Australian businesses are unaware and unprepared about the new personal property securities legislation commencing May 1 next year.
The new legislation will have far reaching implications for the business sector in the same way the introduction of the GST impacted owners and managers early this decade.
The proposed widespread changes require businesses to register their ‘security interests’ over all their assets on a 24/7 national online register.
The Personal Property Securities Act 2009 (Cth) establishes a single national law governing security interests over tangible and intangible assets, but excludes real property.
Personal property can include tangibles, such as cars, boats, machinery and crops but also intangibles, such as shares, intellectual property, receivables and contract rights.
The legislative reform brings together 70 separate acts and related statutes and registration processes across Australia into one Act, and one national database of security interests operated by the Insolvency and Trustee Service Australia (ITSA).
And while the cost of registering is small, businesses will have to absorb much larger compliance costs to protect their businesses, with higher costs which arelikely to be passed onto consumers.
But the short time frame for implementation is already drawing fire as similar legislation introduced in 2002 in New Zealand was given two years to roll out.
Australian businesses will have 10 months to understand the new laws and develop internal processes.
Clearly, businesses will need to dramatically change the way they’re managing their assets to comply with the new legislation, and factor in much higher compliance costs.
And there are other costs to bear.
Registration of security interests will cost businesses anywhere between $1 and $3, and if you have thousands of interests to register, the amount adds up substantially.
Manufacturers and suppliers of goods in particular will need to register security interests over all goods that are supplied to retailers, for example, to minimize the risk of title over products being defeated if that business fails.
And for certain classes of goods such as motor vehicles or boats, the Act requires serial numbers to be recorded in the financing statements under which the security interest is to be registered.
If you own an asset but fail to register it within a specified time period, you could lose it even though you own it.
Businesses will have 20 business days to register their security interests after creating a security agreement.
This is where the heavy-lifting starts for businesses because not only do they have to register their security interests, but they also have to keep track of all registrations.
Staff will need training and guidance on how to register a security interest, and particularly what constitutes an ‘interest’.
Also, electronic and hard copy of records will need to be kept to ensure businesses know what security interests are registered.
But the key issue is what happens when the business you supplied with product, for example, goods on credit, deferred payment or on consignment, fail?
These types of transactions are quite common in the retail industry.
The issue is: if you fail to register your interest, the customer in possession of your goods could give others – such as a Bank or other financiers – a better claim to those goods than your ownership claim.
This is further evidenced if you lease goods to suppliers, and a Bank or other financial institution registers a security interest over the goods before you, then you will have a problem if the supplier becomes insolvent because the Bank will have a better claim on the goods than you.
Therefore, you cannot repossess your goods.
If you have not registered your security interest on the database you may have foregone your rights of ownership, and your claim over the goods will be grouped with other unsecured creditors.
Before it becomes too late it would be sensible to discuss with your business/insolvency advisers matters to address before next May;
Some of the important matters you need to address include:
Checklist
- First, review all assets the company owns, and determine what needs to be registered,
- Review all your loans, and assess what collateral has supported those loans?
- If you sell goods, you should review your standard contract and terms,
- If you lease goods then compile an inventory of lessees, and be ready to register your security interests on day one,
- What intellectual property licenses, investment instruments or shares does the company hold?
- If you are involved in a joint venture then review the interests of the joint venture,
- What training does the company have to undertake for staff?
- What IT processes and protocols does the company have to create to ensure a streamlined, up-to-date database of all the company’s security interests.
- And finally, ensure your inventory of registered security interests is kept up-to-date.
