6 September 2011

Overview and Purpose
In 2009 the Commonwealth Government passed the Personal Property Securities Act 2009 (PPSA). The Act authorises the implementation of the Personal Property Securities Register (PPSR) which will replace several registers across the country including the well known REVS.

The purpose of the act is to provide a single national register of security interests for personal property similar to that for real property held by the LPMA in New South Wales. The Act also provides for a new regime in how competing interests are prioritised.

The Policy
The policy behind the legislation is that it will provide an easier more streamlined approach to security interests making it easier to borrow money against personal property.

The aim of the PPS reform is to improve the ability of individuals and businesses, particularly small-to-medium size businesses, to use all their property in raising capital. Personal property securities reform has been successful in the United States, Canada and New Zealand.

In Australia there are significant limitations on the use of personal property as security due to difficulties and gaps in registering security interests. The rules for registering are different for Commonwealth, each state and territory because they each have their own personal property schemes with separate registers and laws. 

This will in turn encourage lenders to lend money against personal property in view of the greater security arrangements. The increased security is expected to result in a reduction in interest rates as well as a greater number of transactions thereby adding to the Australian economy.

How does this Act Affect Me?
For many companies this Act will have a major affect on business and assets. The affect is best explained by an example.

You are a company, Vendor Pty Ltd (V) that sells plant and equipment (say an excavator) to the building and construction industry. You sell an excavator to Purchaser Pty Ltd (P). There is a written agreement which includes a the granting of a security interest over the excavator. In the past you may have lodged a charge on the ASIC register over the purchaser company. Once the PPSA commences the ASIC register will cease to exist and that security interest should be registered on the PPSR. Fixed and floating charges will be abandoned for future interests.

Registration
You must register the security interest and in so doing you must correctly identify the property. If a serial number is required in that identification it must be entered into the register correctly for the security interest to have any chance of perfection. If not, your interest may fail.

What happens if I don’t register my interest?
Simple, if your interest is not registered on the PPSR your rights to the property may lose priority to another interest. Take the above example and assume the interest was not registered. If P falls into liquidation the rights of V will lose priority to other creditors. That is, the excavator will be marshalled with the rest of the assets of the liquidated company, and sold off to satisfy the creditors of which V is one.

Had V registered the security interest it would stand first in line (subject to a few exceptions) to recover the proceeds of the excavator just as a bank does in relation to land because of a registered mortgage. This priority would be further increased if the agreement contained a title retention clause or a Purchase Money Security Interest (PMSI).

How do I achieve Perfection?
To achieve perfection the following requirements must be satisfied:

1. Attachment - When a person gives value for acquiring the interest, attachment occurs. This is usually done by contract and attachment would occur at the time of signing.
2. Enforcement - the security interest is enforceable against a third party
3. To Perfect:
   a. The secured party has Control of the secured property, or
   b. The secured party has possession of the secured property, or
   c. The security interest is registered.

Priority
In the example of the excavator, where P becomes unable to pay its debts as they fall due and lapses into liquidation, the interest becomes enforceable against third parties, namely other creditors of P. However where attachment has occurred (there is a signed written agreement), and the security interest is registered then V has first priority (subject to a few exceptions). Similarly, if V has control or possession over the property its security interest is perfected.

Possession v Control
Possession is easily understood however what is control? A good example would be where a borrower is lent money say $50,000 by a bank. If the borrower has a bank account with the same bank, the bank has control over the funds within that account.

PMSI & Priority
A PMSI has a super priority and stands first in line above other security interests. A good example of a PMSI would be the interest of a consignor who delivers goods to a consignee under a commercial consignment.