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Focus: PNG personal property security reform – what transactions are covered?

1 May 2012

In brief: The new PNG personal property security law has been enacted and, before it comes into force, businesses need to start considering how it will apply to them. In the first of a series of articles on the new law, Partners Steve Pemberton and Vaughan Mills look at the kinds of transactions that will be caught by the new legislation.

How does it affect you?

  • When it comes into force, which may occur before the end of 2012, the Personal Property Security Act 2011 (the PPS Act) will apply to a wide range of 'security interests'.
  • These include not just traditional mortgages and charges, but other interests that in substance secure payment or performance of an obligation, such as retention of title arrangements.
  • Some consignments and leases will also be caught.
  • Companies that also have operations affected by the equivalent Australian law will find that the PNG provisions are similar, but not identical.
  • You need to consider whether the PPS Act will apply to transactions used in your business. If so, you will need systems in place to make sure you register your interests.

The new PPS Act

In February this year, we published a Focus advising that Papua New Guinea had introduced a new law on personal property securities.

When it comes into force, the PPS Act will reform the law relating to security over almost all property except land. It will apply to a wide range of transactions, not just 'traditional' security interests such as mortgages and charges. It will establish a single Registry for registration of interests covered by the PPS Act. Failure to register may result in loss of priority for the security interest.

We understand the PNG Government is now working on the selection of the Registrar and the establishment of the Registry, with the aim of bringing the PPS Act into force around the end of this year.

This Focus describes the kinds of transactions that will be caught as 'security interests' under the PPS Act.

What is 'personal property'?

The PPS Act covers security interests in personal property.

Personal property is essentially any form of property other than land. It includes goods, fixtures, livestock, shares and other investments, receivables, contractual rights and intellectual property.

The PPS Act does not apply to security interests in tenements under the Mining Act 1992 or licences under the Oil and Gas Act 1998. But where an interest covers both tenements and other property for example, a cross charge in a mining joint venture that applies both to the tenement and to project plant, equipment and contractual rights the PPS Act will apply to the other property.

What is a 'security interest'?

The PPS Act covers two kinds of security interests:

  • 'in substance' security interests, which secure payment or performance of obligations; and
  • 'deemed' security interests three kinds of transactions that are treated as security interests even if they do not secure payment or performance of obligations.
What is an 'in substance' security interest?

An 'in substance' security interest is, in general terms, anything that satisfies the following two tests:

  • it is a legal interest in personal property; and
  • it secures payment or performance of an obligation.

The PPS Act goes on to give some examples. It covers chattel mortgages, conditional sales, floating charges, pledges, trust indentures and trust receipts. This list is not exhaustive. Unless a specific exclusion in the PPS Act applies, every transaction that 'in substance' creates a security interest is caught, 'without regard to its form and without regard to the person who has title to the collateral'.

'In substance' security interests  comments

The reference to a 'legal' interest in property is interesting. The word 'legal' did not appear in the draft legislation when it was first introduced, in August 2011. Nor does it appear in the equivalent Australian or NZ laws, or in the Saskatchewan statute on which the PNG law is most closely based.

The word is probably not referring to the distinction, familiar to property lawyers, between 'legal' and 'equitable' interests. Most company charges are equitable, not legal, interests and it is unlikely that the PNG Government intended to exclude these from the scope of the PPS Act. Probably it only means that the interest must be one that the law recognises, not for example merely a desire to possess something to which you have no entitlement at all.

Retention of title interests are an example of something that is not a traditional security interest but will be caught by the new definition. Retention of title is an agreement to sell property, where the seller delivers the property but retains title until paid. The seller has an interest in the form of ownership, and the substantive purpose of the transaction is to secure the buyer's obligation to pay the purchase price.

Readers familiar with the Australian and NZ PPS laws will note that the PNG list of examples quoted above is shorter than the equivalent in the other countries. In particular, the PNG list does not include 'flawed asset arrangements'. This inclusion in Australia and NZ has caused some trouble, because the scope of what 'flawed asset arrangement' might mean is not clear, and because many arrangements that are normally understood to involve flawed assets such as a deposit that is not repayable unless a stated event occurs would not normally satisfy the essential criterion of creating an 'interest'.

What is a 'deemed' security interest?

There are three kinds of 'deemed' security interests. These interests are caught even if they do not secure payment or performance of an obligation.

  • A 'transfer of an account' or 'transfer of chattel paper'. This covers debt factoring and securitisation transactions.
  • A 'commercial consignment'. This is a consignment of goods, for sale or lease or other disposition, in the ordinary course of both parties' business.
  • A lease for a term of more than one year, but only if the lessor is regularly engaged in the business of leasing goods.
'Deemed' security interests  comments

Debt factoring and securitisation are covered by the Act because they are often considered to be examples of receivable financing techniques, and so the principle of applying the same rules to equivalent transactions regardless of their form has been applied. This is so even though they involve absolute transfers of assets rather than assets being put up as security for a loan or other obligation.

The inclusion of commercial consignments, and leases, can best be understood by reference to a 'false wealth' doctrine. If the owner of property puts it in the hands of another person, then the recipient looks to creditors like a person of wealth who owns the property. But if the wealth is false, and the true owner wants to reserve the right to take back the property in priority to other creditors when things go wrong, then the true owner must make its interest public by registration or else risk losing it.

Leases are caught whether they are finance leases or operating leases.

The equivalent Australian and NZ laws catch some 'bailments' as well as leases. This has caused trouble when parties to a transaction have not always realised that a bailment a transfer of possession that falls short of a formal lease arrangement may need to be registered, and the true owner has lost the asset as a result. The PNG law avoids this uncertainty by catching only leases, not 'bailments'.

What businesses should do

Once the new law comes into force, businesses will have only a 180-day transitional period to register their existing security interests, and new security interests will risk losing priority if not registered immediately.

Businesses should begin to consider whether their transactions may involve security interests either under the 'in substance' test or the three kinds of 'deemed' security interests.

If yes, then the business will need procedures for identifying the security interests and 'perfecting' them, usually by registration.

Our next articles

In future publications, we will describe:

  • why security interests need to be 'perfected' by registration or other means;
  • how registration works; and
  • how the PPS Act will affect specific industry sectors.

In the meantime, if you would like to discuss how the PPS Act will affect you, please contact any of the people below.

For further information, please contact:

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