With the end of the transitional period under the personal property securities legislation fast approaching, those entities that rely upon having interests in property held by others must act now to ensure those interests are properly registered (even where they are transitional), so there is no loss of priority. Partner Steve Pemberton and Lawyer David Allen look at what companies, financiers and insolvency practitioners can expect in the coming months.
How does it affect you?
- The two-year transitional period for agreements entered into before 30 January 2012 ends at the end of this month.
- We list the categories of grantors and transactions that commonly create transitional security interests that need to have been (and haven't automatically been) perfected under the new legislation.
- Having a transitional security interest may not automatically give you protection from competing interests.
- The end of the transitional period also ushers in a new rule regarding a security interest in serial numbered property (eg aircraft, motor vehicles, watercraft and intellectual property) and this will need to be addressed.
The Personal Property Securities Act 2009 (Cth) (the PPSA) greatly expanded the requirement for entities to register the security interests they have in property held by others. The registration requirement now applies across various entities that grant security interests (companies, bodies corporate, trusts, partnerships, individuals, government bodies) and to interests that are provided for by a wider range of transactions (charges and mortgages, but also to some leases, bailments, retention of title arrangements, options, assignments and sale/purchase/repurchase agreements, for example). These provisions began to apply from the PPSA registration commencement time on 30 January 2012.
The PPSA provided for a two year 'catch-up' period for entities to register security interests arising under security agreements that predate 30 January 2012 (transitional security interests) without loss of priority. There is some debate as to when that transitional period ends. On one reading of the legislation it ends on 31 January 2014; on other readings, it may end as early as 29 January 2014. The safe approach is to proceed on the basis that it ends on 29 January, and to perfect all transitional security interests by then. A security interest that is not registered is not 'perfected' within the meaning of the PPSA, unless the secured party has control or possession of the collateral. The consequences of security interests not being perfected include lower priority and effectiveness as against other interests in the property in a number of circumstances prescribed by the PPSA.
Many transitional security interests have already been perfected for the purposes of the PPSA by registrations that were migrated from the ASIC Register of Company Charges or other pre-PPSA registers, or by new registrations made by the secured party since the registration commencement time.
Transitional security interests that have not been perfected in one of these two ways have, in most cases, been perfected under the transitional provisions of the PPSA. That perfection ends at the end of the transitional period and those security interests will become unperfected from that time.
It will still be possible for a secured party to perfect a transitional security interest by making a registration on the Personal Property Securities Register (PPSR) after the end of the transitional period. However, the 'priority time' for determining the priority of the security interest against other security interests will be taken to be the time of the new registration, instead of the time immediately before the registration commencement time, as is the case with transitional security interests that have been continuously perfected from before the end of the transitional period. Transitional security interests that are not re-perfected before the end of the transitional period therefore risk losing priority to subsequent security interests, even if they are perfected following the end of the transitional period.
The transitional security interests that are not perfected by a registration migrated from the ASIC Register of Company Charges (or another transitional register) and that the secured party may not have registered on the PPSR before the end of the transitional period would include security interests granted by:
- foreign entities over property located in Australia;
- trusts with a trustee that is not an Australian company (eg an individual or foreign entity);
- partnerships that have partnership property held by an entity that is not an Australian company (eg an individual or foreign entity); and
- government bodies and other organisations that are not Australian companies.
Many of these security interests would not have been registered on a transitional register. Some secured parties who hold security interests granted by these entities may not have had the information or the resources to identify and register these security interests on the PPSR prior to the end of the transitional period. In many instances, the consequences of non-perfection may not have justified the expense of reviewing a business's past transactions.
Interests provided for by the following transactions may constitute transitional security interests but would not ordinarily have been registered on a transitional register. Many of these are transactions that would not have constituted security interests under pre-PPSA law but should be considered when identifying transitional security interests. They are:
- some leases or bailments (generally, when goods are in the possession of a third party);
- retention of title arrangements and trusts over property pending performance of a contract;
- options before exercise and sale/purchase/repurchase agreements before settlement;
- assignments that fall short of novation, transfer or legal assignment;
- conferral of step-in rights and recourse to property on default; and
- mechanisms for forfeiture or similar remedies upon default.
