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In-House Counsel Day – Priorities for 2012

A guide to Personal Property Securities

Presented by Michael Gill Thursday 1 March 2012

WIN: What in-house lawyers need

Knowledge, support and networking for the in-house lawyer community

www.dlapiperwin.com

Overview

• 6 Key Concepts

• Priority Rules

• Extinguishment

• Enforcement

PPSA fundamentals

• Transitional Security Interests

• PPS Register and teething problems

• Registration

• Financing Statements, Collateral Classes & PMSIs

PPSA implementation

• Staff training, policies and procedures

• Key Risks

• New documentation

Practical issues for in-house counsel

Key points to remember

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Introduction: No more…

Fixed charge

Floating charge

ASIC Register of Charges

Various state security registers

Reliance on ownership

PPSA: Key Concept 1

What is personal property?

Any form of tangible or intangible property (including

a licence) but does not apply to freehold or leasehold

interests in land, fixtures, water rights or minerals in

the ground.

Section 10 PPSA

Common examples:

Vehicles, aircraft, boats

Plant and equipment

Shares and other financial instruments

Trading stock

Animals and crops

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PPSA: Key Concept 1

Personal Property

Goods (tangible property)

• crops

• livestock

• wool

• minerals/hydrocarbons

• space objects

Intangible Property (including a licence)

• intellectual property

• accounts

• ADI accounts

Financial Property

• chattel paper

• currency

• document of title

• investment instrument

• negotiable instrument

Intermediated Security

PPSA: Key Concept 1

Does not include:

Fixtures

Land

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PPSA: Key Concept 2

What is a Security Interest?

An interest in 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).

Section 12(1) PPSA

Note:

Substance over form

Legal form expressly disregarded

Required elements: personal property, transaction, obligation

PPSA: Key Concept 3

Deemed Security Interests

Transferee under a transfer of an account

or chattel paper

Consignor who delivers goods to a consignee under a commercial

consignment

Lessor or bailor of goods under a PPS Lease.

What is a Deemed Security Interest?

Section 12(3) PPSA

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PPSA: Key concepts 2&3… recap

Traditional security interests (eg mortgage, charge, pledge)

Transactions which in substance secure payment or

performance of an obligation:

finance leases

supply of goods with retention of title (ROT)

installment sales where title retained

flawed asset arrangements

Deemed security interests (even if no secured obligation)

Transfer of an account or chattel paper

Consignments of goods

PPS lease

PPSA: Key concepts 2&3… recap

What is not a security interest?

guarantees

set-off

payment „netting‟, „close-out amounts‟

certain statutory and common law liens

subordination

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PPSA: Other Definitions

A person who has an interest in the personal property, to which the security interest is attached.

Grantor

A person who holds a security interest in the collateral.

Secured Party

Personal property to which a security interest is attached.

Collateral

PPSA: Key Concepts 4 & 5

When is a Security Interest Enforceable?

A security interest is enforceable against a grantor in

respect of collateral only if the security interest has

‘attached’ to the collateral.

Section 19(1) PPSA

A security interest is enforceable against a third

party once it has attached to the collateral and any

further steps needed to make it effective have been

taken (perfection).

Sections 20 & 21 PPSA

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PPSA: Key Concept 4

1. Rights in the collateral

OR

2. Power to transfer

rights in the collateral

1. Value given for security interest

OR

2. Grantor has done

an act by which interest arises

SECURITY INTEREST ATTACHES

What is Attachment?

Section 19(2) PPSA

PPSA: Key Concept 5

A security interest is perfected

when:

It has attached to the collateral

Security interest is registered, secured

party has possession or (for certain collateral)

control

It is enforceable against third parties because:

Secured party has possession of the

collateral

Secured party has perfected the security

interest by control of the collateral, or

Collateral is covered by a security agreement (evidenced in writing, signed by grantor &

describes the collateral)

What is Perfection?

Sections 20 & 21 PPSA

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PPSA: Key Concept 6

Purchase Money

Security Interest

Unpaid Vendor s14(1)(a)

Purchase Finance s14(1)(b)

PPS Lease s14(1)(c)

Commercial Consignment

s14(1)(d)

What is a Purchase Money

Security Interest (PMSI)?

