The concept of fixed and floating charges is set to disappear as a consequence of extensive reform of the laws regulating the registration of interests in personal property securities. Business should ensure that they have Board level awareness of the implications of the changes and begin preparing for the likely commencement date in early 2010.
The consultation draft of the Personal Properties Securities Bill, 2008 (the Bill), was released on 16 May, 2008, by the Commonwealth Attorney-General Robert McClelland. It introduces a functional approach to secured transactions premised on the notion that a security interest in ‘personal property’ arises where property is used to secure payment or the performance of an obligation regardless of the legal form of the obligation.
Personal property is defined by the bill to be any form of property other than land and includes a licence.
The abolition of the distinction between fixed and floating charges is just one of many changes as the current laws are to be replaced by generic rules concerning attachment, perfection and enforceability of security interests as well as new priority rules that deal with enforcement situations involving competing interests.
The reforms will establish national comprehensive rules governing security interests in personal property.
Central to the reforms will be a clear set of rules for ordering priorities between competing secured interests in personal property, and the creation of a single national personal property securities register.
- Establishment of a single National Personal Property Securities Regime.
- Businesses that take security over personal property will need to implement new procedures and IT infrastructure that comply with the new legislation and interface with a new national register.
- More forms of personal property should be able to be offered as security.
Introduction of a national system
The Bill represents the continuation of a comprehensive reform process which began in April 2006 with an options paper released by the Standing Committee of Attorneys-General. The Bill brings an end to inconsistent and duplicate laws and registers which presently govern personal securities. The new law will replace more than 70 Commonwealth, State and Territory Acts administered by 30 government agencies with a single national law supported by a single national online system for registering interests in personal property securities.
The Bill establishes rules for creating valid security interests as well comprehensive and coherent rules governing the priority of competing security interests (including where property or security interests are transferred). It applies to all security interests in personal property that secure payment or the performance of an obligation regardless of the form of the transaction, the legal personality of the grantor, or the jurisdiction in which the property or parties are located or in which the transaction occurred.
The Bill also sets out rules for determining priority among competing interests in personal property. It also establishes a single national online register of personal property securities (the PPS Register). The new registration system will help prospective purchasers and lenders to determine whether personal property may be subject to a security interest and would facilitate the resolution of priority disputes.
Benefits of reform
Presently there are significant limitations on the use of personal property as security and the rules for registering an interest in personal property, and whether an interest can be registered at all, vary widely. The Commonwealth, States and Territories all have separate personal property schemes with separate registers and legislation relating to those registers. The current requirements for registering a security interest in personal property vary depending on the type of personal property, where it is located and whether the property belongs to an individual or a corporation. The introduction of a National Personal Property Securities Register will bring all of this information together in the one, definitive register of personal property securities.
In undertaking this reform, a number of models have been drawn on including similar reform in New Zealand in the early 2000s, the work of organisations such as the United Nations Commission of International Trade Law and the International Institute for the Unification of Private Law. There are also similar legislative regimes in Canada and the United States. As a result of the reforms Australia will be closely aligned with Canada, USA and NZ in its regulation of PPS.
What is a Personal Property Security
Personal property is any form of property other than land or buildings and fixtures which are legally treated as forming part of land. Personal property can include tangibles (eg cars, boats, machinery, crops) and intangibles (eg shares, intellectual property, receivables and contract rights).
Personal property securities are interests in personal property that are created or evidenced by an agreement that secures payment or performance of an obligation.
The Bill proposes the establishment of a national PPS Register (PPSR); an Australia wide database of security agreements involving personal property as collateral. Such register contains details of the lender, borrower and identifying information about the collateral. The single, national register will replace more than 40 registers operated by, or on behalf of, the Commonwealth, States and Territories.
The PPSR will be the definitive place where records of security interests in personal property (property other than land or buildings) are held. It will be computer based, publicly accessible and updatable in real time. The PPSR will primarily be accessed through the internet and B2G connections, but also provide for IVR, SMS, call centre and physical lodgement channels.
Why reform Personal Property Securities?
In Australia today, there are significant limitations on the use of personal property as security due to complexities and gaps in the arrangements for registering security interests.
PPS reform has the capacity to minimize the inconsistencies and complexities that currently exist in the laws around Australia and in the practices of the businesses involved with personal property securities. The development of a consistent national approach should enable business to reduce the costs associated with taking and enforcing security interests in personal property.
Comprehensive PPS reform has the potential to make secured lending more cost effective and attractive to lenders, while access to and the cost of finance for businesses may be aided by a clear and low cost system for determining PPS interests.
Importantly a clearer system operating under uniform laws throughout Australia and on a single electronic register where priority is easily determined and security interests relatively easily enforced should limit the incidence of legal disputes. Similar reforms in New Zealand have virtually eliminated disputes arising from priority of interest claims.
Business impact
It is anticipated that the design, development and implementation activities for the national PPS regime will take 12 to 18 months from the introduction of the Bill while the national register will not be comprehensive for 24 months following the implementation of the Act.
Financial institutions, legal firms and other business will need to do a great deal of work to prepare for the new system. This will include new policies, procedures IT systems and standard documentation to enable interaction with the new legislation and register.
Access Economics in a report for the Australian Attorney-General’s Department (The Costs and Benefits of Personal Property Securities (PPS) Reform 6 July 2006), noted that while the reforms are designed to reduce compliance and transaction costs; the magnitude of transition costs for the banking sector as Australia adopts the new regulatory regime (e.g. devising new lending policies, credit risk assessment models, computer systems, procedural manuals and processes, and redesigning forms and retraining staff) could be in the order of $A50 to 100 million dollars.
Next steps
The release of the draft bill is an important step in this key business law reform. The Attorney-General’s Department is accepting submissions on the Bill until 18 August, 2008. PwC Legal will monitor future developments in this area and keep our clients advised in future editions of LegalTalk.
For further information, please contact your usual PricewaterhouseCoopers Legal adviser or:
Andrew Wheeler, Partner
Corporate and Commercial
Phone: +61 2 8266 6401
andrew.wheeler@au.pwc.com
Mark Gardiner, Director
Corporate and Commercial
Phone: +61 2 8266 2445
mark.a.gardiner@au.pwc.com
