Australian Security Law: Personal Property Securities Act and the Impact on Business

Adelaide Law School’s David Brown central to ground-breaking Australian law – the PPSA Associate Professor David Brown of the University of Adelaide Law School is currently working on “one of the most important pieces of commercial law that we have had in this country for decades”. It is a new law in Australia called the Personal Property Securities Act (PPSA) and comes into force at the end of January 2012. What ‘security’ does this apply to? Similar to a bank taking a mortgage over your house, when banks lend money to businesses, they take ‘security’ over a company’s assets, which may be land, plant and equipment, vehicles, stock, etc. The PPSA covers security over the non-land assets. In addition, you have suppliers to the business, who often supply goods on credit terms, for example, giving the business 30 days to pay. Currently, a common condition stated by the supplier is – until you have paid us the goods or any proceeds of sale still belong to us. Similar arrangements apply in the leasing of items, such as vehicles, photocopiers, etc., and even most aircraft are leased, rather than owned by airlines – the item actually belongs to the supplier. All of these items are personal property over which security can be taken – the enforceability and registration of this security in one register is key to this new law. Why is it ground-breaking? “This new law will completely change the way in which security transactions take place, particularly for business.” “In Australia we have lots of different Federal and State laws depending on the type of asset – for example, there are different laws for motor vehicles and land law (land must be registered with the Land Titles Office). Then there are those things that do not have to be registered anywhere, such as when a company supplies a product and says to the customer that they have 30 days to pay, but until payment is received, the product still belongs to the supplier. To add complexity, currently the laws also vary by state.” This new law is ground-breaking because it brings clarity and reduces complexity: (1) it is a national law – “for the first time it will bring the whole system into a national system”; and (ii) “it replaces lots of different laws that exist in each state – it replaces something like 172 pieces of legislation with one system”. “The whole situation is much clearer with this law ” – and of course anyone would agree that clarity and simplicity has to be helpful for any business. The PPSA register Central to the operation of the new PPSA law is a statutory online 24/7 register of (with a few exceptions) all of a business’s non-land securities. “So for example if you want to borrow money from a bank or sell assets, in future what the bank or purchasers will do is check this register, search your name and see what securities are in your name already – another mortgage, car loan, etc. The register will include everything except land. The law covers everything on the register and it also applies to all other sorts of assets of businesses, such as shares and bank accounts.” Professor Brown gives a simple everyday example: “At the moment if I go and buy wood from my local yard, there is a sign saying that until you pay for the wood it still belongs to us. This is fine for now, but it will not (apart from a two-year transitional period) protect them when this law comes into effect, because now they will have to register notice of that agreement as ‘security’. If they fail to register they lose out to others such as banks who take security over the wood, and also if the buyer goes bust, the wood yard will not be able to rely on the clause and may get nothing; but if they do register they get a lot of other advantages..”

Surely this will increase the workload of a small company? “Yes, but it is pretty simple and cheap to register, and it does protect them too. If you don’t register you will lose out.” Title is central to current security law “Title is very important in law, particularly property and security law, and one of the hardest things for people to understand about the new law is that title is no longer that important for PPSA purposes. “At the moment, if you take the example above, title to the goods remains with the wood yard until I have paid for the wood in full this is called a retention of title clause. Under this new law, the supplier can no longer just rely on title to allow it to repossess the wood – instead it is treated as ‘security’ being granted by the buyer. So the new law makes a fundamental change in the legal characterisation of the transaction, but recognises the commercial reality of what was happening, i.e. that the supplier had rights to look to goods in the buyer’s possession to satisfy the debt. “It is possible for the buyer in that situation to grant security to a bank over the wood, for example, if it is used in a business, even though in title terms, the wood doesn’t ‘belong’ to the buyer, but to the wood yard. That is why it will be important for the wood yard to register notice of the clause giving it ‘security’, otherwise they may lose out to a bank which has registered notice of its security over the same assets.” Associate Professor Brown’s involvement “I want to research theoretical aspects of this new law, not just what it does, but how does it change what we do now. It makes a fundamental conceptual shift.” Australia took this law from New Zealand which in turn had taken it from Canada. New Zealand introduced this system in 1999, at which time Professor Brown was working at the Victoria University of Wellington, specialising in insolvency law and land law. He came to Adelaide from New Zealand at a time when they had already decided to introduce this law into Australia. “I wasn’t involved in designing the law here, they had already done that. They didn’t take all of it from New Zealand, some changes had been made, particularly in the area of insolvency, so one thing I am looking at is the interface between insolvency law and this new law. “I spent most of 2011 working on this new *PPSA+ law. I set up a Masters course on it at the University of Adelaide which I delivered in February 2011 with a Canadian colleague Tom Telfer – it was the first course in Australia on this new law.” Professor Brown has also been active interstate in the last 18 months in talking to lawyers, accountants and various government regulators’ staff such as ASIC1 and ITSA2 on the new law. Professor Brown is taking study leave in Canada during the first half of 2012 to look at this new law, because Canada has had it for 20 years, “and in Australia we are going to be using a lot of Canadian cases. New Zealand has about 20 cases and I have written about these but there is a lot of Canadian case law and a lot of complications”. He will be teaching a course on PPSA at the University of Toronto while studying the system there himself.
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Australian Securities and Investments Commission Insolvency and Trustee Service Australia

“A place like Toronto is a big commercial centre, the biggest in Canada, so that’s where most of the cases get generated. So I want to study in Canada and come back and utilise what I’ve learned.” However, Ontario law is different, not in the big picture but in details, from all other provinces in Canada. It is also different to English, Australian, and to New Zealand law – the latter of which is based on Saskatchewan and not Ontario law. Professor Brown is writing a book with a Canadian professor from the University of Toronto, to be published here in Australia, which he hopes will be the leading textbook in Australia on this topic. He hopes to complete it by mid-2012, soon after the new law comes into force at the end of January 2012. (It was passed in 2009, but because it is an online register, they have been working on having the system up and running as soon as it is launched.) “In Canada I’m focusing on teaching and researching the PPSA and hoping to get not just the book but a major journal article on this conceptual issue of the change from the title – the goods belong to us – to buyers giving security over something they don’t necessarily own.” Will there be a national launch? There will be a national launch when the register goes live on 30 January 2012. Professor Brown believes there will be a campaign of media advertisements and other activity and hopes that it will reach most businesses since it is to their benefit. One key concern is that small businesses are not going to know about it and may then omit to register. “Publicity will be crucial. They will probably put ads in newspaper and run a TV campaign but there will always be someone who misses these things. “In New Zealand there was virtually no publicity and a six-month introductory period. Here there is money going to be spent [on the launch] and a two-year period to register so it is better.”

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