More Problems with the PPSA Register
Many are aware that by 30 January 2015, the Attorney General must submit a review of the operation of the Personal Property Securities Act to Federal Parliament.
There have been 4 consultation papers already written. The last consultation paper related to the Personal Property Securities Register. We have been involved in this review process and thought that our readers might be interested in some of the issues that have been raised.
It is often not clear what the correct collateral class is for a particular item of collateral – for example, if the goods are motor vehicles, then should they be registered as such, or should they be registered under the collateral class ‘other goods’?
Another example is whether an interest in a trust should be registered as ‘financial property’ or just ‘intangible property’.
With this uncertainty, a registrant is tempted to make 2 registrations – one covering each possibility – and of course this clogs up the register, as many have observed over the past 2 years.
Of course, the informed reader may well intuitively respond to the first question posed above by stating: “Oh, motor vehicles are serially numbered goods and therefore must be registered by reference to their serial number.’
However, trademarks are also ‘serially numbered goods’, but many entities do not (for a variety of reasons) register their trade marks on the trade marks register. Many patents also remain unregistered. They are ‘serially numbered goods’ as well. What do you do when the Act says you must register serially numbered goods by reference to their serial number (if they are consumer property) when they do not have a serial number? The Act is silent on this point.
In our view, the PPSA should be amended to take this scenario into account, and allow registration say, under the collateral class ‘other goods’.
All present and after acquired property
Another difficulty is that the collateral covered by any one registration must belong to a single class. If a secured party takes a security over a farming enterprise for example, then it may well have to register separate financing statements against the following collateral classes: agriculture, motor vehicles, intangible property, and other goods.
This cumbersome process has lead many grantees to register their security over another collateral class, such as ‘all present and after acquired property’ or ‘all present and after acquired property except’. But these types of registrations have had their own issues, especially the former.
The former was the one used by ASIC when transferring all company charges from the ASIC register to the PPSR, but it means that when a particular asset is no longer caught by the ‘charge’ (now called ‘security interest’), there could be no reference to the partial discharge on the PPSR, as the PPSR does not provide for partial discharges. This means that the parties must simply settle for a common law deed of release in relation to the subject asset.
This clumsy practice has resulted in many grantees applying for the ‘all present and after acquired property except’ collateral class, because assets sold or otherwise no longer caught by the charge/security interest can then be captured by the wording which appears in the free text field on the register which is typically typed up to read: ‘all present and after acquired property except property over which the secured party does not have a security interest.’ This more readily allows for partial releases of collateral from the security interest over time by way of the deed of release mechanism mentioned above.
Many stakeholders have objected to the use of such wording (which over the past 2 years has become very popular), saying that this description is uninformative, unhelpful and should not be allowed. It has also been argued that it does not comply with the PPSA because the PPSA requires that excepted property must be described by item or class. But when preparing the registration in circumstances where it is contemplated that there might be a partial release in the future, how can anyone know what item or class of collateral might be released down the track? We are of the view that such objections should be ignored – the item or class can be inserted into the deed of release at the time that the partial release takes place. With appropriate amendments to the PPSA, this would then satisfy the Act’s requirement to describe the excepted property by item or class.
Searching the PPSR
Similar issues affect searchers. As a result of the above practice, a searcher may have to take into account more than one class of collateral when analyzing search results where it is not clear which class the property in question might belong to.
Searchers are also frustrated by the fact that usually, registration only needs to disclose what collateral class the collateral belongs to, rather than a precise definition of the item of the collateral. This means that further investigation is usually required.
One suggestion arising from the many submissions given by stakeholders was that there should be an additional collateral class – ‘all present and after acquired property relating to’. The argument is that this could be used where a secured party takes a security interest over all of the assets of a grantor in relation to a particular enterprise or activity – for example, if the grantor is giving security over the assets from time to time of a particular factory, or at a particular location or the assets from time to time of a particular trust. The arguments are that such a registration could be used in conjunction with a compulsory free text description.
We think that this suggestion should be adopted.
Registration of PMSIs
Another issue that has arisen is the problem with PMSIs. The PPSA says that if a security interest (to any extent) is a PMSI, then the registration must reflect that. If you fail to ‘tick the box’ then the registration is ineffective! Some stakeholders have suggested that a registration that should be a PMSI but which does not indicate that it is a PMSI, should still be valid as a security interest, although not as a PMSI. This seems to make eminent sense to us, and we agree with it.
Trusts, corporate trustees and the PPSR
The only way to register a security interest against a corporate trustee is to use its ABN. If the trust does not have an ABN, then some registrants take the punt and register against the trustee company itself. Cleary, one is entering dangerous waters when doing so: the PPSR registration (against the corporate trustee, if any) is likely to be considered defective and void by virtue of the current operation of the Act.
In addition, if subsequently, the trustee is changed, then the secured party who has registered against an ACN, will likely be whistling Sweet Dixie to manage their security interest and exercise any rights they may have over the trust property in the event of a default.
What about if a grantor holds collateral in its own right initially, and then declares a trust over that property? This produces similar problems for the registrant as mentioned above. Also, what if the trust does not have an ABN, and then subsequently gets one after registration on the PPSR takes place?
The fact that financing statements must be registered against the trust’s ABN if the trustee is a company can also produce problems for searchers. Anyone who wants to know whether a particular asset is the subject of a security interest, needs to know whether the company holds the asset as trustee of a trust with an ABN or has done so in the past, in order to know how to undertake the searches. This procedure is a burden and gives rise to considerable uncertainty.
Nevertheless, many submissions have reflected the general opinion of stakeholders that the obligation to register against a trust’s ABN (where the trustee is a company) should be retained. It is consistent with security being given directly over a trust’s assets. Alternatively, why not have a register for trusts, like we do for companies? This would solve these problems.