Australian Personal Property Securities Reform

Transcription

1 GTA Briefing Document On Australian Personal Property Securities Reform Grains Industry Prepared by Geoff Farnsworth Principle Lawyer, Macpherson and Kelley Lawyers.

2 Section 1: Personal Property Securities Reform 1.1 What is the Personal Property Securities Reform? The upcoming personal property securities ("PPS") reforms will be one of the most significant pieces of legislative reform for the Australian financial sector, and commerce generally, for many years. Whilst the reforms will have their greatest impact on financiers, the changes will also impact in some way on virtually all commercial enterprises, and many individuals. The reforms will rewrite Australian law relating to: how security interests are formed; how security interests can be enforced; how priority disputes are to be resolved where more than one security interest is given over the same property; and the circumstances in which a security interest can be extinguished against the wishes of the secured party. They will also rewrite a number of other established principles of commercial law. The changes will affect business documentation and procedures, the way businesses conduct their trading relationships, and the extent to which they can rely with confidence on the terms of those relationships to provide them with the level of security and certainty that they have previously expected. The law documenting the reforms to personal property security is the Personal Properties Securities Act 2009 (Cwlth) ("Act"). 1.2 When does the PPSR Commence? The Council of Australian Governments ("COAG") announced on 17 February 2011 that the commencement date of the Act has been delayed until October The PPSR was due to start in May 2011 (after already being delayed from a 2010 start). 1.3 What is personal property? Personal property is any form of property other than land, buildings or fixtures which form a part of that land. It can include tangibles such as cars, goods, art, machinery and crops (including potentially the "proceeds" of crops, that is grain "if the produce is identifiable and traceable" 1 ), livestock; as well as intangibles such as licenses, investment instruments, negotiable instruments and accounts, intellectual property and contract rights. The Act applies to personal property only if an owner of the property can transfer it to another person (even if the consent of another person is required for the transfer, or some other restriction applies before the property can be transferred). 1.4 What is an interest? An interest, in relation to personal property, includes a right in the personal property. A right to possess, use, sell, or otherwise deal with the property can constitute a right in that property. 1 Section 31(4)

3 In determining whether or not an interest is a security interest, the Act takes a functional approach and focuses on the form of the transaction. 1.5 What is a security interest? A security interest is an interest in personal property that secures a payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property). A personal loan that is secured against a motor vehicle is a common example of a security interest. Some other examples of security interests covered by the PPS Act include: fixed and floating charges; chattel mortgages; conditional sale agreements (including retention of title agreements); hire-purchase agreements; pledges; trust receipts; consignments; leases of tangible property (including PPS leases); assignments; factoring of book debts; transfers of title; and flawed asset arrangements. 1.6 Other Personal Property Security Interests A security interest may be provided for expressly in a transaction, but also describes; 1. the interest of a consignor who delivers goods to a consignee under a commercial consignment 2 ; and 2. the interest of a lessor, or bailor of goods under a PPS lease Key Concepts in Grain The Act defines a PPS lease as a lease or bailment of goods, for an indefinite term. 4 An example of a PPS lease will be a storage and handling contract with a bulk handler where that contract is for an indefinite term. The Act defines a commercial consignment 5 as; 2 12(3)(b) 33 12(3)(c) 4 13(1)(b) 5 section 10

4 A consignment if: and (a) the consignor retains an interest in goods that the consignor delivers to the consignee; (b) the consignor delivers the goods to the consignee for the purpose of sale, lease or other disposal; and business; (c) the consignor and the consignee both deal in goods of that kind in the ordinary course of but does not include an agreement under which goods are delivered to: (d) an auctioneer for the purpose of sale; or (e) a consignee for sale, lease or other disposal if the consignee is generally known to the creditors of the consignee to be selling or leasing goods of others. A storage contract with a bulk handler may also be a commercial consignment. A purchase money security interest 6 means a security interest taken in collateral to the extent that it secures all or part of its purchase price; the interest of a bailor of goods under a PPS lease, and the interest of a consignor who delivers goods to a consignee under a commercial consignment. Scenario 1 Grower grants Bank A, a crop-lien to secure crop finance. Following harvest, Grower delivers grain to Bulk Handler. Grower sells the grain and title transfers to Merchant for inclusion in Merchant's pool. Bank B has a fixed and floating charge over all of the assets of Merchant. 6 section 14

