PPSR LOAN AGREEMENTS 

1. Background

The Personal Property Securities Act 2009 came into effect on the 30 January 2012 . It is a Federal law has changed the way security interests in personal property and in relation to companies are created. The PPSR replaces a number of former registers including ASIC fixed and floating company charges.

The Act establishes a new online security interest register called the Personal Property Securities Register, administered by the Insolvency and Trustee Service Australia (ITSA). This replaces most other current registers of security interests and establishes a system of priorities between competing interests. 

2. Operation of the Act

Loans  may be secured over individual assets, or classes of assets. Individual assets include motor vehicles, aircraft, boats, business inventory, goods to which retention of title applies, goods on commercial consignment, bailed and leased goods, intellectual property and company shares.

3. Exclusions

The Act in section 8 also establishes an extensive list of interests to which the Act does not apply. It does not apply to real property (freehold or leasehold), fixtures and water rights, or any offshore mining or petroleum rights as bills of lading, liens and rights of set-off.

4. Commercial Property & Consumer Property

In the financing statement the collateral must be described as either consumer property or commercial property and must be described by serial number, if required by the regulations; it may be provided, if not required; and it must belong to a single class prescribed by the regulations.

5. Collateral

Property is known as collateral if it is, or is anticipated to be, the subject of a security interest. Collateral classes are:

• agriculture
• aircraft
• all present and after-acquired property
• all present and after-acquired property except
• financial
• intangible
• motor vehicle
• other goods; and
•  

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.

6. Perfection

Perfection is achieved by the secured party providing public notice of its attached security interest usually by registration on the PPSR.

7. Creation, Attachment & Perfection

7.1 Creating the general security agreement

The precedent loan agreement creates of a security interest that may be attached and registered on the PPSR.

7.2 Attachment

A security interest is only effective if it has attached to the collateral being the personal property that constitutes the security.

A security interest attaches to collateral when the grantor either gives value for the security interest or does an act by which the security interest arises; for instance, where a loan agreement is used, the signing on the loan agreement creates the security interest.

Whilst attachment allows enforcement of the security interest against the grantor, it is perfection that provides protection for a secured party against third parties with competing interests in the same collateral.

7.3 Perfection

Perfection is a key concept. An attached security interest is perfected by the secured party providing public notice of its secured interest by:

• registering that interest in the register;
• taking possession of the goods;
• taking control over controllable property, such as intangibles like financial instruments;
• by force of the Act; see Division 4 ss 261 to 264.

Failing to perfect a security interest may mean priority being lost, the security interest being extinguished on transfer to a third party, or, in an insolvency, the assets being available to the grantor’s creditors even if title to the relevant assets is with the holder of the security interest – for example, in the case of a lessor under a lease of goods or the seller under a conditional sale agreement.

7.4 Registration and the financial statement

Always perfect a security interest by registering it unless you have a written acknowledgement from your clients stating that they have possession or control of the collateral, and written instructions directing you not to register.

A security interest may be registered as soon as a party has reasonable grounds to believe it will be granted a security interest. You may (and should) register a security interests as soon as a financing offer is accepted in principle. It does not matter that perfection takes place before attachment.

Agreements are themselves enforceable regardless of registration, but it is registration that sets priorities. The purpose of registration is to govern priorities.

8. The PPSR

The Act establishes a central, national, online register, accessible 24 hours a day. It may be searched using numerous criteria.  The register replaces existing state and national registers. A full list of the registers that have ceased to exist is found on the Personal Property Securities Register website. If there are any doubts about the migration of important securities, then enquiry can be made at the registry.

8.1 Periods of registration

For commercial property the default registration period is 25 years unless a shorter registration period is specified on lodgement. The default registration period for a security interest in property described by a serial number is seven years. Registration must not be allowed to lapse. It may be renewed if necessary. Once registration has expired, the security interest will no longer be perfected for the purposes of the Act.

Registration is effected by:

(a)       lodgement of notice of:

(i)        a financing statement, or

(ii)        a financing change statement (to amend an existing financing statement),

and

(b)       payment of registration fees.

The full registration process may be done online.

8.2 Secured party groups

A secured party group can comprise one or more secured parties. Law firms who may register as a secured party group. A secured party group is allocated a number and an access code known only to that operator. That information must be kept secure, otherwise someone without authority might deal with a security interest. 

