The Personal Property Securities Act 2009 (Cth) marked the dawn of a new era in Australian securities law. The Act brought about somewhat of a seismic shift in the legislative framework, challenging traditional concepts. No longer is ownership of personal property determinative of a party’s rights.
The PPSA deals with the creation, legal effect and determination of priority disputes between ‘security interests’.
Being only three years old, there is little jurisprudence to assist us in understanding how some of the complex provisions of the Act will be construed. Accordingly, there is still much uncertainty in the way the Act operates and how it affects various transactions.
The key issues to take home following our recent PPSA presentations are:-
- care should be taken in evaluating transactions to determine whether they give rise to ‘security interests’ which must be registered on the Personal Property Securities Register (PPSR).
- to ensure an effective registration, security interests must be promptly registered within the timeframes set by the Act and also the Corporations Act
- Purchase Money Security Interests (PMSIs) for inventory must be registered before goods are delivered;
- PMSIs for non-inventory must be registered within 15 days of goods being delivered;
- Security interests must be registered within 20 days of the security agreement coming into force.
- care should be taken in completing a finance statement to register a security interest because the Act establishes a very prescriptive checklist.
- a failure to register or an error or misdescription may result in a secured creditor losing its collateral in an insolvency event or alternatively losing out in a priority dispute with other creditors.
The most common transactions giving rise to security interests are sales under retention of title. They can be simply registered prior to delivery of inventory in order to ensure that those security interests are protected.
There is an uncertainty surrounding bailments, such as where goods are deposited on a customer’s premises (for example where ancillary to a service contract) and whether they give rise to a deemed security interest which if unregistered might expose the owner of those goods to loss in an insolvency event. Generally speaking, where goods are bailed there will not be any risk unless the bailee (customer) uses those goods in its business and provides consideration for them. Accordingly, typical bailment arrangements such as for storage, repair and transportation would not ordinarily give rise to a PPS Lease. Nonetheless, consideration should be given to the terms of any agreement.
There is little doubt that the hire industry has been hardest hit by the introduction of the PPSA. Short-term hires of motor vehicles and other goods may give rise to deemed security interests which if not registered may result in a loss of collateral in an insolvency event.
It is important to ensure that transactions are properly documented and signed by the parties to ensure that a security interest may be registered. Remember to exercise care in commercial dealings when receiving a purchase order which contains alternative terms and conditions. Your client might unwittingly agree to the terms of its trading partner which does not provide adequately for the security interest that was intended.
The cost of registering a security interest is minor (eg. $8 for a seven year term) relative to the risk of loss. So, where there is any uncertainty as to whether a transaction gives rise to a security interest, it may be prudent to lodge a finance statement anyway to avoid unnecessary risks.
The PPSA is likely to be amended in the years ahead. A recent review has made 400 recommendations. However, it is not likely that we will see much change in the near future.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.