The PPSA - Ready, Steady, Go!
The PPSA, which is modelled on similar legislation in Canada, the US and New Zealand, will overhaul much of the law in Australia relating to the taking of security over personal property. While many large businesses and banks have been busily familiarising themselves with the changes this Act will bring, a number have not, and for them the PPSA could come as a rude shock.
After two “false starts” in May and October 2011 when the Personal Property Security Act 2009 (the PPSA) failed to commence due to technical issues relating to the on-line PPSA Register (the PPSA Register), the Commonwealth Government will be holding its breath from 30 January 2012 when the PPSA Register was set to “go live”.
What does the Act do?
The Act will change not only the procedure for perfecting security interests in personal property but also the substantive law governing the resolution of disputes between competing parties and the enforcement and extinguishment of those interests. Personal property securities law is currently a fragmented patchwork of common law, statute and arcane equitable principles. In Australia there are around 80 State and Commonwealth statutes which touch upon personal property security and at more than 300 pages, the PPSA aims to consolidate all this into a single Commonwealth Act.
Key features of the Act
The PPSA Register will consolidate around 40 existing personal property registers. Registered securities such as those on the ASIC register of company charges and various vehicle and agricultural registers will “migrate” over to the PPSA while security interests coming into existence after 31 January 2012 will need to be registered on the PPSA Register to retain priority against competing registered interests and to avoid being lost altogether in the case of the insolvency of the grantor.
The idea has been to establish a user friendly registration process where secured parties and those wishing to determine whether certain assets are secured can access and register interests on-line 24/7 through a relatively simple and cheap process.
What transactions does it apply to?
The Act applies to security interests which are defined as:
“interests in relation to personal property provided for 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).”
There are a number of exclusions from the Act, most notably land and fixtures upon land, interests of a seller shipping goods under a negotiable bill of lading (unless it evidences an intention to create or provide security interests in the goods) and non-consensual liens or charges arising by operation of the general law. The Act, however, catches security interests over many forms of tangible and intangible property including, vehicles, ships, aircraft, unfixed plant and machinery, inventory, goods, financial property (chattel paper, currency, documents of title and negotiable instruments) and intellectual property rights.
The usual security transactions are covered such as chattel mortgages, fixed and floating charges, pledges, and hire purchase agreements. It also applies to a host of security interests not previously requiring registration, in particular the ubiquitous retention of title (ROT) or “Romalpa” clause, where, as is usually the case, the ROT clause secures the purchaser’s obligation to make payment. This will impact many manufacturers and suppliers of goods who supply on these terms. Existing security not previously requiring registration (e.g. ROT rights which pre-date the commencement date) need to be registered within two years from the commencement of the Act.
In addition, the PPSA applies to certain transactions that are “deemed” security interests even though they do not secure any obligation, for example, certain leases and bailments of personal property (called PPS leases).
The registration requirements for previously unregisterable interests and the deemed security interests are just some of the surprising features of the Act. If the experience in Canada and New Zealand is anything to go by, many companies could be caught out by these features.
So why was the Act introduced?
Other than modernising, consolidating and clarifying the law, transparency has been an important driver behind these reforms. Companies, in particular those providing loan finance or credit terms to customers, have little way of knowing whether goods on loan or otherwise in the possession of the customer are owned or secured by third parties. The problem becomes acute on the insolvency of the customer where, for example, there are competing claims between third parties such as suppliers of goods and holders of floating charges over the same goods. The PPSA seeks to provide a coherent set of rules for resolving these and other disputes.
This is a complex piece of legislation and time will tell whether it will produce the certainty is aims to achieve.
What do you need to do?
- Identify whether your business is engaged in areas covered by the Act.
- Consider whether any transactions create security interests registerable under the PPSA.
- Review existing registered security interests, e.g. charges on ASIC register to ensure these migrate over to the PPSA Register.
- Review existing un-registered security interests, e.g. ROT clauses to ensure that they are registered within the two year time period.
- New security interests created after the commencement of the Act must be registered and you will need to familiarise yourself with the process.
- Review relevant transactions to make drafting changes to comply with the Act, e.g. there are default enforcement provisions that can be contracted out of.