Section 14 PPSA

PPSA: Priority rules

The general rules are:

As between security interests which haven‟t been perfected, the

order of attachment will govern the order of priority - s 55(2)

A perfected security interest has priority over an unperfected security

interest - s 55(3)

Perfection by control has priority over collateral perfected in another

way (ie. by registration)

As between security interests perfected in the same way (ie. by

registration) the first in time to perfect will have priority – s 55(4)

Purchase money security interest (PMSI) may have super priority - s

62

Numerous specific priority rules

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PPSA: Priority

17

Starts Wins Places Shows Earnings

Generous 11 6 1 1 $2,128,731

Ownership may be lost: Waller v NZ Bloodstock Ltd [2006] 3 NZLR 629

PPSA: Extinguishment rules

Rules in Part 2.5, which allow third parties to take

collateral free of an existing security interest

The main rules are:

Buyer (or lessee) for value takes free from an unperfected

security interest

Buyer (or lessee) takes free of a security interest given by

the seller (or lessor) if the personal property is sold in the

ordinary course of the seller’s (or lessor’s) business of

selling (or leasing) property of that kind

There are also specific rules relating to certain types

of personal property such as motor vehicles and

intermediated securities

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PPSA: Enforcement

If grantor is in default of obligation, secured party may

enforce

Enforcement of security interest is by seizure of collateral

Rules about disposal of seized collateral

Different enforcement rights for consumer property

Security interest is only enforceable against collateral

once it “attaches” to the collateral

Attachment: default time is when grantor has rights to collateral

and has either paid or caused security interest to arise

Parties can agree different attachment time

PPSA: Transitional security interests

Deemed perfection immediately before the Registration Commencement time or up to 2 years (s.322(1) and (2)(f))

Deemed perfection ceases if:

it is a migrated security interest (s.322(2)(a))

there is perfection by preparatory registration (s.322(2)(b))

if the security interest is otherwise perfected by registration, possession or control (s.322(2)(d))

There is retrospective operation of continuous perfection for after acquired property etc (s.322), even if this is acquired after the registration commencement time

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PPSA: The Register – new register

Visit: www.ppsr.gov.au

Commenced on 30 January 2012

Subject to teething problems

Entries from ASIC Register of Charges have been migrated

Maintained by ITSA (Commonwealth agency)

Searchable

Creation of SPGs

PPSA: The Register - teething

problems

Migration (27,000 charges):

to the ABN, ACN or name?

fixed charge as an AllPAP

satisfied charges

double up of security interests

Effect of migration issues on searching

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PPSA: The Register - Registration

Secured Party may register a “financing statement” (or a financing change statement)

Obtain “verification statement” once registered

Registration “perfects” security interests

Time of Registration

No registration of security agreements

PPSA: Financing Statements

Information contained in financing statement:

Secured party

Grantor‟s details (unless consumer property: serial number)

Collateral and proceeds description

Whether the interest is a “purchase money security interest” (PMSI)

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PPSA: The Register - PMSI

Purchase Money Security Interest

Is it a PMSI? RoT, acquisition finance, PPS lease or commercial

consignment

Must claim PMSI in financing statement

Super priority ONLY if register before (inventory), or within 15

business days after, possession

Defective registration if seriously misleading (including if

incorrectly claim a PMSI)

PPSA: Practical issues for in-house

counsel

Does the PPSA impact on your business?

If so, what changes should be made to your documents?

Terminology – security interest, grantor, collateral etc

Contracting out under s115

Verification statement – notice to grantor under s157

Confidentiality agreement – s275(6)

Further assurance – just for registration of a financing statement?

Consider process mapping your procedures

Due diligence in relation to your business affairs and

relationships with your customers/stakeholder/suppliers

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PPSA: Practical issues for in-house

counsel cont...

Guidelines and training for staff

Create and implement policies/procedures:

Identifying the security interest

Accurate registration

Searching for security interests

Keep registrations current and remove old

registrations (using amendment demand procedure, if

required)

PPSA: Practical issues for in-

house counsel cont...

Risks

Lose priority to another person

Lose its security interest in the asset if the grantor

becomes insolvent

Lose right to proceeds of assets if sold by grantor and the

extinguishment rules apply

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PPSA: New documentation

Fixed and Floating Charges become General Security

Agreements (GSAs)

Equitable Mortgage of Shares, Chattel Mortgage,

Aircraft Charge become Specific Security Agreements

(SSAs)

Master Lease Agreements, Rental Agreements, RoT

terms of trade – PPSA provisions?

Receivables Financing Facility, Debt Assignments –

PPSA provisions?

Priority Deeds (see www.bankers.asn.au)

PPSA: Key points to remember

• New „rule book‟ for interests in „personal property‟ PPS

• Applies to (almost) all property, other than land Personal property

• Expanded concept, includes: • traditional security • retention of title • PPS Leases • blocked accounts (as cash security) • receivable financing •

Security interest

• Important – most common method of „perfection‟ Registration

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Questions