THE PERSONAL PROPERTY SECURITIES ACT 2009

BY DEREK CRONINPartner

Cronin Litigation Lawyers

6 October 2011

Cronin Litigation

Commenced 2006

• Provides Specialist Legal Advice – Commercial Litigation, Insolvency Bankruptcy

• 2 Partners (Derek Cronin & Shaun Rose), a total of 5 solicitors (Anne Challenger, Nicola Chow, Melissa Coleman)

• Provides free, no-obligation telephone advice to Gold Coast Lawyers in relation to Litigation and Insolvency matters

• Offices at 33 Elkhorn Avenue, Surfers Paradise

Things we are seeing a lot of:-

• People wanting to terminate contracts to purchase property (BCCM, PAMDA)

• Director’s Penalty Notices and demands by the ATO

• Partnership and business disputes (including Termination of Partnership, Fraud, Breach of Director’s duties etc)

• People who need to clear up their bad debts

• Advice in relation to creditors – guarantees etc.

• People wanting to sue their lawyers

• People with “Google Issues” – content of what is said about them on the internet. Usually ‘investor issues’, stock forums, ‘software-based investments’

PPS – Where are we now?

• Will come into effect in January 2012 (to be confirmed)

• Will be a new national regime in personal property securities, commencement of the Personal Property Securities Register (“PPSR”)

• Will replace approximately 30 federal and state registers (including ASIC register of company charges, REVS, Bills of Sale, Crop and Stock Liens and Mortgages

• Transitional period of 24 months. We are told that existing registered security interests (including ASIC, REVS etc) will be automatically migrated to the new system

• PPS Register - Fully electronic, online, accessible 24 hours

Fees

The government has decreed that PPS Register is to operate on a “cost recovery” basis.

Although final figures are not yet available, it has been projected that registration will cost in the vicinity of $7.40 and the search fee will be in the vicinity of $3.70.

Final figures are said to be announced in “early 2012”

Registration – “Financing Statement”

Registration on the PPSR - online

A financing statement would generally contain the following information:-

• Secured party details and Grantor details

• Collateral details, including a class and description

• Registration details

***

Mistakes in registration – may mean that the registration is ineffective

Registration required within 20 days (no longer 45 days)

A quick overview

• A “security interest” means an interest in personal property (known as “collateral”) provided for by a transaction that, in substance, secures payment or performance of an obligation.

Examples of things covered

• Fixed and Floating Charges• Retention of Title Goods• A charging clause (over personal property) in a guarantee• A debt factoring facility• A security deposit under a supply agreement• Goods used in manufacturing• Motor Vehicles• Intellectual Property• Agriculture and Livestock• Leases• A real property mortgage, if it mortgages property other than the land (and fixtures)

A quick overview (cont.)

• The concept of a security interest will broaden and arrangements not previously considered ‘security interests’ will now fall into that definition

• Retention of Title and Leasing arrangements will now be considered as “security interests”

• Legal title will no longer guarantee priority to personal property (!!!)

•In order to be enforceable against third parties, a security interest will need to be ‘perfected’ by either possession, control or registration

•The most common method of ‘perfection’ will be registration on the PPSR

Example 1Vending Machine

Example 2Prize Vehicle

Example 3Business Premises

Definitions

Grantor – debtor, lessee or guarantor (who owes obligation) – a person who grants a security interest

Collateral- Collateral is personal property that is subject to a security interest.

Examples– company charges, motor cars, goods, shares, crops, livestock, office equipment, timber, artwork, uncertificated shares, currency, negotiable instruments, stock-in trade, interests in managed investment schemes, options, derivatives, book debts, trademarks, copyrights, designs, patents, plant breeder’s rights, and circuit layout designs.

Security agreement- A security agreement is an agreement that creates a security interest.

Chattel paper- Chattel paper is writing that shows the existence of a monetary obligation and a lease of specified tangible property. An example of chattel paper is a hire-purchase agreement.

Attachment- Attachment describes the successful creation of a security interest in personal property that can be enforced against that personal property.

Perfection – done by either control, possession, or registration on the PPSR (in most cases)

Perfection

A security interest will be perfected once the security interest attaches to the collateral and the secured party provides public notice of its security interest by either:

• registering an interest in collateral on the PPS Register;

• taking possession of the goods;

•taking control of controllable property.

Control

control of controllable property by a secured party is a sufficient public notice to perfect a security interest.

Controllable property is defined under the Act as follows:

1.an investment instrument (e.g. a share, bond or derivative);

2.an ADI account (e.g. a bank account);

3.a letter of credit;

4.an investment entitlement (i.e. rights arising out of holding an investment instrument; e.g. dividend rights); or a negotiable instrument that is not evidenced by a certificate.

Control (cont.)

Rick has a printing business. He has both a home loan and savings account with Westpac. He authorises Xerox to debit from his Westpac account monthly amounts to Xerox, a supplier. He defaults on his loans to Westpac. Both Westpac and Xerox have a claim on the amounts held in the savings account. Westpac does not need to take action to perfect its security because it is the holder of the ADI account. Xerox has no priority in relation to the amount due to it because its right to instruct Westpac to make the payment required Rick’s consent.

