How do businesses protect personal property? A look at the PPSA and some recent cases.
In January 2012 the Personal Property Securities Act 2009 (Cth) (“PPSA”) came into full effect, providing a set of rules for creating and protecting security interests in personal property and establishing a national register of all such security interests. The Act made significant changes to the law regarding security interests of personal property by setting out how to create a valid and enforceable security interest, the order of priority between competing security interests and what happens in the case of insolvency. Prior to the PPSA there were over 70 differing state and territory laws pertaining to security interests of personal property, whereas now the law is unified in one Act that applies nationally.
Since personal property covers just about everything except for land, the PPSA is relevant to many aspects of business. The new system of creating and registering security interests as outlined in the PPSA poses significant risks for people who are unaware of the changes, because failing to comply with the PPSA can result in an inability to claim assets that you otherwise own.
Terminology and basic principles
The PPSA sets out the law regarding personal property – but what exactly is personal property?
Personal property is everything other than real property, which means it includes:
- motor vehicles;
- boats and other watercrafts;
- intellectual property;
- crops and livestock;
- extracted minerals;
- financial property;
- satellites and other space objects;
- inventory; and
- consumer and commercial property.
Basically, personal property is any property other than land, buildings, fittings and fixtures.
If you decide to read up about the PPSA you will probably come across the acronym ‘PPSR’. The PPSR is the Personal Property Security Register, which is a national online register in which the details of all security interests are listed, (so long as the interest has been registered). Section 147 of the PPSA provides for the PPSR.
Now that you know what amounts to personal property, you may be wondering what a security interest actually is. A security interest is an interest in an item of personal property that secures the payment of a debt or the performance of an obligation.
A security interest must be made through a security agreement or contract between the secured party and the grantor. The secured party is the party that holds the security interest. In other words, they are the lender. The grantor is the person who provides the secured party with the security interest. The security agreement sets out the grantor’s intention to grant the security interest to the secured party and should be in writing and signed by the grantor.
Enforcing a security interest
Before a security interest will be enforceable, three steps needs to be fulfilled. Those steps include attachment, enforceability and perfection.
Attachment literally refers to the attachment of a security interest to the property. Section 19(1) of the PPSA stipulates that the security interest must be attached to the property for it to be enforceable. Attachment can only occur if the grantor has the right or power to transfer the rights in the property. A grantor will have the power to transfer the rights in property to the secured party if they have ownership or title of the property, if it has been leased or bailed to the grantor under a PPSA lease or sold to the grantor under a conditional sale agreement when the grantor obtains possession of the property.
In addition to the grantor having the power to transfer rights in the property, for attachment to occur there must be value given for the secured interest, or else the grantor must have done an act by which the security interest has arisen.
In order for a security interest to be enforceable, there must be a security agreement in place, as detailed in section 18 of the PPSA. The security agreement should be in writing and must specify that the grantor acknowledges the existence of a security interest and grants that security interest to the secured party. This agreement should be signed by the grantor to demonstrate that they agree to the terms of the agreement.
The PPSA details ways in which a security interest can be perfected. Once again, the security interest can only be enforceable once it is perfected, and perfection can only occur if the previous two steps have occurred. Section 21 of the PPSA says that perfection will occur when the interest is registered with the PPSR or, alternatively, if the secured party takes possession of the property. This does not apply if the secured party takes possession due to seizure of the property, however.
Ownership is no longer relevant
If insolvency occurs and the security interest in question is not registered with the PPSR before insolvency, the security interest will vest in the grantor. The Act does not take into account who has title of the property in question. This means that if you are the secured party, whether or not you have title to the property, you will not be able to recover it in the case of insolvency if you have not registered your security interest. This provision can have a serious impact on an individual or company if they fail to comply with the PPSA requirements. This issue is what recently saw a lot of tradesmen lose equipment when Cooper and Oxley went into receivership.
What can happen if I don’t register my security interest?
