Personal Property Securities Act 2009 (Cth)

Practical implications and what you need to know!

Petrina Macpherson – Senior Associate28 May 2011

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Personal Property Securities Act 2009

The Personal Property Securities Bill 2009 and the Personal Property Securities (Consequential Amendments) Bill 2009 were passed by both Houses of Parliament on 26 November 2009

The PPS Act will apply after the registration commencement time which was expected to be May 2011

In February 2011 COAG determined that the commencement date be deferred to October 2011

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Personal Property Securities Act 2009

Aim of the legislation is: to bring an end to the inconsistent and

duplicate laws and registers which presently govern personal securities law in the various Australian jurisdictions

It will replace 70 Commonwealth and State Acts, administered by 30 government agencies

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Objectives of PPS Reform Increase certainty in insolvency and for holders

of competing security interests

Increase consistency with consistent and comprehensive legislation

Reduce complexity with simpler registration procedures

Reduce costs with security interests being identified on one site

Alignment with overseas developments in this area (NZ, Canada and US)

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PPS Register

Up to 30 existing federal and state registers will be migrated to the PPS Register, including: ASIC register of company charges co-operatives register of charges bills of sale motor vehicle securities ship mortgages crop liens stock liens register of trade marks

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PPS Register Notices are currently being sent out to ensure

only current securities are migrated

Once migrated a verification certificate will be sent to the grantor and grantee of the security interest

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PPS Register

On the PPS register, the end time for the security must be defined, in particular goods used by consumers - security can’t be for more

than 7 years (but can be renewed) motor vehicles - security can’t be for more than 7 years

(but can be renewed) BUT no stated end time needed for company charges

Will be wholly electronic

Accessible 24/7

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PPS Register

Key differences to current position -

Operates on the basis of notice rather than document registration

Registration is by ‘financing statement’

Notice can be registered before any secured transaction takes place

One registration can cover multiple security interests

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Registration

Not mandatory to register security interests

No time limit for registering

PMSIs to be registered within 15 days

However failure to register/perfect will have consequences for enforcement and priority

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Searching register

PPS Register can be searched by grantor details property details (if there is a serial number on the

particular property)

PPS register will be maintained by ITSA

Existing registers will be migrated and verified

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Access to register

Unlike current company charges - copies of the security documents are not included in the register

Information is included via the financing statement

Interested persons will be able to receive a copy of the security agreements from the grantor within 10 business days of a request being made

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Access to register

Only authorised users can access the register e.g. credit providers and current and potential security holders

To protect privacy there will be no general public access except for authorised purpose – but may be difficult to police

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What is Personal Property Personal Property means property (including a

licence) including: tangible items such as cars, boats, aircraft, livestock,

crops and minerals that have been extracted in any form

intangible items such as intellectual property and contract rights, designs, patents, plant breeders rights and trademarks

financial property such as currency, a document of title, investment instruments and negotiable instruments.

investment entitlements (e.g. stockbroker accounts)

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Personal Property

It specifically excludes land fixtures water rights a right, entitlement or authority (including access

entitlements) that is granted by or under a law of the Commonwealth, a State

or Territory declared by that law not to be personal property for the

purposes of the Act

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What is personal property security

Three elements an interest in relation to personal property provided for by a transaction that, in substance, secures payment or performance of

an obligation

This is regardless of the form of the transaction or the identity of the person who has title to the property

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Security interests – examples

Charges that secure obligations - no distinction between fixed and floating charges

Retention of title arrangements

Chattel mortgages

Lease of goods

Hire purchase agreements

Consignment

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Form of documentation There is no prescribed form of security

agreement: General security agreement Specific security agreement

All security is effectively ‘fixed’ - parties need to agree terms of security arrangements

Parties to determine when the property can be disposed of by the grantor

PPSA determines how current fixed and floating securities are dealt with in future

