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AN INTRODUCTION TO THE
“PERSONAL PROPERTY SECURITIES ACT”
Thursday May 3rd 2012
A seminar presented by members of Gordon & Jackson’s List
Chair: Maryanne Loughnan SC
Presenters: Paul Duggan Chris Furnell
GORDON & JACKSON Barristers’ Clerks 205 William Street Melbourne 3000 Dx 94 Melbourne Vic Ph 9225 7333 www.gordonandjackson.com.au
GORDON & JACKSON
DISCLAIMER OF RESPONSIBILITY
The provision of seminar papers by Gordon & Jackson is a free service provided for members of the legal profession. It is not intended nor recommended that the seminar papers and the information contained in them be used by members of the public. Gordon & Jackson, the members of List S and the authors of the seminar papers do not accept responsibility for the information or opinions contained in the seminar papers. No guarantee, undertaking or warranty is provided concerning the accuracy, completeness or currency of the information provided in the seminar papers or for any damage sustained by any person as a result of any reliance placed on such information. As the law is constantly evolving and subject to change it is very likely that the information contained in the seminar papers may be out of date even shortly after publication.
1
Maryanne B Loughnan SC Owen Dixon Chambers West
525 Lonsdale Street Melbourne Victoria
T: + 61 3 9225 8146 M: 0407 882 780 E: [email protected] ___________________________________________________________________ Signed Victorian Bar Roll 1989 Appointed Senior Counsel 2008 Admitted to the Legal Profession 2 Nov 1983 Nationally Accredited Mediator 7 Nov 2009 Qualifications LL.B (Melb)
Primary Practice Areas
Commercial Law
Banking & Finance
Competition and Consumer Law
Credit Law
Equity/Trusts
Insurance
Leases
Professional Negligence
Securities
2
Profile: Maryanne Loughnan practises in most areas of commercial dispute in the superior courts. She has a depth of experience in all aspects of work associated with matters in her primary practice areas including drafting of pleadings, advice, injunctions, mediation, trial preparation and the conduct of trials and appeals. She is available to conduct and appear in matters, or act as mediator, in all jurisdictions including interstate.
She has worked closely with in-house counsel, particularly on a direct briefing basis for banking and finance matters.
Her general approach to dispute resolution is that she advises and assists the litigation team on how to best maximise the effect of its preparation for trial by the timely gathering of the best evidence. She has a particular speciality in obtaining the thorough proofing of witnesses and the settling of their affidavits of evidence. These tasks are performed with her active interaction and integration with the members of the litigation team. She is experienced working with large teams of lawyers and counsel.
Equally she advises on grounds of, and appears in, appeals.
She has a special interest in banking and finance disputes and was the Chair of the Banking and Finance Section of the Commercial Bar Association of Victoria from 2005 to 2011. She often accepts briefs outside her primary practice areas after discussion with her prospective instructor.
From 12 February 2009 liability limited by a scheme approved under Professional Standards Legislation - Professional Standards Act 2003 [Vic]
(Click on the links below to access cases or papers)
Cases
Cases in which Maryanne Loughnan has appeared/advised include the following:
2009 - 2011 - Supreme Court of New South Wales - Commercial List – acting for plaintiff in claim for $45 million involving interests in oil exploration projects – charge over shares - defence of estoppel - settled eve of trial
Henderson's Automotive Technologies Pty Ltd (in liq) v Flaton Management Pty Ltd (2011) 84 ACSR [2011] 93; VSCA 167 - restitution – set-off – equitable lien
http://www.austlii.edu.au/au/cases/vic/VSCA/2011/167.html
Iphostrou & Iphostrou and Ors (No 4) [2011] FamCA 220 (31 March 2011)
- application for disqualification – apprehension of bias
http://www.austlii.edu.au/au/cases/cth/FamCA/2011/220.html
Foster James Pty Ltd v Dalton (2010) 28 VR 204
Westpac Banking Corporation v Rothschild – Supreme Court of Victoria -2010 - claim for mortgage debt of $5 million – married woman’s equity – settled eve of trial
3
Smolle v Australia and New Zealand Banking Group Limited [2008] FCA 1065
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2008/1065.html?stem=0&synonyms=0&query=title(smolle%20)
Smolle v Australia and New Zealand Banking Group Limited [2007] FCA 1673
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2007/1673.html?stem=0&synonyms=0&query=title(smolle%20)
Gheorghiu v Perpetual Trustees Victoria Ltd [2007] VSCA 83 http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSCA/2007/83.html?stem=0&synonyms=0&query=title(gheorghiu%20)
Commonwealth Bank of Australia v Damianos & Anor [2007] VSC 442
http://www.austlii.edu.au/au/cases/vic/VSC/2007/442.html
Westpac Banking Corporation v Dimopoulos [2006] VSC 10 http://www.austlii.edu.au/au/cases/vic/VSC/2006/10.html
Wenczel v Commonwealth Bank of Australia [2006] VSC 324
http://www.austlii.edu.au/au/cases/vic/VSC/2006/324.html
Zaparenkov v Perpetual Trustees Vic Ltd (Credit) [2006] VCAT 2147
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VCAT/2006/2147.html?stem=0&synonyms=0&query=zaparenkov
Skosples v Perpetual Trustees Victoria Limited & Ors [2004] VSC 422
http://www.austlii.edu.au/au/cases/vic/VSC/2004/422.html
Thomas v Southcorp Australia Pty Ltd (No 2) [2004] VSC 50
http://www.austlii.edu.au/au/cases/vic/VSC/2004/50.html
Thomas v Southcorp Australia Pty Ltd [2004] VSC 34
http://www.austlii.edu.au/au/cases/vic/VSC/2004/34.html
Costa Vraca Pty Ltd v Bell Regal [2003] FCA 65
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2003/65.html?stem=0&synonyms=0&query=title(bell%20regal%20)
Commonwealth Bank of Australia v White (No. 7) [2003] VSC 344
http://www.austlii.edu.au/au/cases/vic/VSC/2003/344.html
Commonwealth Bank of Australia v McArthur [2003] VSC 31
http://www.austlii.edu.au/au/cases/vic/VSC/2003/31.html
Commonwealth Bank of Australia v Aspenview Productions and Ors [2001] VSC 444
http://www.austlii.edu.au/au/cases/vic/VSC/2001/444.html
Commonwealth Bank of Australia v Aspenview Productions and Ors [2001] VSC 499
http://www.austlii.edu.au/au/cases/vic/VSC/2001/499.html
Commonwealth Bank of Australia v Aspenview Productions Pty Ltd and Ors [2001] VSC 499
http://www.austlii.edu.au/au/cases/vic/VSC/2001/499.html
Commonwealth Bank of Australia v McKinnon [2001] VSC 193, Byrne J – trial – misrepresentation – sale under value
Commonwealth Bank of Australia v White (No 3) [2000] VSC 259
http://www.austlii.edu.au/au/cases/vic/VSC/2000/259.html
4
Burchell v Golden Wood Pty Ltd (No 2) [2000] VSC 485
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSC/2000/485.html?stem=0&synonyms=0&query=title(golden%20wood%20)
Burchell v Golden Wood Pty Ltd [2000] VSC 86
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSC/2000/86.html?stem=0&synonyms=0&query=title(golden%20wood%20)
Hunter v Croner-Tyco Toys Pty Ltd (Unreported VSC, Gillard J, 23 July 1998 BC9804537)
Dellios V Westpac Banking Corporation – (Unreported Beach J, 30 April 1997, BC9701654)
Commonwealth Development Bank of Australia v Karastavrou (Unreported VSC, Beach J, 12 November 1996, BC9605500)
Commonwealth Bank of Australia v Wallis & Graham (1995) ATPR 41-387; BC9507324
Victorian Bar Memberships and Roles
Member of the Executive Committee of the Commercial Bar Association of Victoria - 2007 to 2010
Chair of the Banking and Finance Section of the Commercial Bar Association of Victoria - 2005 to 2011
Advocacy Training Coach, Victorian Bar Readers’ Course 2009 and continuing
Chair Gordon & Jackson List Committee - 2009 to 2010
Co-developer of the website of the Commercial Bar Association of Victoria at http://www.commbar.com.au
Founding Chief Editor of the Commercial Bar Association of Victoria Newsletter May 2007 to March 2010
Team leader and co-author of the Submission of the Victorian Bar on 23 April 2009 to the Inquiry by the Senate Committee into the Personal Property Securities Bill 2009
Publications
Procedure with Caution, November 2011 85(11) LIJ, p36 - Summary judgment and the Civil Procedure Act 2010 (Vic)
http://www.liv.asn.au/News-and-Publications/Law-Institute-Journal/Archived-Issues/LIJ-November-2011/Procedure-with-caution
Islamic Banking - Borrowing and Investing out of Haraam's Way (2010) 48(4) LSJ 62 with Douglas Drummond
http://www.commbar.com.au/uploads//Publications/Banking%20and%20Finance/Article__Islamic_Banking_-_Loughnan.Drummond.pdf
Case Note - Bofinger v Kingsway Group Ltd (2010) 25(7) BLB 115
http://www.commbar.com.au/uploads//Publications/Banking%20and%20Finance/Bofinger__v_Kingsway_Group__-_Website-_Case_Note_M_Loughnan.pdf
5
Conference and Seminar Papers
Litigation for In-House Counsel - Managing For the Critical Success Factor - Legalwise Seminar – September 2010
Litigation Strategies – Masterclass presented to Australian Corporate Lawyers Association by the Commercial Bar Association of Victoria, May 2010
Understanding and Managing the Driving Forces that Lead to Conflict - paper presented to the National Conference of the Australian Corporate Lawyers Association, November 2009
The Legal and Commercial Roles of In-house Counsel – paper presented at the Leo Cussen Institute – March 2009
Deposits under Sale of Land Contracts - paper presented to the Victorian Bar, July 2007
Breach Notification Requirements of Australian Financial Services Licensees - paper presented to the Victorian Bar, March 2007
Cheques – Breach of Mandate – Developments Since National Australia Bank Ltd V Hokit (1996) 39 ANWLR 377 - paper presented to the Victorian Bar, November 2004
http://www.docstoc.com/docs/72428350/Maryanne-Loughnan---COMMERCIAL-BAR-ASSOCIATION-BANKING-AND-FINANCE-
Consequences of the Accreditation of Financial Advisers and others by Banks - paper presented to the Victorian Bar, May 2003
April 2012
Paul Duggan has practised as a commercial litigation barrister with Gordon & Jackson since the
list’s inception. He has recently started a blog about commercial litigation at
http://pauldugganbarrister.com. His résumé is attached to this paper.
