The following paper was delivered at a seminar hosted by Gordon & Jackson Barristers’ Clerks at the Victorian Bar’s Essoign Club on 3 May 2012.
Personal Property Securities Act 2009
3 May 2012
The Personal Property Securities Act (PPS Act) establishes an Australia-wide regulatory scheme for the registration and regulation of security interests in personal (meaning essentially non-real estate) property.
The PPS Act defies easy summation. Some of it is a repackaging and codification of earlier law while other parts introduce concepts that are both important and entirely new to Australian law. New concepts and familiar ones alike are described in new technical terminology.
This paper is intended principally to be a hard-copy companion to today’s oral presentation. Both the presentation and the paper are intended as brief and broad introductions to a large and complex area. Much has been omitted for reasons of brevity. The PPS Act itself is frequently set out under paired headings such as “main rule” and “exception.” This is emblematic of the qualifications, limitations and complications that riddle the PPS regime and make the broad-brush summaries in this paper a risky substitute for close consultation of the PPS Act itself.
Insolvency 101 revisited – background to the PPS Act
Securities in both real and personal property tend to be of academic interest only until a party involved with that property becomes insolvent. Then the nature and strength of any security interest instantly takes on a crucial significance in determining which creditors are to be paid and which are to be left partly or even entirely out of pocket.
A person or company is insolvent when he/she/it is unable to pay their debts as and when they fall due. Insolvency law usually intervenes at this point. Different outcomes are possible but the most common ones are that insolvent individuals become bankrupt and insolvent companies are placed into liquidation. Either way, the policy motivation behind the legal insolvency mechanism employed is to provide an equal, fair and orderly procedure for handling of the insolvent’s affairs and ensuring the creditors receive an equal and equitable distribution of the debtor’s assets. This ‘equal and equitable distribution’ goal is known as the pari passu principle. It is one of the key principles of insolvency law although it is subject to many exceptions.
Chief among those exceptions (for current purposes at least) is that secured creditors are not confined (as against unsecured creditors) to receiving an ‘equal and equitable’ distribution of the debtor’s assets. A secured creditor will take priority over unsecured creditors to the extent of the security held by the creditor. Hence a bank that holds a mortgage over an otherwise penniless bankrupt’s mortgaged property can typically be confident that it will be repaid the monies owing to it from the proceeds of the sale of that property even in circumstances where the bankrupt’s other creditors might each be left to collect (as between each other) an ‘equal and equitable’ share of nothing at all. In the language of insolvency law, the secured creditors will take priority over the unsecured creditors.
A secured creditor is a creditor holding a ‘security’ interest in another’s property – that is an interest in property which secures an obligation. (A familiar example is the common home mortgage whereby a bank holds an interest in the borrower’s property as collateral for repayment of the home loan. That collateral is there as back-up to satisfy repayment of the bank loan in the event that the borrower fails to.)
This thumb-nail refresher illustrates the enormous financial and legal significance in any insolvency of the reliable and convenient identification of:
a) secured property;
b) secured creditors; and
c) the nature and extent of the interests secured.
The PPS Actattempts to create a one-stop shop regime for capturing and making this information available to interested parties. Whether it accomplishes its objective or not the PPS Act will change the way these securities disputes are approached and resolved.
PPS Act will affect most businesses and many individuals
The PPS Act deserves a wider legal audience than just insolvency and banking and finance types.
Overwhelmingly Australian businesses are financed by credit of one variety or another – overdrafts, leases, hire-purchase, factoring, floor-plan financing, extended terms of trade, margin lending, retention of title clauses, crop liens, and sales by consignment are just some examples.
It follows that almost any litigation lawyer acting for or against any business or business people in civil litigation needs to be conversant with at least the potential implications (if not the entire detail) of the PPS Act.Some examples:
a) Family lawyers cannot efficiently litigate the division of the matrimonial asset pool efficiently without identifying the extent of that asset pool. Where that asset pool includes any form of small business – a corner shop, a farm, a dentist’s practice – its realizable value might be eroded or increased by reference to encumbrances on personal property within the business’s apparent ownership registered pursuant to the PPS Act.
b) Precisely the same considerations are likely to arise for wills and estate lawyers involved in Part IV applications under the Guardianship and Administration Act;
c) Any firm with commercial clients is inevitably going to be asked for advice when clients’ customers become insolvent. Are years-old retention of title clauses still enforceable? Are clients otherwise entitled to withhold (or even retake) possession of widgets for which they have not been paid? Or are those widgets now the property of the liquidator / bankrupt estate?
d) Clients’ ability to obtain finance might be constrained by security interests registered against them in the PPS Register. The very existence and breadth of such PPS Register registrations is hence another potential subject of litigation.
