The Personal Property Securities Act (PPSA) - key implications for manufacturers and wholesalers

What is the PPSA and will it affect my business?

The PPSA is a fundamental overhaul of the existing regime for taking and granting security over personal property (excluding land). The changes will affect nearly all businesses, particularly manufacturers and wholesalers who commonly supply goods to customers on retention of title (ROT) terms.

The PPSA establishes a single national law and a single online register for all 'security interests' in personal property. This replaces over 70 State, Territory and Commonwealth security registers and replaces a system which has been criticised as complex, confusing, inconsistent and outdated.

However, the PPSA does more than simply harmonise and consolidate existing security registers - it fundamentally rewrites established legal principles so that both the form of a transaction and the identity of the person who has legal title to an asset become largely irrelevant. Accordingly, once the PPSA commences title to an asset will no longer afford the protection one might expect.

When does the PPSA come into force?

The PPSA legislation and regulations have been passed but have not yet commenced operation. The PPSA was originally scheduled to come into force on 1 May 2011, however, it now anticipated that this will be deferred until 1 October 2011.

Despite this delay, many businesses underestimate the impact the PPSA will have on their day to day operations and are likely to find themselves unprepared come 1 October 2011.

3PPSA covers a broad range of 'security interests'

The types of 'security interests' covered by the PPSA are far broader than under the current regime. This means that certain transactions which are not traditionally regarded as creating security may now give rise to a security interest which needs to be registered. For example:

• supplying goods on retention of title (ROT) terms;
• supplying goods on consignment;
• leasing equipment to customers (including by way of hire purchase);
• loaning goods to customers or contractors or storing goods on third party premises; and
• assigning book debts, receivables or hire purchase agreements.

Failure to register has severe consequences for the secured party if the customer or lessee becomes insolvent. Title or ownership of the goods no longer offers sufficient protection.

Your business needs to reassess and manage the risk of these transactions in light of the PSSA as well as considering the impact of any new 'security interests' that may be registered against you by a third party.

Will my ROT or 'Romalpa' clauses still work?

Many manufacturers and wholesalers supply goods to customers on a 'retention of title' basis (meaning that the seller retains legal title to the goods, even after delivery to the purchaser, until payment is received). This is usually accomplished by the inclusion of a ROT or 'Romalpa' clause in the seller's standard terms and conditions.

Today, as a ROT supplier, your right to be paid is 'secured' by the fact that you hold legal title to the property, and on the insolvency of the customer you are able to enforce this 'security' by repossessing the property you own.

However, once the PPSA is in force, your ownership or title to the goods you have supplied will no longer provide protection. Under the PPSA unless you take action to perfect your ROT security interest you will lose ownership of the goods and be an unsecured creditor in the liquidation or voluntary administration of your customer.

However, if you take the appropriate steps to register your ROT arrangement your position can be protected. As part of taking protective measures, you should be aware that:

• You can extend your protection to include the book debts referrable to the sale of the products you supply to your customer.
• You can now create protection for yourself where your assets are commingled with other assets (which under the existing law has always been problematic).
• Equally, you can protect yourself where your goods form part of, or are attached to, other goods (which again, under the current law has been problematic).

If your supply arrangements extend beyond the goods you supply to the book debts created upon sale of those goods, you should also be aware that debt factorers or other financiers who subsequently take security over those book debts can potentially rank in priority to you, without your consent.

Key concepts

The PPSA introduces new concepts and terminology that your business will need to become familiar with.

Scope

The PPSA applies to all '"security interests" in "personal property" located in Australia or where the person granting the security interest is an Australian entity.

What is personal property?

Personal property includes all tangible and intangible property including plant and equipment, inventory, motor vehicles, intellectual property (e.g. trademarks/patents), book debts, receivables and other contractual rights.

Specific exclusions

Personal property excludes land and fixtures. Additionally, the PPSA does not apply to certain statutory licenses,1 tradeable water rights, set-off arrangements and non-consensual liens or interests.

What is a security interest?

A security interest is broadly defined as any interest in property securing the payment of money or performance of an obligation. The PPSA takes a 'substance over form' approach which disregards the form of the transaction and the identity of the person who has legal title to the property. This means that a person may be able to grant a security interest over property even if they do not own it!

PPS Lease

A "PPS Lease" is a lease or bailment of goods that may have a term of more that one year, or for certain serial numbered goods, a term of more than 90 days. It is important to recognise that if you lease an item of equipment to a customer under a PPS lease then you (as lessor) will be the secured party and the customer (as lessee) will be the grantor of the security.

PPS Leases are a deemed security interest under the PPSA. This means that although, in substance, they may not secure the performance of an obligation, the lessor's interest in the leased property still needs to be protected by registration.

Again, ownership will not provide sufficient protection.

How do I perfect my security interests and why is it important?

A security interest may be perfected by way of:

• registration;
• possession; or
• control (in the case of certain financial assets only).

In practice, a manufacturer or wholesaler will generally not have possession or control of the secured property, therefore registration is the only available (and recommended) method of perfection.

Perfection is essential to preserve priority and ensure that the security interest is enforceable on the insolvency of the grantor.

The consequences of failing to perfect a security interest are severe. If your security interest is unperfected and a liquidator, voluntary administrator or trustee in bankruptcy is appointed to a customer then your security interest may 'vest' in that customer. This means that even if you have legal title to an asset over which you have an unperfected security interest (such as goods provided on ROT or equipment leased to a customer) you will lose all your rights to that asset on the insolvency of the customer.

Electronic online register

The PPSA will create a single national register which can be searched quickly and cheaply online. Unlike the current ASIC register for company charges, there will be no requirement to file a copy of the security agreement at the time of registration

The fees for searching the registering a "financing statement" are still being finalised, however the proposed fee schedule released by the Attorney-General's Department indicates that fees will be higher than originally anticipated. The proposed fee for searching the online register is $3.70 and the fee for online registration of a financing statement will range from $7.40 (for 7 years or less) to $130.00 (for indefinite registration).²

What does my business need to do to prepare for the PPSA?

Your business needs to allow sufficient time prior to the commencement of the PPSA in order to:

• identify all PPSA security interests arising from your business operations;
• review and update your standards terms of supply, applications for credit, and other key contracts (particularly those containing retention of title clauses);
• review the terms of any equipment leases or bailments and consider if they will be affected by the PPSA;
• review the terms of your own financing arrangements, in particular the scope of any 'negative pledge' covenants. The expanded definition of 'security interest' under the PPSA means that amendments might be necessary to avoid a technical default;
• update business managers and in-house counsel as to the key requirements and implications of the PPSA;
• formulate internal policies as to registration of 'security interests' and consider commercial alternatives to minimise risk (such as changing payment terms, reducing credit lines, credit monitoring etc); and
• put in place appropriate systems to deal with registrations and requests of information under the PPSA.

Next steps

Johnson Winter & Slattery is currently assisting a number of ASX listed companies in preparing for the PPSA. We are able to draw upon an existing depth of knowledge and understand the practical implications the PPSA will have for your business.

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¹ If the statute under which a right, licence or authority is granted declares that the interest is not personal property for the purpose of the PPSA.
² Fees for lodgements or searches in person at the contact centre will be substantially higher.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).