Migrated Security Interests - back in focus!

When the PPSR first started it was immediately populated by a number of registrations representing security interests that had been migrated across from other registers.  

Initially, we were promised that the PPSR would, effectively, absorb the role of 70 national and state registers although, in the end, substantially fewer registers had data moved across.

Unfortunately, the migration exercise was not entirely successful and statutory provisions had to be introduced in order to confer legitimacy on registrations that, in any other circumstances, would have been deemed ineffective.

With the 5^th anniversary of the PPSR, at the end of January 2017, those statutory provisions are scheduled to lapse. 

This means that any PPSR registrations you have that had originally been lodged on an older register will need to be checked to ensure their continued effectiveness.

So what type of problems might there be?

One relatively well publicised issue, when the PPSR first started, revolved around security interests with multiple secured parties.

While an original lodgement on ASIC’s register of company charges might have shown that ABC P/L, DEF P/L and GHI P/L all shared in the same security interest against a debtor/grantor, when transfer to the PPSR took place, only ABC P/L might have been shown as the secured party.  Apparently, some 27,000 registrations are thought to fall in this category!

Another problem arises from the PPSA’s very strict rules regarding how a debtor/grantor should be identified.  

These rules do not necessarily align very well with those used by the original registers.  For example, most registers would not have deemed a Trust as having sufficient legal capacity to grant a security interest and would thus have required any registration to be lodged against the trustee of that trust as opposed to the trust itself.  However, the PPSA pretty much requires registrations to be lodged against the ABN of the trust rather than its trustee.

Similarly, ABNs will have commonly been used to identify corporate grantors on pre-PPSR registers whereas the PPSA requires such to be identified by their ACN, if they have one, or their full legal name if they do not.

Registrations that don’t identify grantors by their proper, PPSA legislated, identifiers are almost certainly likely to be considered ineffective.

The PPSA also has specific rules for identifying motor vehicles, watercraft, aircraft (including various bits of aircraft) and certain intellectual property rights by serial numbers in order to be fully effective.  There will undoubtedly be a great number of instances where those serial numbers were not migrated across from their originating registers.

If you have any security interests that were ‘automatically’ brought across from another register at the start of the PPSR, you only have a matter of weeks left to make sure they meet the PPSA’s requirements before they lose any ‘artificial’ effectiveness the subsequent statutory provisions may have conferred.

PPSA Amendment Finally Passes! [UPDATED]

Back in March 2014, I wrote about a Bill being put before Parliament to do away with the two tier system the PPSA had introduced whereby leasing arrangements were treated differently depending upon whether they involved serial numbered equipment (eg, motor vehicles and watercraft) or non-serial numbered equipment (eg, everything else).

That article, giving some background to the Bill and its implications, can be found here.

Finally, towards the end of last month, that Bill, the Personal Property Securities Amendment (Deregulatory Measures) Bill 2014, was passed.  While the approximately 15 months wait to get this approved won't be good news for those looking for swift implementation of any of the 394 recommendations included in the recently completed review of the PPSA, it will be good news for those businesses regularly engaged in the of hiring vehicles for periods of less than a year.

The Government has estimated that bringing the hiring of motor vehicles into line with the hiring of any other piece of equipment will save business over $11 million a year - whether that is based purely on the saving of registration fees or also includes the administrative costs involved in preparing and lodging a registration is not clear.

The good news, however, won't be felt just yet.  The Act needs to receive Royal Assent before it can be introduced and such introduction may take up to a further 6 months from that point.  

[UPDATE: An announcement by the PPSR today (28/08/15) advises that "The Government is working toward commencement of the amendment on 1 October 2015."]

Any leasing arrangements entered into before the, yet to be announced, amendment commencement date will still need to be registered in accordance with the 'old' rules but after that date, a great many small and medium sized businesses will have found themselves released from an annoying strand of red tape.

Just to reiterate - at present, if you are leasing a motor vehicle (or equipment that might fall under the Act's rather broad definition of motor vehicle) where the period of the lease falls into one of the following categories:

a) a term of more than 90 days; 
b) for an undefined period that may be construed as allowing for a hire extending beyond 90 days; or 
c) for any other period that allows, via automatic or optional renewal, extension to a total period exceeding 90 days.

A PPSR registration is necessary to prevent your property being taken as part of your customer's estate in the event a liquidator is appointed.

After the new amendment comes into force, the rules for motor vehicles will be just the same as for any other hired equipment:

a) a term of more than 12 months; 
b) for an undefined period that may be construed as allowing for a hire extending beyond 12 months; or 
c) for any other period that allows, via automatic or optional renewal, extension to a total period exceeding 12 months.

Any standard leasing arrangement that falls outside of any of the above situations need not register and need not run the risk of a liquidator taking possession of your equipment.

