Overview of the PPSA
Australia's Personal Property Securities Act 2009 (Cth) (PPSA) comes into force on 30 January 2012 and represents an enormous shift in the law relating to security interests in personal property. It is modelled on similar legislation already in force in New Zealand and Canada.
What does the PPSA do?
The PPSA creates a comprehensive set of rules relating to security interests in personal property (in general, all assets other than land). It also significantly expands the concept of a security interest as we know it under English law – under the PPSA, retention of title supply arrangements, hire purchase arrangements, consignments, assignments of accounts receivable and certain leases and bailments are all capable of being security interests.
It introduces a number of new rules in relation to priority, enforcement and extinguishment of security interests – largely centred around the concept of perfection.
It removes the distinction between fixed and floating charges.
It reduces (or removes entirely) the importance of title in priority disputes relating to competing claims in personal property (for instance, the interest of a lessor of goods to a person will not necessarily defeat the interest of a creditor of that person holding all-assets security).
It establishes a new online register for the recording of security interests in personal property – the Personal Property Securities Register (or PPSR).
It replaces a number of Australian State and Federal laws and registers, including Chapter 2K of the Corporations Act and the Australian Securities and Investments Commission (ASIC) register of company charges.
Who will the PPSA apply to?
The PPSA will apply to everyone, including individuals, companies, trusts and partnerships. Anyone who takes or grants security in personal property will be covered by the PPSA.
It applies to both security interests created after its commencement and those created before it.
The PPSA generally applies where either the grantor of the security interest is an Australian entity (for example, an Australian incorporated company) or where the secured property is located in Australia.
Practical changes resulting from the PPSA
There will be a number of practical changes introduced by the PPSA. Some of the more significant ones are set out below.
1. Different terminology
Although not of any legal effect, terminology that has been commonplace in Australia will be replaced by new concepts contained in the PPSA. For example:
- A fixed and floating charge will become a general security agreement/deed.
- Fixed charges over specific assets (such as share or chattel mortgages) will become a specific security agreement/deed.
- Terms like fixed, floating, chargor and chargee will no longer be relevant.
- New terms like attachment, perfection, collateral, grantor and secured party will now be used.
2. Title does not matter
When dealing with security interests under the PPSA, title to personal property is not a relevant consideration.
For example, a supplier of goods on retention of title terms will have a security interest in the goods supplied for the purposes of the PPSA, despite the ownership interest of the secured party in the relevant goods. If this security interest is not perfected (or not perfected within a specific timeframe), the secured party could lose those goods to another secured party enforcing their security interest.
Under the PPSA, parties will not be able to rely on the argument "but I own those goods!".
3. Dealing with secured property
Dealing with property the subject of a security interest is expressly permitted by the PPSA (despite any provision in a security agreement that declares this to be a default or attempts to prohibit it).
The PPSA offers protection to secured parties through 'transferred collateral' rules – which can be very complicated. The rules include, for example, how a priority dispute will be determined if a grantor (in breach of a security agreement) transfers secured property to a third party who then grants a security interest in that property to another secured party.
The PPSA sets out a comprehensive list of 'extinguishment rules' that regulate when a third party can acquire personal property free of security interests in that property. One such extinguishment rule applies to the sale of personal property in the ordinary course of business. It is important to note that, for the most part, it is not possible to contract out of the extinguishment rules – there is no equivalent of crystallisation under the PPSA.
4. New enforcement regime
Enforcement of security interests in personal property will be governed by the rules in the PPSA. In the case of holders of 'new' security interests like lessors and retention of title suppliers, this will make for a marked change from the current law (as these people are presently not generally restricted in how they may recover their property from grantors).
More detailed information on PPSA concepts
1. Perfection of security interests
Perfection is the key concept under the PPSA. It is the means by which the holder of a security interest (the secured party) can protect its security interest.
The three methods of perfection are:
- possession of the secured property;
- control of the secured property (in the case of a limited class or property); and
- registration of a financing statement on the Personal Property Securities Register (an electronic register).
