Focus: Personal property securities reforms and the communications, media and IT industry
14 July 2010
In brief: The far-reaching Personal Property Securities Act 2009 (Cth) is due to come into force in May 2011 and companies operating in the communications, media or technology sectors will be affected by the sweeping changes the new legislation will bring to Australia's commercial law. Partners Ian McGill (view CV) and Diccon Loxton (view CV) and Lawyer Valeska Bloch report on how the changes will affect those sectors.
This is the first in a series of Focus articles that will look at the effect of the new legislation across a range of industries.
- Communications, media and technology scenarios
- Some concepts
- Steps to obtain and protect a security interest
- Insolvency unperfected security interests lost
- The register
- Priority new rules
- Back office queries
- Terms of contracts
- How can the industry start preparing for the reforms?
- Looking forward
- Business Impact Scoping Tool
How does it affect you?
- The Personal Property Securities Act 2009 (Cth) (the PPSA) establishes a single national law governing security interests and similar transactions with respect to all tangible and intangible assets (including intellectual property) except land and some statutory licences. It covers a wide range of transactions, not just security interests. It is not just limited to consumer transactions, and significantly alters aspects of commercial law and contracts. It is similar but not identical to the law in New Zealand.
- The PPSA will affect not only your financing transactions, but also many transactions in which you supply goods or services to your customers, or when your suppliers supply goods or services to you.
- Interests that were not previously treated as security interests will become subject to the new regime. This includes retention of title arrangements and even dealings that do not secure amounts, like leases, assignments of receivables and arrangements where equipment is provided as part of a service (eg, where a content service provider provides customer premises equipment, such as set top boxes or other reception equipment to customers or equipment that is supplied in an outsourcing arrangement).
- If you are a supplier of goods or services, you may need to register your interests and redraft your supply terms.
- If you are a customer or recipient of goods or services, a very large number of interests can be registered against your company. You will need to consider the terms of your negative pledge clause.
- Security interests currently registered under other legislation (eg the Patents Act 1990 (Cth) and the Trade Marks Act 1995 (Cth)) will need to be re-registered under the PPSA. Existing registers will continue to operate, but only for notification purposes. In the future the PPSA register will become the only relevant register.
- Where your business takes security interests you will need to put in place new procedures. Staff will need training and guidance on the new registration procedures. Your businesses will need to compile inventories of existing security interests in order to register them and take any other steps necessary to protect them. New systems will need to be developed to record and manage future security interests, including systems to deal with enquiries and other requirements of the legislation.
- You will need to review your businesses to see how will be affected (and for this we have prepared an on-line scoping tool see below) and you should be thinking about it now.
The PPSA will have a significant impact on the communications, media and IT industry, where relationships are highly contractual and equipment is often supplied without passing full ownership. Below is a list of scenarios that might be caught by the new legislation, but that will ultimately depend on the circumstances of each case.
- Equipment use: Any bailments or leases between parties concerning plant, equipment and other property may be registrable security interests. The supply of equipment in an agency, outsourcing or franchise arrangement might also be covered by the PPSA.
- Transfers of receivables: Transfers of receivables (for example, the cash flows associated with consumer contracts for the provision of services) are caught by the PPSA.
- Phone handsets, set-top boxes and other stock: If a business has acquired finance by offering security over its mobile handsets, set-top boxes or other retail stock, a registrable security interest may be created. This includes where goods are held on consignment. Also, consumer contracts governing, for example, any provision of services where the company retains ownership of an asset used by the consumer will be security interests.
- Joint venture arrangements: Cross charges and default clauses in joint venture agreements may also fall within the regime and will need to be reviewed.
- Intellectual property: The PPSA contains specific rules in relation to security interests in goods that have closely associated IP rights and, in some cases, the PPSA may deem IP rights to be covered by a security agreement. Security interests in relation to computer equipment, master recordings, copyright material (such as source code, music and photographs) and other assets with closely-related IP should be reviewed in this light.
- Film financing: The structuring of financing transactions in the film and television industry may also be affected by the PPSA and will need to be reviewed.
- Franchises: Transactions raising finance against projected franchise fees using franchised IP as the collateral will need to be reviewed.
The PPSA covers security interests in personal property.
What is 'personal property'?
Personal property is any form of property other than land and certain statutory licences. It includes rights under contracts, motor vehicles, shares, equipment, stock, receivables, intellectual property and intellectual property licences.
What is a 'security interest'?
The PPSA generally (although not always see below) takes a 'substance over form' approach to determine what constitutes a 'security interest'.
A 'security interest' is defined generally under the PPSA as an interest in personal property arising from a transaction that, in substance, secures the payment of money or performance of an obligation. An intellectual property licence however is not a security interest per se.
The PPSA gives examples of arrangements that are security interests if interests in property and they secure payment or performance. These include:
- charges, mortgages and pledges;
- conditional sale agreements (including an agreement to sell, subject to retention of title);
- hire purchase agreements;
- leases of goods; and
- flawed asset arrangements.
In certain cases, the PPSA adopts a 'form over substance' approach, and deems some transactions to be security interests, even though they do not secure anything. They include:
- transfers of accounts (receivables for goods or services supplied) and 'chattel paper' (documentation governing certain financial interests in goods, such as a hire-purchase agreement);
- a consignor's interest in a commercial consignment; and
- most relevantly to the communications, media and technology industries, a lessor or bailor's interest in goods under a 'PPS lease'.
