Asset protection: How to comply with the new Personal Property Securities Regime - Part 1

Posted on 22 November 2012

Background to Personal Property Securities law reform

On 8 May 2007, then Attorney- General, the Phillip Ruddock, announced the Commonwealth government's 5 year plan to implement legislative reform to harmonise Australia’s personal property security laws in one Commonwealth Act and develop a single national online register of personal property security interests.

A key feature of the reform was to reduce red-tape for businesses and lead to cheaper finance, more competition in the financial services sector and a reduction in legal disputes. The introduction of the Personal Property Securities Act 2009 (the PPSA) allows both lenders and purchasers entering into transactions involving personal property (all property other than buildings or land) the ability to check on the Internet whether there is an encumbrance in the property.

The risk of unsecured interests

A secured party who has possession of the goods has a measure of protection. However, in many security arrangements the borrower has possession. In that case, there is a risk that the property could be used as security for subsequent borrowings and that the second lender will not be made aware of the existing security interest. To protect potential creditors in these circumstances Australian governments allowed for the registration of certain security interests.

Difficulties with the old scheme

Prior to the introduction of the PPSA, several significant difficulties were identified with the old system including that:

  • there were different registers for different kinds of debtor, property and forms of security arrangementregisters overlapped;
  • some kinds of securities had no registers;
  • differing rules for registering securities; and
  • the consequences for non-registration were different for each register.

The old scheme was inefficient and overly complicated, maintaining separate registers for tracking different types of security, for example there were spate registers mortgages, loans or other financial encumbrance over assets.

Introduction of the new regime

The purpose for the introduction of the new regime was to establish a register of personal property securities that encompassed all securities. Consequently, the PPSA now applies to all transactions which create an interest in personal property that secures a loan or any other obligation.

Specifically, the areas in which the PPSA deals with now include the following:

  • how lenders secure their interest over tangible and intangible property so that they can recover the debt owed in the event that the borrower defaults;
  • whether ownership of personal property, as opposed to possession of personal property, affects the security of the interest;
  • what action lenders can take to enforce their interest over the relevant personal property in the event that a borrower defaults;
  • in the event that personal property is sold or passed to a third person, whether the lenders interest has priority over the interest of the new owner; and
  • how these new rules fit with existing bankruptcy/insolvency law which already contains rules about priority of debts.

While the legislative scheme is only in its first years in Australia, other western jurisdictions have implemented similar schemes in the last 15 years to varying degrees of success. Both New Zealand and Canada are two strong examples of the benefits to small business of introducing one single scheme to regulate personal properties and securities.