The Personal Properties Securities Act: A brave new world for SMEs

Following several false starts, in February 2012 the Personal Property Securities Act (PPSA) is likely to commence, creating a single unified registry for security interests over personal property.

The definitions of “security interest” and “personal property” are extremely broad. Suffice to say that if the security in question is not a mortgage over land then it is most probably captured by this legislation.

The following are some examples of common commercial transactions which will now require that the interests created are registered under the PPSA:

a) A company that leases a photocopier to another firm for a period of period years;
b) A company grants a charge over a business vehicle in favour of a second company which has provided finance for the purchase of the vehicle; and
c) Any transaction where payment for goods delivered was traditionally secured by a retention of title clause (see example below).

The Legal Practitioners Liability Committee has said that the PPS reform will have as big an impact upon the law of personal property as the Torrens Title system has had on real property. For the non-lawyers out there this basically means that the rule book has been torn up and rewritten.

The theory behind the legislation is that by creating greater certainty and transparency in the registration of security interests borrowing costs will decline and lenders will be more willing to extend credit. The experiences of Canada and New Zealand, where personal property security registries have been operational for some time, largely support this reasoning. However, this new legislation is a minefield for the unwary and those who neglect to diligently register all their security interests in a timely manner.

By way of an example applicable to SMEs consider the following:

Company A (a beer distributor) delivers to Company B (a pub) 60 cases of beer. The contractual relationship between Company A and Company B is governed by Company A’s standard terms of trade which provide for 30 day credit terms and include a properly drafted retention of title clause. (A retention of title clause provides that, despite having possession, ownership of goods supplied will not pass to a purchaser until the supplier has received payment for the goods.)

Prior to Company A receiving payment for the beer, Company B is deemed insolvent and placed into the hands of a liquidator. Company B had previously granted a general security interest over all present and after acquired property to Big Bank as security for a loan. Big Bank had registered its general security interest over Company B’s personal property whereas Company A had not registered its security interest in the beer it delivered to Company B.

Historically, Company A would have been able to rely upon the retention of title clause in its trading terms. However, under the PPSA Big Bank will have a priority over the beer as the holder of a registered security interest. Therefore, under the PPSA in circumstances like that described above possession will trump ownership as it is traditionally understood.

This is a concise and simplified example but it serves as a useful warning of how it is possible for businesses to suffer significant losses if they ignore the changes brought about by the PPSA.

Importantly there will be a two year transitional period from the commencement date during which time security interests previously established will continue to be enforceable by the Courts. However, from the commencement date all newly created security interests will need to be registered on the new PPS registry.

The introduction of the PPSA will likely follow a similar pattern to the period following the inception of the GST. The less prepared businesses will remain wilfully ignorant of the changes before a mad panic toward the implementation date.

Then there will be a flurry of work for lawyers redrafting contracts before businesses up-skill and train their staff to simply manage the company’s securities portfolio and exposures on a day to day basis. However, the coming months present an opportunity for businesses to be ahead of the game and to ensure that their early experience of the new PPSA legislation doesn’t become a cautionary tale.

James Berman is a lawyer with Kelly Hazell Quill Lawyers.