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The Personal Properties Securities Act: A brave new world for SMEs
(PPSA) is a single unified registry for security interests over personal property.

The Personal Properties Securities Act, which came into effect on January 30, 2012 requires the owners of consigned goods to lodge their details with an electronic register - called the Personal Property Securities Register - that can be searched by potential buyers.

Anyone selling personal property on consignment must register if they want to avoid the risk of losing a security interest in their goods should the company selling their items collapse.

"Personal property" can include posessions such as cars, boats, caravans, furniture and machinery - almost anything except land and buildings. Before the act was passed, consignment notes were used to prove ownership.

Oliver Shtein, an executive lawyer at Bartier Perry, said the Act has completely re-written the law of security over personal property, and concerns more than just consignment stock.

"It is difficult to think of a more sweeping reform," Mr Shtein said. "Not only does PPSA re-write the law of securities such as mortgages and charges over personal property, it extends and changes accepted legal concepts, including ownership concepts, in areas [such as] retention of title, hiring and leasing, and consignment sales and floor plans."

The Legal Practitioners Liability Committee has said that the PPS reform will have as big an impact upon the law of personal property as the Torrens Title system has had on real property. For the non-lawyers out there this basically means that the rule book has been torn up and rewritten.

The theory behind the legislation is that by creating greater certainty and transparency in the registration of security interests borrowing costs will decline and lenders will be more willing to extend credit. The experiences of Canada and New Zealand, where personal property security registries have been operational for some time, largely support this reasoning. However, this new legislation is a minefield for the unwary and those who neglect to diligently register all their security interests in a timely manner.

By way of an example applicable to SMEs consider the following:

Company A (a beer distributor) delivers to Company B (a pub) 60 cases of beer. The contractual relationship between Company A and Company B is governed by Company A's standard terms of trade which provide for 30 day credit terms and include a properly drafted retention of title clause. (A retention of title clause provides that, despite having possession, ownership of goods supplied will not pass to a purchaser until the supplier has received payment for the goods.)

Prior to Company A receiving payment for the beer, Company B is deemed insolvent and placed into the hands of a liquidator. Company B had previously granted a general security interest over all present and after acquired property to Big Bank as security for a loan. Big Bank had registered its general security interest over Company B's personal property whereas Company A had not registered its security interest in the beer it delivered to Company B.

Historically, Company A would have been able to rely upon the retention of title clause in its trading terms. However, under the PPSA Big Bank will have a priority over the beer as the holder of a registered security interest. Therefore, under the PPSA in circumstances like that described above possession will trump ownership as it is traditionally understood.

This is a concise and simplified example but it serves as a useful warning of how it is possible for businesses to suffer significant losses if they ignore the changes brought about by the PPSA. That property extends to almost everything except most buildings.

The importance of the registry is this: if you register your property, you’ll be treated as a secured creditor, rather than an unsecured creditor, in the event of a company collapse. “If you’re a supplier, then just register, register, register. Set and forget.”