A PPS lease is defined as a lease or bailment of goods for more than one year or an indefinite term, or 90 days for serial numbered goods. However, a PPS lease does not include arrangements where the lessor or bailor is not regularly engaged in the business of leasing or bailing goods and it only includes bailments where the bailee (the party that gets possession) is paying the bailor (the party that gives possession and owns the goods).
A PPS lease covers operating leases as well as finance leases. This will be particularly relevant to the communications, media and technology industries, where there are numerous arrangements where equipment is provided as part of a service.
There will be a three-stage process to register a security interest:
Attachment where the security interest becomes good against the asset and the grantor, but no one else;
Enforceability where the security interest becomes enforceable against third parties, which requires attachment, and one of;
- a written agreement with a sufficient description of the collateral;
- possession of the collateral by the secured party; or
- (in the case of certain financial assets) control,
Perfection which is necessary to preserve the security interest in insolvency and to preserve priority. It occurs when one of the following takes place:
- the registration of the security interest;
- the possession of the collateral by the secured party; or
- (in the case of financial assets) control by the secured party.
Most often, parties will perfect their security interest by making sure it is in writing and registering it.
Perfection is particularly important in the event of insolvency because, subject to only a few exceptions, on appointment of a liquidator, bankruptcy trustee or voluntary administrator unperfected security interests 'vest' in the company. The secured creditor loses its security and becomes unsecured. (This is different from New Zealand's personal property securities law.)
In other words, even if you own an asset, if you are regarded as having a security interest in that asset and you have not perfected it, you can lose the asset on the insolvency of your counterparty. This can be severe in its effects.
The PPSA establishes an electronic register. This register is designed to provide a simple, quick and cheap registration process. The register is a 'red flag' register: that is, it draws attention to the security interest without giving too many details. While registration is generally simple, there will be some traps in deciding how to describe the collateral, and also in deciding under which category to file the interest.
The details surrounding the registration process are still being developed by the Federal Government, but it is likely that parties will be able to register their security interests online or by SMS.
Migration of existing registrations
Because so many arrangements are security interests, hundreds or even thousands of security interests may need to be registered against a particular company, and so there will be a lot of data or 'noise' on the register.
Security interests currently registered in some registers such as the charges register maintained by ASIC under the Corporations Act 2001 (Cth) will be automatically migrated across. However, there will be no automatic migration for the IP registers for trade marks, designs and patents.
Priority new rules
The PPSA establishes a complete set of rules for determining priority between security interests, and also determining under what circumstances a purchaser of collateral will take the collateral free of the security interests in it. These replace the old principles-based approach of the common law and equity.
In relation to priority between security interests, the general rule is that perfected security interests take priority over unperfected interests.
Another general rule is that perfected interests take priority according to the order of perfection, but there are many exceptions.
There are some prescriptive rules governing enforcement of security interests. In all cases except certain consumer transactions, the parties will be able to contract out of most of them. You will need to redraft your standard terms so as to contract out of the enforcement provisions.
Secured creditors will be required at very short notice to answer challenges to their security, and also to provide information on request from certain parties. They will also need systems in place to deal with these.
The law overrides restrictions on the assignments of debts arising under contract. This means your counterparty may be able to assign to other parties their rights in respect of amounts payable by you under contracts, even though you do not wish to give your consent.
The industry should begin preparing immediately for the new PPSA regime to protect their interests and minimise disruption to businesses once the PPSA takes effect. Preparations should include, where applicable:
- Scoping the task. This will involve checking in particular your standard terms of supply, as well as your financing arrangements and other potentially affected contracts. Allens have developed a simple online survey for business lines to complete, in order to be able to scope the task. See below.
- Where necessary, preparing new policies as to requirements for transactions and documentation.
- Redrafting the standard terms of supply.
- Identifying the transactions that will need to be registered.
- Identifying the assets affected.
To date, the PPSA and referral legislation for New South Wales, Queensland, Victoria and South Australia have all been passed and there have been two amending acts to the PPSA. There has been some hope of further amendments to the PPSA, though hope is fading.
The regulations will be significant, and a draft produced, but not the final regulations.
Despite the uncertainty, it is important to prepare for the inevitable changes that the regime will bring. Allens is working closely with clients to develop procedures to manage the introduction of the new personal property security scheme. If you have any questions about this or any other communications, technology and media issue, please contact one of the people below.
One of the most difficult and time consuming issues for businesses will be to work out what the personal property securities (PPS) reform means for that business and to make sure that an organisation and its subsidiaries have identified all the various transactions and products where PPS may be relevant. To help with this task, we have created a comprehensive on-line risk assessment tool that can assist clients to assess their PPS exposure. The Scoping Tool includes a comprehensive survey of various business and legal units, a risk assessment report and consultation with Allens' team of PPS specialists. If you are interested in hearing more about this tool, please contact your relationship partner or one of our specialist PPS team.
- Diccon LoxtonSenior Finance Counsel,
Ph: +61 2 9230 4791
- Ian McGillPartner,
Ph: +61 2 9230 4893
- John GallimoreConsultant,
Ph: +61 7 3334 3135
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