Property Securities Act What it means for your business

Australian Personal Property Securities Act What it means for your business 30 January 2012

Radical and revolutionary function over form. The commencement of the Personal Property Securities Act 2009 (Cth) (PPSA) on 30 January 2012 means that Australia now joins the United States, Canada and New Zealand with a comprehensive system for recognising, registering and enforcing security interests over personal property. Overview In very broad terms, personal property means any asset other than real property. Subject to certain statutory exceptions, it covers all forms of moveable goods as well as all forms of intangible property, like intellectual property, financial products and accounts receivable. Goods that are affixed to land are excluded. When a security interest has attached to personal property it is called collateral, the entity giving the security interest is called the grantor, the entity liable for the secured obligation is the debtor (which may also be the grantor) and the holder of the security interest is the secured party. The PPSA applies equally to individuals and companies and to consumer property as well as commercial property. Before the PPSA, Australia followed the English common law tradition of having a different legal treatment for the various forms of security devices used in secured transactions, ranging from the legal mortgage, the equitable fixed and floating charge and the pledge on the one hand, to title-based security devices like retention-of-title arrangements (so called Romalpa clauses) and finance leases on the other. Now any transaction that in substance has the effect of providing an interest in personal property as security for the payment or performance of any obligation (without regard to the form of the transaction or the identity of the person who has title to the property) will be treated as a security interest under the PPSA. Key features Key features of Australia s new PPSA regime include the following: A single online national Personal Property Securities Register (PPS Register), replacing over 40 Commonwealth, state and territory security registers. Most existing security interests registered on other registers (including the ASIC Register of Company Charges) will be migrated across to the new PPS Register. Any existing security interests that are currently not registrable (like title retention sales and PPS leases) will be treated as transitional security interests, which will not need to be registered for up to two years after the commencement of the PPSA. The PPSA includes a set of specific priority rules, which generally give priority to security interests based on the order in which they are perfected. Perfection of a security is generally achieved by registration of a financing statement on the PPS Register, although perfection can also be achieved by possession or control (in the case of certain financial assets or space objects) by the secured party. A super priority status is given to a Purchase Money Security Interest (know as a PMSI, pronounced pimmsie), provided it is registered within strict time periods. Some transactions are deemed to be a security interest even if they do not secure any obligation like an absolute assignment of a book debt and any PPS lease. A PPS lease will include any lease of goods for more than one year, or 90 days or more in the case of serial numbered property. There are special rules and registration requirements for serial numbered property being motor vehicles, watercraft, aircraft and registered intellectual property rights. Key risks While it is not compulsory to perfect (by registration, possession or control) a security interest, for so long as a security interest remains unperfected, the secured party is subject to significantly increased risks, including: If the grantor becomes insolvent or goes into administration, the secured party in effect becomes an unsecured creditor. The secured party will rank in priority behind any later perfected security interests. There is a greater risk of the extinguishment rules applying if the personal property is transferred by the grantor to a third party. In order to limit the insolvency risk, any security interest granted by a company should be registered within 20 business days and generally any PMSI should be registered before the grantor obtains possession of the relevant goods. 02 What it means for your business

What is personal Property? SOME INTANGIBLE PROPERTY - EXCLUDED Water rights Certain statutory licences, eg mining tenements PERSONAL PROPERTY FINANCIAL PROPERTY Chattel paper Currency A document of title An investment instrument A negotiable instrument An intermediated security OTHER INTANGIBLE PROPERTY Including: Intellectual property Contractual rights Accounts ADI accounts Statutory licences (unless excluded) Including: Motor vehicles Watercraft Aircraft LAND - Excluded GOODS Crops Livestock Fixtures Wool Minerals Space objects Personal Property Securities Act 03 02

