Newsletter July Corporate / Mergers & Acquisitions Tokyo. Changes to personal property security in Australia. Overview.

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1 Corporate / Mergers & Acquisitions Tokyo Newsletter July 2011 Changes to personal property security in Australia The law of personal property security is set to be revolutionised the new legislation will affect lenders and borrowers of all kinds. It will also affect many transactions which have not previously been thought to be security arrangements by deeming them to give rise to security interests. The new legislation will change the legal landscape for secured transactions in a fundamental way and you need to be aware of the implications of these changes. While it is not expected that the legislation will apply until October 2011, the legislation's commencement date was in December As the changes will be significant, you should start planning soon how to respond to the new law. Overview The Personal Property Securities Act 2009 (Cth) (PPSA) commenced on 15 December 2009, and is expected to apply from October The PPSA is based on the equivalent personal property securities legislation adopted in New Zealand and Canada. Corresponding amendments have also been made to the Corporations Act 2001 (Cth) (Corporations Act), in the Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth) which will start to apply from the date the PPSA starts to apply. The aim of the PPSA is to create a single registry for security interests (PPS Register) that applies regardless of the legal personality of the entity that creates the security interest, be it a natural person, company or other entity. An express intention in the approach taken by the PPSA is to look to the substance of a transaction rather than its strict legal form in order to determine whether a transaction is a security interest. The intention is that it should not be possible to structure a transaction which is in substance a security arrangement as another type of transaction so to avoid the effect of the legislation. Key changes The following are some of the key changes. Expansion of registrable security interests: Under the PPSA, far more forms of security will be registrable than under the Corporations Act. Under the Corporations Act, only certain charges are required to be registered (registrable charges) and those that do not fall within the specific list of registrable charges are expressly excluded. However, under the PPSA, as a general rule, any arrangement which has the effect of "in substance" securing a payment or performance of an obligation is considered to be a security interest and is registrable. Unlike the Corporations Act, the type of the property being secured generally will not affect whether the security is registrable.

2 Other transactions not traditionally considered "security": Due to the expansion of registrable security interests noted above, certain transactions will be considered to be a security interest, despite them not traditionally being considered a form of "security" at general law. These include interests relating to leases of goods, consignments (whether commercial consignments or not) and conditional sale agreements (including retention of title arrangements). A creditor under one of these arrangements may be entitled to priority as the holder of a purchase money security interest if that creditor perfects its interest and otherwise meets the requirements for a purchase money security interest. Deemed security interests: In addition, certain transactions which do not purport to secure a payment or performance of an obligation will be deemed to create a security interest under the PPSA. These include interests relating to: leases of goods (land is expressly excluded) with a term of more than one year (or for a term of 90 days for goods (such as motor vehicles) that must be described by serial number according to the regulations); assignments of accounts receivable; and commercial consignments. For example in the case of an equipment lease with a term of more than one year, even though the terms of the lease will state that title to the equipment remains with the lessor, the legislation expressly deems the lease to create a security interest with the result that if the lessor has not registered its "lease" as a security and the lessee becomes insolvent (and a voluntary administrator or liquidator is appointed), the lessor will effectively be an unsecured creditor in the administration or liquidation and have no enforceable ownership interest in the equipment. Leases of goods which are serially numbered, where the lease has a duration of more than 90 days, are treated in the same manner. A creditor under one of these arrangements may also be entitled to priority as the holder of a purchase money security interest if it perfects its interest. Attachment, enforcement against third parties and perfection The PPSA introduces new key concepts in the creation and registration of security interests. Attachment Under the PPSA, a security interest will not be enforceable against a grantor unless it has attached to personal property (collateral). A security interest will attach to personal property when the grantor has rights in the collateral and the secured party has given value or the grantor does an act by which the security interest arises (such as signing a security agreement or handing over the share certificates for security over shares). 2 Changes to personal property security in Australia July 2011

