Over the last three weeks I’ve had the opportunity to present a practical paper on the Personal Properties Securities Act (PPSA). There are a number of planning opportunities and potential traps that come out of that Act, which were dealt with in the paper. In this short update, I deal with a couple of those issues.
By way of background, an unperfected security interest under the PPSA vests in a liquidator, voluntary administrator, deed administrator or trustee in bankruptcy, pursuant Section 267. As a result it is extremely important that clients have perfected security interests, otherwise they risk losing the asset. For example if they have previously provided goods on Retention of Title terms, if they do not perfect their interest, the goods could be lost to a liquidator. In addition unperfected security interests lose priority to a perfected security interest in the same collateral.
Goods or assets that are required to be registered under the PPSA but which are not registered become an “unperfected security interest” and upon insolvency vest in a grantor pursuant to Section 267(2). As a result if a financier fails to register its interest in a motor vehicle, that motor vehicle will vest in the grantor (being the debtor) on the day the grantor becomes bankrupt, goes into administration or liquidation. In those circumstances, it’s possible that the financier will be nothing more than an ordinary unsecured creditor. If the grantor becomes bankrupt ultimately the trustee in bankruptcy may sell the vehicle and return the first $7,200 to the bankrupt and the rest will be available to the unsecured creditors.
This is also the case if a financier registers with an incorrect serial number (in this case, a VIN Number for a vehicle). Section 164 provides that registration will be ineffective if there is a seriously misleading defect in data relating to that registration. Section 165 provides that in a case in which the collateral is required by the regulations to be described by a serial number and there is an error in that serial number, that this will be regarded as a seriously misleading defect in the registration. Interestingly, it is not necessary to show that anyone has been misled in relation to the registration.
The timing of registration is quite tight under the legislation. For a purchase monies securities interest (PMSI), in relation to inventory, registration must be prior to supply under Section 62 (2). For goods that are non-inventory the registration timeframe is 15 business days under Section 62(3)(b) for a PMSI. A general security agreement is required to be registered on the PPS Register within 20 business days.
There is a planning benefit that can be available to your clients as a result of the PPSA. This arises as a result of the ability of a PMSI supplier (usually previously a supplier who was supplying on retention of title terms), to trace their security interest through to commingled goods. This is the benefit of Section 100 of the Act which provides that perfection of a security interest in goods that subsequently become part of a product or mass is to be treated as perfection of the security interest in that product or mass. As a result, whilst previously altered or manufactured goods were not able to be returned pursuant to retention of title arrangements, they will be able to be traced with a validly registered PMSI. As a result, if your client registers a valid PMSI, in relation to commingled goods, they may share pro-rata with anyone else who also has a perfected security interest in those goods. Suppliers of goods that become accessions may also get benefit by registering a valid PMSI as Section 88 of the PPSA provides that security interests continue in accessions. Accessions are such things as gearboxes in trucks.
As a result, there are a number of opportunities and potential traps in the PPSA that have become evident since its inception on 30 January 2012. With only a 24 month transitional period in which to register security interests that were seen as transitional, this period is quickly disappearing and we encourage all of your clients to register their interests urgently on the Personal Properties Securities Register.