The Personal Property Securities Act (PPSA) is the legislation that governs everything about security interests in personal property, which is almost all property that is not land.
A ‘security interest’ is defined broadly (in section 12 of the PPSA) as being any number of transactions if the transaction, in substance, secures payment or performance of an obligation.
The broad purpose of the PPSA is to create a system for the registration of security interests, which is searchable by anyone and which can then be enforced against other parties. This register has been formed as the Personal Property Securities Register (PPSR). The PPSR allows anyone to conduct an online search to determine if property they are considering acquiring is subject to claim from another person/entity.
Typically, the PPSA comes into play when a person or entity becomes insolvent or when they default on the terms of a security agreement (which is often when they are insolvent).
Practical impact of the PPSA
As mentioned above, the main impact of the PPSA is in insolvency. The first thing a liquidator, administrator or bankruptcy trustee will do when appointed is search the PPSR for relevant registrations.
A first-ranking secured party can then generally choose whether to enforce their security and take the property or get priority of payment from the sale of the property.
In most appointments of liquidators or bankruptcy trustees, unsecured creditors will either receive nothing or very few cents in the dollar. Therefore, if you propose to offer funds or goods to a person or entity, securing the obligation should be the first thing on your mind.
To do this, you will need two things:
- A well-drafted security agreement (either within a larger agreement, or in a separate document); and
- To register that security on the PPSR.
This is where we come in.
Elements of a valid PPSA security interest
There are three essential elements that must be in place to have valid security under the PPSA:
- A security interest. This will be created under a security agreement (contract), and will almost always be in writing;
- The security interest ‘attaching’ to the property. This occurs when the grantor of the interest has rights in the property (referred to as ‘collateral’ in the PPSA), and they do something that causes the security interest to arise under the security agreement; and
- The security interest ‘perfecting’ in the particular property. Perfection can occur in a number of ways, including by registration on the PPSR or by the secured party having control of the property.
Section 19 of the PPSA outlines when a security interest attaches to property:
- The grantor (the party giving the security) has rights in the property, or the power to transfer rights in the property, to the secured party (the party taking the security in the property); and
- Value is given for the security interest; or
- The grantor does an act by which the security interest arises (such as incurring an obligation under a security agreement).
A security agreement can also specify that a security interest attaches to property at a later time, such as when a certain thing is done under the agreement and an obligation arises because of it.
The concept of ‘perfection’ of a security interest is fundamental to the PPSA regime. Without perfecting the security interest in one way or another, there really is no point taking security in the first place and the secured party will be exposed.
Section 21 of the PPSA outlines the elements required for perfecting an interest:
- The security is attached to the property;
- The security interest is enforceable against a third party; and
- The security interest has been effectively registered on the PPSR; or
- The secured party has possession or control of the property (other than as a result of seizure).
Kinds of registrations
Other than the standard registration, there are several other kinds of registrations that can be registered on the PPSR:
All present and after-acquired property (an ALLPAAP). These are the registrations generally used by banks, whose security agreements charge the entirety of a person or entity’s property. They require a specific ‘general security agreement’ to be effective and are essentially a cover-all to capture all property owned by the grantor.
Purchase Money Security Interest (a PMSI). These registrations are distinguished from standard registrations as they secure assistance provided by the secured party to enable the grantor to purchase or acquire rights in the property. The most common are:
- A supplier providing goods on a post-paid account (essentially retention of title);
- A person who gives value for the purpose of enabling a grantor to acquire a particular piece of property (a chattel mortgage); and
- A PPS Lease. A lease or hire arrangement from one party to another must be registered if the lease duration is more than two years. An indefinite lease is deemed to be a PPS Lease once it has run for a duration of two years.
The PPSA sets out in detail the priority rules, with timing of each security interest registration being paramount. There are several types of registrations that are given priority over others. If there are multiple registrations of the same type, the first registered will have priority.
The order of priority for types of registered security interest:
- Perfection by control will beat all other forms of perfection, with banks controlling funds in accounts having the highest priority; then
- A perfected PMSI; then
- A perfected security interest; then
- An unperfected security interest.
As priority is generally given to the security interests that are registered the earliest, it is always a good idea to register the interest as soon as possible.
If a security interest is not perfected prior to the person or entity having a formal insolvency appointment, the security interest will be invalid as against the appointee.
A PMSI must be registered within 15 business days of the day the grantor received the property, or the security interest otherwise attached to the property.
Although there are no specific timeframes set down in the PPSA for registration (other than for PMSI priority), the effective timeframe for registration is 20 business days after the relevant security agreement comes into force (provided there is no other type of perfection). This is because, under the Corporations Act, if a PPSA security interest is not registered within 20 business days and a liquidator or administrator is appointed over the company within 6 months of the registration, then the registration will be ineffective.
Registrations on the PPSR
The PPSR itself is fairly cheap and easy to use. However, great care should be taken when registering security interests otherwise the registration (and therefore the security) may be invalid.
The main thing to ensure is that you have the correct details for the grantor (being the person/entity granting the security). If the grantor’s details are incorrect or the wrong grantor has been selected, the security will be invalid.
The key thing to consider is whether another person who performs a search of the PPSR on that entity will be able to see your registration. This consideration was highlighted in the recent decision of In the matter of OneSteel Manufacturing Pty Limited (administrators appointed) NSWSC 21. Brereton J decided that a registration over the insolvent company’s ABN, rather than ACN, was not effective as it would not show up for people conducting a search on the PPSR using the ACN.
This is converse to if a company is acting as trustee, where you should register over the trust’s ABN, rather than the corporate trustee’s ACN. However, if a trust does not have an ABN, either an ABN should be registered for the trust, or the security interest should be registered over the trustee using either the corporate trustee’s ACN or the individual trustee’s details.
The PPSA does not cover the enforcement of security under a security agreement, however it does set out other procedural requirements for enforcement.
If the secured party is empowered by the security agreement, it may seize the secured property as it ordinarily would. However, before either disposing of or retaining the property, the secured party must give at least 10 business days’ notice to the grantor and any secured party with a higher priority interest in the same property.
There is a process set out for objections to either the disposal or retention of property at sections 137 and 138 of the PPSA.
For more information on the PPSA and the PPSR, contact us on 1300 654 590.