The PPSA commenced on 30 January 2012, bringing with it significant changes to the area of security interests taken in personal property (generally, non-land assets). The aim of the PPSA is to have national legislation that governs security interests in personal property and that provides rules as to their priorities and enforcement. It is intended to make the process simpler for businesses and individuals to register their interests in personal property, check whether such property has a security registered over it, and also to minimise the risk to purchasers of personal property.
The practical application of the PPSA however is far-reaching and it will have a significant impact on many industries, particularly in the fields of finance, mining, manufacturing, retail and wholesale. This Plain English Guide provides an overview of the Act and its importance.
What is personal property?
Personal property has a wide definition under the PPSA. It is essentially any form of property other than land. It includes tangible property such as cash, stock in trade, artworks, motor vehicles, boats, aircraft, equipment, as well as intangible property such as patents, licences and financial property. It includes both consumer and commercial property.
The Introduction of the Personal Property Securities Register
One of the key components of the PPSA is the introduction and establishment of the Personal Property Securities Register (PPSR). The Register is a single national, on-line register of security interests over personal property that is web-based and can be searched 24 hours a day, seven days a week.
Importantly, the PPSR has replaced various State, territory and Commonwealth electronic and paper registers, enabling users to search security interests quickly and effectively in one database – minimising the risk to purchasers and consolidating all of the relevant information into one place.
What actually constitutes a security interest over personal property?
There are two strings to this bow, so if your interest does not fit into the first category, it may still be considered a security interest for the purposes of PPSA.
A Security interest can be defined as:
- any interest in personal property provided for in a transaction that secures payment or performance of an obligation (regardless of the form of the transaction, the length in time of the agreement and who has title to the property) e.g. a mortgage, charge, lease, a conditional sale (such as sale under a retention of title (ROT) arrangement), or an assignment of a debt; or
- one of the following transactions, even if it does not secure payment of performance of an obligation:
i) a consignment sale where a consignor delivers goods to a consignee for commercial sale on its behalf;
ii) a lessor or bailor of goods under a PPS Lease
iii) a transfer of an account (money obligation) or chattel paper (e.g. an equipment lease)
What is a ‘PPS Lease’?
If you are regularly engaged in the business of leasing or ‘holding’ (e.g. storing) goods for a certain term, your lease agreement may be considered to be a PPS lease. A PPS lease is deemed to be a security interest under the PPSA.
The position for lease agreements entered into on and from 1 October 2015 but before 20 May 2017
A PPS Lease is a lease or bailment:
i) of more than 1 year; or
ii) for an indefinite term (even if it can be ended within a year); or
iii) that is less than a year but automatically renewable where total terms may exceed a year; or
iv) that is less than a year, but where the lessee has uninterrupted possession of the goods for more than a year.
The position for lease agreements entered into after 20 May 2017
A PPS Lease is a lease or bailment:
i) of more than 2 years; or
ii) for up to 2 years that is automatically renewable for terms that might exceed 2 years; or
iii) for up to 2 years or for an indefinite term where, with consent, the lessee or bailee has mostly uninterrupted possession of the property for more than 2 years after they first took possession of the property.
Note: For leases entered into before 1 October 2015 there is a slight difference to the definition of what will constitute a PPS Lease and which we can advise upon on request.
I think I have a security interest over personal property, so what do I do now?
If you think that you have a security interest over personal property you need to check whether:
- your security agreement (e.g. the terms of trade or lease agreement) gives rise to a security interest.
- the Grantor (e.g. your buyer or lessee) has signed the agreement or otherwise adopted it.
- your security interest has been attached to the personal property.
If these requirements have been satisfied, then you should PERFECT your security interest.
The most common way to do this will be to register it on the PPSR. There are other ways to perfect your security interest, such by possession of the property or by control, however whether these other types of perfection apply will depend on the type of personal property you are dealing with.
If your security interest arose under a security agreement that was in place prior to 30 January 2012 (a ‘transitional security interest’), then you had a period of 24 months from this date in which to perfect your interest. If you did not take action to perfect your interest within that period, your interest may be deemed inferior to another party’s interests in the property if there is a dispute, or it could be lost completely in the event of the Grantor’s insolvency. _
The Purchase Money Security Interest (PMSI)
In certain circumstances you can also claim and register your security interest in a Grantor’s personal property as a PMSI. This could give you an edge in priority over another secured party who also has a security interest in the same personal property.
