Uncovering critical issues with the PPSA: can you afford not to register?

Transcription

1 Uncovering critical issues with the PPSA: can you afford not to register? Dr William A.J. Higgs Barrister at Law Elizabeth St Chambers Alex Chernishev Senior Associate Mills Oakley

2 Why PPS? The purpose - "establish a single national law governing security interests in personal property", by taking a functional in substance" approach in which legal outcomes do not depend on the particular form a transaction takes. Looking to substance rather than to form, so many of the familiar concepts and technical rules are either less relevant or irrelevant (although there are unfamiliar new concepts and technical rules to grapple with). It came into effect on 30 January It is based, proximately, on Canadian provincial legislation and, remotely, on Article 9 of the United States Uniform Commercial Code. It provides for the creation and registration of security interests in personal property and their enforcement against those that have granted them and against third parties This is intended to result in "more certain, consistent, simpler and cheaper arrangements for personal property securities for the benefit of all parties"

3 The old has passed.. On review of the PPSA readers would be entitled to the view that the old has passed away; behold the new has come. The change is radical not incremental, there is much to learn. As Professor O Donovan cautioned, the PPSA is not old wine in a new bottle: It provides new and sometimes radical rules dealing with attachment, perfection, priority, enforcement and extinguishment of security interests.

4 Fresh beginnings. Some of the commentators (there are many!) to the PPSA say that the best way to understand the operation of the PPSA is to put to one side your knowledge of the existing regime relating to personal property. There is no correlation with what existed before and the PPSA. So if you didn t understand the previous regime then this is an advantage and will assist to come to grips with the PPSA.

5 Key issues in PPS for sale of business

6 Key Issues in PPS for sale of business Does the transaction include personal property? What is (or are) the security interest/s relevant to the transaction? Who are the parties (in particular, who is the grantor, the debtor (if different from the grantor) and the secured party)? Has attachment occurred? (If so, the security agreement will generally be enforceable between the parties but not, without more, as against third parties). How might perfection be (best) achieved? Has perfection in fact occurred? How should these issues be addressed in the sale agreement We ll come back to this but first we need an overview of the PPSA

7 Key elements of PPS

8 Key elements The key elements of the PPSA are set out in the Guide to the PPSA in s 3 and are as follows: A security interest is an interest in personal property provided for by a transaction that, in substance, secures payment or the performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property) (see s 10(1) PPSA). The form of the transaction and the identity of the person who has title to the property do not affect whether an interest is a security interest. Certain transactions that do not secure payment or the performance of an obligation may also give rise to deemed security interest: transfers of accounts, consignments and certain long-term leases and bailments (called PPS leases).

9 Key elements (cont) A security interest is enforceable against a grantor when it attaches to collateral. A security interest attaches to collateral when a person gives value for acquiring the security interest (or does something else to acquire it), and in return, the person gains rights in the collateral. this is a contractual matter.

10 Key elements (cont) A security interest is enforceable against third parties when it has attached to the collateral and either the secured party has possession or control of the collateral, or a security agreement covers the collateral.

11 Key elements (cont) If a security interest in collateral is perfected, it takes priority over another security interest that is unperfected when the security interest comes to be enforced. A security interest is perfected if: it has attached to collateral; and it is enforceable against third parties; and certain extra steps (possession or control of the collateral, or registration on the Register of Personal Property Securities) have been taken to protect the interest.

12 Key elements (cont) The secured party whose security interest has the highest priority is entitled to enforce that interest ahead of secured parties with security interests that have a lower priority.

13 Key elements (cont) Between perfected security interests, perfection by control has a higher priority than other forms of perfection. The next level of priority is given (subject to certain rules) to perfected purchase money security interests or PMSI s. If no other way of working out priority between perfected interests is provided, the highest priority is given to the security interest that has been continuously perfected for the longest period.

14 Key elements (cont) The Register of Personal Property Securities enables secured parties to give notice of actual or prospective security interests. Notice is given by the recording of data about secured parties, grantors and collateral. The register may be kept electronically, for example in a form that is interactive and accessible over the internet.

15 New Terminology you can teach a dog new tricks! The following terminology is now used: Grantor refers to the entity providing the security interest (s 10). This may or might not be the same person as the debtor. Under the previous scheme the reference was to a chargor. Debtor - refers to a person who owes payment or performance of an obligation that is secured by a security interest in personal property (whether or not the person is also the grantor of the security interest) (s 10). Secured Party refers to the entity acquiring (who enjoys) the benefit of the security interest (s 10). Under the previous scheme the reference was to a chargee. Collateral refers to the personal property that is subject to a security interest (s 10). Under the previous scheme the reference was secured property.

