The PPSR; A creditors newest ally?
he Personal Property Securities Register (the “PPSR”) has been hailed by some as the most fundamental change to credit in the last 150 years – not since 1958 has something this significant been introduced in Australia, that being the Torrens Title system of property registration. The PPSR has replaced over 70 current registers around Australia, including the REVS (Registry of Encumbered VehicleS) check and the division of the ASIC (Australian Securities and Investments Commission) that formerly listed charges and securities over companies.
Technically, the PPSR is a creation of the Personal Property Securities Act 2009 (the “Act”), which was enacted on 30 January 2012, and presents changes to the credit regime that are so fundamental that New Zealand, who enacted a similar regime 10 years ago, are still feeling the impact of the change. The major banks in Australia have invested some $50,000,000 internally in order to ensure compliance with the new laws, and almost anyone with secured finance (apart from security over real property) will have received communication from their financial institution advising them that any secured property has now been listed on the PPSR.
Essentially the Act is geared to protect anyone who gives credit, for anything with either an individual item, or a line of credit whose total is over the value of $5,000, by enabling the credit provider to register their security on the PPSR. For any other creditor, you can search the credit applicant to see what security has been registered against them, thus enabling better credit decisions.
As is becoming clear, the ramifications for credit providers and credit users are significant.
A simple example is that of Mr Jones. Mr Jones has a company, XYZ Pty Ltd, and XYZ owns a vehicle valued at $25,000. He owns the vehicle outright, but wants some additional cash for his business. Jones goes to his local manager at First Bank with whom he has a relationship and enquires about a loan for $10,000. He does not take the loan, but the bank manager is so sure that Jones will return and take the loan that he registers First Banks security interest on the PPSR. Jones goes to Second Bank and also asks about a loan. He is very impressed with the terms Second offers and decides to take the loan through Second Bank. Second bank fail to do a PPSR search but do register their interest on the PPSR.
Jones business takes a turn for the worst, and Jones decides to go back to First bank and get a second loan over the vehicle. The bank manager signs him up, and as he has already registered First Banks interest previously, has now perfected First banks interest.
Jones business falters completely and is placed in liquidation. Who has first priority in the funds from sale of the vehicle? If you said Second Bank then you would be mistaken. Despite being first in time with their loan, they were not first in time registering their interest, and additionally failed to carry out a search on the vehicle, so they lose out to First bank.
An actual example of the Act in play was for the New Zealand equivalent of “Portaloo”. Portacom leased their ‘facilities’ from a manufacturer, and sub-leased them to various sites. Portacom held loans through ABC finance, who held security over all the assets of Portacom, and had registered their interest. When Portacom went into liquidation, ABC acted on their interest and received the proceeds of sale of the facilities, despite Portacom not actually owning them. The manufacturer had not registered their interest in the facilities.
What makes the Act even more encompassing is the extremely loose interpretation of security. If you contract with anyone, and the terms of the contract imply, or appear to be, a form of security, then the security can be registered with the PPSR. This means that the agreement does not have to specify that it is security, or define security, or even specifically mention any “defined” words meaning security. As long as it appears to be security, or even simply that one party will do something in return for something specified in the agreement, then it satisfies the Act and the security can be registered on the PPSR.
There are of course some technical steps that must be carried out in order to properly register a creditors interest. Firstly, the creditor must have in their agreement the right to register the interest on the PPSR. Once the agreement has been entered, and goods provided under credit, or funds advanced over the secured goods, the interest must be registered with the PPSR. Where the goods have serial numbers the serial number may be entered to identify the good/s (eg a VIN number for motor vehicles). Where the goods are not identified individually, or the security is over changing property (akin to the former Retention of Title or Romalpa clauses) then the security rests over anything that has been distributed under the agreement, though of course the goods must be able to be identified, or if they have been incorporated into something else, for instance parts supplied for repairs to vehicles, then the interest attaches to the vehicles to which they become part. The tricky part is that you have to ‘follow’ the interest with the PPSR.
There are some exceptions not covered under the Act. It does not apply to real property, which has its own register (the LPI – Land and Property Information) or, interestingly, to fixtures on land. This is controversial because while the PPSR applies to the goods builders and contractors supply to a building site, once the materials form part of a fixture, the protection vanishes. The ramifications of this however are untested and will need to be watched carefully in the near future.
So what do creditors need to do now? Generally the best way to protect yourself is to amend any agreements you have to add a clause relating to the PPSR. Ideally creditors should get specialised assistance but MUST do at least this]. Then advise everyone you deal with that there is a change to your terms and conditions and direct them to your website or provide the terms and conditions and tell them it is due to the Act.
Once you have done this then there is a further step to perfect your interest.
If you supply items that people generally keep, then just register your interest on the PPSR. If you supply things that people pass on to others, then you may have to “follow” your security by registering the interest not only with your client, but with those to whom your client supplies. ie if supplying goods (over $5K) to a contractor, for instance gyprock, you register your interest with them either for seven years or if a long term client then forever, then go to the end user eg the builder or developer, and register your interest in the building – however, if the materials become fixtures they may not be covered by the Act. Creditors in this situation can be protected by the Building and Construction Industry Security of Payments Act 1999, or the Contractors Debts Act 1997.
The protection this offers is far better than that available previously – especially if you can identify your goods. Take the better example of a forklift repairer. While each part is relatively small, where the client is a long term client, the creditors interest can be registered over all goods supplied (not the services). The only difficulty will be having to then register your interest over each and every forklift in which parts have been installed – by taking the VIN and using that to register the interest. Of course once the account is paid, you would have to release the security in the event the client wanted to sell the forklift – technically of course the release should be given at the point the credit has been paid. A forklift repairer however may consider the whole process too time consuming and therefore uneconomical, however the ramifications should be apparent and the creditor can elect which goods they need to protect.
A few issues to bear in mind; the Act does not protect services, only goods. In order to protect your interests the security must be registered within 10 days of creation.
For further information on how the Act will impact your operations, or assistance with implementing changes to your operations to incorporate the Act, please contact me.
This article is not to be construed as legal advice. The legislation surrounding the Personal Property Security Act 2009 (the “Act”)is new and untested, in addition to which the writer has not yet fully investigated the material set out above. The article is intended to be a rough overview of the Act in order to bring the ramifications of the Act to the attention of creditors who may be unfamiliar with the Act and its ramifications.