The case of Albarran v Queensland Excavation Services is an example of a few of the provisions of the PPSA in action. The case involved Queensland Excavation Services (“QES”) leasing some vehicles to a company called Maiden. The lease was a PPSA lease and therefore amounted to a security interest. It was a PPSA lease because although it was not in writing, the lease was continuous for more than a year and in that time Maiden had uninterrupted possession of the vehicles. According to section 13 of the PPSA, this makes it a PPSA lease. In this situation, QES was the secured party and Maiden was the grantor. QES did not register the security interest.
Maiden then obtained finance from another company, called Fast Financial Solutions (“Fast”) to help them pay the required funds to QES for the lease of the vehicles. This created a security interest, which Maiden was entitled to do because, as discussed above, the PPSA allows grantors to transfer rights to property to a secured party even if they don’t own the property – if the property has been leased to the grantor they still have sufficient power to transfer the rights. Here, Fast was the secured party and Maiden was the grantor. Fast perfected their security interest by way of registration with the PPSR.
Maiden ended up defaulting on a provision of the security agreement they had with Fast and Fast subsequently appointed receivers over all of Maiden’s assets. Shortly after, Maiden went into voluntary administration and then into liquidation.
At this point, QES terminated their lease of the vehicles to Maiden and leased them to another client. The receivers that Fast appointed made a claim that they had the right to possession of the vehicles, to which QES argued that they had the right to possession because they were the ones that owned the vehicles.
The court found that the receivers were entitled to possession of the vehicles as against QES because Fast’s security interest was perfected and QES’s were not. According to the PPSA, if there are competing security interests over the same property, priority is given to a perfected security interest over an unperfected one.
QES tried to argue that their security interest was perfected by possession, as per section 21 of the PPSA, however, since they accrued possession through seizure this provision did not apply. The result was that Fast was entitled to retain the vehicles.
What if I register my security interest late?
The Corporations Act 2001 (Cth) stipulates that a security interest must be registered within 20 business days of entry into the security agreement. You can still register it after this time has expired, but you will be at significant risk of losing your interest in the property if the grantor becomes insolvent.
In the case of Relux Commercial v Doka Formwork, the 20-day provision had detrimental effects for Doka. Relux was a construction business and Doka leased equipment to Relux valued at over $1 million. Doka leased most of this equipment to Relux on 1 January 2014, and then leased some more in February and March. Doka did not register its security interest over the equipment until 20 February 2014. Relux went into liquidation and Doka made a claim for possession of their equipment on the basis that they had a registered, and therefore perfected, security interest in it.
This argument was rejected by the court because, in respect of the equipment leased in January, Doka took more than 20 business days to register the security interest, meaning that Doka lost equipment that they otherwise owned, to the value of almost $1 million. Doka was entitled to retain the equipment leased in February and March because the security interest over this equipment was registered in time and was therefore perfected. This case serves as an example of the severe consequences you can face for failing to register your security interest on time.
If a secured party misses the 20-day deadline, they should apply to the court for an extension of time to avoid the risk of losing their assets. The court may grant an extension if the registration was late because of an accident or some other sufficient cause, or the extension would not be of such a nature as to prejudice the position of creditors and shareholders. Additionally, the court always has discretionary powers to grant an extension on any grounds that it sees just and equitable to grant relief. Alternatively, recall the goods and enter into a new lease arrangement and register within 20 days.
The PPSA has significantly changed the way security interests in personal property are to be managed. Some of the provisions in the PPSA can be quite hard to wrap your head around, but they are also extremely important because failure to comply with them can result in devastating consequences for you or your company.
If you have been caught out by any of the PPSA provisions, need assistance to register an interest, need a security agreement to be prepared, or if you think you’ve missed the 20-day deadline to register a security interest, please contact Lynn & Brown Lawyers for advice.
About the authors:
This article has been co-authored by Chelsea McNeill and Steven Brown at Lynn & Brown Lawyers. Chelsea is in her third year of studying Law at Murdoch University. Steven is a Perth lawyer and director,and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.