By Jacob Carswell-Doherty
Excluding the ownership of real estate, most companies and individuals usually own some kind of “property”. For the purposes of this article (and subject to the definition below), this property is referred to as “Personal Property”.
Personal Property may be used as security to obtain finance, leased to third parties or it may be sold to a purchaser pursuant to a hire-purchase agreement. When a party who owns the Personal Property transfers possession (not ownership) to another party, the owner inevitability loses a certain amount of “control” in doing so, and needs a way to protect its interest. Likewise, a financier who provides finance on the basis of security over an asset will want to ensure that its asset is not ‘dealt with’ (or sold) by the borrower in a way that prejudices its interest and diminishes its ability to recover a loan.
The Personal Property Securities Act 2009 was enacted to deal with these situations and applies to all Security Interests in both tangible and intangible Personal Property. Essentially, this means any kind of property which is not fixed to the ground (such as the family home).
The most basic function of the PPSA is the protection of an interest in the Personal Property of one person (the “secured party”) when this asset is in the possession and use of another (the “grantor”) who does not own it.
What is Personal Property?
Personal Property includes:
“Tangible assets” such as goods, crops, livestock, motor vehicles, paintings, machinery; and
“Intangible assets” such as licences, intellectual property and some investment “instruments”.
N.B. Land is specifically excluded from this reform, as well as fixtures and water rights. The laws governing registering a mortgage or caveat over real property have not changed.
How does it work?
The PPSA works by invoking the concept of a “Security Interest” which “attaches” to the Personal Property in order to protect the interest of the secured party.
The Security Interest is best created using a General Security Deed and this interest is then registered on the Personal Properties Securities Register (“PPSR”), usually by the secured party.
What is a “Security Interest”?
A Security Interest is any interest in Personal Property provided for by a transaction that secures a payment or performance of an obligation. This concept includes, but is not limited to:
- fixed charge or floating charges;
- conditional sale agreements (including an agreement to sell subject to retention of title);
- chattel mortgages;
- hire purchase agreements;
- transfer of title or flawed asset arrangements
- trust receipts;
- lease of goods; and/or
A Security Interest will also include other transactions/arrangements not traditionally considered as falling within the realm of secured lending, such as:
- a sale of goods on a retention of title
- a security deposit under a supply agreement;
- a suspense account clause in a guarantee; or
- an escrow agreement;
- real property mortgage, if it mortgages property beyond the land itself and any fixtures;
- an agent’s right under an agency agreement to retain the principal’s property until the agent has been paid its fees and expenses; or
- a debt factoring facility.
What is the Personal Property Security Register?
The PPSR is a single, national, online register. It enables online searches for Security Interests relating to all Personal Property, 24 hours a day, 7 days a week.Any person or company is able to register an interest in Personal Property on the PPSR over the internet (www.ppsr.gov.au). Generally, the person who makes a ‘registration’ will be the secured party (or its agent).Existing information as at January 2012 should have already been migrated across to the PPSR.Those wishing to register need to provide a description of the property so that it can be readily identified in a PPS search. They will also need to provide information about the secured party, as well as precise details of the security or “collateral”.A verification statement will then issue to the secured party who must, in turn, provide it to the grantor.Demise of the fixed and floating chargeThe PPSA does not distinguish between the previously known concepts of “fixed” and “floating” charges. All Security Interests are effectively “fixed” to Personal Property.
The PPSA works on the basis of a system of “priorities” and the Security Interest which is “perfected” first will prevail over all other claims to ownership and later perfected and unperfected Security Interests.
Recent case law has said one that; “ownership” of the Personal Property is largely irrelevant if the Security Interest is not perfected (i.e. unless there is a valid Security Interest which has been registered on the PPSR).
For instance, Party A leases a tractor to Party B.
A fails to register their Security Interest on the PPSR.
B then uses the tractor as security to obtain finance from C.
B says to C that the tractor is his/hers and C otherwise has no knowledge of the lease between A and B.
C then promptly registers their Security Interest on the PPSR.
In the event of liquidation or bankruptcy of B, C will take the tractor ahead of A, due to the priority found in the PPSA, and because A failed to “perfect” their Security Interest. Party A may very well be left with nothing.