers, including the ASIC Register of Charges and the Register of Encumbered Vehicles (REVs), with a single national electronic register, the Personal Property Securities Register (“PPSR“) and a single body of law that sets out in detail the rules governing nature of security interests and priorities between competing security interests.
In general, the PPSA will apply to security interests over all types of personal property other than land, fixtures, water rights and certain State based ‘statutory rights’. It will apply both to tangible and intangible property such as intellectual property, licenses, payment obligations and financial instruments such as shares and debentures. Personal property is known as ‘collateral’ if it is (or is anticipated to be) the subject of a security interest.
Section 12 PPSA
The PPSA is not just about replacing the old registers. Its effect will go beyond all of the existing laws and applies to many transactions that previously would not even have been considered to involve any sort of “security interest”.
Under the new PPSA, Section 12 defines “security interest” as:
“an interest in relation to personal property provided by a transaction that, in substance, secures payment or performance of an obligation, without regard to the form of the transaction or the identity of the person who has title to the property.“
The PPSA definition incorporates a ‘substance over form’ approach in which the form of the transaction or the identity of the person who has title in the actual property becomes irrelevant. This is a substantial shift from traditional legal thought as the new legislation now focuses on the underlying commercial effect of each business transaction, rather than its legal form.
As such, the PPSA will not only apply to recognised forms of security such as fixed and floating changes, legal and equitable mortgages and liens, but may apply to many commercial arrangements that are not traditionally treated as securities, such as retention of title arrangements, hire purchase agreements, leases and title transfer or flawed asset arrangements. See Section 12(2) PPSA for a non-exhaustive list of typical PPSA ‘security interest’ type arrangements.
Furthermore, Section 12(3) PPSA deems particular interests under certain transactions as “security interests” despite not being, in substance, security for a payment or performance obligation. Deemed security interests include:
- interest of a transferee in transfers of account or chattel paper;
- interest of consignor under a commercial consignment of goods; and
- interest of a lessor or bailor of goods under a PPS lease. Here, a PPS lease includes both leases and bailments of goods whereby the lessee or bailee retains substantially uninterrupted possession over the goods for an indefinite term or a term of more than one year.
Beyond introducing a new system of registration for security interests, the PPSA imports new vocabulary in the realm of taking, granting and enforcing security interests.
Under a typical security arrangement, it is the Grantor who will grant a ‘security interest’ over the relevant personal property to the Secured Party as security for a payment or performance obligation. In most cases, the identity of each of the parties will be intuitive and straightforward. Notably, the identity of the Grantor is not necessarily the person who has title or legal ownership in or to the goods.
Depending on the type of security interests involved in a transaction, the PPSA applies various new terms to describe different interests and types of assets.
Attachment, Perfection and Enforcement
Significantly, the taking of ‘good’ security under the PPSA requires implementing a three-stage process:
A security interest is only effective if it has attached to collateral.
Under Section 19 PPSA, attachment requires that the grantor has rights in the collateral (or, at the very least, the power to transfer rights in the collateral to the secured party), and has given value for the security interest or does an act by which the security interest will arise.
As the PPSA covers such a diverse range of personal property and applies to complex and esoteric financial transactions and interests, unless a time is explicitly agreed to by the parties, attachment of a security interest to collateral may occur before or after relevant transactional documents are executed.
Enforceability against Third Party
A security interest may be enforceable against a Third Party if it has attached to collateral and the secured party has either taken possession of the collateral or perfected the security interest by controlling the collateral or entered into a written security agreement with respect to the collateral.
It is important to note that achieving this element does not provide protection against insolvency of the grantor or a wrongful dealing with the collateral and, most importantly, does not guarantee priority of the security interest in any competition with other security interests. Such protection may be afforded only upon ‘perfection’.
Perfection of the security interest is absolutely critical in protecting the rights of the secured party. Without perfection the security interest is vulnerable in insolvency and vulnerable to other third parties who may hold security interests in the same collateral.
In most cases, the Secured Party may perfect a security interest against particular collateral by registering such interest on the PPS Register or through possession or control of the collateral.
Concepts of possession and control vary with respect to different types of transactions, with the PPSA outlining unique rules in relation to when possession or control is or has been achieved. It is noted that ‘perfection by control’ does not apply to goods (generally) and will only be possible for certain kinds of collateral, namely, ADI accounts, intermediated security, investment instruments, negotiable instruments, and satellites and other space objects. As a consequence, for security interests over tangible property and with respect to most commercial transactions such as bailments, leases and retention of title arrangements, the only realistic perfection method is through registration.
Under Part 8.2 PPSA, upon the insolvency of the Grantor, an unperfected security interest will ‘vest in’ the insolvent Grantor. This is a radical aspect of the PPSA regime and highlights the importance of perfecting any interests, which would constitute in substance security interest under PPSA.
New Rules of Priority
Section 55 PPSA
The PPSA introduces new and complex rules of priority for security interests. Where a Grantor defaults, the rules determine the order of priority in which the various secured parties may enforce their security interests.
In any case, unless otherwise provided by the PPSA, all perfected interests have priority over unperfected interests. Where there are perfected interests amongst themselves, priority is determined on a first-in-time basis, except where perfection has been obtained by control. That is, interests which are ‘perfected by control’ will have priority over interests which have been perfected by other means.
