Personal Property Securities Act 2009 (Cth) Practical implications and what you need to know!

1. Personal Property Securities Act 2009 (Cth)Practical implications and what you need to know! Petrina Macpherson – Senior Associate 28 May 2011

2. Personal Property Securities Act 2009 • The Personal Property Securities Bill 2009 and the Personal Property Securities (Consequential Amendments) Bill 2009 were passed by both Houses of Parliament on 26 November 2009 • The PPS Act will apply after the registration commencement time which was expected to be May 2011 • In February 2011 COAG determined that the commencement date be deferred to October 2011

3. Personal Property Securities Act 2009 • Aim of the legislation is: • to bring an end to the inconsistent and duplicate laws and registers which presently govern personal securities law in the various Australian jurisdictions • It will replace 70 Commonwealth and State Acts, administered by 30 government agencies

4. Objectives of PPS Reform • Increase certainty in insolvency and for holders of competing security interests • Increase consistency with consistent and comprehensive legislation • Reduce complexity with simpler registration procedures • Reduce costs with security interests being identified on one site • Alignment with overseas developments in this area (NZ, Canada and US)

5. PPS Register • Up to 30 existing federal and state registers will be migrated to the PPS Register, including: • ASIC register of company charges • co-operatives register of charges • bills of sale • motor vehicle securities • ship mortgages • crop liens • stock liens • register of trade marks

6. PPS Register • Notices are currently being sent out to ensure only current securities are migrated • Once migrated a verification certificate will be sent to the grantor and grantee of the security interest

7. PPS Register • On the PPS register, the end time for the security must be defined, in particular • goods used by consumers - security can’t be for more than 7 years (but can be renewed) • motor vehicles - security can’t be for more than 7 years (but can be renewed) • BUT no stated end time needed for company charges • Will be wholly electronic • Accessible 24/7

8. PPS Register Key differences to current position - • Operates on the basis of notice rather than document registration • Registration is by ‘financing statement’ • Notice can be registered before any secured transaction takes place • One registration can cover multiple security interests

9. Registration • Not mandatory to register security interests • No time limit for registering • PMSIs to be registered within 15 days • However failure to register/perfect will have consequences for enforcement and priority

10. Searching register • PPS Register can be searched by • grantor details • property details (if there is a serial number on the particular property) • PPS register will be maintained by ITSA • Existing registers will be migrated and verified

11. Access to register • Unlike current company charges - copies of the security documents are not included in the register • Information is included via the financing statement • Interested persons will be able to receive a copy of the security agreements from the grantor within 10 business days of a request being made

12. Access to register • Only authorised users can access the register e.g. credit providers and current and potential security holders • To protect privacy there will be no general public access except for authorised purpose – but may be difficult to police

13. What is Personal Property • Personal Property means property (including a licence) including: • tangible items such as cars, boats, aircraft, livestock, crops and minerals that have been extracted in any form • intangible items such as intellectual property and contract rights, designs, patents, plant breeders rights and trademarks • financial property such as currency, a document of title, investment instruments and negotiable instruments. • investment entitlements (e.g. stockbroker accounts)

14. Personal Property • It specifically excludes • land • fixtures • water rights • a right, entitlement or authority (including access entitlements) that is • granted by or under a law of the Commonwealth, a State or Territory • declared by that law not to be personal property for the purposes of the Act

15. What is personal property security • Three elements • an interest in relation to personal property • provided for by a transaction • that, in substance, secures payment or performance of an obligation • This is regardless of the form of the transaction or the identity of the person who has title to the property

16. Security interests – examples • Charges that secure obligations - no distinction between fixed and floating charges • Retention of title arrangements • Chattel mortgages • Lease of goods • Hire purchase agreements • Consignment

17. Form of documentation • There is no prescribed form of security agreement: • General security agreement • Specific security agreement • All security is effectively ‘fixed’ - parties need to agree terms of security arrangements • Parties to determine when the property can be disposed of by the grantor • PPSA determines how current fixed and floating securities are dealt with in future

