Focus: Personal property security reform
1 September 2009
In brief: A Senate Committee has released its report on the Personal Property Securities Bill 2009 that will significantly alter financial and commercial law and procedures in Australia. Partners Diccon Loxton (view CV) and Catherine Parr report.
How does it affect you?
- Although the committee thought the Bill needed more work, it appears still to be on track for implementation in May 2011. That seems a long way off, but New Zealand experience indicates that the time will barely be adequate, and you should start preparing now.
- Banks and others in the finance sector: You should now survey your products and transactions across your entire portfolio to scope the Bill's effect and the task ahead. Then you will need to review – and, in all likelihood, redesign – policies, procedures, systems and standard documentation. You will also need to assess the effect on existing transactions.
- Leasing companies and others who provide the use of equipment as part of their business: You should also be scoping the task ahead. Leases, and other arrangements under which goods are provided, will be regarded as security interests. These can include arrangements where equipment is provided as part of a service, for example, where a cable or satellite TV company provides transponder units to customers.
- Securitisers and debt factors: Assignments of some debts will be deemed to be security interests and may need to be registered. You will also need to scope out the effects.
- Resources, manufacturing, retail and trading companies: You should examine the standard terms under which you acquire and dispose of property, with a particular focus on retention of title clauses. In many cases, these will be security interests (as defined) and your rights and priorities may be affected.
- Construction and other contractors: You will need to consider the effect on your rights against principals and subcontractors, particularly in regard to goods delivered on site and contractual rights to payment.
- Joint venturers: You should examine cross charges and also clauses in joint venture documentation dealing with default.
- Borrowers: You should examine your negative pledge clauses, as many transactions that are not currently regarded as security interests will become security interests and may be caught by the clause.
- Parties to contracts: When negotiating and drafting contracts, you will need to take account of the fact that it may no longer be possible to prevent assignments by a party of amounts owing under the contract.
Progress of the Bill
The Bill has been introduced into Parliament.
It requires legislation from the states referring powers to the Commonwealth. Such legislation has been passed by the New South Wales Parliament and introduced in Victoria. That referral legislation sets out the exact form of the Bill as introduced.
The Bill was examined by a Senate Committee. Allens again combined with Blake Dawson, Mallesons Stephen Jaques and Freehills to produce a joint submission to the committee.
The committee handed down its report on 20 August 2009 and both sides of politics recommended that further work be done on the Bill. The Labor majority were of the view that a review of it should be conducted, taking account of submissions made before 30 September 2009. They said the Bill should be passed in its present form (as it was the subject of state referral legislation) but there should be subsequent amending legislation to correct any issues. That amending legislation would take effect simultaneously with the main Bill. The Liberal minority took the view that the Bill itself should be revised, particularly in the light of its effect on farmers and small business.
We listed a number of features of the Bill in our Client Update. Some major points to note are:
- The Bill fundamentally alters the law of 'security interests' in personal property, and some aspects of commercial law, for example, contracts and negotiability.
- It uses a substance-over-form approach to defining a security interest. However, it also deems commercial consignments, certain leases and bailments, and assignments of some accounts receivable, to be security interests even where they do not secure money.
- It will, in some cases, be irrelevant who has title to an asset.
- There will be a national electronic register, which should be easy to use.
- Perfection is necessary to ensure a security interest is enforceable against third parties, and effective in a winding up. It can be via registration, possession or (in the case of some financial assets) control.
- The rules regarding priority and when an asset can be transferred free of a security interest are complex.
- All assets charges will continue to be possible. However, there will be a much longer list of circumstances in which the secured party can lose priority or security over the asset, even when the party buying or taking security over the asset has knowledge of the earlier security interest (for further comment on this, see the schedule to our submission) This is a significant weakening from the current position and will require secured parties to take extra steps to protect their position.
- There are some prescriptive rules for enforcement but, except in the case of consumer property, they can generally be contracted out. There are some wrinkles in the current drafting.
Allens is working closely with clients to develop procedures to manage the introduction of the new personal property security scheme. Please contact one of our PPS team partners listed below if you would like more information.
- Diccon LoxtonSenior Finance Counsel,
Ph: +61 2 9230 4791
- Andrew BoxallConsultant,
Ph: +61 2 9230 4534
- John GallimoreConsultant,
Ph: +61 7 3334 3135
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