Liability limited by a scheme approved under the Professional Standards Act 2003
AN INTRODUCTION
TO THE
PERSONAL PROPERTY SECURITIES ACT 2009
Paul Duggan
3 May 2012
Introduction
1. The Personal Property Securities Act (PPS Act) establishes an Australia-wide regulatory
scheme for the registration and regulation of security interests in personal (meaning
essentially non-real estate) property.
2. The PPS Act defies easy summation. Some of it is a repackaging and codification of
earlier law while other parts introduce concepts that are both important and entirely new to
Australian law. New concepts and familiar ones alike are described in new technical
terminology.
3. This paper is intended principally to be a hard-copy companion to today’s oral
presentation. Both the presentation and the paper are intended as brief and broad
introductions to a large and complex area. Much has been omitted for reasons of brevity.
The PPS Act itself is frequently set out under paired headings such as “main rule” and
“exception.” 1 This is emblematic of the qualifications, limitations and complications that
1 See for example Part 2.5 of the PPS Act where these paired subheadings are employed in each of sections 43, 44,
46, 47, 50, 51 and 52.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
2
riddle the PPS regime and make the broad-brush summaries in this paper a risky substitute
for close consultation of the PPS Act itself.
Insolvency 101 revisited - background to the PPS Act
4. Securities in both real and personal property tend to be of academic interest only until a
party involved with that property becomes insolvent. Then the nature and strength of any
security interest instantly takes on a crucial significance in determining which creditors are
to be paid and which are to be left partly or even entirely out of pocket.
5. A person or company is insolvent when he/she/it is unable to pay their debts as and when
they fall due.2 Insolvency law usually intervenes at this point. Different outcomes are
possible but the most common ones are that insolvent individuals become bankrupt and
insolvent companies are placed into liquidation. Either way, the policy motivation behind
the legal insolvency mechanism employed is to provide an equal, fair and orderly
procedure for handling of the insolvent’s affairs and ensuring the creditors receive an equal
and equitable distribution of the debtor’s assets.3 This ‘equal and equitable distribution’
goal is known as the pari passu principle. It is one of the key principles of insolvency law
although it is subject to many exceptions.
6. Chief among those exceptions (for current purposes at least) is that secured creditors are
not confined (as against unsecured creditors) to receiving an ‘equal and equitable’
distribution of the debtor's assets. A secured creditor will take priority over unsecured
creditors to the extent of the security held by the creditor. Hence a bank that holds a
mortgage over an otherwise penniless bankrupt's mortgaged property can typically be
confident that it will be repaid the monies owing to it from the proceeds of the sale of that
2 see section 122(1) Bankruptcy Act; section 95A Corporations Act. This is the "cash flow" or "commercial" test of
insolvency. In some situations the "balance sheet" or "absolute" test of insolvency might be more appropriate but
that issue will not be explored here. See Keay and Murray Insolvency Personal and Corporate Law and Practice Law
Book Company 2002 at p 12 for a discussion with these concepts. 3 A cynic’s version appears in Blake Odgers, W & Poland, H (Eds). A Century of Law Reform. Macmillan and Co Ltd,
London. 1901, at page 14 where bankruptcy is defined as 'The state of things which exists when, a man being
unable to pay his debts, his solicitor and an accountant divide all his property between them.’
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
3
property even in circumstances where the bankrupt’s other creditors might each be left to
collect (as between each other) an ‘equal and equitable’ share of nothing at all. In the
language of insolvency law, the secured creditors will take priority over the unsecured
creditors.
7. A secured creditor is a creditor holding a ‘security’ interest in another’s property – that is
an interest in property which secures an obligation. (A familiar example is the common
home mortgage whereby a bank holds an interest in the borrower’s property as collateral
for repayment of the home loan. That collateral is there as back-up to satisfy repayment of
the bank loan in the event that the borrower fails to.)
8. This thumb-nail refresher illustrates the enormous financial and legal significance in any
insolvency of the reliable and convenient identification of:
a) secured property;
b) secured creditors; and
c) the nature and extent of the interests secured.
9. The PPS Act attempts to create a one-stop shop regime for capturing and making this
information available to interested parties. Whether it accomplishes its objective or not the
PPS Act will change the way these securities disputes are approached and resolved.
PPS Act will affect most businesses and many individuals
10. The PPS Act deserves a wider legal audience than just insolvency and banking and finance
types.
11. Overwhelmingly Australian businesses are financed by credit of one variety or another –
overdrafts, leases, hire-purchase, factoring, floor-plan financing, extended terms of trade,
margin lending, retention of title clauses, crop liens, and sales by consignment are just
some examples.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
4
12. It follows that almost any litigation lawyer acting for or against any business or business
people in civil litigation needs to be conversant with at least the potential implications (if
not the entire detail) of the PPS Act. Some examples:
a) Family lawyers cannot efficiently litigate the division of the matrimonial asset pool
efficiently without identifying the extent of that asset pool. Where that asset pool
includes any form of small business – a corner shop, a farm, a dentist’s practice – its
realizable value might be eroded or increased by reference to encumbrances on
personal property within the business’s apparent ownership registered pursuant to the
PPS Act.
b) Precisely the same considerations are likely to arise for wills and estate lawyers
involved in Part IV applications under the Guardianship and Administration Act;
c) Any firm with commercial clients is inevitably going to be asked for advice when
clients’ customers become insolvent. Are years-old retention of title clauses still
enforceable? Are clients otherwise entitled to withhold (or even retake) possession of
widgets for which they have not been paid? Or are those widgets now the property of
the liquidator / bankrupt estate?
d) Clients’ ability to obtain finance might be constrained by security interests registered
against them in the PPS Register. The very existence and breadth of such PPS
Register registrations is hence another potential subject of litigation.4
13. What follows is an introduction to some (but certainly not all) of the key terms and
concepts underpinning the new PPS system.
