Personal Property Securities law changes - implications for technology contracting

Posted by Ian MacKenzie

Following its meeting on 13 February, the Coalition of Australian Governments has agreed to delay the commencement of the Personal Property Securities Act 2009 (Cth) (PPSA) until October 2011.

This means that the business community has an extra six months to prepare for the PPSA. But what is the PPSA, and what will it mean for people in the technology, media and telecommunications area?

What is the PPSA?

The PPSA is a comprehensive re-write of the law relating to personal property securities in Australia. It is modelled on existing New Zealand and North American laws and has enormously broad application.

What does it apply to?

Generally, the PPSA applies to all property, other than land, including most intangible property.

Although the PPSA applies to standard security arrangements such as mortgages and charges, it also applies to transactions that have not previously been considered "security" transactions.  These include retention of title supply arrangements.  Under the PPSA, the commonly-used retention of title arrangement (where a supplier of property retains ownership of that property until it is paid for by the purchaser) will be considered to be a "security interest".

Leases of goods (generally those for a term of more than a year or for an indefinite term) will also be considered to be security interests.  However, a licence, in and of itself, is not a security interest under the PPSA.

What do I have to do?

The person with the benefit of a security interest (ie, the supplier or lessor – the secured party) will have to take steps under the PPSA to "perfect" its security interest to ensure that it: 

• does not become void on the insolvency of the person granting it (ie, the purchaser or lessee – the grantor); and 
• has the priority required by the secured party in an enforcement scenario (vis-à-vis other secured creditors of the grantor). 

Perfection will, in most cases, be by the lodgement of an electronic form on a new register to be established – the Personal Property Securities Register. There are certain timeframes set out in the PPSA by which a secured party must perfect its security interest in order to achieve the desired protection.

What are the consequences for not doing it?

Failure to perfect a security interest may expose a secured party to some unexpected consequences.  Because an "unperfected" security interest is subordinate to a perfected security interest, if a supplier or lessor does not adequately perfect its security interest, it may well lose its asset to someone with a competing security interest in it.  In most cases this will be the purchaser's/lessee's bank who has taken all-assets security to secure its lending to the purchaser/lessee.

An important point to note is that, under the PPSA, a person can give security over assets it does not own (such as property purchased on retention of title terms, or property it has acquired on lease).  In effect, a supplier or lessor could find that, under the PPSA, it loses title to property it owns if it fails to perfect the security interest that the PPSA declares it to have.

How could it change the way I do business?

To ensure that a security agreement (such as a supplier's terms of trade or a lease agreement) is enforceable against third parties, in most cases, it will need to be in writing and signed by the grantor.  This may mean a significant change in business practice for some suppliers who may not previously have had written terms of trade or who may not have been in the practice of requiring a purchaser to sign them.

The PPSA sets out certain procedures for enforcing security interests.  These will need to be followed by a secured party if it wants to recover secured property from a grantor (and may include giving notice of enforcement action to the grantor or another person with an interest in the property subject to the security interest).  These provisions will not apply to some leases, but will apply to retention of title suppliers.   For such suppliers, this will be a marked change from the current position where there are relatively few constraints on a supplier looking to recover their property.

Re-think required

The PPSA will mark a significant shift in the way suppliers and lessors will need to think about the transactions they enter into.  The next six months are the time for all businesses to give thought to how the PPSA may affect them and seek advice to prepare themselves adequately.

Partner: John Elias