INDUSTRY SPECIFIC FAQS Manufacturers, distributors and suppliers Retention-of-title no longer provides automatic security for payment Q: I supply goods on a retention-of-title basis and have always relied on my title to the goods as security if customers do not pay amounts owing to me. Do I need to worry about the PPSA? A: Yes. If you fail to register your interest in the goods on the PPS Register you may lose your interest in the goods and end up simply being an unsecured creditor of the customer. Q: How can I protect myself from the potential adverse impact of PPSA on my business? A: If you supply goods on retention of title terms, your interest in the goods will be a PMSI. Provided you register your PMSI on the PPS Register within strict timeframes, you will have the benefit of a superior priority and your position under the PPSA will largely be the same as that applicable under pre-ppsa law. Q: What happens if I do not register on the PPS Register? A: While registration on the PPS Register is not compulsory, if you do not register a security interest, your ownership interest in the goods may be lost because of subsequent dealings with the goods by your customer. For example, if your customer grants a security over all its assets to its main banker, that banker will be able to deal with the goods in priority to you. If the customer becomes insolvent and a liquidator or administrator is appointed, the liquidator or administrator will be entitled to deal with the asset free of the interest of the supplier. If the customer sells or leases the goods, the third-party purchaser or lessee will generally take the goods free of the supplier s security interest. Equipment hirers and asset financiers Failure to register the interest of the hirer/financier in its own assets on the pps Register may result in hirer/ financier losing its assets to other parties Q: I regularly hire scaffolding to building sites and equipment to building and mining sites. Does PPSA affect me? A: Yes. The PPSA deems certain contractual arrangements to be security interests. These deemed security interests include a PPS Lease, which extends to a lease or bailment of goods for a term of more than one year or, for serial numbered goods (motor vehicles, watercraft or aircraft), for a term of 90 days or more, or for an indefinite term. Accordingly, if the customer retains possession of the goods indefinitely or in excess of the above periods, a PPS Lease will arise, which will be treated as a security interest for the purposes of the PPSA. If you do not register the security interests on the PPS Register as a PMSI within strict timeframes, your interest in the goods may be lost to third parties. Q: I am an asset financier who provides finance to customers in respect of all forms of equipment (ranging from aircraft to cranes) in the form of finance lease or hire purchase arrangements. Does my title to the assets protect me from the claims of third parties? A: No. A finance lease or a hiring arrangement that meets the requirements of a PPS Lease (see above) will be treated as a security interest under the PPSA. For security purposes, the title of the lessor/hirer is disregarded. Q: My standard business documents clearly restrict my customers from dealing with the assets that I lease or hire to them. Will this protect me? A: No. The PPSA makes it clear that notwithstanding such restrictions, dealings with third parties can occur and in the absence of perfection by registration (or by other means allowed for by the PPSA) by the secured party, such dealings will be effective. 04 What it means for your business

Parties involved in mergers and acquisitions Failure to account for the impact of pps on business acquisitions or takevoers may have a substantial negative impact on value Q: We regularly advise clients on the acquisition of businesses and takeovers. What do I need to know about PPSA? A: Due to the significant adverse consequences flowing from failure to comply with the PPSA, it is important that the due diligence processes undertaken by acquirers of target businesses or companies be expanded to include appropriate PPS enquiries. Failure by the target to comply with the attachment and perfection rules provided for by the PPSA either at all or in a timely manner (or in the case of a PMSI, in accordance with the timeframes set out in section 62) may result in third parties (being either other financiers with perfected security interests, third-party buyers or lessees or insolvency practitioners) being able to deal with the target s assets. It is therefore important that due diligence enquiries in relation to any M&A transaction extend to ascertaining such things as: Is the target s business impacted upon by the PPSA? Has the target sought advice as to whether or not PPSA affects its business? What procedures and documents have been put in place to ensure that the business complies with the PPSA? Q: What negative impact could the PPSA have on M&A transactions? A: Clearly the ability of third parties to take assets of a company, which the company thought it had security over or has title to, free of such security interests or title can have a significant negative impact on the value of the business. Receivables financiers Transfers of debt can amount to security interests subject to the ppsa Q: In our business, we acquire receivables from clients under receivables purchase arrangements. Does this amount to a security interest under the PPSA? A: Yes. The PPSA treats the interest of a buyer of an account or chattel paper as a security interest. Depending upon the nature of your arrangements, the purchase of receivables from your clients may therefore be treated as a security interest for the purpose of a PPSA. As a result, if you do not register your security interest as provided for by the PPSA, other parties may defeat your interest in those assets. GENERAL FAQS Q: Does the PPSA mean I need to register every single transaction on the PPS Register? A: Under the PPSA, a financing statement is lodged in relation to security interests. Copies of documents are not required to be lodged on the PPS Register. In certain circumstances, a master or umbrella registration can occur, which therefore avoids the need to lodge a financing statement on the PPS Register for each subsequent transaction. This may not be appropriate, however, if the subsequent transactions relate to serial numbered goods (being motor vehicles, watercraft, aircraft or registered intellectual property rights). Q: I have a fixed and floating charge over all the assets of a company, which was registered with the Australian Securities and Investments Commission (ASIC) prior to the commencement of the PPSA. Do I need to do anything to maintain my security position in respect of that charge? Personal Property Securities Act 05 04