What follows is an introduction to some (but certainly not all) of the key terms and concepts underpinning the new PPS system.
The PPS Act itself comprises more than 300 pages. Even then, it is not a stand-alone document. Depending upon the particular PPS Act issue you are considering you might also need to consult the various regulations made under the PPS Act, the Corporations Act (particularly the amended provisions relating to charges) and the various state acts referring relevant state powers to the Commonwealth (which generally contain their own carve-outs).
The scope of the legislation should be appreciated. It is intended to change (in whole or part) the effects of approximately 70 different statutes Australia-wide that formerly dealt with discrete types of securities. Better known Victorian acts affected by the new regime include:
a) The Goods Act 1958;
b) The Chattel Securities Act 1987;
c) The Fisheries Act 1995; and
d) The Motor Vehicle Traders Act 1986.
The PPS Act introduces new concepts and much new terminology. One text on the PPS Act starts by essentially urging readers to put aside any prior knowledge of personal property securities as there is no direct correlation between the new PPS Act regime and its various predecessors. Attempting to marry up old security concepts to the new PPS Act ones might impede rather than assist understanding of the new system accordingly.
The PPS Register is central to the PPS Act scheme (but not always conclusive)
The PPS Act creates the Personal Property Securities Register (“PPS Register”) as an internet-based, one-stop shop for registration of security interests. Registration of security interests will generally – but not always – determine priorities in insolvency situations.
While the PPS Register mightbe likened to Torrens-type land registration the similarities are passing. The most obvious distinction between the two registers is that the Torrens system registers ownership of property while the PPS Register looks only to registration of security interests. (Whether you have any clear or encumbered title to ‘Greenacre’ will be apparent to anyone doing a title search on ‘Greenacre’. By contrast, if you have clear title to your car there should be no security interest registered against it hence (absent other relevant security interests) both you and your vehicle will be invisible to anyone searching for either on the PPS Register.
Although the PPS Register is the centerpiece of the PPS Act and its contents are admissible evidence of the existence of a security interest crucially there will be some instances where powerful security interests are not disclosed by a register search. Parties relying on a single search of the PPS Register will occasionally be misled as a consequence. Examples of this obvious hazard include:
b) Where ‘temporary perfection’ is automatically accorded by circumstances; and
c) Where a ‘silent PMSI’ temporarily exists.
Fundamental concept # 1 – personal property
Inevitably some lay people particularly will understand the reference to ‘personal property’ in the PPS Act’s title as limiting the Act to ‘household’ or ‘consumer’ property. This is fundamentally wrong. The Act does contain provisions which are specific to “personal, domestic or household property” but the Act is in reality directed much more at commerce and industry than the ‘mum and dad’ end of the economy.
“Personal property” does not mean “consumer property.” It means almost any property at all – tangible or intangible – that is not either -
a) Land; or
b) Excluded from the operation of the PPS Act by the PPS Act itself or by some other Commonwealth or state statute.
Motor vehicles, household goods, business inventory, intellectual property, accounts receivable and company shares are thus all obvious examples of relevant personal property. One less obvious category which is specifically provided for is “satellites and other space objects.”
Fundamental concept # 2 – ‘security interest’
The PPS Act does not define ‘security’ or ‘securities’ but uses the term instead the defined term “security interest” -
A security interest means an interest in personal property provided for by a transaction that in substance secures payment or performance of an obligation (without regard to form of the transaction or the identity of the person who has title to the property).
Examples offered by the Act of security interests include:
a) Fixed and floating charges;
b) Agreements to sell subject to retention of title;
c) Leases of goods;
d) Hire-purchase agreements;
e) Consignments; and
f) Chattel mortgages.
There will be others. Two examples not referred to in the PPS Act that occur to me are floor-plan financing (widespread in the car sales industry whereby floor stock is owned by a financier rather than by the dealership ostensibly selling the vehicles) and margin lending (where banks and others lend investors money on security of shares held by those investors).
A surprising further example should be highlighted to litigators particularly. Section 148 sets out the data that the PPS Register is to contain and permits the prescription of further classes in the regulations. Buried at Regulation 5.3(c) of the Personal Property Securities Regulations 2010 is the prescription for the purposes of the PPS Register of:
…personal property that is subject to an order of a court or tribunal (however described) that:
(i) prevents or restricts a person dealing with the property; or
(ii) enforces another court order (however described); or
(iii) orders the sale or other disposal of all or part of the property.