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Entities covered

PPSA applies to security interests granted by corporations partnerships managed investment schemes registrable and non registrable legal entities individuals

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Creating a security interest

Step 1 – entering into a transaction

Step 2 – attachment of the security interest to the personal property (enforceable against the grantor)

Step 3 – possession, control or written security agreement (enforceable against third parties)

Step 4 – perfecting the security interest

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Attachment

A security interest attaches to personal property when

The grantor has rights in the collateral* that are transferrable to the secured party and

The secured party gives value in return for the security interest

*Collateral is the personal property to which a security interest is attached

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Attachment

For an attached security interest to be enforceable against third parties, section 20 of the PPSA requires that either the collateral is in the possession of the secured party the collateral has been perfected by control or the grantor and the secured party have entered into a

valid written security agreement

PPSA contemplates that security agreements can be entered into electronically

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Perfection

Perfection is required to obtain priority over another security interest, or survive a dealing in the same collateral

The main methods of ‘perfection’ are (section 21) taking control of collateral that is controllable property

(e.g. bank accounts, investments) registering a security interest in the collateral taking possession of the collateral or temporarily perfecting a security interest in the

collateral

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Control

Controllable property is defined as an investment instrument an ADI account (e.g. bank account) investment entitlements investment instruments (e.g. shares) letters of credit negotiable instruments not evidenced by a certificate

(e.g. bills of exchange)

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Priority A perfected security interest will have priority

over an unperfected security interest – section 55(3) example

ABC Cranes Pty Ltd (ABC) grants a security interest in one of its cranes to Bendigo Bank

ABC later grants a security interest in the same crane to NAB

NAB registers the crane on the PPS register, Bendigo Bank does not

the security interest held by NAB will have a higher priority

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Priority

A security interest perfected by control (of controllable property) will have priority over a security interest perfected by any other means – section 57(1) Example (investment instrument)

Bob borrows $20,000 from ANZ to invest in a pizza oven and grants ANZ a security interest in shares issued by Macquarie

ANZ perfects its security interest by registering the shares on the PPS register

Bob later borrows another $25,000 from Westpac and grants Westpac a security interest in the same shares issued by Macquarie

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Priority

Westpac perfects its security interest by taking control of the shares

Westpac’s security interest would have priority over ANZ’s interest because Westpac has perfected its interest through control, while ANZ has perfected only by registration

Where competing security interests are both perfected by control, priority is determined by the order in which the secured parties took control of the collateral – section 57(2)

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Priority

Priority between security interests perfected by means other than control is also determined by the first in time principle – section 55(4) it is necessary to determine the priority time the priority time will not necessarily be when the

security interest was perfected

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Priority time

Providing a security interest is continuously perfected, the priority time will be the earliest of registration on the PPS register possession of the collateral when the interest is temporarily perfected by force of

the PPS Act

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Priority

Priority between unperfected security interests is determined by the order of attachment of the security interest – section 55(2)

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Exceptions to the general priority rules

Purchase money security interests (PMSI) PMSI is essentially where the secured party has

provided finance or given value required by the grantor to acquire the collateral, (e.g. vendor finance)

PMSIs have ‘super-priority’ over the same collateral (which has been granted by the same grantor) which has been perfected by registration or possession

however, a security interest which has been perfected by control has priority over a PMSI

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New Zealand Cases

Graham and Portacom New Zealand Limited (the Portaloo case)

Waller and Ors v New Zealand Bloodstock Limited and Anor

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Graham and Portacom New Zealand Limited (the Portaloo case)

NDG leased five Portaloos from Portacom

NDG gave a security interest over all of its property in favour of HSBC to secure a loan

When the NZ PPS Act came into force in 2002, HSBC registered its interest on the PPS register, but Portacom did not

NDG went into default, a Receiver was appointed and took possession of ALL assets under the security agreement

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Graham and Portacom New Zealand Limited (the Portaloo case)

Despite retention of legal ownership, Portacom’s unregistered title was deemed subordinate to that of NDG

Receiver sold off the Portaloos

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Waller and Ors v New Zealand Bloodstock Limited and Anor

Glenmorgan Farm Limited gave a general security over all of its property in favour of SH Lock Ltd.