16 Personal property is any form of property other than land or buildings and fixtures which are legally treated as forming part of land. Personal property includes both tangibles (e.g. cars, boats, machinery, crops) and intangibles (e.g. shares, intellectual property, receivables and contract rights). The exclusion of land is unsurprising however land is expressly defined to exclude fixtures (s 10). Intuitively this seems an odd exclusion as it flies in the face of the common law concept of land but the exclusion is not material as an interest in a fixture is specifically excluded from the PPSA (s 8(j)).

17 Personal property (cont) The PPSA categorises personal property into four groups. There are: Goods (defined as tangible property including crops, livestock, wool, minerals that have been extracted, satellites and other space objects; but does not include financial property or an intermediated security). Financial property (defined as any of the following: chattel paper, currency, a document of title, an investment instrument or a negotiable instrument). Intermediated securities (s 15). Intangible property (defined as personal property other than goods, financial property or an intermediated security mentioned above). Examples of personal property listed in the Guide include motor vehicles, household goods, business inventory, intellectual property and company shares. Personal property is known as collateral if it is (or is anticipated to be) the subject of a security interest. Personal property therefore includes all property other than land (i.e. personal as opposed to real property). The word personal does not refer to property of an individual. PPSA covers security interests in most forms of personal property where the property belongs to an individual, company, partnership or other arrangement.

18 Security Interest Section 12(1) defines security interest as: an interest in personal property provided for by a transaction that, in substance, secures 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). The key point to note is that functional approach for a transaction that in substance secures payment or performance of an obligation and whatever its legal form. This is the first key point that a security interest is something which secures payment or performance of an obligation. This can include traditional forms of security interests, such as a fixed charge, a floating charge, a chattel mortgage, a conditional sale agreement (including an agreement to sell subject to retention of title), a hire purchase agreement, a pledge, a trust receipt, a consignment (whether or not a commercial consignment), a lease of goods (whether or not a PPS lease), an assignment, a transfer of title, a flawed asset arrangement (s 12). Transaction - the security interest must arise as the result of a consensual transaction, rather than by operation of law

19 Deemed security interest In addition to the genuine security interests defined in s 12(1) there are four types of deemed security interests covered by s12(3). Deemed security interests fall into four categories: The interest of a transferee of an account (ie an account receivable); The interest of a transferee of chattel paper (such as a chattel mortgage or a lease of personal property or a supply contract containing retention of title terms); The interest of a lessor or bailor of goods under a PPS lease; and The interest of a consignor who delivers goods to a consignee under a commercial consignment (such as a floor plan arrangement of a motor vehicle dealer). The difference between a security interest under s 12(1) and a deemed security interest under s 12(3) is that a deemed security interest is registrable, whether or not it secures payment or performance of an obligation. In each of the four cases the person who is in possession of the personal property does not own it. Third parties might, therefore, be led to believe that the person in possession could sell or lease the property free of any security interest. The PPSA requires these deemed security interests to be registered.

20 Excluded security interests Section 8 excludes certain interests from the PPSA such as equitable liens under the general law setoffs and rights of accounts, for example. Interests in fixtures You need to investigate and be familiar with these exceptions. Intuitively they are not transactions because they arnt consensual. If you consider the interest is a insubstance security interest and it is excluded then it isn t a security interest.

21 Attachment refers to the concept whereby a security interest is enforceable against the grantor (note we not concerned with 3 rd parties at this stage). While attachment may be a new and perhaps initially unfamiliar expression in Australian Law, the underlying concept is straightforward and its common law origins are easily identifiable. Broadly speaking, there are three requirements that must be met before a security interest can attach to collateral: there must be a valid security agreement; the secured party must give value for the security interest; and the grantor must have rights in the collateral. A security interest is only effective if it has attached to collateral. A security interest attaches to collateral when the grantor has rights in the collateral, or can transfer it to the secured party, and value is given, or the security interest otherwise arises. It denotes the creation of the security interest between the grantor and the secured party. The security interest is said to fasten on the property. Attachment is therefore a prerequisite to registering an interest effectively in a way that can be enforced. This provision looks to the intention of the parties in granting the security interest.