Thus it seems that Mareva injunctions, asset preservation orders and orders for seizure and sale (to name just some examples) can (and should) now all be registered on the PPS Register.
Other basic terminology
Property which is (or is intended to be) the subject of a security interest is “collateral”. A security interest “attaches” to collateralwhen a person (eg a credit provider) gives value for acquiring the security interest and in return gains rights in that collateral. A person granting a security interest in the collateral (ie the borrower, debtor, guarantor of borrower/debtor) is referred to in the Act as a grantor.
The resulting security interest is enforceable against third parties when that interest has attached to the collateral and either -
a) the secured party has possession or control of the collateral; or
b) the secured party has otherwise perfected that interest.
Strive for ‘perfection’
“Perfection” is the means by which a security interest in collateral is made known to the world so that third parties (such as potential purchasers of that collateral and/or other prospective creditors) can be alerted to the existence of the security interest in that collateral and organise their affairs vis-a-vis the grantor and the collateral accordingly.
Perfection will usually be achieved in one of three ways:
b) registration of the security interest on the PPS Register; or
c) in some cases, automatic temporary perfection in particular circumstances.
A perfected security interest will generally rank ahead of an unperfected security interest in an insolvency. Where two perfected security interests compete ‘first in, best dressed’ will apply.
Not even perfection is perfect
Don’t be misled by the lay meaning of ‘perfection’. A security interest that has achieved ‘perfection’ in PPS Act terms does not simply by reason of its ‘perfection’ ensure that the security interest holder will succeed in enforcing its interest in the event of the debtor’s insolvency.
The principal hazards are:
a) defects of form and/substance (including drafting and clerical errors) in lodging PPS Register registrations;
c) prior or subsequently registered Perfected Purchase Money Security Interests (PMSI).
This is important. A perfected security interest can still be trumped by a subsequently registered PMSI.
The ‘super priority’ of the PMSI
A PMSI is a security interest granted to an entity that in substance provides the purchase money for the particular collateral concerned. PMSI holders will hence typically be -
a) a vendor selling on terms whereby it retains title pending payment of the balance of the purchase price;
b) a financier who provided value for the purchase of the collateral;
c) a lessor or bailor under a PPS lease; or
d) a consignor who delivers property on a commercial consignment.
After actual possession or control of collateral, the PMSIis the holy grail of the PPS Act. A PMSI confers a ‘super priority’ on the secured party and will usually take precedence over any security interest which has not been effected by control of the collateral. The ‘super-priority’ principle is important and means that a PMSI will generally trump a lesser registered security interest (for example an all-assets floating charge) even if that lesser interest was registered first in time.
The public policy rationale for the ‘super priority’ of PMSI is twofold:
a) earlier creditors should not benefit by having potential recourse to assets which the grantor might not have been able to acquire but for the assistance of the subsequent financier; and
b) but for this ‘super priority’ the PMSI-secured creditor might well be deterred by an existing security interest from advancing to the grantor the money or assistance the grantor requires to develop the grantor’s business further.
A PMSI can lose its ‘super-priority’ if it is not appropriately and promptly registered on the PPS Register.
Retention of title (aka ‘Romalpa clauses’) and PMSIs
Property is frequently sold or leased on the basis that the buyer takes possession of the item concerned without acquiring legal title to it until full payment is made. Under the PPS Act such arrangements create a security interest in the property leased or sold. If such security interests are not registered on the PPS register the vendor/lessor’s rights in that property may be lost in the event that the buyer/hirer becomes insolvent. Accordingly, supply and lease agreements need to be reviewed with an eye to both ensuring that:
a) the retention of title provisions effectively create security interests for the purposes of the PPS Act (which will be the usual case); and
b) that following execution of these agreements the resulting security interests are promptly and effectively registered in the PPS Register (failing which they will be effectively useless as security interests and the collateral will be lost to the liquidator in the event of the grantor’s liquidation.)
Enforcement rights and remedies for secured parties
The first step in enforcement of a security interest upon default remains seizure of the collateral. That collateral may then be retained or sold for the best price reasonably obtainable/market value after the observance of notice requirements in the interim.
Anyone purchasing the collateral takes it free of all security interests and also of any claim the grantor might otherwise have in it. The proceeds from sale are distributed amongst secured and unsecured creditors in order of priority with any residue returned to the grantor.
