1. Personal Property Securities Act 2009 (Cth) Practical implications and what you need to know! Petrina Macpherson – Senior Associate 28 May 2011

2. 11950375_12 Personal Property Securities Act 2009  The Personal Property Securities Bill 2009 and the Personal Property Securities (Consequential Amendments) Bill 2009 were passed by both Houses of Parliament on 26 November 2009  The PPS Act will apply after the registration commencement time which was expected to be May 2011  In February 2011 COAG determined that the commencement date be deferred to October 2011

3. 11950375_13 Personal Property Securities Act 2009  Aim of the legislation is:  to bring an end to the inconsistent and duplicate laws and registers which presently govern personal securities law in the various Australian jurisdictions  It will replace 70 Commonwealth and State Acts, administered by 30 government agencies

4. 11950375_14 Objectives of PPS Reform  Increase certainty in insolvency and for holders of competing security interests  Increase consistency with consistent and comprehensive legislation  Reduce complexity with simpler registration procedures  Reduce costs with security interests being identified on one site  Alignment with overseas developments in this area (NZ, Canada and US)

5. 11950375_15 PPS Register  Up to 30 existing federal and state registers will be migrated to the PPS Register, including:  ASIC register of company charges  co-operatives register of charges  bills of sale  motor vehicle securities  ship mortgages  crop liens  stock liens  register of trade marks

6. 11950375_16 PPS Register  Notices are currently being sent out to ensure only current securities are migrated  Once migrated a verification certificate will be sent to the grantor and grantee of the security interest

7. 11950375_17 PPS Register  On the PPS register, the end time for the security must be defined, in particular  goods used by consumers - security can’t be for more than 7 years (but can be renewed)  motor vehicles - security can’t be for more than 7 years (but can be renewed)  BUT no stated end time needed for company charges  Will be wholly electronic  Accessible 24/7

8. 11950375_18 PPS Register Key differences to current position -  Operates on the basis of notice rather than document registration  Registration is by ‘financing statement’  Notice can be registered before any secured transaction takes place  One registration can cover multiple security interests

9. 11950375_19 Registration  Not mandatory to register security interests  No time limit for registering  PMSIs to be registered within 15 days  However failure to register/perfect will have consequences for enforcement and priority

10. 11950375_110 Searching register  PPS Register can be searched by  grantor details  property details (if there is a serial number on the particular property)  PPS register will be maintained by ITSA  Existing registers will be migrated and verified

11. 11950375_111 Access to register  Unlike current company charges - copies of the security documents are not included in the register  Information is included via the financing statement  Interested persons will be able to receive a copy of the security agreements from the grantor within 10 business days of a request being made

12. 11950375_112 Access to register  Only authorised users can access the register e.g. credit providers and current and potential security holders  To protect privacy there will be no general public access except for authorised purpose – but may be difficult to police

13. 11950375_113 What is Personal Property  Personal Property means property (including a licence) including:  tangible items such as cars, boats, aircraft, livestock, crops and minerals that have been extracted in any form  intangible items such as intellectual property and contract rights, designs, patents, plant breeders rights and trademarks  financial property such as currency, a document of title, investment instruments and negotiable instruments.  investment entitlements (e.g. stockbroker accounts)

14. 11950375_114 Personal Property  It specifically excludes  land  fixtures  water rights  a right, entitlement or authority (including access entitlements) that is  granted by or under a law of the Commonwealth, a State or Territory  declared by that law not to be personal property for the purposes of the Act

15. 11950375_115 What is personal property security  Three elements  an interest in relation to personal property  provided for by a transaction  that, in substance, secures payment or performance of an obligation  This is regardless of the form of the transaction or the identity of the person who has title to the property

16. 11950375_116 Security interests – examples  Charges that secure obligations - no distinction between fixed and floating charges  Retention of title arrangements  Chattel mortgages  Lease of goods  Hire purchase agreements  Consignment

17. 11950375_117 Form of documentation  There is no prescribed form of security agreement:  General security agreement  Specific security agreement  All security is effectively ‘fixed’ - parties need to agree terms of security arrangements  Parties to determine when the property can be disposed of by the grantor  PPSA determines how current fixed and floating securities are dealt with in future

