Nemo No More – Title after the PPSA

• Published on 29th May 2012


• by Abraham Schwarcz (View profile)

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The introduction of the Personal Property Securities Act 2009 (Cth) (“PPSA”) earlier this year represents a seismic shift in the Australian legal landscape. Among the most significant reforms is the virtual elimination of the Nemo Dat¹ rule in relation to personal property.

Security Interest

Section 12(1) of the PPSA introduces the concept of a “security interest”, which is a cornerstone of the new regime:

A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).

Section 12(2) of the PPSA provides a number of examples of a security interest including:

• A conditional sale agreement (including an agreement to sell subject to retention of title).²
• A provision of personal property on a consignment basis.³
• A lease of personal property.⁴

These examples are instances where title to personal property is retained by one party (“A Co”) despite possession of the personal property passing to another party (“B Co”).

Position Pre-PPSA

Previously, if A Co were to provide personal property pursuant to a reservation of title clause or consignment to B Co or lease personal property to B Co and B Co was subsequently placed into liquidation, A Co would be entitled to approach the liquidator and retake the personal property in question and have that personal property excluded from the pool of property available to the unsecured creditors. The priority afforded to A Co was based on the Nemo Dat rule which meant that B Co’s liquidator could not achieve better title to the personal property than B Co itself.

The approach of the PPSA

The introduction of the PPSA practically rendered irrelevant A Co’s title to the personal property in a dispute with B Co’s liquidator. If A Co wants to preserve its priority to the personal property under the PPSA it will now be required to register its security interest on the Personal Property Security Register (“PPSR”).

Generally, the priority between the holders of registered security interests is established by the order in which the security interests are recorded on the PPSR. Sales of personal property pursuant to a reservation of title clause, consignments of personal property or leases of personal property give rise to what is now known as a Purchase Money Security Interest (“PMSI”) which, if registered within the time periods stipulated in the PPSA, will give the PMSI holder a priority over the holders of prior registered non-PMSI security interests.

NZ Experience

The PPSA was based heavily on the equivalent legislation passed in New Zealand in 1999. New Zealand has developed a body of case law around its PPSA which would, according to most commentators, be persuasive on Australian courts when they apply the PPSA.

In the case of Graham v Portacom New Zealand Ltd,⁵ Portacom was in the business of leasing portable buildings and entered into a lease with NDG Pine Ltd in respect of a number of portable buildings for an indefinite period. NDG had a debenture facility with a bank and provided the bank with a security in the form of an all assets charge (previously known as a fixed and floating charge) which the bank registered on the New Zealand PPSR. Portacom failed to register its security interest in the portable buildings New Zealand PPSR. NDG fell into default under its obligations under its facility with the bank and as a consequence the bank appointed a receiver to take possession of the property of NDG, including the leased portable buildings owned by Portacom. The court held that Portacom’s failure to register its security interest resulted in it losing its rights to the portable buildings which, in turn, resulted in the assets becoming available to the bank (through its receiver). The case of Waller v New Zealand Bloodstock Ltd,⁶ based on similar facts to Portacom, affirmed the position in Portacom.

Transition to the PPSR

In order to allow for a smooth transition into the new system, the PPSA allows for a 2 year period starting from the commencement date (30 January 2012) within which to register all security interests that were in existence immediately prior to the commencement date (“Transitional Security Interests”) on the PPSR. During the transition period, all Transitional Security Interests will be considered to be temporarily protected until they are permanently protected by registration on the PPSR. It is important to note that the temporary protections will only be afforded to Transitional Security Interests and not to security interests created after the commencement date.

Action Item

Clients who supply stock on reservation of title or on a consignment basis or clients who provide personal property on lease terms must review their customer documents for PPSA compliance and consider the utility ofregistering their security interest on the PPSR.

Morgan Lewis is currently assisting clients with their PPSA risk and compliance issues.

Published in: Banking & Finance, Corporate & Commercial, Insolvency, Litigation & Dispute Resolution