18 December 2017
In Australia, security over personal property is managed by the provisions of the Personal Property Securities Act 2009 (Cth) (PPSA). The PPSA provides the framework for registration of legal rights known as “security interests” in various types of personal property on a national register, the Personal Property Securities Register (PPSR). All kinds of entities including individuals, partnerships, companies and trusts may provide security interests to another party.
This purpose of this article is to provide an overview of the key PPSA concepts that businesses and anyone transacting on a regular basis need to be aware of. It covers:
‘Personal property’ is any property that is not ‘real property’ (being land or interests in land such as a lease). Personal property includes tangible items (items you can pick up, such a book) and intangible items (items that exist but do not have a physical form, such as a website).
General examples of personal property include motor vehicles, household goods, inventory, and intellectual property. In dealing with personal property, it is important to note that the PPSA does not apply to ‘fixtures’. A item of personal property will become a fixture if it is attached to the land and is unable to be easily moved. As a result, it will not have a security interest apply to it.
By way of simple explanation:
A ‘security interest’ is an interest in personal property arising out of a transaction which secures the payment or performance of an obligation. There are many examples of security interests – hire purchase agreements, leases of goods (such as motor vehicle leases), retention of title clauses (where a seller owns the goods until the goods are paid for even if they have been delivered) and where a person grants another person/entity a security interest as evidence of their intention to pay – or put another way, provides security for the future performance of their promise.
The PPSA also provides automatic (or deemed) security interests where the transactions are: transfers of account and chattel papers; the commercial consignment of goods and in certain cases, leases and bailments.
These automatic security interests occur irrespective of obligations to be performed or money to be paid.
So how does this work practically?
The person providing the security interest as security for their obligation(s) is called the “Grantor”. The person who receives the legal rights in the personal property (the security interest) is called the “Secured Party”.
4. A security interest is granted – now what?
Merely giving the security interest is not enough to afford protection to the secured party – the secured party must be able to enforce it against the personal property by showing that the security interest has attached.
The secured party (remember, the person receiving the rights) must show:
If the secured party can establish these two requirements, then it has an enforceable security interest as against the grantor’s personal property.
However, without registering its interest on the PPSR the secured party may lose its rank among the secured creditors entitled to have access to the grantor’s personal property. It is imperative that on establishing a security interest, that it is registered to:
The secured party must then seek to show that the security interest is enforceable against a third party who now has possession or ownership.
A simple example of where this might happen is if a painting has formed part of the secured personal property.
The grantor gives or sells the painting to their friend. The secured party cannot seek the personal property from the grantor and instead must now show it has the right to seek it from the third party friend.
For a security interest to be enforced against a third party, the secured party must show:
In addition, the secured party must also show that there was a security agreement (that is an agreement for the transaction), evidenced in writing between the grantor and the secured party that is:
So, taking the above example of the painting:
The PPSA is a complex piece of legislation and it is noted that this article is written by way of general comment and any reader wishing to act on information contained in this article should first approach their legal professional advisor for properly considered professional advice which takes into account the reader’s specific situation.
Belinda Pinnow – Senior Associate