1. Significant changes introduced under the PPSA
The introduction of the PPSA (Personal Property Securities Act 2009 (Cth)) heralded a significant change in the way Australian businesses and consumers will interact with each other.
On 30 January 2012 a single national register was introduced in relation to such interests as charges (both fixed and floating), chattel mortgages, hire purchase, conditional sale agreement (ROTA), a lease or transfer of title.
Also included are the interests of a transferee under a transfer of an account or chattel paper, the interests of a consignor who delivers goods under a commercial consignment and the interest of a lessor of bailor of goods under a PPS lease.
Additionally all goods which are required to be identified by serial number have special requirements for registration contained within the PPSA.
New terms have been introduced under the PPSA such as accession, commingled goods, collateral, attachment, circulating assets to name just a few. In order to understand the operation of the PPSA both practitioners and consumers will need to understand the meaning of these concepts.
2. Importance of understanding new definitions
Part 1.3 of the PPSA contains deals with Definitions. A Dictionary is to be found in s 10, however the entire part contains relevant explanations and clarification in relation to the meaning and operation of the various terms to be used under the Act.
What creates the security interest is the relationship between the obligation created and a right against personal property. These relationships are to be distinguished from mere contractual rights which involve some form of agreement which is enforced pursuant to the terms of the contract and not secured against property.
The introduction of the Personal Properties Security Act 2009 (PPSA) has also lead to significant changes being made to parts of the Corporations Act 2001 (Cth). The terminology of the Corporations Act has been amended to apply the functional approach of the PPSA to those sections of the Corporations Act that deal with charges. Prior to these reforms, only transactions which created charges or mortgages were security agreements under the Corporations Act.
3. Security interests and circulating security interests
Under the PPSA, however, transactions which have the same effect of securing the payment or performance of an obligation are treated alike. These security interests are therefore included as PPSA security interests in the Corporations Act.
For example issuers of debentures to retail investors will need to notify debenture trustees of far more transactions as ss 283BE and 283CC have been amended to involve the granting of security interests rather than merely charges.
All current charges on ASIC’s Register of Company Charges have been migrated to the new PPS Register and form part of the ‘migrated lists’. Section 332 of the PPSA provides a definition of “migrated security interest” and refers to security interests that existed before 1 February 2012.
Those types of company charges (now known by the generic term “security interests”) which previously were required to be registered under Ch 2K of the Corporations Act, and which are created on or after 30 January 2012, are subject to the PPS regime, and must be registered on the PPS Register.
Note that s 8 of the PPSA provides a list of interests to which the PPSA does not apply. Included in this list are certain charges, liens and pledges such as liens arising by operation of law.
Floating and fixed charges are now called circulating and non-circulating security interests respectively but with the intention of maintaining existing rights, for example, employee preferences under s 561 of the Corporations Act.
Section 340 of the PPSA provides a definition of circulating asset.
In general terms a circulating asset is:
a) an account that arises from granting a right, or providing services, in the ordinary course of a business of granting rights or providing services of that kind (whether or not the account debtor is the person to whom the right is granted or the services are provided);
b) an account that is the proceeds of inventory;
c) an ADI account (other than a term deposit);
d) currency;
e) inventory;
f) a negotiable instrument.
4. Migration of ASIC’s Register of Company Charges
All current charges on ASIC’s Register of Company Charges have been migrated to the new PPS Register and form part of the ‘migrated lists’. Section 332 of the PPSA provides a definition of “migrated security interest” and refers to security interests that existed before 1 February 2012.
Those types of company charges (now known by the generic term “security interests”) which previously were required to be registered under Ch 2K of the Corporations Act, and which are created on or after 30 January 2012, are subject to the PPS regime, and must be registered on the PPS Register.
ASIC’s Register of Company Charges (including provisional charges) is closed to new registrations, although ASIC is required to retain existing records on its register for seven years after the commencement time (30 January 2012; see below). This is to enable chargees, lienees and pledgees of registrable charges to continue to obtain information relating to their charges, liens or pledges.
If a charge was registered provisionally with ASIC, it has been transferred to the PPS Register. However, after this transfer, the security interest will no longer have any legal effect and the security interest will have to be registered on the PPS Register within 24 months to retain the original creation date.
Following the closure of ASIC’s Register of Company Charges, people may need to search both the PPS Register and the ASIC Register to get the full history of charges for a company.
