Personal Property Securities Act 2009 (Cth)

Overview and Practical Implications

University of Adelaide

Philip Laity and Martin Lovell

31 October 2011

Personal Property Securities

Act 2009 (PPSA)

• What is the PPSA?

– Extensive overhaul of the existing regime for taking

security over personal property

– Establishes single national law and online register

for all „security interests‟ in personal property

(excluding land)

• What does the PPSA cover?

– creation of valid and enforceable security interests

– priority between competing security interests

– extinguishment of security interests (e.g. when a

party can take collateral free of a security interest)

– enforcement

Why was the PPSA needed?

• Existing system complex, confusing,

inconsistent and arguably outdated

• Over 195 Acts and Regulations

• Over 70 State, Territory and Commonwealth

security registers

• Reform consistent with legislation in NZ,

Canada and USA

When does the PPSA come into

force?

• PPS Act and Regulations passed

• Commencement delayed

• Personal Property Securities (Registration

Commencement) Bill 2011 introduced to

remove default commencement date of

1 February 2012

• www.ppsr.gov.au

Why is the PPSA relevant?

• Broader definition of „security interest‟

• Transactions which are not traditionally regarded as creating security now need to be registered. For example:– supplying goods on retention of title (ROT) terms

– leasing equipment to customers

– loaning goods (i.e. bailments)

• Failure to register has severe consequences if the customer/lessee becomes insolvent

• Consider impact on Adelaide University as a:– secured party

– security provider

– purchaser of assets which may be subject to a security interest

Scope of the PPSA

The PPSA applies to:

• all “Security Interests” in “Personal Property”

located in Australia; OR

• all Security Interests where grantor is an

Australian entity

What is Personal Property?

• All tangible and intangible property (except

land and buildings)

• Includes:

- plant and equipment

- inventory

- motor vehicles

- intellectual property (including

trademarks/patents)

- artwork

- stock/book debts/receivables/proceeds

- commingled goods

Exclusions

Excludes:

• Certain statutory licenses (if the statute under

which a right, licence or authority is granted

declares that the interest is not personal

property for the purpose of the PPSA)

• Tradeable water rights

• Set-off arrangements

• Non-consensual liens and charges

What is a Security Interest?

• Any interest in property securing the payment

of money or performance of an obligation.

• „Substance over form‟ approach

– Irrespective of form of transaction

– Irrespective of who is legal owner of property

• Defined in section 12(1) of the PPSA:

A security interest means an interest 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).

Security Interests - examples

• Traditional security (charge, mortgage,

pledge)

• Retention of title

• Consignment

• Hire purchase

• Assignment (by way of security)

• PPS Lease

- Lease or bailment > 1 year

- Serial numbered goods > 90 days

Specific exclusions

• Licenses (non-statutory)

• Priority arrangements / subordination

Perfecting a Security Interest

• A security interest can be perfected by:

– registration;

– possession; or

– control (certain financial property only)

• Registration is the recommended and most

common method by which perfection can be

achieved

Why is perfection important?

Perfection is important to:

• Preserve priority

• Allow the security interest to be enforceable

against an administrator/liquidator/trustee in

bankruptcy

• Avoid the vesting rule

Vesting on insolvency - PPSA

• If, at the critical time, a security interest is

unperfected and an insolvency event occurs,

the security interest vests in the grantor

immediately before the insolvency event

• This means that a secured party can lose its

interest in the collateral which is subject to an

unperfected security

When is the critical time?

Insolvency Event Critical Time

Company enters into

liquidation

The time the winding up

was taking to have

commenced (s 513A or

513B)

Appointment of an

administrator

The time the

administration began (or

the winding up was taken

to have commenced)

(s 513C)

Execution of a deed of

company arrangement(As above)

A sequestration order is

madeWhen the order is made

A person becomes a

bankrupt

When the person

becomes a bankrupt

Vesting – Corporations Act

• Section 588FL of Corporations Act

• Additional to vesting rules in the PPSA

• Applies to companies only

• Imposes time limits for registration of security

interest similar to existing Ch 2K regime

– 20 business days after the security interest is

created; or

– 6 months before the critical time

Priorities – default rules

• Perfected security interest has priority over an

unperfected security interest

• Priority between two or more perfected

security interests is determined by time of

perfection

• Priority between two or more unperfected

security interests is determined by the time

the security interest was created

Priorities – special rules

• Purchase Money Security Interest (PMSI) –

super priority (e.g. ROT supply)

• PMSI has super priority over general

security interest (i.e. the PMSI will „trump‟ or

rank ahead of a general security interest)

PPS Register

• Online register

• Searchable by security provider or serial

number

• Interested person may register a security

interest by lodging “financing statement”

• Financing statements can be completed

online and must contain specified information

• A copy of the security agreement does not

need to be filed on register (cf existing Ch 2K

regime)

• Costs of registration (see handout)

What must be included in a

financing statement?

