Buyer & Businesses Beware of the “PPS” Reforms

June 30, 2011

Why should you care?1206847141H31Oga

Prior to purchasing a car from the man down the street, a conscientious buyer would check with Vicroads that the car is not already subject to some type of loan or mortgage.  Should the man down the street choose not to use the purchase money to discharge the loan and then default on the repayments, the lender still has the right to take that car you just bought to recoup their money.  The Victorian Vehicle Register is a current version of the proposed national PPS register and it acts as a way for you as the buyer to protect yourself from this type of situation.

The Personal Property Securities Act 2008 (Cth) applies to personal property, both tangible and intangible – that includes things like contractual rights, book debts, business inventory, company shares and intellectual property.  It does not apply to land.

The proposed PPS Register will come into operation in October 2011 and aims at nationalising this system via an electronic registration process.  Businesses of all sizes need to be aware of this system because it will provide them with the ability to protect their security interests.  A security interest can arise in the following transactional scenarios:

–          A conditional sale agreement (including an agreement to sell subject to retention of title)

–          Hire purchase agreement

–          Consignment of goods

–          Lease of goods

For example, a lumber mill business provides stock to a lumberyard business under a conditional sale agreement and the customers then make their purchases from the lumberyard.  The lumber mill business would more than likely provide the stock on the condition that it retains the right to repossess the stock should the owner of the lumberyard be unable to pay for it.  The lumber mill business (or secured party) keeps its title in the goods until the lumber yard (or the grantor) pays for it.  However, this type of unsecured conditional sale agreement becomes ineffective when the following facts are added.   If the lumberyard business is subject to a secured mortgage and then goes into liquidation, their lender’s security interest could be considered stronger than the lumber mill business’ unsecured right to the stock.

The PPS Reform is aimed at precisely such a scenario.  The Act deems that a security interest attaches to the goods when the grantor acquires possession.  So, in the above scenario, a security interest has attached to the stock the minute the lumberyard business (the grantor) accepts delivery of the goods.  In order for the lumber mill business to be considered a secured party under the PPS Reform, it must ensure two things:

(1)    That there is a written agreement between both businesses, which has been signed and accepted;

(2)    That the secured party registers a financing statement on the new PPS Register, which must include the following:

–          The secured party’s details

–          Details of the collateral (or relevant personal property over which there is security interest in force), including class and a description

–          Grantor’s details, except where the property in question is consumer property and is a car, watercraft or aircraft; and

–          Registration details – a time frame for when the registration expires;

What are the benefits?

While registration is not compulsory, the benefits are worth considering for any business.  When two security interests are in competition, priority must be given to one.  The new PPS Reform has developed clear rules for deciding the priority and they can be summarised as follows:

1.       A perfected (registered) security interest will take precedence over an unperfected (unregistered) one;

2.       Where it is a case of two registered security interests, it will come down to which one was registered first;

3.       Where it is a case of two unregistered security interests, it will come down to when the security interest attaches to the collateral;

4.       Where it is a registered Purchase Money Security Interest, it will take priority over any other kind of security interest.

The cost associated with the registration process has yet to be determined.  Further information will be made available in the future on the following website: http://www.ppsr.gov.au

What happens if you already have a security interest registered on an existing register?

A number of existing security registers will close as a consequence of PPS Reform.  Those currently registered are to be migrated across to the national PPS Register.  Notable registers ear marked for migration include –

At the Commonwealth level:

i.           Australian Register of Ships (mortgages only)

ii.         ASIC – Register of Company Charges (including provisional charges)

iii.        Fisheries Register

At the Victorian State level:

i.           Vehicle Securities Register

ii.         Register of Liens on Wool and Stock Mortgages (stock mortgages only)

iii.        Register of Co-operative Charges

* If you have already registered your security interest on one of the above registers you will not be charged when it is migrated to the new PPS Register.

The Attorney General has set up a number of communication and educational processes to assist you in understanding and complying with the PPS Regime.  Businesses are encouraged to make contact with the Attorney General’s Department for further information: http://www.ag.gov.au/pps

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