Tread carefully
14. The PPS Act itself comprises more than 300 pages. Even then, it is not a stand-alone
document. Depending upon the particular PPS Act issue you are considering you might
4 See PPS Act at Part 5.6 re demands for amendments to the PPS Register and Chapter 6 re judicial proceedings
generally.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
5
also need to consult the various regulations made under the PPS Act, the Corporations Act
(particularly the amended provisions relating to charges) and the various state acts
referring relevant state powers to the Commonwealth (which generally contain their own
carve-outs).5
15. The scope of the legislation should be appreciated. It is intended to change (in whole or
part) the effects of approximately 70 different statutes Australia-wide that formerly dealt
with discrete types of securities. Better known Victorian acts affected by the new regime
include:
a) The Goods Act 1958;
b) The Chattel Securities Act 1987;
c) The Fisheries Act 1995; and
d) The Motor Vehicle Traders Act 1986.
16. The PPS Act introduces new concepts and much new terminology. One text6 on the PPS
Act starts by essentially urging readers to put aside any prior knowledge of personal
property securities as there is no direct correlation between the new PPS Act regime and its
various predecessors. Attempting to marry up old security concepts to the new PPS Act
ones might impede rather than assist understanding of the new system accordingly.
The PPS Register is central to the PPS Act scheme (but not always conclusive)
17. The PPS Act creates the Personal Property Securities Register7 (“PPS Register”) as an
internet-based, one-stop shop for registration of security interests. Registration of security
interests will generally - but not always - determine priorities in insolvency situations.8
5 See for example the Personal Property Securities (Statute Law Revision and Implementation) Act 2010 (Vic) which
excludes some mining-related rights etc from the definition of ‘personal property’ for PPS Act purposes. 6 Cseti Understanding Personal Property Securities Law CCH 2010 at page 1.
7 See section 147 of the PPS Act.
8 The priority rules are set out at Part 2.6 of the PPS Act.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
6
18. While the PPS Register might be likened to Torrens-type land registration the similarities
are passing. The most obvious distinction between the two registers is that the Torrens
system registers ownership of property while the PPS Register looks only to registration of
security interests. (Whether you have any clear or encumbered title to ‘Greenacre’ will be
apparent to anyone doing a title search on ‘Greenacre’. By contrast, if you have clear title
to your car there should be no security interest registered against it hence (absent other
relevant security interests) both you and your vehicle will be invisible to anyone searching
for either on the PPS Register.
19. Although the PPS Register is the centerpiece of the PPS Act and its contents are
admissible evidence of the existence of a security interest9 crucially there will be some
instances where powerful security interests are not disclosed by a register search. Parties
relying on a single search of the PPS Register will occasionally be misled as a
consequence. Examples of this obvious hazard include:
a) Where a security interest is ‘perfected’ by control10 rather than by registration;11
b) Where ‘temporary perfection’ is automatically accorded by circumstances;12 and
c) Where a ‘silent PMSI’ temporarily exists.13
Fundamental concept # 1 – personal property
20. Inevitably some lay people particularly will understand the reference to ‘personal
property’ in the PPS Act’s title as limiting the Act to ‘household’ or ‘consumer’ property.
This is fundamentally wrong. The Act does contain provisions which are specific to
“personal, domestic or household property”14 but the Act is in reality directed much more
at commerce and industry than the ‘mum and dad’ end of the economy.
9 See section 174(1) of the PPS Act.
10 See section 57(1) of the PPS Act.
11 As to the separate but related concepts of ‘possession’ and ‘control’ see Part 2.3 of the PPS Act.
12 See for example sections 34, 35, 36 and 39 of the PPS Act.
13 See section 63(c) which permits a PMSI to be registered up to 15 business days after a grantor takes possession
of the relevant collateral. 14
See example section 47 of the PPS Act which deals with purchase of such property free of security interests
where, inter alia, the property is worth less than $5000.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
7
21. "Personal property" does not mean “consumer property." It means almost any property at
all - tangible or intangible - that is not either -
a) Land; or
b) Excluded from the operation of the PPS Act by the PPS Act itself or by some other
Commonwealth or state statute.15
22. Motor vehicles, household goods, business inventory, intellectual property, accounts
receivable and company shares are thus all obvious examples of relevant personal
property. One less obvious category which is specifically provided for is "satellites and
other space objects."16
Fundamental concept # 2 – ‘security interest’
23. The PPS Act does not define ‘security’ or ‘securities’ but uses the term instead the defined
term “security interest” -
A security interest means an interest in personal property provided for by a
transaction that in substance secures payment or performance of an obligation
(without regard to form of the transaction or the identity of the person who has title
to the property).17
24. Examples offered by the Act18 of security interests include:
a) Fixed and floating charges;
b) Agreements to sell subject to retention of title;
c) Leases of goods;
d) Hire-purchase agreements;
e) Consignments; and
15
see definition of "personal property" in section 10 of the PPS Act and, for some sample exclusions, section 8 of
the PPS Act and the Personal Property Securities (Statute Law Revision and Implementation) Act 2010 (Vic) (which
carves some mining-related rights etc in Victoria from the definition of ‘personal property’ for PPS Act purposes). 16
see section 21(2)(c)(vi) of the PPS Act. 17
see section 12 (1) of the PPS Act. 18
see section 12 (2) of the PPS Act.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
8
f) Chattel mortgages.
25. There will be others. Two examples not referred to in the PPS Act that occur to me are
floor-plan financing (widespread in the car sales industry whereby floor stock is owned by
a financier rather than by the dealership ostensibly selling the vehicles) and margin lending
(where banks and others lend investors money on security of shares held by those
investors).
26. A surprising further example should be highlighted to litigators particularly. Section 148
sets out the data that the PPS Register is to contain and permits the prescription of further
classes in the regulations. Buried at Regulation 5.3(c) of the Personal Property Securities
Regulations 2010 is the prescription for the purposes of the PPS Register of:
…personal property that is subject to an order of a court or tribunal (however
described) that:
(i) prevents or restricts a person dealing with the property; or
(ii) enforces another court order (however described); or
(iii) orders the sale or other disposal of all or part of the property.
27. Thus it seems that Mareva injunctions, asset preservation orders and orders for seizure and
sale (to name just some examples) can (and should) now all be registered on the PPS
Register.
Other basic terminology
28. Property which is (or is intended to be) the subject of a security interest is “collateral”.19
A security interest “attaches”20 to collateral when a person (eg a credit provider) gives
value for acquiring the security interest and in return gains rights in that collateral. A
person granting a security interest in the collateral (ie the borrower, debtor, guarantor of
borrower/debtor) is referred to in the Act as a grantor.21
19
see section 10 PPS of the Act. 20
see section 19 PPS of the Act. 21
see section 10 of the PPS Act.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
9
29. The resulting security interest is enforceable against third parties when that interest has
attached to the collateral and either -
a) the secured party has possession or control of the collateral;22 or
b) the secured party has otherwise perfected that interest.23
Strive for ‘perfection’
30. "Perfection" is the means by which a security interest in collateral is made known to the
world so that third parties (such as potential purchasers of that collateral and/or other
prospective creditors) can be alerted to the existence of the security interest in that
collateral and organise their affairs vis-a-vis the grantor and the collateral accordingly.
31. Perfection will usually be achieved in one of three ways:
a) possession24 or control of the collateral itself (which is the paramount form of
perfection);25
b) registration of the security interest on the PPS Register;26 or
c) in some cases, automatic temporary perfection in particular circumstances.27
32. A perfected security interest will generally rank ahead of an unperfected security interest
in an insolvency.28 Where two perfected security interests compete ‘first in, best dressed’
will apply.29
22
see section 20(1) of the PPS Act but note that possession of collateral will often ipso facto constrain the
grantor’s ability to economically utilise that collateral. (Eg A truck financier would quite thwart the very purpose of
a hire purchase agreement if it financed the acquisition of a truck and then refused to release possession of it to
the trucking business [grantor] on whose behalf it in fact had acquired the truck.) 23
see section 20 and 21 of the PPS Act. 24
see section 21(2)(b) of the PPS Act. 25
see section 57(1) of the PPS Act (but note the limitation imposed on it by section 322A). 26
see section 21(2)(a) of the PPS Act. 27
see section 21(1)(a) of the PPS Act. 28
see section 55(3) of the PPS Act. 29
see section 55(5) of the PPS Act.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
10
Not even perfection is perfect
33. Don’t be misled by the lay meaning of ‘perfection’. A security interest that has achieved
‘perfection’ in PPS Act terms does not simply by reason of its ‘perfection’ ensure that the
security interest holder will succeed in enforcing its interest in the event of the debtor’s
insolvency.
