PPSA January 2014 deadline looms for transitional security interests

Quick recap – what is a security interest?

The PPSA defines a ‘security interest’ as an interest in personal property (what the PPSA calls ‘collateral’) provided for by a transaction that, in substance, secures payment or performance of an obligation.  This is a broad and ‘functional’ definition and catches all the traditional kinds of security interests, such as mortgages and charges as well as retention of title sales.  However, other arrangements that are caught include hires, bailments for value and commercial consignments.  It doesn’t matter that these latter arrangements are not really ‘security’ in the traditional sense.

Why does it matter?

If you have a PPSA security interest it will need to be ‘perfected’ otherwise it may fall foul of PPSA extinguishment, vesting and priority rules.  This can include not only losing the benefit of traditional security but could also mean losing the ownership of your property that you have sold on retention of title terms or that you have hired or consigned.

Most businesses have been learning about PPSA and the steps needed to perfect – usually by registration on the Personal Property Securities Register (PPSR) which is at www.ppsr.gov.au.  But some may still be unaware of PPSA or may be relying on the transitional grace period.

What is a transitional security interest?

A transitional security interest is a security interest provided for by a security agreement that was in force immediately before 30 January 2012, and that has continued in force since that time.  Example - HireCo has a crane on hire to GrantCo as at 29 January 2012 under an agreement in force immediately before 30 January 2012.  It is an agreed three year hire so it is deemed to be a security interest and is also a transitional security interest.

How are transitional security interests currently protected?

A transitional grace period applies until the end of the month that is 24 months after 30 January 2012 (the End Date).  Until that time transitional security interests are deemed perfected.  The wording in the legislation is unusual and some commentators have expressed a view that the End Date is 30 January 2014 and not 31 January 2014.  Although we don’t share that view it is prudent to assume that it could be correct.

The grace period has operated to allow security holders a reasonable opportunity to register their security interests on the PPSR and perfect them.  Continuing on our example above, the PPSA treats HireCo’s hire to GrantCo as perfected as at 30 January 2012 but that protection only continues until the End Date.  The protection is backdated to 30 January 2012.

What happens on the End Date?

At the End Date the transitional grace period ends.  Any transitional security interests that are not perfected by then will become unperfected. Continuing our example above.  If come the End Date, HireCo’s crane remains on hire to GrantCo, but HireCo still has not registered its security interest in the crane, the security interest becomes unperfected.

This could have serious implications for HireCo.  For example:

• The crane could vest in the grantor (GrantCo) on its insolvency– e.g. if come, say 10 February 2014 HireCo has not perfected its interest in the crane, and GrantCo goes into administration, HireCo will lose its ownership of the crane.  The crane will vest in GrantCo.  HireCo would have only a claim as unsecured creditor.

• HireCo could lose its priority interest in the crane to other competing parties who have already registered their interest in the crane – e.g. BankCo could have priority over HireCo in relation to the crane if GrantCo has previously given BankCo a security over all GrantCo’s assets and BankCo has registered that interest.

• If GrantCo were to sell the crane to a third party (wrongfully), then the crane could belong to the third party, and HireCo would have no rights against the third party.

Even if HireCo registers its transitional interest after the End Date but before any of these events befall GrantCo, the security interest will not, going forward, have some of the special priority attributes that it could have had if HireCo had acted to register during the grace period.

What steps should you take now?

You should urgently review your current circumstances to determine whether you have any transitional security interests that have not yet been perfected.  If you do, you should take steps to ensure that those interests are perfected before the End Date. 

Perfection is achieved in one of three ways – possession, control or registration. In cases of retention of title, hire and consignment arrangements you will usually not have possession or control of the collateral that is the subject of the security interest, so the only way to perfect is to register your security interest on the PPSR.

The PPSR is complex and unforgiving.  There are also grey areas about what is transitional and what isn’t depending on the wording of agreements and timing issues. 

Bartier Perry can assist you in carrying out an audit of your current circumstances and advising you about PPSA and the PPSR registration process.

Author: Oliver Shtein