Taking personal property free of security interests
The PPS Act sets out ten main rules dealing with how and when a purchaser can acquire an interest in property free of a prior security interest in that property. Inevitably they are all subject to exceptions but the first rule is illustrative:
A buyer or lessee of personal property, for value, takes the personal property free of an unperfected security interest in the property.
This puts an onus on security holders to register their security interests on the PPS Register unless their interest is already otherwise perfected. Put simply, perfect your security interest or risk losing it if the collateral to which it is attached is sold to a third party.
Registration is voluntary but desirable
The most common form of perfection will be registration on the PPS Register. Registration is not compulsory but it does confer three obvious benefits:
a) registration will generally define the priority status that a security interest has relative to other interests in the same collateral;
b) registration should ensure that the security interest survives the insolvency of the grantor rather than the collateral being realised and distributed among all creditors as part of the insolvent estate; and
c) registration of a security interest in collateral will generally protect that interest as against third parties who might otherwise purchase the property from its apparent owner (typically the grantor) for value and thereby extinguish the interest of any unregistered security holders in that collateral.
Registration of security interests is intended to be relatively quick, simple, and cheap although the complexities of the ‘simple’ registration system might well discourage or defeat less sophisticated security interest holders particularly from effectively registering their security interest entitlements.
Security interest holders might neglect to or choose not to register their security interests properly or at all. They will face two obvious consequences:
a) They will rank with unsecured creditors in insolvencies; and
b) They will risk loss by sale of their collateral to unsuspecting third parties.
A security interest can be registered on the PPS Register by an application supported by specific information and a payment of between $7 and $145 (depending on the nature and duration of the particular registered security interest. Once a security interest is registered notice of that registration must be given to the grantor.
The PPS Register is a public document accessible via the internet. For a small fee (eg $3.70 for a motor vehicle search) it may be searched for details of security interests registered against particular grantors and/or types of property.
The PPS Act sets out priority rules. The default rules in summary are:
a) a perfected security interest takes priority over an unperfected security interest;
b) priority between two or more perfected security interests is determined in favour of an earlier perfected security interest over a later one;
c) priority between two or more unperfected security interests is determined in favour of an earlier attached security interest over a later one.
These are the default rules only. They yield to more specific priority rules found throughout the PPS Act such as those relating to PMSIs.
Non-security interests are not changed by PPS Act
The PPS Act revises the rights of security interest holders as between each other. It does not otherwise revise Corporations Act / Bankruptcy Act priorities in insolvencies (eg unsecured creditors, outstanding employee entitlements etc are not affected by the PPS Act). Such other creditors will in all likelihood be neither helped nor hindered by the new regime.
This comes back to the concept of security interests. A creditor owed money but without any lawful entitlement to seize particular property from the debtor’s possession is on first principles an unsecured creditor. That creditor will generally have no security interest capable of registration under the PPS Act.
The PPS Act came into operation on 30 January 2012. It applies to security interests that are created after that date but also to security interests that predate it. For this purpose pre-30 January 2012 security interests from the PPS Register’s various predecessors (eg ASIC’s Register of Company Charges and Victoria’s Register of Motor Vehicle Securities) have been migrated to the PPS Register automatically. This migration is accompanied by a “temporary perfection” regime directed at ensuring that no security interest valid under the various old systems is prejudiced by the introduction of the new. But note the temporary nature of this safeguard. An older security interest not perfected under the PPS Act before 30 January 2014 will on that date become ‘unperfected’ (and hence be both subordinate to security interests perfected in accordance with the PPS Act and exposed to the risk of unauthorized sale of collateral to third parties).
As you would hope from an internet-based service the Personal Property Securities Register itself provides a helpful range of fact sheets, forms and information on its website – http://www.ppsr.gov.au
In preparing this paper I have been particularly assisted by two text books on the PPS Act:
a) Del Cseti’s ‘Understanding Personal Property Securities Law’ (CCH) 2010; and
b) Lionel Meehan’s ‘The PPS Guide’ (Woof Creative) 2011.
Cseti’s book is good but I found Meehan’s better. Inevitably (given their publication dates) both are quite unburdened by Australian judicial authorities on the subject.
The PPS Act brings a new system of security interest regulation to Australia. Much of it (such as issues concerning accession, processing and comingling of secured goods, circulating security interests (floating charges) and transfers of accounts and invoice finance (factoring) and PPS leases) has not been touched upon in this paper.