Secured parties have been advised to consider whether their existing transactions fall into these categories from before the registration commencement time. However, given the diversity of the transactions that are potentially affected, it is likely that many of the security interests that arise from these transactions have not been identified and perfected by registration on the PPSR within the transitional period.
Practitioners and market participants should be aware that such interests, if they have not been registered by the end of the transitional period, are likely to come second to any competing interests in the relevant property. Under the PPSA, most unperfected security interests will vest in the grantor upon the grantor's voluntary administration, winding up or bankruptcy, resulting in them being unenforceable by the secured party.
The end of the transitional period is also significant as the commencement time for a new rule in relation to aircraft, motor vehicles, watercraft and intellectual property. From 30 January 2014, a buyer or lessee of serial numbered property takes the property free of a security interest if a serial number search on the PPSR immediately before the time of the sale or lease would not have disclosed a registration of the security interest. A registration on the PPSR in respect of the grantor that specifies the correct collateral class is not sufficient. Serial numbered property is property that may, or must, be described by serial number under the PPSA regulations: aircraft, motor vehicles, watercraft and intellectual property.
In most cases, a sale or lease of serial numbered property by the grantor would be a breach of the security agreement between the grantor and the secured party. But if the property is sufficiently material to the secured party, it is advisable for it to describe the property by serial number in a registration on the PPSR, to preserve its security interest in the event that the grantor breaches the restrictions on dealing contained in the security agreement.
Many transitional security interests are perfected by registrations that have been migrated onto the PPSR from the ASIC Register of Company Charges. The effectiveness of migrated registrations is limited in a couple of respects.
First, a registration of a transitional security agreement (including all migrated registrations) is ineffective to the extent that it describes collateral that is not covered by a transitional security agreement. That is, a migrated registration cannot be relied upon to perfect a security interest arising under a post-30 January 2012 security agreement, even if the grantor and the secured party are the same. A new non-transitional (and non-migrated) registration is required.
Second, registrations migrated from ASIC usually attach the security agreement in the form of a PDF. The attachment is part of the financing statement. It is uncertain whether a security interest (transitional or non-transitional) arising under another security agreement between the grantor and the secured party can be perfected by the migrated registration or whether that registration is effective only for security interests that arise under the attached security agreement.
A perfected transitional security interest ordinarily has priority over a perfected security interest that arises under a post-30 January 2012 security agreement. The priority between two perfected transitional security interests is determined by the law that applied before the PPSA, if it cannot be determined under the PPSA. The PPSA makes special provision that alters these default positions in a couple of areas.
A perfected transitional security interest held by an ADI (such as a bank) in an ADI account with the ADI has priority over any other perfected transitional security interest in the ADI account. A secured party that holds an earlier transitional security interest over an ADI account would rank after the ADI if the ADI has a transitional security interest in the same account. A secured party can avoid this result by entering into a separate agreement with the ADI. It is unclear whether a non-transitional security interest held by an ADI in an ADI account would have priority over a perfected transitional security interest held by another secured party, as there are conflicting provisions in the PPSA relevant to the question. These rules can be relevant where proceeds of another asset are paid into an ADI account over which the ADI has competing security.
Transitional security interests that are perfected by control may have priority over transitional security interests that are not perfected by control. Only certain types of property are able to be perfected by control (ADI accounts, shares, bonds and other investment instruments, letters of credit and other negotiable instruments). Secured parties can take steps to obtain control over these assets (if they do not have control already) to ensure their priority position is reinforced, including where the security interests are transitional and arose pre-30 January 2012.
Steve Pemberton and David Allen are authors of the recently published LexisNexis Practical Guidance module on Personal Property Securities.