Australian law governing security interests in personal property will undergo major change following the commencement of the Personal Property Securities Act 2009 (the “PPSA”) later this year. Australia currently has more than 70 varying Commonwealth, State and Territory legislative instruments dealing with the creation of security interests over personal property. The PPSA, combined with the new national PPS Register (the “Register”), will effectively replace the existing legislation and the multitude of related security registers, creating a unified and streamlined national personal property securities regime in Australia. An understanding of the PPSA and the operation of the Register is essential for all financiers, secured investors, suppliers and insolvency practitioners dealing with Australian personal property. Some of the key changes are summarized below.
The PPSA was introduced into Australian law in July 2010 following a lengthy consultation process. It has, in part, been modeled on existing laws in place in New Zealand, Canada and the United States. Readers who are familiar with Article 9 of the U.S. Uniform Commercial Code, the Canadian Personal Property Security Acts or the New Zealand Personal Property Securities Act 1999 will find many of the concepts in the PPSA to be familiar to them. The scope of the PPSA is far-reaching. Once the PPSA is operational, it will affect the way that security interests in all forms of personal property are created, recognized and enforced.1
What is “Personal Property?”
Personal property is essentially any form of property other than land, fixtures and certain statutory rights. It covers both tangible property (such as plant and equipment) and intangible property (such as intellectual property). In the context of the PPSA, personal property will be known as “collateral” where it is, or is anticipated to be, the subject of a security interest.
What is a “Security Interest?”
The PPSA makes significant conceptual changes to the historical notion of what constitutes security by encompassing security interests which are already recognized at law and in equity (such as charges and mortgages) as well as interests which have not previously been considered to be security interests under Australian law.
The PPSA broadens the concept of a security interest by shifting the focus to the substance rather than the form of the transaction. The rationale for this approach is to, where appropriate, eliminate the need to retrospectively examine the intention of the parties to the transaction, thereby creating increased certainty for all stakeholders.
The PPSA defines a security interest as 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). As a result, the PPSA will recognize interests arising from transactions where the secured party retains title to the collateral, such as conditional sale agreements, hire-purchase agreements, agreements containing retention of title clauses, leases of goods and consignments on the basis that the transaction, in substance, secures payment or performance of an obligation.
In addition, the PPSA deems certain limited categories of transactions — such as transfers of accounts receivable — to be security interests even where they do not technically secure payment or performance of an obligation.
There will remain interests to which the PPSA does not apply, such as certain liens, rights of set-off and interests under certain netting arrangements.2
Impact on Fixed and Floating Charges
The PPSA will formally do away with the current terminology of fixed charges and floating charges. Instead, the PPSA refers to charges over non-circulating assets (formerly fixed charges) and charges over circulating assets (formerly floating charges).
The PPSA has no equivalent to the fixed and floating charge, although section 18 of the PPSA makes it clear that a security agreement may provide for future advances and security interests in after-acquired property.
Attachment, Enforceability and Perfection of Security Interests
The PPSA sets out prescriptive rules in relation to the priority of competing security interests and the ability to acquire personal property free of security interests.
A security interest will be enforceable against the grantor of the security when it attaches to collateral. A security interest will be considered to attach to collateral when a person gives value for acquiring the security interest (or does something else to acquire it), and in return, the person gains rights in the collateral.
A security interest will only be effective as against third parties if it is attached and perfected. Ways of perfecting a security interest include:
1. registering an interest in the collateral on the Register;
2. taking possession of the collateral; or
3. taking control of controllable property.
Where there are two or more competing security interests, perfected interests will have priority over unperfected interests, regardless of which security interest was first attached. As between unperfected security interests amongst themselves, the general rule is that priority will be determined by reference to which security interest was first attached.3
As between perfected security interests amongst themselves, priority will in most cases be determined by which security interest’s “priority time” occurs first. The “priority time” for a security interest is the first to occur of registration, perfection by taking possession or control of the collateral, or perfection by operation of the PPSA. However, one notable exception to this rule is that, in certain circumstances, priority will be given to perfected purchase money security interests over perfected security interests in the same personal property that are not purchase money security interests within the meaning of section 62 of the PPSA.