In the case of unperfected interests in the same collateral, then priority is awarded to the interest that has been attached to the collateral first.
Purchase Money Security Interest
The PPSA also introduces a whole new type of ‘super’ security interest known as the ‘purchase money security interest’ (PMSI). It is intended to protect both suppliers of goods and lenders who finance the purchase price of the collateral and will generally arise where:
- a Secured Party provides for the collateral;
- a person provides funds to acquire collateral;
- the interest of a lessor or bailor under a PPS Lease; or
- the interest of a consignor under a commercial consignment.
There are strict time restrictions for perfection so as to obtain a super-priority status over a normal security interest. For inventory that are goods, a PMSI may be perfected if it is registered prior to the Grantor obtaining possession, and for all other kinds of inventory, the PMSI must be registered prior to attachment.
For personal property that is not inventory, to gain super-priority status, the PMSI must be registered within 15 business day after the Grantor obtains possession and for any other property within 15 business day after the interest attaches.
Under PPSA a security interest takes effect according to its terms. Because equitable and legal rules are largely displaced, PPSA provides for the circumstances in which a third party lessee or purchaser may take the property free of any security interests, thereby introducing further exceptions to the nemo dat quod non habet rule under the PPSA.
PPSA’s main rule of ‘taking free’ is that a buyer or lessee of personal property, for value, takes the personal property free of an unperfected interest in property. The only exception is when the purchaser or lessee was party to the transaction that created the interest – actual or constructive knowledge or notice therefore may not prevent extinguishment of security interest by a third party.
The ‘taking free’ rules are highly prescriptive and apply specifically to different transactions.
Fixed and Floating Charges Under Ppsa
Under the PPSA, there is neither a distinction between fixed and floating charges nor a concept of crystallization of a floating charge over property. Instead, a security interest will attach in accordance with the terms of a general security agreement (‘GSA’) and the Grantor will be able to deal with the collateral as provided for in the GSA and under the PPSA.
In other jurisdictions that have implemented similar PPS reform, the GSA will take a similar form to a fixed and floating charge document and restrict the Grantor’s dealings with the collateral (that is subject to the security interest under the GSA) upon the occurrence of a default event.
Accessions and Proceeds
Under PPSA, an ‘accession’ to goods means goods that are installed in, or affixed to, other goods, except where both the accession and the other goods are required or permitted by the regulation to be described by a serial number. An accession preserves its identity once installed in or affixed to the other goods.
Section 90 – 97 of the PPSA provides detailed provisions relating to priority interests in accessions and obligations on a secured party as to their removal.
The default rule on priority is that a security interest in goods that is attached at the time when the goods become an accession has priority over a claim to the goods as an accession made by a person with an interest in the whole.
The PPSA also contains detailed provisions that are designed to allow a Secured Party to trace their security interest into the proceeds of sale of the collateral.
This is a significant extension to the simple ROT clause and may be particularly helpful in the case where a ROT is otherwise practically ineffective.
Registering on Pps Register
Part 5.3 and Part 5.4
When registering a security interest on the PPS Register, it is important to be mindful of the timing of the registration, the description of the collateral and the effective registration time. While registration in advance is possible, a person is not to register a security interest unless the person believes on reasonable grounds that the person described in the financing statement as the Secured Party is or will become a Secured Party in relation to the collateral.
Instead of registering the security agreement itself, a financing statement will be registered on the PPS Register through an on-line process. A financing statement shall describe: the identity of the Grantor and Secured Party, the collateral and proceeds over which the security interest is to effect, the nature and scope of the security interest, the end time for registration and any other prescribed matters.
A registration is effective from the registration time until the earliest of:
- the registered end time; or
- an amendment time; or
- the time when the registration stops being available for search in the register.
A registration is only ineffective because of a defect: if there is a seriously misleading defect in data relating to the registration, or one of a number of particular defects set out in Section 165 PPSA. If a security interest in certain property becomes unperfected, the Secured Party may be obliged to take steps to end the effect of the registration.
PPSA will apply to security interests that: (1) arise before PPSA commencement but still exist when PPSA commences; or arise after PPSA commencement but do so under pre-PPSA security agreements that remain ‘in force’ when PPSA commences.
Existing registered security interests will be ‘migrated’ to the new regime from the existing Federal, State and Territory registers (ASIC, REVS etc.) to the PPSR.
For transitional security interests that are not currently registrable on such registers (for example PPS leases, ROT and commercial consignments), the transitional provisions under the PPSA, deems such interest to be attached and perfected from immediately before the ‘registration commencement time’. However they will only be deemed perfected for 24 months. This period is intended to allow businesses to adjust to the new system and to give time for transitional security interests to be registered in an orderly way.
PPSA allows transitional security interests to be perfected by actual registration and once this step is taken the temporary ‘deemed’ transitional perfection will no longer need to be relied on. If no actual registration has been taken to perfect the transitional security interests, the interests will become ‘unperfected’ after the 2 (two) year period.
Call Ben Skinner on (03) 9863 9731 or email him at firstname.lastname@example.org to discuss your PPS requirements.