Australia: The PPSA priority rules: lessons from abroad

In October 2011, Australia will adopt the Personal Property Securities Act 2009 (Cth) (PPSA), which is based on Canadian¹ and New Zealand² interpretations of the American Art 9 regime.³

The PPSA will overhaul the law relating to security interests in personal property, particularly in relation to the determination of priorities. It will establish a set of codified priority rules that rely on the concepts of attachment, enforceability and perfection, rather than legal title.⁴ The PPSA will also expand the definition of "security interest" to include retention of title (ROT) arrangements and PPS Leases.

This article will examine some areas of concern identified by the writer having regard to the Canadian and NZ experiences.⁵

The priority rules

The default priority rules are contained in s 55 of the PPSA.⁶ The rules generally operate to make the first registered security interest prevail over subsequent security interests. However, there are a number of exceptions to the general priority rules, including purchase money security interests (PMSIs) such as ROTs and PPS Leases.⁷

Provided a secured party complies with the concepts of attachment, enforceability and perfection,⁸ a PMSI will obtain super-priority over all other security interests in the same collateral irrespective of when the other security interests were perfected.⁹

The super-priority afforded to PMSIs is causing the most controversy in Australia. However, as this article discusses, PMSIs should not be the sole focus of Australian practitioners. There are other issues that require equally detailed attention.

Lessons to be learnt

As the PPSA regime is based on the Personal Property Securities Act 1999 (NZ) (NZ Act) and the Personal Property Security Act RSS 1993, c P-6.2 (Canadian Act), which in turn have their origins in Art 9 of the Uniform Commercial Code (US) (UCC),¹⁰ there are substantial similarities between the legislation in each of those jurisdictions particularly in relation to the rules of priority.¹¹

As a result of those similarities, there is a sizeable body of NZ and Canadian case law, commentary and precedents that Australian practitioners can draw from.¹²

This article will now consider some of the more important issues that arose during, and in the years after, the implementation of the Canadian and NZ Acts.

Deemed security interests

The expansion of the definition of security interests in the PPSA to include ROTs and PPS Leases is likely to involve controversy. That much is evident from NZ case law.

Four years after the implementation of the NZ Act, there had only been two cases heard by the NZ courts - Graham v Portacom New Zealand Ltd ¹³ and Wailer v New Zealand Bloodstock.¹⁴ Both of those cases related to a secured party's failure to register their interest on the Personal Property Securities Register (PPSR) after the NZ Act came into effect.

In Graham v Portacom, the lessor of portable buildings appeared unaware of the requirement to register a security interest over those buildings after the implementation of the PPSA and, as a result, lost priority to a subsequent security interest that was registered on the NZ PPSR.

The Wailer case indicated that even the judiciary was confused by the change in focus from title to perfection. In that case, the judge at first instance decided the matter based on the common law priority rules determined by ownership rather than the rules contained in the NZ Act. He held that the PPS priority rules have no application to a contest between the holder of a security interest and the absolute owner in possession.¹⁵ Of course, that decision was later overturned.

Fixtures

The PPSA, in a marked departure from the Canadian Act but in line with the NZ Act, does not include a provision dealing with priority disputes relating to collateral that has become a fixture.¹⁶ The policy reason for that decision appears to be based on the assumption that fixtures are adequately dealt with by the existing Bills of Sale regime.¹⁷

Whatever the reason, the result is that priority disputes between financiers of fixtures and financiers of land must be determined in accordance with the common law degree of annexation test.¹⁸ If the degree of annexation is such that the collateral is considered to be a fixture, then the secured party loses its security interest and priority in the collateral.

Interestingly, both the May 2008 draft of the "Bond Bill" and the consultation draft of the PPSA Bill 2008 included a provision that dealt with fixtures.¹⁹ That proposed section largely mirrored the equivalent provision in the Canadian Act²⁰ and, with a few exceptions,²¹ gave priority to any interests in land.²²

The Canadian Act provides that a security interest in a fixture can survive despite being annexed to land and allows such a security interest to he registered on the title for the land.²³

It is unfortunate that the Australian legislature did not follow the Canadian Act in this respect, as the common law rules relating to fixtures are complex, uncertain²⁴ and often difficult to apply.²⁵

The writer considers that the decision not to include fixtures within the scope of the PPSA priority rules could prove costly, as a secured party cannot protect its security interest and priority in collateral that becomes affixed to the land on a register²⁶ to put other third-party security providers on notice of its interest, Simply put, if the collateral over which the secured party has security is determined to be a fixture, then the secured party is likely to lose its priority interest over that collateral to the mortgagee of the land.

The NZ experience confirms the writer's view, After nearly a decade of application, there remain calls for the NZ Act to be amended to follow s 37 of the Canadian Act, however, it appears unlikely that such an amendment will he made in the short term or at all. Despite New Zealand's reluctance to amend its Act, the writer considers that the PPSA should be amended to reflect the Canadian approach to overcome the sometimes inconsistent application by the judiciary of the common law rules relating to fixtures and the adverse impact such a decision can have on a security interest and its related priority in collateral.

Education

If the NZ experience is anything to go by, then the education of lawyers, accountants, banks and the general public will be extremely important.

As discussed earlier in this article,²⁷ the expanded definition of security interest caused some initial confusion in New Zealand not only for ROT holders and lessors, but also for the judiciary, who, for a while after the implementation of the NZ Act, attempted to resolve priority disputes by reference to the pre-PPSA rules rather than those contained in the legislation.²⁸

However, New Zealand was not alone in the "teething" problems it faced with the implementation of its new PPSA regime. Similar situations arose in Canada shortly after its provincial Acts were implemented,²⁹ and these are "a reflection of the extent to which the registration regime introduced by the Act has altered long-established priority principles grounded in notions of legal title".³⁰

In order for the transition to the PPSA regime to be an orderly one, the writer considers that the Australian government must immediately start advertising its roadshows not only to lawyers, financiers and accountants, but also to the general public (the large majority of which still appears to be unaware of the PPSA regime) so that Australia can avoid some of the issues surrounding ROT holders/lessors being unaware of the requirement to register their interest on the PPSR.

Respond to changes

The final point is more of a comment than an identified issue. The writer notes that although both the Canadian and the NZ Acts have been successful, they are not perfect. Many defects have been identified and rectified by amendment.³¹

The writer considers that the PPSA must also be periodically amended so that it remains responsive to changing patterns of commercial practice, economies, markets and policies, and to deal with newly discovered deficiencies in its operation.³²

It is essential that the Australian legislature acknowledge this fact so that the PPSA remains relevant, rather than returning to a system no better than the archaic Bills of Sale regime.

Conclusion

Australia is in a unique position in that it can, for the most part, rely not only on the Canadian interpretations of the Canadian Act, but also on New Zealand's experiences with the implementation and application of such a law. It is that ability to rely on the commentary, case law and lessons learnt in Canada and New Zealand that is likely to make the implementation of the PPSA priority rules a smoother one in Australia.

What remains to be seen is how the Australian legal community will adapt to the dramatic changes relating to priorities and how the new PPSA priority rules will be interpreted in the Australian context. It will also be interesting to see what amendments, if any, are made to the PPSA when it is reviewed in 2015.³³

In the meantime, Australia can take comfort in the fact that those that have been through the transition to an Art 9 regime consider that while the implementation of the PPSA does involve some initial difficulties, the changes are ultimately worthwhile and provide clarity to what was previously an extremely confusing area of law.

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.