The Personal Property Security Act 2009 (PPSA), is a regime to secure an interest in personal property.
What is Personal Property?
Personal property is any property, including, goods, plant and equipment except for land and its fixtures.
What is a Security Interest?
A security interest is any interest in personal property created by an agreement to secure 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 security interest may exist without regard to ownership and can be granted over property without the owner’s consent. Some agreements such as leases or bailments of goods are deemed Security Interests. These are commonly known as PPS Leases.
What is a Security Agreement?
The Security Interest attaches to the property because of a written agreement, which creates the contractual obligation, usually governing the use of the property, that is being secured. The security interest cannot exist unless it is created by a written agreement and once created by that agreement, title and location of the goods is of little relevance.
What is a PPS Lease?
A PPS Lease is a lease or an agreement for the hire or lease of goods, including plant and equipment, that have a term of more than 12 months or for serial numbered goods, a term of more than 90 days. Under a PPS Lease the Lessor is the Secured Party and the Lessee is the Grantor of the security interest. If a security interest exists then that interest must be perfected prior to becoming enforceable.
Why do we perfect a Security Interest?
A security interest must be perfected by either:
- Possession; or
In most cases, goods are out on hire or leased and therefore out of the possession and control of the owner. In such circumstances, the only method to perfect the security interest is to register the interest on the Personal Property and Security Register (PPSR).
Perfection is essential to ensure priority over other interests and ensure that the security is enforceable upon insolvency.
If the security interest remains unperfected, even though there may be title to the goods, upon liquidation the goods vest with the lessee and the goods become part of any disposal in liquidation.
For example: A is a civil contractor that leases or contracts for civil works with B on terms that include A’s plant and equipment contracted out on either a dry or wet hire basis. The contract between A and B includes terms for retention of title or the bailment of goods. The contract between A and B is a PPS Lease and therefore a deemed secured interest is created. If A’s interest in the goods, plant or equipment are not perfected by registration, upon B’s liquidation, A’s equipment may become the assets of B for the purposes of liquidation even though title never passed from A to B. A would gain a windfall and B would become lower in the order of priority relative to A’s other creditors.
What is Collateral?
Collateral is the “goods” the subject of the secured interest but only become collateral from the time the secured interest is created.
How do we perfect a Security Interest by Registration?
The issue of perfection becomes essential when the equipment is scattered across Australia, on multiple sites performing works, which renders the goods no longer within the owners control or possession.
The security interest must be registered to perfect the interest and ensure that title takes priority in liquidation. Registering such interests can be completed online by setting up an account at www.ppsr.gov.au.
When creating a registration of a secured interest, you will need the following:
- Details of the Collateral (goods, plant or equipment):
- Details of the Grantor (the lessee of the collateral); and
- Details of the Secured Party (Owner of the collateral).
(Note: Grantors and Secured Parties must be parties to a written agreement that creates an obligation between the parties in respect of the use of the goods)
Who has priority?
Perfection by control will prevail over any other type of perfection. Perfected security has priority over unperfected security. Perfected security has priority over later perfected security.
Competing unperfected security have priority according to the order of attachment (the earlier agreement in time creating the obligation to pay or perform prevails).
Frequently asked questions in respect of perfection by registration:
- What is transitional versus non-transitional?
The PPSA commenced on 12 January 2012. If a secured interest was created prior to the PPSA, the PPSA cannot alter the priority of that secured interest.
- What if the term of hire or lease over serial numbered goods is less than 90 days or the term of hire or lease over other goods is less than 12 months, does a security interest exist?
The 90 days or 12 month rule is only relevant to determining whether an agreement is a PPS Lease and therefore a deemed security interest. If the hire or lease is less than 12 months or 90 days then it will not be a PPS Lease. However, if it is not a PPS lease there may still be a secured interest. For non-PPS Leases, you must determine if the agreement creates a secured interest and if so registration is required.
- Do you need to register all plant, equipment and goods?
Yes. It is highly recommended that all goods that leave the title holders control and possession are registered.
- If so, how do you describe the goods on the register?
Where possible the PPSR website will assist in this regard, for items such as motor vehicles the process is simple. However, for goods of a different or general nature, it is necessary to provide as many details to identify the goods as possible and preferably by a unique serial number for each item. It is prudent to create serial numbers or a coding system uniquely associated to the secured party.
- Do you need to register each time goods or equipment move to various third-party sites?
The secured interest is attached to the agreement that creates the subject matter to which the goods relate. Accordingly, while equipment may move around many sites, if that item remains on lease or hire under the same agreement or PPS Lease then the secured interest requires only one registration.
Accordingly, registration of a secured interest would need to be created on each occasion the item in question becomes the subject of a new agreement for hire or lease.
- Is the secured interest enforceable on a third party (ie not the grantor) where the grantor then on-leases (subleases) or passes on possession and or control of the goods leased from the secured party?
The security interest will continue to be enforceable over the registered goods but not in all circumstances. For example: if A is the secured party and it leases goods to B and B then leases or uses the goods under contract on C’s project. If C becomes insolvent, A’s secured interest will continue to have priority. In some cases, if B leases or disposes of the goods as part of its ordinary course of business then A may lose its secured interest.
It is prudent that A imposes an obligation on B to create a secured interest and perfect any such interest as part of any contract between B and C.
What to do now!
Have a specialist construction lawyer review your contracts, ensure that the appropriate clauses are in place and train your staff on procedures for PPSA registrations.
As a sponsor of CCF, we are committed to providing our service to all members. If you would like to discuss or need legal advice, give George Hayek a call on (02) 9642 7748 or email at email@example.com