22 Perfection Perfection is a term used to describe the effective registration or possession of a security interest. A security interest is perfected if it has attached and all of the necessary steps to perfect it under the legislation (such as registration of a financing statement or taking possession of the collateral) have been performed. Perfection refers to the process whereby a security interest acquires the optimal protection available under PPSA. There are four different ways in which a security interest can be perfected: by possession; by control; by registration; and by force of a temporary perfection provision in PPSA.

23 Purchase Money Security Interest or PMSI refers to a security interest which is taken in collateral to the extent that it secures all or part of the collateral's purchase price or the interest of a lessor or bailor of goods under a PPS lease (s 14). PMSIs are eligible for "super priority" status under the new regime and trump most security interests in the same collateral. The PPSA recognises and regulates purchase money security interests. A purchase money security interest (PMSI) is a security interest that is granted to a person who facilitates the acquisition of personal property. The person who facilitates the acquisition could be a lender, a lessor, a consignor or a supplier. They could provide assistance by advancing the deposit or the full purchase price or by leasing or supplying the personal property on credit or retention of title terms. PMSIs must be registered to preserve their priority and the PPSA accords a PMSI a super-priority status over many other security interests.

24 Circulating assets refers to personal property which is subject to a security interest, which the grantor may transfer free of any security interest. A security interest in circulating assets approximates what used to be known as a 'floating charge' ( s 340): personal property where the secured party has given the grantor express or implied authority for any transfer of the personal property to be made, in the ordinary course of business, free of the security interest; accounts receivable from granting a right or providing services in the ordinary course of business, including credit card receivables; accounts receivable arising as the proceeds of inventory; ADI accounts; currency; inventory; negotiable instruments.

25 PPS Lease refers to a special type of lease or bailment of goods which creates, for the benefit of the lessor or bailor, a purchase money security interest. A lease or bailment of goods (s 13): for a term of more than one year; for an indefinite term; for a term of up to one year which is renewable (automatically or pursuant to the exercise of an option) for one or more terms if the total of the terms might exceed one year; for a term of up to one year where the lessee or bailee retains possession of the goods, with the consent of the lessor or bailor; for goods which may or must be described by a serial number, if the lease or bailment is in accordance with paragraphs above, but with '90 days or more' substituted for 'more than one year' and 'less than 90 days' for 'up to one year'.

26 Priority One security interest in collateral taking precedence over another security interest in the same collateral. In the absence of any agreement as between two secured parties, the following rules apply (s 55): As between unperfected security interests, the first in time to have attached to the collateral takes priority. As between a perfected and an unperfected security interest, the perfected interest takes priority. As between two perfected security interests, the one with the earliest 'priority time' prevails. 'Priority time' means the earliest of: the registration time for the collateral; the time when the secured party took possession or control of the collateral; and the time when the security interest is temporarily or otherwise perfected by force of the PPS Act

27 Enforceability against the grantor There are two prongs to enforceability. As mentioned earlier, the first prong relates to enforceability of the security interest as against the grantor of that security interest. Section 19(1) provides that a security interest is enforceable against a grantor in respect of particular collateral only if the security interest has attached to the collateral. Attachment occurs when: the grantor of the security interest 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 by which the security interest arises.

28 As against third parties Second prong A security interest that has attached will be enforceable against third parties if one of the following conditions is satisfied: the secured party possesses the collateral; or the secured party has perfected the security interest by control; or there is a security agreement containing an appropriate description of the collateral.

29 As against third parties (cont) There are only six types of collateral in which a secured party can perfect its security interest by control. The six types of controllable property are: an Authorised Deposit-taking Institution (ADI) account in relation to which the ADI is the secured party; intermediated securities (for example, uncertificated shares and financial products); investment instruments (for example, certificated shares and financial products); negotiable instruments that are not evidenced by a certificate (for example, bonds or promissory notes); 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; and satellites and space objects. There are different tests for determining how a secured party takes or asserts control over the first five forms of controllable property. The common theme of these tests for control is that the secured party is able to deal with the collateral without any further involvement of the grantor.

30 Perfection by control A security interest in collateral perfected by control will take priority over security interests perfected by other means. For competing security interests perfected by control, priority rests with the first in time to have been perfected by control. The priority of a security interest perfected by control under s 57 takes precedence over all other security interests, no matter how they are perfected.

