The Personal Property Securities Act and the changes to the Corporations Act and State Acts have created a new security regime which business is just starting to understand.

Putting aside the mechanics of migration from previous registers and how security interests are registered, searched and discharged, it is critical to understand that the PPSA is not limited by the names of particular transactions and is not restricted to particular industries.

This is reflected in the fact that over 600,000 security interests were registered in the first 60 days after 30 January 2012 in addition to the 6.3 million security interests migrated from existing registers or pre-loaded.

As the PPSA has regard to substance over form and contemplates the registration of security interests not previously registrable it is likely that the first disputes will involve determining priority between competing security interests.

In deciding PPSA disputes title and equitable principles are not relevant.

Once it is determined that the PPSA applies to a security interest, Section 55 PPSA sets out default priority rules.

An indication of how priority may be decided can be obtained from the Canadian case of Bank of Montreal v. Innovation Credit Union, 2010 SCC 47.

James Buist, a Saskatchewan farmer, obtained a loan from Innovation Credit Union. In order to obtain this loan, he provided the Credit Union with a security interest governed by the PPSA in all of his present and after-acquired personal property pursuant to a security agreement dated October 7, 1991. The Credit Union did not register this security interest until June 28, 2004.

The Bank of Montreal, between 1998 and January 2004, took Bank Act security over much of the same property. The farmer, however, did not disclose either the Credit Union’s loans or its security interest and the Bank’s searches of both the PPSA and Bank Act security registries disclosed no prior security interests. After the debtor defaulted, the Bank seized and sold some of his property covered by its security.

The Credit Union brought an application pursuant to the Canadian PPSA seeking a declaration that it had a priority claim over the proceeds of the disposition. The Supreme Court of Canada held that the first-in-time PPSA security interest had priority over the Bank Act security because the Bank acquired no greater interest than the debtor had at the time the Bank Act security was taken. At the time that the Bank of Montreal took its Bank Act security, the debtor had already given the Credit Union a security interest in that collateral under the PPSA. The Supreme Court decided that the Bank’s security interest was therefore subject to the Credit Union’s prior interest, regardless of the fact that the latter was unperfected.

Langes can advise you on registration of security interests as well as priority and enforcement issues under the PPSA. Contact your local office.

Section 173(2) of the PPS Act prohibits unauthorised searches of the PPS Register, or use of the personal information obtained as a result of an unauthorised search. These interference with privacy provisions cover any entity or individual whether or not they are otherwise subject to the Privacy Act.

Only people with a genuine purpose for searching personal property securities may search the Register. The Act contains a list of persons who may search the register, and for what purposes: Section 172(2).

Persons who undertake a search on the Register in relation to an individual will be required to make a declaration that they are undertaking a search for an authorised purpose.

There are serious consequences for undertaking an unauthorised search on the Register:
• Civil penalties may apply (maximum of approximately $5,500 per unauthorised search by an individual, or $27,500 per unauthorised search by a body corporate)
• Parties who suffer loss or damage may recover damages from the person who undertook the search; and
• The unauthorised search is an interference with the privacy of an individual under section 13 of the Privacy Act 1988.

The Act requires that certain collateral must be described on the Register by serial numbers. Requiring collateral types used for consumer purposes to be described by serial number promotes privacy protection, as such property would be identifiable on the Register by the serial number alone, and not by the grantor’s name.

A serial number search should be conducted if the collateral is:
• consumer property;
• is a motor vehicle or watercraft or aircraft; and or
• certain kinds of intangible property (designs, patents, plant breeder’s rights and trade marks).

However, when registering a motor vehicle as commercial property, the user has the choice of registering it with or without a serial number. Regardless of which choice the user makes, the grantor details are mandatory. The details are the grantor’s name and date of birth. If the grantor is a company, it will be identified by its ACN only.

Registrations on the Register will also include data about the secured party, such as the secured party’s identifier and address for service. But it will not be possible to search the Register against the details of the secured party.

Currently, a company charge must be lodged with ASIC within 45 days of being created or registered more than 6 months before an administration, liquidation, or deed of company arrangement of the grantor, whichever is the later, to ensure it is not void. (Section 266(1)(e) Corporations Act).

What are the rules for a company charge under PPSA?

Under changes to the Corporations Act which commence on 30 January 2012, when a company grantor is being wound up, an administrator appointed, or a deed of company arrangement executed (“the critical time”), any PPSA security interest which was perfected, registered or enforceable against a third party after the latest of:
a. six months before the critical time; or
b. 20 business days after the security agreement came into force;
c. a later time ordered by the Court under section 588FM;
would vest in the company and be available to creditors (section 588FL).

The Personal Property Securities Act does not generally impose any obligation to register a security interest at all or within a particular period of time. The PPSA also will not require a copy of a charge to be lodged.

Of course if a security interest is not promptly registered the secured party may lose priority against third parties or on the insolvency of the grantor. And a Purchase Money Security Interest must be lodged within 15 business days.

If you are taking a company charge as security it is critical to make sure it is registered on the PPS Register within 20 business days (15 business days if it is a Purchase Money Security Interest).