18. Entities covered • PPSA applies to security interests granted by • corporations • partnerships • managed investment schemes • registrable and non registrable legal entities • individuals

19. Creating a security interest • Step 1 – entering into a transaction • Step 2 – attachment of the security interest to the personal property (enforceable against the grantor) • Step 3 – possession, control or written security agreement (enforceable against third parties) • Step 4 – perfecting the security interest

20. Attachment • A security interest attaches to personal property when • The grantor has rights in the collateral*that are transferrable to the secured party and • The secured party gives value in return for the security interest • *Collateral is the personal property to which a security interest is attached

21. Attachment • For an attached security interest to be enforceable against third parties, section 20 of the PPSA requires that either • the collateral is in the possession of the secured party • the collateral has been perfected by control or • the grantor and the secured party have entered into a valid written security agreement • PPSA contemplates that security agreements can be entered into electronically

22. Perfection • Perfection is required to obtain priority over another security interest, or survive a dealing in the same collateral • The main methods of ‘perfection’ are (section 21) • taking control of collateral that is controllable property (e.g. bank accounts, investments) • registering a security interest in the collateral • taking possession of the collateral or • temporarily perfecting a security interest in the collateral

23. Control • Controllable property is defined as • an investment instrument • an ADI account (e.g. bank account) • investment entitlements • investment instruments (e.g. shares) • letters of credit • negotiable instruments not evidenced by a certificate (e.g. bills of exchange)

24. Priority • A perfected security interest will have priority over an unperfected security interest – section 55(3) • example • ABC Cranes Pty Ltd (ABC) grants a security interest in one of its cranes to Bendigo Bank • ABC later grants a security interest in the same crane to NAB • NAB registers the crane on the PPS register, Bendigo Bank does not • the security interest held by NAB will have a higher priority

25. Priority • A security interest perfected by control (of controllable property) will have priority over a security interest perfected by any other means – section 57(1) • Example (investment instrument) • Bob borrows $20,000 from ANZ to invest in a pizza oven and grants ANZ a security interest in shares issued by Macquarie • ANZ perfects its security interest by registering the shares on the PPS register • Bob later borrows another $25,000 from Westpac and grants Westpac a security interest in the same shares issued by Macquarie

26. Priority • Westpac perfects its security interest by taking control of the shares • Westpac’s security interest would have priority over ANZ’s interest because Westpac has perfected its interest through control, while ANZ has perfected only by registration • Where competing security interests are both perfected by control, priority is determined by the order in which the secured parties took control of the collateral – section 57(2)

27. Priority • Priority between security interests perfected by means other than control is also determined by the first in time principle – section 55(4) • it is necessary to determine the priority time • the priority time will not necessarily be when the security interest was perfected

28. Priority time • Providing a security interest is continuously perfected, the priority time will be the earliest of • registration on the PPS register • possession of the collateral • when the interest is temporarily perfected by force of the PPS Act

29. Priority • Priority between unperfected security interests is determined by the order of attachment of the security interest – section 55(2)

30. Exceptions to the general priority rules • Purchase money security interests (PMSI) • PMSI is essentially where the secured party has provided finance or given value required by the grantor to acquire the collateral, (e.g. vendor finance) • PMSIs have ‘super-priority’ over the same collateral (which has been granted by the same grantor) which has been perfected by registration or possession • however, a security interest which has been perfected by control has priority over a PMSI

31. New Zealand Cases • Graham and Portacom New Zealand Limited (the Portaloo case) • Waller and Ors v New Zealand Bloodstock Limited and Anor

32. Graham and Portacom New Zealand Limited (the Portaloo case) • NDG leased five Portaloos from Portacom • NDG gave a security interest over all of its property in favour of HSBC to secure a loan • When the NZ PPS Act came into force in 2002, HSBC registered its interest on the PPS register, but Portacom did not • NDG went into default, a Receiver was appointed and took possession of ALL assets under the security agreement