This is particularly relevant at the moment as not all securities were successfully migrated to the PPS Register. ASIC has a list of securities that were current prior to the date of migration.
Chapter 2K of the Corporations Act has been repealed by the amending Act, but this is subject to a complex and lengthy transitional procedure. This is discussed in detail in our Australian Corporations Commentary product.
5. What if your security interest was not migrated?
Unfortunately around 6,000 security interests were not successfully migrated.
ASIC has provided a List of Charges not migrated to PPSR which is available on the ASIC website. This list is regularly updated.
Secured parties may be eligible for a $50 payment per registration if they hold a security interest that was not migrated from the ASIC Register of Company Charges to the Personal Property Securities Register (PPSR), and have registered that transitional security interest on the PPSR.
The PPSR released a new form: Notification of re-registration of non-migrated security interests (including application for payment) on 2 July 2012. Secured parties may use this form to apply for the payment. Claimants must be a secured party in respect of a non-migrated charge that is included in the list published by ASIC.
6. Other amendments
There are also other and consequential amendments which have been made to the Corporations Act.
Chapter 2K (Registration of company charges) of the Corporations Act has been repealed, because the PPS Act provides for the registration of security interests in personal property. However, provisions equivalent to s 266 and 267 in Ch 2K (which provide that charges are void against an administrator or liquidator in certain circumstances) have been retained
Floating and fixed charges are now called circulating and non-circulating charges respectively but with the intention of maintaining existing rights, for example, employee preferences under s 561 of the Corporations Act.
Numerous amendments have been made throughout the Corporations Act, many of which adjust the terminology of the Act to align with the terminology of the PPSA. Reference should be made to the Explanatory Memorandum to the Personal Property Securities (Corporations And Other Amendments) Bill 2010, which is available here.
7. Amendments to the Corporations Act
The relevant pieces of amending legislation for the Corporations Act were the:
- Personal Property Securities Act 2009 (Cth) (PPSA), and
- Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth) (amending Act).
The terminology of the Corporations Act has been amended to apply the functional approach of the PPSA to those sections of the Corporations Act that deal with charges. Prior to these reforms, only transactions which created charges or mortgages were security agreements under the Corporations Act.
For a more detailed explanation of the definitions under the PPSA see PPSA Definitions.
8. Assent and commencement of the PPSA
The PPS Act received Royal Assent on 14 December 2009. The amending Act received Royal Assent on 6 July 2010. The PPS Act, however, generally speaking, begins to apply at the “registration commencement time”, as defined in s 306 of the PPS Act. On 21 November 2011 the Minister made a determination which set the registration commencement time as the beginning of 30 January 2012: see the Personal Property Securities (Migration Time and Registration Commencement Time) Determination.
The amendments to the Corporations Act made by the amending Act are also expressed (with one exception) to commence at the “registration commencement time”.
This extended transition period was provided primarily in order to allow time for the new PPS Register to be established, and for existing security interests registered under the various Commonwealth, state and territory registration systems to be migrated to the new register. Time was also allowed for the various states and territories to refer constitutional power to the Commonwealth to support PPS reform and to make necessary amendments to their own existing legislation affecting security interests.
9. Transitional provisions
As with any substantial amendment to the law, the amendments are subject to a number of transitional provisions.
The amendments to the Corporations Act commenced when the PPS Register started to operate, that is, 30 January 2012. Because most amendments require the alignment of existing categories of security interests in the Corporations Act and related concepts to the PPSA, they will only apply to PPSA security interests that arise under agreements made after the new PPS Act scheme started to operate.
The repeal of Ch 2K of the Corporations Act will not immediately apply to “registrable charges” under the Corporations Act, except to the extent necessary to close the ASIC register to new registrations, and to limit the effect of s 266 (the voiding of registrable charges). A “registrable charge” is a charge created before the commencement time (30 January 2012) that was a registrable charge within the meaning of s 261 of the Corporations Act when it was created: s 1499.
Chapter 9 of the PPSA sets out detailed rules for dealing with transitional security interests, which are essentially security interests that arise under pre-PPSA security agreements (see s 308).
Not all security interests arising under the pre-PPSA laws are automatically included on the PPSR at the registration commencement date. Security interests that are automatically included on the PPSR at commencement date are called ‘migrated security interests’ (see s 332).
A ‘transitional security agreement’ (TSA) is a security agreement which was in force before 30 January 2012 (registration commencement time) and that continues in force after that date ( s 307).