34. The principal hazards are:
a) defects of form and/substance (including drafting and clerical errors) in lodging PPS
Register registrations;
b) prior30 registered security interests in the same collateral (remember ‘first in – best
dressed.’31) and
c) prior or subsequently registered Perfected Purchase Money Security Interests
(PMSI).
35. This is important. A perfected security interest can still be trumped by a subsequently
registered PMSI.
The ‘super priority’ of the PMSI
36. A PMSI is a security interest granted to an entity that in substance provides the purchase
money for the particular collateral concerned.32 PMSI holders will hence typically be -
a) a vendor selling on terms whereby it retains title pending payment of the balance of
the purchase price;
b) a financier who provided value for the purchase of the collateral;
c) a lessor or bailor under a PPS lease; or
d) a consignor who delivers property on a commercial consignment.
31
see section 55(5) of the PPS Act – competing ‘perfected’ interests is likely to be a common phenomenon. 32
see section 14 of the PPS Act.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
11
37. After actual possession or control of collateral, the PMSI is the holy grail of the PPS Act.
A PMSI confers a ‘super priority’ on the secured party and will usually take precedence
over any security interest which has not been effected by control of the collateral.33 The
‘super-priority’ principle is important and means that a PMSI will generally trump a lesser
registered security interest (for example an all-assets floating charge) even if that lesser
interest was registered first in time.
38. The public policy rationale for the ‘super priority’ of PMSI is twofold:
a) earlier creditors should not benefit by having potential recourse to assets which the
grantor might not have been able to acquire but for the assistance of the subsequent
financier; and
b) but for this ‘super priority’ the PMSI-secured creditor might well be deterred by an
existing security interest from advancing to the grantor the money or assistance the
grantor requires to develop the grantor’s business further.
39. A PMSI can lose its ‘super-priority’ if it is not appropriately and promptly registered on
the PPS Register.34
Retention of title (aka ‘Romalpa clauses’) and PMSIs
40. Property is frequently sold or leased on the basis that the buyer takes possession of the
item concerned without acquiring legal title to it until full payment is made. Under the PPS
Act such arrangements create a security interest in the property leased or sold. If such
security interests are not registered on the PPS register the vendor/lessor’s rights in that
property may be lost in the event that the buyer/hirer becomes insolvent. Accordingly,
supply and lease agreements need to be reviewed with an eye to both ensuring that:
a) the retention of title provisions effectively create security interests for the purposes
of the PPS Act (which will be the usual case); and
33
see section 62 of the PPS Act. 34
see section 63 of the PPS Act.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
12
b) that following execution of these agreements the resulting security interests are
promptly and effectively registered in the PPS Register (failing which they will be
effectively useless as security interests and the collateral will be lost to the liquidator
in the event of the grantor’s liquidation.)35
Enforcement rights and remedies for secured parties
41. The first step in enforcement of a security interest upon default remains seizure of the
collateral.36 That collateral may then be retained37 or sold for the best price reasonably
obtainable/market value38 after the observance of notice requirements in the interim.39
42. Anyone purchasing the collateral takes it free of all security interests and also of any claim
the grantor might otherwise have in it.40 The proceeds from sale are distributed amongst
secured and unsecured creditors in order of priority with any residue returned to the
grantor.41
Taking personal property free of security interests
43. The PPS Act sets out ten main rules dealing with how and when a purchaser can acquire an
interest in property free of a prior security interest in that property.42 Inevitably they are all
subject to exceptions but the first rule43 is illustrative:
A buyer or lessee of personal property, for value, takes the personal property free of an unperfected security interest in the property.
35
see section 267 of the PPS Act. 36
see section 123 of the PPS Act. 37
see section 134 of the PPS Act. 38
see sections 128 - 131 of the PPS Act. 39
see sections 130 PPS Act and section 135 of the PPS Act. 40
see section 133 of the PPS Act. 41
see section 140(2) of the PPS Act. 42
see Part 2.5 of the PPS Act. 43
43(1) of the PPS Act.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
13
44. This puts an onus on security holders to register their security interests on the PPS Register
unless their interest is already otherwise perfected. Put simply, perfect your security
interest or risk losing it if the collateral to which it is attached is sold to a third party.
Registration is voluntary but desirable
45. The most common form of perfection will be registration on the PPS Register. Registration
is not compulsory but it does confer three obvious benefits:
a) registration will generally define the priority status that a security interest has
relative to other interests in the same collateral;
b) registration should ensure that the security interest survives the insolvency of the
grantor rather than the collateral being realised and distributed among all creditors as
part of the insolvent estate; and
c) registration of a security interest in collateral will generally protect that interest as
against third parties who might otherwise purchase the property from its apparent
owner (typically the grantor) for value and thereby extinguish the interest of any
unregistered security holders in that collateral.44
46. Registration of security interests is intended to be relatively quick, simple, and cheap
although the complexities of the ‘simple’ registration system might well discourage or
defeat less sophisticated security interest holders particularly from effectively registering
their security interest entitlements.
47. Security interest holders might neglect to or choose not to register their security interests
properly or at all. They will face two obvious consequences:
a) They will rank with unsecured creditors in insolvencies; and
b) They will risk loss by sale of their collateral to unsuspecting third parties.
44
43(1) of the PPS Act.
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
14
48. A security interest can be registered on the PPS Register by an application supported by
specific information45 and a payment of between $7 and $14546 (depending on the nature
and duration of the particular registered security interest. Once a security interest is
registered notice of that registration must be given to the grantor.47
49. The PPS Register is a public document accessible via the internet. For a small fee (eg
$3.70 for a motor vehicle search) it may be searched for details of security interests
registered against particular grantors and/or types of property.48
Priorities
50. The PPS Act sets out priority rules. The default rules in summary are:49
a) a perfected security interest takes priority over an unperfected security interest;
b) priority between two or more perfected security interests is determined in favour of
an earlier perfected security interest over a later one;
c) priority between two or more unperfected security interests is determined in favour
of an earlier attached security interest over a later one.
51. These are the default rules only. They yield to more specific priority rules found
throughout the PPS Act such as those relating to PMSIs.50
Non-security interests are not changed by PPS Act
52. The PPS Act revises the rights of security interest holders as between each other. It does
not otherwise revise Corporations Act / Bankruptcy Act priorities in insolvencies (eg
45
see section 153 of the PPS Act 46
See table of fees at http://www.ppsr.gov.au/AbouttheRegister/AboutFees/Pages/default.aspx 47
see section 157 of the PPS Act 48
some privacy-motivated constraints apply to access - see section 172 of the PPS Act and some forms of property
capable of being identified by serial number (eg motor vehicles, aircraft, patents) will only be searchable by those
serial numbers and not by the identity of the grantor. 49
see section 55 of the PPS Act 50
see Part 2.6 of the PPS Act generally
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
15
unsecured creditors, outstanding employee entitlements etc are not affected by the PPS
Act). Such other creditors will in all likelihood be neither helped nor hindered by the new
regime.
53. This comes back to the concept of security interests. A creditor owed money but without
any lawful entitlement to seize particular property from the debtor's possession is on first
principles an unsecured creditor. That creditor will generally have no security interest
capable of registration under the PPS Act.
Transitional arrangements
54. The PPS Act came into operation on 30 January 2012. It applies to security interests that
are created after that date but also to security interests that predate it. For this purpose pre-
30 January 2012 security interests from the PPS Register’s various predecessors (eg
ASIC’s Register of Company Charges and Victoria's Register of Motor Vehicle Securities)
have been migrated to the PPS Register automatically. This migration is accompanied by a
"temporary perfection" regime51 directed at ensuring that no security interest valid under
the various old systems is prejudiced by the introduction of the new. But note the
temporary nature of this safeguard. An older security interest not perfected under the PPS
Act before 30 January 2014 will on that date become ‘unperfected’ (and hence be both
subordinate to security interests perfected in accordance with the PPS Act and exposed to
the risk of unauthorized sale of collateral to third parties).
