Preparing For Australia’s New Securities Law

In October 2011 there will be an overhaul of Australian laws governing the taking of security interests and transactions relating to property (except land).

The practical impact of these changes is far-reaching and now is the time for business owners and managers to prepare their businesses for the new regime.

The Personal Property Securities Bill 2009 (‘PPSA’) and Personal Property Securities (Consequential Amendments) Bill 2009, scheduled for implementation during October, aim to:

  • Simplify the laws relating to securities
  • Align Australia’s laws with other legal jurisdictions such as New Zealand (who have had similar laws since 2002)
  • Reduce the risks for borrowers and lenders
  • Replace State-based existing legislation which is often complex, fragmented and inconsistent.

In practice, the new regime will change the way security is taken over most forms of property, with the exception of land.

Of greater significance to commercial businesses is that the new regime will capture transactions not currently required to be registered. These include equipment leases and the supply of goods to customers on credit terms.

Who will be affected?
Any business which currently registers securities (such as mortgages and charges over items, other than land) will be impacted by the changes.

The regime will also impact businesses which transact in:

  • Security against individuals
  • Security against foreign companies
  • Leases
  • Conditional sale agreements
  • Goods sold subject to retention of title
  • Consignment contracts
  • Purchase Money Security Instruments (eg. ROT).

These transactions, and the supply of goods subject to retention of title clauses, and equipment supplied to customers under a lease, rental or bailment (loan) arrangement, will all be captured under the new legislation.

Impact on equipment renters, lessors and bailors
Under current laws, lessors making goods available for hire or loan continue to own those goods. If the customer defaulted or became insolvent, the equipment owner would simply repossess their goods.

The new regime, has the potential to reverse this position.  For example, if a business leases, rents or lends equipment to its customers, and the nature of the arrangement creates a ‘PPS Lease’, but the business fails to register its interest on the PPS Register, the equipment owner may lose its goods under the new regime if the customer becomes insolvent. This is because the security interest attached to those goods may vest with the customer.

Therefore it is critical that business owners and managers know whether their lease, rental or bailment agreements are captured under the new regime. If so, ensure that they are accurately registered on the PPS Register.

New regime affects Retention of Title suppliers
Under current laws, if a Retention of Title clause is adequately incorporated into the terms of trade with a customer, then the supplier could take comfort from the fact that those goods remain theirs until they are paid for.

Under the new regime the security must be registered (referred to as being ‘perfected’) for the retention of title clause to remain valid.

Suppliers of goods subject to retention of title, or goods on consignment, enjoy a special type of security interest called a Purchased Money Security Interest (PMSI).

Providing they comply with all of the requirements of PPSA then a PMSI confers a “super priority” on the supplier who will rank ahead of all other creditors; including the company’s bank and the ATO in respect of those goods.

This will enable the supplier to:

  • Repossess goods that are not paid for which are still in the hands of the debtor
  • Continue to hold security in manufactured goods, where the debtor has used the goods supplied in the manufacturing process
  • Remove goods that are not paid for which have been affixed to other goods (accessions)
  • Have rights in co-mingled or mixed goods
  • Continue to hold security in proceeds where the collateral has been sold or otherwise dealt with.

The new regime provides a two year transition period in relation to existing customers. However all retention of title trading arrangements relating to new customers and new PPS lease agreements created following the opening of the register will need to be registered within specified timescales to be effective.

How can I prepare for the new regime?
Business owners and managers should be focusing on the following in preparation for the October changes:

  • Identify contracts or transactions which are now currently registrable, and those which will require registration under the new regime.
  • Review contracts and charges which are currently on a register such as the ASIC company register and the state based encumbered vehicles registers. These securities will ‘migrate’ to the PPS register. However a review will require to be undertaken to ensure successful migration.
  • Educate staff on the requirements of the new regime and implement procedures for taking security, registration and enforcement.
  • Ensure corporate governance practices reflect the ongoing compliance obligations of the new regime.

The new regime is complex and business owners and managers will need to determine if these changes can be managed in-house or whether their business would benefit from the expertise of a specialist.

Elizabeth Mawby was a former Client Director at Vantage Performance, one of Australia’s leading turnaround management and profit improvement firms – solving complex problems for businesses experiencing major change.

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