A ‘transitional security interest’ is defined in s 308 of the PPSA as a TSA which was in operation before the registration commencement time and the PPSA would have applied to but for s 310, and one in which the right to grant the interest occurred before this date ( ss 308 & 309).
10. Priority rules — Part 2.6
The priority rules are contained in Pt 2.6 of the PPSA. There are six divisions in this part each dealing with a particular priority situation.
Div 2 of Pt 2.6 provides the default rules for priority between perfected and unperfected interests and between perfected interests amongst themselves. As is to be expected a perfected interest will have priority over an unperfected interest.
What happens between two perfected interests? The basic rule of thumb to remember with the PPSA is that first in time generally wins. The PPSA does not care who owns the property, just who has a security interest and when was it perfected.
Section 54 provides a guide to Pt 2.6 and is a useful overview of the priority rules. I have reproduced on the following pages.
11. Section 54 Guide to Part 2.6
This Part deals with how to work out the priority between competing securityinterests in collateral (and in some cases, other kinds of interests).
Priority rules are relevant when the same personal property is subject to 2 or more security interests. If the debtor defaults, the rules determine the order of priority in which the various secured parties can enforce their security interests under Chapter 4.
Division 2 sets out the default rules that apply if this Act provides no other way of determining that priority.
Unless otherwise provided:
(a) perfected interests have priority over unperfected interests; and
(b) priority between perfected interests amongst themselves, and unperfected interests amongst themselves, is determined on a first-in-time basis.
The Division contains other rules of general application (such as the priority that applies to the proceeds of collateral). Security interests perfected by control have the highest priority.
For example, a security interest held by an ADI in an ADI account with the ADI has priority over any other security interest in the ADI account. An ADI has control over an ADI account held with the ADI (see section 25). Only the ADI with which an ADI account is held may perfect a security interest in the ADI account by control (see section 21). A security interest perfected by control has priority over any other security interest in the same collateral (see section 57).
Division 3 deals with the priority rules that apply when one of the security interests is a perfected purchase money security interest. These interests are exceptions to the first-in-time rule (except for certain security interests in an account dealt with in section 64). A perfected purchase money security interest that is granted to a seller, lessor or consignor takes priority over a perfected purchase money security interest that is granted to others.
Division 4 deals with priority of security interests in transferred collateral where a transferor and a transferee have both granted security interests in the transferred collateral. Provided the transferor-granted security interest has remained perfected, that security interest will take priority.
Division 5 deals with the priority of certain creditors who have their debts repaid. The priority of those who purchase negotiable instruments, chattel paper and negotiable documents of title is also dealt with. Generally, the purchaser’s interest will take priority over a security interest in the negotiable instrument, chattel paper or negotiable document of title.
Division 6 deals with priorities in relation to the following:
(a) interests that arise under law;
(b) interests of execution creditors;
(c) security interests in returned goods;
(d) security interests in accounts, financial property or intermediated securities if a foreign law governs their perfection but does not provide for public registration.
12. Priority rules — existing registered charges
The priority rules for existing registrable charges will apply indefinitely.
Registrable charges notified before 30 January 2012 (including provisional charges), are migrated across to the PPS Register and (as transitional security interests) will retain the priority they had prior to migration.
Registrable charges not notified before 30 January 2012 will be able to be registered at any time on the PPS Register (but will have priority dating to that day), unless a court order is obtained under s 274 to retain their pre-commencement time priority.
Section 266(4) will continue to apply to registrable charges which became void under s 266 before 30 January 2012. This will maintain the existing rights of secured creditors to apply to a court for relief and a declaration that the registrable charge never was void
13. Priority rules for transitional security interests
Section 320 of the PPSA provides a guide to the priority rules which will apply in relation to transitional security interests. It is important to take note of the priorities set out in the table contained in s 320(1).
The general rule in relation to priorities is that established pursuant to the default priority regime established under s 55 of the PPSA. Basically, a perfected security interest of either description, (transitional or created after the commencement of the PPSA), takes priority as against an unperfected interest.
This is why perfection is such a crucial aspect of ensuring your security is protected against other creditors. Section 21 of the PPSA contains the main rule in relation to perfection which addresses the four ways a security interest can be perfected. Once a security interest is registered on the PPSA it is considered perfected for the purposes of the Act. The perfection of a security interest is an important concept under the PPSA.
It is the date of perfection which will determine, in most cases, the order of priority for creditors. However the PPSA is concerned with priority contests between security interests and does not attempt to decide who the ultimate owner of the collateral is.