Further reading
55. As you would hope from an internet-based service the Personal Property Securities
Register itself provides a helpful range of fact sheets, forms and information on its website
– http://www.ppsr.gov.au
51
see sections 320 – 323 of the PPS Act
Paul Duggan -
An Introduction to the PPS Act 3 May 2012
16
56. In preparing this paper I have been particularly assisted by two text books on the PPS Act:
a) Del Cseti’s ‘Understanding Personal Property Securities Law’ (CCH) 2010; and
b) Lionel Meehan’s ‘The PPS Guide’ (Woof Creative) 2011.
57. Cseti’s book is good but I found Meehan’s better. Inevitably (given their publication dates)
both are quite unburdened by Australian judicial authorities on the subject.
Conclusion
58. The PPS Act brings a new system of security interest regulation to Australia. Much of it
(such as issues concerning accession, processing and comingling of secured goods,
circulating security interests (floating charges) and transfers of accounts and invoice
finance (factoring) and PPS leases) has not been touched upon in this paper.
59. Even this selection of omissions hints at the new lexicon introduced by the PPS Act.
Beneath its novel terminology some of the PPS Act system is more familiar than it sounds
but other parts are entirely fresh to Australian eyes. But none of it is easy. For better or
worse, it will keep very many lawyers and accountants employed for the foreseeable
future.
Paul Duggan Barrister Owen Dixon Chambers West Melbourne 3 May 2012
Paul Duggan BA, LLB
Chambers: Room 304, Owen Dixon West
Admitted: 1992
Signed Bar Roll: 1996
Phone: (03) 9225 6840
Mobile: 0411 259 589
Facsimile: (03) 9225 7907
E-Mail: [email protected]
Jurisdictions: Victoria, New South Wales, the federal jurisdictions and Northern Ireland.
Paul appears mainly in the Supreme Court, the County Court and VCAT (particularly its Retail Tenancies, Domestic Building, Real Property and Civil Claims lists) but is also available for work in the federal and interstate jurisdictions. Paul is a nationally accredited mediator. He has a wide commercial practice and particular experience in disputes involving: -
• Retail leases;
• Commercial leases;
• Partnerships;
• Franchises (acting both for franchisors and franchisees);
• Farming enterprises (such as supply and share farming disputes);
• Building - both commercial and residential;
• Insurance;
• Corporate and personal insolvency;
• Management and agency agreements; and
• Partition and sale of land. Paul's blog can be found at http://pauldugganbarrister.com . Before coming to the Bar, Paul had two careers:
• A total of 4 years as a solicitor at Dunhill Madden Butler and then Arthur Robinson & Hedderwicks; and
• 6 years as a journalist with publications including 'The Herald' and 'The Age'.
Paul's interests outside the law include skiing, farming, bushwalking and learning German from his
four kids.
PPS Act introduction-Chris Furnell Page 1
AN INTRODUCTION TO THE PERSONAL PROPERTY SECURITIES ACT 2009
Introduction
The PPS Act has downsides for those that don’t observe it. On the other hand, if observed, it has
upsides. It should enhance the capacity to obtain funding using personal property as security. It can
also lead to improved protection from bad debts by, for example, effectively improving the capacity
of suppliers under retention of title clauses to gain access to a customer’s debtors and reducing the
risk of payments to them having to be repaid as voidable transactions.1
Irrespective, however, of whether the upsides outweigh the downsides, it is in place and it is a major
change.
According to the LPLC:
“Of all the recent legislative reforms, this one stands out as the one that has the most
obvious potential to lead to more claims being made against practitioners, because:
1. A huge number of businesses face the risk of significant losses in the future if they ignore
the PPS Reform.
2. The PPS Act is a complicated piece of legislation and can be very counter-intuitive for
lawyers.
3. The PPS Reform entails a fundamental change in the law of personal property, and cuts
across many established and well known legal principles.
4. The PPS Reform is similar to the GST in that it has the potential to give rise to some sort of
issue or question for consideration in virtually every transaction in any area of legal
practice.“2
In this seminar I will try to clarify some (but certainly not all) matters concerning:
• Why and when your client might want you to conduct searches of the PPS register.
• Searches of the register.
• What you might want to do if a search reveals a security interest over property.
1 S588FA Corporations Act 2001 defines unfair preferences by reference only to unsecured debt. Note
perfected security interest can, however, vest in a company’s liquidator if, for example, they are
perfected within 6 months of commencement of winding up-588FL(4) 2 Personal Property Securities Act 2008 (Cth)-Background and Key Concepts-LPLC publication 15 June 2011
PPS Act introduction-Chris Furnell Page 2
• What information you might want to gather if you take on the task of perfecting a client’s
security interest by registering a financing statement.
• What you might want to consider if you take on the task of overseeing your client’s
registration.
• How personal property security interests line up against charges.
• Transitional arrangements.
Why and when search-some points
If you or your client is buying or leasing personal property, you might first want to conduct a search
of the PPS register to check whether the property is encumbered.
Whether you will want to conduct a search may depend on the circumstances in which the property
is to be acquired.
Generally, if personal property is being acquired from a person in the ordinary course of the person’s
business of selling or leasing such property, you or your client will take free of any (even perfected)
security interest over the property given by the seller.3 (This will be so unless you have actual
knowledge that the sale or lease is a breach of a security agreement or the goods may be described
by serial number and are being acquired as inventory.4)
Generally, if your client is acquiring personal property other than in the ordinary course of the
supplier’s business and the property is of some significance, you will want to conduct a search.5 This
is because your client will want to know whether there are any perfected security interests over the
property and registration of a financing statement on the PPS register is the way in which security
interests are generally perfected. (Note, however, registration is only one way of obtaining
perfection. Hence, a security interest perfected by possession will not be discoverable by a search.)6
If there are perfected security interests you will, presumably, seek their release (discussed below).
If the search does not reveal any perfected security interests, you should be protected (to an extent)
because:
• An acquirer of personal property for value usually takes the property free of unperfected
security interests unless he or she was party to the transaction providing for the security
3 S46-note, however, a security interest over property given by a person from whom the seller acquired
the relevant property might survive. 4 Actual and constructive knowledge concepts are elaborated upon at ss297-299
5 I am ignoring acquisitions of personal household or domestic property worth less than $5000-see s47
6 S21
PPS Act introduction-Chris Furnell Page 3
interest (noting, again, however, that perfection can be achieved other than by
registration).7
• A buyer or lessee of personal property that may be described by serial number will (unless
the property is being acquired as inventory) acquire such property free of security interests
if a relevant search by reference only to the serial number would not reveal the interest8
(although this will generally not apply to protect from transitional security interests a
purchase or lease undertaken before the end of January 2014).9
Searches-some points
In order to conduct a search you will generally need accurate customer information (customer
name, ABN in the case of a partnership, ACN in the case of a company, name and date of birth in the
case of an individual).
In terms of searching:
• The PPS register is accessible at www.ppsr.gov.au
• Records from more than 70 databases and security interests recorded on 23 registers were
moved onto the one system. Glitches in the move have arisen.
• The PPS register provides for a number of types of search criteria; principally, grantor, serial
number (for property that may or must be described by serial number, such as cars, boats
and certain IP) and registration number. Most searches will be by grantor.
• In terms of individuals, the name used should be the name and date of birth on the person’s
licence. Nevertheless, as the register only recognises a single name, it has been
recommended that searches also be conducted of individual name variants such as “Chris”,
“Christopher”; “Sam”, Samuel”.
• In terms of companies, ASIC’s register of charges has generally migrated into the PPS register
by reference to each chargor’s ABN, rather than its ACN. This issue is apparently expected to
be resolved by 11 May 2012 but in the meantime it has been recommended that searches
be conducted by reference to each of three criteria; ABN, ACN and company name.
7 S43
8 S44
9 PPS regulation 2.2 expands this so as to afford protection to those purchasing vehicles from licensed
motor vehicle dealers
PPS Act introduction-Chris Furnell Page 4
(Apparently, in some cases, the three different searches have revealed different security
interests for the same entity.)