Purchase Money Security Interests (PMSI’s)

A PMSI arises when:-

• a person takes a security interest in collateral which they sell but are not immediately paid for;• a person takes a security interest in collateral for which they have lent another person the money needed to buy it; • a person owns goods and leases or bails them under a PPS lease; or• a person consigns goods under a commercial consignment.

The holder of a PMSI is entitled to a “super priority”, that is, they have priority over most other interests in the same collateral group.

Priority between Security Interests - The Default Priority Rules

1.A perfected security interest has priority over an unperfected security interest (even where the unperfected security interest has title to the relevant collateral, and even if the secured party took the perfected security interest with knowledge of the existence of the unperfected security interest)2.Perfection by control will have priority over perfection by other means. If two interests are perfected by control, priority is determined by the order of perfection3.If two interests are perfected other than by control, the first party to perfect will have priority.4.If there are two unperfected interests, then priority is determined by the order of attachment.

(Except – PMSIs) which enjoy a ‘super priority’ – provided they are registered within the prescribed timeframe (usually 15 business days).

ExampleJohn buys a Yacht in May 2012 at the Sanctuary Cove Boat show, using funds advanced by Sorrento Finance. In June 2012 John borrows money from another finance, Capri Lending, also secured against the same Yacht. Capri Lending registers its security interest on the PPSR in June. Sorrento Finance registers its security interest on the PPSR in July. Capri Lending enjoys priority for the full amount of the advance by Capri Lending, because it was first registered on the PPS.

Changes to the Corporations Act

• Many provisions of the Corporations Act 2001 (Cth) will be amended upon commencement of the PPSA• References to ‘charge’ and ‘chargee’ will be replaced with ‘security interest’ and ‘secured party’• References to ‘floating charge’ will be replaced with a reference to ‘circulating security interest’.• Section 51 of the Corporations Act to include new definitions for:-

* PPSA security interest•Security interest• Secured Party• Circulating security interest• Possessory security interest• Secured creditors• PPSA Retention of Title Property

Retention of Title Property

A Retention of Title Clause (also known as a “Romalpa” clause from the decision of the UK Court of Appeal – Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676) is commonly used by suppliers to retain title in the goods that they supply to a buyer, pending payment by the purchaser of amounts due under the contract of supply.

Traditionally, the issues regarding enforcement of ROT clauses have included:-

• Consequences of goods intermingling with other goods; and• Issues concerning whether the purchaser had adequate notice of the terms of the ROT clause• Complications where the goods are processed or incorporated as components in the creation of other goods.

Retention of Title Property (cont.)

• A retention of title (ROT) clause will be a security interest under the PPSA• The PPSA will effectively treat the purchase as if it already owns the goods (despite the ROT) and the seller as having a security interest over the goods for the amount owed• Sale of the goods on ROT terms will give rise to a PMSI (super priority) for the unpaid purchase price – unless goods are predominantly for personal, domestic or household purposes• A seller may lose title if the purchase sells or leases the goods and the seller has not perfected its security interest

Accordingly:-•Sellers will need to comply with the requirements of the PPSA to retain an interest in the goods (i.e.. Register their interest in the goods on the PPSR)• Sellers who do not comply will lose their interest in the goods, even if they retained ownership of them.

Continuing Impact of Section 266 of the Corporations Act

Section 266 is the provision of the Corporations Act which creates the “45 day rule” applying to registrable charges. It provides that a registrable charge on company property is void as security against a liquidator or administrator unless notice of the charge was lodged either within 45 days after the charge was created or at least six months before the commencement of the winding up or the appointment of an administrator (the “critical day”).

The Corporations Act will be amended (S588FL) to require that a security interest be “perfected, registered or enforceable against” a third party within 20 business days after the security agreement came into force.

The remaining provisions will remain upon similar terms, but practitioners will need to be aware of the shortening of the registration period effectively from 45 days to 20 business days.

Example 3Portacom

Graham-v-Portacom New Zealand Ltd [2004] 2 NZLR 528

Portacom leased five portable buildings to NDG Pine Ltd (in receivership) (NDG). The buildings were delivered to NDG and NDG granted a debenture to its bank. The bank’s debenture was registered under the PPS but Portacom did not register its interest in the buildings.

NDG became insolvent and its Bank appointed receivers and managers to NDG’s assets.

The receivers claimed that they had the right to sell the buildings and they sought directions from the court as to their powers and the respective priorities of the parties.

The New Zealand High Court held that the rights of NDG as lessee of the portable buildings were not confined to possessory rights. It had sufficient rights of ownership under the New Zealand Personal Property Securities legislation to confer a security interest on the bank in priority to the rights of the lessor, Portacom.

Graham-v-Portacom New Zealand Ltd (cont’d)

In other words, NDG could grant a security interest in the portable buildings themselves not just its leasehold interest.

NDG was treated as the owner of the buildings for registration and security purposes and in the result, both NDG’s leasehold and proprietary interests in the buildings were subject to the bank’s security interest which took priority over Portacom’s unperfected security interest.

