Australia: How the Personal Property Securities Act 2009 affects

Last Updated: 27 March 2011
Article by Daniel Pinti

The Personal Property Securities Act 2009 (PPSA) will have a significant impact on the core business operations of many industries. Businesses need to review their operations now and make arrangements to ensure their interests are protected when the PPSA commences.

Importantly, under the PPSA, suppliers and other beneficiaries of a retention of title clause will need to register their interest to ensure that the clause is enforceable and has its intended effect.

Here, partner Paul Cullen and senior associate Daniel Pinti discuss how the registration and enforceability of retention of title arrangements will change under the PPSA, and what businesses should be doing now to ensure their interests are protected.

Key points 

  • The PPSA is currently scheduled to commence in October 2011. If you use retention of title arrangements in your business operations, or if you have ever used a retention of title clause and that arrangement will still be in place at the time the PPSA commences, you should seek advice now. Procedures for new transactions will need to be updated, and many existing arrangements - including arrangements which are not currently considered to be security interests - will need to be registered.
  • For suppliers or manufacturers who use retention of title arrangements, the period leading up to the commencement of the PPSA is an important time to review existing terms of trade and put into place processes to register any security interests in goods before they are sold.
  • It may also be appropriate for suppliers to register a purchase money security interest to ensure that they will have priority over their customer's other creditors for future ongoing supplies. Suppliers will also need to keep appropriate records and put in place systems to address enquiries about the security interests permitted under the PPSA.

Who will the PPSA affect?

It's not only businesses and other commercial entities that will be affected by the PPSA. Any person who has been granted, or who may in the future be granted, an interest that constitutes a "security interest" for the purposes of the PPSA must carefully consider their position and seek advice as necessary. The definition of "security interest" in the PPSA is wide and includes the following examples:

  •  Charges
  • Mortgages (excluding a mortgage over land or water rights)
  • Conditional sale agreements, including retention of title arrangements
  • Hire purchase agreements
  • Pledges
  • Trust receipts
  • Leases of goods
  • Consignments
  • Assignments
  • Transfers of title
  • Flawed asset arrangements (eg controlled/restricted bank deposits)

This list is not exhaustive, as the PPSA will regulate any interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation. In addition, the legislation also classes certain prescribed interests as security interests even though they may not secure payment or performance of an obligation. Examples of this include the interest of a consignor under a commercial consignment or the interest of a lessor or bailor of goods under a "PPS lease" (certain leases or bailment of goods arrangements specified in the PPSA to be a "PPS lease").

It is essential that those who have entered into a transaction of this nature, and who may be the beneficiary of a security interest under the PPSA, review their arrangements and seek advice as to the steps that need to be taken to protect their interests before the Act commences.

Retention of title arrangements

Anyone who is a supplier of goods should pay close attention to the PPSA requirements to make sure their retention of title clauses remain enforceable. A retention of title clause (sometimes also referred to as a "reservation of title" or "Romalpa" clause) is often used by suppliers to retain ownership of or title to goods until the buyer makes the final payment.

Retention of title clauses are currently recognised at law and do not require registration to be effective. However, that position will change under the PPSA. Suppliers or other beneficiaries of a retention of title clause will need to register their interest (their "security interest") to ensure that the clause is enforceable and has its intended effect.

The legislation also offers some new protections, of which a beneficiary of a retention of title arrangement can take advantage. Examples include the ability to extend the security interest to cover the book debts referrable to the relevant goods, and mechanisms to protect commingled and attached goods (which, in both cases, are problematic under the current law).

Purchase money security interests

The security interest arising from a retention of title arrangement is an example of what the PPSA refers to as a "purchase money security interest". In simple terms, this is a security interest over goods that is given to a party who has provided credit to assist with the purchase of those goods. Examples of purchase money security interests include equipment leases and hire purchase agreements.

The significance of this type of interest is that it has a "super priority" in certain circumstances, meaning that a supplier who has a registered purchase money security interest can potentially have priority over a previously registered security interest, such as a company charge. For example, consider a situation where a customer has granted a security interest to a bank over all of its present and future property. A supplier to that customer who uses a retention of title arrangement can potentially have priority over the bank's security, even if the bank's security was registered first.

The registration of the retention of title arrangement must indicate that it is a purchase money security interest to obtain the super priority. It must also be made within a prescribed timeframe.

Insolvency: Legal title is not enough

The concept of "ownership" or "title" is, for all practical purposes, redundant under the PPSA. In general terms, the PPSA assumes that assets subject to a security interest should be available for realisation and distribution to secured creditors, regardless of who has title to it. Emphasis is placed on the status and priority of the "security interest". For example, where goods are leased, ownership and title to the item remains with the lessor. The lessee has rights over the item, but does not have title to it. This presents a difficulty in the event of the insolvency of the lessee under the current regime, as it is not always clear which assets the lessee "owns" that can be realised to repay secured creditors. Assets owned by the lessor would not be available to the lessee's creditors.

This distinction does not exist under the PPSA and, using the same example, the lessor would be required to record its interest on the Personal Property Securities Register as a "security interest" (even though the lessor has title to the goods). In this example, the lessor must register its interest in order to "perfect" its interest. The concept of perfection under the PPSA is important and of particular relevance in the context of enforceability and priority. For example, while there are exceptions, a perfected security interest will generally have priority over an unperfected security interest.

An unperfected security interest will generally mean that the underlying property becomes available to the creditors of the security provider on its insolvency. The effect of this is that the security interest is essentially void. While this is consistent with the current position for charge and mortgage securities, it differs significantly for retention of titles and other interests, which were previously not considered to be "security interests".

For example, a supplier who has used a retention of title clause would, under the current regime, retain ownership of the goods in circumstances where the buyer is insolvent. Under the PPSA, the supplier may lose its priority and its interest in the goods if it does not register its security interest. This will apply even if the supplier has title to the goods. A secured party whose interest is void due to insolvency will only have the same rights as other unsecured creditors, even though it holds legal title to the goods. This is a dramatic change to the position under the current law and emphasises the importance of registration/perfection under the PPSA.

© HopgoodGanim Lawyers

Gold Employer of Choice - ALB magazine, April 2010
Finalist, Brisbane Law Firm of the Year, ALB Australasian Law Awards 2010

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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