14. Priority between two perfected security interests â s 55(4)
Section 55(4) provides that the default priority rule between two perfected security interests is that the first in time will prevail. The subsection refers to the concept of ‘priority time’ discussed in s 55(5) and (6). Whilst the Act, for the purposes of s 55, does not discriminate between the methods of perfection adopted by the secured party, certain of the more specific priority rules only operate with regard to particular modes of perfection and take primacy as against the default priority rules pursuant to s 55. See also Bulut v Brampton (City) (2000) 15 PPSAC (2d) 213; 185 DLR (4th) 278 at [74]—[80].
Section 55(4) also provides a valid reason why the pre-perfection steps permitted by the PPSA are beneficial to secured parties including the registration of a financing statement prior to a security interest attaching to particular collateral (see ¶38-950). Where the ‘first in time’ rule prevails it is important that secured parties prudently perfect their interest as soon as practicable.
The requirements of perfection must be fully constituted in order for the priority rule pursuant to s 55(4) to apply. For example, certain property must be described by serial number in a financing statement (see s 153) and if this does not occur, the interest is unperfected and s 55(3) applies by default.
In a British Columbia Court of Appeal case, 674921 BC Ltd v Advanced Wing Technologies Corp (2006) 9 PPSAC (3d) 43; 263 DLR (4th) 290 at [14], Newbury JA noted that the:
“‘Residual Priority Rules, provide a set of ‘default’ rules to be applied in contests between security interests. Importantly for this case, priority between perfected security interests in the same collateral is generally determined according to the order of the registration of financing statements, ‘without regard to the date of attachment of the security interest’. Thus as Cuming and Wood observe, although the ‘perfection of a security interest is an essential feature of priority, priority is not based on the time of perfection. A security interest may have priority even though it was not the first security interest to be perfected. Time of attachment is also not a factor in determining priorities between two secured parties (except in the unlikely event that both secured parties have failed to perfect their security interests).’”
Also see the decision in BMP & Daughters Investment Corp v 941242 Ontario Ltd (1992) 4 PPSAC (2d) 220; 96 DLR (4th) 741 at [19].
15. Perfection and attachment
Three of the four methods place an active onus on the secured party with the fourth operating pursuant to the Act. See s 10 for the definition of a secured party.
Basically you can achieve perfection by registration, possession or control. Also relevant is the concept of temporary perfection.
The rationale behind temporary perfection is the preservation of commercial arrangements and allowing secured parties a window of time to amend the register reflecting the relevant change in their interest. Temporary perfection is particularly significant with respect to the Act’s transitional operation (see Ch 9).
Before the interest can be perfected it must be ‘attached’ to the collateral. Attachment is said to occur when either value (consideration) is given for the security interest or the grantor performs an act whereby the interest arises. See s 10 of the PPSA for a definition of ‘value’.
Chapter 5 of Understanding Personal Property Securities Law, D Cseti, deals with the various methods used to achieve perfection. In order to perfect a security it must first be attached to the property.
16. Provisions which continue to apply
Despite the repeal of Ch 2K, the following provisions will continue to apply after the commencement time for a period of seven years:
- s 265(1), in relation to registrable charges entered on the register before the commencement time
- s 266(4), in relation to notices that are required to be lodged before the commencement time
- s 272, in relation to registrable charges entered on the register before the commencement time, and
- s 274, in relation to registrable charges arising before the commencement time.
Also the existing exemptions from s 266 and 267 will continue to apply.
17. Keep up to date with PPSR updates
At the moment the PPSR is regularly being updated to improve or fix teething problems. For example the following announcement was made on 10 September 2012.
The Personal Property Securities Register (PPSR) has developed a software solution to fix approximately 480 incorrect registrations, so that grantors are identified by an Australian Registered Body Number (ARBN), rather than an Australian Company Number (ACN). This software fix should be implemented by Friday, 14 September 2012.
Secured parties will receive a verification statement, in relation to claimed registrations. However, they will not be required to notify grantors about the statements under s 157 of the Personal Property Securities Act 2009 (PPSA).
Source: PPSR, Announcements, ASIC data change â ACN/ARBN (10 September 2012).
You should check the PPSR Announcements page regularly or sign up for a free RSS feed.