31 Financing Statement Majority of security interests are going to be perfected by registration refers to a statement relating to a security interest which is used to register the security interest on the PPS Register. Note: don t need to lodge written security agreement A financing statement is required to contain information about the following persons or matters (s 153): the identity of the secured party; the identity of the grantor; an address for the giving of notices relating to the registration; the nature of the collateral; whether the registration is to lapse at a certain date; whether the security interest is subordinate to any other security interest; and whether the security interest is a purchase money security interest.

32 PPS Register The Personal Property Securities Register ( PPSR ) creates a single national online register, enables security interests to be registered "on-line" 24 hours a day, 7 days a week. The PPSA uses a notice filing system. The grantor is a consumer and the collateral is a car the required collateral description is consumer property; serial number; motor vehicle. The grantor is a wheat farmer and the collateral is the coming year s crop the required collateral description is commercial property; agriculture. The grantor is a retailer and the collateral is the grantor s accounts the required collateral description is commercial property; intangible property. The grantor is a manufacturer and the security interest is a general one the required collateral description is commercial property; all present and after-acquired personal property.

33 Defects Section 164(1): (1) registration with respect to a security interest that describes particular collateral is ineffective because of a defect in the register if, and only if, there exists: (a) seriously misleading defect in any data relating to the registration, other than a defect of a kind prescribed by the regulations; or (b) a defect mentioned in section 165.

34 Defects (cont) Section 165(b): For the purposes of paragraph 164(1)(b), a defect in a registration that describes particular collateral exists at a particular time if : (b) [for non serial numbered goods] no search of the register by reference to that time, and by reference only to the grantor s details is capable of disclosing the registration. So misspelling the grantor s name (or an incorrect date of birth) may be fatal and has been held to be so.

35 Considerations for business sales

36 Starting position in any analysis basic proposition Vendor usually represents and warrants: that it owns all assets the subject of the sale and there is no Encumbrance over any of the Assets. Commercially then to extent representations are not correct then there will be a breach of a representation (damages and depending on the asset, rescission) (vendor due diligence?) However, common commercial sense dictates that purchaser is not blindly going into transaction without conducting its own due diligence! So, purchaser is going to require comfort that security interests are released at completion. A wrinkle in the proposition above is that the vendor shouldn t be liable if a security interest is identifiable from the PPSR and is overlooked by the purchaser (so consider carve out to vendor s representation liability above) serial numbered property.

37 Issues that follow from the basis proposition Issues then are: What are the assets subject of the business sale (ie scope of both representation) What do we mean by Encumbrance (in the sense does it capturing ALL or SOME of the security interests over assets (narrow: personal property ) (ie so, narrowing the scope of second representation) 2 in substance vs deemed we will come back to that How do we identify the security interests (PPSR register and due diligence, asking the right questions) searching criteria (serial number property, entity status..) we came back to this issue Extinguish security interests vendor (where grantor) or assign them (where vendor secured party)

38 Considerations for business sales Aim 1: What are the assets subject of the sale? Aim 2: Are the assets personal property? From a vendor s perspective, there are two sides to the PPSA question: Vendor as grantor of security interest: What security interests has the vendor granted? (ie to its financiers) What security interests need to be extinguished? Vendor as secured party: What security interests does (or should) the vendor hold? (ie PPS lease; ROT) Cant search PPSR for this. But as part of the usual DD these security interests should be identified. What security interests need to be assigned? For example leasing contracts and ROT arrangements but also what security interest need to be registered (such as where business is assignee of receivables)

39 Vendor as grantor of security interest (cont) 99.9% of cases the purchaser will conduct search (DD exercise for valuation not just security DD) General search of PPSR against vendor entity and specific serial number search Consider flow of information (Letter of intent) from vendor to purchaserfocused/correct information for the search (pre and post completion) process is the key What about Purchaser contact with secured party to obtain further information security document, information Obvious tension to business relationship/sale and confidentiality issues (s172; searching against grantor who is individual)

40 Vendor as grantor of security interest Many security interests will be registered as a result of the migration of ASIC charges. Problems with migrations (some releases came through as new registrations) New security interests being registered. It is very possible that the vendor will not have expected or anticipated them or even understood why they are there. Note: Despite the fact that a security holder (secured party) is (usually) required to give a verification statement to the grantor of a security interest (under s 157), many vendors do not realise the relevance of the certificate. They do not understand them. They do not keep them. Also consider: who has possession of the vendor s assets? Where are they? Why are they there? Who has control of the vendor s assets?