5 Section 2: Attachment, Enforcement & Perfection 2.1 New Rules For Creating Security Interests The Act establishes new rules for the creation of effective security interests. Different rules apply to determine: when a security interest will be enforceable against the grantor (the giver of the security interest) (known as attachment); when a security interest will be enforceable against third parties; and what steps can be taken to protect a security interest from being defeated by a competing interest (known as perfection). 2.2 Who is a grantor? A grantor is a company, individual or other entity that grants a security interest over personal property to another party. Grantors include those who: use their personal property as security for a loan, for example a secured car loan; use their business assets as security for a loan, for example a fixed and floating charge; receive property under a retention of title arrangement; or lease personal property from another party for an extended period. A grantor 7 includes a person who receives goods under a commercial consignment and/or a lessee (or bailee) under a PPS lease, for example, the Bulk Handler would be the grantor. 2.3 Attachment A security interest will attach to personal property (that personal property is then referred to in the Act as collateral), making the security interest enforceable against the grantor, if: the grantor has rights in the collateral (or the power to transfer rights in the collateral); and either value is given for the security interest, or the grantor does an act that causes the security interest to arise. (Section 19(2)(b)(ii) of the Act). These requirements should generally be easy to satisfy. In a situation where grain is delivered to a bulk handler by a grower, that grower has a security interest in the grain by virtue of section 12(3) of the Act. The bulk handler will be the grantor as that term is defined. Under section 19(1), in order for the grower's security interest to be enforceable against the bulk handler, the security interest must have attached to the collateral. In order for the security interest to have attached to the collateral, the grantor (that is, the bulk handler) must have rights in the collateral, or the power to transfer rights in the collateral to the secured party (that is, the grower) AND either value is given for the security interest, or the grantor does an act by which the security interest arises. 7 section 10

6 By virtue of section 19(5), the grantor under a PPS lease, consignment or conditional sale agreement/rot has rights when it obtains possession, without limitation to any other rights it may obtain. 2.4 Enforceability against third parties For a security interest to be enforceable against a third party in respect of particular collateral, the security interest needs to be attached to the collateral, and either: the secured party must possess the collateral, or have perfected the security interest by control (these concepts are discussed further below), or there must be a security agreement providing for the security interest, and that security agreement must cover the collateral. A security interest will cover collateral if: it is in writing, and is signed (or adopted in another specified manner) by the grantor, and the writing contains a description of the collateral. While most traditional security interests will satisfy these requirements, the requirements are likely to cause problems for some commercial relationships that have not previously been regarded as security interests, such as retention of title provisions under long-standing supply arrangements. 2.5 Perfection Even if a security interest has attached to collateral and is enforceable against third parties in accordance with section 21 of the Act, it will be important in most cases that the security interest also be perfected. Perfection is a means of describing the priority status of a security interest. An item of personal property may be subject to more than one security interest, each with a different secured party. A security interest that is perfected has priority over a security interest that is not perfected. If it is not perfected, the secured party will be exposed to the risk that its security interest could rank behind other security interests in a priority dispute, or even be extinguished entirely (for example, if the grantor transfers the collateral to another person). Most security interests, if they are not perfected, will also be at risk of being extinguished if the grantor is wound up or bankrupted. 2.6 How can a security interest be perfected? A security interest can be perfected in up to five different ways, depending on the nature of the collateral. A security interest may be perfected regardless of the order in which registration, possession or control occurs. A. Registration The Act establishes a securities register called the Personal Property Securities Register. The Register, a key component of the PPS reform package, will be maintained in electronic form, and is to be readily accessible online. A secured party can make a registration on the PPS Register to protect their priority. Through registration of their security interest in the collateral the secured party perfects their security interest and can gain priority over later secured parties.

