Personal Property Securities Update: The Countdown Begins - Corporate and Company Law

With the Personal Property Securities Act 2009 (Cth) (PPSA) to commence in October this year (currently anticipated to be from 10 October 2011), there is a greater focus by all stakeholders to ensure that all processes are in place to provide for a smooth transition from the current law to the law under PPSA. The purpose of this update is to highlight various matters relevant to the smooth implementation of such transition from a secured party's perspective.

AMENDMENT ACT

As mentioned in our February Update, the Personal Property Securities (Corporations & Other Amendments) Bill 2011 (Bill) was tabled in Federal Parliament in February. The Bill has now been passed by both Houses of Parliament and received Royal Assent on 26 May 2011 (Amendment Act).

The Amendment Act is the last piece of legislation intended to be passed in relation to the PPSA prior to its commencement, although further regulations may be promulgated prior to the registration commencement time (RCT). A consolidated version of the PPSA, incorporating all amendments, is available at Comlaw.

TECHNICAL TRAPS FOR THE UNWARY

Despite the amendments to the PPSA, there is still a number of issues that may operate against the interests of secured parties. Examples of some potentially significant adverse consequences are as follows:

Not all charges registered at ASIC will be migrated security interests

The clear intention of the PPSA is to transfer or migrate the charges currently registered on the ASIC Charges Register to the PPS Register (PPSR) so that as from the RCT (currently anticipated to be from 10 October 2011), existing charges will continue to be registered and have the priority they currently have under the Corporations Act.

Section 332 of the PPSA provides for the meaning of a migrated security interest. One of the requirements for an existing security interest or charge to be regarded as a migrated security interest is that:

The registration in a transition register was duly authorised by the law under which the register was maintained.

In the case of charges registered under Chapter 2K of the Corporations Act, section 262 of that Act (dealing with registration) makes it clear that the requirement to register charges applies only in relation to the charges specified in that section and will not apply in relation to any other charges.

There is a number of charges that (as a matter of prudent practice, rather than due to the requirements of the Corporations Act) are often registered on the ASIC Charges Register. These include charges over certain marketable securities which, technically, are not required to be registered under section 262. From a lender's perspective (being the beneficiary of such a charge), there is no harm in having the registration on the Charges Register. Indeed, it can assist financiers in becoming aware of the existence of such charges (which will occur as a result of their search of the Charges Register).

Depending upon the meaning of the term 'was duly authorised by the law under which the register was maintained' as referred to above, such charges may not be migrated security interests. Although they will still be transitional security interests and have the benefit of the transitional priority rules, those rules only apply for the two year period commencing on the RCT.

If such charges are not otherwise registered prior to the expiry of the transitional period, they may become unperfected security interests resulting in the security holders potentially losing priority over the assets the subject of such charges, or having such assets vest in the liquidator or administrator of the grantor of the security interest or allowing a third party to buy such assets free of the security holder's charge. If however the charge is properly regarded as a migrated security interest, none of these consequences would apply.

Unless this issue is clarified, it may be necessary for financiers that hold a large number of securities that are registered on the ASIC Charges Register, but are not technically required to be so, to undertake an audit to identify all such securities and ensure that they are registered prior to the expiry of the transitional period.

The above issue also arises where a charge registered on the ASIC Charges Register extends to different assets, some of which require a security over the asset to be registered under Chapter 2K of the Corporations Act, while security over other assets does not require such registration.

Is a PMSI all it is stacked up to be?

There is a general perception that a purchase money security interest (PMSI) will provide the secured party, which has the benefit of the PMSI, super priority over other security interests. Although this is true if the timing requirements relating to registration contained in section 62 of the PPSA are complied with, super priority will not be enjoyed if such timing requirements are not satisfied. In other words, PMSIs will not automatically be afforded 'super priority'.

A security interest will still be a PMSI (even if the timing requirements of section 62 are not met) provided that it meets the description of a PMSI contained in section 14 of the PPSA. In addition, the registration process allows for the notation of a security interest as a PMSI without any need for the timing requirements referred to in section 62 to be satisfied. As a result, it is likely that a number of security interests that will be noted on the PPSR as being PMSIs will not in fact have super priority. However, in order to determine this, it will be necessary to ask for evidence that the timing requirement has not been satisfied. This may lead to litigation as financiers and insolvency practitioners seek to dispute the priority of the PMSI holder.

A further issue that may arise from the above disconnect between a security interest being a PMSI and whether or not it enjoys a super priority provided for by section 62 is whether the registration of a security interest that did not satisfy the timing requirements of section 62 as a PMSI is a defective registration. As a security interest can be described as a PMSI notwithstanding that it has not met the timing requirements of section 62, it would not appear that such registration would be defective.

Migrated security interests over serial numbered goods

As mentioned in our February Update, concerns have previously been raised in relation to the operation of section 44 of the PPSA in relation to transitional security interests (being those in existence prior to the RCT) over serial numbered goods. The Amendment Act overcomes the concern and provides that section 44 (which states that a buyer or lessee of personal property may take it free of a security interest if the serial number on the PPSR is incorrect or missing) will not apply for a period of 24 months in respect of a transitional security interest, other than a migrated security interest in a motor vehicle or a migrated security interest in a watercraft within the meaning of the Regulations.

