Focus: Personal property securities reforms and intellectual property
30 August 2010
In brief: The far-reaching personal property securities reform is due to come into force in May 2011 and companies with significant intellectual property assets will be affected by the sweeping changes the new legislation will bring to Australia's commercial law. Partners Diccon Loxton (view CV) and Tim Golder (view CV), Special Counsel Rebecca Sadleir and Senior Associate Robyn Chatwood report on how the changes will affect IP owners.
This is the fourth in a series of Focus articles that looks at the effect of the new legislation across a range of industries.
- Some concepts
- IP provisions
- Steps to obtain and protect a security interest
- The register
- Back office queries
- Terms of contracts
- How can you 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 IP) except land and some statutory licences. It covers a wide range of transactions, not just security interests. It is not just limited to consumer transactions, and significantly alters aspects of commercial law and contracts. It is similar but not identical to the law in New Zealand.
- The PPSA may make it easier to use your IP assets as security when raising funds.
- Security interests currently registered under other legislation (eg the Patents Act 1990 (Cth) and the Trade Marks Act 1995 (Cth)) in the IP registers maintained by IP Australia will need to be re-registered under the PPSA and those registrations refreshed every seven years. Existing registers will continue to record security interests, but in the future the PPSA register will become the only relevant register.
- The PPSA will affect not only your financing transactions, but also many transactions in which you supply goods or services to your customers, or when your suppliers supply goods or services to you, or when you are considering buying, selling or licensing IP assets.
- As personal property includes rights under IP licences, licence terms may need to be reviewed to ensure that licensors have an appropriate level of control over licensees wishing to use their licensed rights as security.
- When buying and selling IP rights, buyers will most likely seek warranties and disclosure of security interests in IP, as well as other assets.
- 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 amounts, like leases, assignments of receivables and arrangements where equipment is provided as part of a service.
- If you are a supplier of goods 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 watch carefully the terms of those interests, particularly retention of title clauses. You will also need to consider the terms of your negative pledge clause.
- If you take security interests as a part of your business, new procedures will need to be put in place. Staff will need training and guidance on the new registration procedures and businesses will need to compile inventories of existing registrable security interests. New systems will need to be developed to record and manage future security interests, including systems to deal with enquiries and other requirements of the legislation.
- You will need to review your businesses to see how it will be affected (and for this we have prepared an on-line scoping tool) – and you should be thinking about it now.
The PPSA will have a significant impact on companies who are securing finance with IP assets or who have significant IP assets that may be bought, sold or licensed. Below are some scenarios that might be caught by the new legislation, but that will ultimately depend on the circumstances of each case.
- Intellectual property as security: When the legislation was being proposed, one of its benefits was said to be that it would make it easier for parties needing to raise money to use intellectual property rights as security. It does now make a 'one-stop shop' for registration, and it provides registration (for security interests, not title) for those types of assets which may not previously have had a registration system. Further, it removes some doubts as to priorities under legislation, and sets up a detailed regime for priorities.
It remains to be seen whether it will have this effect. It has long been possible for companies to give security over all the various types of intellectual property, by granting a charge, even though there may have been no formal registration system. The traditional fixed and floating charge picked up intellectual property. Some issues may remain as to the value or title to the intellectual property, particularly where the intellectual property is not registered, such as copyright.
One effect in relation to taking security is that where a secured creditor is taking security over all assets of a company, it may become more common for it to file particular financing statements registering the security interest with respect to particular serial numbered and commercial properties such as trade marks and patents.
- Royalty streams: Transactions raising finance against projected licensing royalties or franchise fees are common in some industries, and will be affected by the reforms. Existing arrangements will need review.
- Assets with related IP: The PPSA contains specific rules for goods that have closely associated IP rights. These provisions are discussed further below. Companies with assets in that category will need to exercise caution in granting security over those assets.
- Film financing: The structuring of financing transactions in the film and television industry may also be affected by the PPSA and will need to be reviewed.
- Equipment use: Any bailments or leases between 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.
- Transfers of receivables: Transfers of receivables (for example, the cash flows associated with retail contracts for the provision of services) are caught by the PPSA.
- Machinery and other stock: If a company has acquired finance by offering security over its machinery or stock, a registrable security interest may be created. This includes where goods are held on consignment. Also, consumer contracts governing, for example, any provision of services where the company retains ownership of an asset used by the consumer will be security interests.
- Joint venture arrangements: Cross charges and default clauses in joint venture agreements may also fall within the regime and will need to be reviewed.
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, IP and IP licences. An IP licence is not a security interest per se, but a licensee's rights under an IP licence constitute personal property over which security can be granted.
