In 2009 new legislation called the Personal Property Securities Act (PPSA) was passed. The Act will come into force in May 2011. It is based on similar legislation previously enacted in both Canada and New Zealand.

The PPSA triggers profound changes in the way security is taken over personal property. Financiers, along with businesses operating across all industries – but particularly in the manufacturing, wholesale and retail sectors - will be affected.

The Act applies to almost all forms of tangible and intangible property owned by any type of legal entity including money, goods, motor vehicles, hire purchase agreements, accounts receivable, long term leases, investment securities and documents of title. Exclusions include land, water rights and certain rights or entitlements created by statute.

The intent of the PPSA is to streamline procedures involved in formal insolvency appointments. It replaces a number of existing registers, including the ASIC Register of Charges, and the Register of Encumbered Vehicles (REVs), which is based on legal form and the holding of title, and moves to a single regime based on the substance of the transaction. The PPSA will apply to debentures, chattel mortgages, retention of title, hire purchase, leases exceeding one year, assignments of debt, consignments, and security trust deeds.

However the practical applications of the Act have wider implications than insolvent companies and insolvency practitioners. This is particularly the case if you or your business lease out equipment or supply goods to other businesses on delayed settlement terms.

Under the PPSA, the concept of “title” is irrelevant.

The Act attempts to resolve the confusion of previous regimes by referring to "security interests" instead of “title”. "Security interest" is defined in the legislation as a transaction which "in substance secures the payment or performance of an obligation".

Most of us are familiar with “title” as ownership. If I own a car, and I lease it to you, it remains mine: I retain the “title”, while you have rights of use of the car.

Previously this could cause difficulty in formal administrations, liquidations and receiverships when appointees were under pressure to realise assets for the benefit of secured creditors. It was not always immediately clear which goods and assets (such as stock, machinery, fit-out etc), were the property of the insolvent party (and therefore available to reimburse secured creditors), and which were subject to the “title” of another party (e.g. a leasing company or supplier who hadn’t been paid).

Essentially, the PPSA assumes assets are generally available for realisation by an insolvency practitioner and reimbursement of secured creditors (regardless of “title”), unless “security” over them is “perfected” by the true owner or holder of the title. Title itself does not equate to rights over one’s own property in such circumstances. Failure to register an interest in an asset may result in you or your business having no claim over the asset in an insolvency scenario. Security over assets should be registered on the Personal Property Securities Register (PPSR).

Example: Supposing your business manufactures and leases out jukeboxes to entertainment venues. One of your lessees is a pub, which goes into administration. In theory your jukebox could be sold by the administrator and its value realised for the benefit of creditors if you had not registered security over it. This scenario is overly-simplified, but nonetheless illustrates the effect of the PPSA.

In reality the application of the PPSA will be more complex than the above example. The Act also provides for the determination of priority between multiple security interests in the same personal property; determination of priority between a security interest and another type of interest in the same personal property; and various exceptions. There are also complex rules on how security interests apply when supplied goods are affixed to other goods or mixed with, or blended into, other goods. So what do you need to do?

The PPSA raises serious risks for many Australian businesses.  Business owners and directors should understand that usual “asset protection” and separation vehicles and structures such as trusts and separation of entities may not protect your assets from the reaches of the PPSA.

You should seek appropriate advice and put steps in place to mitigate risk to ensure that the interests of your business are protected. A properly structured plan should address:

1. A review of the group structure including arrangements or agreements between entities
2. A review of your terms of trade if you supply inventory to another entity
3. Processes to ensure you register your security interest in inventory prior to any stock being sold. Retention of Title (“ROT”) terms will need to be agreed in writing and registered to be effective. You may also need to register a Purchase Money Security Interest ("PMSI") in order to gain a super priority over the customer's other creditors so your future ongoing supplies may be protected
4. Where your business takes 'security interests' in property and registers these interests, then you will need to have in place records and systems to deal with enquiries and other requirements of the legislation. Your staff will need to be educated and informed of the new registration procedures.  Your business should compile inventories of existing security interests in order to register them. You will also need to ensure that appropriate systems are in place to record and manage future security interests
5. If you are a customer or recipient of goods or services, suppliers will seek to register security interests against your company. These will need to be checked carefully and regularly to ensure that they do not exceed the exceptions allowed in negative pledge agreements. In particular, some retention of title clauses purport to give security over all the assets of the buyer.

Company directors and management may also find that in the early stages of the new legislation, financial institutions may review their security margins and reduce the availability of credit which means additional equity or working capital may be required.

There is still time to get your house in order. The Act comes into full effect in May 2011. Beyond that there will be a two-year “grace period” to allow businesses and financiers to bed down new arrangements and get security interests registered correctly.

However based on the introduction of PPSA in both Canada and New Zealand, there is potential for conflict and litigation, so you should be proactive in how you approach it.

Companies should begin preparing for the PPSA regime to protect their interests and minimise disruption to businesses once the PPSA takes effect. Preparations should include seeking appropriate advice to assist you with:

• Reviewing group structures and the arrangements between group entities
• Checking your standard terms of supply, as well as your financing arrangements and other potentially affected contracts
• Identifying the assets affected
• Identifying the transactions that will need to be registered
• Redrafting standard terms
• Where necessary, preparing new policies concerning the requirements for registering transactions and associated documentation.

One of the most difficult and time consuming issues facing businesses will be to work out what PPSA means for that business. To help with this task, Grant Thornton has developed a comprehensive and cost-effective fixed price PPSA evaluation review and report to help our clients understand how the PPSA might affect them specifically, and what their priorities need to be in addressing it.

If you are interested in hearing more about the PPSA review, we encourage you to contact your usual Grant Thornton advisor or the author of this article.