41 Unknown security interests If the vendor discovers security interests on the Register which it was not aware of or which it disputes, the vendor can and should request a copy of the relevant security agreement from the security holder under s 275. Likewise if security interest is identified by purchaser then vendor may be asked to make request because purchaser would be an interested person s 275(9) (obvious tension could develop affecting business relationships particularly where Tx is confidential) If it is incorrect, the vendor should request a correction of the security details under s 186 or s 178. Moreover, the PPSA contains provisions enabling a grantor to pursue their rights through administrative and Court proceedings if necessary - see sections

42 Vendor as grantor of security interest (cont) Once security interests are identified (via PPSR or otherwise), vendors should ensure that all security interests (registered or not; where they are grantor or secured party) are correct and that on settlement, they are addressed ie extinguished, registered or assigned. How does a security interest become extinguished? The PPSA does not prescribe any requirement to give a release of security. It is only concerned with the registration of financing statements or financing change statements in relation to a secured party s interest in personal property (section 150).

43 Vendor as grantor of security interest (cont) What are the expectations around extinguishment of security interests on completion? This is normally a condition to completion BUT parties need to be frank about what they require or expect at completion. What is the purchaser expecting on completion???? Make this clear up front to avoid delays and disputes. What are the consequences if settlement is delayed because of PPS issues?? (such security interest not recognised by vendor until DD or corrections) this needs to be within the contemplation of the parties to avoid recision Drafting point to consider - ensure that references in your BSA to PPS terms such as perfected, control, possess, personal property etc refer to the PPS Act, to avoid them being given their ordinary meanings

44 Suggestion - How to effect extinguishment at settlement Completion Release means documentation evidencing, to the satisfaction of the Purchaser [?], that all Encumbrances[?] over the Assets [?] have been [discharged]/extinguished by the sale under the [BSA], including a written notice signed by or on behalf of each party with a Security Interest in the Assets [NOT ALL]created by, provided for by, or arising from [refer to security agreement], by which each party expressly: authorises the sale of the Assets under this agreement; agrees that the sale of the Assets under this agreement will extinguish all Security Interests it holds in the Assets; and undertakes to promptly take all steps and file all documents as may be necessary to end any registration on the Register (as defined in the PPSA) with respect to those Security Interests The aim of this definition is to ensure that, to the extent possible, all Security Interests under the PPSA in the Assets are extinguished as a result of the sale, as contemplated by section 32 of the PPSA (express or implied rep to the contrary). Use the correct terminology extinquish and don t refer to 275 like some people do.

45 Security interests held by vendor as secured party Part of the due diligence process should include identifying security interests granted to the vendor as a secured party, both registered and unregistered. Like one of those Venn diagrams in High School (SI = granted + secured party) The identification process can be assisted by asking what does the vendor supply: graders, computers? Give rise to PPS Lease or ROT arrangement Any discharged security interests held by the vendor (as secured party) which are still registered, should be removed. This is done by lodging a Financing Change Statement. The vendor will need to identify any security interests it holds which have not been registered or which have not been perfected by the other means available. They may need to adopt new terms and conditions for their customer contracts so that their supplies to customers will all be on terms which include appropriate PPSA provisions enabling registration of their security interests such as ROT. It is appropriate to identify security interests, which have not been perfected as soon as possible and generally well in advance of a sale. This will give the vendor an opportunity to perfect their security interests prior to the sale discussions commencing.

46 Encumbrance - careful! Encumbrance means a mortgage, charge, pledge,, including any Security Interest This definition of Encumbrance includes "Security Interest" as defined in the PPSA. Careful as inclusion will significantly expand the transactions and arrangements captured. Importantly, the interests under section 12(3) of the PPSA will be included regardless of whether they secure the payment or performance of an obligation. Did you mean that!?

47 How PPSA affects specific transactions

48 All property security Common wish a secured party wishes to take security over all assets of grantor. Typically done under a general security deed and registered on PPSR as an all present and after-acquired property without exceptions Advantage is that it mitigates against administrator risk (s440b of CA). Secured party whose security covers the whole or substantially the whole of the grant s property are able to enforce their security interest during the decision period (s441a of CA).

49 All property security (cont) Model PPSA provision Collateral means all present and after-acquired property, interest, rights and proceeds in respect of which the Grantor has at any time sufficient rights to grant a security interest. Circulating vs. Non-Circulating Assets If an asset is circulating asset, then a receiver must use any property subject to a circulating assets to repay certain preferred debts (s433 of the CA) Circulating assets include all Current Assets unless the secured party controls the relevant Current Asset under Pt 9.5 of PPSA and the registration reveals that control. Current Assets include negotiable instruments, currency, inventory, ADI accounts and certain accounts. For example to obtain control over a bank account will usually be obtained if the secured party have signing rights, but control is sometimes difficult to achieve.

