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Focus: PNG personal property security reforms

22 September 2011

In brief: The PNG Government has announced its intention to reform the laws dealing with security over all property other than land, and has tabled a draft Personal Property Security Bill that will follow the pattern of similar laws introduced in New Zealand and Australia. It will cover a wide range of transactions, including retention of title and equipment leases, not just traditional security interests. It will cover both consumer and commercial transactions. In many cases parties will need to register their interests to ensure they achieve their desired effect. Partners Vaughan Mills and Steve Pemberton look at the draft legislation.

How does it affect you?

  • If the Personal Property Securities Bill (the PPS Bill) becomes law in PNG, it will establish a single law governing security interests and similar transactions with respect to all tangible and intangible assets (including intellectual property) except land.
  • The new law 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 certain dealings that do not secure anything, like operating leases, assignments of receivables (eg debt factoring) and commercial consignments. They may not be fully effective unless registered.
  • If you are a supplier of goods on retention of title terms, you may need to register your interests and redraft your supply terms.
  • Financiers, including leasing companies, will need to make significant changes to their standard documentation and business processes.
  • In joint venture agreements and joint operating agreements, in the mining and oil & gas sectors, 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 you buy goods on retention of title or lease goods, a large number of security interests could be registered against your company. You will need to consider the terms of any negative pledge clause in your financing arrangements.

Some concepts

The PPS Bill covers security interests in personal property.

What is 'personal property'?

Personal property is essentially any form of property other than land. It includes equipment, motor vehicles, stock, receivables, shares, rights under contracts, intellectual property and intellectual property licences.

What is a 'security interest'?

The PPS Bill 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 PPS Bill as an interest in personal property that secures the payment of money or performance of an obligation. The Bill applies to every transaction that, in substance, creates a security interest, without regard to its form and without regard to the person who has title to the property.

The PPS Bill gives examples of arrangements that are security interests if they secure payment or performance. These include:

  • charges, mortgages and pledges;
  • conditional sales (such as an agreement to sell subject to retention of title);
  • consignments;
  • leases; and
  • trusts.

In certain cases, the PPS Bill 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) and 'chattel paper' (documentation evidencing both a monetary obligation and a lease or security interest in goods, such as an equipment lease or chattel mortgage);
  • commercial consignments; or
  • a lease of goods for a term of more than one year, whether it is a finance lease or an operating lease.

Steps to perfect a security interest

Perfection is necessary to make the security interest effective in liquidation or bankruptcy, preserve its priority and protect it against buyers or lessees of the property. Perfection occurs when there is one of the following:

  • registration of the security interest;
  • possession of the property by the secured party; or
  • (in the case of deposit accounts and investment property) control by the secured party.

Unless the secured party has possession or control, the security interest must be created by a signed security agreement that describes the relevant property.

Most often, parties will perfect their security interest by making sure it is in writing and registering it.

The register

The PPS Bill provides for the establishment of 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 much detail.

A registration will need to identify the parties and provide a description of the relevant property. It should not be necessary to file a copy of the security agreement.

The consent of the debtor will be required to register a security interest. However, consent will not be required to register security interests that were created before the commencement of the new law.

A registration will be effective for five years. After that time it will need to be renewed.

Transition period

To maintain priority, existing security interests will need to be registered within a transitional period of 60 days from commencement of the Act. This is much shorter than the equivalent transitional periods offered in New Zealand (six months) and Australia (two years).

Priority – new rules

The PPS Bill establishes a complete set of rules for determining priority between security interests, and for determining under what circumstances a purchaser of collateral will take the collateral free of security interests. These rules replace the old principles-based approach of the common law and equity, and replace the priority rules for company charges currently contained in the PNG Companies Act.

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.

Enforcement – new rules

There are some prescriptive rules governing enforcement of security interests. For example, generally a secured party will be required to give at least 20 days' notice before selling the relevant property.

Terms of contracts – restrictions on assignment overridden

The PPS Bill 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.

What the reforms would mean for you

The New Zealand and Australian experience has shown us that parties need much more time than they think to prepare for the new law. If the reforms proceed, it will be necessary to act promptly to prepare for the new law. Preparations should include, where applicable:

  • Scoping the task: identifying the impact of the new law on:
    • your existing transactions (both traditional and new forms of security interests), and
    • new transactions.
  • Redrafting standard form documents.
  • Managing the transition: registering existing security interests.
  • Planning and implementing changes to policies and business processes.

If the PPS Bill is passed into law, it will not commence operation immediately. The Investment Promotion Authority will be responsible for prescribing the date of commencement, which must not be before the Authority is able to make the new electronic register available for operation.

Looking forward

The PNG Department of Treasury has called for submissions on the PPS Bill by 30 September. We will be lodging comments with the Department, based on our experiences with advising clients on the equivalent new laws currently being introduced in Australia.

If you would like any assistance with preparation of a submission, or would like to discuss the impact of the PPS Bill on your business or operations, please contact one of the people below.

For further information, please contact:

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