PPSR End of Year Statistics

The Insolvency and Trustee Service Australia (ITSA) has recently released their statistics for activity on the PPSR for the quarter ending 30th June 2013.

Probably not surprisingly, out of over 1.5 million searches conducted (the busiest quarter of the 2012/13 year), the vast majority (61.4%) were searches of motor vehicle serial numbers with the balance pretty much taken up by searches for registrations against organisations (32.2%). 

543,620 registrations were lodged on the Register during the quarter with an overwhelming majority (87.8%) being non-transitional registrations.

Interestingly, at 354,937, the number of discharges was equivalent to almost two thirds of the number of new registrations lodged giving 188,683 in net new registrations.  However, with the total number of registrations as at the end of June (7,366,053) showing only a 111,721 increase over the equivalent figure reported for the end of the previous quarter, this leaves us with a discrepancy of just under 77,000.

ITSA provides no explanation for the loss of 77,000 registrations during the quarter.  Conceivably they have all expired naturally (although that does seem a particularly high figure this early in the life of the PPSR given that the register virtually encourages registrations for up to at least 7 years) or perhaps someone will find that they have slipped down the back of a cupboard somewhere.

Motor vehicles are the most common collateral class listed on registrations on the PPSR. As at 30 June 2013, there were 3,998,373 current registrations on the PPSR of this class.  ALLPAPs (with and without exceptions) came in second with just under half that number and then ‘Other Goods’ registrations at 1.23 million.

The full set of statistics released by ITSA can be found at the following link:

https://www.itsa.gov.au/about-itsa/ppsr/ppsr-statistics/ppsr-quarterly-statistics/june-2013-ppsr-quarterly-statistics/june-2013-ppsr-quarterly-statistics-report

PPSA Pitfalls

I've been asked to compile some speaking notes for a colleague who wants to talk about some of the PPSA pitfalls we have become aware of since the PPSR opened for business at the end of January this year.  

While this is far from an exhaustive list (this is for a speaking engagement after all and it doesn't take long for eyes to glaze over once the subject of PPSR is raised) I nevertheless thought it might be helpful to reproduce it here.

• Don’t rely on an independent body such as a judge, court or the PPSR itself to determine the validity of your security interest under the PPSA – more often than not such issues will be decided by a receiver acting on behalf of a bank who will have a vested interest in defeating any competing rights you hold.
  
• Where the PPSA requires goods to be registered by serial number you must not make any mistakes in recording that serial number on the PPSR as any error is likely to invalidate the registration without it having to be demonstrated that anyone was misled by that error.
  
• Banks are frequently (wilfully?) misunderstanding PPSR registrations and asking suppliers to discharge registrations to enable the bank to put their own registration in place – they are then ‘generously allowing’ the supplier to re-register their own interest!  Do not fall for this!
  
• If your debtor/grantor is a company with an ACN and you do not specifically register against that ACN then your registration will almost certainly be deemed to be invalid.
  
• Timeliness is very important. Do not allow your new credit agreements to pile up with the intention of registering  them all at the end of the month.
• Where your goods are destined to form part of your buyer’s inventory (WIP, end product etc.) you need to register before you make delivery.
• Where you are selling equipment that will not be on-sold you need to register not later than 15 days from delivery.
  
• Do not confuse ARBNs with ABNs – an ARBN (Australian Registered Body Number) is a 9 digit number issued by ASIC, most commonly to overseas companies whereas an ABN is an 11 digit number issued by the Australian Business Register.  We have seen a lot of invalid registrations arise from this confusion.
  
• While the PPSA does not require you to obtain prior permission from your buyer to register your security interest against them it does require you to notify them once you have lodged your registration. (With the right wording in your agreed Terms & Conditions, however, you can have your buyers waive their rights to receive such notification).
  
• PPSR registration is not enough to justify your claim against an administrator; you will still need to be able to provide the documents that demonstrate you have the valid security interest you are claiming with your registration.
  
• Most know that Retention of Title clauses justify PPSR registration but don’t overlook the need to also register consignment stock and long-term leasing arrangements.
  
• Make sure that your staff who are actually lodging your registrations understand what they are doing – we see many instances where they seem confused by terms such as ‘inventory’ and ‘Retention of Title’ let alone ‘Purchase Money Security Interest’.
  
• It is better to have a PPSR registration you don’t need than to need a registration you don’t have.
  
• Do I need to register all my security interests – No, only the ones you want to be effective.

PPS Leases

Earlier this week I was asked to explain to one of our clients the position the PPSA takes on Leasing and Hiring arrangements. In particular the client wanted clarification on the duration of leasing arrangements and gave, as an example, the situation where “some customers hire our machines for 2 months but then decide to just keep them for 5 months”.

