Personal Property Security
Personal Property Security Law
The Personal Property Securities Act 2009 (Cth) (‘PPSA‘) came into effect on 30 January 2012 and radically changed the laws affecting interests in Personal Property.
The PPSA created a new national scheme for the registration of Security Interests over Personal Property. The Register is known as the Personal Property Securities Register and is commonly referred to as the PPSR.
The PPSA affects almost every business that supplies goods (whether by sale or lease) or extends credit with security. If used effectively the PPSA creates rights and protections for businesses that did not exist previously. However, businesses that ignore the PPSA and fail to register a Security Interest on the PPSR face a real risk of suffering significant losses in ways that would not have occurred prior to 30 January 2012.
In broad terms, businesses seeking to protect themselves against a customer’s insolvency by taking security over a debtor’s Personal Property will now need to Register a Security Interest on the PPSR.
Personal Property Securities Register (PPSR)
The Personal Property Securities Register (‘PPSR‘) is the register where details of Security Interests in Personal Property can be registered and searched.
What is a Security Interest?
A Security Interest is an interest in Personal Property provided for by a transaction that, in substance, secures payment or performance of an obligation. Specifically, a Security Interest includes an interest in Personal Property provided by any of the following transactions:
- an agreement to sell subject to Retention of Title,
- a lease of goods or equipment,
- a hire purchase agreement,
- a consignment,
- a chattel mortgage, and
- a fixed or floating charge.
Generally, when you buy Personal Property on hire purchase or use Personal Property as security for a loan or another type of credit providing transaction (eg Retention of Title sale), the transaction creates a Security Interest in the Personal Property.
Why Register a Security Interest
If your business does not register a Security Interest and a debtor goes into bankruptcy or is placed into liquidation, you will not be able to enforce any security you have over the debtor’s Personal Property. Instead your position will be that of an unsecured creditor, meaning generally that you can only expect a payment after all secured creditors and the costs of the bankruptcy/liquidation are paid in full.
This will often mean the difference between getting paid in full or paid only a few cents in the dollar or nothing at all.
The PPSA contains rules for determining priority between Security Interests in the same Personal Property. The prompt registration of Security Interest is, therefore, essential so that priority is not lost to a party who acquires a later Security Interest but perfects the Security Interest by registration before your business.
Even where your business is able to recover payment from a debtor or enforce an unregistered Security Interest before the debtor goes into bankruptcy or is placed into liquidation, unless the Security Interest was registered on the PPSR it is likely that the payment you received will be recoverable by the Trustee/Liquidator as a preferred payment.
Therefore, businesses can improve the way they manage their credit risk by adopting a practice of promptly registering Security Interests on the PPSR over goods they supply or lease to customers.
Personal Property is broadly defined. With a few exceptions only, it covers any property someone can own other than land, buildings and fixtures.
Personal Property includes, without limitation:
- plant & equipment,
- cars, boats, plates,
- crops & livestock,
- licenses, shares,
- accounts receivable, contract rights, and
- intellectual property
Retention of Title
Retention of Title refers to a type of clause often included in a contract for the sale of goods where a purchaser may take possession of goods, but does not acquire title to the goods from the seller until the full purchase price is paid. There is typically a right to repossess the goods if the purchaser breaches the contract.
However, the new rules under the PPSA mean that businesses can no longer rely solely on retaining title to their goods to reclaim them if they supply to customers who become insolvent or bankrupt. Instead, to preserve their title to the goods in these circumstances they now need to register a Security Interest in relation to the goods on the PPSR.
Significantly, a supplier of goods pursuant to a Retention of Title clause has a Purchase Money Security Interest. Once registered, this gives the supplier a form of ‘super priority‘. That is, the interest of the Retention of Title supplier will take priority over all other Security Interests in relation to the secured property. Conversely, if a Retention of Title supplier fails to register their Purchase Money Security Interest they will lose the title to the property in the event of the bankruptcy of liquidation of the purchaser.
For wholesalers or other continuous supply of goods situations, the supplier needs only to register once a Purchase Money Security Interest for each customer not for every supply.
The PPSA treats leases and bailments for a term of more than two (2) years, as PPS Leases. This includes leases or bailments of an indefinite term once they run for two (2) years.
PPS Leases are Security Interests. Owners of Personal Property who grant a PPS Lease over their property should, therefore, register their interest on the PPSR to fully protect their interest. Failure to do so may mean that other secured parties could have a superior claim to the goods if the lessee became insolvent.
Purchase Money Security Interests
The PPSA gives particular recognition to the common practice of businesses providing a loan or credit for the purchase of particular property or inventory. Under the PPSA, the Security Interest created is called a Purchase Money Security Interest (‘PMSI‘). Significantly, a PMSI can have priority over other Security Interests in the same property.
The most common form of PMSI is one that arises pursuant to a Retention of Title provision in a contract. However, the holder of a PMSI must register the PMSI on the PPSR to fully protect their interest in the goods supplied subject to the Retention of Title provision.
A business with a PMSI may, therefore, benefit from a ‘super-priority’ which defeats all other Security Interests in the property. This includes Security Interests created and registered before the PMSI. For example, a supplier of goods that holds a PMSI will be entitled to priority over the holder of an all assets Security Interest (eg, a bank) where the customer becomes insolvent. However, certain registration requirements must be complied with in order for the PMSI to benefit from the super-priority.
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Understanding Personal Property Securities.
Security interests over personal property are typically granted when businesses borrow money, buy/sell goods on credit or lease/hire items for periods over two (2) years.
The prompt registration of security interests is crucial to ensure that your security will have priority after other creditors and is enforceable in the event of a debtors insolvency.
How We Help
We assist both businesses extending credit and needing to create and register security interests as well as businesses borrowing money and granting security interests to creditors.
In most cases the search of a company will reveal many security interests of different kinds and careful consideration is required to determine what securities and priorities can be granted. This is especially the case for what is know as an AllPAAP (a security interest over All Present and After Acquired Property).
Understanding Security Interests is crucial when loaning money, buying and selling equipment or businesses and leasing or hiring equipment (or other personal property).
We assist businesses with:
- standard form contract solutions that create Security Interests over personal property including retention of title clauses, Purchase Money Security Interests (“PMSI“) and PPS Leases,
- registration of Security Interests on the PPSR,
- PPSR searches and advice,
- advice in relation to Loan Agreements and General Security Agreements granting AllPAAP’s,
- drafting and negotiation of Loan Agreements, General Security Agreements and Priority Deeds,
- buying and selling equipment and other personal property, and
- enforcing Security Interests against debtors and Insolvency Practitioners (Liquidators and Bankruptcy Trustees).