7 Importantly, a secured party does not need to wait until the security interest has been granted before entering it on the register, and can register a security interest before it has been granted as well. B. Possession Where the collateral is goods (tangible personal property), possession by the secured party would be sufficient to perfect the security interest. Some security interests could, therefore, be perfected without registration on the Personal Property Securities Register (the Register). This means that the Register will not necessarily be a complete record of all security interests over personal property. Some kinds of personal property cannot be perfected by possession (e.g. intangibles, such as an investment instrument that is not evidenced by a certificate or an intermediated security). A security interest that has attached to goods in the possession of a bailee is perfected when the bailee possesses the goods on behalf of the secured party. C. Control A secured party can perfect its security interest over some types of personal property, by taking control of the collateral in a manner specified in the Act. Only security interests in the following kinds of collateral may be perfected by control: an authorised deposit-taking institution (ADI) account in relation to which the ADI is the secured party; an intermediated security; an investment instrument; a negotiable instrument that is not evidenced by a certificate; or a right evidenced by a letter of credit that states that the letter of credit must be presented on claiming payment or requiring the performance of an obligation. D. Temporary perfection The Act provides for temporary perfection or perfection of security interests in some circumstances. temporary perfection while negotiable document of title is in transit when a bailee takes possession of goods and issues a negotiable instrument of title (Section 22(2)); a security interest in proceeds will be temporarily perfected when a security interest in original collateral is perfected, but the security interest in the proceeds is not otherwise perfected (Section 33(2)); when collateral is transferred by the grantor to another person (Section 34(1)); when goods are returned to a grantor for dealing (Section 35(1)); where negotiable instruments or investment instruments are given to the grantor for a dealing (Section 36(1)); when goods subject to a transferred account or chattel paper are returned (Section 38(3)); when the collateral is relocated to Australia (Section 39(1));

8 When a security interest in intangible or financial property, has been continuously perfected and the grantor moves to Australia or the collateral is transferred to a person who is located in Australia (Section 40(3)); or for transitional security interests during the 24 month transition period (Section 322(1)). Temporary perfection means that a security interest will be taken to be temporarily perfected without any act by the secured party. E. Deemed perfection In some limited situations, the Act will also deem a security interest to be automatically perfected for example, in some circumstances where collateral under a perfected security interest is disposed of, and the security interest attaches to the proceeds. Section 3: Priority of Security Interests 3.1 Priority The Act has default priority rules and specific rules for certain circumstances. In many cases, the first to register will have priority. 3.2 Basic Priority Rules The basic rules of priority are set out below: Perfected security interests have priority over any unperfected security interests. Priority between two or more perfected security interests in collateral is determined by the time at which each security interest is registered. Eg. The first perfected security interest in collateral will have highest priority. The priority between registered but unperfected security interests in the same piece of collateral is to be determined according to the order of time at which the security interest is registered. Eg. The first unperfected security interest in collateral will have highest priority. 3.3 Specific Priority Rules The more specific rules are designed for specific situations such as where: a party has control of collateral; a party has a purchase money security interest ("PMSI") in collateral; a party takes a non-pmsi interest in accounts; collateral is transferred in such a way so that there are two security interests given by two different grantors in the same collateral; or there is a competition between a security interest and a statutory interest. Please let us know if you require more specific advice in relation to specific priority rules.

9 3.4 How do purchase money security interests ("PMSI") differ from a normal security interest in personal property? PMSI stands for Purchase Money Security Interest. PMSI are security interests that have super priority over most other interests in the same collateral group. A PMSI is a type of security interest that can protect an owner under law in arrangements such as retention of title and leasing. There are specific registration requirements for a PMSI. A PMSI arises when: a person takes a security interest in collateral which they sell but are not immediately paid for; a person takes a security interest in collateral for which they have lent another person the money needed to buy it; a person owns goods and leases or bails them under a PPS lease; or a person consigns goods under a commercial consignment. Section 4: The Personal Property Security Register 4.1 The PPS Register The PPS Register is a single, national online register. Secured parties and potential secured parties will be able to use it to search for and register security interests in personal property. The Register will replace numerous State, Territory and Commonwealth electronic and paper registers. Existing information on these registers will be migrated to the PPS register under the PPS Act s transitional provisions. The national PPS Register will be computer-based, updated in real time and accessed publicly 24 hours a day, seven days per week. The Register will operate from the registration commencement time and a Customer Contact Centre will be established to support it. 4.2 Using the Personal Property Securities Register A secured party may use the PPS Register to: search for existing security interests; find out if security interests are registered against personal property; or register security interests. 4.3 Searching the Personal Property Securities Register People who want to search the Register can either create an account or search as a casual user. A casual user will use the register on a pay-as-you-go basis. Users can search the register using different search criteria, including: grantor details; or the serial number of certain types of property.

