Introduction
A new law comes into effect on 31 May 2019 that will affect nearly everybody who
- lends
- borrows
- leases vehicles and equipment
- supplies goods on credit
The Personal Property Securities Act 2017 (PPSA) was passed by Parliament two years ago. In a Gazette dated 30 April, Government announced that it would become effective on 31 May. This is a very short time to get to grips with an important new law that determines (in some cases) who gets priority over the assets of a business heading towards insolvency.
The law affects personal property, that is, almost anything that is not real property – land and buildings. Land and buildings are generally not directly regulated by the PPSA. Nor, generally speaking, are third-party interests in ships or aircraft. Some securities (as they do now) include power over future property – that is, personal property the debtor may acquire in future.
What does the new law do?
The new law was enacted (it says) to facilitate the financing of movable or personal property, in order to provide access to credit for micro, small and medium enterprises and individuals. It follows similar laws in place in New Zealand, Australia, Canada and (more recently) a number of our Pacific island neighbours.
Whether the law improves access to finance for SMEs remains to be seen (some of us are sceptical). However the PPSA will definitely make debtor information more transparent[1]. It will definitely require a complete change in how lenders and borrowers (and their lawyers) think about who has security over borrowers’ property. Some of the outcomes might surprise you.
New concepts
Up to now, legal ownership has generally given lenders or creditors priority in a contest over assets of an insolvent party. So a financier who let out goods on hire purchase remained the owner of the goods with a right to retrieve them. Business who sold their goods under retention of title (RoT) clauses could be confident that if a business went bust, they would get their goods back. All of this changes under the PPSA.
The jargon
Businesses (or less often, individuals) holding security interests which attach to property in the possession of others (collateral) must register those security interests on the Personal Property Securities Registry (PPSR) maintained by the Registrar, the Reserve Bank of Fiji (RBF). That is one of the ways (but not the only one) in which those interests will be perfected.
Without a perfected security interest, a creditor of a person or business in financial trouble could find itself at the back of the queue in being able to recover on its loan or account balance for goods sold on credit.
A security interest
A “security interest” is an interest in personal property that secures the payment or performance of an obligation.[2] Most commonly this is because a business has borrowed money and given security to a bank, or bought stock on credit, or equipment on hire purchase. In most such cases the security interest results from a security agreement – a bill of sale, or a terms of supply agreement with a supplier at wholesale level. However, execution creditors – including creditors with a court judgment, FRCS and FNPF – can also register security interests.
Perfection
To protect their positions as secured creditors, those who hold security interests must perfect them, usually by registering them on the PPSR. An unregistered creditor (which might have thought it was secured) gets no priority over unsecured creditors. Sometimes there will be more than one secured creditor of a business (for example a bank and a hire purchase provider). The order of registration may be critical in deciding who has the right to recover money on the assets of a business.
Legal ownership is no longer key
Up to now, a financier selling a mobile crane on hire purchase typically relied for its priority on the fact that it was the legal owner of the crane until it was fully paid. Now, if the financier does not register its security interest over the crane, it could (in a contest) lose priority to others. The same is true of a manufacturer selling goods to a supermarket relying on RoT terms in its supply agreement. The manufacturer could also lose priority to the supermarket’s bankers if it does not perfect its interest.
Online registration and searching on the PPSR
The PPSR is the cornerstone of the Act. It is an electronic online register, open 24/7. There will be a limited number of people filing security interests (those who register an account with the RBF). However anybody may search the Register to see if the assets held by a person or business are subject to a security interest. For example if you wish to buy a second-hand car you can check if the seller is free to do so – or is there a security interest that might give priority to the car to someone else? This means that you must be satisfied that when you take the asset, the seller has discharged all relevant security interests.
We are advised by the RBF that no fees will be charged at the outset to file or search at the Registry. That may change over time.
Examples
Mortgage debentures: Many companies have granted mortgage debentures to their banks, giving security over all assets and undertaking of the business. These are security agreements creating security interests over the assets of the businesses. Over time these generalised “securities over everything” are likely to become known as general security agreements.
Bills of sale: These are a common security over specific assets (eg a motor vehicle, generator or a piece of plant and equipment). These are security agreements creating security interests over those specific assets. Over time these securities are likely to become known as specific security agreements.
Share mortgages, assignments over book debts etc. These too create security interests which will require registration.
Leases of equipment: If an owner of goods or equipment leases it to someone else for more than 12 months, this creates a security interest for the lessor/owner. It is important for the owner to understand that it must register a security interest or it may lose its own asset to another creditor. It can no longer rely on its legal ownership.
Goods supplied on account, subject to RoT: This is a less well understood idea, but consistent with the policy of the PPSA. A manufacturer, importer or wholesaler may sell goods to a retailer on terms which say that it retains title to the goods (RoT) clause. This creates a security interest which must also be registered.
Purchase money security interests (PMSIs)
Overriding the priorities discussed so far is the possibility of a perfected PMSI. A PMSI is a special security interest recognised over a specific asset if value was given to the debtor to enable the debtor to possess that specific asset. So, for example, a bank may have a security interest in Company A’s assets via a mortgage debenture granted in 2010. However it would still be out-ranked by a finance company lending money to Company A in 2019 to buy a new bulldozer – under a PMSI provided the finance company registers its interest within the timeframes provided under the PPSA.
What about existing securities?
The PPSA contains transitional provisions to allow secured parties to register existing security agreements (mortgage debentures, bills of sale, etc) on the PPSR and maintain existing priorities. This will take place without the involvement of the debtor. The process must be completed before the end of November.
What about stamp duty?
The PPSA through consequential amendments to the Stamp Duties Act also introduces a new category of documents for stamp duty. These “security agreements” are to be stamped at 1.75% of the principal sum involved. This generally does not change for most businesses. However merchants supplying goods under RoT clauses may have to consider whether their supply agreements require stamping (which may possibly be 1.75% of the upper limit of credit). This could become expensive.
Conclusion
This alert covers only the basic elements of the PPSA. It is aimed mostly at readers who are customers of banks or finance companies, or suppliers/lessors of personal property needing a quick update. Generally, issues of security interests over property are straightforward where a business has one bank or financier. However matters can rapidly become complicated when more than one bank, lessor or hire purchase provider is supplying one business, or suppliers of trading stock use RoT clauses.
If you have any questions or concerns about how the PPSA may affect you and your business or require help with the registration of security interests, please contact either Richard Naidu or Glenis Yee.
Disclaimer
The information and opinions in this Legal Alert are for general information purposes only. They are not intended as specific legal or other professional advice and should not be relied upon or treated as a substitute for specific advice. Munro Leys can accept no responsibility for any loss arising from reliance on the general information contained in this Legal Alert.
[1] a good thing, especially the passing of the Fair Reporting of Credit Act 2016 which affected the operations of Data Bureau
[2] Section 2
Source: Munro Leys Law