• Section 153(1) of the PPSA contains a table

that specifies the data that must be included

in a financing statement

• Must specify if security interest is a „Purchase

Moneys Security Interest‟ (PMSI)

• The Office of the Commonwealth AG has

published screen shots of the web pages that

must be completed to register a financing

statement

Transitional Provision and

Migration

• PPSA provides some protections for existing

security interests arising prior to the

registration commencement time

• Certain existing security interests will be

“migrated” automatically to the new PPSR

• Other transitional security interests will be

taken to be perfected for 24 months following

the registration commencement time

• Transitional provisions provide more limited

protection that perfection

Managing PPSA risk

• Registration / perfection (recommended)

• Commercial alternatives to minimise risk:

– changing payment terms (e.g. COD)

– reducing credit lines

– reducing payment/invoice periods (e.g. 90 days to

30 days)

– credit monitoring

– reducing term of equipment leases or bailments

(e.g. less than 1 year / 90 days)

– others?

How will this affect your

business?

• Practical examples which are likely to be

relevant to Adelaide University:

– Taking security

– Equipment leasing

– Property located on third party premises

– Retention of title

– Guarantees

– Purchasing goods (taking good title)

– Finance leases / hire purchase

– Intellectual property (IP) and IP licences

– Financing arrangements

Taking security

• Adelaide University agrees to provide funding,

goods or services to a third party, subject to

the third party providing security over its

present and future assets to secure any

amounts owing to Adelaide University from

time to time.

• How does Adelaide University take a security

interest in this property?

Equipment leasing

• Adelaide University leases lab equipment to a

third party (the lessee) for a term of 2 years.

• The lessee fails to pay and a liquidator is

appointed. Adelaide University attempts to

recover its leased equipment from the

liquidator.

Property located on third party

premises

• Adelaide University has agreed to loan some

of its equipment to companies and individuals

free of charge for an indefinite term. The

agreements are not always documented

although records are usually kept. Some of

these third parties are refusing to return the

equipment and one of the companies has

recently gone into administration.

• What rights does Adelaide University have to

reclaim its goods?

Retention of title

• Adelaide University sells books/course materials

to a student bookstore on credit, subject to its

standard terms and conditions. The standard

terms and conditions include a retention of title

clause which provides that legal title in the

products does not pass to the purchaser until

Adelaide University has received payment. The

terms and conditions provide that the proceeds

of sale of any such goods are held on trust for

the University.

• The purchaser fails to pay and a liquidator is

subsequently appointed. Adelaide University

tries to recover its goods and obtain payment.

Guarantees

• Adelaide University agrees to enter into a joint

venture with a private company, subject to its

joint venture partner providing a personal

guarantee from a director or parent company.

• What steps need to be taken under the

PPSA?

Purchasing goods (taking good

title)

• Adelaide University purchases the assets of a

business including plant, equipment and

motor vehicles. The vendor has warranted

that it has good and unencumbered title to the

assets.

• However, Adelaide University is concerned to

ensure that it will obtain title free of any other

security interest.

Finance leases / hire purchase

• Computers Inc leases IT equipment to

Adelaide University on a hire purchase basis.

• At the end of the lease term, Adelaide

University has the right to purchase the

equipment by paying a pre-determined

amount.

• What security interest would arise as a result

of this transaction?

Intellectual Property

• Adelaide University enters into an

arrangement with a small company to jointly

commercialise a new technology for which a

patent has just been granted. To secure its

obligations under the joint venture agreement

the company gives Adelaide University

security over its patent.

• What actions does Adelaide University have

to take to perfect its security? What additional

steps are required because the collateral is

IP?

Intellectual Property Licence

• Adelaide University grants a commercial

licence to a third party to use its

technology/IP.

• Does this arrangement need to be registered

under the PPSA?

Financing Arrangements

• Adelaide University has entered into a facility

agreement with its bank to provide working

capital and other day to day banking facilities.

As part of this facility Adelaide University has

agreed to a „negative pledge‟ which prevents

it from granting security interests to any other

parties.

• What steps does Adelaide University need to

take?

For discussion

• Identify other potential PPSA “security

interests” relevant to University of Adelaide‟s

operations

• Consider further scenarios where the PPSA

may apply

• Consider what further actions or reviews may

need to be taken

Next steps

Consider:

• Risks to business if security interests not

perfected vs compliance/registration costs

• Policy for registration in respect of :– individuals vs companies

– ROT arrangements

– leases

– bailments / consignments

– serial numbered goods

– other

• Might monetary thresholds be appropriate?

• Internal registration and information systems

Questions?

Contact details

Philip Laity

Partner

+61 8 8239 7125 philip.laity@jws.com.au

Martin Lovell

Senior Associate

+61 8 8239 7152 martin.lovell@jws.com.au