Legislative change with implications for SMSFs

From 31 October 2011, the Personal Property Securities Act 2009 will begin operation. Operating across Australia, it revolutionises traditional concepts of ownership in all types of property except land, which remains untouched by the legislation. It will replace 70 State and Territorial Acts and over 40 different registries.

Many business owners are already aware of the fact that it will change how securities over goods and chattels operate. But few, if any, are aware that its tentacles extend far beyond that – try intellectual property, company charges, taxi licences, retention of title arrangements and ‘intermediated securities’ for starters.

If a business leases equipment, supplies goods on a retention of title basis, lends money to companies for the acquisition of goods or has any interest in personal property provided for in a transaction that secures the performance of any obligation (this definition can include trusts), then it needs to understand how this new law works. It has a whole new language that will cause common terms to fall by the wayside. For example, a ‘floating charge’ will be known as ‘a security interest in circulating assets’.

A business owner failing to address the legislation could suffer a catastrophic outcome. Business Lawyer Leigh Adams cites an example of what can go wrong:

“Consider a company in the business of leasing property. It could be leasing mobile homes or motorcars, for example. Assume it has a valid lease under which it leases the property to a lessee.  Independently, the lessee then enters into a charge over the lessee’s assets. If the lessee later defaults in its obligations to its bank, then the bank can take the leased property, sell it and keep the proceeds if the legislation is not complied with. Retention of title arrangements are likewise rendered useless if the Act is not complied with. Ownership is irrelevant in determining the priority of security interests under the Act.”

This can also affect self-managed superannuation funds. If a DIY super fund has artwork and leases it to an art gallery, and the art gallery then charges the art gallery’s assets to the art gallery’s bank but the super fund does not comply with the legislation, then the art work will be caught by the bank’s charge and the bank will be able to sell it and keep the proceeds if the gallery defaults. So the gallery will be able to reduce its own indebtedness to its own bank by taking the super fund’s artwork.

Moreover, the legislation introduces concepts that are foreign to our system of law as we currently know it. The following example given by Adams explains the concept of ‘proceeds’, which is introduced by the new laws.

“It means for example that if a bank has a ‘security interest’ (or  ‘charge’ or ‘mortgage’ using the old terminology) in a jeweller’s sapphires and the jeweller swaps them for rubies in breach of the agreement with the bank, then the rubies will be considered ‘proceeds’ and the bank’s security interest will ‘attach’ to the rubies without the bank having to do anything.”

Another example of the reach of the new laws given by Adams is where a bank has a security interest in a factory’s robots, which operate under a patent. Upon the bank exercising its rights of possession and sale, the patent rights will be included in the sale, without any need by the bank to separately deal with the patent rights.

Many business owners are under the impression that registration of their interests on the PPS Register is sufficient protection for them but this is only one of four ways to ‘perfect’ their security interest. Other ways include ‘control’, ‘temporary perfection’ and ‘possession’. Yes, now possession really is nine-tenths of the law.

Furthermore, priorities can be upset by the existence of purchase money security interests (PMSIs), an example of which is where finance is advanced to a business to acquire specified equipment.

The banks are currently busy re-drafting all their security documents. Business owners should do likewise, according to Adams. Most legal documents, including for example the humble copyright licence agreement, will need to be revisited and likely revised.

Adding a further layer of frustration is the complicated transitional provisions. For the next two years, Australia will be labouring under the old system and the new system, but failure to address the new legislation will be problematic for those who wait until October 2013 to do anything about it.