Focus: Personal property securities reforms and the mining and petroleum industries
21 July 2010
In brief: The far-reaching Personal Property Securities Act 2009 (Cth) is due to come into force in May 2011 and businesses operating in the mining and petroleum sectors will be affected. It covers a wide range of transactions, not just security interests. It is not limited to consumer transactions, and significantly alters aspects of commercial law and contracts law. Partners David Maloney and Diccon Loxton (view CV) report on how the changes will affect the mining and petroleum industries.
This is the second in a series of Focus articles that looks at the effect of the new legislation across a range of industries.
- Mining, petroleum and gas industry scenarios
- Some concepts
- Steps to perfect a security interest
- Insolvency – unperfected security interests lost
- The register
- Migration of existing registrations
- Priority – new rules
- Enforcement – new rules
- Back office queries
- Confidentiality – your documents can become public
- Terms of contracts – restrictions on assignment overridden
- 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 will cover those mining and petroleum licences and authorities that are not regarded as interests in land, unless expressly excluded by state legislation.
- The PPSA will affect not only your financing transactions, but also many other transactions and relationships.
- 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 anything, like operating leases, assignments of receivables and arrangements where equipment is provided as part of a service.
- Farm-ins and farm-outs may be affected.
- In joint venture agreements and joint operating agreements, cross charges will be significantly affected. Potentially so also will be dilution and other default clauses. These may need to be redrafted, or steps taken to protect them.
- If a joint venture agreement or joint operating agreement does create a security interest, then certain parties have a right to require copies, and confidentiality will be at risk.
- If you are a supplier of product 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.
- Restrictions in contracts on assignments may be ineffective.
- Where your business takes 'security interests', you will need to put in place records and systems to deal with enquiries and other requirements of the legislation. Your staff will need training and guidance on the new registration procedures and your businesses should compile inventories of existing security interests in order to register them. You will need to develop systems to record and manage future security interests.
- You will need to review your businesses to see how you are 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 mining, petroleum and gas industries. Below is a list of scenarios that might be caught by the new legislation, though that will ultimately depend on the circumstances in each case.
- Joint venture arrangements: Cross charges and some default clauses in joint venture agreements and joint operating agreements will fall within the regime and will need to be reviewed. You will need to look at the drafting of cross charges, particularly if new cross charges may be entered into with new parties on or after May 2011.
You will need to look at your joint venture agreements to see whether they create any security interests and, if so, consider redrafting them, taking steps to perfect them, and potentially taking the relevant provisions out of the joint venture or joint operating agreement and placing them in a side document, in order to be able to preserve confidentiality. You may need to revisit the priority arrangements with external financiers.
- Confidentiality clause carve-outs: You will need to examine the carve-outs in confidentiality clauses, particularly in secured obligations like joint venture agreements. Provisions that allow disclosure to the extent required by law may need to be amended so that the confidentiality clause overrides the disclosure requirements in the PPSA.
- Farm-ins and farm-outs: In the case of mining and petroleum licences and authorities that are not regarded as interests in land, farm-ins and farm-outs will need to be investigated, as they potentially could be security interests as defined. Where the farmor retains title until the farm-in work is completed, the farmor may have a security interest in relation to performance of the work. Where the farmor transfers title but has a right to regain title if the work is not completed, that right may be a security interest.
- Equipment use: Any bailments or leases between the 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.
- Assignments of receivables: Assignments of receivables (for example, the cash flows associated with sales contracts) are caught by the PPSA.
- 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, computer-controlled mining and drilling equipment, copyright material (such as source code, photographs and marketing materials) and other assets with closely related IP should be reviewed in this light.
- Negative pledges: You will need to review your negative pledge clauses. Many arrangements that were not security interests may now be security interests and potentially may breach the clause.
- Commingling of product: The PPSA could have particular effects where goods the subject of security interests are commingled (like ore in a stockpile or coal at a coal loader). This is in distinction to the position where the participants in a joint venture continue after extraction to hold the extracted product as tenants-in-common in proportion to their participating interests in the joint venture. Where goods are commingled, then holders of security interests over goods that became part of the mass acquire a security interest over all of the mass. There are rules and limits, but they can be anomalous where the relevant product fluctuates in value, or where highly geared assets are mixed with lowly geared assets.
