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What thethe PPSA? Whatis is PPSA? October 2015 September 2015 This document is strictly private and is not to be reproduced or relied upon by any party other than those expressly authorised by Ferrier Hodgson. © Ferrier Hodgson PPSA Coverage What is the PPSA? What is the PPSR? The Personal Property Security Act (PPSA) sets out the rules for security interests in personal property. It is a national act and applies to personal property. Personal property is the description for all property other than real property (which is land and buildings). [PPSA website and FH presentation] The Personal Property Security Register (PPSR) is an important part of the PPSA. The PPSR is a single national online register recording details of registered security interests and company charges. The register is effectively a noticeboard of security interests. The PPSA establishes uniform rules for: Creating valid and enforceable security interests; Setting the priority between competing security interests; When you can enforce a security interest after an insolvency event; and Circumstances where personal property is acquired free of a security interest. [F What is Personal Property? Personal property is any property other than real property, which consists of land and buildings or fixtures and fittings. Real property is not covered by the PPSA. What is a Security Interest? There are a number of terms in the PPSA that are important to understand. Security interest is an interest in an item of personal property that secures payment of a debt or other obligation, regardless of the form of the transaction. A security interest arises out of contracts or agreements between parties. Secured party is a person who holds a security interest for the person’s own benefit or for the benefit of another person, or both. Personal property can include: Grantor is the person who provides the secured party with a security interest. Motor Vehicles Boats and Watercraft Intangible and Intellectual Property Crops and Livestock Extracted Minerals Satellites and Space Objects Financial Property Inventory Consumer and Commercial Property Collateral is personal property that has a security interest attached. Security agreement provides evidence of the grantors intention to grant the security interest to the secured party. A security interest in collateral is made enforceable through the execution of a security agreement. The parties to a security agreement are the grantor and the secured party. In the PPSA, holding title to personal property is not relevant. The fact that title to collateral is held by a party other than the grantor does not affect the application of the PPSA (for example retention of title stock). Page 2 Purchase Money Security Interest Secured party Delivers stock subject to retention of title Supplier Grantor Supplies stock Customer Supplier Security Interest Customer (Secured Party) Granted to the secured party by the Grantor (Grantor) PMSI attaches to stock What is a Purchase Money Security Interest (PMSI)? A PMSI is a type of security interest where there is a direct link between the collateral and the obligation. An example would be retention of title stock, or specific asset finance. The PPSA gives PMSIs a super-priority over other undifferentiated or general security interests. For a PMSI, the obligation that is secured by the collateral relates directly to the collateral itself. For example, a bank may advance funds to a company and this gives rise to a security interest in all of the Company’s property. This is a General Security Interest, otherwise known as an All Present and After Acquired Property (AllPAAP) interest. A delivery of stock subject to retention of title is a PMSI. This PMSI will rank first over that stock, even through the AllPAAP security interest over all of the property of the company was created earlier. PMSI also attach to proceeds of collateral if that collateral is sold, as outlined in the adjacent diagram. A PMSI can attach to proceeds of sale if the customer was to on-sell the collateral again. Proceeds can also include insurance funds received, for example if stock is destroyed before sale, but is insured and funds are received from an insurer as compensation for the lost stock. The insurance monies constitute proceeds, and PMSIs can attach to them. … then, Sells stock to third party Supplier (Secured Party) Customer (Grantor) Buyer PMSI Becomes a debtor PMSI attaches to proceeds $ Debtor represent proceeds of PMSI Page 3 PPSA enforcement How do I enforce a security interest? In order for a security interest to be enforceable against third parties, there are three requirements: Practically, providing some evidence that the grantor has read and agreed to the terms of a security agreement is usually sufficient. Importantly, the security agreement must specify that the grantor acknowledges the existence of, and grants a security interest to, the secured party. Perfection Attachment (when the transaction occurs) Enforceability (security agreement) Perfection (registration on the PPSR, usually or control) Valid Security Interest, Enforceable Against a Third Party. Attachment A security interest can only be effective if it is attached to collateral. Attachment to collateral