• Also in terms of companies, approximately 6000 ASIC charges have not migrated successfully
to the PPS register. As ASIC cannot now migrate them, each relevant chargee has to do it, a
process that need not be completed until the end of January 2014 (given that transitional
security interests are deemed to be perfected for up to two years from commencement of
the PPS regime). Pending completion of that process a person acquiring property from a
company will not be able to confidently ascertain from a search of the PPS register whether
the company can deliver title free from charges in place prior to February 2012 . Given this,
the LIV recommends that its members exercise caution and, potentially, seek warranties or
statutory declarations as to clear title from vendor companies. It might also be useful to
check whether the company you are dealing with is subject to one of the non-migrated
charges. The ASIC website includes a list of charges yet to migrate; see.
http://www.asic.gov.au/asic/asic.nsf/byHeadline/Some%20charges%20not%20migrated%20
to%20PPSR?opendocument
• If a search reveals that a company is subject to a subsisting charge that has migrated from
the ASIC charges register, it might not be accurate. Approximately 38000 satisfied charges
migrated from the ASIC register and appear on the PPS register as current. Whether a charge
is satisfied can be checked by looking to a document entitled “ASIC satisfied charges data”
available at
http://www.ppsr.gov.au/EventUpdates/Announcements/Pages/default.aspx
• If a search reveals that a company is subject to a subsisting charge that has migrated from
the ASIC charges register and you want to deal with the secured party (because, for
example, you want to enter into priority arrangements), care needs to be taken that you are
dealing with all the secured parties. ASIC charges with more than one chargee have been
migrated with only one secured party in the secured party group. This affects, apparently, up
to around 26000 registrations. Options to deal with this issue are identified at the web
address specified in the preceding paragraph.
Once a search is completed, a search certificate can be downloaded.
PPS Act introduction-Chris Furnell Page 5
A search of the register in relation to individuals can only be conducted, and the information
derived on a search can only be used, for certain purposes (such as to disclose whether personal
property to be purchased is described in a registration).10
If a search reveals that the personal property being acquired is subject to a security interest, to try
and obtain clear title, you will need to obtain a release and undertaking to amend registration from
each secured party.
As to the form of that document, the LPLC has referred to a pro-forma formulated by the finance
industry and available at http://www.bankers.asn.au/Submissions/Personal-Property-
Securities/Personal-Property-Securities-Information-and-Protocols
As is implicit in such a document, a purchaser will be relying on each relevant secured party to
honour his or her undertaking.
This will mean checking after a purchase to ensure that they have and, if not, issuing to them an
amendment demand requiring the secured party to issue a financing change statement to either
remove its registered financing statement or amend it to remove the relevant property as collateral
subject to it.11
Financing statement information-some points
In terms of practice, the LPLC has made a number of recommendations in relation to the taking and
maintenance of personal property security interests.
Whether these recommendations are of direct relevance to you may depend on the extent to which
you agree, on behalf of your clients, to register financing statements and to thereafter maintain
them. (As will be recalled, financing statement registration is often a requirement in order to perfect
registration of a security interest and, thereby, preserve and protect the interest of the holder in the
security interest against third parties and the grantor, on its insolvency. In this regard, title to
personal property now is likely to be treated as just another security interest, liable to be defeated if
not perfected.12)
10
S172 11
S178 12
Waller v New Zealand Bloodstock [2006] 3 NZLR 629 at [47]; s55-note, as mentioned previously, that,
generally, a buyer takes free of an unperfected security interest [s43], a buyer of property that may be
described by serial number takes free of a security interest if a search of the serial number would not
disclose the security interest [s44]; a buyer of property sold in the ordinary course takes free of any
security interest [s46].
PPS Act introduction-Chris Furnell Page 6
If that is not agreed, you might wish to make this plain in your retainer letters.
If it is agreed, as noted by the LPLC, registering a financing statement, relative to registration of a
charge with ASIC, entails more risk as the process is more complex and scope for error enlarged.
A financing statement needs to include a variety of information, such as:
• Whether the property is commercial or consumer property. (This is the first thing the PPS
register asks when seeking to register a financing statement.)
• Whether the security interest is a transitional one (that is, essentially, whether it arose
before February 2012).
• The relevant secured party group number.
• The class which best describes the relevant collateral. The classes of collateral
are13agriculture; aircraft; all present and after-acquired property; all present and after-
acquired property, except (property that might be described in the free text field of the
statement or in an attachment); financial property; intangible property; motor vehicles;
other goods; watercraft.
• The identifier which the client wants to be used when notice is given to it about the relevant
registration.
• Grantor details (comprising, as previously indicated, customer name, ABN in the case of a
partnership, ACN in the case of a company, name and date of birth in the case of an
individual).
• If the collateral is commercial property, whether it includes inventory and whether or not it
is subject to the secured party’s control.14
• The end time of registration. For consumer property (or property described by serial
number), it can be no later than seven years after registration. For other property, there
need be no stated end time but the fee for registration is much larger. Otherwise, the stated
end time can be no later than 25 years after registration.
13
Cl2.3, Schedule 1 to the Regulations 14
S341
PPS Act introduction-Chris Furnell Page 7
• Whether the security interest is a PMSI.
The one transaction might trigger a need for multiple statements. For example:
• A financing statement is restricted to one class of collateral.15 Hence, multiple statements
are required if the collateral is of multiple classes (although multiple registrations can be
effected by the one application).
• Multiple financing statements might be required where the security is both a PMSI and a
non-PMSI security. As will be recalled, securities capable of being a PMSI include security
interests “to the extent that” they secure the purchase price of collateral (such as arise
under retention of title provisions), the interest of a lessor or bailor of goods under a PPS
lease, the interest of a consignor under a commercial consignment16 and security interests of
financiers of collateral17, unless the collateral is not described by serial number and the
purchaser, lessee, bailee or consignee intends to use it predominantly for personal domestic
or household purposes.
While the one transaction might trigger multiple registrations, similarly, multiple transactions can,
potentially, be addressed by the one registration. This is because a single registration can perfect
multiple security interests.18 Each supply to the one customer under, say, a retention of title
provision should be able to be addressed by the one registration.
If you access the register reasonably often you presumably have, or will, set up an account. If you set
up an account, you will have (or will receive) a login which, depending on your requirements, can be
used by a number of users.
In order to create a registration, a secured party needs to establish a secured party group in relation
to which a number and an access code will be issued so that details of the group can be changed.
By using such a group, a secured party only needs to enter its details once, rather than each time it
creates a registration in the register. (Whether you will want to be the address for service for
notifications from the register to a secured party group will depend, I suspect, on the scope of your
retainer.)
15
S153 16
Essentially, consignment transactions the parties to which deal in goods of the relevant kind in the
ordinary course of business unless the consignee is generally known to its creditors to be selling or leasing
goods of others 17
S14 18
S21(4)
PPS Act introduction-Chris Furnell Page 8
There are risks in getting a statement wrong. For example, a financing statement will not be
effective (and, hence, the risks of not having a security interest perfected will arise) if:
• It contains a seriously misleading defect.
• A search of the register would not be capable of disclosing the registration because
(essentially) the grantor’s details are wrong or the serial number of the collateral is wrong.
• The security interest is described as a PMSI when it is not.19
Moreover, care needs to be taken that the statement is accurate as the PPS Act can be contravened
by registering a statement when there are no reasonable grounds to believe that the person
described in it as the secured party is or will become a secured party in relation to the collateral
described in it.20
Oversight of registration-some points
Registering a financing statement is only part of the deal if responsibility for registration and
maintenance is taken on. For example, after registration, the secured party will receive (and,
presumably, need to store safely):
• A statement verifying registration. The secured party might then become obliged to include
information from that statement in a particular notice to be given to the grantor of the
security interest.21
• A token enabling the registering party to amend or discharge the registration. That token
will need to be retained for subsequent use.
For businesses that acquire security interests in personal property the LPLC recommends adoption of
a number of business procedures that can be broken down temporally; before and after a relevant
transaction is entered into.
Before a transaction is entered into the LPLC recommendations include putting in place procedures
that:
• Ensure provision up-front of accurate customer information so as to facilitate financing
statement registration (customer name, ABN in the case of a partnership, ACN in the case of
a company, name and date of birth in the case of an individual).
19
S165 20
S151 21
S157
PPS Act introduction-Chris Furnell Page 9
Such information might not be required, however, where the relevant property is required
to be registered by serial number (cars/boats/certain IP/licences over the IP) and is
consumer property (that is, held by an individual other than in the course or furtherance of
carrying on an enterprise).