10 Consumer motor vehicles will only be able to be searched by serial number. 4.4 How can I make entries on the Register? Anyone will be able to register personal property on the PPS Register. It is not necessary to apply for login details to make a registration on the Register. Generally, the person who makes a registration will be the secured party or its agent. It will be possible to make entries on the PPS Register over the internet using a web browser. Business users will be able to submit registrations via a B2G (business to government) channel employing XML. A registration can also be made using a hard copy registration form that is sent to the PPS Contact Centre. Registrants would provide information about the secured party, the person who is or has granted the security interest and the collateral that is or would be the subject of the security interest. The registration will need to describe the property so that it can be readily identified by any other person who searches the PPS Register. 4.5 Financing Statement A security interest is registered by lodging a financing statement with the Registrar. The financing statement is a notice of the security agreement and not the actual agreement creating the security interest. The actual security agreement creating the security interest does not need to be lodged on the Register. A financing statement would generally contain the following information: secured party details; collateral details, including class and a description; (please refer to section 6 of this information paper for further information in classes of collateral.) grantor details, except where the collateral is consumer property and is a car, watercraft or aircraft; and registration details the end time for the registration, if the interest is a transitional security interest and further relevant information. Note: End time is the PPS legislation phrase for when registrations will expire. 4.6 Information required to make a registration Registrations on the Register include data about the grantor s personal property. A secured party will sometimes be required to record information about the grantor in the PPS Register, for example, where collateral cannot be described by a serial number. Consumer property which must be described by serial number will not require the grantor s details to be recorded on the Register Individual Grantors For grantors that are individuals, the individual may be identified by name and date of birth. The draft Personal Property Securities Regulations set out rules that will be applied to determine an individual s name and date of birth. The secured party will be required to perform due diligence to ensure they have a valid and correct grantor name and that it is entered in the correct form.

11 4.6.2 Organisation Grantors For grantors that are organisations, the organisation is identified according to the organisation type. The appropriate identifier is generally based on whether the organisation has an Australian Company Number (ACN), Australian Registered Body Number (ARBN) or Australian Registered Scheme Number (ARSN) Partnership Grantors For partnerships that have an ABN, the ABN is the identifier. For partnerships that do not have an ABN, the grantor will be recorded as an individual (e.g. one of the partners). 4.7 Why should a registration be made on the Register? Perfection of a security interest is required to bind third parties to the security interest. Perfection is a means of describing the priority status of a security interest in competition with another interest in collateral (refer to sections 2.5 and 2.6 of this Information Hand Out for further information about perfection). 4.8 What will it cost? A fee will apply for making registrations on the Register. The Attorney-General's Department has released a draft schedule of the fees that will be charged for using the PPS register. The fees will be reviewed in June The fees are intended to cover the costs of establishing and operating the Register, and not to operate as a more general fundraising tool. The fees for using the Register will depend on the type of activity and the channel through which the Register is accessed. Most fees for using the Contact Centre will be higher than fees for accessing the Register online, reflecting the greater cost to the Registrar of handling communications through this channel. The proposed fees for the most frequently used activities are set out in the table below. Activity Online Fee Contact Centre Fee Register or amend a financing statement Financing statement is for 7 years or less $7.40 $22.20 Financing statement is for more than 7 years but less than 25 years $37.00 $51.80 Financing statement is for an indefinite period $ $ Cancel a financing statement No charge No charge Search the register $3.70 $11.60 Issue copy of a verification statement, including certificate of registration $3.70 $11.60

