Focus: The PPSA 12 months on
19 February 2013
In brief: With the midpoint of the two-year transition period under the Personal Property Securities Act having just passed, it is a good time to reflect on some issues that have come to light in the past 12 months. The Allens PPS team reports.
- The register
- Extension of time to register under s588FM of Corporations Act
- Practical approach for voluntary administrator dealing with uninformative register and unresponsive secured parties
- Sales in the 'ordinary course of business'
- Some lessons
The introduction of the Personal Property Securities Act 2009 (Cth) (the PPSA) regime was one of the most significant law reforms in recent Australian history, creating a nationwide scheme for the registration of security interests over personal property. The Personal Property Securities Register (the PPSR) now records more than seven million consumer and commercial registrations, with more than one-and-a-half million searches being conducted in the last quarter of 2012.
Unsurprisingly, there were some teething problems in migrating more than 4.7 million security interests on the previous 23 State and Commonwealth registers onto the PPSR. One significant glitch was the migration of Australian Securities and Investments Commission (ASIC)-registered charge data, where the majority of grantors were identified by their Australian Business Number (ABN) rather than their Australian Company Number (ACN) a technical error that needed to be rectified by system-programming intervention. This issue was reportedly resolved in June 2012. In addition, approximately 25,000 securities registered on the ASIC Company Charges Register with more than one secured party were migrated listing only one secured party. The proposed solution has simply been re-registration. Another issue was the failure to migrate 6000 records from the ASIC Company Charges Register. These too now need to be 'manually' registered (albeit at no fee) by 29 January 2014, to ensure priority is not affected.
Technical issues aside, in the short period since its introduction, there has been relatively little judicial commentary on the PPSA provisions. However, a few cases have given insights into approaches that courts are likely to adopt.
Two cases in the New South Wales Supreme Court considered in what circumstances the time period to register a security interest can be extended.
In one case, the UK counsel for Barclays failed to register a security interest within 20 business days of it being created.1 The court was willing to extend the time for registration (under section 588FM of the Corporations Act 2001 (Cth)), as it was satisfied that the failure to register was 'accidental or inadvertent'. This was because the UK counsel had limited training in the PPSA regime, and had not understood the potentially serious risks of late registration. The court in that instance found that extending the registration period was not likely to prejudice creditors or shareholders. Other material factors included that there was no opposition to the application, the parties were in a strong financial position, no further security interests had been granted to third parties, and there had been no significant change in the financial position of the grantor of the security.
In the recent case of Cardinia Nominees Pty Ltd,2 the court once again granted an extension of time to register a security interest. However, in this case the extension was conditional, as another security interest had been registered first, and evidence as to the financial position of the grantor of the security interest was incomplete. The conditions imposed were that priority of the earlier registered security interest (over a motor vehicle) be preserved, and that a liquidator, administrator or other unsecured creditor could apply to discharge the order within a six-month period from the date of registration.
In these two cases, the court acknowledged that it 'will not be surprising if such errors occur during the transition to the Personal Property Securities Act 2001 (Cth) regime'.3 As the transitional period draws to a close, and the PPSA regime becomes more widely and better known, such judicial tolerance might be expected to diminish. However, some tolerance should continue. The two cases largely adopted the law that developed under the repealed s266(4) of the Corporations Act in the exercise of the court's discretion for extensions of time for registration under that section and the courts often exhibited with tolerance in that exercise. Of course it is better not to be dependent on that discretion.
Another case in the New South Wales Supreme Court examined whether two linear accelerators bolted on to base plates cemented into depressions in the floor were fixtures under the common law and therefore part of the land.4 This concerned the concept of a fixture under the common law. The court did not need to examine whether they were 'fixtures' under the PPSA, but in applying the common law tests, the court did say that5 registration of a lessor's interest in equipment on the PPSA register was an additional factor in reaching the conclusion that the equipment was not intended to be a fixture at law, even though it was affixed to premises.
Practical approach for voluntary administrator dealing with uninformative register and unresponsive secured parties
A case arising out of the administration of the Hastie Group highlighted the practical difficulties that registrations under the PPSA have raised.6 The Hastie Group had 995 security interests registered against it. Many of those registrations contained insufficient detail for the administrator to adequately or accurately determine which property in the possession of the group of companies was subject to security interests (or the amount of claimed outstanding debt). The administrators attempted to contact all secured parties. However, a majority failed to respond and comply with requests for details. The court held that the administrators had taken sufficient steps to discover which assets were subject to valid security interests and, as such, it allowed the administrators to realise the assets, to the detriment of various creditors that had registered security interests over those assets.7 Further such cases are expected to arise in the future, when their facts are similarly complicated. This may include claims for the apportionment and valuation of interests in processed and commingled goods and their proceeds, based on the rules in Part 3.4 of the PPSA, which have significantly altered the previous general law principles.
A recent New Zealand case may assist in interpreting s46 of the PPSA (which states that a purchaser of property sold in the ordinary course of business takes the property free from any security interest).8 In this case, the court largely adopted the Canadian approach to the question of whether conduct is in the ordinary course of business considering factors such as the nature and significance of a transaction, the reason for the transaction, where the relevant agreement was made, who the parties to the transaction were, the price charged for the goods, the quantity and frequency of the relevant transactions, and whether the transactions were at arm's length. The court concluded that, despite the company being primarily a large-scale dairy farmer (which necessarily involved buying and selling of livestock), a major sale and lease-back of livestock and change in business strategy were outside the ordinary course of its business, and did not afford the transfer of those assets free of the security interests over them.
There are several lessons to be learned from the past year, including:
- When searching the PPSR, be mindful that there have been some migration failures. In order to reduce the risk of missing a registered security interest, searches should continue to be made under a grantor company's ACN and ABN and the list of non-migrated charges provided by ASIC. Further, the PPSR website should be monitored for other migration issues and failures as they are identified and rectified.
- Security interests should be registered as soon as possible it is permissible (with reasonable expectations) to register an interest before a relevant agreement or transaction is completed.9
- If an extension of time for registration is requested, the applicant should ensure they can produce comprehensive evidence as to the grantor's continuing solvency and financial position, as well as evidence that no third-party interests will be adversely affected.
- Secured parties must ensure that their security information is well organised, and that there are procedures in place to deal with requests from administrators and other relevant entities about the security interests they claim to hold.
There is less than one year to go until the transitional provisions allowing continuous perfection of pre-PPSA security interests (previously unregistrable on a transitional register) expire. Those who have not yet undertaken a review of their business activities and processes, and taken steps to assess their exposure to the PPSA, should do so.
- Re Barclays Bank PLC  NSWSC 1095. The 20 business days requirement is not, in fact, found in the PPSA, but in s558FM of the Corporations Act, enacted as part of the PPS reforms.
-  NSWSC 32.
- Re Barclays Bank PLC at  per Justice Black.
- In the matter of Cancer Care Institute of Australia Pty Limited  NSWSC 37.
- Carson, in the matter of Hastie Group Limited (No 3)  FCA 719.
- It is worth noting that generally the registrations were considered valid (or were not challenged as being defective) the PPSA does not require extensive detail be set out in financing statements.
- StockCo Limited v Stiassny & Ors  NZCA 330.
- See section 151 of the PPSA.
- Diccon LoxtonSenior Finance Counsel,
Ph: +61 2 9230 4791
- Karla FraserPartner,
Ph: +61 7 3334 3251
- John GallimoreConsultant,
Ph: +61 7 3334 3135
- Ben FarnsworthPartner,
Ph: +61 8 9488 3877
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