Are you sure you have done enough to protect your interests when buying or leasing a motor vehicle?

Twelve months ago the Personal Property Securities Act 2009 (Cth) (PPSA) established a new national system for registering security interests in personal property - including motor vehicles and other serial numbered property. This article aims to assist banks and customers who are impacted by the new system.

The PPS register can tell a buyer or lessee whether or not a motor vehicle has a security interest attached to it (an interest in the vehicle which secures a debt or some other obligation). If a buyer or lessee acquires a vehicle subject to a security interest, the holder of that security interest may be able to repossess it. Performing a search on the PPS register can alert buyers and lessees to this important aspect before they enter into a sale or lease.

Interestingly, ITSA has recently reported that the most common type of search in the December quarter of 2012 was by serial number (933,254) and of those searches motor vehicles accounted for the vast majority.

What is serial numbered property?

The PPS regulations specify the kinds of personal property which may or must be described by its serial number. These include motor vehicles, watercraft, aircraft and certain IP (ie designs, patents, plant breeder’s rights, trade marks, or licences over those assets).

Where a security interest is over consumer property (ie property held by a natural person which is not used for carrying on an enterprise to which an ABN has been allocated) then motor vehicles, watercraft, aircraft and certain IP must be described by serial number.

Registration by serial number is optional for commercial property (except aircraft), but serial numbers should be stated where possible to avoid buyers and lessees taking free of security interests. Serial numbers are compulsory for commercial property that is an aircraft or parts of an aircraft.

Taking serial numbered property free of security interests

Buyers and lessees can acquire motor vehicles and other serial numbered property free of security interests:

• if the PPS register shows no security interest registered against that property: ss 44 and 45. The relevant search must be done immediately before the sale or lease (or up to the previous day in the case of a motor vehicle). This places the onus for missing or incorrect serial number registrations on secured parties.
• when the seller or lessor is a licensed motor vehicle dealer. In these circumstances, there is no need for the buyer or lessee to search the PPS register.
  
  

Example

Jack’s company obtains a number of cranes under a hire purchase arrangement with Big Bank. Big Bank is satisfied with Jack’s credit rating and only elects to register generally against all of the cranes. Jack’s company starts to experience short term funding difficulties and decides to sell one of the cranes to Mary even though Jack has not paid Big Bank for the final two instalments on that crane. Mary is aware that the PPSA came into effect last year and performs a search on the PPS register by reference to the crane’s serial number which does not disclose Big Bank’s security interest. As a result, Mary takes the crane free of Big Bank’s interest because she has searched the PPS register by reference to the crane’s serial number, and the search did not reveal Big Bank’s interest.

Exceptions

Buyers and lessees will not take free of security interests even after performing a search of the PPS register, and not finding a registered security interest, in the following situations:

• The buyer or lessee holds the property as inventory, either for themselves or on someone else’s behalf.
• The buyer or lessee was a party to the transaction that created the security interest.
• In relation to motor vehicles only:
  • The secured party is in possession of the motor vehicle immediately before the time of the sale or lease.
  • The motor vehicle is bought at a sale held by or on behalf of an execution creditor.
  • The buyer or lessee has actual or constructive knowledge of the security interest.

Secured party’s rights and remedies

Although buyers and lessees can take free of security interests in serial numbered property as outlined above, secured parties have the following rights and remedies available to them.

Proceeds

Where the proceeds of the sale or lease of property are identifiable or traceable, the secured party’s interest automatically attaches to those proceeds unless the security agreement that created the security interest provides otherwise: s 32.

Reattachment

If the property is taken free of a security interest, but is repossessed by the seller or lessor, the security interest reattaches to that property, and (where the security interest had been perfected by registration) the perfection status of the security interest is unaffected: s 37.

Subrogation

If a buyer or lessee takes the property free of a security interest, the secured party's rights are subrogated to the rights of the seller or lessor: s 53. In that case the secured party can recover unpaid amounts owing to the seller or lessor directly from the buyer or lessee.

Example

Bob owns a fleet of trucks which he hires out to a number of construction companies. Bob obtains a loan from Big Bank to expand his business which is secured against the trucks. Big Bank registers its interest on the PPS register against all of Bob’s trucks but, critically, does not register its security interest against each truck’s serial number. Following this, Bob sells one of the trucks to Jane. Before Jane buys the truck, she performs a search on the PPS register by reference to the truck’s serial number. The search does not reveal Big Bank’s security interest. Accordingly, Jane takes the truck free of Big Bank’s interest because she has searched the PPS register by reference to the truck’s serial number, and the search did not disclose Big Bank’s interest. Although Big Bank’s interest in the truck is extinguished, its security interest would attach to any identifiable or traceable proceeds that Bob received from Jane on the sale. However, if Bob had not been paid by Jane for the truck, Big Bank could take over Bob’s rights and recover payment directly from Jane. On the other hand, if Bob had leased the truck to Jane (instead of selling it to her), Big Bank would have rights to the rent payable under the lease as proceeds and Big Bank’s interest would re-attach to the property at the end of the lease.

Transitional provisions

The ability of a buyer or lessee to take free of a security interest as outlined above does not apply to security interests in aircraft and certain IP under a security agreement that was in force immediately before 30 January 2012 and that continues to be in force today. Secured parties should start preparing to register against any valuable aircraft and IP before the benefit of the transitional provisions ends in 12 months time.