It followed that the receivers had power to sell the buildings. The bank’s security interest prevailed over Portacom‘s ownership rights because Portacom had not taken steps to perfect its security interest by registration. This case sends out a clear warning to owners that they cannot sit on their ownership rights and ignore the PPS legislation.

Summary - Security Interests

A security interest can override ownership rights if the true owner does not take steps under PPS to perfect its interest and preserve its priority.

In addition, the true owner cannot overcome its failure to perfect its security interest by relying on a constructive trust or unjust enrichment. Such a claim is inconsistent with PPS.

Exclusions from the definition of security interests

The Act provides that the following are not security interests:

1.a lien;

2.any right of set-off ;

3.any right held by a person under a close-out netting contract as defined in Section 5 of the Payment Systems and Netting Act 1998 (Cth);

4.land law;

5.a charge created under Section 'l39ZN or 139ZR of the Bankruptcy Act 1966, an interest created under a personal insolvency agreement under Part X of the Bankruptcy Act 1966, and the interests of the Official Trustee or a registered trustee in property of a bankrupt that has vested in the Official Trustee or the registered trustee under Section 58 of the Bankruptcy Act 1966 (Cth).

6.the interests of the Official Trustee or a registered trustee who has taken control of a debtor’s property under Section 50 of the Bankruptcy Act 1966 (which deals with taking control before sequestration).

Ships

Ships are personal property for the purposes of the PPS. The AMSA Register under the Shipping Registration Act 1981 (Cth) will continue to record vessel owners and the PPS Register will give searchers the capacity to identity security interests in the vessel.

Intellectual Property

Interests in security interests in intellectual property (Trademarks, Designs etc) will also come within the PPS.

The transitional provisions

The Transitional Provisions generally preserve existing rights for a period of 24 months. During the transitional period, a prudent searcher would conduct searches in both the PPS Register and any other relevant registers.

However the new PPS regime will start immediately from the commencement date, and new registrations will be made on the PPS at that time. Practitioners will need to be familiar with client’s requirements regarding registration on the PPS well prior to October this year.

Particular clients to be concerned about would include:- Clients who lease goods (finance companies, office equipment), Farmers, Pawnbrokers, Motor Vehicle and Motor Vessel Industry, Manufacturers, Retailers, Franchisors, Building Industry suppliers.

There are businesses who specialise in assisting businesses in migrating to the new system. (e.g.EDX)

Example 5Cement Company Client

Temporary Perfection

In certain circumstances a security interest can be perfected for a limited period without registration and without the secured party taking possession or control.

For example, there are circumstances where the importation of goods will have temporary perfection for the first to occur of:-

(i)56 Days after it is moved to Australia; or(ii)5 days after the secured party has actual knowledge that the property is relocated in Australia.

Acquiring property free of security interests

•Acquisitions in the Ordinary Course of Business

A person who acquires an interest in personal property in the ordinary course of business of dealing with property of that kind, would acquire the interest free of any security interest granted by the vendor whether perfected or unperfected.

•Personal, Domestic or Household Property

A person who buys or leases property that they intend to use predominantly for personal, domestic, or household purposes would take the goods free of any security interest in the property provided that the market value of the consideration provided by the purchase or lessee at the time of payment is not more than $5,000

•Special Rules for Motor Cars

Innocent purchase of a motor vehicle will acquire the vehicle free of a security interest if new value was given and a search of the PPS register would not have disclosed a registered security interest.

Accessions

Goods installed in or affixed to other goods unless described by serial number.

The general rule is that a security interest in an accession has priority over an interest in the whole unless the interest in the whole falls within an exception. For example, the starting position is that a security interest in an engine that is later affixed to a motor car would have priority over a security interest attached to the car.

Processed or Co-mingled Goods

Special provisions apply to goods which are manufactured, processed, assembled or co- mingled so that they become a product of mass and their separate identity is lost.

The general rule under the Act is that a security interest in tangible properly continues in the combined product, where through assembly, processing, co-mingling or manufacturing, its identity is lost. Examples include grain that becomes co-mingled with other grain in a silo and a piece of wood that is manufactured into a fruit bowl.

Enforcement of Security Interests – “Commercially Reasonable”

All parties have a duty to act honestly and in a commercially reasonable manner.

Canadian case law says this means acting as a reasonably prudent businessman would act in similar circumstances.

Application of Amounts and Proceeds

The effect of the Act is that where a security interest remains unperfected at the time of insolvency (corporate or personal), the unperfected security interest, whatever its form, will be considered to be part of the estate of the insolvent Grantor and will therefore be available for distribution in the grantor’s insolvency.

In other words, if you fail to perfect your security interest before the grantor's insolvency, it will be lost to the bankruptcy trustee or liquidator or administrator.

Distribution of proceeds – Section 140 PPSA

• Obligations to persons holding higher interests (other than security interests)

• Reasonable expenses incurred in enforcement of security interest

• Obligations to persons holding higher priority security interests

• Obligations to secured party (i.e. Enforcing secured party)

• Obligations to persons holding lower priority security interests

• The grantor (i.e. The company)

THE END

Further information

derek@croninlitigation.com.au

5592 6633