Arguably not since the introduction of GST has there been a more urgent need for businesses to review and revise their business practices, procedures and documentation than now. With the recent commencement of the Personal Property Securities Register under the Personal Property Securities Act (PPS Act), businesses need to take proactive steps to protect their businesses.
This article provides a summary of the impact of certain aspects of the PPS Act and provides recommendations about the proactive measures businesses should be considering now.
Importantly businesses will need to review the documents which they provide to customers, including credit applications, invoices and terms and conditions.
PERSONAL PROPERTY SECURITIES ACT
What is Personal Property Securities Reform?
The PPS Act commenced on 30 January 2012 and made fundamental changes to secured finance in Australia. It established the Personal Property Securities Register (Register) - a single, national database of all personal property security interests. It affects nearly all businesses, particularly:
- financial institutions that take an interest in a customer’s property as security for a loan or other obligation
- manufacturers, wholesalers and retailers who commonly supply goods to customers on credit terms
Why is the PPS Act so important?
Prior to the operation of the Register it was possible to register an interest in personal property on one of the 70 odd registers that existed throughout Australia (e.g. charge on the ASIC Register). However, in most cases registration was not possible or necessary for an interest in personal property in order to protect that interest.
However, with the introduction of the PPS Act a significant number of the registers were replaced by one single national register where lenders and businesses are able to register their interest (which is now known as a “security interest”), in personal property (defined by the PPS Act as “collateral”). While this, in theory, is intended to introduce uniformity throughout the country and provide for a simpler and more efficient means of registering a security interest, the most relevant aspect of the PPS reform for lenders and businesses may, in fact, be the potentially dire consequences of failing to adopt and utilise the new regime. With the commencement of the Register mere ownership of personal property does not offer the same protection it previously did. Possession may now trump ownership. If a party fails to register their security interest in personal property, including those interests that could not under the previous regime be registered, they could lose their entitlement to that property regardless of ownership.
What is a security interest?
A security interest is an interest in personal property that secures payment of a debt or other obligation regardless of the form of the transaction. Personal property is all forms of property other than land. It includes both tangible and intangible property.
A security interest is created through agreement between a “grantor” (i.e. the party giving the security interest) and a “secured party” (i.e. the party obtaining the interest). A variety of transactions can give rise to a security interest that is registrable on the Register:
- Financing/hire purchase agreements where the lessee can acquire ownership in the property leased.
- Leases of personal property for a term exceeding 12 months, or 90 days in the case of motor vehicles, boats or aircraft (PPS Lease).
- Sale of goods agreements, usually comprised in quotations or as terms and conditions on invoices, which include retention of title clauses thereby including most dealings by businesses which supply goods on credit.
- The supply of goods on commercial consignment.
- Loan agreements.
- Various types of secured finance.
What is the Effect of Registration?
Registration, if completed correctly, will have the effect of “perfecting” a party’s security interest, giving the secured party a legally enforceable acknowledgement of their interest over that property.
Perfection by registration can improve the priority status the security interest has relative to other security interests in the personal property and ensures that a security interest survives the bankruptcy or insolvency of the grantor.
The PPS Act also recognises a “Purchase Money Security Interest” (PMSI), which is a special type of security interest. A PMSI differs from other security interests in that it has “super-priority” over most other interests in the same collateral group, even pre-existing security interests. A PMSI can be created where:
- funds are provided by a financer or other lender to a grantor for the purchase of the personal property
- the secured party advances personal property and all or part of the purchase price remains outstanding (typically through a retention of title arrangement)
- a secured party enters into a PPS lease or consignment transaction
Special priority rules also apply to agriculture –priority in crops is given to financiers who provide credit to enable the crops to be produced, and priority in livestock is given to financiers who provide credit to enable the livestock to be fed and developed. This is regardless of whether or not another security interest has been registered beforehand.
While the operation of the PPS Act will have far reaching consequences for many businesses, not the least because many banks may require businesses to be “PPS Act” compliant before providing credit, it is worth mentioning a number of common business transactions which are significantly affected by the commencement of the PPS Act.
Sale of Goods on Retention of Title Terms
Many manufacturers, wholesalers and retailers supply goods to customers on a ‘retention of title’ basis (meaning that the seller retains legal ownership in the goods, even after delivery to the purchaser, until payment in full is received). This is usually accomplished by the inclusion of a retention of title clause in the supplier’s standard terms and conditions of trade.
Prior to the operation of the Register, as a supplier on a retention of title basis, the supplier’s right to be paid was ‘secured’ by the fact that they held legal title in the property. Upon the default or insolvency of the purchaser, a well drafted retention of title clause entitled the supplier to enforce their interest against the purchaser and other creditors by repossessing the property that they owned.
However, with the Register now in operation, retention of title suppliers have become secured parties with a security interest in the property and, as such, the security interest should be registered to preserve priority against other secured creditors. If registration of such a security interest does not occur, the supplier could lose their interest in the property:
- on a sale of the property to a third party buyer
- upon the insolvency of the purchaser
In this situation the supplier would have no entitlement to its property.
The Manufacture and/or Supply of Component Parts or Raw Materials
Prior to the operation of the Register, a business involved in the manufacture and/or supply of component parts or raw materials had difficulty recovering their property once it was mingled with other property. However, with the commencement of the Register, businesses are able to register their interest in those component parts or raw materials and, in the event of the purchaser’s default or insolvency, the secured party can receive part of the proceeds from the sale of the end product or commingled product.
Similar to the sale of goods on a retention of title basis, any equipment leases or hiring agreements which fall within the definition of a PPS lease and create a security interest should be registered in order to give a lessor protection against other secured creditors and on insolvency. Failure to do so could mean the lessor will lose priority or simply lose their property altogether, being left to claim any loss as an unsecured creditor. This has particular relevance to leasing arrangements between related entities.
Financial institutions or other businesses that lend money generally obtain security over certain assets of the borrower. Where the security is in the form of a charge over personal property, it will be necessary for the lender to register their security interest in order to avoid a third party obtaining a superior security interest over that property.
Searching the Register
The Register is also a handy tool for prospective lenders and purchasers of personal property. There is an ability to search the Register to determine whether there is a pre-existing security interest registered over personal property. For example a purchaser would be well advised to search the Register before purchasing a motor vehicle or watercraft to ensure it is not subject to a security interest that could jeopardise the purchaser’s entitlement to the property.
What Do Businesses Need To Do?
Registration of a security interest on the Register is not compulsory. However, those businesses that take advantage of the Register will be entitled to powerful protections. Those that opt not to register their security interests will be placed alongside unsecured creditors and will risk losing their interest in their property.
Businesses are advised to:
- Review existing contracts to identify existing security interests that should be registered now that the Register is in operation.
- Revise documentation (particularly contracts, terms and conditions of invoices and quotations) to:
2.1 ensure that they are worded in such a way as to clearly establish a security interest that is capable of registration
2.2 contract out of those provisions of the PPS Act that are not mandatory so as to minimise the PPS Act obligations of the business.
- Review trading activities to identify when security interests are established in favour of the business.
- Review existing internal policies and procedures to ensure that the registration of security interests occurs in an efficient and accurate manner.
- Train staff in the operation of the new regime.
- Carefully consider all contractual documentation provided by third parties to ensure that any PPS Act provisions are acceptable and manageable by the business.
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