Perfection is vital in an insolvency scenario. This is because, subject to certain exceptions, upon the appointment of a liquidator, a trustee in bankruptcy or an administrator, an unperfected security interest will be taken to vest in the grantor and a previously secured creditor will immediately become an unsecured creditor for the purposes of the insolvency administration. Accordingly, perfection is necessary in order to be secured in insolvency or bankruptcy proceedings.
The PPSA will not affect the law that governs the contractual rights and obligations of the parties to a security agreement. However, Part 7.2 of the PPSA does specify rules for determining whether, in Australian Court proceedings, Australian law or the law of a foreign jurisdiction will govern property rights in respect of a security interest.
The law governing the validity, perfection and effect of perfection or non-perfection of a personal property security interest will ordinarily be determined by reference to the type of collateral in question. For example, if the collateral consists of goods the security interest will ordinarily be governed by the law of the jurisdiction in which the goods are located when the security interest attaches. By contrast, the validity of a security interest in financial property (such as trade receivables) will generally be governed by the law of the jurisdiction in which the person or entity granting the interest is located when the security attaches.4
Creation and Operation of the Register
The Insolvency and Trustee Service Australia, a government body that has to date been responsible for administering certain matters relating to personal bankruptcies in Australia, will assume responsibility for the Register and a related Customer Contact Centre will be established upon the Register’s commencement. The Register will be a single, national online register for personal property security interests. Interested parties will be able to use the Register to search for and register security interests in personal property. The Register will be publicly accessible over the internet and will be updated in real time.
Certain transitional security interests that cannot be migrated to the Register will receive temporary perfection for 24 months after the PPSA takes effect. Temporary perfection means that an existing security interest may keep the priority it had before the PPSA commenced. Failure to register transitional security interests on the Register during the transitional period may mean that the secured party will lose out to another secured party that registers its security interest first. It is therefore important that registration be undertaken as soon as practicable.
Timing and Concluding Remarks
The PPSA is due to take effect in May 2011,5 at which time the Register will supersede the Australian Securities and Investments Commission Register and various intellectual property registers, amongst others.
The related Personal Property Securities (Corporations and Other Amendments) Bill, which has not yet been passed by Parliament, aims to amend relevant legislation to ensure conceptual consistency between the PPSA and the Corporations Act 2001 (the “Act”) and other applicable legislation. For example, the amendments will seek to clarify the concept of a secured creditor for the purposes of both the PPSA and the Act and to incorporate the new terminology in respect of circulating and non-circulating security interests into the Act.
Financiers and institutions that invest in Australia and that have taken or intend to take security interests in any kind of personal property will need to understand the changes brought about by the PPSA to ensure that their security interests are fully enforceable and protected as against insolvency appointees and other third parties with competing interests. Secured parties should consider whether they hold existing security interests that need to be registered on the Register and whether any additional steps need to be taken to perfect their security interests. Parties to secured financing transactions and their advisers should also consider the effect of the PPSA on deal documentation. For example, negative covenants prohibiting the granting of security interests by a corporation may cover more interests post-PPSA than they would have prior to the commencement of the PPSA and therefore prohibit company actions that the parties never intended to prohibit at the time the deal was documented.
By way of general observation, while the PPSA will result in far-reaching changes that interested parties should carefully consider, it is expected to bring welcome uniformity to Australia’s previously fragmented approach to the creation and enforceability of security interests in respect of personal property.
For more information on this alert, please contact any of the lawyers listed below:
, Partner, Financial Restructuring
, Partner, Financial Restructuring
, Partner, Financial Restructuring
, Partner, Financial Restructuring
, Partner, Financial Restructuring*
*Admitted to practice in Hong Kong, England and Wales, and Australia