The Proposed Personal Property Securities Act (PPS)

After years of confusion surrounding the classification and registration of personal property security interests, the Australian Senate appears set to rationalise this difficult area of commercial law.

The proposed PPS will replace a myriad of Commonwealth, state and territory laws and registers for securities affecting both tangible and intangible personal property rights. Ultimately, if passed, the Act will affect anyone who uses items defined as a ‘security interest’.

A committee convened by the Senate, reported on the PPS on February 24, 2009.

The PPSs Coverage

With a few exceptions, the PPS covers all security interests in tangible and intangible personal property given by corporations, individuals or other legal entities. This includes any interest or right in relation to personal property that secures payment or performance of an obligation.

The PPS expressly defines a security interest to include a fixed charge, floating charge, chattel mortgage, conditional sale agreement, hire purchase agreement, pledge, trust receipt, consignment, lease of tangible property, and an assignment or transfer of title that in substance secures payment or performance of an obligation. The definition of security interest is so broad it may even apply to “deemed” security interests, which do not secure payment or performance of obligations, such as the interests or rights of a consignor under a commercial consignment.

The PPS will not apply to non-consensual interests in personal property, or rights of set-off, under which banks can combine a customer’s accounts and treat the balance as a single due amount. Additionally, the PPS will not apply to certain specified transactions, including:

• interests or rights created or transferred in connection with an interest in land where the creation or transfer specifically identifies only that particular land;
• a transfer of personal property under a typical securities lending transaction, for example where a transferee is obliged to transfer personal property to a transferor which can be replaced by the original property;
• an interest in tangible property that is affixed to land.

Important Changes

The proposed legislation will not distinguish between ‘fixed’ and ‘floating’ security interests. As a result, there will be no continued relevance for concepts such as crystallisation. However, both the grantor and grantee will still be free to agree between themselves on the disposal of collateral.

Most importantly, the PPS will also establish a register to record the grantee’s details, and where possible, provide a unique serial number referable to that personal property. This will allow personal property to be searched in a similar way to motor vehicles under the VIN register. Although it is not mandatory to register a security interest, failure to register will be a failure to perfect a security under the PPS. The failure to register could prove costly for the secured party as, under the PPS Priority and Extinguishment rules, a perfected security interest will have priority over an unperfected interest.

What do you need to consider?

The PPS will have direct implications for anyone holding a security interest in personal property. Lenders and lessors need to be particularly careful, and should reconsider their current credit policies and procedures. Failure to review and adopt new credit, compliance and audit procedures, could adversely affect that entity. If you are a financier, lender or any party which intends on securing money or an obligation by the use of personal property as security, this legislation could affect you. To ensure you adopt the best approach, Holding Redlich has an experienced Property & Projects team which can facilitate the protection of your security interests.

At present the PPS looks likely to be in operation in May 2010.