Firstly, I should probably explain that leasing and hiring arrangements fall into a similar category to Retention of Title arrangements in that they do not technically involve the creation of a security interest but rather clarify an ownership position and the rights of the hirer/supplier to recover their property in the event of any breach of contract on the part of the lessee/buyer. With the PPSA's emphasis on substance over form the rights of a leasing company to recover their property is treated as a security interest and is now covered under that Act.

PPS Leases are defined under Section 13 of the PPSA (the wording for which I’ve included at the end of this article should anyone enjoy reading that sort of thing).

Briefly, for goods that are required under the Act to be described by serial number (primarily motor vehicles, watercraft, aircraft etc) registration is appropriate where the lease is for 90 days or more or where the lease is for a shorter period but allows for being renewed or extended to such an extent that the total lease period extends beyond 90 days.

For goods that are not required to be described by serial number the cut-off requirement for registrations extends to periods of 12 months (or shorter periods that allow for extensions/renewals which would take the overall period beyond 12 months). 

Hirers (and other suppliers) should be aware that when the Act refers to serial numbered goods it is referring to specific types of goods.  Most goods have serial numbers stamped on them somewhere if you look hard enough; however, only those stamped on motor vehicles, watercraft, aircraft etc count as far as the Act is concerned.

It should also be noted that while most of us think we have a pretty good handle on what constitutes a ‘motor vehicle’ the PPSA extends the ‘normal’ interpretation to include, for example, “a piece of machinery or equipment that is equipped with wheels and designed to be attached to, or towed by, a motor vehicle” (see below for the PPSA Regulations Act's definition).

If we use our client’s example scenario, “some customers hire our machines for 2 months but then decide to just keep them for 5 months” – if the goods in question are required to be registered by serial number and the lessee is entitled under the lease agreement to extend the lease in that fashion then our client would be advised to register their security interest in the goods on the PPSA Register and should do so at the outset.  My advice in these and other situations is that it is better to have a registration you don’t need than to need a registration you don’t have.

PPS Leases are able to be registered as Purchase Money Security Interests (PMSIs) which give the lessor a greater priority in their security than holders of general security interests.  For this to be effective the registration must be lodged within 15 business days of the lessee taking possession of the goods or, where the goods will be used as inventory, before the lessee takes possession of the goods.

As I threatened at the outset, the PPSA’s definition of PPS Leases is as follows:

(1)   A PPS lease means a lease or bailment of goods:

                     (a)  for a term of more than one year; or

                     (b)  for an indefinite term (even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment); or

                     (c)  for a term of up to one year that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed one year; or

                     (d)  for a term of up to one year, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of more than one year after the day the lessee or bailee first acquired possession of the property (but not until the lessee’s or bailee’s possession extends for more than one year); or

                     (e)  for goods that may or must be described by serial number in accordance with the regulations, if the lease or bailment is:

                              (i)  for a term of 90 days or more; or

                             (ii)  for a term of less than 90 days, but is automatically renewable, or is renewable at the option of one of the parties, for one or more terms if the total of all the terms might be 90 days or more; or

                            (iii)  for a term of less than 90 days, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of 90 days or more after the day the lessee or bailee first acquired possession of the property, (but not until the lessee’s or bailee’s possession extends for 90 days or more).

             (2)  However, a PPS lease does not include:

                     (a)  a lease by a lessor who is not regularly engaged in the business of leasing goods; or

                     (b)  a bailment by a bailor who is not regularly engaged in the business of bailing goods; or

                     (c)  a lease of consumer property as part of a lease of land where the use of the property is incidental to the use and enjoyment of the land; or

                     (d)  a lease or bailment of personal property prescribed by the regulations for the purposes of this definition, regardless of the length of the term of the lease or bailment.

The PPSA Regulations (a separate act to the PPSA itself) holds the following definition of Motor Vehicle:

Meaning of motor vehicle

         (1)   For the definition of motor vehicle in section 10 of the Act, personal property described in sub regulation (2) or (3) is a motor vehicle.

         (2)   The personal property:

                (a)    is built to be propelled, wholly on land, by a motor that forms part of the property; and

               (b)    either:

                          (i)    is capable of a speed of at least 10 km/h; or

                         (ii)    has 1 or more motors that have a total power greater than 200 W; and

                (c)    has any of the following:

                          (i)    a vehicle identification number;

                         (ii)    a chassis number;

                        (iii)    the manufacturer’s number; and

               (d)    does not run on rails, tram lines or other fixed path.

         (3)   The personal property:

                (a)    is capable, when being towed by, or attached to, a motor vehicle, of travelling at a speed greater than 10 km/h; and

               (b)    is a piece of machinery or equipment that is equipped with wheels and designed to be attached to, or towed by, a motor vehicle; and

                (c)    has any of the following:

                          (i)    a vehicle identification number;

                         (ii)    a chassis number;

                        (iii)    the manufacturer’s number.