PPSA applies from the registration commencement time to transitional security agreements and interests.
The PPSA applies to transitional security agreements and security interests arising under them from early 2012 (the registration commencement time)1. However, the PPSA treats transitional security interests differently so they are not weakened by the new system, as explained below.
During the migration period (the month of January 2012), security interests registered on a prescribed list of recognised State and Commonwealth public registers of security interests are to be migrated to the PPS Register. Given that the PPSA covers a very wide scope of security interests, anything registered as a security interest pre- PPSA will almost certainly be regulated as a security interest under the PPSA. The transitional security interests that are migrated to the PPS Register during January 2012 are called migrated security interests.
The priority time for migrated security interests under the PPSA will be immediately before the registration commencement time4. This does not mean that migrated security interests lose the benefit of the priority they enjoyed before the PPSA commenced. See paragraph 18.19.1 and below of Chapter 18 (Priority) for discussion of the priority of transitional security interests.
Non-migrated transitional security interests
Transactions that were not regulated as security interests pre-PPSA but which will become regulated as security interests under the PPSA (for example, conditional sales by retention of title, leases and transfers of accounts) will probably not previously have been recorded on a public register of security interests. These transactions, together with "traditional" security interests that were not registered or required to be registered, will not be migrated to the PPS Register.
These transactions will be transitional security interests in the full sense. As discussed next (paragraph 19.2.8 and below), transitional security interests benefit from temporary perfection for two (2) years until 2014 without the secured party lifting a finger to do anything. Once actually perfected before 2014, transitional security interests lose the benefit of temporary perfection – temporary perfection is then no longer necessary because the security interests would be actually perfected.
The priority time of these “non-migrated” transitional security interests will be immediately before the registration commencement time. Again, this does not mean they lose their original priority – see the discussion on the priority of transitional security interests in Chapter 18 (Priority) commencing at paragraph 18.19.1.
Temporary perfection of transitional security interests for two (2) years until 2014
It would be unfair suddenly to “spring” a registration or other perfection requirement upon existing transitional security interest transactions, especially those that were not registrable pre-PPSA and which will not be migrated to the PPS Register. The classic examples are leases of goods, retention of title sales (conditional sales), transfers of accounts (receivables), consignments and trusts (to the extent they secure obligations and are security interests). To do so may cause significant prejudice.
The PPSA addresses this issue by “grandfathering” transitional security interests for two (2) years after
the registration commencement time (until 2014). This means that transitional security interests can continue to be recognised and can compete under the PPSA against security interests newly created and perfected under the PPSA after its commencement, without being registered or perfected in any way, but only for two (2) years until 2014. Transitional security interests will be temporarily perfected with a priority time of immediately before the registration commencement time (sometime in early 2012) for two years until 2014.
The PPSA requires that security interests (A) attach, (B) be enforceable against third parties by being evidenced in writing that adequately describes the collateral or the secured party taking possession or control of the collateral, and (C) be perfected. The PPSA applies to transitional security agreements and interests from the registration commencement time. The PPSA therefore must, and does, address each of these three criteria of enforceability in relation to transitional security interests to help them transition into the PPSA system.
The PPSA achieves this by providing that transitional security interests are deemed (taken automatically) to:
(a) deemed attachment: have attached to collateral immediately before the registration commencement time5. Attachment is taken to occur immediately before the registration commencement time to ensure that transitional security interests are attached immediately upon the PPSA coming into force, and are not on risk of being defeated in competitions with new security interests that attach under the PPSA. The deemed attachment of transitional security interests is not limited in time (but temporary perfection is limited to two (2) years only – see below);
(b) deemed enforceability: be enforceable against third parties, if they would have been generally enforceable against others before the PPSA commenced6. So long as security agreements are evidenced in writing and give reasonable descriptions of collateral so they are not void for uncertainty, and (if relevant) were registered within applicable timeframes, then they are likely to have been enforceable against persons other than the grantor pre-PPSA. Again, the deemed enforceability against third parties for transitional security interests is not limited in time; and
(c) temporary perfection: be perfected with a priority time of immediately before the registration commencement time, but only for two (2) years following the registration commencement time (until 2014)7. Again, this is to ensure that transitional security interests are not defeated in competitions with new security interests created under the PPSA, which by definition will have priority times that arise after the registration commencement time.
The PPSA also protects transitional security interests from being defeated by security interests perfected by control8, but is silent on the matter of priority disputes between transitional security interests and PMSIs which arise under the PPSA. The priority of pre-PPSA “common law” PMSIs is discussed at paragraphs 18.19.8 to 18.19.11 of Chapter 18 (Priority).
Temporary perfection ends after two (2) years in 2014
Consistent with the grandfathering of transitional security interests for only two (2) years, transitional security interests lose the benefit of temporary perfection at the earliest of the following times9:
(a) migration to the PPS Register: the time when a transitional security interest is successfully migrated to the PPS Register during the migration process in. They then no longer need temporary perfection because they are actually registered;
(b) actual registration or other perfection: the time when a transitional security interest is actually perfected under the PPSA by its holder either registering or otherwise perfecting it during the two (2) year transition period ending in 2014. Again, the transitional security interest then no longer needs temporary perfection because it is actually perfected; and
(c) at the end of the transition period in 201410.
It is critical that transitional security interests are either registered or otherwise perfected before 2014. If not, transitional security interests will lose the benefit of temporary perfection and become unperfected. Unperfected security interests are exposed to:
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- being defeated by other perfected security interests in the same collateral;
- being void upon the bankruptcy, administration or liquidation of the grantor (vesting in the grantor); and
- being extinguished upon sales or transfers by way of lease of the collateral. The deemed attachment of transitional security interests under section 321 should not end, and this should enable unperfected transitional security interests to compete against other attached (but not perfected) security interests after 2014.
Temporary perfection does not apply to all transitional security interests
The PPS Regulations dis-apply the automatic temporary perfection available under section 322 for certain transitional security interests. These are security interests that, pre-PPSA, should have been registered within a registration timeframe but were not registered before commencement of the PPSA.
For instance, company charges must be registered within 45 days under Chapter 2K of the Corporations Act 2001 (Cth). If a company charge was created before the registration commencement time, and so is a transitional security interest, but is not registered on the ASIC company charges register at all before the registration commencement time, then even if the 45 day period for registration did not expire before the commencement of the PPSA, the company charge does not get the benefit of temporary perfection11.
Secured parties should be very careful when taking a registrable security interest in the weeks and months leading up to the registration commencement time in early 2012, and ensure they actually register before the PPSA commences.
Notes:
1 PPSA section 310(c) and (d)
2 PPSA section 306(2)
3 PPSA section 306(1)
4 PPSA section 322
5 PPSA section 321
6 PPSA section 311
7 PPSA section 322
8 PPSA section 322A
9 PPSA section 322(2)
10 PPSA section 322(2)(f)
11 PPSA section 322(3) read with PPS Regulation 9.2(2).
