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Contract Law News, November 2010

The new Personal Property Securities Act 2009 [“PPSA”]

Let's get prepared for the new regime for the registration of securities for goods – don't get caught out in May 2011

As foreshadowed in the last edition of this newsletter, the PPSA is soon to come into effect in May 2011. It will replace 70 current pieces of legislation Australia-wide.

You may recall that security interests caught by the new Act will include mortgages over goods and chattels, company fixed and floating charges, pledges, hire purchases, trust receipts, and conditional agreements for sale or agreements including a Romalpa [retention of title] clause. The internet-based PPS Register will allow for up-to-date searching of existing or prospective security interests.  

Points to note

• The PPS Act will effectively place “fixed” and “floating” charges on the same footing with respect to prioritising such interests;
• A “fixed” charge will be understood under the Act simply as a charge that has attached to a non-circulating asset, while a “floating” charge will be defined as a security interest that is attached to a circulating asset. An interest will be “attached” to the relevant property from the creation of that interest.
• The notion of a charge “crystallising” in pre-determined circumstances will no longer have any relevance or operation under the Act.
• Unlike the current Corporations Act regime, security agreements will not be confined simply to transactions that give rise to a charge.  Security interests will, under the new Act, apply in situations where a secured party retains title to the relevant goods regardless of a “crystallising event”, as is currently the case in sales subject to a Romalpa clause or in instances of hire-purchase.
• Where a seller retains title to property representing all or substantially all of the buyer company's property, that seller may be able to exercise the power to appoint an administrator to that company. 
• Broadly, a creditor who holds a “perfected” security interest under the new Act will have access to s436C(1) of the Corporations Act, being recognised as a charge for such purpose.  Such a creditor will also be considered a secured creditor with respect to the unfair preference provisions contained in s588FA of the Corporations Act.
• The Act sets up a hierarchy as between perfected and unperfected interests.  An unperfected interest will be enforceable as against the grantor only, whereas a perfected interest may be enforced against third parties who also claim an interest in the property.

Perfection of a security interest may be achieved by the secured party:

• Registering its security interest on the PPS Register;
• Taking possession of the relevant property; or
• Taking control of the property if this is possible.

It may be noted that liens, rights of set-off and similar rights, as well as various “interests” created under the Bankruptcy Act such as those created by a personal insolvency agreement under Part X, will not be security interests for the purposes of the PPS Act.   

To be “perfected” under the PPSA, security interests will need to be registered on the PPS Register.  This will be a wholly online, real time database. 

Significantly, a party having a valid security interest under the PPSA will have an interest akin to that of a secured creditor in the event of the bankruptcy or liquidation of the grantor individual or company of the security interest.  This will have far-reaching practical and commercial ramifications.  For example, a person having a security interest that has been perfected by registration will be recognised as a chargee for the purposes of the Corporations Act.  Such creditor will also be exempted from the unfair preference provisions of the Corporations Act. 

Priorities

Disputes arising as between secured parties seeking to seize the collateral or realise their security will be determined on the basis of ‘priorities' as established by the Act.

The following priorities rules will apply:

• A perfected interest will rank above an unperfected interest;
• An interest perfected by possession or control will outrank an interest perfected by other means;
• A perfected interest that is first in time will prevail over other, competing interests;
• An unperfected interest that is first in time will prevail over all other unperfected interests.

A perfected ‘Purchase Monies Security Interest' (e.g. a sale under a Romalpa clause) is the highest form of security interest recognised by the PPSA scheme.

Checklist

What Type of Security Interest is captured by the new PPSA?

Examples of the types of interests captured by the new PPSA include charges, chattel mortgages, retention of title (“Romalpa”) clauses, hire purchase agreements, bills of sale and pledges or pawns.

What Type of Security Property is captured by the new PPSA?

Any form of consumer property or commercial property except real property [land]

Existing Security Interest (as at commencement of PPSA)? 

Interests recorded on the following registers prior to commencement of the PPSA will be automatically transferred to the new PPSA Register:

Commonwealth Registers:

Australian Register of Ships (mortgages only)

ASIC - Register of Company Charges (including provisional charges)

Fisheries Register

New South Wales Registers:

Register of Encumbered Vehicles (REVS NSW)

Security Interest of Goods Register:

• stock mortgages originally registered under the Liens on Crops and Wool and Stock Mortgages Act 1989
• Bills of Sale from 1 January 2000
• current crop mortgages and all other interests registered under the Security Interests in Goods Act 2005

Register of Co-operative Charges

Security interests registered under a regime not included in this list will need to be re-registered on the PPSA Register.

New Security Interests: 

Is registration of the interest necessary?  Registration gives a security interest priority over other, competing security interests that are not registered.  Registration may also allow a security interest to survive the insolvency or bankruptcy of the grantor, and may, in some situations, allow the interest to survive the sale of the collateral.

Ultimately, the scheme of the Act requires perfection of security interests if they are to assume priority over other security interests, for instance in the event of the grantor's insolvency.

Perfection may be achieved by simple “attachment” in certain security arrangements; or by registration; or by possession of the secured goods by the secured party or grantee.

Example:

Charge over circulating assets [circulating security interest]:

• Validly created so as to attach to property?
• Cost to register / perfect: Filing fees to be released closer to commencement of register in May 2011
• Steps required to register / perfect the security interest: lodge a “financing statement” [notice of the security agreement and not the actual agreement creating the security interest] online.  Financing statements must note:
• Details of the secured party;
• Details of the collateral, including its class and a brief description;
• Details of the grantor [this is not necessary where the collateral is consumer property and is a car, watercraft or aircraft]; and
• Registration details – the end time for the registration, if the interest is a transitional security interest and further relevant information.

Forum Law will issue more information to clients as developments occur in early 2011 in the fine tuning of this new regime, We shall also advise clients with handy checklists to assist with the registration of suitable Interests.