The PPSA is a single national law governing contractual security interests in personal property.
The features of the PPSA include:
- a searchable national online register for disclosing security interests;
- rules determining the priorities between security interests; and
- various enforcement remedies for secured creditors.
The PPSA matters for everyone involved with the extension of credit. This includes businesses who receive loans from banks, financial institutions and other lenders. It also includes businesses who provide goods to their customers on conditional sale or leasing terms. This Plain English Guide provides an overview of the PPSA and its importance.
What is personal property?
Personal property is essentially any form of property other than land and some other legislated exceptions. It includes tangible property such as motor vehicles, boats, agricultural products and other goods. It also includes intangible property such as intellectual property, licences, accounts and financial property (shares, bonds and the alike).
What is a ‘security interest’ under the PPSA?
To qualify as a ‘security interest’ the interest in personal property must be ‘provided for by a transaction’. This means only consensual interests (i.e. interests provided by contracts or agreements) can be a ‘security interest’.
The ‘transaction’ element is a key point for creditors. It means that to claim a ‘security interest’ the creditor must have documented an agreement with their debtor that provides for the security interest. Example agreements include general security deeds and trading terms providing for retention of title.
Once the transaction element is met the interest must satisfy one of two alternative criteria. The first criterion is that the interest must, in substance, secure payment or performance of an obligation. Typical examples of this include fixed and floating charges and goods mortgages. Other examples include title retention arrangements such as agreements to sell subject to retention of title, goods leases and hire purchase agreements.
However that is not the end of it with ‘in substance’ security interests being identified in a very wide variety of circumstances. Indeed a significant source of litigation under the PPSA is over whether or not there is one of these ‘in substance’ security interests. Some further examples include contractual liens, pledges, assignments, step-in clauses in construction contracts, power of attorney provisions, termination rights, turnover trusts, and escrow arrangements.
The second criterion is that the interest is deemed to be a security interest even if it does not secure payment or performance of an obligation. Examples of where these ‘deemed security interests’ arise include certain consignments, leases, bailments and factoring arrangements. Again litigation often arises over whether one of these ‘deemed security interests’ exist.
The Personal Property Securities Register
The PPSA establishes a single national online real-time Personal Property Securities Register (PPSR) under which personal property that is or may be subject to a security interest can be registered. The PPSR serves these functions:
1. Better protection for secured creditors when their debtors become insolvent.
2. Information for searchers about existing security interests in personal property so that they may make informed decisions over whether they should purchase the property or lend money in relation to it.
3. Improved priorities for secured creditors when enforcing debts.
Effective registration of the security interest is the most important way of ensuring ‘perfection’ of a security interest. The reason ‘perfection’ matters is that the security interest is completely extinguished if it is not perfected and the debtor enters external administration.
Unfortunately the registration process with the PPSR is complex and technical and demands precise data entry. The Australian and overseas experience is that insolvency practitioners and competing creditors fiercely contest registrations when they identify anything potentially defective. Even slight registration defects can result in the loss of the secured property in an insolvency.
The usual priority rule is that the first creditor to register is the creditor who wins. However there are numerous ‘ifs and buts’ to that rule including:
1. later correctly registered ‘purchase money security interests’ (PMSIs) beat earlier registered interests;
2. later correctly registered security interests in accounts prevail over earlier registered interests;
3. security interests perfected by control have priority over security interests perfected by other means; and
4. banks and other ADIs have priority over all other security interests in accounts they hold.
PMSIs are especially important for suppliers of goods. They typically arise in retention of title arrangements and certain consignments, leases and bailments. PMSIs also matter for lenders when they advance money so that their borrower may acquire an asset.
Correctly structuring the transaction and registering the PMSI is absolutely essential for later enforcing it against competing creditors and insolvency practitioners. Challenges frequently arise for secured parties claiming PMSIs because they must prove that the PMSI exists. For example, the secured party must prove that it is their goods that they supplied and that remain unpaid, or that the loan they advanced was actually applied so that the borrower could acquire rights in the asset claimed.
Continuation of security interests
A neat feature of the PPSA is that security interests generally survive when something happens to the property. Examples include:
1. If a farmer sells a horse the security interest continues in the horse and attaches to the proceeds of sale.
2. If a mechanic fits the wheels to a car then the security interest still continues in the wheels.
3. When grapes are converted into wine the original security interest in the grapes continues in the wine.
An exception to these rules is when the personal property becomes a fixture to land. In that situation the PPSA stops applying to the property. To cover off that risk the creditor’s usual strategy is to also obtain an equitable charge or mortgage in the land so that they may later lodge a caveat if the debtor defaults.
Loss of Security Interests
The most common threats to security interests are ineffective registrations and failures to register at all. Both result in the extinguishment of the security interest if the debtor becomes insolvent and enters external administration. Therefore creditors who fail to effectively register risk entirely losing the property they financed and provided to the debtor.
Further security interests do not always survive when something happens to the property. Examples of when the security interest may be lost include where the debtor:
1. transfers the property to someone else;
2. sells or leases the property in the ordinary course of business;
3. sells unregistered property.
The PPSA also provides enforcement rights for secured creditors. These enforcement rights permit secured parties to seize property from a defaulting debtor and then retain or sell the property.
The main limitation on these enforcement rights is that they do not permit entry on to the debtor’s land without their consent. This is even where the security agreement expressly authorises entry. Therefore it is essential for the creditor to apply to the Court for an order authorising entry if they want to recover property from the debtor.
The PPSA matters for everyone looking to advance credit and take security in personal property because:
1. By using the PPSR they may make informed decisions about whether to advance the credit.
2. It requires that they properly document security agreements so that they may claim their security interests.
3. By effectively registering they materially improve their prospects with recovering assets if the debtor becomes insolvent.
4. It provides them further rights when the property is sold, affixed to or turned into something else.
5. It provides enforcement remedies when the debtor defaults.
The PPSA though is complex and technical legislation to navigate. Its legal challenges include:
- identifying when a transaction may provide for a security interest;
- correctly documenting the security agreement so that it creates the security interest;
- effectively registering on the PPSR;
- proving the priority position for the creditor;
- legally enforcing the security interest.
Coleman Greig’s Commercial Advice and Litigation lawyers are experts with solving PPSA challenges. Click here for more information on how our lawyers can help you with the Personal Properties Securities Act
For more information on the contact our Commercial Advice lawyers on +61 2 9895 9200.