PPSA amendments on the way

In September 2023, the Australian Federal Government published for consultation a comprehensive reform package, including exposure draft legislation, to amend the Personal Property Securities Act 2009 (Cth) (PPSA) and Personal Property Securities Regulations 2010 (Cth) (PPS Regs). 

The reforms are intended to:

• simplify the regulatory framework for security interests in personal property to reduce complexity for users of the personal property securities (PPS) framework, particularly in relation to the Personal Property Securities Register (PPSR); and
• achieve a clearer, more consistent, and more accessible PPS framework.

While many of the proposed reforms do simplify and improve the current regime, others raise new questions and issues which need to be carefully considered.  Feedback was sought on the exposure draft legislation, including to “test the operation of the proposed reforms against the current operating involvement”.  The consultation closed on 17 November 2023.

We prepared a submission and assisted several industry associations prepare submissions.  We are now awaiting the Government’s response to the submissions.

In this alert, we outline:

• the background to the reforms;
• the overall impact of the changes;
• the key proposed changes; and
• the impact the reforms may have on particular transaction areas.

Please get in touch with our team if you would like to discuss how these reforms could impact you, your business and the security interests which you have taken or may take.

Background

The reforms are the Government’s response to the Final Report of the 2015 statutory review of the Personal Property Securities Act 2009 (the Whittaker Review).  The Whittaker Review made 394 recommendations to reduce complexity and allow the PPSA to better meet its objectives.  The Federal Government has accepted 345 of the recommendations.  These reforms also follow an industry consultation on financial products and the PPSA in 2020.

The exposure draft legislation comprises amendments to the PPSA through the Personal Properties Securities Amendment (Framework Reform) Bill (the Amendment Bill) and new PPS Regs through the proposed Personal Property Securities Regulations 2023.  The exposure draft legislation and other explanatory material can be found on the AGD PPSA Reform Consultation website.

Overall impact of the changes

The reforms are intended to simplify the regulatory framework for security interests in personal property so that the rules for their creation, validity and enforcement are clearer and easier for users to engage with.  They include numerous amendments designed to simplify the process for registration of security interests on the PPSR.

However, the consultation paper acknowledges that:

…the PPS framework cuts across a broad spectrum of users, ranging from high-value entities to small businesses and individual consumers. While the proposed reforms have been developed on a balance of stakeholder interests, it is likewise important to consider the reform package in light of these various interests, which can often conflict and at times be contradictory.

As a result of the reforms, anyone who takes security interests in the Australian market (including financiers) should carefully consider the impact of these proposed reforms on their security structures and will need to:

• review their existing PPSA analysis and policies to determine whether the reforms will affect whether the interests they hold are PPSA security interests, which security interests they want to perfect, and if, and how, they can perfect any security interests by control;
• review their standard security agreements and any other documents which contain security interests in personal property to determine if they need to be amended;
• review their procedures for enforcement of security interests in personal property;
• review their registration processes to ensure that registrations are made correctly; and
• possibly take steps to transition to the new regime.

Summary of the changes

The following is a high level summary of the main changes made by the reforms.

Security interest

The PPSA currently provides (in s12(2)) a list of examples of pre-PPSA transactions that can give rise to a security interest (as defined by s12(1)).  This list is to be repealed on the basis that the general definition provides sufficient clarity to determine a security interest without the aid of a list of examples. 

This change will mean that the current reference to a flawed asset arrangement as an example of a security interest will be deleted.  The Explanatory Memorandum (EM) to the Amendment Bill states that the concept of a flawed asset arrangement is deleted “as it does not have a commonly accepted meaning amongst businesses and consumers. Retaining this wording will increase the risk of potential confusion and uncertainty”.  However, the deletion may not resolve questions as to whether flawed asset arrangements are captured by the general definition of a security interest.

Key definitions changed

Several key definitions have been substantially amended or repealed, including the following:

Exclusions from the PPSA

The provisions which exclude certain types of property or interests have largely been retained but reorganised into two separate provisions.  However, minor amendments have been made with the result that the PPSA will apply to:

• a transfer of an account, if the transferee’s sole purpose in acquiring the account is to collect it (eg debt collectors when a right to collect and then keep a debt is transferred to the debt collector);
• a transfer of an account or negotiable instrument to satisfy (either wholly or partly) a pre-existing indebtedness; and
• security interests in personal property taken by pawnbrokers.

Collateral description in security agreements

The reforms impose more prescriptive requirements about how collateral must be described in a security agreement.  Collateral must be described by item or kind, as all present and after-acquired property (ALLPAAP) or as all present and after-acquired property, except specified items or kinds of personal property (ALLPAAP except).

