The New Personal Property Securities Register How it Effects Franchise Businesses

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1 May 2012 The New Personal Property Securities Register How it Effects Franchise Businesses Stephens Lawyers & Consultants Newsletter: May 2012 The Personal Property Securities Act 2009 (Cth) (PPS) came into effect on 30 January 2012 and introduced an Australia-wide legislative scheme for registering and enforcing all personal property securities. It replaces the State based registers with a single national electronic PPS register. 1 All businesses involved in the supply of goods need to be aware of PPS and its relevance and application to their business. The PPS is particularly relevant to the franchise relationships, where franchisors supply goods to franchisees on credit terms or are involved in leasing or hire purchase arrangements. This update provides an overview of this complex law. Franchise businesses should review their terms and conditions of sale, supply agreements, franchise agreements, rental and hire purchase agreements and licenses of intellectual property. Franchise businesses also need to implement processes for registering and updating security interests on the PPS register and monitoring the register How is the PPS relevant to my businesses? The PPS will be relevant to businesses that: Supply goods on credit under general terms and conditions that include a retention of title (ROT) or Romalpa clause; 2 Supply goods on consignment; 3 Supply Bailment arrangement (eg warehousing or storing of goods); Provide finance and the collateral for security is a circulating asset (or floating charge) over inventory, accounts or other assets of the company; 4 Supply Plant and equipment under lease, hire and rental agreements. Supply Intellectual property licenses. What is a security interest? A security interest is an interest in personal property that in substance secures payment of a debt or other obligation regardless of the form of the transaction. 5 Personal property is all forms of property other than real estate. 6

2 Property interests which are not included under the PPS are: Land; Water Rights; Government licences such as taxi, gambling, racing, fishing and mining exploration licences. A Purchase Money Security Interests (PMSI) is a particular type of security interest. 7 A PSMI will arise where under a Franchise Agreement where: The Franchisor has advanced property and all or part of the purchase price is outstanding, for example, goods supplied on credit terms which include a retention of title clause; Where property is subject to consignment; Where a PPS Lease arises. 8 PMSI Leases arises where a lease or bailment of personal property exceeds 12 months, in the case the motor vehicles, boats and aircraft the term in three months. Who is responsible for registration the security interest? The responsibility to register a security interest on the PPS register is on the secured party. The secured party is the person or business that holds the security interest. For example this will commonly be the: Suppliers of goods which are subject to a terms contract which includes a Retention of Title clause; Owners of intangible property that is being used to raise finance; Financiers providing finance to businesses to acquire property in which the security interest is created. Where a franchisor supplies equipment, goods and products to franchisees on credit terms and holds a security interest, the franchisor can register the security interest on the PPS. Once the verification statement from PPS register has been issued confirming that registration has occurred, the secured party must give notice of the verification statement to the other party to the agreement. Is consent required to be included on the PPS register? The suppliers of goods and intangible property on payment terms or the financer of the goods or intangible property does not have to obtain written consent to register the security interest on the PPS register from the purchaser or acquirer. The PPS expressly states that Grantors (the borrower, mortgagor or person or business that enjoys the benefit of the contract) are taken to have consented to being included on the register by their acceptance of the terms of the agreement. Although no written consent is required, it is recommended that the contract which creates the security interest refers to registration of the security interest on the PPS register. Franchisors supplying goods and other intangible property to franchisees on credit terms should review their Franchise Agreements and terms of supply to ensure they have a registrable security interest.

3 How are security interests registered? In order to registrar an interest the security interest holder must complete and file a financing statement on the PPS register. 9 Accessed on the website A finance statement uploaded on PPS register requires the secured party to include details relating to the parties to the transaction, the collateral and the security interest. 10 If the property in question is a motor vehicle, watercraft or aircraft and it is being acquired for consumer purposes rather than commercial, then it is sufficient to enter the serial number in place of the grantors personal details. 11 How are ongoing supply agreements registered? Where businesses deal with ongoing supply arrangement with customers, the secured party is only required to make a single registration against the customers. Ongoing supply arrangements occur when a supplier makes repeated supplies of property to the same customers and made on the same terms. Ongoing supply arrangements are common in franchisor/franchisee relationships where the franchisee is required to purchase all equipment, goods or products required to operate the franchise business from the franchisor or a related company. Where the ongoing supply arrangement is on the same terms, franchisor or related company making the supply is only required to make a single registration on the PPS register. Is registration of a security interest a mandatory requirement? There is no legal obligation to have a security interest registered on the PPS register, however, in the case of insolvency, registered security interests holders will have priority in payment according to rules specified in the PPS Act. Businesses supplying equipment and goods to the franchise sector on credit terms can secure their position for payment, in the event of insolvency of franchisors or franchisees, by registering their security interest on the PPS register. When can security interests be registered? A security interest may be registered after the interest has attached itself to the personal property by way of possession and is enforceable against third parties through a written agreement. A security interest is considered to have attached to personal property after the grantor does as an act which gives them rights in the property (eg executes a document) or after value is given by secured party for the interest (eg a loan is given). A security agreement must generally be in writing and signed by the grantor in order for it to be enforceable against a third party.

