Keeping Afloat: Preparing for Personal Property Securities Reform

While it can be hard for businesses to keep afloat with the barrage of constantly changing laws and regulations, some impending legislative reforms are too important to ignore. In less than six months, a radical (yet long overdue) federal scheme will come into force that will impact on manufacturers, retailers, lenders and borrowers alike. Right now, all across Australia, businesses are preparing for the introduction of the Personal Property Securities Act(PPSA), a piece of legislation that will dramatically alter the way in which the law recognises and deals with securities over personal property. This article will provide a brief introduction of the Act, and explain some of its far-reaching ramifications, especially on the marine industry.

What is a Personal Property Security Interest?

security interest is an interest in property, granted to a party in order to secure the payment of money or performance of an obligation. By way of illustration, we are all comfortable with the idea of a mortgage over real-estate. Taking out a mortgage grants your bank or lender security over your property, allowing them to seize and sell your home if you are unable to discharge your debt. The same principles can be applied to personal property. Personal property is any property that is not real-estate, and includes physical property (such as cars, boats, furniture and equipment) as well as intangible property (such as trademarks and patents). When personal property is used as some form of collateral, the grantor is said to have provided the secured party with a personal property security interest, which will now be able to be registered and enforced under the PPSA.

Why Reform?

The pre-existing landscape regulating personal property securities is a mess. Registration of an interest currently depends on the nature of the personal property, the type of security, the legal personality of the parties and the jurisdiction in which the security interest was created. The new Act aims to simplify the process by removing all barriers to registration, instead embracing a universal and centralised scheme applicable for all types of personal property. As such, the PPSA replaces over seventy Federal, State and Territory laws, abolishes over twenty pre-existing registration schemes, and establishes an online, real-time, publically accessible Personal Property Security register, comparable to the Torrens Title for real-estate. By adopting this broad functionalist approach, the PPSA greatly expands what types of property can be registered as security – everything from paintings to rights granted under contract.

It is hoped the reforms will provide lenders with greater certainty to approve loans, allowing small to medium businesses to more easily use their assets as collateral to raise finance. This will, in turn, reduce the confusion, costs and risks associated with all transactions involving personal property securities. It will also be easier for purchasers to ensure the goods they buy are free from any existing securities. For those looking to purchase a boat, for example, the national PPSA register will replace all current states schemes, such as the NSW Fair Trading REVS check. This will ensure national consistency, and eliminate the need for multiple searches over several registries.

Importance of Registration

Under the PPSA, the old mantra that possession is nine-tenths of the law still rings true. If you are a business who does not have possession of your personal property (such as trading stock), there may be issues under the new scheme. The PPSA does away with the idea that owning legal title guarantees a right over property. Instead, the rules established under the Act introduce concepts of attachment and perfectionto determine whose interest in the property takes priority in the event of a dispute. Registration is the key to perfect an interest, and priority is granted based on the order in which interests are registered. Failure to register your interest in property means that in some instances, you could lose your right over the property.

These reforms will especially impact on manufacturers or suppliers who currently rely on contractualRetention of Title or Romalpa clauses when selling goods. Traditionally these clauses ensured that a seller could deliver goods to a prospective buyer, but still remain the legal owner until all debts were paid. However under the new scheme, registered interests will trump unregistered interests, regardless of ownership. Subsequently, all conditional sales agreements are now viewed as security interests and must be registered on the PPSA register in order to be enforceable (and indeed registration will grant the owner a super-priority security interest, provided they record their goods on the register before a purchaser takes possession). Because of this somewhat confusing scheme, if your business relies on title retention clauses, we would recommend you seek legal advice before entering into new contracts of sale after October.

Impact on Marine Industry

Of particular relevance to the marine industry, the PPSA will abolish any record of security interests from the Australian Register of Ships, the Fisheries Register and the Australian Securities and Investment Commission Register of Company Charges. The good news for business is that any pre-existing securities recorded in these registers will automatically be migrated across to the PPSA register. However current registry listings may be inadequate. Under the PPSA, if a watercraft is used in the course of a registered Australian business, it may be registered by serial number (or alternatively the craft’s identification number). If the watercraft is classed as consumer property, however, it must be registered by serial number. It should also be noted that the PPSA will not impact on any current State boating registration processes, as these are not records of ownership or property interests, but rather regulatory systems aimed at protecting members of the public.

What you should do to prepare?

In October the ambitious PPSA register will go live, and anyone will be able to view or add security interest to the register. It doesn’t matter if you’re a small sole trader or a large company, you should now be beginning to make preparations. We recommend you:

  • Familiarise yourself with the new Act, especially the ideas of ‘attachment’ and ‘perfection’.
  • Identify any unregistered security interests, especially in relation to conditional sale agreements in contracts (which previously could not be registered), and intellectual property (which will not automatically be transferred to the PPSA register)
  • Train staff members in understanding and searching the new PPSA register

Finally, once the reforms come into force, it would advisable that all businesses check the register to ensure that all security interests have been successfully migrated. Secured parties may wish to re-register to provide a more detailed description as to ensure the highest possible security.