- Gas meters: Gas retailers will need to consider whether their arrangements under which customers or others obtain equipment, such as meters, need to be registered as a security interest or redrafted.
- Export arrangements may need dual registrations: Particular issues arise when parties are taking security interests from parties incorporated overseas, or over assets overseas. For example, it might be necessary to ensure that a security interest over an asset in Australia owned by a foreign company is registered in the jurisdiction of that foreign company and in Australia.
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.
It will cover any mining and petroleum licences and authorities that are not regarded as interests in land, unless exempted by state legislation. The states may specify in legislation that such titles are excluded from the PPSA, but to date no such legislation has been proposed.
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.
The PPSA gives examples of arrangements that are security interests if they are 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 a 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 monetary obligations and security interests in goods or intellectual property, such as a lease or hire-purchase agreement);
- a consignor's interest in a commercial consignment; and
- 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 many operating leases as well as finance leases. It would include arrangements under which equipment or other goods like scaffolding or mining equipment are provided as part of a service or in connection with the service, and the customer obtains possession of the equipment. It should not cover mining contracting arrangements where the contractor operates the equipment itself and which are not leases.
Perfection is necessary to preserve the security interest in insolvency and to preserve priority. It occurs when there is one of:
- registration of the security interest;
- possession of the collateral by the secured party; or
- (in the case of certain 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.
In order for the security interest to be enforceable, it must be in writing and specify the relevant asset subject to the security interest. That description can be very broad and generic. Motor vehicles, aircraft and ships are able to be registered by serial number. This is optional in non-consumer transactions, but gives extra protection if it is done.
Perfection is particularly important in insolvency because, subject to only a few exceptions, on appointment of a liquidator, bankruptcy trustee or voluntary administrator, unperfected security interests 'vest' in the grantor company or individual. 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 and become just an unsecured creditor. This can be quite severe in its effects – for example, a farm-in arrangement where the farmor retains title could be regarded as a security interest relating to performance of the earning work. If so, if the farmee is wound up, the farmor could lose its title if unperfected.
The PPSA establishes an electronic register that is designed to provide a simple, quick and cheap process. It 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.
Because so many arrangements are security interests, hundreds or even thousands of security interests may need to be registered against any particular company, and so there will be a lot of '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 may be problems with the quality of data and secured parties may want to re-register in order to give more details to gain better protection.
There will be no automatic migration from registers of mining and petroleum titles, or the IP registers like trade mark, designs and patents.
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.
Most importantly, ownership of the asset can be irrelevant in determining priority disputes.
In relation to priority between security interests, the general rule is that perfected security interests take priority over unperfected security 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. Secured parties will want to redraft their documentation 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 need the systems in place to deal with these.
Certain parties can also request copies of the security agreement that creates the security interest, and of the secured obligations and secured property. This can be subject to confidentiality agreements between the parties, but those confidentiality agreements are ineffective to stop the right of access after a default.
The law overrides restrictions on the assignments of debts arising under contract. This means your counterparty may be able to assign to other parties its rights in respect of amounts payable by you under contracts, even though you do not wish to give your consent.
May 2011 seems a long way off but the New Zealand experience is that parties need much more time than they think to prepare. The mining and petroleum industries should begin preparing for the 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 joint venture and farm-out or farm-in arrangements, and standard terms of supply, as well as your financing arrangements and other potentially affected contracts. Allens has 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 joint venture agreements and charges.
- Identifying the transactions that will need to be registered.
- Identifying the assets affected.
To date, the PPSA has been passed and there have been two amending acts to the PPSA. There has been some hope of further amendments to the PPSA, though it 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 PPS scheme. If you have any questions about this or any other PPS or mining and petroleum 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 PPS 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 online 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 an 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
- Igor BogdanichPartner, Sector Leader, Oil & Gas,
Ph: +61 3 9613 8747
- Gerard WoodsPartner,
Ph: +61 8 9488 3705
- John GreigPartner,
Ph: +61 7 3334 3358
- John GallimoreConsultant,
Ph: +61 7 3334 3135
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