Three determinations have been made under the Personal Property Securities Act in anticipation of registration commencement on 30 January 2012:

• Fees: The Attorney General has determined the fees to apply. The fees include:
  1. To apply to register a financing statement that has no end time: $130
  2. To apply to register a financing statement with an end time of up to the end of the day 7 years after the registration time: $7.40
  3. To apply to register a financing statement with an end time of more than the end of the day 7 years after the registration time and up to the end of the day 25 years after the registration time: $37
  4. To apply to search the register using a grantor’s details, using the serial number by which collateral has been described or using a unique identifier allocated to a registered financing statement: $3.70

The fees will be higher if a person requires the contact centre to process an application or produce a document.

• Priority of statutory interests: The Attorney General has determined to maintain the priorities that existed under the Corporations Act and Bankruptcy Act in relation to an administrator’s lien and a controlling trustee’s lien provided for under those Acts over company debts secured by a security interest.
• Reports: The Registrar of Personal Property Securities has determined that he may produce the following reports:
  1. The registration of a security interest if the grantor is not an individual
  2. Any other matter relating to registered data in relation to the person
  3. Registrations that are due to expire in a particular period
  4. Registrations conducted in a particular period
  5. Searches conducted in a particular period
  6. Transactions that incur a fee and are conducted on the Register in a particular period

The Attorney-General has made a formal Determination that:

• the migration time (of existing security interests to the PPS Register) is the start of 21 November 2011; and
• the registration commencement time is the start of Monday 30 January 2012.

It is expected that the existing registers will be closed on the weekend of 28-29 January 2012 to permit the transfer to the new Register of all data as at close of business on 27 January 2012.

The Senate Legal and Constitutional Affairs Legislation Committee’s Report on the Personal Property Securities Amendment (Registration Commencement) Bill 2011 has recommended the Bill be passed by the Senate subject to the Attorney-General’s Department revising and reissuing the Explanatory Memorandum.

The purpose of the Bill is to amend the PPS Act to ensure that it will not automatically commence on 1 February 2012 if the PPS Register is not ready for use by that date.

The Report quotes the Attiorney-General’s Department submission that “Based on the level of testing already undertaken and the progress of work across the program, the target dates that have been planned with industry are that data migration commences on 28 November 2011 and the registration commencement time is 30 January 2012. However, meeting these dates is dependent on an assessment of readiness after user acceptance testing is completed.”

The Department also advised the Committee that it has developed a communications campaign, which is proposed to begin the week commencing 22 January 2012 and continue through until June 2012.

The Government has introduced the Personal Property Securities Amendment (Registration Commencement) Bill 2011 into Parliament.

UPDATE 25 November 2011: The Bill has been passed by both Houses.

If passed, the definition of “registration commencement time” will be amended so that the Attorney-General may determine any time other than 1 February 2012 as currently fixed by section 306 of the PPS Act.

Without the amendment, the Attorney-General could determine an earlier time for the registration commencement time. However, the Attorney-General could not determine a later time.

The amendment ensures that the relevant provisions will not automatically commence before the national online PPS register is ready to be made available for public use.

Any decision by the Attorney-General under the proposed amendments to determine the registration commencement time to be a date after 1 February 2012 would need to be made before that date is reached.

Under current law a consignor remains the owner of goods it has delivered to someone else for sale, lease or disposal.

Under PPS, consignment of goods (including livestock such as cattle and horses and extracted minerals) is a registrable security interest if the transaction, in substance, secures payment or performance of an obligation, whether or not it is a commercial consignment: PPSA section 12(2)(h).

From the PPS Register commencement date (expected to be 31 October 2011), the consignment must be registered to be enforceable against third parties.

In the case of a consignment, the consignor is the secured party and the consignee is the grantor.

Once the consignee has possession of the goods, failure to have a written description of the consigned goods and agreed written consignment terms which are “perfected” (by registration) leaves a consignor at risk that its rights will not be enforceable against a third party, for example in the event of the consignee’s insolvency or failure to account for a sale to a third party: PPSA section 20.

The interest of a consignor who delivers goods to a consignee under a commercial consignment will be a security interest whether or not the transaction, in substance, secures payment or performance of an obligation: PPSA section 12(3)(b).

A “commercial consignment” is defined in section 10 as a consignment where:
(a) the consignor retains an interest in goods that the consignor delivers to the consignee; and
(b) the consignor delivers the goods to the consignee for the purpose of sale, lease or other disposal; and
(c) the consignor and the consignee both deal in goods of that kind in the ordinary course of business,
but excludes consignments where the consignee is an auctioneer to whom the goods are delivered for the purpose of sale or the consignee is generally known to its creditors to be selling or leasing goods of others.

A consignor of inventory under a commercial consignment will have a purchase money security interest (PMSI) in the inventory
[PPSA section 14(1)(d)]. But section 62(2) requires that such PMSI be registered by the consignor before the consignee obtains possession of the supplied goods and that the registration states that the interest is a purchase money security interest.This should be done at the beginning of a commercial relationship.

A security interest in consigned goods will attach to the proceeds of sale.

Langes can review your consignment documentation and advise you on registration procedures.