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Changes To The Law Of Personal Property Securities In Australia

Introduction

The Australian Federal Government is currently in the process of reforming the law with respect to personal property securities (“PPS”). PPS involve an arrangement whereby an individual or business offers personal property (which includes all property except for land) in order to secure a financial loan provided by a financial lending institution, such as a bank.

The new law will alter the way in which PPS products are dealt with in Australia. It is therefore important for financial lending institutions to understand the changes before they come into effect in order to ensure a smooth transition.

What is wrong with the current law?

At present there are several inconsistencies in the way PPS products are dealt with under Australian law, particularly with respect to registration of PPS interests. The Commonwealth and each of the States and Territories currently have their own schemes for the registration of PPS interests which vary widely. The situation was summed up by the Attorney General, the honourable Robert McClelland, who stated that current system of PPS is ‘complex’ and ‘inconsistent’ and noted that it is made up of “…an hoc web of common law and legislation, involving over 70 Commonwealth, state and territory acts”. As a result, different PPS rules apply depending on where property is located as well as how the property is owned.

Naturally, this has lead to a lot of uncertainty and the use of PPS products to secure financial loans has been limited as a result.

The Proposed New Legislation

In response to the abovementioned problems, the Federal Government has authored the Personal Property Securities Bill 2009 (the “Bill”) which will bring into force new legislation (the “Legislation”) dealing with PPS in Australia. The main aim of the Bill is to create a national approach to PPS, and thereby overcome the present inconsistencies which exist across jurisdictions.

Some of the most important provisions of the proposed legislation are outlined below:

1. The Establishment of the Personal Property Security Register

The Bill provides for the establishment of a national Personal Property Security Register (the “Register”). The register will contain a variety of data regarding security interests and personal property.

Registration with the register is important as it may ‘perfect’ the PPS interest which will give the secured party an advantage under the legislation in terms of enforcement and priority. In order to lodge a PPS with the register it will be necessary to complete a financing statement which must contain a variety of information including, but not limited to, details of the secured party and the grantor, as well as the security interest.

Correct registration is important as certain defects can make a registration ineffective which may in turn have consequences in terms of enforcement at a later stage.

2. Rules regarding determining the priority between competing securities

In cases where there are two or more secured lenders, priority rules are the way in which the law determines which secured lender should have access to the secured property first, in order to meet the debt owed in the event of a default. The Bill sets out new rules for determining priority between two competing security interests.

Generally speaking ‘perfected’ interests will have priority over ‘unperfected’ interests under the new legislation, however there are a variety of other rules which deal with more complicated priority disputes which financial lenders need to be aware of.

3. Rules regarding the enforcement of security interests

An important consideration for all financial lenders who choose to secure their loans with PPS is the ability to enforce their interests in the event of a default.

The Bill provides financial lenders with a variety of rights and remedies which may enable them to effectively enforce security interests in personal property. These remedies include, but are not limited to; seizure, disposure or retention of the personal property (collateral) secured.

There are however limits to the rights and remedies which will be available under the legislation, some of which include that:

  • the rights and remedies do not apply all types of security interests;
  • all enforcement actions are subject to general standards of honesty and commercial reasonableness; and
  • parties are allowed to contract out of certain enforcement provisions under the legislation.

4. Rules regarding the application of civil penalties

Certain civil penalties will be applicable for some breaches under the new legislation. This includes, but is not limited to registering a financing statement without believing on reasonable grounds that the collateral will secure an obligation owed by a debtor.

Conclusion

The new national approach to PPS contemplated by the Bill promises to provide more consistency and fewer limitations than currently exist under the mixture of laws which govern this area. Additionally, breaching a civil penalty provision under the new legislation will allow the Federal Court of Australia to make an order requiring the payment of a pecuniary penalty. It is therefore important for financial lending institutions to have a sound awareness of the changes to PPS laws in Australia and their obligations under the new legislation. If you are a financial lending institution and wish to learn more about the new PPS legislation, please contact Berrigan Doube Lawyers.