SH Lock registered its interest on the PPS register when it came into existence

NZ Bloodstock Ltd leased a racehorse to Glenmorgan, retained the legal ownership but did not register its interest on the PPS register

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Waller and Ors v New Zealand Bloodstock Limited and Anor

Glenmorgan defaulted under the lease, NZ Bloodstock terminated the lease and repossessed the horse

Glenmorgan then defaulted under its finance agreement with SH Lock and a receiver was appointed

The receiver asserted the right under the PPS Act to take possession of and sell the horse in priority of the claim of NZ Bloodstock

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Waller and Ors v New Zealand Bloodstock Limited and Anor

Court was required to determine the priority of competing security interests held over a race horse.

In the end, the perfected security interest (SH Lock’s interest) took priority over the unperfected security interest of NZ Bloodstock

Even though NZ bloodstock had retaken possession that was not sufficient to defeat SH Lock’s claim

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Enforcement and remedies

Chapter 4 PPSA governs the enforcement of security interests

Any secured party regardless of priority ranking, may enforce its interest

Secured parties are not required to obtain judgment prior to enforcement

The PPSA is not a code and will be able to be used in conjunction with other rights and remedies available

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Important rules regarding enforcement

A general standard of honesty and commercial reasonableness is to apply to enforcement actions

Parties can contract out of enforcement provisions (depending on use of collateral)

May use land law to enforce security interest in some circumstances

May seize liquid assets from third party

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Seizure of collateral

Secured party may seize collateral by any lawful method

Higher ranking priority holders may seize collateral from lower ranking priority holders

Higher ranking priority holder must pay enforcement costs of lower ranking priority holder where lower ranking priority holder initially seized the collateral

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Disposal of collateral

Three methods of disposing of collateral sale to a third party sale where the collateral is purchased by the enforcing

secured party lease or license to a third party

Must obtain market value for collateral or best price reasonable – same duty required as a controller under Corporations Act 2001

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Retaining collateral

Secured party may retain collateral if it is not predominantly used for a personal, domestic or household purpose

Retention of seized collateral is not an absolute right

The grantor and other interest holders may object – in which case collateral must be sold

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Rules after enforcement

Proceeds must be distributed in accordance with the provisions in section 140 PPSA

Statement of account must be provided within 20 business days of a request to do so

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Redemption and reinstatement There is a right of redemption available to the

debtor, the grantor and higher ranking secured creditors.

Redeemer must pay the amount required to discharge the obligation

Reinstatement is allowed prior to the exercise of enforcement. Achieved by paying amount of arrears and any enforcement costs.

A security agreement can only be reinstated once

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Transitional provisions

It is hoped that the transitional provisions in the PPSA will remove the risk of a Portacom or NZ Bloodstock situation occurring in Australia

Any existing security interest that is not migrated to the PPS register after commencement of the Act will be deemed ‘temporarily perfected’.

Applies for the period starting immediately before the registration commencement time and ending on the earlier of the time when the security interest ceased to be continuously

perfected otherwise than by temporary perfection the end of the month that is 24 months after the registration

commencement time

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Transitional provisions

After the 24 month transitional period ends, the priorities will be determined under the substantive provisions of the legislation

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Preparing for the storm

You should be taking the following action: increasing knowledge of the concepts and timeframes

involved across your firm considering the consequences of non compliance for

clients informing clients of the implications of the PPS reform

on any ongoing securities that they hold updating your precedents to incorporate the new

concepts

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Contact details

Presenter: Petrina Macpherson

Position: Senior Associate

Direct line: 07 3233 8551

Email: pmacpherson@mccullough.com.au