27 February 2006
New Security Interest in Goods Act to commence in March 2006
After a long period remaining uncommenced, the Security Interests in Goods Act 2005 ("SIGA") will finally commence on 1 March 2006. The SIGA will significantly simplify the way lenders take security interests over goods from individuals.
The SIGA repeals and replaces the Bills of Sale Act 1898 and the Liens on Crops and Wool and Stock Mortgages Act 1898 and creates a new regime for registering security interests in agricultural and non-agricultural goods.
The new regime does not affect the existing Corporations Act provisions dealing with priorities and validity of charges given by companies. Nor will SIGA affect the existing regime for registration at REVS of interests in motor vehicles and boats under the Registration of Interests in Good Act.
The focus of SIGA is security interests given by individuals over goods other than cars and boats.
In this bulletin we will focus on the implications for security interests in non-agricultural goods governed by the Bills of Sale Act 1898. Security interests in agricultural goods will be the subject of a separate bulletin.
The current registration regime needed reform
In general the Bills of Sale Act is archaic. It imposes strict timeframes for registering a bill of sale. For an ordinary bill of sale it must be registered in the General Register of Deeds within 30 days. For a 'trader's bill of sale' (given by person engaged or about to engage in the retail sale of goods) it must be registered within 14 days.
There are also severe ramifications for the lender in failing to register bills of sale. A trader's bill of sale that has not been registered is absolutely void. An ordinary bill of sale that has not been registered is only valid as between the parties and is void against other parties such as assignees. Bills of sale also must be renewed every five years. The mechanics of execution of a bill of sale under the Bills of Sale Act are also cumbersome and prescriptive, involving a statutory declaration and affidavit with validity threatened if there is a mistake.
The new SIGA registration regime
The old distinction between a 'trader's bill of sale' and an 'ordinary bill of sale' is now abolished. Under the SIGA the term 'bill of sale' is no longer used as the primary name for a security over goods. The interest or power in goods created or arising under a security such as a bill of sale is now referred to as a 'security interest' and is registrable if it is a 'registrable security instrument'.
Registration requirements simplified
To be registrable, a security instrument must:
- state the name and address of each grantor of the interest and the name of the holder of the security interest, i.e the lender; and
- describe the goods to which the security relates to the extent to which the goods are ascertainable at the time of the execution of the document; and
- be duly executed by all the parties. SIGA also sets out what is required for an instrument to be "duly executed".
The SIGA abolishes the requirement that to be registered the security document must contain a statutory declaration and affidavit.
No time limits but a priority scheme applies
Under the SIGA the time limits for registering a security interest have been removed. Registration is not mandatory. However:
- a registered security interest in goods ranks in priority over any unregistered security interests in the same goods; and
- registered security interests in the same goods rank in priority in the order in which they are registered.
SIGA provides, however, that an unregistered security interest in goods ranks in priority over a registered security interest in the same goods if the holder of the unregistered interest takes possession of goods before the registered security interest is registered.
The new regime also allows for the holders of the security interests to enter into their own arrangements regulating priority.
Assignment, variation, and discharge of security interests
SIGA will allow the registration of assignments of security interests. Variations may also be registered and the procedure for discharge has been simplified.
Transition between the two regimes
The old regime for registration of bills of sale will continue to apply if the security document is executed, or purportedly executed, before 1 March 2006 and it is a bill of sale that the old regime applies to.
Implications for financiers
There are no longer any requirements to register securities taken over goods to ensure their validity. However, a registered security interest in goods will normally rank in priority over any unregistered security interests. Any security instrument by or under which a 'security interest' in respect of goods is created should therefore be registered promptly for priority purposes.
The abolition of the requirement not to renew every 5 years will be welcome, although this is not removed retrospectively to bills of sale executed before SIGA commences.
Financiers should review and update their forms for taking security over goods from individuals. They should review, and can simplify, their procedures for taking these securities.