Plain English Guide to Personal Property Securities Act - PPSA and PPSR

The Personal Property Securities Act (PPSA) commenced on 30 January 2012, bringing with it significant changes to the area of security interests taken in personal property (generally, non-land assets). The aim of the PPSA is to have national legislation that governs security interests in personal property and that provides rules as to their priorities and enforcement. It is intended to make the process simpler for businesses and individuals to register their interests in personal property, check whether such property has a security registered over it, and also to minimise the risk to purchasers of personal property. 

The practical application of the PPSA however is far-reaching and it will have a significant impact on many industries, particularly in the fields of finance, mining, manufacturing, retail and wholesale. This Plain English Guide provides an overview of the Act and its importance. 

What is personal property? 

Personal property has a wide definition under the PPSA. It is essentially any form of property other than land. It includes tangible property such as cash, stock in trade, artworks, motor vehicles, boats, aircraft, equipment, as well as intangible property such as patents, licences and financial property. It includes both consumer and commercial property.

 The Introduction of the Personal Property Securities Register

One of the key components of the PPSA is the introduction and establishment of the Personal Property Securities Register (PPSR). The Register is a single national, on-line register of security interests over personal property that is web-based and can be searched 24 hours a day, seven days a week.

Importantly, the PPSR has replaced various State, territory and Commonwealth electronic and paper registers, enabling users to search security interests quickly and effectively in one database – minimising the risk to purchasers and consolidating all of the relevant information into one place.

What actually constitutes a security interest over personal property?

There are two strings to this bow, so if your interest does not fit into the first category, it may still be considered a security interest for the purposes of PPSA.

 A Security interest can be defined as:

  1. any interest in personal property provided for in a transaction that secures payment or performance of an obligation (regardless of the form of the transaction or who has title to the property) e.g. a mortgage, charge, lease, a conditional sale (such as sale under a retention of title (ROT) arrangement), or an assignment of a debt; or
  2. one of the following transactions, even if it does not secure payment of performance of an obligation:

i) a consignment sale where a consignor delivers goods to a consignee for commercial sale on its behalf;

ii) a lessor or bailor of goods under a PPS Lease*

iii) a transfer of an account (money obligation) or chattel paper (e.g. an equipment lease)

What is a ‘PPS Lease’?

If you are regularly engaged in the business of leasing or ‘holding’ (e.g. storing) goods for a certain term, your lease agreement may be considered to be a PPS lease. A PPS lease is deemed to be a security interest under the PPSA.

1. For goods that are not serial numbered goods, this is a lease or bailment:

i) of more than 1 year; or

ii) for an indefinite term (even if it can be ended within a year); or

iii) that is less than a year but automatically renewable where total terms may exceed a year; or

iv) that is less than a year, but where the lessee has uninterrupted possession of the goods for more than a year.

2. For goods that are described by serial number (e.g. motor vehicles, watercraft, aircraft), this is a lease
    where the term is:

i) 90 days or more; or

ii) less than 90 days but the lease is renewable so that the total time is 90 days or more; or

iii) less than 90 days but the lessee has uninterrupted possession of the goods for 90 days or more.

I think I have a security interest over personal property, so what do I do now?

If you think that you have a security interest over personal property you need to check whether:

  1. your security agreement (e.g. the terms of trade or lease agreement) gives rise to a security interest.
  2. the Grantor (e.g. your buyer or lessee) has signed the agreement or otherwise adopted it.
  3. your security interest has been attached to the personal property.

If these requirements have been satisfied, then you should PROTECT your security interest.

The most common way to do this will be to register it on the PPSR. There are other ways to perfect your security interest, such by possession of the property or by control, however whether these other types of perfection apply will depend on the type of personal property you are dealing with.

If your security interest arose under a security agreement that was in place prior to 30 January 2012 (a ‘transitional security interest’) , then you have a period of 24 months from this date in which to perfect your interest. If you do not take action to perfect your interest within that period, your interest may be deemed inferior to another party’s interests in the property if there is a dispute, or it could be lost completely in the event of the Grantor’s insolvency.

During the 24 month period you are considered have temporary protection (or perfection).