The current PPSA gives parties flexibility on collateral descriptions.  The changes limit this flexibility.  It may be difficult to meet the “item or kind” or description requirement where there is a broad range of collateral under a security agreement.

Perfection by control

The provisions which set out how secured parties can perfect a security interest by control have been substantially amended.  The main changes are:

• It will no longer be possible to perfect by control a security interest in letters of credit, negotiable instruments or space satellites and other objects.
• The provisions which set out how a secured party can take control of intermediated securities and investment instruments have been substantially amended and aligned.
• It will be possible to perfect by control a security interest in cash that is held by an intermediary (see the exclusion of “cash” from the definition of “financial product”).
• It will be possible for an intermediary to perfect by control a security interest it holds in an intermediated security for which it is the intermediary.

PMSIs

In addition to the changes to the definition of PMSI noted above, there have also been several changes to the priority rules and registration requirements in relation to PMSIs. These include  the following:

• It will no longer be necessary for a registration to indicate whether or not a security interest is a PMSI.
• However, a registration in respect of a PMSI will still need to be made within specified time frames. The timing requirements are changed.
• There are also changes to the circumstances in which an accounts financier has priority over an inventory financier under s64. The section provides that an accounts financier will have priority over all PMSIs and non-PMSIs held by an inventory financier in certain circumstances.  To obtain this priority, the accounts financier will need to make an earlier accounts registration which refers to s64 or give a notice in the approved form to the inventory financier at least 15 business days before the accounts financier’s security interest attaches to the account.

Restrictions on dealings in collateral

The provisions permitting collateral under a security agreement and accounts to be transferred despite a restriction on dealing in the security agreement or the account contract have been broadened to apply to any other dealing with the collateral or account.  The provisions relating to accounts also no longer exclude an account arising from the provision of financial services.  However, a new provision states that unless the account debtor consents, a dealing in an account is ineffective to the extent that the dealing would make the performance of the account contract more onerous than if the dealing had not occurred.  

There have also been changes to provisions which allow a secured party to require the account debtor to pay to the secured party any amount owing to the account creditor under the account contract by giving notice to the account debtor.  The secured party must include proof of the dealing, give a copy of the notice to the account creditor and payment to the account creditor will discharge the account debtor’s obligation to make payment in certain circumstances.  However, a new provision states that unless the account debtor consents, a dealing in an account is ineffective to the extent that the dealing would make the performance of the account contract more onerous than if the dealing had not occurred.

Enforcement

The enforcement provisions in Chapter 4 have been restructured and reorganised to provide a more logical flow.  While many minor drafting changes have been made, most of the provisions remain in substance unchanged.  However, substantive changes have also been made.  These changes include the following:

• The enforcement provisions will not apply to security interests in personal property:
  • to which the National Credit Code (NCC) applies
  • which are taken by a pawnbroker.
• The enforcement provisions will apply to security interests:
  • in goods located outside Australia
  • in collateral which is used for personal, domestic or household purposes.
• It will no longer be possible for a person to object to a secured party disposing of collateral, or purchasing collateral.
• It will still be possible for a person to object to a secured party retaining collateral. However, the secured party can request proof of an objecting party’s claim that it would be adversely affected by the retention. The secured party can also apply to court to challenge an objecting party’s notice of objection.
• The PPSA will provide that all rights, duties and obligations that arise in the enforcement of security interest must be exercised in a commercially reasonable and honest manner. This duty currently only applies to rights, duties and obligations arising under Chapter 4.  It will also not be possible to contract out of this duty (whereas contracting out is currently permitted while property is subject to a controller (other than a receiver or manager)).
• The PPSA currently provides that Chapter 4 does not apply to property that is controlled by a receiver and manager. While the Amending Bill does not change this, the Government has not settled on a finalised position on whether company receiverships should remain outside Chapter 4.

It will be possible to contract out of any provision which is not a mandatory enforcement rule but any term is void to the extent it purports to contract out of a mandatory enforcement rule.  However, there have been some changes to the provisions which can be excluded.

Any exclusions of the enforcement provisions in standard security agreements will need to be reviewed.

Vesting rules

PPS leases that are not in-substance security interests are excluded from the vesting provisions.