A: Security interests in place prior to the commencement of the PPSA will be treated as transitional security interests. For a period of two years from the commencement of the PPSA, the law applicable to such security interests will be that which was in existence prior to the commencement of the PPSA. After the expiry of the two-year transition period, if such security interests continue to be on foot, they should be registered on the PPS Register. In relation to existing fixed and floating charges and other charges registered on the ASIC Charges Register, the data on that register (and a number of other state-based registers) should have been migrated across to the PPS Register and those securities will be deemed to be registered on the PPS Register from commencement of the PPSA. In relation to any security interests that are migrated in this fashion, there should be no need for any further registration to be done on the PPS Register, however, in the case of motor vehicles and watercraft, such further registration may be required if the serial number for such asset is not already apparent from the existing registration. Also, the secured party should set up a secured party group and find and claim each of its migrated security interests on the PPS Register. Q. Do I need to totally revamp my standard documents and procedures in order to comply with PPSA? A: In general, no. Compliance with the PPSA is voluntary. However failure to comply with it can have significant adverse consequences to your business. We recommend that an assessment be made as to the impact of the PPSA on your business and following the result of that assessment, appropriate amendments be made to documents and (more particularly) processes and procedures. In particular, additional due diligence (predominantly being additional searches of all parties involved in the transaction) will need to be undertaken to ascertain what security interests are already registered on the PPS Register and determining how best to ensure that your desired priority position can be implemented. As a secured party under the PPSA, there are certain notice and other obligations that must be complied with (including on enforcement of your rights against the collateral) and your existing procedures will need to be varied to take account of these obligations. Q: I am a foreign bank that occasionally does business with Australian companies. Do I need to worry about the PPSA? A: Yes. In order to register a security interest, you will need to obtain a secured party group number from the PPS Register. We recommend that you seek advice on the impact of the PPSA from lawyers involved in transactions, where either the grantor of the security is in Australia or the assets are in Australia, to determine how best to ensure compliance with the PPSA. Failure to comply with the PPSA can have significant negative consequences to a secured party that has not perfected its security interest under the PPSA. In keeping with Australian market practice, facility documents should include both PPS further assurance clauses and PPS covenants from the borrower/security provider. How we can assist In relation to the introduction of the new PPS regime, we can assist you with the following: For any business that relies on title-based security (including any rental or leasing businesses), undertake a PPSA review of your current business processes and documentation in order to identify relevant PPSA risks, and then to recommend changes in your business processes and documentation in order to obtain maximum protection available under the PPSA Review existing security documentation for any secured transactions and provide advice on what steps should be taken by the secured party to properly perfect and protect its interests under the PPSA Review and recommend any amendments to standard terms-of-trade documentation, which include retention-of-title terms, so that the supplier can preserve its security position under the PPSA Review and advise on any assignments or transfers of property (including any intangible property) that may now fall within the security interest concept under the PPSA and provide assistance on undertaking a cost benefit assessment of whether or not to register the security interest on the new PPS Register Provide advice on how to complete and register a financing statement in a way that perfects the relevant security interest and minimises the risk that the financing statement is ineffective because it contains a seriously misleading defect Prepare or advise on priority and subordination agreements between secured parties Provide advice on any of the PPSA priority rules (including for migrated and transitional security interests), extinguishment rules or enforcement provisions under the PPSA. 06 What it means for your business

For more information please contact a member of our team sydney Hugo Thistlewood Partner T +61 2 9286 8474 hugo.thistlewood@dlapiper.com Peter Faludi Special Counsel T +61 2 9286 8159 peter.faludi@dlapiper.com melbourne Monique Stella Partner T +61 3 9274 5409 monique.stella@dlapiper.com Caroline Monks Senior Associate T +61 3 9274 5085 caroline.monks@dlapiper.com Brisbane Rod Besley Partner T +61 7 3246 4209 rod.besley@dlapiper.com Perth Michael Gill Special Counsel T +61 7 3246 4116 m.gill@dlapiper.com Brian Pass Partner T +61 8 6467 6209 brian.pass@dlapiper.com Personal Property Securities Act 06 07

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