18. 11950375_118 Entities covered  PPSA applies to security interests granted by  corporations  partnerships  managed investment schemes  registrable and non registrable legal entities  individuals

19. 11950375_119 Creating a security interest  Step 1 – entering into a transaction  Step 2 – attachment of the security interest to the personal property (enforceable against the grantor)  Step 3 – possession, control or written security agreement (enforceable against third parties)  Step 4 – perfecting the security interest

20. 11950375_120 Attachment  A security interest attaches to personal property when  The grantor has rights in the collateral* that are transferrable to the secured party and  The secured party gives value in return for the security interest  *Collateral is the personal property to which a security interest is attached

21. 11950375_121 Attachment  For an attached security interest to be enforceable against third parties, section 20 of the PPSA requires that either  the collateral is in the possession of the secured party  the collateral has been perfected by control or  the grantor and the secured party have entered into a valid written security agreement  PPSA contemplates that security agreements can be entered into electronically

22. 11950375_122 Perfection  Perfection is required to obtain priority over another security interest, or survive a dealing in the same collateral  The main methods of ‘perfection’ are (section 21)  taking control of collateral that is controllable property (e.g. bank accounts, investments)  registering a security interest in the collateral  taking possession of the collateral or  temporarily perfecting a security interest in the collateral

23. 11950375_123 Control  Controllable property is defined as  an investment instrument  an ADI account (e.g. bank account)  investment entitlements  investment instruments (e.g. shares)  letters of credit  negotiable instruments not evidenced by a certificate (e.g. bills of exchange)

24. 11950375_124 Priority  A perfected security interest will have priority over an unperfected security interest – section 55(3)  example  ABC Cranes Pty Ltd (ABC) grants a security interest in one of its cranes to Bendigo Bank  ABC later grants a security interest in the same crane to NAB  NAB registers the crane on the PPS register, Bendigo Bank does not  the security interest held by NAB will have a higher priority

25. 11950375_125 Priority  A security interest perfected by control (of controllable property) will have priority over a security interest perfected by any other means – section 57(1)  Example (investment instrument)  Bob borrows $20,000 from ANZ to invest in a pizza oven and grants ANZ a security interest in shares issued by Macquarie  ANZ perfects its security interest by registering the shares on the PPS register  Bob later borrows another $25,000 from Westpac and grants Westpac a security interest in the same shares issued by Macquarie

26. 11950375_126 Priority  Westpac perfects its security interest by taking control of the shares  Westpac’s security interest would have priority over ANZ’s interest because Westpac has perfected its interest through control, while ANZ has perfected only by registration  Where competing security interests are both perfected by control, priority is determined by the order in which the secured parties took control of the collateral – section 57(2)

27. 11950375_127 Priority  Priority between security interests perfected by means other than control is also determined by the first in time principle – section 55(4)  it is necessary to determine the priority time  the priority time will not necessarily be when the security interest was perfected

28. 11950375_128 Priority time  Providing a security interest is continuously perfected, the priority time will be the earliest of  registration on the PPS register  possession of the collateral  when the interest is temporarily perfected by force of the PPS Act

29. 11950375_129 Priority  Priority between unperfected security interests is determined by the order of attachment of the security interest – section 55(2)

30. 11950375_130 Exceptions to the general priority rules  Purchase money security interests (PMSI)  PMSI is essentially where the secured party has provided finance or given value required by the grantor to acquire the collateral, (e.g. vendor finance)  PMSIs have ‘super-priority’ over the same collateral (which has been granted by the same grantor) which has been perfected by registration or possession  however, a security interest which has been perfected by control has priority over a PMSI

31. 11950375_131 New Zealand Cases  Graham and Portacom New Zealand Limited (the Portaloo case)  Waller and Ors v New Zealand Bloodstock Limited and Anor

32. 11950375_132 Graham and Portacom New Zealand Limited (the Portaloo case)  NDG leased five Portaloos from Portacom  NDG gave a security interest over all of its property in favour of HSBC to secure a loan  When the NZ PPS Act came into force in 2002, HSBC registered its interest on the PPS register, but Portacom did not  NDG went into default, a Receiver was appointed and took possession of ALL assets under the security agreement

