A Guide to the Personal Property Securities Act 2009

A Short Guide to the Personal Property Securities Act 2009 for the Perplexed

by Richard Winter & Sagi Peari

If you lend money to someone, what are some of the ways to make sure you get your money back?

You obviously need to check if the borrower has good credit, that they have the means to repay the debt or, you might want to take security (also known as ‘collateral’) from them so that if they don’t repay, you can sell the collateral and recover the debt.

Prior to 2012, the laws regarding taking of and enforcing security against personal property (that is, all property excluding real estate property, know has “real” property) were a jumble with dozens of separate state and federal based laws in place regulating the taking of security over different types of collateral. There were also different registers if the security provider (the “Grantor”) was a company, or whether the type of property was something like a car, and even then it varied from state to state.

In 2012, the Personal Property Securities Act 2009 (Cth) (”PPSA”) came into effect and replaced the myriad of state, territory and federal laws and registers with one national system and register – the Personal Property Securities Register (“PPSR”).

In Substance Security

Apart from collapsing multiple registers and laws into one, the PPSA also introduced some new and innovative legal concepts to assist in capturing “what is a security interest”.

The PPSA does not care what the form of document is that creates the security interest, whether it is in the form of a mortgage, charge or pledge, to name a few examples. The traditional priority of form over substance approach was seen to be problematic as it meant many transactions that would in substance act as security would not be recognised.

The guiding principle in the PPSA is that it applies to every transaction that “in substance” creates a security interest. Further, in treating varying types of security interest on an equal basis (that is, if they are in substance security then they are security interests) the PPSA was able to set out rules that apply to all security interests, ranging from the ways in which that interest is perfected (registration typically), how different security interests are ranked/compete with one another, treatment of third party buyers and the remedies available following default.

Now at last there was a single unifying law and register covering all personal property security interests, and covering all variety of Grantors including companies, partnerships, trusts and individuals.

The Register: A One Stop Shop

The strongest position that a funder taking security (that is a “Secured Party”) can have is if its security interest is perfected. Perfected means that the security interest is in the strongest form it can be which can assist in any battle between Secured Parties as to who gets first use of the collateral in being able to recover and discharge their debt and which may also protect that Secured Party against third party purchasers.

The key way in which a security interest is able to be perfected is through registration on the PPSR. The golden rule is that first in time prevails, or “you snooze you lose”. Further, the PPSR, being the sole place in which personal property security interests are registered, acts as a notice board to all others wanting to lend and take security. The opposite is also true, if you had the chance to register and perfect but did not, then you cannot complain if someone else, on checking the register and seeing it clear, takes security and gets a first place ranking.

Deemed Security Interests

The PPSA further widened the scope of what is a security interest by deeming certain types of transactions as security interests, some potentially obtaining “super priority” if properly registered.

Certain types of transactions, such as leases, may not fall within the “substance test” and without the deeming provisions would not be able to be captured under the PPSA. Failing to recognise these types of transactions would have been a large gap in what is otherwise a uniform code and if left out would mean a party searching the register and not finding these transactions may be misled as to the extent to which a Grantor has financed its activities.

So the PPSA included provisions which stated that if a lease is for over 2 years (or has been going for at least 2 years where there is no term) and where leasing is a regular part of the Secured Party’s business (that is a “PPS Lease”), then even if it was not in substance a security (say because at the end of the term the leasehold item, say a car, would be returned to the lessor) nevertheless it would be “deemed” to be a security interest. The same rules then would apply, failure to register would leave the lessor’s security interest unperfected.

Besides potentially losing a battle with another secured party if the security interest (in substance or deemed) is unperfected, there is also another very large and big stick that the PPSA wields to encourage registration. Where a security interest is unperfected then, if the Grantor goes insolvent and is wound-up or becomes bankrupt, the assets forming the collateral will become part of the estate of the Grantor. This is highly problematic for funders such as lessors who, prior the PPSA’s introduction, relied on their ownership of the leased assets and their ability to recover them in the Grantor’s insolvency. The PPSA overrides that previously fundamental legal principle and vests ownership of those assets with the Grantor, converting the lessor into an unsecured creditor in the Grantor’s insolvency.

This rather dramatic law change has provided one of the most compelling reasons for Secured Parties to ensure that they register their security interests!

Super Security and Timing of Registrations

The PPSA also introduced the idea that some security interests are to be deemed to be higher in their priority than other standard securities.

If the security interest is found to be “Purchase Money Security Interest” (“PMSI”) then in a battle between a registered PMSI and a registered standard security, even if the standard security was registered first, the PMSI will win the priority battle. Simply, a PMSI occurs where the funds used to acquire the relevant asset were specifically provided by the Secured Party, such as money lent to buy a car. This type of security is given super status because it is in effect “new money” provided to the Grantor for that specific asset or assets and is treated as if it should exist beyond the reach of general secured creditors (like banks that provide a line of credit for the general running of a business). It is in a sense the flip side of the potential for an unperfected lessor’s security interest/asset being lost in a Grantor’s insolvency – here if the lessor can manage to register its PMSI correctly, it will replicate the advantages of the old law and access those funded goods in priority to all other creditors.

There are special rules that apply to registering PMSIs though – where the security interest is a “PPS Lease” then registration needs to occur within 15 days of the Grantor obtaining possession of the goods and if those goods form “inventory” then registration must take place before possession itself.

Note for other security interests (not PMSIs) registration can be done only from the time that the Secured Party believes on reasonable grounds that they have, or will become, a secured party in relation to the relevant collateral. This might mean in appropriate circumstances that registration can be done in advance of entering into any formal security agreement (for example, parties signing binding terms sheets committing to the secured financing). Where those reasonable grounds no longer exist, the Secured Party has 5 Business Days to remove that registration. Additionally, if the Grantor is a company, registration must be done within 20 Business Days of entry into the security agreement (otherwise the Secured Party may not be able to enforce its security against the Grantor if the Grantor goes insolvent within 6 months of that security being granted).

Conclusion

The PPSA has fundamentally altered the landscape in Australia for the creation and protection of security interests in personal property. Individuals and business alike need to get familiar with this new landscape in order to ensure that their secured goods are protected in the most optimal way or that what they are acquiring is indeed free of third party interests and clear title is obtained. The ease of searching and nominal costs involved means there is little excuse for not searching the register and the outcomes of failing to register correctly and on time are so dramatic that the mental tattoo of “Register, Register, Register” should be indelibly inked in every Secured Party’s mind.

Richard Winter is a Sessional Tutor, University of Western Australia Law School.

Sagi Peari is a Senior Lecturer in Private & Commercial Law; Director, UWA Business Law Major, University of Western Australia Law School.

Using the Register

The PPSA not only provides convenience for funders in terms of a one stop shop for searching and registration but it also assists purchasers for potential transactions. Purchasers are able to run PPSR searches (for the very nominal $2 per search if done directly via the government website: https://www.ppsr.gov.au/) to check that the asset they are contemplating buying is free of security (or to the extent it is secured who has security and what that security covers) to ensure that when they complete their purchase they are obtaining full title and ownership to that property.

A good example is buying a car. A purchaser is able to run a search against the car’s VIN (vehicle identification number) or chassis number (depending on the age of the car) and if the search comes up with no results then even if there was a security interest in that car (unregistered and hence unperfected) the purchaser would buy that car free of the security interest. If a security interest was found then the seller would need to ensure that the registration was removed as part of the sale process.