PERSONAL PROPERTY SECURITIES BASICS A starters guide to the Personal Property Securities Act 2009 (Cth) Michael Turnell Associate 19 October2017

THIS PRESENTATION WILL COVER Basics of the PPSA Focus on business transactions – particularly buying and selling Short preview of the PPSR WWW.CAPPELLOROWE.COM.AU

PERSONAL PROPERTY SECURITIES What is the Personal Property Securities Act? The PPS Act is the Commonwealth legislation that replaced more than 70 existing Commonwealth, State and Territory Acts with a single, national law. It introduces a national online register - called the Personal Property Securities Register ("PPS Register") - for the registration of all security interests. What does the PPS Act apply to? The PPS Act applies to "security interests" in "personal property". WWW.CAPPELLOROWE.COM.AU

PERSONAL PROPERTY / SECURITY INTEREST What is personal property?   property other than land and fixtures or a right, entitlement or authority granted by law and declared not to be personal property for the purposes of the PPS Act. can be tangible or intangible property. financial property What is a security interest? “an interest in personal property that is provided for by a transaction that, in substance, secures payment or performance of an obligation”: section 12 of the PPS Act. WWW.CAPPELLOROWE.COM.AU

WHAT IS NOT COVERED? interests of a seller who has shipped goods under a negotiable bill of lading; liens; interests in land or payments in connection with land; water access licenses; transfer of accounts; transfer of an account or negotiable instrument interests in fixtures; and superannuation interests. WWW.CAPPELLOROWE.COM.AU

WHAT HAS CHANGED? Personal property = collateral. A retention of title (Romalpa) = a Purchase Money Security Interest ("PMSI"). A lease of personal property for more than 2 years = PPS Lease. A fixed and floating charge = a Circulating Asset or a General Security Agreement ("GSA"). WWW.CAPPELLOROWE.COM.AU

Security interest > Ownership MAJOR TAKE HOME POINT Security interest > Ownership WWW.CAPPELLOROWE.COM.AU

Common Structures that are at risk Leases Assets Owns Assets Uses Assets WWW.CAPPELLOROWE.COM.AU

Common Structures that are at risk - Bank A Bank B All present and after acquired property All present and after acquired property Supplier of Raw Materials Manufacturer of Machinery Retailer of Machinery supplies on retention of title terms supplies on retention of title terms supplies on retention of title terms Customer WWW.CAPPELLOROWE.COM.AU

Compliance with the PPSA Attachment the grantor has rights in the collateral, or the power to transfer rights in the collateral to the secured party; and either: value is given for the security interest (i.e. a loan); OR the grantor does an act by which the security interest arises (lease/loan goods). Enforceability Against Third Parties   Possession OR Control OR Written Agreement Perfection – Main Rule Registration on the PPSR OR Possession OR Control WWW.CAPPELLOROWE.COM.AU

Example of a Registration WWW.CAPPELLOROWE.COM.AU

What happens if I do not perfect? taking free – transferee for value without knowledge takes free of unperfected security interest (i.e. purchase of a vehicle) priority – unperfected security interest ranks after perfected security interests liquidation – unperfected security interest subordinated to interest of liquidator or trustee in bankruptcy WWW.CAPPELLOROWE.COM.AU

The Maiden Case (Uncanny) Bank (provides funds for security) Security Loan QES (Owns machine) Maiden (Leases, requires finance, defaults under loan) Rental WWW.CAPPELLOROWE.COM.AU

The Maiden Case (Continued) “Laters” WWW.CAPPELLOROWE.COM.AU

How does this work for my business? There are two main situations that can expose a business to risk. These are:   A failure to pay (without insolvency); or A failure to pay (and a subsequent insolvency). WWW.CAPPELLOROWE.COM.AU

WORKING EXAMPLES Sarah = Secured Party Andrew = Grantor WWW.CAPPELLOROWE.COM.AU

A failure to pay (without insolvency) Example A Sarah sells goods to Andrew on credit terms, and claims a retention of title. The goods Sarah is selling is collateral. Sarah’s retention of title right is a security interest (a "PMSI"). Andrew fails or refuses to pay for the goods. There is no wider insolvency or liquidation. Sarah’s PMSI security interest will be enforceable against Andrew provided that either: Sarah has physical possession of the goods (which is simply not possible in reality if the goods have been delivered to Andrew); or Sarah has a written contract or terms and conditions with Andrew, which incorporates retention of title terms and PPS clauses. WWW.CAPPELLOROWE.COM.AU

A failure to pay (and a subsequent insolvency) Example B We will use the same fact scenario as Example A but this time, Andrew is bankrupt.   Sarah’s PMSI will be enforceable against Andrew and against the other competing creditors (subject to priority rules), provided that: She has a written contract or terms and conditions with Andrew, which incorporate retention of title PPS clauses; and Sarah physically has possession of the goods (which is simply not possible in reality); or She has properly and accurately registered her PMSI on the PPS Register. WWW.CAPPELLOROWE.COM.AU