12 4.9 Verification Statement Upon registration, a verification statement will be sent to the registrant at the address nominated in the registration (address for service) showing details of the registration, and confirms the registration time. After a registration is made, a verification statement is automatically sent to the address nominated in the registration (address for service). A verification statement sets out the data that was registered, and confirms the registration time. In limited circumstances such as for registrations of data that are migrated from existing State, Territory and Commonwealth security interest registers, the Registrar may publish a single verification statement on the PPS website. If this is done, then a verification statement may not be sent to the address for service Do I need to advise the grantor of the registration? A grantor is required to be informed when a registration is made against their personal property. The secured party is generally required to send a notice of the verification statement to the grantors as soon as reasonably practicable (a notice is not required if the Registrar publishes a single verification statement on the PPS website). Failure to send the grantor(s) a notice of the verification statement may amount to interference with the privacy of the individual grantor for the purposes of the Privacy Act 1988, and may expose the secured party to an action for damages What happens if I make a mistake in my registration? A registration may be ineffective if there is misleading data related to the registration or if it has a defect mentioned in Section 165 of the Act. Defects mentioned in Section 165 include errors in: the serial number; the grantors details; identifying the registration as a purchase money security interest; and further errors in the data related to the registration that are prescribed in the PPS Regulations. The draft PPS Regulations prescribe that a defective registration exists in relation to transitional security interest which are also provided for by a security agreement after the registration commencement time Can I amend a registration? A secured party that makes a registration on the Register can make amendments to its registration. There will be several ways of accessing a registration through the Register, including: using the registration number and a token which will be provided for that registration; or

13 via the secured party group workbench (will require the secured party group number and access code). It will be apparent from the online form which information can be amended and which cannot. More details on the amendment processes will be available closer to the registration commencement time. Grantors will have the ability to request that changes be made to registrations made over their property What are the relevant end times for registrations on the PPS Register? The end time for a registration of a security interest in consumer property or property described by a serial number is no later than seven years after from registration. The end time for a registration of a security interest in commercial property can be nominated as an indefinite end time or an end time up to 25 years. Note: End time is the PPS legislation phrase for when registrations will expire Do registrations expire automatically or can they be renewed? If a registration is about to expire and the secured party wishes to continue the registration, the secured party can renew the registration. The same end time rules will apply depending on whether it is consumer or commercial property. When a registration has passed its end time, the security interest will no longer be perfected for the purposes of the PPS Act Temporary Perfection for 24 months Transitional security interests that cannot be migrated to the PPS Register will receive temporary perfection for 24 months after October 2011 when the PPS Register comes into effect. Temporary Perfection means that an existing security interest may keep the priority it had before the PPS Act commenced. This 24 month period is referred to as the transitional period. Failure to register transitional security interests on the PPS Register during the transitional period may mean that the secured party will lose priority to another secured party that registers its security interest. While secured parties will be protected by temporary perfection for 24 months, we recommend that every effort should be made to register transitional security interests on the PPS Register within the transitional period to avoid losing priority after the end of the period. A fee will not apply when registering a transitional security interest on the PPS Register during the transitional period. Section 5: Privacy, Protection & Penalties 5.1 Privacy, Protection and Penalties The Act creates a regime to protect grantors, secured parties and other members of the public from users of the Personal Property Securities Register who misuse the Personal Property Securities scheme.

14 5.2 Grantors privacy Registrations on the Register include data about the grantor s property or collateral and may contain information such as a person s name and date of birth. The following measures have been adopted to protect privacy concerns of grantors: Where consumer collateral can be described by serial number, no grantor details will be recorded on the Register. If the grantor is a company, it will be identified by its ACN only. If an individual grantor s collateral is not described using a serial number, then the grantors details will be required. The details are the grantor s name an date of birth. A search of the Register against an individual grantor s name and date of birth, and use of the search results, will only be allowed for authorised persons and purposes as set out in Section 172(2) of the Act. An illegal search may attract: (i) civil penalties; (ii) constitute an interference of an individual s privacy under the Privacy Act 1988; and/or (iii) damages for loss caused by the unauthorised search or use of data. To successfully make a search for security interests granted by the grantor, it is necessary to: (i) (ii) know the exact serial number for the property; or have the correct grantor name (given names and surname) and date of birth. A grantor is required to be provided with a notice of a verification statement, as soon as reasonably possible following registration or following an amendment to the registration. The notification will be required to be in an approved format (which is yet to be set). This will ensure that a grantor will be notified when a registration is made against them. A grantor can apply to receive an automatic notification from the Register when a registration is made against their name. 5.3 Protecting grantors and the public The Act protects members of the public from having illegitimate registrations being made against their property and may impose a civil penalty where this has occurred. When registering a security interest over collateral (through a financing statement or financing change statement) the party registering the interest must reasonably believe that the secured party (usually themselves) has or will have a legitimate security interest in the collateral.