In any event, the information obtained from customers who are individuals should extend to
information designed to ascertain whether the relevant property is, or is not, to be held in
the course or furtherance of an enterprise to which an ABN has been allocated (that is,
whether it is consumer property).
• Ensure unequivocal acceptance is obtained of the relevant security agreement, such as the
terms of trade providing for retention of title. (A security agreement includes writing
evidencing the creation of a security agreement.)
Proof of acceptance is important. Generally, a security interest with respect to personal
property is only enforceable against third parties,22 and is only capable of being perfected,23
when the security interest has attached to the property (which happens when, say, a
purchaser takes possession of goods sold subject to a retention of tile provision)24 and a
security agreement which provides for the security interest (that is, it arises under the
security agreement) covers the property.
A security agreement will generally only cover property if:
o It is in writing and is either signed by the grantor or (“by an act, or omission, that
reasonably appears to be done with the intention of adopting or accepting the
writing”) adopted or accepted by the grantor.
o It describes the collateral subject to it or includes a statement that it covers all
present and after acquired property (or all present and after acquired property
except certain property).25 If collateral is described as inventory, note that the
security interest is likely to cease to be perfected when the grantor ceases to hold
the property as inventory.
• Ensure PMSI securities are registered within the tight time frame provided for their
registration (if they are to gain super priority).26
22
S20 23
S21 24
S19 25
S20 26
S14-note PMSIs do not extend to property to be used predominantly for personal domestic or
household purposes unless the property may be described by serial number
PPS Act introduction-Chris Furnell Page 10
Generally, priority between perfected security interests is determined by the order of
perfection27 unless it is a PMSI which has been perfected within a certain time frame.28 Such
a PMSI has priority over another, non PMSI, perfected security interest if the financing
statement is registered before the grantor obtains possession (where the relevant goods are
inventory29) or within 15 business days of the grantor obtaining possession (where the
relevant goods are not inventory), as long as the financing statement states that the interest
is a PMSI and the security interest is given by the same grantor.
Accordingly, if your client is supplying goods that constitute inventory of the customer on
retention of title terms, the financing statement needs to be registered before possession of
the goods is taken. If it is, your client should succeed, say, against a bank that has a
perfected security interest over all present and after acquired property (except insofar as
the bank’s security is a PMSI also on the basis that it has given value for the purpose of
enabling the customer to acquire the inventory, that is, provided funding for the inventory).
• Ensure other security interests given by a company are registered within 20 business days.
This is because a security interest is liable to vest in a grantor company that is being wound
up or to which an administrator is appointed unless perfected and registered either more
than 6 months before the wind up or appointment or within 20 business days of the relevant
security agreement coming into force.30
• Ensure that there is capacity to identify goods supplied under an unpaid invoice.
Your client’s security interest will extend to the proceeds realised on re-supply of the goods
your client supplied unless the disposal of the goods was expressly or impliedly authorised.31
For your client to be able to trace into proceeds, however, it will be necessary for your client
to identify that the relevant book debt arose as a result of a re-supply of goods supplied by
your client for which he or she has not been paid (noting that “proceeds” includes
identifiable or traceable personal property derived from a dealing with collateral, but,
generally, only if the grantor has an interest in the proceeds).32
27
S55 28
S62 29
Essentially, property held as raw materials or for on-sale or lease by an enterprise to which an ABN has
been allocated 30
S588FL Corporations Act 2001-note this does not, generally, apply to commercial consignments or PPS
leases of property identified by serial number-s588FN 31
S32-proceeds are automatically captured by a security agreement-s20(6) and a security interest in them
is generally perfected when the security interest in the original collateral is perfected-s33F 32
S31
PPS Act introduction-Chris Furnell Page 11
This security interest in proceeds will be lost if the re-supply occurs in the ordinary course of
your client’s customer’s business. In such a case, the relevant buyer or lessee will take the
goods free of your client’s security interest (absent the buyer or lessee having actual
knowledge that the sale or lease is a breach of your client’s security agreement or the goods
being capable of description by serial number and the buyer or lessee acquires them as
inventory).33
Even where the security interest in proceeds is so lost, however, it would be desirable to be
able to identify goods supplied under an unpaid invoice because, while the security interest
might not subsist, your client will be subrogated to the customer’s right to be paid for the
on-supply.34
Another reason for being able to identify goods supplied under an unpaid invoice relates to
accessions (that is, goods installed in or affixed to other goods).
In essence, a security interest over goods can trace not only into proceeds but also into
other goods to which your client’s goods become affixed. In such a case, usually, the
security interest of your client will have priority over any security interest a person has in
the goods, as a whole.35 The example used by the LPLC involves a suppy of a truck gearbox
under a retention of title clause. Even after the gearbox is installed in a truck, the
supplier will continue to have a security interest in the gearbox and may have priority
over a person with an interest in the whole truck (something that could prove a
nightmare for the financier of the truck).
Again, however, for the gearbox supplier to take advantage of this, he or she will need
to be able to identify that the invoice for the relevant gearbox has not been paid.
Lastly, your client will want to be able to identify goods (or at least what happened to
goods) supplied under an unpaid invoice because of the right to effectively trace into goods
into which your client’s unpaid goods have been incorporated.
In this regard, a security interest in goods survives the goods being incorporated into a
larger product or mass.36
After a transaction is entered into the LPLC recommendations include putting in place procedures
that provide for:
33
S46 34
S53 35
S89 36
S99
PPS Act introduction-Chris Furnell Page 12
• Renewal of financing statements at the end of their registration period (noting the inclusion
of end dates in financing statements). There is an icon on the PPS register for renewing
registrations.
• A capacity to address requests for information from the grantor and certain others (such
as a person with a security interest in the same collateral). The information requested
can include a copy of the relevant security agreement and a statement as to the amount
secured and terms of its payment.37
A secured party generally needs to respond to such
requests within 10 business days of their receipt38
(although a response might not be
required if the secured party is bound by a confidentiality agreement under which it is
agreed not to disclose the information, the agreement was made before the relevant
security agreement and the “debtor” is not then in default under the security
agreement).
• Amendment of financing statements when details change (such as contact details). This can
be achieved through the registration of financing change statements.39 There is an icon on
the PPS register for amendments.
• Registration of financing change statements amending each relevant registration so as to
end its effect after the security becomes unperfected by reason of, say, the customer having
paid all outstanding amounts, promptly or (where the collateral is consumer property or
registered by serial number) within 5 business days of the security becoming unperfected.40
There is an icon on the PPS register for discharging registrations.
• A capacity to address amendment demands. In particular, a person with an interest in
collateral described in a registered financing statement can demand that the relevant
secured party issue a financing change statement either to end registration or to remove
certain collateral from the registration.41
• A capacity to monitor who is in actual possession of the relevant property. As previously
indicated, in some circumstances a security interest can be lost on disposal of collateral to
37
S275 38
S277 39
S150 40
S167 41
S178
PPS Act introduction-Chris Furnell Page 13
third parties. Where collateral subject to a perfected security interest is transferred and the
security interest is not lost, however, a perfected security interest arises, but it is
temporary.42 The period of this temporary perfected security interest is up to two years but
will be shorter if, within the two year period, the secured party gets actual or constructive
notice of the transferee’s details (in which case the secured party has 5 business days to re-
perfect its interest by an amendment to its registration). During the period in which a
temporary perfected security interest applies, a buyer or lessee for value from the
transferee can take the relevant property free of the security interest.43
• Recognition of those PPS Act requirements and rights that have been contracted out of in
relation to each relevant security interest registration.44 The Act provides for certain
enforcement rights, including seizure (by any method permitted by law),45 disposal and
retention of collateral. (Clients need to be aware that such rights arising under the Act are
required to be exercised both honestly and in a commercially reasonable manner.46) Where
property is commercial property, most of those enforcement rights can be contracted out
of. (Further, those rights cease to apply when a receiver has been appointed.47)
PPS compared to charges-some points
Rather than employ a special form of words (such as assign, mortgage or charge), in order to create
a security interest, a security agreement need only contain words to the effect that the grantor
grants a security interest in the personal property covered by the agreement. It can be expressed to
cover after acquired property and future advances.48
The PPS Act does not employ concepts used in connection with charges, such as “floating” or
“crystallisation”.
