Are you PPS protected? How PPS regimes affect your ICT operations

Key points to consider

Personal property securities (PPS) legislation establishes a single, national regime to regulate security interests in personal property. PPS legislation creates a register of security interests, enabling secured parties to give notice of security interests.
While PPS legislation normally represents a complete overhaul of the laws surrounding the use of personal property as credit, PPS legislation also affects a wide range of commercial transactions (not just lending transactions), and can have significant commercial implications for your business if you are not “PPS-ready”.
We have seen a wave of PPS legislation enacted across the Pacific. In this article, we focus on how PPS affects businesses operating in the information and communication technology (ICT) sector.

Overview

It’s an exciting time to be operating in the Pacific Islands region, with telecommunications projects and finance reform modernising and simplifying the way we do business. We have seen in recent years personal property securities (PPS) regimes adopted across the Pacific, with Fiji’s Personal Property Securities Act also expected to come into force. At the same time, the region has seen several exciting telecommunications projects including, notably, the Australian Government-funded Solomon Islands ‘Coral Sea Cable System’ which is targeted to be completed by the end of next year.

PPS legislation represents comprehensive reform to the financial sector in a jurisdiction, greatly improving access to credit. Coupled with increased investment in the telecommunications industry, promising cheaper, faster and more reliable telecommunications service and greater connectivity (both within the region and beyond), there is certainly a lot to be excited about. But with so much change in the air, have you considered what impact PPS legislation has on your ICT business?

In this article, we will consider how PPS impacts on some commercial arrangements typical of ICT businesses, as well as the steps you can take to ensure you are “PPS-ready”.

Business owners should note that many of the concepts discussed below are not peculiar to the ICT sector, and the principles will apply across many sectors in your economy.

PPS – some key concepts

The Pacific Legal Network has written (at length!) on PPS legislation across the Pacific Islands. While each jurisdiction has different legislative nuances, as a brief overview (or a refresher to those familiar with PPS) –

Personal property can mean many kinds of both tangible and intangible property, excluding real property. Examples include cars, household goods, business inventory, intellectual property.[1]
Personal property is known as collateral once it is (or it is anticipated to be) the subject of a security interest.
A security interest means a property right in collateral that secures payment or performance of an obligation.
A security interest is enforceable against the debtor[2] once it attaches to collateral. Attachment occurs when:
each debtor has signed a security agreement;
value has been given by the secured party; and
the debtor has rights in the collateral.
A security interest is enforceable against third parties when it has attached to the collateral and a means of perfection has been completed.
The main means of perfection are:
filing a notice on the personal property securities register (Register);
possession of the collateral; or
control of the collateral.
If a security interest is perfected, it takes priority over another unperfected security interest. Priority is measured from the earliest to occur of a filing of a notice or perfection by other means.
Registration is the practical method of choice when it comes to perfecting security interests, and can be used in conjunction with the other means of perfection.[3]
The Register allows you to electronically file notices of security interests and search the Register to view details of any registered security interests.
Whoever has the highest priority has the right to enforce their security interest prior to other secured parties.

The treatment of title and the PPS regime

PPS has changed the way we think about the importance and treatment of ownership and retaining title to property.

Prior to PPS, retaining title to property reigned supreme, providing protection of sorts in the event of a priority dispute. Under PPS regimes, title is not relevant for most transactions, and a title-based claim (in and of itself) will be ineffective in the event of a default.[4]

What this means is that even if you retain ownership to property, your status as “owner” will not protect you unless you perfect your security interest under the PPS legislation.[5]

ICT commercial arrangements caught by PPS legislation

Example # 1: Customer contracts and retention of title (‘ROT’) clauses

Customer contracts for the supply of software or hardware are at the core of many ICT businesses. For example, your business may involve the supply of software or hardware to customers. These customer contracts usually include a ROT provision, whereby you retain title to the property in question until the purchase price for that product is paid in full by the customer.

Prior to the enactment of PPS legislation, such arrangements were not typically treated as ‘security interests’ under the law.[6] So long as you retained title, you were protected in the event of a customer default.

However, under the PPS regime, ROT arrangements give rise to a security interest. To ensure you are protected if your customer defaults, you need to perfect this security interest in accordance with the PPS rules. Failure to perfect the security interest means that even though you hold title you are not automatically prioritised and protected in the event of a customer default.

Example # 2: Leasing equipment to your customers

ICT operations also often involve the lease of equipment to customers; for example, leasing a printer or other hardware to your customer under a leasing arrangement, where you, as the lessor, retain ultimate title to the equipment.

Under PPS legislation, financing leases and bailments may be deemed to create security interests (depending on the duration of the lease).[7] This means that in the event of a customer default, your interest in the equipment will be governed by PPS rules.

If you fail to register your security interest, you won’t have access to the protections under PPS regime, and may face losing vital business assets if your customer defaults.

Example # 3: entering into a hire-purchase agreement

Your customer arrangements may also include hire-purchase agreements, where your customers hire equipment from you, paying for the purchase price in instalments, akin to rent for use of that equipment. In this example, you retain title to the equipment until such a time as the customer has repaid the total purchase price.

This transaction would likely give rise to a security interest, in that it involves securing payment or performance of an obligation by the customer (i.e. to pay the purchase price). This means that this hire-purchase agreement would be caught by PPS legislation, creating a security interest. Failure to perfect this security interest may prove fatal if the customer defaults.

How can you protect your business?

PPS legislation can affect a wide spectrum of commercial arrangements. We have seen businesses taken by surprise and left in an unprotected position as an unsecured creditor simply because they were not aware that their commercial arrangements had given rise to a registrable security interest.

While registration may increase your administrative burden, it’s important you consider your commercial arrangements to identify whether a security interest is created and should be registered.

The Pacific Legal Network has advised extensively on PPS legislation across the Pacific Islands region. We can:

review your customer terms and conditions to identify whether a security interest is created;
review any equipment leasing arrangements;
amend your commercial arrangements to include PPS provisions;
ensure your security interests are perfected.

Remember: these issues apply to any sector in your economy, not just the ICT sector!

For more information, please contact one of our team.

[1] In the Solomon Islands Secured Transactions Act 2008, this is referred to as “moveable property”. For ease of reference, we have used the terminology “personal property”, which is more commonly used throughout the region.

[2] Different jurisdictions use different terminology, referring to “debtor” or “grantor”. For ease of reference, we have used the term “debtor” throughout this article.

[3] Ian Davidson, ‘Overview of the new Personal Property Securities Law’ (2011) 35 Aust Bar Rev 93.

[4] Stuart Butterworth, ‘Reconceptualising the supremacy of title under the Personal Property Securities Act 2009 (Cth)’ (2012) 20 APLJ 173, 2.

[5]Ian Davidson, ‘Overview of the new Personal Property Securities Law’ (2011) 35 Aust Bar Rev 93.

[6] Stuart Butterworth, ‘Reconceptualising the supremacy of title under the Personal Property Securities Act 2009 (Cth)’ (2012) 20 APLJ 173, 2.

[7] In Australia, for example, a lease may be deemed to be a PPS lease if it has a duration of 2 years. This has increased from 1 year since the Personal Property Securities Act 2009 (Cth) passed into law.