50 Serial number property Limited class of property may or must be described by serial number on PPSR

51 Serial number property (cont) Failure to register by serial number: 1. Renders registration ineffective (for property that MUST be described by serial number). 2. Has consequences under the take-free rules (for both property that MUST or MAY be described by serial number). If personal property may or must be described by serial number then a buyer or lessee of that personal property will take it free from a security interest if a search on the PPSR immediately before the sale or lease does not reveal a security interest (s44 of PPSA). For motor vehicles, a buyer or lessor will take the motor vehicle free from a security interest is a search on the PPSR at any time from the beginning of the day prior to the relevant sale or lease transaction does not reveal a security interest (s45 of PPSA). Need to look at PPSA Regulations to determine the kinds of serial numbers that need to be recorded for the relevant property.

52 PPS leases Certain leases and bailments give rise to a deemed security interest under 12(3) regardless of whether or not the transaction is an in substance security.

53 PPS leases (cont) But PPS leases do not cover: Lease by lessor not regularly engaged in business of leasing goods (s 13(2)(a)) Lease of consumer goods incidental to lease of land (s 13(2)(c)) All PPS leases need to be registered. Failure to register will have the following consequences: Defeated by perfected security interests. Extinguished under the take-free rules. Vest in the grantor upon grantor becoming subject to certain insolvency processes. All PPS leases are purchase money security interest ( PMSI ) and therefore enjoy super-priority.

54 PPS leases (cont) Bailments Bailment is the delivery or transfer of possession of goods with a specific mandate which requires those goods be returned or dealt with in a particular way by the bailee. All leases are bailments (but not vice versa). Bailments require the bailee have possession. If there is no possession arguably there is no PPS lease. Leases may be in substance security interests Financing leases under which substantially all risk and benefit of ownership of leased property passes to the lessee are in substance security interests.

55 Security over bank accounts PPSA distinguishes between two types of security over ADI accounts: 1. Secured Party is the account bank (i.e. charge back). 2. Bank account held with third party. Perfection by control Security interest over certain types of collateral (including ADI accounts) can be perfected by control have priority over security interest in the same collateral perfected by other means. A secured party will only have control if it is the account bank (see s25 of PPSA)

56 Security over bank accounts (cont) Circulating Asset ADI accounts (other than term deposits) are circulating assets unless the secured party has control over the account & the registration on the PPSR reveals that control. Note, this control is distinct from control by perfection discussed in the previous slide. For the purposes of ensure the security is not a circulating asset, the control tests that need to be met are contained in s341 and 341(1A) of PPSA: Right to direct disposition of funds from ADI account.

57 Accounts & Chattel Paper What is an Account? Accounts are receivables or book debts that arise from the (a) disposing of property or (b) granting rights, or providing services, in the ordinary course of business. PPSA security interest may arise: 1. Security taken over an account (i.e. in substance security s12(1)). 2. Transfer of an account (i.e. deemed security s12(3)). Hence, an outright sale of an account gives rise to a registrable security interest. Circulating Asset An in substance security interest over an account will usually be a circulating asset unless the secured party controls the account (see s of PPSA).

58 Accounts & Chattel Paper (cont) A transfer of accounts which is a deemed security interest is not a circulating asset (s340(4a) of PPSA). Note, for this reason the model PPSA clauses recommend security over accounts should take effect as a transfer Chattel Paper New concept introduced by PPSA Transfer is chattel paper is a deemed security interest Need to distinguish between account & chattel paper Chattel paper is tangible vs. account is intangible Chattel Paper = receivable + security interest in personal property Examples: hire purchase agreements, chattel mortgages, leases of personal property

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60 That s all folks

61 Now look at the purchaser s perspective. The purchaser will need to start by identifying the assets being acquired by the purchaser and the liabilities being assumed by the purchaser. To assist this, the purchaser s business lawyer needs to consider the nature of the business being acquired. The purchaser s lawyer will also need to consider the types of assets and transactions which might give rise to security interests under the PPSA.

62 Tenant s Fixtures The status of some assets are easy enough to come to terms with - others however, may involve the unexpected creation of security interests. We ve discussed the Cancer Care Institute case: How will that be applied if you have a cool-room in a restaurant which contains a heavy large leased refrigerator the security agreement in respect to which creates a security interest which is unregistered? Hopefully there would be no problem.

