The PPSA Has Hit Town - Why Should IT Businesses Care?

May 2002

The Personal Property Securities Act (PPSA) came into force on 1 May 2002 and completely changed the laws regulating security over just about every form of property, other than land. After 1 May 2002, many businesses will have to change their operating procedures to ensure that they obtain effective security over such "personal property". These businesses include suppliers of goods and equipment under retention of title arrangements, lessors of equipment and, somewhat surprisingly, software developers.

Although the PPSA is intended to simplify the law, the new regime contains its own complexities, exceptions and exceptions to exceptions that must be considered when implementing new operating procedures. We introduce the new regime below and highlight some of the new complexities that are particularly relevant to the IT industry.

A new register

From 1 May 2002, in accordance with the PPSA, a unified online national register will replace:

• the Companies Office register of charges;
  
  
• the High Court register of chattel securities; and
  
  
• the Motor Vehicles Securities Register.
  

As the new register is an online register, there will be no need to file actual agreements, all that is required is an electronic "financing statement" containing certain details about the relevant security.

The new register will contain details of registered "security interests" in personal property. The term "security interest" covers most common types of security - such as charges, chattel mortgages and hire purchase agreements. However, "security interest" also covers transactions that are not traditionally considered to be security - such as retention of title supplies, leases for more than a year and commercial consignments.

New priority rules

The PPSA establishes new rules for determining the priority of security interests in the same personal property. In this regard, a "perfected" security interest normally takes priority over other security interests. Also, if there is more than one "perfected" security interest, the party that was first to register its security interest will normally take priority. As a result, it is important to know what comprises a "perfected" security interest.

In general, to obtain a "perfected" security interest, the secured party should have a written security agreement (signed or assented to by the debtor), the debtor must have rights in the relevant property and value must have been given (e.g., funds advanced or a binding commitment given). At this stage, the security interest "attaches" to the relevant property. However, for "perfection" to occur the secured party must also electronically file a financing statement containing the relevant security details. These components of "perfection" can be carried out in any order, so it is possible to file a financing statement well before the relevant funds are advanced or equipment supplied. However, an exception to these rules makes it possible for a secured party to "perfect" a security interest by taking possession of the relevant property, instead of having a written security agreement and filing a financing statement.

Special priority exceptions

Special priorities apply in certain cases. The most important special priority is given to purchase money security interests, referred to as PMSIs (and said "pymsies"). In this regard, super priority is given to secured parties that provide funds for the purchase of specific personal property. Such PMSIs expressly include supplies under retention of title arrangements, leases for more than a year and commercial consignments. However, in order to obtain this super priority, the PMSI must be registered at the time the debtor takes possession of the relevant property or, if the property is not inventory, within a 10 day grace period.

How will this affect the IT industry?

IT businesses need to establish procedures for registering security interests that previously did not need to be registered. If such procedures are not put in place, these businesses risk losing priority to others with rights in the property subject to the security interests. Such risks can be illustrated by a receivership example.

Assume that one of your customers is placed in receivership and you have not registered a security interest in equipment you have supplied to that customer under sale conditions that include a retention of title clause. Under the PPSA, the creditor that places the customer in receivership will probably have a better claim than you to products that you supplied to the customer, but have not yet been paid for.

These risks arise in two main areas, the supply of hardware or equipment and the development of custom built software.

Hardware suppliers

Previously, where you supplied hardware or other equipment to your customers under a retention of title clause or a long term lease, there was no need to register such arrangements to retain a level of priority over others with competing claims. That is because the customer took no title in the relevant property under the old law.

However, under the PPSA, the actual title to the property becomes irrelevant. If you lease hardware to customers for more than one year, the lease is deemed to be a security interest. Likewise, if you supply hardware under a retention of title clause, the retention of title clause creates a security interest.

Under the PPSA you can lose priority to others with security interests in the customer's property if you do not "perfect" your interest. Consequently, you should ensure that your lease or retention of title clause is set out in an agreement that your customer has actually signed. You should also register a financing statement in relation to the security interest created by that agreement.

Software development

Under the PPSA, personal property includes intangible property, such as intellectual property rights and software.
If you are developing software on the basis that it will not be owned by the customer until you are paid in full, then you effectively create a retention of title clause that would be treated as a security interest under the PPSA. If this security interest is not registered then you could lose out to other creditors, who may take priority over the software through general security interests in the customer's property (for example, through a debenture).

As a result, software developers should ensure that the payment terms under which the development is to proceed are set out in a written agreement, and signed by the customer. The software developer should also consider registering the security interest in the software being developed to ensure that they retain priority over others who may have competing claims.

Transition

The PPSA provides for a six month transition period from 1 May 2002, during which existing security interests will continue to retain their current priority. Also, certain existing security interests (such as retention of title supply arrangements) are deemed to be perfected for the transition period. However, any new security interests will lose priority unless registered. By the end of the transition period, all existing security interests should be re-registered and retention of title supply arrangements should be registered, to ensure priority is retained.