15 Section 6: Collateral 6.1 Collateral Collateral is personal property to which a security interest is attached. In relation to a registration, collateral also includes personal property described by the registration (whether or not a security interest is attached to the property). Section 161 of the Act authorises a registration describing personal property before or after a security agreement is made covering the property, or a security interest is attached to the property. 6.2 Registering an interest in collateral When a security interest is registered, the collateral must be described in accordance with the rules given in Section 153 of the Act. A collateral description must be in accordance with all of the following rules: (a) the collateral must be described as one of the following: (i) (ii) consumer property; or commercial property; (b) (c) (d) the collateral must, or may, be described by serial number, if required or allowed by the regulations (refer to section 6.4 of this Information Hand Out for further information); the collateral must belong to a single class of collateral prescribed by the regulations; and any description of proceeds must comply with the regulations. It is important for users who are registering collateral to understand which type of personal property a security interest relates to because the type of personal property will, to some extent, govern priority disputes between secured creditors. A more precise description of the collateral also makes it easier for prospective lenders and other secured parties to search the Register and determine whether a particular item of personal property is subject to a security interest. Two or more types of collateral that belong to different classes prescribed by the regulations must be described in separate registrations. However, two or more registrations can be effected through a single application. 6.3 Consumer or commercial property Consumer property is defined as personal property held by an individual, other than personal property held in the course or furtherance of carrying on an enterprise to which an ABN has been allocated. Commercial property is defined as personal property other than consumer property. Some rules in the Act relate only to commercial property, and some relate only to consumer property (see collateral subclasses below). For consumer property, the Act has rules about collateral description that will maximise individual privacy. For example, when registering a motor vehicle as consumer property, a serial number must be specified, and no grantor details are required. 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.

16 6.4 Collateral & serial numbers The PPS Regulations will specify which types of collateral are required to be described by serial number Mandatory serial numbers Collateral of the following classes, which is consumer property, must be described by serial number: (i) (ii) aircraft; motor vehicles; and (iii) watercraft Non-mandatory serial numbers Collateral of the following classes, which is commercial property, may be described by serial number: (i) (ii) (iii) (iv) aircraft; motor vehicles; watercraft; and collateral that is intangible property may be described by serial number if the property is: (a) (b) (c) (d) a design; or a patent; or a plant breeder s right; or a trade mark. 6.5 Collateral classes The Act divides personal property into a number of classes. Personal property can only fall into one class. The Act specifies rules that apply to how collateral should be described. If collateral is not described according to these rules, the registration will be invalid. The main collateral classes which are currently proposed to be included in the Regulations are: Agriculture Aircraft all present and after-acquired property all present and after-acquired property except financial intangible motor vehicle

17 other goods; and watercraft. Definitions for some classes are provided in the dictionary section of the Act. Other classes are defined in the Regulations (e.g. motor vehicle). The regulations provide precise definitions for users to identify the type of property involved. 6.6 Collateral subclasses Collateral may be required to be registered in a collateral subclass. Dependent on whether the collateral is commercial or consumer property, there are a number of different collateral subclasses. Further information on collateral subclasses will be available closer to the Register s commencement. Section 7: Leases 7.1 Does the PPS Act apply to leases? In the case of personal property, a lease for a term of at least one year will be deemed to be a PPS Lease and therefore deemed to be security interest for the purposes of the PPS Act (whether or not it secures payment or performance of an obligation). This also includes leases for an indefinite term and leases for a term of up to one year that are automatically renewable. Shorter term leases may be deemed PPS Leases in certain circumstances. Where the goods can be described by serial number according to the PPS Regulations, a lease will be deemed a PPS Lease provided it: is for a term of 90 days or more; is for a term of less than 90 days but the lease is automatically renewable, or renewable at the option of one of the parties involved for one or more terms where the total time might be more than 90 days; or is for term of less than 90 days, in a case in which the lessee, with the consent of the lessor, retains uninterrupted (or substantially uninterrupted) possession for more than 90 days after first acquiring the property.