Introduction to PPSA

The Personal Property Securities Act 2009 (Cth) (PPSA) introduced comprehensive Commonwealth legislation which now governs all aspects of the use of personal property as security for credit or the performance of obligations. It erodes some traditional rights of the holder of title in personal property. It does this by deeming the title interest to be a security interest.

A significant aspect of the PPSA is the creation of the Personal Property Securities Register (PPSR) – a single national, centralised, searchable register of registered ‘security interests’ in personal property. The introduction of the PPSR replaced many of the previously existing registers for company charges, bills of sale and motor vehicle securities.

Understanding the PPSA is very important as failure to take steps to protect your security interest in personal property (such as registration of your interest on the PPSR) may result in loss of your security or your title to personal property. In the construction industry, examples of where the PPSA is particularly relevant include equipment leases, retention of title clauses and step-in rights.

Key concepts

The PPSA applies to security interests in relation to personal property. Understanding the PPSA therefore starts with understanding these two concepts.

Where a security interest in personal property exists, there can be important consequences if the secured party fails to take steps to protect its interest. These consequences may include:

• loss of priority in relation to other competing security interests in the same personal property;
  the security interest being more susceptible to ‘extinguishment’ (ie loss of the security interest including loss of title);
• the security interest will be lost if the party giving the interest becomes insolvent.

These concepts will be examined further in the section understanding priority and extinguishment.

What is personal property?

Generally, ‘personal property’ includes all property other than:

• land (including all estates and interests in land);
• fixtures (goods affixed to land other than crops); and
• government granted rights and authorities (for instance water rights).

There are two broad sub-categories of personal property under the PPSA, ‘consumer property’ and ‘commercial property’. Consumer property is property ‘predominantly for personal, domestic or household purposes’. In a construction context the personal property will be commercial property. The understanding of these sub-categories can be important in terms of how:

• a financing statement is lodged on the PPSR; and
• enforcement rights may operate with respect to the security interest.

What is a security interest?

In substance security interests

A ‘security interest’ under the PPSA  has two elements:

• it is an ‘interest’ in relation to personal property;
• provided for by a transaction that in substance secures payment or performance of an obligation (irrespective of the form of the transaction or who has title to the property).

An ‘interest’ in personal property includes any right in relation to that property. However, some interests such as a right of ‘set-off’  and rights granted by a government in relation to water are specifically excluded from the PPSA (section 8 of the PPSA).

Examples of security interests include mortgages, charges, leases, retention of title arrangements, consignments, pledges and hire purchase agreements. However, the PPSA requires a ‘substance over form’ approach when determining whether a security interest exists. What is important is not the name used to describe the transaction (for example ‘charge’ or ‘mortgage’), but whether the transaction in substance secures payment or performance of an obligation.

Deemed security interests and PPS Leases

The PPSA deems certain interests to be ‘security interests’ even if the transaction does not in substance secure payment or performance of an obligation. There are three types of deemed security interests under the PPSA:

• the interest of a transferee under a transfer of an account or chattel paper;
• the interest of a consignor who delivers goods to a consignee under a commercial consignment;
• the interest of a lessor or bailor of goods under a PPS Lease.

The most relevant of these for the construction industry are PPS Leases, which may include certain leases or bailments of goods depending on the duration of the agreement, type of goods and the business practices of the lessor/bailor (in particular whether the lessor/bailor is in the business of leasing or bailing goods). In order to determine whether a lease or bailment is a PPS Lease it is important to understand the term of the agreement, as well as when the lease or bailment was entered into.

Leases or bailments will be a PPS Lease if the lease or bailment is:

• for a term of more than 2 years; or
• for a term of up to 2 years that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed 2 years; or
• for a term of up to 2 years, or a lease for an indefinite term, but only if the lessee or bailee retains uninterrupted possession (with consent) for more than 2 years.

This regime has applied since 20 May 2017 and changes to the regime were also made with effect from 1 October 2015. Before that date shorter durations applied in determining whether a lease or bailment constituted a PPS Lease.

An element in the definition of PPS Lease is that the lessor or bailor must be regularly engaged in the business of bailing or leasing goods. This does not mean that leasing or bailing goods needs to be the only business (or even the principal business) of the owner of the goods. While  frequency or repetitiveness of bailment or leasing transactions will be a relevant consideration, it is not determinative of whether a party is regularly engaged in the business of bailing or leasing goods. The question is whether the relevant transaction forms a proper component of the lessor/bailor’s business (Forge Group Power Pty Limited (In Liquidation)(receivers and Managers Appointed) v General Electric International Inc [2016] NSWSC 52).

For instance, in Rabobank New Zealand Ltd v McAnulty [2011] 3 NZLR 192, the court stated that a bailment or leasing transaction that is the first of a possible series of subsequent bailment or leasing transactions could be considered “regular” on the basis that it is the start of the regular engagement.

The way that the PPSA deems certain interests in property to be security interests is a significant change to the previous position because it has the potential to erode traditional rights of the security holder as the owner of the property if its security interest is unperfected or not perfected by registration within the required timeframes. If an appropriate registration is not made, a perfected security interest of another secured party would have priority (in effect, ownership) in an enforcement or insolvency scenario. For details regarding other types of deemed security interest, see section 12(3) and 13 of the PPSA.

It is necessary that clear wording is used to show that the parties intend to create a security interest or a charge. It is not enough in finance documents to say the loan is ‘secured’ if the words alone do not also create a security interest or charge. For example, in Keon Pty Ltd as trustee for Keon Family Trust v Goldfields Equipment Pty Ltd (In Liquidation) [2020] WASC 61 the court found that no security interest had been created by the deed. The loan in this case was made ‘with an associated floating mortgage over all business assets’ of the borrower and that there may be a ‘charge’ executed by the borrower in the future. This future contemplation puts the lender at risk. This can be dealt with by using a separate security document that creates the security to be given.