Registration

There are substantial changes to simplify and streamline the registration process including the following changes to a financing statement:

Other registration issues

There are substantial changes to how an amendment demand will be able to be made including:

• Amendment demands will need to be given in an approved form.
• A contract term will be void to the extent that it purports to prevent the making of amendment demands by an individual, or requires an individual pay a secured party to comply with an amendment demand.
• The PPSA will continue to provide that if a secured party does not amend a registration in response to an amendment demand, the person who made the amendment demand can apply to the Registrar to register a financing change statement to give effect to the amendment demand. However, the reforms provide that the Registrar will no longer assess the merits of an application but will instead ask the secured party asked to show cause why the Registrar should not give effect to the demand.

Governing law rules

Section 6 of the PPSA, which currently provides a set of rules that determine when the PPSA will apply to a security interest, is deleted on the basis that the governing law rules in Part 7.2 are more appropriate for identifying the circumstances in which Australian law, including the PPSA, should apply to a transaction concerning a security interest.

The governing law rules in Part 7.2 have also been amended. The changes include the following:

• The ability of parties to a security agreement to select Australian law as the governing law in certain circumstances has been removed.
• There are new provisions which set out when a security interest is taken to be attached and perfected under the law of a foreign jurisdiction.
• There are new governing law rules for:
• instruments embodying a payment obligation
• intermediated securities
• the enforcement of a security interest.

Confidentiality rules

It will be simpler for a secured party to contract out of the obligation to disclose a security agreement and other information under s275.  The reforms provide that a secured party will not need to make a disclosure if the secured party has agreed in writing with the debtor or the grantor that the secured party need not respond to the request, or must not do so.  Confidentiality clauses in standard security agreements should be reviewed if a secured party wishes to take advantage of this change.

Circulating asset rules

The rules on circulating assets in ss340 to 341A are relocated to the Corporations Act.  The concept of “control” in these provisions will be referred to as “circulating asset control”.  The provision on how to obtain circulating asset control over inventory has been amended. 

Transitional issues

There will be a period of transition from the pre-amendment to post-amendment PPS system covered by transitional arrangements.  The period is expected to be 24 months.  However, no specific transitional arrangements have been definitively determined.  The Government is considering a grandfathering model (where security interests that pre-date amendments continue to be governed by pre-amendment PPSA) and a temporary perfection model (where all interests are transitioned to the new laws and new PPSR).

Impact of the changes on particular transaction areas

We have set out below some initial comments on the impact the reforms may have on particular transaction areas.

Asset finance

The changes to the definitions of a PPS lease and a PMSI will have ramifications for equipment lessors, hire purchase companies and other asset financiers who will need to consider the extent to which the changes will affect whether or not some of their transactions are PPSA security interests and this in turn may affect their existing registration policies. 

Existing registration policies will also need to factor in changes to the registration process described above including the changes relating to PMSIs. There are also changes to the definition of motor vehicles and aircraft which will further impact registrations for asset finance transactions because they will narrow the range of vehicles and aircraft which can be registered by serial number.

The changes to the PMSI priority rules for accounts financiers will impact on the priority of inventory financiers who may hold PMSIs in accounts as proceeds of inventory.

Financial markets security structures

Custodians, margin lenders, prime brokers, derivative counterparties who use security-based credit support structures and other financial markets participants should consider the extent to which the changes to the definitions of investments instruments, intermediated securities, changes to the rules for perfecting security interests by control, and the changes to the governing law rules will affect which of their transactions are PPSA security interests which are subject to the PPSA.  They will also need to consider if and how they can perfect their security interests by control in light of the changes to the control tests, the impact of any rights retained by the grantor on the perfection analysis, and whether it is still prudent to register financing statements on the PPSR.

Insolvency and restructuring

Secured parties will need to familiarise themselves with any changes to enforcement procedures and the impact this will have on clauses in standard security agreements which exclude PPSA enforcement provisions. 

Real estate finance

The PPSA will continue to not apply to an interest in a fixture or an interest provided for by the creation or transfer of an interest in land.  However, the Government has stated that it will explore with the States and Territories whether:

• water rights should only excluded from the Act if they are able to be recorded under a statutory registration scheme that complies with the expectations set out in the 2005 Intergovernmental Agreement on a National Water Initiative
• whether a regime can be developed, potentially along the lines of the principles applied in the Canadian PPSAs, that would allow fixtures to be brought within the Act
• legislation should be enacted that clarifies the circumstances in which “trees” can be “crops”.

Securitisation and receivables financing

In securitisation and other receivables financing transactions, the deletion of the concept of chattel paper may affect registration policies in relation to the transfers of receivables.  Securitisation funding vehicles and receivables financiers will need to review their procedures in relation to s64 notices to ensure they can obtain priority under the section.  The impact of the changes to the rules on transfers of collateral and accounts despite contractual dealings need to be considered.