63 Inventory Of course, the financing of business inventory will often give rise to a registrable security interest. What about the real estate lessor s security interest in goods which remain on site after termination? The real estate lease provides words to the effect: All goods remaining on site must be removed or they will be sold and the lessor can keep the proceeds and apply them to outstanding rent and/or the cost of removal.. A clause to that effect will frequently give rise to a security interest requiring registration on the PPSR.

64 Intellectual Property A company distributing goods using their own registered trademark might grant an allpap security interest which affects both the goods and also a trade mark which is licenced by the vendor as licensee. If the trademark itself is then sold by the trademark licensor to another party (the fourth party), then the security interest binds the trademark transferee (new licensor) s 106 found in Part 3.5 PPSA. The implications of Part 3.5 must be considered when buying and selling a business. Intellectual property falls into the category of serially numbered goods and you must use the serial number for registration if it is consumer property. But if there is no serial number (because it is unregistered), then I recommend a registration as other goods and then fully describe it in the descriptor box in the registration process. Unperfected security interests: these need to be identified.

65 Security interests held by the vendor From a purchaser s perspective, the purchaser s lawyer should ask if the purchaser is acquiring the debtors of the business or is taking an assignment of continuing contracts which include retention of title or other finance arrangements. The purchaser should: Identify the specific contracts which could give rise to security interests. Review the documents to ensure that they give rise to a security interest which they are entitled to perfect by registration. Require evidence that the security interests have been perfected by registration. AND IMPORTANTLY, satisfy themselves that the vendor has the necessary systems in place to manage registrations and discharges and corrections.

66 Size of due diligence How much is enough? This needs to be discussed with your client of course. For a particularly large transaction you might: Conduct sample checks. Have warranties in relation to possible defective securities. Search only transactions over a certain threshold value. Negotiate for an independent audit of registrations at the vendor s cost. If there are widespread defects in the perfection of security interests then require the vendor to remedy them.

67 Defects in registration Section 164 of the PPSA states that a registration will be ineffective if there is a seriously misleading defect or a defect mentioned in s 165. Section 165 provides that a registration is defective if, where registration by serial number is required (for example motor vehicles), the serial number has been incorrectly entered. Examples of seriously misleading defects in Canada and New Zealand include where there was a misspelling the grantor s name by only one letter and also in the case of a partnership, listing as the grantor only one of the partners, instead of the partnership s firm name.

68 Risk of insolvency Serious consequences follow in the event that the grantor of the security interest becomes bankrupt or liquidated and there has been a failure to register or correctly register a security interest. Vesting under s 267 In the Hastie Group case, the administrators sought directions in the Federal Court pursuant to s 447D of the Corporations Act that they would be justified in selling unclaimed plant and equipment in the possession of the Hastie Group. They had plant and equipment worth $6.4m at 36 different locations throughout Australia which were causing the administrators to incur significant rental costs which they could ill afford. The administrators sought to identify which items of plant and equipment were owned by the Hastie Group and then to sell them. They wrote to all 995 registered security holders and placed ads in the press but only 23% responded to confirming the nature of their security interests. Many responses were not sufficient to adequately particularise the equipment or the security agreement under which the security interest arose or was claimed. Yates J directed: That the administrators would be justified in treating the unclaimed plant and equipment as the property of the Hastie Group; and Selling it by online auction and thereafter (broadly) distributing the proceeds in the ordinary course of the administration. The orders were made as directions not as a final judgment and this left it open (for a time) for any interested party to apply to set aside the orders. But no such application was made and the effect of the case is that if you do not actively pursue or defend your rights under the PPSA, you risk losing them.

69 Useful rule to determine if registration required Whenever you are presented with a PSSA problem of whether a security interest requires registration, you can pretty much determine which sections you should be looking to answer the question by answering five questions: The first question is fairly simple. Am I dealing with personal property? The general rule is that if you are not dealing with real property of fixtures then you are dealing with personal property. The second question is then do I have a security interest over that property? You have to ascertain whether or not the instrument secures in substance payment or performance of an obligation under the instrument. It s not always an easy thing to determine and it is a question of fact. The answer to this question deals with s 12 (1). If you cannot fit the security interest into a category provided by s 12(1) and 12(2), you then look to see whether the security interest is a deemed security interest for the purpose of s12 (3). The third question is, if you do have a security interest (under s12) and you are confident of that determination, does an exception apply in the sense that it is excluded from the regime expressly by s8 (i.e., interests to which this PPSA does not apply). The fourth question is, assuming the answer to the question whether an exemption applies is no, have I complied with the PPSA. That will be a question of fact whether the security interest is perfect at all not and whether the register will disclose whether that is the case. The fifth question is what happens before the PPSA dictates priority or remedy. The debtor obviously has to default on a payment before the priority rules have application. The key is making sure that the PPSA is triggered upon such default. This is where accurate drafting comes into play.

