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Fixed and Floating Charges & the Personal Property Securities Act

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Our PPSA team is a member of the federal Attorney General’s PPSA Legal Special Interest Group. The Attorney-General’s PPSA unit has agreed to host a seminar exclusively for MST clients on Tuesday, 10 May 2011. Please note the date now – further details will be provided shortly.

Financiers have traditionally used FFCs to secure their loans. Under the PPSA, FFCs will no longer exist. Both financiers and businesses with FFCs need to prepare for this fundamental change. The new Personal Property Securities Register (PPSR) will commence on 11 October 2011.

The PPSA: transformational legislation

The PPSA introduces an entirely new process to establish and record security interests over personal property (i.e. all property except land, fixtures and water rights). The reforms replace some more than 70 existing Commonwealth, state and territory laws and current registered security interests. The new regime also introduces new terminology.

The new priority rules are particularly important where the issue of insolvency arises. This is because under the PPSA, if a creditor fails to perfect a security interest and the grantor becomes insolvent, the administrator will be able to seize the security interest as part of the asset pool for distribution to all creditors.

Fixed and floating charges and the PPSA

Usually an FFC operates over all of the assets of a company – present and future. Under the PPSA, there is more flexibility to restrict the new security interest to specific assets.

The PPSA defines a security interest as “an interest in personal property provided for by a transaction that secures payment or performance of an obligation”. In order to secure a loan, financiers (known as the secured party) will need to “perfect” their security interest in the property (collateral) provided to the grantor (now known as a chargor or debtor) on the Personal Property Securities Register (PPSR) in accordance with the new legislative requirements. The new system does not provide for a distinction between “fixed and floating charges”, nor does the concept of crystallisation exist under the PPSA.

Under the PPSA:

  • the agreement between the parties (the secured party and grantor) will be known as a “security agreement”
  • an FFC will merely be a security interest which “attaches” to the grantor’s property
  • the property (“collateral”) may be identified as “all present and after-acquired property” (ALPAP) or “all present and after-acquired property; except…” (ALPAPE)
  • the secured party and grantor must agree the extent of the grantor’s ability to deal with the collateral without the secured party’s consent

Currently a floating charge permits the chargor to deal with the charged assets in the ordinary course of its business and it only becomes a fixed charge on crystallisation. Under the PPSA, there is no concept of deferral of time in relation to when a security interest attaches.

General Security Agreements

Registration for the purposes of the PPSR will require the secured party to register a “financing statement” with respect to the security interest. Whereas a financier can now obtain a FFC over a company, under the PPSA the secured party will be required to ask the grantor for a “General Security Agreement” (GSA). The GSA establishes a security interest in an ALPAP (as a specified collateral class) of the company.

The PPSA extinguishment rules are very complex. In essence, a buyer of personal property for value can take the property free of an unperfected security interest in the property if the security interest is not registered on the PPSR. Additionally, financiers who use FFCs to secure loans should ensure they establish comprehensive GSAs with grantors in order to protect their security interests maximally. There are many cases in both New Zealand and Canada where a secured party failed to perfect its security interest and not only lost its priority, but also its claim to the property itself.

What action should you take now?

All FFCs currently registered with ASIC will be automatically migrated to the new PPSR. It is critical you review all existing FFCs and understand how they will be documented under the PPSA. It is also important to note that if there are any errors on current ASIC-registered FFCs, the migrated security interest may be defective.

Irrespective of whether you are a financier (secured party) or a debtor (grantor) you should be taking steps to prepare for the PPSA as soon as possible. The new system is transformational, and requires all businesses to consider any existing financing arrangements and how they might be structured from 11 October 2011.

For further assistance please contact David Boyall or Susan Reece Jones in our Corporate Advisory team.

Send an email to David and Susan