New Laws: Suppliers of Goods, Customer Insolvency & the Personal Property Securities Act 2009

Starting early 2012, the Personal Property Securities Act 2009 (“the Act”) establishes a new national online register (“PPS Register”), which will allow for:

  • the creation, enforcement and extinguishment of security interests in personal property;
  • determining priority among competing security interests throughout Australia.

This article summarises the Act, particularly for the benefit of suppliers of commercial goods.

What is Personal Property?

The Act covers personal property, which is basically all property, except land and fixtures and some other things such as water rights.  It covers not only tangible property (like motor vehicles, plant and equipment, inventory, crops and livestock), but also intangible property (such as intellectual property, contractual rights and shares).

A personal property security is an interest in personal property that secures a payment or performance of an obligation, regardless of the form of the transaction or the identity of the person who has title to the property (e.g. a personal loan secured against a motor vehicle).  Some other examples of security interests covered by the Act include fixed and floating charges, chattel mortgages, finance leases, margin loans, commercial consignments (including retention of title arrangements) and the factoring of book debts.

How will the Act affect property rights?

Under the Act, rights to personal property that were not previously treated as security interests will now be deemed to comprise security. This security will be available to others if the giver (grantor) of the security interest defaults under the relevant contract.  A common example is retention of title (“ROT”) clauses, sometimes known as “Romalpa” clauses.

ROT clauses apply when a supplier’s contract says that it retains ownership of the goods it supplies until all payments for those goods have been made.  Under the Act, the supplier should register the contract containing the ROT clause as this will perfect the supplier’s right to repossess the goods until full payment is received. It will also reduce the risk of the supplier’s right to the goods being defeated by the claims of a third party, such as the customer’s bank, in case of the customer’s insolvency (because the bank will most likely have registered its own security interest to protect the credit facilities it provides to the supplier).  For the customer, the implication is that its name will appear on the PPS Register as the grantor of a security interest.

The Act also says that if a security interest has been granted in goods that are installed in or affixed to other goods (called “accessions” under the Act), then that security interest continues into the whole product. The exception is in the case where a customer acquires the goods in the normal course of trade, in which case the existing security interests are extinguished.  Likewise for goods that are processed (“co-mingled”) into a larger whole; their security interest remains intact, subject only to the Act’s rule that in some cases the security interest is over-ridden by an innocent third party acquiring the goods in the normal course of sale or trade.

What is the PPS Register?

The Act provides for the creation of a single national online register of personal property security interests.  Secured parties and potential secured parties will be able to use it to search for and register security interests in personal property.  The PPS Register, which will replace numerous State, Territory and Commonwealth electronic and paper registers, will be web-based, available in real time and accessible 24/7.  Most existing security interests that are registered on existing registers (e.g. ASIC’s company charges register and state REVS) are to be migrated across to the new PPS Register under the Act’s transitional provisions.

There is no need to register existing security interests immediately after the registration start time to ensure priority. The Act provides a transitional 24 month “temporary perfection period” in which parties will be able to register pre-existing “transitional security interests” on the PPS Register. However, these transitional security interests will need to be registered within the transitional period to avoid losing priority after the end of the transitional period.

In certain circumstances you will be able to “perfect” your security interest, which will mean that:

  • you will hold a purchase money security interest (PMSI) in the goods supplied and your interest will generally have priority over an “unperfected” security interest that will survive the grantor’s insolvency/bankruptcy (an unperfected security interest will not);
  • you will hold a PMSI in the proceeds of a sale of goods, even if the customer has on-sold the goods (an unperfected security interest will not); and
  • you will hold a PMSI in manufactured goods, even if those goods have been affixed or co-mingled with other goods and you will be able to repossess those goods if they are still held by the customer.

Importantly, the enforcement provisions set out in the Act will only apply to security interests provided by security agreements made at or after the registration start time. For transitional security interests the enforcement rules that applied at the time of entering into the security agreement would apply as if the Act had not been enacted.

How can the PPSA help you?

The Act will significantly impact upon the way a supplier does business with its customers.

Suppliers of commercial good should get advice on whether they need to immediately register a security interest for each contract once the PPS Register commences.  Suppliers should also review and, where necessary, amend their standard terms of supply, including retention of title clauses, finance arrangements and other similarly affected contracts so that they comply with the Act.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

Liability limited by a scheme approved under professional standards legislation.