8.3 Registration

Once the registration fee is paid, the system confirms that the registration has been submitted and displays the registration number. On registration a security interest is allocated the PPSR issues:

• a publicly available registration number
• a registration token, which is not available to the public.

The secured party group receives a verification statement, which includes the registration number and the registration token details from the register.

Anyone may use the registration number and token to deal with that security. The registration number is public.  The token must be kept secure.

8.4 Verification statement

The statement holder must give notice of the verification statement in the approved form to the grantor as soon as reasonably practicable after registration unless the collateral is commercial property and the provision has been contracted out (as in the attached precedent).

9. Priority of Security Interests

The priority rules established by the Act. If the Act provides no other more specific priority rules, then the default priority rules apply. These are set out in s 55.

Section 60 of the Act provides that the transfer of security interests in collateral does not affect the priority of the transferred interest.

9.1 Default priority rules

(a)       A perfected security interest takes priority over an unperfected security interest. Perfection is achieved by:

(i)        registration, or

(ii)       possession or,

(iii)      control (for certain kinds of collateral).

(b)       Priority between two or more perfected security interests is determined by the order in which the priority time for each security interest occurs. Priority time is the earliest of the registration time or the time the secured party takes possession or control of the collateral.

(c)       The priority time only continues if the security interest remains continuously perfected. This can occur by two or more different means such as, for instance: by possession and by registration, or by two different registrations.

(d)       Priority between two or more unperfected security interests is determined in favour of an earlier attached security interest over a later one.

(e)       Purchase money security interests have priority over non-purchase money security interests in the same collateral.

(f)        A security perfected by control has priority over a registered security.

(i)        Control priority takes precedence over any other priority rules.

(ii)       The first perfection in point of time determines the priority between competing securities perfected by control.

For the following kinds of collateral, the secured party has control of the collateral:

• an ADI (authorised deposit-taking institution) account;
• an intermediated security;
• an investment instrument;
• a negotiable instrument that is not evidenced by a certificate;
• 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;

10. Enforcement

Part 4 of the Act sets out the provisions for enforcement of security interests. It provides secured parties with remedies additional to those in their agreements. A guide to Part 4 is contained in s122 of the Act.

10.1 Remedies

Remedies available to a secured party on the grantor’s default include the rights to seize and sell the collateral. The secured party who seizes the collateral has a power of sale to dispose of it. There is a duty to obtain market value or the best price that is reasonably obtainable.

Before sale  a secured party must give the grantor and other secured parties with a higher priority security interest a notice of the intended sale. The notice must include:

(a)        particulars of the collateral,

(b)       the enforcing secured party and

(c)       the manner of sale.

On sale by a secured party, the purchaser takes the collateral free of the grantor’s security interests and all subordinate security interests. The proceeds of the sale must be distributed among secured parties in order of priority and any residual proceeds go to the grantor.

Retention is an alternative to disposal. The enforcing secured party can retain the collateral to satisfy the outstanding amount owed under the security agreement. That party must give notice of the proposed retention to the grantor and secured parties with registered security interests. If there is no objection, retention transfers title to the retaining party and extinguishes all other security interests.

11. Glossary

‘Attachment’ –  occurs when either value is given for a security interest or the grantor does an act by which a security interest arises. “Attaches” has the meaning given by s19.

‘Circulating’ and ‘Non-circulating’  mean ‘fixed’ and ‘floating’ respectively. Circulating Assets are defined in s340.

‘Collateral’ –  the generic name for property if it is or will be the subject of a security interest. A formal definition is contained in s10

‘Commercial property’  –  personal property other than consumer property. s10

 ‘Consumer property’  –  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. s10

Financing statement is the PPSR form (usually lodged electronically but possible using a hard copy) lodged to effect registration. A formal definition is contained in s10

Grantor means borrower. A formal definition is contained in s10

Perfection is achieved by the secured party providing public notice of its attached security interest usually (by registration). A formal definition is contained in s21.

Security interest is a transaction that secures payment or the performance of an obligation. Three types of interest are deemed security interests regardless of whether they secure payment or performance of an obligation. These are:

(a)       the interest of a transferee of an account or chattel paper,

(b)       the interest of a consignor under a commercial consignment, and

(c)        the interest of a lessor or bailor of goods under a Personal Property Securities lease.

A formal definition is contained in s12.

Security agreement means loan agreement. A formal definition is contained in s10.

Secured party means lender. A formal definition is contained in s10.

Secured party group is the entity, be it of one or more persons, given a number and access code for dealing with the registry.