What are the general priority rules? Perfected by control PMSI Registered First In Time Registered Later In Time Unperfected WWW.CAPPELLOROWE.COM.AU

What if Andrew has on-sold the goods prior to paying Sarah for them? If Andrew on-sells Sarah’s goods prior to paying for them, Sarah can claim an interest in the proceeds of the sale. However, if Andrew is insolvent, Sarah’s priority ranking can be altered depending on "who" are the competing creditors of Andrew, and "where" those proceeds have been paid. For example: if a bank holds a general security interest over the assets of Andrew, and the proceeds have been paid into a bank account, then the bank will take priority over Sarah. however, if there is no bank involved, or if the proceeds have been paid into an account that is not controlled by the bank, then Sarah’s claim to the proceeds will take priority. WWW.CAPPELLOROWE.COM.AU

What happens if Sarah sells goods that get "mixed up" with other goods? Example C Sarah is a mass producer of grapes. She sells her grapes to Andrew’s winery on credit terms. Another business supplies concentrate to Andrew. Once the grapes are crushed and the concentrate is added, it is impossible to separate the individual inputs back out again However, provided that Sarah registered her security interest in the wine on the PPS Register, she has an interest in the wine. She might be able to trace and receive a proportion of the proceeds of the sale of the wine. The proportion that she would ultimately receive depends on the ratio of her grapes when compared to the other ingredients that make up the finished products. WWW.CAPPELLOROWE.COM.AU

What happens if the goods are less than the cost of the inputs? Following on from Example C, let’s say that Sarah sells her grapes to Andrew for $100,000 and Andrew purchases $50,000 of concentrate from a third party. Andrew is a terrible winemaker however and is only able to sell his wine for $125,000. All things being equal, each party would be entitled to their respective portion of the $125,000 with the remainder being an unsecured debt: Sarah: Two thirds of the input = $125,000 x 2/3 = $83,333.33   Third Party: One third of the input = $125,000 x 1/3 = $41,666.67 WWW.CAPPELLOROWE.COM.AU

What happens if Sarah sells goods that are installed into or affixed to other goods? Example D Sarah has decided that after years farming grapes, she would prefer to sell tractor parts. Coincidentally, Andrew has now gone in to the business of selling tractors. Andrew decides to purchase an engine and various fittings from Sarah on credit terms and installs it on his tractor.   Sarah is entitled to register a security interest on the PPS Register over her products supplied to Andrew. Her security interest continues, notwithstanding that the engine and parts have been installed and forms part of Andrew’s tractor. Subject to certain priority rules set out in the PPS Act, Sarah can enforce her security over the tractor, to the value of her products. If Sarah is the highest priority holder (or with the consent of the higher priority holders), she can take possession and sell the tractor and recover her debt. WWW.CAPPELLOROWE.COM.AU

How do I enforce a security interest? Enforcement via written security agreement   Enforcement via the PPS Act WWW.CAPPELLOROWE.COM.AU

PERSONAL PROPERTY SECURITIES REGISTER WWW.CAPPELLOROWE.COM.AU

What information will need to be entered on the PPS Register? WWW.CAPPELLOROWE.COM.AU

Key points to consider How much will it cost to register a security interest? When do I have to register my retention of title PMSI? What happens if I make a mistake in my registration?   Do I have to register a security interest for each invoice I send?    What is the "Verification Statement"? What is the registration "Token"? Is it compulsory to register on the PPS Register? WWW.CAPPELLOROWE.COM.AU

TERMS AND CONDITIONS OF TRADE Make it clear that the terms and conditions apply.   A customer must be made aware of the terms and conditions before the contract is made. Give the customer the terms and conditions before entering into any contract. Invoice is too late. WWW.CAPPELLOROWE.COM.AU

GOOD PRACTICE Provide customers with the terms and conditions. If suitable, have customers sign the terms and conditions. Include a statement on the new terms and conditions stating that all future purchases are subject to the terms and conditions. For new customers, the terms and conditions should be provided simultaneously at:   the time that they complete a credit application; the time they enter any contract; along with any quotation issued; and prior to payment for the goods or services. WWW.CAPPELLOROWE.COM.AU

GOOD PRACTICE Give an opportunity to read through the terms and conditions. Where a quote or statement is provided, you should include a small note that that document is subject to the terms and conditions.    Register on the PPS Register, include the PMSI clause in terms and conditions. One registration per customer. WWW.CAPPELLOROWE.COM.AU

ANY QUESTIONS? WWW.CAPPELLOROWE.COM.AU