33. 11950375_133 Graham and Portacom New Zealand Limited (the Portaloo case)  Despite retention of legal ownership, Portacom’s unregistered title was deemed subordinate to that of NDG  Receiver sold off the Portaloos

34. 11950375_134 Waller and Ors v New Zealand Bloodstock Limited and Anor  Glenmorgan Farm Limited gave a general security over all of its property in favour of SH Lock Ltd.  SH Lock registered its interest on the PPS register when it came into existence  NZ Bloodstock Ltd leased a racehorse to Glenmorgan, retained the legal ownership but did not register its interest on the PPS register

35. 11950375_135 Waller and Ors v New Zealand Bloodstock Limited and Anor  Glenmorgan defaulted under the lease, NZ Bloodstock terminated the lease and repossessed the horse  Glenmorgan then defaulted under its finance agreement with SH Lock and a receiver was appointed  The receiver asserted the right under the PPS Act to take possession of and sell the horse in priority of the claim of NZ Bloodstock

36. 11950375_136 Waller and Ors v New Zealand Bloodstock Limited and Anor  Court was required to determine the priority of competing security interests held over a race horse.  In the end, the perfected security interest (SH Lock’s interest) took priority over the unperfected security interest of NZ Bloodstock  Even though NZ bloodstock had retaken possession that was not sufficient to defeat SH Lock’s claim

37. 11950375_137 Enforcement and remedies  Chapter 4 PPSA governs the enforcement of security interests  Any secured party regardless of priority ranking, may enforce its interest  Secured parties are not required to obtain judgment prior to enforcement  The PPSA is not a code and will be able to be used in conjunction with other rights and remedies available

38. 11950375_138 Important rules regarding enforcement  A general standard of honesty and commercial reasonableness is to apply to enforcement actions  Parties can contract out of enforcement provisions (depending on use of collateral)  May use land law to enforce security interest in some circumstances  May seize liquid assets from third party

39. 11950375_139 Seizure of collateral  Secured party may seize collateral by any lawful method  Higher ranking priority holders may seize collateral from lower ranking priority holders  Higher ranking priority holder must pay enforcement costs of lower ranking priority holder where lower ranking priority holder initially seized the collateral

40. 11950375_140 Disposal of collateral  Three methods of disposing of collateral  sale to a third party  sale where the collateral is purchased by the enforcing secured party  lease or license to a third party  Must obtain market value for collateral or best price reasonable – same duty required as a controller under Corporations Act 2001

41. 11950375_141 Retaining collateral  Secured party may retain collateral if it is not predominantly used for a personal, domestic or household purpose  Retention of seized collateral is not an absolute right  The grantor and other interest holders may object – in which case collateral must be sold

42. 11950375_142 Rules after enforcement  Proceeds must be distributed in accordance with the provisions in section 140 PPSA  Statement of account must be provided within 20 business days of a request to do so

43. 11950375_143 Redemption and reinstatement  There is a right of redemption available to the debtor, the grantor and higher ranking secured creditors.  Redeemer must pay the amount required to discharge the obligation  Reinstatement is allowed prior to the exercise of enforcement. Achieved by paying amount of arrears and any enforcement costs.  A security agreement can only be reinstated once

44. 11950375_144 Transitional provisions  It is hoped that the transitional provisions in the PPSA will remove the risk of a Portacom or NZ Bloodstock situation occurring in Australia  Any existing security interest that is not migrated to the PPS register after commencement of the Act will be deemed ‘temporarily perfected’.  Applies for the period starting immediately before the registration commencement time and ending on the earlier of  the time when the security interest ceased to be continuously perfected otherwise than by temporary perfection  the end of the month that is 24 months after the registration commencement time

45. 11950375_145 Transitional provisions  After the 24 month transitional period ends, the priorities will be determined under the substantive provisions of the legislation

46. 11950375_146 Preparing for the storm  You should be taking the following action:  increasing knowledge of the concepts and timeframes involved across your firm  considering the consequences of non compliance for clients  informing clients of the implications of the PPS reform on any ongoing securities that they hold  updating your precedents to incorporate the new concepts

47. 11950375_147 Contact details Presenter:Petrina Macpherson Position:Senior Associate Direct line:07 3233 8551 Email:pmacpherson@mccullough.com.aupmacpherson@mccullough.com.au