Protect your Interests By William Buck on 06/07/12 - Mins to read: 4 minutes The Personal Properties and Securities Act (2009) PPSA has introduced a number of significant changes to Australia’s commercial law, which could have a considerable impact on your business and the security of your assets. In spite of this, few business owners are aware of the PPSA, the changes that it enacts and the practical implications for their business. What is the PPSA? The Personal Properties and Securities Act (2009) came into effect on the 30th of January 2012. It introduces one single online register where all ‘security interests’ in personal properties are recorded. The new national register replaces approximately 70 Commonwealth and State registers and is designed to simplify the regime. It is hoped that the creation of a single register will make it easier for individuals and small to medium business to secure lending using their personal assets as collateral and to simplify procedures for both acquisitions and insolvency cases. The practical implications of the register are, however, further reaching. The PPSA now extends the concept of ‘security interest’ to numerous transactions that were never covered by previous legislation such as leasing, retention of title sales, consignments and transfers of receivables. As such, many common transactions will, for the first time, be considered ‘security interests.’ Failure to register these ‘security interests’ may result in the interest being lost through a subsequent transaction involving the personal property such as insolvency, bankruptcy or sale of a counterparty to whom you supply. It’s vitally important that you seek advice in relation to the Act and take the necessary steps to protect your assets. How will the register work? The Personal Property Securities Register changes the way in which the rights of ownership and priority between ‘security interests’ is determined and enforced. The general rule is that perfected ‘security interests’ (see key concepts below) will take priority over unperfected ‘security interests’. If a ‘security interest’ is not perfected, your position may be like that of an unsecured creditor. Those interests that are perfected first will be given top priority. Importantly businesses can no longer rely solely on ‘retention of title’ to their goods to reclaim them if they supply to customers who become insolvent or bankrupt. Retention of Title (ROT) arrangements are exceptionally common. A typical arrangement includes a condition that ownership will not pass from the vendor to the purchaser until payment has been made in full. Under the PPSA all ROT arrangements will need to be registered for the seller’s interest to be protected otherwise it may be available for the reimbursement of creditors regardless of whether you or your business has a title over it. Additionally, in the case of financing leases, lessors can no longer rely on ownership to reclaim their goods should the lessee be unable to pay. Key concepts Personal property Personal property is given a wide definition by the PPSA. With a few exceptions, it covers any property someone can own, other than land, buildings and fixtures. Security interest A ‘security interest’ arises when an interest in personal property is taken as security for a loan or another obligation by a secured party. Perfection A security interest will be perfected when: Attachment has occurred (e.g. value has been given for the security) The ‘security interest’ is enforceable against 3rd parties The ‘security interest’ has been registered via a ‘financing statement on the PPSA register, or the collateral is in the possession of the secured party. How could the PPSA affect me? Unfortunately the real implications of failing to register your ‘security interests’ is only likely to become apparent in the event that a counterparty or lessee becomes insolvent – by this time it will be too late. The examples below outline the stark reality of what can happen if you fail to register your interests. Example 1 On the 1st of February 2012 Top Co (the lessor) signs a five year lease aggreement with Construction Co (the lessse). TopCo relies on the lease agreement to protect it’s rightful ownership to the equipment and does not register its interest on the PPSR. Six months later, Construction Co goes into liquidation and defaults on a loan with Lend Co (registered on the PPSR) where the leased equipment has been given as collateral. Top Co loses the right to the equipment and it is claimed by Lend Co pursuant to is registered security interest. Had TopCo registered its interest on the 1st of February 2012, it would have retained legal ownership fo the equipment. Example 2 Manufacture Co supplies goods to Retail Co on a regular basis. They have an arrangement in place stating that Manufacture Co will retain ownership of the goods until Retail Co has paid for them in full. Manufacture Co does not register this interest. RetailCo becomes bankrupt and the goods are sold for the benefit of RetailCo’s creditors. Had Manufacture Co registered its interest before the goods were supplied, it would have retained legal owenrship over them. Where there is a continuos supply of goods between two parties, the supplier only needs to register once for each purchasor – not for every supply. Next Steps Action should be taken now to ensure that all interests are protected. While the PPSA is designed to simplify matters, it brings a raft of new legal and commercial concepts and has the ability to extend beyond the more traditional concepts of ownership. It’s important to seek professional advice; contracts may be need to be rewritten and care must be taken to ensure that that interests are registered correctly. For more information please contact your local William Buck advisor.