3 Enforceable against third parties A security interest will be enforceable against third parties if, the security interest is attached to collateral and: a) the secured party has taken possession; b) the secured party has taken control over property capable of being controlled in accordance with the PPSA; or c) a written security agreement is in place with the grantor that covers the collateral in accordance with the requirements of the PPSA. Perfection To ensure the security interest obtains the appropriate priority over competing security interests in the same property, and is enforceable in any subsequent administration or liquidation of the grantor, the security interest must be perfected. A security interest will be perfected if all of the following apply: a) it is attached to collateral; b) it is enforceable against third parties; and c) in respect of property not in the possession or control of the secured party, if the security interest has been effectively registered on the PPS Register within the time limits prescribed. There is no requirement under the PPSA as to the order of attachment and any of the other steps required to complete perfection. Attachment is a necessary element of perfection, but does not need to occur before the other steps required for perfection are undertaken. If a security interest is perfected by registration on the PPS Register, the period of registration will be for seven years for consumer property and serialnumbered goods, and 25 years or indefinitely for equipment and inventory. To maintain a security interest on the PPS Register, and hence maintain its perfection and priority, the registration of a security interest may be amended in corresponding seven year or 25 year increments. Given the importance of perfection in relation to maintaining priority, you should ensure that appropriate procedures and systems are implemented to monitor the registration times of each security interest. Priorities and PMSIs The legislation will introduce complex rules regarding the priority of competing security interests which will differ from those that currently apply under the common law and the Corporations Act. Importantly, priority will not depend on title to the property. The general principle under the PPSA is that for perfected security interests, priority is determined by time of registration of the security, unless the security is perfected by control or possession, in which case priority is determined by the time of control or possession. Unperfected security interests will always rank behind perfected security interests, even where the security interest which is perfected is created second and the holder of that security has knowledge of the other security created earlier. Rules apply to tracing the priority of a security interest through proceeds of sale of secured property acquired with the cash proceeds of sale. The priority of a security interest will extend to all amounts secured. That is, the PPSA displaces the common law rule against tacking and the rules relating to maximum prospective liability under the Corporations Act. 3 Changes to personal property security in Australia July 2011

4 Under the PPSA, a certain class of secured creditors can obtain super priority over other perfected security interests. These are purchase money security interests (PMSIs). There are rules regarding the creation and effective perfection of PMSIs. These rules are designed to give equipment lessors, receivables financiers and retention of title suppliers (who will constitute secured parties under the new "in substance" test of a security interest) an ability to obtain first priority, if they are able to comply with the PPSA's requirements. Transitional period Prior security interests which have been created and registered on certain other registers (such as the ASIC register for company charges) will be migrated to the new PPS Register. For existing security interests for which this does not occur, there will be a window of approximately two years within which the security will be deemed registered to give parties time to carry out registrations (although it is worth noting that these transitional rules will not give PMSI priority status to the holders of PMSIs who would do well to promptly register their PMSIs). Priority of pre-existing security interests will be compromised if they are not registered within this two year window. The transitional provisions will also govern the relative priority between these security interests and other security interests created after the implementation of the PPSA. Industries affected It is too early to have a complete picture now as to how different industries will be affected in practice. However, some of the industries that will be significantly affected include: Financial institutions: Banks and financial institutions will have to adapt their policies, systems and procedures to comply with the new legislation. Equipment leasing and receivables financing: The equipment leasing and receivables financing industries will be two of the most affected industries. Financiers of this sort will have to implement a system for registration of security interests where in the past they have not needed to do so. Corporate borrowers: Borrowers who have used equipment leasing and receivables financing products will also be affected. They will have to assess whether they will comply with their current banking and other contractual obligations (e.g. where they have given a negative pledge not to create security, they will need to assess whether equipment leases, receivables financings or purchase of goods on retention of title terms will put them in breach). Suppliers: Suppliers of goods on retention of title arrangements will need to adopt internal procedures to ensure that their interest is protected through registration of their security interest in the goods. 4 Changes to personal property security in Australia July 2011

5 For further information please contact Tokyo Hiroshi Kondo hiroshi.kondo@bakermckenzie.com Insolvency practitioners and litigators: The PPSA sets out detailed rules in relation to enforcement of security interests. These rules distinguish security interests over consumer goods and security interests over non-consumer goods. The enforcement and priority rules in the PPSA will also intersect with the external administration provisions in Chapter 5 of the Corporations Act (which have been amended pursuant to the Personal Property Securities (Corporations and Other Amendments) Act Owners and users of intellectual property: The PPSA sets out detailed rules in relation to taking security over intellectual property. Fumiko Niimura Senior Associate fumiko.niimura@bakermckenzie.com Baker & McKenzie GJBJ Tokyo Aoyama Aoki Koma Law Office (Gaikokuho Joint Enterprise) The Prudential Tower , Nagatacho Chiyoda-ku, Tokyo Japan Tel Fax Sydney Howard Fraser howard.fraser@bakermckenzie.com Bryan Paisley bryan.paisley@bakermckenzie.com Tetsuo Tsujimoto Senior Associate tetsuo.tsujimoto@bakermckenzie.com Baker & McKenzie Level 27, 50 Bridge Street Sydney, NSW 2000 Australia Tel: Fax: Baker & McKenzie. All rights reserved. Baker & McKenzie GJBJ Tokyo Aoyama Aoki Koma Law Office (Gaikokuho Joint Enterprise) is a member firm of Baker & McKenzie International, a Swiss Verein. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm. This Publication has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this Publication is not an exhaustive treatment of the area of law discussed and no responsibility for any loss occasioned to any person acting or refraining from action as a result of material in this Publication is accepted by Baker & McKenzie. This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. 5 Changes to personal property security in Australia July 2011