After the expiry of 24 months, this provision will not apply and therefore any serial numbers that need to be inserted in a registration should be attended to.

One issue not dealt with by the Amendment Act is whether or not the lack of serial numbers in a migrated security interest (which is not in respect of a motor vehicle or watercraft) would make the registration defective under section 165(a). We understand that this issue is anticipated to be dealt with by the Registrar issuing an appropriate legislative instrument under section 333 of the PPSA providing for a waiver of this potential risk for up to five years.

Potential loss of priority to PMSI holders and receivable financiers in respect of proceeds

The Amendment Act amended section 25 of the PPSA to make it clear that the only secured party that can have control (for the purposes of perfection) of an ADI account is the ADI. Under the general priority rules, perfection by control provides the highest priority.

As a result, from a practical perspective both the holders of a security interest over a supplier or lessor of goods (whether such security interest is a PMSI or a non PMSI) as well as receivables financiers to such supplier or lessor may be at risk that the proceeds arising from the sale or leasing of the goods by the supplier/lessor will not be subject to the same priority as the goods or the receivables the subject of the security interest.

In the case of sales or leases by the supplier/lessor, the proceeds of such dealings would generally go into an ADI account. In the absence of an appropriate priority/ subordination deed between the holder of the security interest granted by the supplier/lessor over the goods and the ADI in relation to the ADI account, the ADI with whom the account is kept may have a superior priority to the holder of the other security interest (if the ADI has a security interest over the ADI account).

Similarly, although a receivables financier may take priority over sale and lease proceeds to which the supplier/ lessor is entitled ahead of the holder of a PMSI over the goods to which the proceeds relate (section 64), if the proceeds of the sales/leases are placed into an ADI account, the same issue arises in relation to the priority of the receivables financier relative to the priority of the ADI with which the account is kept.

As a result, it will be necessary for secured parties seeking to rely either on the superior priority granted to PMSIs under section 62 or the superior priority granted to receivables financiers under section 64 to ensure that the ADI with which proceeds are deposited does not in fact have any debt facilities owing to it by the grantor and/ or that the ADI does not have a security interest over the account. If such facilities are in place with the ADI, the ADI may seek to have a security interest over the ADI account, for example a flawed asset arrangement in respect of the account.

A flawed asset arrangement is a security interest for the purposes of the PPSA, which can be perfected by control, giving the ADI superior priority to that of the holder of the PMSI security and the receivables financier. As a result, a search of the PPSR will not assist a secured party in identifying whether such security interest is in place between the ADI and the supplier/lessor.

DEVELOPMENT OF A PPS INDUSTRY

The impact of PPS not only on financiers but suppliers, bailors and other parties who receive the benefit of a security interest over personal property in their commercial dealings is significant. Although larger financial institutions have established PPS working groups and committees that have been assisting them in preparing for the introduction of PPS and the smooth transition to it, other institutions and businesses that do not have such resources or are unaware of the impact of PPS on their business will not have progressed in getting ready for the introduction of PPS.

As a result, various third-party service providers have been established to assist businesses in implementing processes and procedures necessary to be in place for the PPS regime.

The outsourcing of compliance with PPS can provide those businesses that do not have the staffing or the resources to dedicate to such activity a means by which they can minimise the adverse consequences of not complying with PPSA. However, given the legal complexity and technical nature of the PPSA, it is still necessary for all businesses to have access to the legal advice necessary to ensure that the processes suggested by such third-party service providers are indeed compliant with the PPSA and appropriate for their business.

The registration process is fundamental to ensuring the interests of a business are protected. Failure to accurately register a security interest can lead to significant consequences, including:

the loss of priority to other secured parties
the extinguishment of the secured parties' security interest in favour of third parties
the removal of the registration from the PPS register resulting in the security interests being unperfected
the vesting of the assets the subject of the security interests in the grantor and the subsequent control of those assets by an insolvency practitioner appointed over the assets of the grantor
the possible inability for the supplier/lessor to claim on credit insurance
a potential breach of PPS covenants that may be imposed on the business by its financiers.

ATTORNEY-GENERAL PROVIDES PRACTICAL ASSISTANCE

With the commencement of the PPSA only four months away, the Attorney-General has set up a number of communication and educational processes to assist parties understand and comply with the PPS regime.

This extends to:

educational workshops as to the operation of PPSR (presented in each capital city)
establishment of work groups to test the PPSR technology to ensure that it is accurate and timely, including scenario testing
the establishment of a discovery site, which includes access to dummy financing statements so parties can become familiar with the registration and searching processes as well as the process for creating a secured party group.

Businesses are encouraged to make contact with the Attorney-General's Department for more information about these facilities as it will assist parties in understanding and complying with PPSA.

MORE INFORMATION
If you have any questions in relation to PPSA, please contact a member of our PPS team.

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

Australia: Personal Property Securities Update: The Countdown Begins