How does the PPSA impact your business? - NAB

How does the
Personal Property
Securities Act
impact your
business

What is personal
property securities
The Personal Property Securities Act (PPSA) established
a single national law, governing security interests in
personal property. It replaced the large number of
existing Commonwealth, State and Territory laws, and
more than 20 registers, for personal property security.
It is important to understand and act
on the requirements of the PPSA to
‘perfect’ and protect your security
interest from other security interests
taking priority, or losing your title to
another secured party.
Changes to PPSA law and practices relating to secured
lending involving personal property apply to companies
and individuals (including partnerships), trusts and
other legal entities. Please see page 5 for a definition
of ‘personal property’.
There is a single Personal Property Securities Register
(PPSR); a national online register on which all security
interests in personal property can be registered. The
PPSR replaced a number of State and Commonwealth
registers, including ASIC Register of Company Charges
and all State Registers of Encumbered Vehicles (REVs).
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Understanding PPSA concepts
What is PPSA
PPSA is a legislation which changed the way security
interests are dealt with across Australia. The legislation
has led to the creation of an online Personal Properties
Securities Register (PPSR), in which any holder of a
security interest in a personal property must register
to ensure they have a priority claim to that property.
Legal title is no longer enough, as this legislation
overturns fundamental personal property law
concepts.
Purchase Money Security Interest (PMSI)
A PMSI is a type of security interest that can be
registered on the PPSR. A PMSI is available if the lender
provides the funds to purchase an asset, or a similar
arrangement such as leasing goods.
When perfected, a PMSI provides a higher ranking than
most other security interests.
General Security Agreement (GSA)
A GSA is the type of agreement used by banks to
secure their lending against your property generally.
This replaced the traditional fixed and floating charge.
Serial numbered goods
Serial numbered goods are certain goods which must
(or in some cases, may) be registered by serial number
under the PPSA (for example, aircraft and motor
vehicles). The term does not include all goods that
bear a serial number.
Defining ‘personal property’
Under the PPSA, personal property generally includes
all property (tangible and intangible) other than land,
fixtures, most water rights and some statutory licences.
It includes goods or inventory, intellectual property,
shares, debts and contractual rights.
What is a ‘security interest’
A security interest is an interest in personal property,
created by a transaction that in substance secures
payment or performance of an obligation.
Security interests can include:
• Interests created by leases;
• Hire purchase agreements;
• The retention of title arrangement.
The PPSA deems certain interests to be security interests
regardless of whether they actually secure payment or
performance of an obligation, for example, the interest
of a lessor or bailor under a ‘PPS lease’.
Importantly, the PPSA states that a security interest
exists regardless of the form of the transaction, or the
identity of the person who has title to the property.
As a result, the concept of a security interest under the
PPSA covers a broader range of interests than traditional
securities, such as charges and mortgages.
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How does PPSA impact your business
As a result of the broader definition of a security interest
under PPSA, there are some significant implications on
businesses, most importantly in regards to:
Retention of title arrangements
Some transactions that were not previously registrable
security interests are now registrable on the PPSR. For
example, if you sell goods on retention of title terms,
you may need to review your terms of trade and register
an interest.
Leases
Under the PPSA, ‘title’ or ‘ownership’ of goods can
have a lower status than possession or control of goods
if the owner of the goods has not registered its interest.
The PPSA will affect your business if you lease serial
numbered goods (see explanation below) to a third
party business for an indefinite period or a period of
90 days or more; or you lease non-serial numbered
goods (such as shop fittings) for an indefinite period
or a period of greater than 12 months.
You should register your security interest to ‘perfect’
your rights. If you do not register, then you may not be
able to get your goods back or receive payment if the
third party business becomes insolvent. You may also
lose your rights to another creditor of the third party
business who has registered or ‘perfected’ their
security interest over the property. The requirements
for ensuring that your security interest ranks above
another person’s security interest in the same property
can be complex and may vary depending on the
particular circumstances. NAB recommends that you
seek legal advice about the implications of the PPSA
to your individual circumstances.
Be aware: If the period of the lease is not stated it
may be regulated by the PPSA even if it is, in practice,
for less than 90 days (serial numbered goods) or 12
months or less (non-serial numbered goods).
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Scenario 1
Lease of serial numbered goods
(i.e. Vehicles or machinery)
GSA/PMSI
LessOr (Owner)
BANK
Machinery
PMSI
Lessee (business)
Business
A significant change has occurred when an owner of
goods leases (or lends) serial numbered goods to a third
party business for 90 days or more (or for an undefined
period), whether the owner has financed them or not.
As illustrated in Scenario 1, if serial numbered goods are
leased or lent to a third party business for 90 days or
more (or for an undefined period), it will be considered
a PPS lease under PPSA, and the owner’s interest in the
goods needs to be registered on the PPSR to perfect
the owner’s security interest.
In the event that the owner’s security interest on
the PPSR is not perfected and the third party business
became insolvent, then the third party business’
liquidator may be able to take title in the goods
and apply the proceeds to the third party business’
other creditors.
Bank
As Scenario 1 illustrates, the PPSA can affect title to
equipment when equipment is leased. Banks will take
an increased interest in what owners propose to do
with the serial numbered goods, because if the owner
loses title to the serial numbered goods, as illustrated
here, then the owner loses the asset which the bank
secured in order to lend money.
