The Personal Property Securities Act

David Craig, Partner and David McPherson, Partner | February 2001

This is the second in our series of newsletters dealing with the Personal Property Securities Act 1999 (the PPSA). The PPSA is significant new legislation affecting all parties who deal with personal property, such as financiers, trade creditors and lessors of personal property. In this newsletter, we consider the types of personal property that will be governed by the PPSA and review the main features of the new Personal Property Securities Register.

In our previous newsletter, we discussed the meaning of the term "security interest". This is a fundamental concept in the new legislation since the PPSA will only apply to creditors seeking to claim a security interest in personal property to secure the payment or performance of an obligation. In certain circumstances, a deemed security interest will exist even if the relevant security agreement does not secure the payment or performance of an obligation.

If a secured creditor establishes that it has a security interest, the second key consideration is whether that security interest relates to personal property. This is because the PPSA only relates to security interests in personal property and not other property (such as land).

The Concept of Personal Property

The PPSA divides personal property into a number of classes. The PPSA is drafted so that personal property can only ever fall within one class.

It is important to understand which type of personal property a security interest relates to because the type of property will, to some extent, govern priority disputes between secured creditors.

In addition, when registering a financing statement (this is the registration document that will replace the traditional Companies Office or chattels transfer registration certificate), a secured creditor must nominate the types of personal property in which that secured creditor is claiming a security interest.

"Goods" is likely to be the most widely used category of personal property. As you will see from the diagram below, the term "goods" includes certain sub-categories, being equipment, inventory and consumer goods. The sub-category that particular goods fall within depends on the use of the goods at the time that the security interest in the goods attached (unless the PPSA applies another method for determining the category into which those goods fall). By way of example, a debtor may carry on business selling computers. A computer is "goods" under the PPSA. While a computer sits in the storefront ready for sale, it is "inventory" under the PPSA. If the debtor removes the computer from the store and uses it in the operation of his or her business, the computer is no longer "inventory" but will instead be "equipment".

The distinction between some categories is not clear. For example, chattel paper is defined as a writing that evidences both a monetary obligation and a security interest in specific goods. An account receivable is defined as a monetary obligation that is not, among other things, chattel paper. It is not easy to determine when a monetary obligation will be an account receivable and when it will be chattel paper. However, the distinction could be critical since a purchaser of chattel paper for value takes free of competing security interests but a purchaser of an account receivable does not.

Where a secured creditor intends to take a security interest over all the assets of a debtor, it is not necessary to list all categories of personal property. Instead, a secured creditor may create a security interest in all present and after-acquired property of a debtor. This type of security agreement is likely to replace the current fixed and floating charge debenture as the most widely used form of security document.

Personal Property Securities Register

Draft regulations establishing the Personal Property Securities Register (the Register) have now been published. These draft Regulations have been subject to a number of submissions and may well change. However the Regulations provide some important guidelines to the types of information required to register a financing statement. Therefore, we summarise below the Regulations in their current form.

Relevance of the Register

The Register will become the new centralised location where notice of security interests will be registered. The Register replaces the Companies Office register, the motor vehicle securities register and the High Court register of chattel securities.

Registration is a critical part of protecting a secured creditor's rights in personal property. If a secured creditor does not register notice of its interest on the Register, it may not be able to enforce its security against a third party or it may lose priority to a party who has registered a security interest on the Register.

Key features of the Register

The Register will be a centralised electronic register available 24 hours a day, seven days a week. The old system of physically lodging a copy of a document with a registration statement will disappear. Instead, all registrations on the Register must be filed in electronic form over the Internet (other than in very limited circumstances). Users will therefore need access to a computer and must establish an account with the Registrar.

All correspondence with the Registrar will be by email. The secured creditor will log on to a website and will be prompted to complete the information contained on various screens. The secured creditor will then email the information to the Registrar. If all the information boxes have been completed, the Registrar will email back a verification of registration (known as a verification statement). This is the only confirmation that will be received from the Registrar - no paper confirmation is sent.

There will in fact be no paper files kept.

Re-registration

The PPSA creates a six-month transitional period from its commencement date (which is not yet known but is likely to be in the third quarter of 2001). During this transition period, all existing security interests must be re-registered or registered on the Register in order to maintain existing priority. To re-register an existing security interest on the Register, the secured party has to provide all of the information required by the Regulations.

Information required when registering a financing statement

The information that a secured creditor needs in order to register a financing statement is quite different from the information that was previously required to register a charge at the Companies Office or on the High Court chattels register. For example, if the debtor is an individual, the date of birth and full name must be included. If the correct information is not included in a financing statement, then that financing statement will not be accepted when submitted for registration.

The information that must be included can also change depending on the nature of the debtor (whether a person or an organisation), the type of collateral and whether the registration is a new registration or a re-registration during the transitional period.

Too much information?

The information outlined over the page is the information that the draft Regulations require in order for a secured party to complete a financing statement. However, this is more information than the PPSA itself requires. The PPSA does not, in general, set any guidelines for the information that must be included in a financing statement. Instead, the PPSA says that a secured creditor will lose priority if the financing statement contains seriously misleading information. Some of the submissions made on the Regulations suggest that the drafters of the Regulations are wrong to require all the information set out in the highlighted box and should instead leave it to secured parties to decide what information to obtain. The rationale for this approach is that should a secured party register a financing statement that is seriously misleading, it will lose priority.

It remains to be seen whether the Regulations will be amended.

The seriously misleading risk

The Register imposes a high degree of responsibility on the person entering information on to a financing statement. Under the PPSA, a financing statement will be invalid (even if accepted for registration) if the financing statement contains seriously misleading information.

It is therefore critical that secured parties take particular care when entering information on to a financing statement.

The term "seriously misleading" is not defined in the PPSA. It will therefore be necessary for the courts to interpret this term. Some guidance can be taken from Canadian decisions where legislation materially the same as the PPSA has been in force for some time. The Canadian courts apply a "reasonable person" test . That is, would a reasonable person reasonably familiar with the workings of the Register have been misled when searching the Register?

The obligation to maintain information

The draft Regulations require the secured creditor to ensure that information held on a financing statement is accurate and up to date. This could be onerous, especially if debtor details are changed without the creditor's knowledge. Again, submissions on the Regulations suggest this requirement should be softened.