The Purchase Money Security Interest (PMSI)

In certain circumstances you can also claim and register your security interest in a Grantor’s personal property as a PMSI. This could give you an edge in priority over another secured party who also has a security interest in the same personal property. 

A PMSI can be claimed: 

  1. where the security interest granted secures all or part of the purchase price (e.g. where you sell under a ‘retention of title’ or if you are lending the money to the Grantor to acquire the personal property);
  2. where your security interest is under a PPS lease;
  3. where your security interest is as a consignor under a commercial consignment.

PMSIs typically arise in commercial rather than consumer transactions and except for serial numbered collateral such as motor vehicles, cannot be claimed where the Grantor intends to use the goods for mainly personal, domestic or household purposes.

Why are PMSIs important?

A correctly registered PMSI is important because in some instances it can provide what is known as a "super-priority" interest over personal property. This means that the PMSI could take priority over any other registered interest in that particular property.

To get the full benefit of a PMSI, and a "super-priority", you should register your security interest within the time limits outlined below: 

Type of Collateral

Supplied as inventory

When to register
Goods

Yes

Before the time Grantor obtains possession
Goods

 No

 Within 15 business days of Grantor obtaining possession
Intangible property

Yes

At the time the PMSI attaches or is created
Intangible property

No

Within 15 business days of the day the interest attaches to the property

Default Priority Rules

The PPSA provides a set of overall rules to determine priority between competing security interests in the same personal property, in the absence of an agreement between the secured parties.

Generally these rules can be summarised as follows: 

Security interest has priority over
Security interest perfected by Control  Security interest perfected by other ways
PMSI Other perfected security interest
Security Interest perfected earlier in time Security interest perfected later in time
 Perfected security interest  Unperfected security interest
Unperfected security interest attached earlier  Unperfected security interest attached later
 

Extinguishment of Security Interests

The PPSA also provides rules under which a buyer or lessee may take the personal property free of your security interest.

Under the legislation, the basic rule is that this will happen when a security interest is ‘unperfected’ (i.e. not registered or perfected in some other way). A perfected security interest may also be extinguished in cases where the purchaser or lessee:

i) acquires the personal property in the ordinary course of business;

ii) acquires a serial numbered property after a PPSR search using only the serial number does not show a registered (perfected) interest;

iii) acquires personal property that was intended to be used mainly for personal, household or domestic purposes (and is less than $5,000).

There are a number of exceptions to these basic rules and if you have any questions, you are advised to discuss your situation with a legal professional.

Conclusion 

There are many types of security interest that fall within the terms of the PPSA. The existence of a national register as an electronic notice-board highlights the need for prudent searches to be carried out before lending money, acquiring a business or advancing credit to another party.

While registration on the PPSR is not compulsory, and purely a commercial decision for any secured party, a decision not to register should only be made after all the risks are understood and accepted. The risks include the possibility of losing your security interest (and your property) altogether!

 For more information on the PPSA and its application to your business contact Rebecca Hegarty at rhegarty@colemangreig.com.au or ph 02 9635 6422.

Glossary/ Key Terms in the PPSA

The PPSA introduces a number of key terms that are important to know. These are:

Grantor: Person or entity who grants the security interest (e.g. buyer, lessee, mortgagor).
Secured Party: Person or entity that takes a security interest (e.g. seller, lessor, mortgagee).
Collateral: Personal property to which a security interest has attached.
Security agreement: The agreement whose terms give rise to a security interest (e.g. terms of trade, deed of charge)
Attachment: Time when the collateral becomes the subject of a security interest e.g. when security agreement signed or goods delivered.
Perfection: Steps taken to ensure the security interest has priority e.g. by registration on the PPS register, by control or by possession.
 RCT: Registration Commencement Time – 30 January 2012.

At any time, you may be a Grantor or a Secured Party. For example, you may sell goods to a buyer (the Grantor) under an ROT arrangement and take a security interest over those goods. In this instance, you are the secured party.

At the same time, you may borrow funds from your bank and grant the bank a security interest over all your present and after acquired personal property. In this case, you are a Grantor.

Disclaimer: The information provided above is a general summary and is not intended to be nor should it be relied upon as a substitute for legal or other professional advice.