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Personal Property Securities ('PPS') Reform

New PPS legislation was recently passed which makes substantial changes to the registration of security interests in personal property. These changes are currently expected to commence in February 2012.

The PPS Register

The PPS Register is a new national online register that will allow lenders and businesses to register their security interests. Secured parties, buyers and other interested parties can search the PPS Register to find out if a security interest is registered over the personal property.

The Register will replace numerous State, Territory and Commonwealth electronic and paper registers. Existing information on these registers will be migrated to the PPS register, available at: http://www.ppsr.gov.au.

Attention! Some security interests must be registered on the PPS Register in a timely manner in order to ensure your assets are not at risk!

Many businesses are not aware that this legislation will radically change the notion of legal title to assets. If you don't understand how the new legislation will affect you, your assets may be at risk!

What is personal property?

Personal property is any property other than land, buildings or fixtures which form a part of that land. It includes:

  • Tangibles such as goods, crops and livestock, trading stock, motor vehicles, paintings, machinery and debtors;
  • Intangibles such as licences; intellectual property, trademarks and investment instruments.

Land is specifically excluded from this reform, as are water rights.

Will you be affected by the new PPS legislation?

Yes, if you:

  • Sell goods on credit, or provide credit facilities in any form, including to related parties;
  • Make loans or advances to anyone, including to related parties;
  • Keep goods or assets located at other people's premises;
  • Rent, lease or hire goods or assets to others;
  • Supply goods on retention of title terms;
  • Supply goods on consignment where these goods are stored elsewhere;
  • Grant licences to other parties to use any of your products, trademarks or intellectual property;
  • Plan to enter into and pay a deposit for a conditional sale or purchase contract;
  • Intend to take security over certain assets;
  • Have guarantors with charging clauses in your favour;
  • Have assets or funds held on trust by other parties;
  • Sell/purchase/lease assets outside of the ordinary course of business;
  • Manufacture or supply equipment parts that form part of a larger piece of equipment or supply certain goods to processing or storage facilities ('co-mingling').

If the above applies to you, the new PPS rules mean that you may be at risk of losing your assets if your interest in the assets is not registered on the PPS Register!

Example 1 – retention of title clause. If you previously issued invoices or contracts with a ‘retention of title’ clause which enabled you to retain ownership of goods until fully paid for by customers, these will no longer be sufficient and you will need to register your interest in the goods on the PPS Register.

Example 2 – hire/lease/rent of goods. If you are running a business of supplying goods to others (e.g. hire of machinery) on terms beyond one year or for an indefinite term, you will need to register your interest in these goods on the PPS Register or potentially expose yourself to the risk of losing ownership of the goods.

Example 3 – supply of goods on consignment. If you supply products for sale/distribution on consignment to other parties and these goods are held at another party’s premises, you will need to register your interest in the consigned goods on the PPS Register in order to protect your ownership of these items.

Example 4 – purchase/sale of asset outside of ordinary course of business. You run a printing business and you purchase a second-hand printing press from another party who is not in the business of selling printing presses, e.g. another printing business closing down. This would be considered a transaction outside of the ordinary course of business for the seller. If the seller owes money secured over the asset this would be required to be registered on the PPS Register. As the buyer, you would need to check the PPS Register to ensure than no other party has a registered interest in the press, e.g. a financial institution. If another party other than the seller has a registered interest in the asset, you may be at risk of losing the press to the party with the registered interest if you don’t check the register before acquiring the asset.

Example 5 – co-mingling. You supply timber to furniture makers on credit. Provided you execute and register your interest in the timber supplied appropriately, you will have a financial interest in a share of the final product, i.e. furniture, in proportion to the value of timber used in a particular piece of furniture. This is an improvement on the situation under the current law.

Example 6 – assets located on someone else’s property. You run the business of hiring out machinery. An excavator owned by your business has been used by your customer (“dry hire”) or by you (“wet hire”) and stored on their premises for the last 18 months. If you have not registered your interest in the excavator appropriately on the PPS Register, you run the risk of losing ownership of the excavator.

What is Personal Property Security ('PPS')?

A personal property security is when a secured party takes an interest in personal property as security for a loan or other obligation, or enters into a transaction that involves the supply of secured finance. E.g. a person borrows money from a bank and offers the bank personal property (as defined) as collateral or security for the loan. The bank’s interest over the collateral is a personal property security.

The new PPS legislation will affect the established forms of secured finance including fixed and floating charges, chattel mortgages, finance leases, margin loans and the factoring of book debts. It will also affect other transactions that are not usually thought of as security arrangements, including leases of personal property for a term of more than one year and commercial consignments, including retention of title arrangements.

What you should do

  • Review your trading activities to determine whether you need to register a security interest over personal property;
  • Review your trade agreements and amend if necessary to ensure they are in line with the new PPS rules;
  • Your financiers may contact you to execute new security arrangements in line with the new PPS rules. You will need to ensure that all details and charged property are correct;
  • Review existing internal procedures that the registration of security interests takes place;
  • Train administrative staff in respect of this new legislation;
  • Above all, when in doubt, seek professional advice on whether you need to register security interests over assets.

Failure to put in place appropriate procedures in relation to PPS may mean that directors have failed to ensure that their companies’ assets are adequately protected and may expose directors to claims for breach of directors’ duties.

The new PPS legislation is complex and significantly different to the current rules regarding personal property securities. Please contact your Ruddicks adviser to discuss how the new legislation may affect your business and how to ensure that the assets of your business are safeguarded.

More information is available at http://www.ppsr.gov.au.

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