The most common form of perfection will be registration of a financing statement. A financing statement will need to contain a description of:
- the secured property;
- (generally) the person granting the security interest (the grantor); and
- the secured party,
each of which must comply with the PPSA and associated regulations.
In order to register financing statements, a person will need to have an account with the Personal Property Securities Register and establish a 'secured party group' on the Personal Property Securities Register.
It will be possible to 'perfect' a security interest before it is created. This means, for example, that a supplier of goods on retention of title terms will be able to register a financing statement against a grantor before supplying any goods to it.
It will also be possible to perfect multiple security interests through one financing statement. For example, if a secured party supplies goods on retention of title terms to a grantor under a number of different transactions, each such transaction will constitute a security interest. One financing statement (appropriately worded) will be able to perfect each such security interest.
The PPSA applies to both new and pre-PPSA security interests. Consequently, the PPSA contains a number of transitional provisions that offer pre-existing security interests temporary perfection for two years, by which time the secured party should re-perfect those security interests in accordance with the PPSA. Certain security interests already registered on a number of State and Federal registers (including the ASIC register of company charges) will be automatically 'migrated' to the PPSR (by the automatic creation of a financing statement).
2. Consequences of not perfecting security interests
If a security interest is not perfected, it will lose priority to another (perfected) security interest in the same personal property (see the summary of the PPSA's priority rules below).
Under the PPSA, a person is able to grant a security interest in property it does not own (eg, property that it holds on lease, or that it has acquired on retention of title terms but not yet paid for). As a result, secured parties with an ownership-based security interest (such as retention of title suppliers or lessors) that do not perfect their security interests could lose title to goods to the holder of a security interest in all of the grantor's assets (such as a bank with a fixed and floating charge or general security agreement).
An unperfected security interest is void on the insolvency of the grantor. This will apply to supplies of goods on retention of title terms and lessors of goods in the same way it applies to holders of charges, meaning that a secured party can lose title to goods by operation of the PPSA.
A third party purchaser for value of personal property will acquire that property free of an unperfected security in it (except in very limited circumstances).
3. Priority under the PPSA
The PPSA sets out rules to determine the priority of competing security interests in personal property. These rules can be summarised as:
- perfected security interest versus unperfected security interest – the perfected security interest will have priority;
- perfected security interest versus perfected security interest – the first perfected security interest will have priority; and
- unperfected security interest versus unperfected security interest – the first security interest to have attached will have priority.
However, there are some exceptions to these priority rules. One important exception is purchase money security interests (PMSIs).
A PMSI is a security interest that secures an obligation owed by the grantor in relation to the acquisition of personal property (such as the obligation to pay its purchase price). The interest of a supplier on retention of title terms is a PMSI, as is the interest of a lessor of goods.
PMSIs are significant under the PPSA as they afford their holder a form of super priority (that gives that secured party priority over the relevant personal property in priority to even a prior-perfected secured party).
In essence, the PMSI concept is the PPSA's way of respecting ownership rights of secured parties.
5. Transitional provisions
As set out above, the PPSA provides that pre-existing security interests will be temporarily perfected for two years once the PPSA commences. Certain security interests already registered on a number of State and Federal registers (including the ASIC register of company charges) will be automatically 'migrated' to the PPSR (by the automatic creation of a financing statement).
Any transitional security interest that is not migrated to the PPSR should be re-perfected (in one of the ways set out above) prior to 30 January 2014. Any migrated transitional security interest will be perfected by registration, but a holder of such a security interest will need to claim the migrated financing statement as its own using the 'find and claim' process being established by the registrar of the PPSR. Other than participating in the find and claim process, the holder of a migrated transitional security interest need take no further action, subject to the comments below.
Migrated financing statements will only be effective (and therefore able to be relied on by a secured party) if the registration on the relevant original State or Federal register was 'duly authorised by law'.
Most significantly, this proviso will mean that if:
- a share mortgage; or
- a fixed and floating charge that covers contractual rights,
is registered on the ASIC register, the migrated financing statement will not be effective to fully perfect that security interest. If this is the case, the secured party in respect of such a security interest will need to re-register a financing statement on the PPSR.
Perfecting a security interest