A PMSI can be claimed:
- where the security interest granted secures all or part of the purchase price (e.g. where you sell under a ‘retention of title’ or if you are lending the money to the Grantor to acquire the personal property);
- where your security interest is under a PPS lease;
- where your security interest is as a consignor under a commercial consignment.
PMSIs typically arise in commercial rather than consumer transactions and except for serial numbered collateral such as motor vehicles, cannot be claimed where the Grantor intends to use the goods for mainly personal, domestic or household purposes.
Why are PMSIs important?
A correctly registered PMSI is important because in some instances it can provide what is known as a “super-priority” interest over personal property. This means that the PMSI could take priority over any other registered interest in that particular property.
To get the full benefit of a PMSI, and a “super-priority”, you should register your security interest within the time limits outlined below:
|Type of Collateral||Supplied as inventory||When to register|
|Goods||Yes||Before the time Grantor obtains possession|
|Goods||No||Within 15 business days of Grantor obtaining possession|
|Intangible property||Yes||At the time the PMSI attaches or is created|
|Intangible property||No||Within 15 business days of the day the interest attaches to the property|
Default Priority Rules
The PPSA provides a set of overall rules to determine priority between competing security interests in the same personal property, in the absence of an agreement between the secured parties.
Generally these rules can be summarised as follows:
|Security interest||has priority over|
|Security interest perfected by Control||Security interest perfected by other ways|
|PMSI||Other perfected security interest|
|Security Interest perfected earlier in time||Security interest perfected later in time|
|Perfected security interest||Unperfected security interest|
|Unperfected security interest attached earlier||Unperfected security interest attached later|
Extinguishment of Security Interests
The PPSA also provides rules under which a buyer or lessee may take the personal property free of your security interest.
Under the legislation, the basic rule is that this will happen when a security interest is ‘unperfected’ (i.e. not registered or perfected in some other way). A perfected security interest may also be extinguished in cases where the purchaser or lessee:
i) acquires the personal property in the ordinary course of business;
ii) acquires a serial numbered property after a PPSR search using only the serial number does not show a registered (perfected) interest;
iii) acquires personal property that was intended to be used mainly for personal, household or domestic purposes (and is less than $5,000).
There are a number of exceptions to these basic rules and if you have any questions, you are advised to discuss your situation with a legal professional.
There are many types of security interest that fall within the terms of the PPSA. The existence of a national register as an electronic notice-board highlights the need for prudent searches to be carried out before lending money, acquiring a business or advancing credit to another party.
While registration on the PPSR is not compulsory, and purely a commercial decision for any secured party, a decision not to register should only be made after all the risks are understood and accepted. The risks include the possibility of losing your security interest (and your property) altogether!
Glossary/ Key Terms in the PPSA
The PPSA introduces a number of key terms that are important to know. These are:
|Grantor:||Person or entity who grants the security interest (e.g. buyer, lessee, mortgagor).|
|Secured Party:||Person or entity that takes a security interest (e.g. seller, lessor, mortgagee).|
|Collateral:||Personal property to which a security interest has attached.|
|Security agreement:||The agreement whose terms give rise to a security interest (e.g. terms of trade, deed of charge)|
|Attachment:||Time when the collateral becomes the subject of a security interest e.g. when security agreement signed or goods delivered.|
|Perfection:||Steps taken to ensure the security interest has priority e.g. by registration on the PPS register, by control or by possession.|
|RCT:||Registration Commencement Time – 30 January 2012.|
At any time, you may be a Grantor or a Secured Party. For example, you may sell goods to a buyer (the Grantor) under an ROT arrangement and take a security interest over those goods. In this instance, you are the secured party.
At the same time, you may borrow funds from your bank and grant the bank a security interest over all your present and after acquired personal property. In this case, you are a Grantor.
For more information on how our Commercial Advice lawyers can help you with the Personal Properties Securties Act