If a bank has provided finance to purchase serial
numbered goods, under the PPSA the bank is likely
to register a PMSI on the PPSR to perfect its security
interest in the goods. This process remains broadly
similar to how banks registered a security interest
previously.
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Scenario 2
Lease of non-serial numbered
goods
GSA/PMSI
LessOr (Owner)
BANK
Shop fittings
PMSI
Lessee (business)
Business
A significant change has also occurred in the treatment
of non-serial numbered goods, such as shop fittings,
which are treated differently under PPSA.
As shown here, if an owner leases shop fittings (non
serial numbered goods) to a third party business for a
defined period of 12 months or less, the arrangement is
not considered a registrable PPS lease, and in the event
of the third party business’ insolvency, the liquidator is
not entitled to take title to the shop fittings.
If the lease is for greater than 12 months (or for an
undefined period) and the owner has not registered
their interest in the shop fittings on the PPSR, then the
liquidator (or the holder of a GSA from the third party
business) could possibly deal with the shop fittings as
part of the third party business’ property and sell it up.
If the owner has registered their interest on the PPSR,
then the owner retains title to the shop fittings and
the liquidator cannot take title to the shop fittings.
The owner may register their interest in the shop fittings
as a PMSI on the PPSR, against the third party business,
so they will have priority over most existing security
interests; e.g. the holder of a prior GSA from the third
party business.
Bank
In scenario 2, the bank will consider whether it needs
to register a specific charge over non-serial numbered
goods, such as the shop fittings, or whether it may rely
solely on a General Security Agreement to secure its
interest in the event of its customer (that is, the owner
of the goods) becoming insolvent. The bank may
register a PMSI over specific non-serial numbered goods
if it has provided finance to purchase the goods.
The bank will also need to consider how the PPSA
affects its customer’s title to non-serial numbered goods
that the customer leases to third parties. In scenario 2,
if the customer leases non-serial numbered goods to
the third party business for greater than 12 months (or
an undefined period) without registering the PPS Lease,
the customer could lose title to the goods if the third
party business became insolvent. Obviously, this would
damage the customer’s financial positioning and also
the bank’s security in respect of the goods (even where
the bank itself has properly registered its interest).
It is also important to note that the same PPSR
considerations apply if the customer and the business/
third party are related entities. For example, if the
customer is an asset holding company which leases
goods to a related trading company.
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Scenario 3
Purchase of goods from a supplier
(i.e. Whitegoods, Electrical Goods)
Business
The terms of the purchase for Business may have
changed. As mentioned above, if the supplier has
registered their ROT via a PMSI over the goods they
may have the right to recover the goods.
BANK
BANK
GSA/PMSI
If the trade terms which you agree to, include a ROT,
the supplier may rank ahead of your bank in relation
to the goods and its proceeds (if it only holds a GSA)
in the event of the business becoming insolvent.
SUPPLIER
Goods
business
PMSI
These examples are provided for illustration purposes only and do not constitute legal advice.
Supplier
A supplier may previously have relied on the legally
enforceable Retention of Title (ROT) clauses for recovery
of goods in the event of default. Since the
commencement of PPSA, the ROT clause alone may
not entitle the supplier to retrieve inventory in the event
of non-payment on the customer’s insolvency.
Bank
Your bank will consider its security position in light of
the PPSA and how it impacts on their ability to recover
your borrowings in the event of insolvency. As shown in
Scenario 1, the bank may register additional security on
the PPSR, to ensure that it ranks ahead of the supplier
under the priority rules set out in the PPSA.
If the ROT has not been registered on the PPSR, then
the supplier will only have the same rights as other
unsecured creditors if the customer becomes insolvent,
even though the supplier holds legal title to the goods.
Further, if not registered as a PMSI then it will be
defeated by certain prior security interests.
Although it may not be practical to register a PMSI in
every case, it is worth considering at least for large
transactions. In some instances where the PMSI security
interest is registered under the supplier’s terms of trade
at the beginning of the trading relationship, the ROT
supplier may not be required to register its PMSI every
time a delivery is made.
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Scenario 4
Storage of goods or stock
In addition to the other considerations previously
mentioned, there may be registrable security interests
created by storage arrangements. Where a party
(‘storage provider’) holds goods on behalf of another
(‘owner’) under a commercial storage arrangement for
more than 12 months (non-serial numbered goods),
90 days or more (serial numbered goods) or an
indefinite period, the owner’s ownership interest is a
security interest in the goods for the purposes of PPSA.
This means that the ownership interest could be
extinguished on the insolvency of the storage provider
if it is not registered.
This should be borne in mind in a number of business
arrangements, including:
• Storage of grain by a bulk handler where the owner
of the grain may need to register against the
storage provider;
• Storage of food or beverages at a distribution
warehouse facility (if the occupier of the facility is
not the owner of the food or beverages) where the
owner may need to register against the occupier of
the facility.
A bank may therefore require the owner of these
various items to effect the relevant registrations.
Important Information:
This brochure contains general information about
personal property securities. It does not constitute legal
advice and does not purport to contain all relevant
information regarding the Personal Property Securities
Act (PPSA). NAB recommends that you seek legal advice
about the implications of the PPSA to your individual
circumstances before acting on the information given
in this brochure.
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To find out more.
Please talk to your local business
banker about how PPSA affects
your business or for more
information visit
www.comlaw.gov.au
www.ppsr.gov.au
©2013 National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian
Credit Licence 230686 A102718-0613