occurs if the grantor has rights or the power to transfer rights in the collateral to the secured party and either: Value is given for the security interest; or The grantor does an act by which the security interest arises. Security interests are only enforceable against competing claims if they are perfected. A security interest is perfected either through registration on the PPSR, by control, or through taking possession of the collateral by the secured party. In order for perfection to be effective, a security interest must have attached and must be enforceable. The most common form of perfection is through registering on the PPSR. Registration is only effective if there is a valid security agreement granting the secured party with a security interest. What security interests get priority over others? If more than one secured party has a security interest in the same asset (e.g. stock) and no insolvency event has occurred, then a Receiver or Controller must apply the PPSA priority rules to resolve conflicts. In summary these are: The following Security Interest… Has priority over… Perfected security interest Unperfected security interest Enforceability Perfected by control Perfected by any other means Attachment does not guarantee enforceability. For a security interest to be enforceable, a security agreement must be in place. A security agreement should be in writing and usually signed by the grantor e.g. customer, to be enforceable. Perfected first (in time) e.g. registration time on PPSR Perfected later (in time) (unless a PMSI) PMSI General Security Interest Attachment happens when a transaction occurs or goods are delivered, for example when stock is delivered, and the grantor grants a security interest in the stock to the secured party. Page 4 PPSA vesting and transitional provisions Collateral is tangible property Collateral is intangible property Collateral is inventory The security interest must be registered prior to the time the grantor obtains possession of the collateral. The security interest must be registered before the time the PMSI attaches, or is created, over the inventory. Collateral is not inventory The security interest must be registered within 15 business days of the grantor obtaining possession of the collateral. The security interest must be registered within 15 business days of the grantor obtaining possession of the time of attachment, or creation, of the PMSI. Source: Personal Properties Securities Act Website https://www.ppsr.gov.au/purchase-money-security-interests What is Vesting? Certain security interests which are unperfected immediately before an insolvency event automatically vest in the grantor. If any of these events occur, an unperfected security interest will vest in the grantor and the security interest holder claim will become an unsecured claim. This means that the property subject to the security interest (retention of title stock, leased equipment etc.) will not be recoverable by the security interest holder and instead stay with the grantor, regardless of who has the legal title to the relevant assets. What are Transitional Provisions? In order to allow for entities to transition into the implementation of the PPSA, the PPSA provided for a two year period where entities were able to register a security interest which arose under security agreements that were in existence prior to 30 January 2012 (transitional security agreement). A secured party remains able to perfect their transitional security interests by registering each interest on the PPSR after 30 January 2014 (the end of the transitional period). However, secured parties who register after the end of the transitional period can lose priority to subsequently created security interests that are registered on the PPSR before the transitional interests are registered. Vesting is a significant issue arising under the PPSA, and represents a very substantial risk to suppliers of goods subject to retention of title, lessors or owners of equipment used by a company, or anyone with a security interest. Unperfected security interests will vest in the grantor on the occurrence of an insolvency event. An insolvency event includes: Appointment of a Voluntary Administrator Appointment of a Liquidator or a Trustee in Bankruptcy Execution of a Deed of Company Arrangement Page 5 How Ferrier Hodgson can assist PPSA Efficacy Review Ferrier Hodgson have several PPSA subject matter experts, and are well placed to review your PPSA policies and procedures, advising on their effectiveness or otherwise in the event one of your customers experiencing an insolvency event. To ensure your security interests are not at risk, contact us for more information and a free initial discussion. Customer Screening: Independent Business Reviews Ferrier Hodgson are frequently retained to review substantial debtor exposures for companies by checking PPSA registrations and the ability of aged debtors to meet their obligations. Contact us for more information regarding our Independent Business Review Services. PSiDAR is a mobile application enabling users to easily and conveniently access and search the PPSR. To download the PSiDAR Application for iOS & Android, please use the following links. PSiDAR Application for iOS. PSiDAR Application for Android. Page 6