4 What will the effect of registration be? One of the primary goals of the PPS was to create a set of clear rules for appointees in formal administrations, liquidations and receiverships to use when distributing repayment of monies owed over personal property. Because it is very common for two businesses to hold secured interests in the same property, the rules of priority under the PPS Act become very important. Businesses may have an interest in the same property where, for example, a Business has a loan or overdraft facility which is secured by a floating charge over the assets and inventory of the business by a bank. The Business also has a supply agreement for inventory with a manufacturer which contains a Retention of Title provision. In this example, both the bank and the supplier of inventory will have a security interest in that property. Registration of a security interest on the PPS register will enhance the secured parties priority interests under the default priority rules in the PPS Act. The default priority rules state that: Registered security interests will have priority over unregistered interests; Priority between two or more registered security interests will be determined by order of registration; Priority between two or more unregistered security interests will be determined by order of attachment. What will be the effect of registering a Purchase Money Security Interest? A secured party with a PMSI may benefit from a super-priority which will defeat other security interests that were created and registered before the PMSI. PSMI s are a powerful tool established to protect the security interest holder who provides the payment of terms or the finance assistance in order to enable the purchase or acquisition of personal property. For example, a company granted a floating charge to a bank which his registered on the PPS register. The company subsequently purchases inventory on a Retention of Title basis from its supplier which is registered on the PPS register as a PMSI. In the event that the company becomes insolvent the suppliers registered PSMI will have super priority and defeat the security interest of the bank which was earlier. What are the time limits in which to register a security interest? The PPS Act imposes strict time limits for registration of security interests in particular the PMSI which gives super priority. Because of these strict time restraints businesses must have processes in place to register their security interest within the time limits otherwise they will not benefit from the protection of registration which gives their security priority.

5 Will businesses that are yet to adapt their processes be unprotected? The PPS Act contains a Transitional Security Interest Regime that establishes a bridging period in which businesses can transition to the new system without being adversely affected. The Transitional Security Interest Regime will be effective until the 30 January During this period security transactions that were created before the PPS came into effect will be deemed to be capable of registration on the register regardless of whether the security agreement meets the criteria established by the Act. The Transitional Security Interests, which are not registered on the PPS register will have the same priority rights as other unregistered security interests. These Transitional Security Interests will expire after January or after the secured party has registered the interest on the register. 13 All security interests on relevant Commonwealth, State and territory registers existing before January have been migrated to the PPS register. Businesses should search the PPS register to check whether existing registrations have been migrated to the new PPS register. What benefits will registration provide Franchise Businesses? During an uncertain economic climate where business failure is high, franchisors and other suppliers of goods and other personal property to the franchise sector on credit terms are often at risk of not being paid, if the customer becomes insolvent. PPS registration can provide security for payment of goods, equipment and other intangible property supplied on credit. For further information contact: Katarina Klaric Principal Stephens Lawyers & Consultants Level 34, 360 Collins Street Melbourne VIC 3000 Phone: (03) Fax: (03) Stephens@stephens.com.au Website: All Correspondence to: PO Box Collins Street West Melbounre VIC 8007 To register for newsletter updates and to send comments and feedback please Stephens@stephens.com.au Disclaimer: This newsletter is not intended to be a substitute for obtaining legal advice. Stephens Lawyers & Consultant. May Authored by Katarina Klaric and Matthew Churkovich.

6 1 LRLC, PPS No.1 (June 15, 2011). 2 This is a supply agreement whereby the supplier retains ownership or title of the goods until payment is received by the supplier in full from the purchaser. 3 Goods that are supplied but paid for when used or sold to a third party; 4 Section 19 (2) PPS Act 2009 (Cth), here after PPS ; The Personal Securities Act 2009 (Cth) and floating charges fact sheet, accessed at 5 Section 12 PPS Act 2009 (Cth); Personal Securities key concepts fact sheet, accessed at 6 Section 10 PPS Act 2009 (Cth). 7 Section 14 PPS 2009 (Cth). 8 PPS Lease is a lease of bailment for a term exceeding either three months in the case of cars, boats and aircraft, or one year for other types of personal property. 9 Section 153 PPS Act 2009 (Cth). 10 Personal Property Security (PPS) Register and priorities fact sheet, assessed at 11 Regulation 3.2 PPS Regulations. 12 Section 322 PPS 2009 (Cth). 13 Section 322(2) PPS Act 2009 (Cth).