70 Extensions of registration time []

71 Extensions of registration time At least four Supreme Court decisions in which holders of security interests have sought (and obtained) an extension of the time within which a security interest with a corporate grantor can be registered. Relevant time 20 business days, with Court empowered to extend time see Corporations Act 2001 ss 588FL, 588FM

72 Cases seeking extensions of time In the matter of Barclays Bank plc [2012] NSWSC 1095 In the matter of Cardinia Nominees Pty Ltd [2013] NSWSC 32 In the matter of Apex Gold Pty Ltd ACN [2013] NSWSC 881 and In the matter of Black Opal IP Pty Limited ACN (subject to Deed Of Company Arrangement) [2013] NSWSC 1225 Each sought extension and each granted. Brereton J had some misgivings. Query whether future applications less likely to succeed as familiarity with PPS builds.

73 Maiden Civil (P&E) Pty Ltd Decision of Brereton J: citation In the matter of Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors [2013] NSWSC 852. The most comprehensive judicial analysis of the Act to date (in particular the priorities between perfected and unperfected security interests, cross jurisdictional issues and operation of the transitional provisions). Chattels were 3 caterpillar vehicles.

74 Maiden Civil (P&E) Pty Ltd Approach adopted by Brereton J (at [10]): Identify the true owner of each chattel. Compare the security interests using the PPS Act priority rules. In these proceedings this involved considering: What if Perfected vs unperfected Status of transitional security interest (where interest could have been registered on a pre PPS register but wasn t). Are there currently enforceable rights arising from the PPS registration? In short: PPS registration trumped true owner.

75 PPSA Practical difficulties The accuracy and integrity of migrated data (most notably information about registered company charges); The manner of noting transitional security interests on the Register (in particular, ensuring that the attempt to note the existing interest does not instead create a new security interest, with consequential loss of priority); The role of secured parties in transactions such as sales and purchases of business (particularly problems arising from the fact that when a security interest is released the Act envisages this will be done by the discharging mortgagee rather than the purchaser or incoming financier).

76 The New PPSA clause.

77 The Hastie litigation A saga in the making: Carson, in the Matter of the Hastie Group Ltd [2012] FCA 626 Carson, in the Matter of the Hastie Group Ltd (No 2) [2012] FCA 717 Carson, in the Matter of the Hastie Group Ltd (No 3) [2012] FCA 719 Carson, in the Matter of the Hastie Group Ltd (No 4) [2012] FCA 968 Carson, in the Matter of the Hastie Group Ltd (No 5) [2012] FCA 1174

78 The Hastie litigation background Hastie was a group of 44 companies with operations in seven regions (Australia, the UK, Ireland, the Middle East, China, South America and the Caribbean) projects at 1000 sites in Australia. 40 premises throughout Australia. Assets included 1000 vehicles and thousands of items of machinery, plant and equipment. Estimated value $6.4 million. Rental storage fees $62,000 per week (values diminishing, so they wanted to deal asap).

79 The Hastie litigation PPSR issue There were 995 registrations on the PPSR. The administrators wrote to each registered secured party seeking further details on the interest claimed. Only 20% responded. The administrators then ed a further 3000 known creditors asking did they have a claim on the listed items (100 pages). The inquiry process left some 3,864 items (77% of the total number of items) were unclaimed. Court made directions about further steps (and approved costs for 2 months work: $239,000). Additional Clause 35 of new editions Business Contract There was a Debate whether provisions should apply releases all SI or only perfect security interests. It would be difficult to ident unperf si. Applies to only those that are perfected ie those that show up on the register most commonly. Then imposes obligation on vendor to do anything reasonable whether there is any security interest in the subject matter of the sale. Eg where the si has been granted by natural person the vendor should provide the correct name and date of birth of the natural persons. It is envisage that something is handed over on settlement. Either, Approval or correction of the register A pps release from each si (in the form published by A bankers association for example) so purchaser cannot accept release Statement from secured party saying nothing owing by the party