33. Graham and Portacom New Zealand Limited (the Portaloo case) • Despite retention of legal ownership, Portacom’s unregistered title was deemed subordinate to that of NDG • Receiver sold off the Portaloos

34. Waller and Ors v New Zealand Bloodstock Limited and Anor • Glenmorgan Farm Limited gave a general security over all of its property in favour of SH Lock Ltd. • SH Lock registered its interest on the PPS register when it came into existence • NZ Bloodstock Ltd leased a racehorse to Glenmorgan, retained the legal ownership but did not register its interest on the PPS register

35. Waller and Ors v New Zealand Bloodstock Limited and Anor • Glenmorgan defaulted under the lease, NZ Bloodstock terminated the lease and repossessed the horse • Glenmorgan then defaulted under its finance agreement with SH Lock and a receiver was appointed • The receiver asserted the right under the PPS Act to take possession of and sell the horse in priority of the claim of NZ Bloodstock

36. Waller and Ors v New Zealand Bloodstock Limited and Anor • Court was required to determine the priority of competing security interests held over a race horse. • In the end, the perfected security interest (SH Lock’s interest) took priority over the unperfected security interest of NZ Bloodstock • Even though NZ bloodstock had retaken possession that was not sufficient to defeat SH Lock’s claim

37. Enforcement and remedies • Chapter 4 PPSA governs the enforcement of security interests • Any secured party regardless of priority ranking, may enforce its interest • Secured parties are not required to obtain judgment prior to enforcement • The PPSA is not a code and will be able to be used in conjunction with other rights and remedies available

38. Important rules regarding enforcement • A general standard of honesty and commercial reasonableness is to apply to enforcement actions • Parties can contract out of enforcement provisions (depending on use of collateral) • May use land law to enforce security interest in some circumstances • May seize liquid assets from third party

39. Seizure of collateral • Secured party may seize collateral by any lawful method • Higher ranking priority holders may seize collateral from lower ranking priority holders • Higher ranking priority holder must pay enforcement costs of lower ranking priority holder where lower ranking priority holder initially seized the collateral

40. Disposal of collateral • Three methods of disposing of collateral • sale to a third party • sale where the collateral is purchased by the enforcing secured party • lease or license to a third party • Must obtain market value for collateral or best price reasonable – same duty required as a controller under Corporations Act 2001

41. Retaining collateral • Secured party may retain collateral if it is not predominantly used for a personal, domestic or household purpose • Retention of seized collateral is not an absolute right • The grantor and other interest holders may object – in which case collateral must be sold

42. Rules after enforcement • Proceeds must be distributed in accordance with the provisions in section 140 PPSA • Statement of account must be provided within 20 business days of a request to do so

43. Redemption and reinstatement • There is a right of redemption available to the debtor, the grantor and higher ranking secured creditors. • Redeemer must pay the amount required to discharge the obligation • Reinstatement is allowed prior to the exercise of enforcement. Achieved by paying amount of arrears and any enforcement costs. • A security agreement can only be reinstated once

44. Transitional provisions • It is hoped that the transitional provisions in the PPSA will remove the risk of a Portacom or NZ Bloodstock situation occurring in Australia • Any existing security interest that is not migrated to the PPS register after commencement of the Act will be deemed ‘temporarily perfected’. • Applies for the period starting immediately before the registration commencement time and ending on the earlier of • the time when the security interest ceased to be continuously perfected otherwise than by temporary perfection • the end of the month that is 24 months after the registration commencement time

45. Transitional provisions • After the 24 month transitional period ends, the priorities will be determined under the substantive provisions of the legislation

46. Preparing for the storm • You should be taking the following action: • increasing knowledge of the concepts and timeframes involved across your firm • considering the consequences of non compliance for clients • informing clients of the implications of the PPS reform on any ongoing securities that they hold • updating your precedents to incorporate the new concepts

47. Contact details Presenter: Petrina Macpherson Position: Senior Associate Direct line: 07 3233 8551 Email: pmacpherson@mccullough.com.au