PPSA - perfect early ... and perfect often?
The vexed question of multiple registrations
Many users of the new register under the Personal Property Securities Act 2009 Cth (PPSA) are choosing to register more than once for some customers.
Under PPSA one security agreement can create or provide for many security interests. One registration can also perfect multiple security interests. However some difficult questions can arise when determining how many registrations are really necessary.
In this bulletin we look at the reasons why two or more registrations may be needed to protect security interests, especially in respect of ongoing arrangements involving security interests. The issue is a wide one but particularly affects equipment hire and retention of title (ROT) supplies.
Serial number registration
Under one PPSA extinguishment rule, for serial number registrable property - essentially vehicles (as widely defined), watercraft and aircraft but also certain intellectual property - a third party buyer or lessee can ‘take free’ of the security interest if there is no registration by serial number. If a business makes multiple ongoing deliveries to a customer, specific serial number registrations are needed from time to time as the specific items are identified and delivered.
Transitional v non-transitional
When registering a security interest under PPSA it is necessary to specify whether it is transitional or not transitional. The PPSA provides that a transitional registration is ineffective to the extent the collateral is not ‘covered by a transitional security agreement’ – i.e. a security agreement that was in force immediately before 30 January 2012 and remains in force.
Difficult questions can arise whether this test is satisfied where there are ongoing arrangements spanning the beginning of PPSA. Some businesses have elected to register in both transitional and non-transitional categories to remove any risk that deliveries after 30 January are not protected.
Multiple security agreements
A ‘fact sheet’ available on the Government’s PPS website for the hire and rental industry states the following:
It is important to note that the PPS Register is a noticeboard of security interests and not a register of agreements. Accordingly, a single registration may cover a number of agreements where the hirer/lessee is the same person or business entity.
The above statement may perhaps be true under the PPSA but it seems it is not true under the related provisions in the Corporations Act.
One of the scariest things for secured parties especially lessors, hire businesses and ROT sellers is the PPSA ‘vesting rule’ – unperfected interests ‘vest in the grantor’ when the grantor goes into liquidation, administration or a deed of company arrangement. When the vesting rule applies, security interests become ineffective. Owners can lose their ownership.
Incredibly (and despite urging from the legal profession to put all vesting rules in the PPSA) there is a harsh vesting rule which is not in the PPSA at all. It is in the Corporations Act and applies to most kinds of PPSA security interests when the grantor is a company. It vests perfected interests if there has been undue delay in registration.
Under this rule a security interest vests in the grantor company if it is registered after the later of:
- 6 months before the insolvency;
- 20 business days after the security agreement that ‘gave rise to’ the security interest ‘came into force’.
Supplier and BakerCo sign an agreement for sale of a commercial oven. Supplier delivers the oven on the same day. The agreement provides that Supplier keeps ownership until BakerCo pays the full price.
Supplier registers its security interest 10 business days after the agreement is signed. BakerCo becomes insolvent 30 business days after that date. Supplier would retain the oven, because Supplier registered the security interest within the required 20 business day period under the Corporations Act.
Supplier registers its security interest 25 business days after the agreement. BakerCo becomes insolvent 2 months after the security interest is granted. The oven would vest in BakerCo because Supplier did not register the security interest within the required 20 business day period.
Supplier registers its security interest 25 business days after the agreement. BakerCo becomes insolvent eight months after the agreement. Supplier would retain the oven because it registered its security interest prior to the six month period before the insolvency.
Critically, it seems from the drafting that the vesting rule in the Corporations Act can only be avoided if there is a registration within 20 business days of the security agreement.
Accordingly if BakerCo and Supplier sign a second and separate agreement for a subsequent sale of a different oven it appears the first registration may not, at least for Corporations Act purposes, protect Supplier.
- Multiple registrations will be needed to protect interests in serial number registrable property.
- Businesses need to be sure that if they have made registrations as ‘transitional security interests’ these remain appropriate for deliveries post 30 January. Transitional registrations may be ineffective unless there was a binding pre-PPSA agreement in place pre-30 January 2012 that provided for the relevant security interests, and that agreement continues.
- The register may be ‘a register of security interests’ as the Government’s fact sheet says but under the Corporations Act, each security agreement seems to trigger the need for a registration. Business need to be mindful of the 20 business day requirement in the Corporations Act where their customer is a company. Risks will arise if there is no over-arching security agreement that ‘gives rise’ to the security interests where there are ongoing deliveries. Multiple registrations (one for each agreement) may be prudent.
- In addition to the 20 business day requirement discussed above, for priority purposes and obtaining ‘PMSI super priority’ registration must occur before the goods are delivered. There is a 15 business day grace period for goods that are not ‘inventory’ but the wide definition of that term makes it risky to assume there is a grace period in many cases.
Before PPSA came along, most ROT suppliers, consignment sellers and lessors were blissfully free of the complexities of ‘finance law’ and relied on their ownership. That has all changed. Casual practices in documenting agreements will now put assets at risk.
The reality is that businesses are now deemed to be taking security interests under a highly complex regime. Whilst most businesses understandably don’t want to trouble their customers with documents and legal requirements, PPSA means that they should at least consider the risks in not doing so.
There are reasons to think the benefits of PPS reform will not outweigh the risks for businesses who fall victim to its complexities.
Author: Oliver Shtein