Personal Property Securities Act ("PPSA") Now Law

After several false starts, PPSA is now in operation!

The PPS Register (“PPSR”) went live on 30 January 2012. The PPSR can be accessed at the following web address: https://transact.ppsr.gov.au/ppsr/Home. Searches of the register attract a fee (starting from $3.70 for a basic search).

Early Observations:

We have encountered several issues in the operation of the register and the information provided in the search results:

(i) Specific information on the property which is subject to a security interest is generally not available from a search of the PPSR nor can a copy of the security agreement which gave rise to the security interest be accessed (i.e. a copy of the “charge”).

(ii) The ASIC database of company charges has been integrated into the PPSR. Company searches conducted using the ASIC database will no longer disclose any company charge information (other than those charges satisfied before commencement of the PPSR (i.e. before 30 January 2012)).

(iii) Pursuant to s275(1) of the Act, the Secured Party is obligated to provide certain information “to an interested person, or any other person”, including but not limited to, a copy of the security agreement that provides for the security interest and a statement in writing setting out the amount or the obligation that is secured by the security interest and the terms of payment as at the day specified in the request.

(iv) We are aware that several large motor vehicle dealers & finance companies are incorrectly registering security interests on the PPSR without Grantor details where motor vehicles are collateral. Pursuant to s153 of the PPSA and Part 1.3 of Schedule 1 to the PPS Regulations 2010, where the lessee is a body corporate and the collateral is not consumer property (i.e. the collateral is not held by an individual or in the furtherance of an enterprise), the registration on the PPSR must include Grantor details. These incorrect registrations are one example we have encountered which adversely affect the reliability of information being disclosed in the search results (when searching by Grantor).

Impact of the Transitional Provisions on Search Results:

The transitional provisions allow a “grace period” of two (2) years commencing 30 January 2012 for registration of pre-existing (ie. before 30 January 2012) security agreements on the PPSR before transitional priorities are lost. During the transition period, it is likely that transitional securities will exist which were not part of the migrated registers and will need to be registered manually by the Secured Party.

Until the expiration of the transitional period on 30 January 2014, there may be Secured Parties who have not registered their interests and do not appear on the PPSR searches but nonetheless have a valid claim.

Our PPS Reform update in November 2011, viewable at www.smithhancock.com.au under the “News and Updates tab”, focused on the different categories of secured interests and the priorities which operate between them.

The remainder of this article will explore some of the more specific rules relating to security interests, including:
- Accessions
- Processed & Comingled Goods
- Proceeds

Worked examples, of how the provisions of the PPSA discussed below operate in practice, are provided on our website (www.smithhancock.com.au). These may assist you in understanding the effects of these provisions.

Accessions:

Accession to other goods means goods that are installed in, or affixed to, the other goods, unless both the accession and the other goods are required or permitted by the regulations to be described by serial number (see Part 2.2 PPS Regulations 2010).

Importantly, the PPSA protects the interest of a Secured Party with a security interest in goods that become an accession by legislating that a security interest in the goods that become an accession to other goods, continues in the accession.

Furthermore, a security interest arising in the accession before it is affixed to goods has priority over a subsequent security interest in the goods as a whole (s89-91).

Other sections to be aware of in dealing with accessions under the PPSA include:

• A Secured Party removing an accession from the whole good is not allowed to cause damage to the whole good (s92);
• Secured Party seeking to remove an accession must reimburse parties (other than grantor) for any damage (s93);
• Other parties can refuse permission for the removal of an accession until the secured party provides adequate security for reimbursements (s94);
• The Secured Party must give at least 10 business days notice (before the day the accession is to be removed), to the grantor and any other Secured Party with a higher priority security interest in the accession (s95);
• Other Secured Parties can apply to Court to postpone removal or determine the amount payable to the Secured Party for retention of accession (s97).

Processed & Commingled Goods:

Under previous common law decisions, a party would lose their security interest in goods, for example in Retention of Title (“ROT”) claim, once the goods the subject of the ROT claim were processed and or mixed with other goods.

Part 3.4 of the PPSA changes the way in which security interests are treated for goods that become an unidentifiable part of a larger product. The PPSA provides that a security interest continues if the goods are manufactured, processed, assembled or commingled so that their identity is lost (s99). Identity is lost where it is not commercially practical to restore goods to their original state.

The priority held by a Secured Party in the commingled good is the same as that of the original product. The Secured Party priority amount is limited to the value of the original product on the day it became part of the commingled product (s100).

Where two or more perfected security interests exist in the commingled good, each Secured Party is entitled to “share” in the product according to the ratio that the obligation secured by the security interests bears to the sum of the obligations secured by all perfected security interests in the commingled good (s102).

A PMSI has priority over other non-PMSI’s prior to the “sharing” outlined above in s102 (i.e. a properly registered ROT claim in the good prior to mixing would have a priority over a “floating charge” interest in the commingled good) (s103).

Proceeds:

Division 2 of Part 2.4 of the PPSA legislates the way in which security interests in the proceeds of collateral, and in collateral after it is transferred, are dealt with. For example, where stock subject to ROT is sold to a third party, the Secured Party (ROT supplier) has a security interest in the sale proceeds.

Proceeds of collateral to which a security interest is (or is to be) attached means identifiable or traceable personal property that is derived from dealings with the collateral (e.g. cash from the sale of ROT stock), including:

• Personal property that is derived directly or indirectly from a dealing with the collateral (or proceeds of the collateral) (s31(a));
• A right to an insurance payment or other payments as indemnity or compensation for loss of, or damage to, the collateral (or proceeds of the collateral) (s31(b));

There are three (3) key distinctions to be made in dealing with the proceeds of collateral:

i) Whether the description of proceeds provided in the financing statement complies with the regulations (see s153 Item 4(d) and Clause 2.4 in Schedule 1 of the PPS Regulations 2010); and

ii) Whether proceeds are identifiable or traceable; and

iii) Whether the Grantor has an interest in the proceeds or the power to transfer rights in the proceeds to the Secured Party.

Where the above criteria are not satisfied, the Secured Party is unlikely to have any claim to the proceeds of collateral or collateral which has been transferred.

The existing common law decisions dealing with these issues often lead contesting parties into trust law disputes, particularly in respect to ROT claims which purport to secure an interest in the proceeds of goods sold without title passing.

The PPSA aims to reduce the complexity of the disputes, by setting the above three (3) criteria. Whether it is successful, in achieving this aim, time will tell.

Generally, the same priorities apply to security interests in proceeds which apply to the original collateral.