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 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 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 financial interests in goods, such as a hire-purchase agreement);
- a consignor's interest in a commercial consignment; and
- most relevantly to the retail industry, a lessor or bailor's interest in goods under a 'PPS lease' (a lease or goods bailment for more than a year or an indefinite term or for 90 days for serial numbered goods). A PPS lease covers operating leases as well as finance leases, which will be particularly relevant to the retail sector where arrangements providing equipment as part of a service are common.
Of greatest significance to IP owners are the provisions dealing with goods that have closely associated IP rights. Examples of goods in this category include patented pharmaceutical products, hardware devices with embedded software, manufacturing equipment that is patent-protected, branded clothing, and food and beverage containers protected by registered design rights. Where the exercise of the associated IP rights is necessary for the exercise of the security over the goods, and an additional security interest is attached to those IP rights (a matter that is likely to be decided by a court), then the PPSA deems the IP rights to be included in the security agreement. This applies unless the parties have expressly agreed otherwise. If this section applies, a description of the goods on the PPS register will be deemed to include a description of the IP rights.
The likely implications of this section may not be as far-reaching as some commentators suggest. However, the message is clear: to avoid any doubt, security agreements should always clearly specify what IP rights are included and what are not.
The PPSA also provides that where an IP licence is being transferred to another licensor and the licence survives the transfer, security interests in the IP licence will continue to bind each licensor's successors-in-title. The effects of this provision are unclear as it would be a very rare case where a licensor was bound by the acts of its licensee, and it seems unlikely that this section will be much relied upon in practice.
Complex conflict of law rules apply for security interests in IP which may require you to consider the effect of the location of both the owner of the IP and the law under which the IP is granted.
There will be a three-stage process to register a security interest:
Attachment – where the security interest becomes good against the asset and the grantor, but no one else;
Enforcement – where the security interest becomes enforceable against third parties, which requires attachment, and one of:
- a written agreement with a sufficient description of the collateral;
- possession of the collateral by the secured party; or
- (in the case of certain financial assets) control;
Perfection – which is necessary to preserve the security interest in insolvency and to preserve priority. It occurs when one of the following takes place:
- the registration of the security interest;
- the possession of the collateral by the secured party; or
- (in the case of financial assets) control by the secured party.
Perfection is particularly important in the event of insolvency because, subject to only a few exceptions, on appointment of a liquidator, bankruptcy trustee or voluntary administrator (of companies or individuals) unperfected security interests 'vest' in the company. The secured creditor loses its security and becomes unsecured. (This is different from New Zealand's personal property securities law.)
To perfect a security interest in IP, registration will be required.
The PPSA establishes an electronic register. This register is designed to provide a simple, quick and cheap registration process. The register is a 'red flag' register: that is, it draws attention to the security interest without giving too many details. For those IP assets that are registered with IP Australia, the 'serial number' used in the PPSA register will be the IP Australia unique identifier (for example, trade mark number or trade mark application number). For serial numbered property, which would include registered IP such as patents, trade marks and designs, registrations of security interests will have a lifespan of seven years and will need to be renewed at seven year intervals. While registration is generally simple, there will be some traps in deciding how to describe the collateral (for example with unregistered IP such as copyright), 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 a particular company, and so there will be a lot of data or '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 will be no automatic migration for the IP registers for trade marks, 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.
In relation to priority between security interests, the general rule is that perfected security interests take priority over unperfected 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. You will need to redraft your standard terms 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 also need systems in place to deal with these.
The law overrides restrictions on the assignments of debts arising under contract. This means your counterparty may be able to assign to other parties their rights in respect of amounts payable by you under contracts, even though you do not wish to give your consent.
You should begin preparing immediately for the new PPSA regime to protect your interests and minimise disruption to your business once the PPSA takes effect. Preparations should include, where applicable:
- Scoping the task. This will involve checking, in particular, your 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.
- Where necessary, preparing new policies as to requirements for transactions and documentation.
- Redrafting the standard terms of supply.
- Identifying the transactions that will need to be registered.
- Identifying the assets affected.
- Checking the effect of the PPSA on any IP transactions (such as IP financing, asset sales or transfers of IP licences).
To date, the PPSA, two amending acts and referral legislation for New South Wales, Queensland, Victoria and South Australia have all been passed. Discussions are continuing on the new regime and it may be that there will be further amendments to the PPSA itself.
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 personal property security scheme. If you have any questions about this or any other intellectual property 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 the personal property securities (PPS) reform 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 on-line 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 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.
- Tim GolderPartner,
Ph: +61 3 9613 8925
- Diccon LoxtonSenior Finance Counsel,
Ph: +61 2 9230 4791
- Andrew WisemanPartner,
Ph: +61 2 9230 4701
- John GallimoreConsultant,
Ph: +61 7 3334 3135
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