Personal Property Securities Act

The future is simpler ... sort of...
The Personal Property Securities Bill 2009 completed passage of both Houses of the Parliament on 26 November 2009 and is set to become effective from May 2011. 
Australian business has lived with a hodge podge of laws dealing with the registration of securities and other interests in goods and property other than land (over 70 different laws apparently), since time immemorial.
After 25 years of efforts it now appears that our federal system, through a referral of power from the states to the commonwealth, will actually deliver a one stop law and register that will provide uniformity, simplicity and clarity that business and consumers deserve.

What the law does

The new law will:

• Regulate the creation of security interests in all property; other than land and some other property such as water rights
• Establish a priority scheme for two or more security interests in the same personal property
• Create specific rules for security interests in certain types of property (e.g. agricultural property and intellectual property), and
• Set out the enforcement regime – though recognising the process under legislation such as the National Consumer Credit Protection Act (and the National Credit Code)

Substance not form is critical

The author, as a young lawyer, ran a series of cases (many reported) about ‘Romalpa’ or retention of title clauses and whether they were charges requiring registration to be effective against insolvency administrators.   No longer will lawyers have the pleasure of such esoteric debates.  Clients will no longer have to listen to their lawyers discussing the distinction between a hypothecation and a bill of sale.  The law simply looks at the nature of the arrangement from a functional perspective.  If the arrangement has the effect of securing payment or performance of an obligation, then regardless of the form of the arrangement this law will apply.  
So now, in addition to the traditional forms of chattel mortgages, fixed and floating charges and mortgage debentures, other arrangements such as retention of title, finance leases, and factoring will all be subject to the new law.

New terms and concepts

We will need to understand new concepts and terminology.  For example, there are concepts of ‘attachment’, ‘perfection’, and security interests over ‘circulating and non-circulating assets’.
As the new law defines when a security interest has been created and when it is effective against other parties it has had to break down the process of creating a security interest into its component parts and set out rules for how a security operates, especially against the rest of the world, depending on how many of the components are in place.

What is attachment?
A security is attached when rights are given over personal property and either some value is given for the security interest or an act is undertaken  creating those rights (such as signing a document). 
However, the rights given under the security may only be enforceable against the rest of the world (and not just against the person who gave the security) when they are attached and one of the secured party either:

• possesses the personal property,
• controls the personal property, or
• has entered into a security agreement.

What is perfection?
To obtain priority over third parties, however, the security interest must be perfected.  This will most commonly occur because the security interest has been registered on the PPS register.  It may also be perfected by the secured party has control of the personal property, for a limited number of categories of personal property.
Perfection is important.  Unless a security interest is perfected, a security will not be enforceable against a liquidator or trustee in bankruptcy.  The security is worthless and the creditor effectively unsecured.
What are circulating assets?
Floating charges now have a new name.  They are security interests over circulating assets.  By corollary fixed charges are over non-circulating assets.

Rules for priorities

There is a new regime of priority rules.  General rules apply which then have exceptions.  The general rules are:

• as between unperfected securities the first in time to become attached has priority
• a perfected security has priority over an unperfected security
• perfected securities have priority in the order in which they were perfected.

Enforcement

There is a detailed process outlined in the new law dealing with the enforcement process.  Many of the provisions may be contracted out.  The laws relating to enforcement of consumer credit contracts are not affected.

Registration

An online registration process is probably the best thing this legislation delivers.  What is created is a ‘one stop shop’ to lodge details of security interests irrespective of the nature of the secured property or the nature of the entity giving the interest. 
The process will entail lodging financing statements with certain information such as:

• details of the person giving the security,
• a description of the goods or other property (known as ‘collateral’) specifying whether it is commercial or consumer property and giving identification numbers,
• the details of the end date of registration, if there is one
• an indication of whether the security interest is a purchase money security

This new registration process will mean that the underlying security documents will not be registered and people will not be able to obtain them from ASIC, for example, as is currently the case.  However, copies of such documents can be obtained from the secured party.

Who does this affect?

Anyone who currently relies on something in the nature of a security interest needs to consider whether the new law applies.  The PPS Act will have consequences for them.  It may mean that if they want to enforce an interest under a ‘retention of title clause’ or financing lease against a liquidator in future that their interest in the goods will, from May 2011, need to be registered.
Those who already register charges under range of existing laws will appreciate the efficiency of a single on-line register.
Donovan Oates Hannaford is able to assist anyone wishing to understand the legislation more.
Hadyn Oriti
February 2010
P: +61 2 6583 0449
E: horiti@dohlaw.com.au