Even this selection of omissions hints at the new lexicon introduced by the PPS Act. Beneath its novel terminology some of the PPS Act system is more familiar than it sounds but other parts are entirely fresh to Australian eyes. But none of it is easy. For better or worse, it will keep very many lawyers and accountants employed for the foreseeable future.
 See for example Part 2.5 of the PPS Act where these paired subheadings are employed in each of sections 43, 44, 46, 47, 50, 51 and 52.
 see section 122(1) Bankruptcy Act; section 95A Corporations Act. This is the “cash flow” or “commercial” test of insolvency. In some situations the “balance sheet” or “absolute” test of insolvency might be more appropriate but that issue will not be explored here. See Keay and Murray Insolvency Personal and Corporate Law and Practice Law Book Company 2002 at p 12 for a discussion with these concepts.
 A cynic’s version appears in Blake Odgers, W & Poland, H (Eds). A Century of Law Reform. Macmillan and Co Ltd, London. 1901, at page 14 where bankruptcy is defined as ‘The state of things which exists when, a man being unable to pay his debts, his solicitor and an accountant divide all his property between them.’
 See PPS Act at Part 5.6 re demands for amendments to the PPS Register and Chapter 6 re judicial proceedings generally.
See for example the Personal Property Securities (Statute Law Revision and Implementation) Act 2010 (Vic) which excludes some mining-related rights etc from the definition of ‘personal property’ for PPS Act purposes.
 Cseti Understanding Personal Property Securities Law CCH 2010 at page 1.
 See section 147 of the PPS Act.
 The priority rules are set out at Part 2.6 of the PPS Act.
 See section 174(1) of the PPS Act.
 See section 57(1) of the PPS Act.
 As to the separate but related concepts of ‘possession’ and ‘control’ see Part 2.3 of the PPS Act.
 See for example sections 34, 35, 36 and 39 of the PPS Act.
See section 63(c) which permits a PMSI to be registered up to 15 business days after a grantor takes possession of the relevant collateral.
 See example section 47 of the PPS Act which deals with purchase of such property free of security interests where, inter alia, the property is worth less than $5000.
see definition of “personal property” in section 10 of the PPS Act and, for some sample exclusions, section 8 of the PPS Act and the Personal Property Securities (Statute Law Revision and Implementation) Act 2010 (Vic) (which carves some mining-related rights etc in Victoria from the definition of ‘personal property’ for PPS Act purposes).
 see section 21(2)(c)(vi) of the PPS Act.
 see section 12 (1) of the PPS Act.
 see section 12 (2) of the PPS Act.
 see section 10 PPS of the Act.
 see section 19 PPS of the Act.
 see section 10 of the PPS Act.
see section 20(1) of the PPS Act but note that possession of collateral will often ipso facto constrain the grantor’s ability to economically utilise that collateral. (Eg A truck financier would quite thwart the very purpose of a hire purchase agreement if it financed the acquisition of a truck and then refused to release possession of it to the trucking business [grantor] on whose behalf it in fact had acquired the truck.)
 see section 20 and 21 of the PPS Act.
 see section 21(2)(b) of the PPS Act.
 see section 57(1) of the PPS Act (but note the limitation imposed on it by section 322A).
 see section 21(2)(a) of the PPS Act.
 see section 21(1)(a) of the PPS Act.
 see section 55(3) of the PPS Act.
 see section 55(5) of the PPS Act.
see section 55(5) of the PPS Act – competing ‘perfected’ interests is likely to be a common phenomenon.
 see section 14 of the PPS Act.
 see section 62 of the PPS Act.
 see section 63 of the PPS Act.
 see section 267 of the PPS Act.
 see section 123 of the PPS Act.
 see section 134 of the PPS Act.
see sections 128 - 131 of the PPS Act.
 see sections 130 PPS Act and section 135 of the PPS Act.
 see section 133 of the PPS Act.
 see section 140(2) of the PPS Act.
 see Part 2.5 of the PPS Act.
 43(1) of the PPS Act.
 43(1) of the PPS Act.
 see section 153 of the PPS Act
 See table of fees at http://www.ppsr.gov.au/AbouttheRegister/AboutFees/Pages/default.aspx
 see section 157 of the PPS Act
 some privacy-motivated constraints apply to access - see section 172 of the PPS Act and some forms of property capable of being identified by serial number (eg motor vehicles, aircraft, patents) will only be searchable by those serial numbers and not by the identity of the grantor.
 see section 55 of the PPS Act
 see Part 2.6 of the PPS Act generally
 see sections 320 – 323 of the PPS Act