PPSA is a Wolf in Sheeps Clothing
Little comment in commercial circles has occurred in relation to the Personal Property Securities Act 2009. Some companies know in a general sense that this Act is about to come into force, but few understand the practical implications of the legislation.
This may be due in part to the government’s poor explanation and the complex nature of this area of the law. It may also be due to the fact that the mainstream media has not picked up on the story.
However, the commercial implications of the Act are profound and franchisors and suppliers in particular should be aware of the dramatic ways in which the legislation could affect their businesses.
Fortunately implementation has now been delayed (yet again) from the anticipated start date of October 2011 until early 2012 due to teething problems identified in administering the beta version of the national register. This allows key participants to come to terms with the new regime and prepare their systems to deal with the additional administrative demands that this new legislation will impose upon them.
Background
The Personal Property Securities Act 2009 (PPSA) is a Commonwealth Act designed to set up national system of registration for claims against property other than land. It seeks to clarify the position of competing creditors in relation to all security interests in “personal property”.
As is well known, banks and other creditors already have clear rights in relation to land through registered mortgages and Torrens title. They also have clear rights in relation to their claims against companies through the ASIC registration of fixed and floating charges.
This new regime is designed to achieve something similar in relation to security interests attaching to “personal property rights”.
Why is this necessary?
It is often difficult to know whether somebody in possession of goods actually owns those goods unencumbered. For example, a store selling second hand products may have purchased those goods outright or be holding them on consignment for the seller, and the seller actually still owns the goods despite the “appearance” of the store owning and presenting the goods for sale.
If that store goes into liquidation, often creditors are confused as to what particular items are owned by the store (and therefore can be taken by creditors and sold in satisfaction of the debt) and what items are owned by third parties (and therefore cannot be taken by creditors but must be returned to their owners).
The key reason for the PPRA is to introduce one national register of encumbrances over personal property – the PPS Register – that can be searched to easily and quickly identify the state of encumbrances in respect of a business or person.
This will allow banks and other creditors to lend to businesses and individuals, confident in their knowledge of the borrower’s true financial status.
However, other suppliers to these business who did not have to “compete” with banks and other financial institutions on liquidation (due to retention of title clauses in supply agreements and other commercial arrangements) will now be forced to register their interests to ensure they are not “blocked” from retaining their interest due to lack of registration.
What is “personal property”?
Essentially, personal property involves all property rights other than land and buildings and other rights specifically excluded from the PPSA.
What is a “security interest”?
Security interests are transactions that grant an interest in personal property to secure payment or performance of an obligation.
Examples of security interests in personal property include the following:
• The right of a supplier to recover goods for non-payment (so called retention of title rights under a supply agreement)
• Consignments (where goods are placed for sale but title is retained by the seller until the sale occurs)
• Partial or total assignments of intellectual property which provide for a reversion (or transfer) back to the owner after an agreed period (for example, at the end of a licence agreement)
The PPSA creates a Personal Property Securities Register (PPS Register) on which personal property security interests need to be noted. Failure to note a personal property security interest could lead to a loss of entitlements or priority in a situation of insolvency.
How does this affect me?
Suppliers Beware
For suppliers, they should review their retention of title clauses with their lawyers and consider a streamlined process to register their interest with the PPS Register. Given the administrative complexity in registering individual invoices (which is a near impossibility for most businesses) a standing supply agreement could be signed between the parties and that agreement could be registered to allow for a simplification of the process of registration.
There is a real danger that retention of title clauses will be rendered ineffective with this legislation given that many suppliers will not bother to register their interests. You should seek appropriate advice now to ensure your supply arrangements are not adversely affected by these changes.
Importers and suppliers to retailers in particular should comprehensively review their current arrangements. If they do not have standing supply agreements and rely on the terms of their individual invoices, they should seriously consider entering into standing supply agreements now in preparation for registration with the PPS Register next year to protect the effectiveness of their retention of title clauses.
Franchisors Beware
Franchisors should review their franchise agreement in light of the new legislation and at the very least their agreement template should provide for the power to: (1) register their security interests against the franchisee and (2) prohibit the franchisee from giving security interests to third parties without the franchisor’s consent.
In addition, franchisors should consider the consequences of taking back possession of property on termination and consider amending the handback provisions to take into account the “notice” requirements under the PPSA.
Unfortunately, given the complexity of the legislation, most franchisors will need to make contact with their legal advisors to ensure their template franchise agreement is amended appropriately.
Conclusion
This legislation will prove a benefit to lawyers (and creditors) but a burden to commercial suppliers and others who are faced with a new regulatory regime which diminishes the effectiveness of retention of title clauses and puts another layer of complexity into “normal” commercial dealings. However this legislation (having been “imported” from the UK and New Zealand) will soon become a fact of life in commercial dealings – particularly in retail and franchising – and franchisors are encouraged to obtain appropriate advice to protect themselves and their franchise systems in future.
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