18. Carson, in the matter of Hastie Group Limited (No 3)
Although there were some PPSA issues raised in the WOW Sight and Sound liquidation, the first case to be decided on the PPSA was in the Hastie Group liquidation (Carson, In the Matter of the Hastie Group Limited (No 3),(2012) APPSR ¶701-001,[2012] FCA 719).
This is not surprising perhaps given that there were 995 registrations recorded in the PPSR against the 30 companies in the Hastie Group. What was surprising however was the failure by approximately 80% of the secured creditors to respond to the administrators’ letter within the relevant period.
The problem for the administrators of course is that they could not dispose of this property without an order of the court. They therefore applied to the Federal Court of Australia for orders seeking permission to dispose of the property and apply the proceeds to the administration after a certain period. These orders were made by the court.
Justice Yates made some interesting observations about the difficulties faced by the administrators. These are extracted below.
- Of the secured creditors who did respond to the administrators’ correspondence regarding PPSR registrations, many of the responses were of little assistance to the administrators in identifying the property in which a security interest might be claimed. This was because the responses failed to adequately particularise the equipment or the security agreement creating the security interest [10].
- In light of the level of generality of many of the PPSR registrations and the existence of many transitional security interests that were not registered, it was extremely difficult for the administrators to rely on the PPSR to identify property that was subject to security interests [10].
- It was appropriate to make the directions sought by the administrators. There had been genuine and substantial difficulties in identifying the items of plant and equipment that were subject to a security interest and other claims. The administrators had taken a number of steps to try to clarify that question to their best abilities. The proposed directions involved a further attempt to identify any other undisclosed claims against the plant and equipment [18]—[19]. (references are to para numbers in the judgment)
Secured creditors and advisers should take the following lessons from this decision.
Firstly they should consider implementing systems that enable them to respond adequately to urgent enquiries by administrators seeking further information about registrations recorded in the PPSR against the companies to which the administrators are appointed. Failure to respond might ultimately result in the sale of the secured assets, and a loss of the sale proceeds.
Lawyers acting for secured parties may also wish to reconsider the level of specificity or generality used in financing statements, in light of this case. If a registration is made in very general terms, this can cause practical difficulties for clients in the future, because it hampers the ability of conscientious third parties to rely on the PPSR to identify specific items of property that are subject to security interests. On the other hand, there can be advantages to describing the collateral in broad terms. For example, it may be more efficient to register a single broadly-worded financing statement in relation to all property supplied under an ongoing trading relationship.
19. Agricultural interests
Part 3.2 of the PPSA contains a series of rules which apply to agricultural interests. These rules distinguish between the three stages in the process of growing crops or raising livestock.
The three stages cover the crops and their relationship with the land, the situation whilst the crops are growing or the livestock are maturing, and the security interests which apply in relation to the crops and livestock developing over time.
Interests in land are generally excluded from the operation of the PPSA, however crops grow on land. Section 84 distinguishes between the rights of a secured creditor in relation to the land on which the crops grow and the rights of a secured creditor in relation to the crops themselves. This distinction was one of the recommendations of the ALRC Report No 64.
Section 84 protects a lessor or mortgagee’s interest in land provided their interest was created before security was taken over the crops and they did not consent to the granting of the security. It also protects the holder of a perfected security interest in the crops against subsequent dealings with the land.
20. Super Priority of crops but not livestock?
The PPSA provides special priority for financiers who provide funds which allow the crop to be produced or the livestock to be fed or developed. The Explanatory Memorandum referred to ss 85 and 86 of the PPSA as creating ‘agricultural PMSI’s’. It remains to be seen whether they will operate in the same way as general PMSI’s remains to be seen.
The special priority created by s 85 will only apply if the security is given whilst the crops are growing or the crops are planted within 6 months of the security agreement being made.
For the special priority provided by s 86 to apply the grantor must be hold the livestock or acquire them within 6 months of the agreement being made.
Interestingly s 86 provides that a general PMSI will have priority over a livestock ‘agricultural PMSI’. This condition is not contained in s 85, which would lead one to presume that an ‘agricultural PMSI’ relating to crops does out rank a general PMSI.
21. Further reading and sources
The PPS Registrar has provided a number of fact sheets and information sources to assist practitioners and consumers in dealing with the transition to a PPS regime.They are available from the PPS Register here .
The fact sheets are currently divided into subject areas such as general information, the automotive industry, consumers, the fishing industry, government agency access, legal concepts and pawn brokers.
A newsletter is also available here with editions dating back to 2008.
Sources
Anne Wardell