A security interest in personal property no longer crystallises but, rather, an interest attaches.49
42
S34 43
S52-this doesn’t apply to the temporary protection afforded to transitional security interests. 44
S115 45
S123 46
S111 47
S116 48
S18-note as PPS Act priority applies to future advances irrespective of notice of a subsequent lender,
priorities for personal property securities and for land securities will differ. 49
S19
PPS Act introduction-Chris Furnell Page 14
It attaches when the grantor has rights to the property (assuming the secured party has given value),
which (in the context of a sale subject to retention of title or a PPS lease) is when the grantor obtains
possession.50
This, however, can be changed by agreement as security agreements take effect in accordance with
their terms.51 Hence, parties can agree that a security interest attaches at a later time, say, at the
time when an event occurs that (in the past) would have bean an event by reason of which a floating
charge would have crystallised.
If a security interest in personal property has attached, a reference in a security agreement made on
or after 1 February 201252 to:
• A floating charge is a reference to a security interest that has attached to circulating assets
(basically, inventory and other property which the secured party has authorised the grantor
to transfer free of the security interest, in the ordinary course of the grantor’s business).
• A fixed charge is a reference to a security interest that has attached to personal property
not being circulating assets.
• A charge is a reference to a security interest that has attached to circulating assets and to
other personal property.53
In any event the Corporations Act 2001 has been amended in an endeavour to ensure that the
treatment afforded to security interests over circulating assets equates to that given to floating
charges.
Hence:
• An administrator can disregard the fact that what was a circulating asset has ceased to be a
circulating asset (much as an administrator can disregard the fact that a floating charge has
become a fixed charge).54
• As with the position that applied to floating charges, employee claims rank in priority to
those of secured parties under circulating asset securities.55
50
Note value means consideration sufficient to support a contract but seems to include, effectively, past
consideration-being an antecedent debt or liability. 51
S18 52
S318 53
S339 54
S442B 55
S562
PPS Act introduction-Chris Furnell Page 15
• A security interest in circulating assets may be void if created within six months of a winding
up.56
Indeed, amendments to the Corporations Act 2001 have been made to try and apply to personal
property securities the position that applied to charges, generally. In this regard:
• A creditor with security over the whole or substantially the whole of a company’s property
will continue to be able to appoint an administrator to the company (albeit now subject to
the security interest having been perfected).57
• A creditor with security will still have its enforcement rights restricted while a debtor
company is in administration.58
• As with the position in relation to other securities, winding up will not generally affect the
rights of a creditor where the debt owed is secured by a PPS Act security interest.59
• Property divisible amongst a company’s creditors would generally not include property in
the company’s possession but to which it does not have title if a security interest has
attached to the property.60 Hence, in essence, property subject to a security interest under
which the secured party retains title will not be available to an obligor’s creditors. This is
qualified, however, where the security interest is not perfected or where the financing
statement is registered out of time61.
The foregoing applies largely to perfected security interests. This is because a security interest that
has not been perfected vests in the grantor when, say, a company commences to be wound up or an
administrator is appointed.62
Transitional
The PPS Act applies in relation to:
• Security agreements made, and security interests arising, on or after 1 February 2012.
• Security agreements in force as at 1 February 2012.
• Security interests provided for in security agreements in force as at 1 February 2012
(essentially, “transitional security interests”).63
56
S588FJ 57
S436C(1A) 58
S440B 59
Ss51E and 471C 60
S51F 61
513AA and 588FL 62
S267 PPS Act-this does not, generally, apply to commercial consignments or PPS leases of property
identified by serial number-s268
PPS Act introduction-Chris Furnell Page 16
While the PPS Act applies to transitional security interests, they also attract special rules. For
instance:
• Such a security interest is enforceable against third parties64 if it would have been
enforceable under the law that applied to the enforceability of security interests before 1
February 2012.65 (Enforceability, however, does not mean that an unperfected transitional
security will have the priority it would have had under the old law.)
• Enforcement rights provided for in the PPS Act cannot be exercised in relation to the
interest.66
Transitional security interests:
• Are deemed to be perfected as from 31 January 2012 until 31 January 2014, unless
perfected earlier, such as by registration under the migrated security interest provisions.67
As a result of those provisions, those transitional security interests that have been migrated
onto the PPS register (such as ASIC charges) are deemed to have been perfected as from 31
January 2012 by registration.
• While perfected, have priority over other security interests perfected after 31 January
201268 (although priority between two perfected transitional security interests is
determined in accordance with the pre-existing law).69
While migrated ASIC charges are perfected by registration, this only applies insofar as registration in
the ASIC register “in relation to the property” was effective.70
Registration in the ASIC register of a charge in relation to some property, however, might not have
been effective. In particular, such registration might not have been effective in relation to certain
securities over shares under the former s262 of the Corporations Act 2001 (such as securities
created by the deposit of title documents). If so, then insofar as such a security was registered with
ASIC then it might need to be re-registered under the PPS Act prior to 31 January 2014 despite its
purported migration to the PPS register.
63
S310 64
S20 65
S311 66
S314 67
S322 68
S320 69
S323 70
S332 PPS Act
PPS Act introduction-Chris Furnell Page 17
Those who had charges or other securities entered in registers that have now closed should be
checking the PPS register to identify the secured party group of migrated security interests that
belongs to them, and then claim that secured party group. This is effected through what has been
called a find and claim process.
If an important part of a client’s migrated security interest (eg, an ASIC charge) was the security it
gave over property that may be described by serial number (such as a patent licence, but not a car or
boat), your client will want to ensure that prior to the end of January 2014 a search of the register by
reference only to serial number would reveal the security interest. This is because a buyer or lessee
of the property would then (generally) take free of the security interest if such a search would not
disclose the security interest.71
Clearly migration does not cover the range of security interests now arising under the PPS Act.
Hence, for example, lessors of personal property under leases in place before February 2012 will
need to consider whether the seek registration before February 2014.
Opining on security interests
The LPLC recommends that firms not give opinions as to title to personal property. In this
regard, the PPS register is not a title register.
The LPLC also recommends that firms not give opinions as to priority of interests in personal
property. The number of qualifications and assumptions that would need to be made is
considered likely to make any opinion meaningless.
Given these recommendations, it is suggested that written retainers identify the consequent
limits on the nature of the role being undertaken in terms of PPS Act advice.
Chris Furnell
3 May 2012
71
S44
Christopher Furnell LL.B, B. Comm.
Chambers: Floor 10, Room 1002, Douglas Menzies Chambers
Year Admitted: 1982
Year Signed Bar Roll: 20thNovember, 2003
Admitted to Practice in: Victoria, New South Wales, Western Australia, Federal Jurisdictions..
Phone: (03) 9225 6971
Mobile: 0419 337 545
Facsimile: (03) 9225 7907
E-Mail: [email protected]
Areas of Practice
o Administrative Law o Banking and Finance o Bankruptcy/Insolvency o Commercial Law o Contract o Corporations (Company) Law o Energy & Resources
o Equity & Trusts o Freedom of Information o Property Law/Sale of Land o State Taxes o Succession o Trade Practices
Chris was admitted to practice in 1982. He has over 20 years broad experience as a commercial lawyer, more than 13 of which was as a partner of one of Australia's largest law firms. He has particular expertise in:
access regime enforcement and interpretation - Chris provided extensive advice to privatized energy utilities and to their regulator, the Essential Services Commission;
the interpretation and enforcement of complex project documentation - Chris acted for the State in relation to the City Link project;
finance -Chris acted for the financiers in the M2 tollway project and Loy Yang B;
capital markets' documentation -Chris acted for the issuer in a recent note issue in the USA and advised on the large scale securitization of a pool of trade receivables;
banking ;
swaps and derivatives -Chris documented a number of the swaps undertaken by a then leading gold producer and has prepared for a bank standard foreign currency swap and option documentation;
administrative law -Chris was for several years a principal legal adviser to a statutory authority and, in that capacity, advised on FOI, tort liability, trade practices liability, procedural fairness and related issues;
state taxation - he has practiced in state taxation for over 20 years.
Chris has authored in excess of 20 publications and has been a member of the Law Institute's state taxes committee since its inception in the late 1980s.
He is also a member of the Law Council's financial services committee.
From 1/07/2008: Professional Standards Act 2003 [Vic] "Liability limited by a scheme approved under Professional Standards Legislation."