The New Personal Properties Securities Law - A Revolution Draws Near
From 1 May 2011, Australia will have a new and unified Federal law for the taking, registration and enforcement of security over virtually all kinds of property except land. The changes in the Personal Property Securities Act 2009 ('PPSA') and its related legislation represent the most significant reforms ever in this area. Not only will the PPSA rewrite the law on traditional securities such as mortgages and charges, but it will also extend to retention of title, bailment and lease arrangements and operate in a way that will be wholly new to Australian financiers.
Although the commencement of changes is more than a year off, they are now law and their scope and complexity mean that financiers need to start working through the implications for their business now. In this bulletin we can only state the most significant aspects of the new law.
Background and objectives of the PPSA
All Australian governments recognised that the existing patchwork of inconsistent and archaic State-based securities law and registration, mixed with the Corporations Act rules for companies and other Federal rules (e.g shipping and intellectual property) needed drastic reform under a national approach. The reform that has emerged is a comprehensive code drawing on similar reforms in Canada and New Zealand.
PPSA will cover both companies and individuals. Like the Corporations Act and other security registration regimes, the PPSA is based on the premise that financiers and 'real' owners should register their interests to protect others, who purchase or extend credit to companies and individuals, from the illusion of apparent wealth or ownership.
A whole new lexicon
PPSA adopts a whole new vocabulary, much of it imported from North America. PPSA will apply to 'security interests'. But these are broadly defined, in a functional way. The definition refers to an interest in property provided for by a transaction that in substance secures money or an obligation, without regard to the form of the transaction.
Security interests over virtually all forms of 'personal property' are within the Act. The only exceptions are land and certain statutory licences. So the PPSA regime will apply not just to goods such as vehicles, stock, equipment, boats and so on, but also to shares and trust units, intellectual property, crops, book debts and other contractual rights.
A person granting a security interest is a 'grantor'. The thing over which the security interest is taken is the 'collateral'. The 'secured party' is the person who takes or holds the security interest from the grantor. PPSA contemplates a number of qualities of the security interest that will each be critical to its value to the secured party.
The first quality is 'attachment' which requires that the grantor has rights in the collateral (or can transfer rights) and that the secured party gives value or the grantor creates an interest.
Enforceability of the security interest against third parties requires attachment and one of the following: possession, control or a signed security agreement.
Finally 'perfection' of the security interest will generally require attachment and one of registration, possession or control. Secured parties who hold unperfected interests will lose priority to those who hold perfected ones. They will also be susceptible to loss of their rights to purchasers of the collateral and they may have no priority over unsecured debts in an insolvency.
A notable feature of the PPSA is that it accords some greater priority to 'purchase money security interests' - that is security interests securing the purchase price of the collateral.
Legal title is not enough
Many forms of commercial credit take advantage of the protection that the law gives to a legal owner of property. But in a change that overturns fundamental personal property law concepts, certain lease and bailment arrangements (including dealer floor plan arrangements) will be treated as security interests. PPSA will also cover certain retention of title (ROT) arrangements.
A by-product of this approach is that legal title itself may not protect an owner from loss of its property. The rights of floor plan financiers and ROT suppliers will depend broadly on the priority and extinguishment rules that apply to other kinds of security interests.
It will also follow that for the first time bailment financiers, lessors and ROT suppliers will be required to register their arrangements to obtain protection. PPSA will reach beyond typical 'credit-based' bailment, lease finance or ROT. It could for example apply to a provider of scaffolding to a building site.
The PPSA register
The PPSA register will be a single national internet-based register accessible in real time. The detail of the register will be contained in regulations which have not yet been made but are expected to be available shortly.
For most financiers registration will be the main way to perfect security interests. Special rules apply to registration of property described by a serial number.
PPSA creates a whole new code for the enforcement of security interests. This will include rules about the priority of security interests on insolvency, the duties of secured parties and the powers of sale and other remedies open to them.
Existing security interests, for example on State bills of sale registers or in the ASIC database will be 'migrated' to the PPSA register. However security interests which are not currently regarded by existing law as registrable and are therefore not on any register cannot be migrated. So, for example, it will be up to the owners of ROT or bailed or leased goods who wish to protect their interests to register them during the proposed 2 year transitional period. This will of course be a massive task for those affected.
Financiers now need to address the implications of the PPSA without delay. This will include reviewing standard documents, credit and due diligence procedures, registration systems and staff training. For ROT, bailment and lease financiers the deadlines posed by the need to register during the transitional period will be critical.
Our PPSA team of lawyers from across relevant practice groups is addressing the issues raised in the lead up to the "go live" date of 1 May 2011.
Author: Oliver Shtein