How the PPSA can affect your business

Personal Property Securities Act

General information

The Personal Property Securities Act 2009 (PPSA) Cth Act, is a new national regime that came into effect on the 30 January 2012 and has radically changed the way in which property is secured by providing increased transparency in relation to the ownership of property during insolvency.

The PPSA replaces over seventy existing Territorial and State laws and registers with a single national law that deals with security interests of personal property.

The New Register

The PPSA establishes that a registration of a security interest has to be made online in the Personal Property Securities Register (PPSR) in order to achieve priority claims over personal property. The term “personal property” refers to both tangible and intangible assets except for land, water rights and fixtures.

Additionally, registration of commercial transactions such as retention of title, consignments, financial leasing and PPS leasing agreements has to be made in order to preserve ownership of the assets. Such transactions have not been regarded as “registrable security” arrangements before (See PMSI below).

Enforceability

For security interests over personal properties to be enforceable against third parties, there is a fundamental principle of the PPSA which requires them to be “perfected”. Perfection can be achieved by registration on the PPSR and through possession and control. Attachment of the security interest onto the relevant personal property is required for effectiveness. If finance has been provided it is important to hold security interest over the property until full payment has been made. Even though a property is unregistered, the security interest may be valid between the parties, however, it is not secured against third parties. Failure to register a security interest when leasing, hiring or licensing property may result in losing the goods, in the case of the other party becoming insolvent. The financier might be able to sell the goods to a third party.

Example

Building A is leased and the lessee has been provided finance by his or her bank. The lessor needs to register the property on the PPSR to be entitled security interest over Building A. By registering the security interest, the lessor can reclaim the building if the lessee becomes insolvent. The registration prevents third parties from claiming ownership over the asset since a perfected security interest has priority over an unperfected security interest regarding the same property. Consumers, business operators and other third parties can search the PPSR to find out if there is any security interest connected to the property.

Registration

A registration can be made if the security interest has been created through an agreement in Australia or if the corporation responsible for the agreement is incorporated under Australian law. There are some costs connected to the registration which is usually to be paid by the grantor, but if it is not formulated in the agreement there is a presumption that the security holder should be responsible for the costs.

It is important that the registration is correctly completed and that changes are reported to the grantor, otherwise there is a risk that the registration of the security interest may be ineffective.

Purchase Money Security Interest (PMSI)

A PMSI is a type of security interest taken in collateral by a seller to secure the obligation to pay a purchase price, or a person who provides the value to purchase the personal property. A PMSI can also be the interest of a lessor or bailor under a PPS lease or the interest of a consignor who delivers property under a commercial consignment. There are certain exceptions to this such as lease backs, various investment instruments or collateral that is for personal or domestic use.

The significance of a PMSI is that perfected PMSI’s have “super priority” over general security over acquired property. (section 62 PPSA)

A PMSI is likely to arise in four main scenarios.

  1. Where funds are provided by a financer or lender to a grantor for the purchase of the personal property. This is the most common transaction that gives rise to a PMSI and covers such transactions as purchases of motor vehicles where finance is provided at the point of sale.
  2. A PMSI will arise where the secured party has advanced personal property and all or part of the purchase price remains outstanding. The most common transactions in which this occurs are supply by retention of title clause. This typically involves the transfer of possession of collateral with the title only passing after the full payment price is paid.
  3. A PPS lease transaction. A PPS lease is defined in the Personal Property Securities Act 2009 (Cth) as a lease or bailment for a term exceeding either three months in the case of motor vehicles, boats and aircraft, or one year for other types of personal property. Both financing leases and operational leases can fall within the definition of PPS lease.
  4. A consignment transaction. The interest of a consignor who delivers goods to a consignee under a commercial consignment.

PMSIS and Priorities

A secured party with a PMSI may benefit from a ‘super-priority’ which defeats all other security interests in the collateral. This includes security interests created and registered before the PMSI. Certain registration requirements must be complied with in order for the PMSI to benefit from the super-priority.

e.g. A Business Pty Ltd grants an all-assets floating charge to Bank Ltd, who registers that interest. IT Company Pty Ltd then sells goods to A Business Pty Ltd and supplies IT equipment on a retention of title basis, which is also registered. A Business Pty Ltd subsequently becomes insolvent.

Who has the superior title?

The effect of the super-priority is that the PMSI held by IT Company Pty Ltd defeats the security interest of Bank Ltd.

Contact us

For more information and legal advice regarding this subject, call our experienced solicitors on (02) 9233 7776 or email us.

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