What you should know about the Personal Property Securities Register (PPSR)
Prior to Personal Property Securities (PPS) reform, security interests in aircraft were predominantly created by way of mortgage or fixed and floating charge, which were registered on the Australian Securities and Investment Commission (ASIC) Register of Company Charges. Registration and the relative priority of these interests were governed by the Corporations Act 2001 (Cth). However, despite provision for one under the Air Navigation Act 1920 (Cth), no separate register was created for security interests in aircraft. The Australian Civil Aircraft Register, provided for by the Civil Aviation Safety Regulations 1998 (Cth), does not record security interests in an aircraft; it records the aircraft for the purpose of designating Australian nationality to it.
The effect of PPS reform on security interests in aircraft
On 30 January 2012, the Personal Property Securities Act 2009 (Cth) (PPS Act) commenced in Australia and established a new system for the registration of security interests in personal property. Personal property is generally all property other than land, fixtures and certain statutory interests. Importantly, aircraft is personal property to which the PPS Act applies and security interests in aircraft can be registered on the PPSR.
The PPS Act broadens the concept of a ‘security interest’; the definition looks at what the effect of the transaction is rather than the form it takes. Essentially, it is whether the transaction provides for an interest in personal property in order to secure payment or performance of an obligation.
How are leasing arrangements treated under the PPS Act?
As a result of this wider concept of security interest, some transactions that have not been traditionally regarded as creating security interests will be treated as doing so. For example, because they effectively secure an obligation, finance leases and hire purchase agreements are regarded as creating security interests under the PPS Act.
However, leases for a term of more than one year or more or for an indefinite term are known as ‘PPS leases’ under the PPS Act and are treated as having created a security interest in the property leased. This is so whether or not the transaction actually secures payment or performance of an obligation; consequently, a long-term operating lease may result in the lessor being a secured party under the PPS Act.
How are retention of title (ROT) arrangements treated under the PPS Act?
A term of an agreement that provides that property is sold or leased on the basis that the purchaser takes possession of the property but legal ownership, or title, to the property remains with the seller until full payment for the property is made is commonly referred to as a retention of title, or ‘Romalpa’ clause.
The PPS Act recognises that ROT arrangements effectively use the property sold or leased to secure the payments owed. The transaction creates a security interest and the owner of the property supplied is a secured party. As a result, a supplier who sells on ROT terms may be at risk of losing its ownership interest in the property if the security interest is not registered on the PPSR.
The terms of supply agreements and leases may need to be reviewed by business owners or their business advisors to determine whether they come under the PPS Act.
Why register on the PPSR?
An important aspect of the PPS Act is that it does not generally have regard to the identity of the owner of the property the subject of a security interest when determining priority between two or more security interests in the same property. For example, a security interest that is created as an incident of ownership, such as the interest of a lessor of a small aircraft, will have its priority against another security interest determined by the priority rules in the PPS Act rather than by the fact that the lessor is the owner of the property.
The PPS Act generally requires the registration of security interests in order for priority to be maximised. As a simple example, a registered security interest will have priority over an unregistered security interest despite being created after the unregistered security interest and regardless of whether there was knowledge of the existence of the earlier interest.
Also if a secured party, such as a lessor, fails to register its security interest, it could lose its property in the event that the lessee becomes bankrupt or is placed into liquidation; it could also lose its interest in the property if the security interest is unregistered and the property is subsequently sold or leased. In the case of serial numbered goods, discussed further below, a failure to register by serial number may also result in the loss of a security interest in the property.
What are the details asked for when registering a security interest in aircraft on the PPSR?
The PPS Act and the Personal Property Securities Regulations 2010 (Cth) set out the details required when registering security interests on the PPSR. For the purposes of registration, ‘aircraft’ is a collateral class that requires further description by sub-class. A secured party must identify whether the property used as security can be described as an aircraft engine, airframe, helicopter or small aircraft.
The PPS Regulations provide that aircraft engine, airframe and helicopter have the meanings given by the Protocol on Matters Specific to Aircraft Equipment (the Aircraft Protocol), which is a Protocol to the Convention on International Interests in Mobile Equipment. The definitions are set out in the appendix to this document. When describing any of those types of property in a registration, three identifiers must be included whether the property is commercial or consumer property.
A registration must include the manufacturer’s number, the manufacturer’s name and the manufacturer’s generic model designator. A failure to include the relevant serial number in a registration will render the registration ineffective and will also see a buyer or lessee of the property ‘take free’ of any security interest in the property. In the case of airframes and helicopters, the PPSR also provides the option of including the aircraft nationality and aircraft nationality code and registration in accordance with the Convention on International Civil Aviation (the Chicago Convention); however, the failure to include these will not affect the effectiveness of the registration.
‘Small aircraft’ is defined by the PPS Regulations as an aircraft other than an airframe, aircraft engine or helicopter. Small aircraft are to be identified in a registration by Nationality Code and registration mark assigned to it under the Chicago Convention. Registration under the convention is about security interests in the mobile parts of the aircraft rather than the aircraft as a whole, and consequently separate identifiers are needed for those parts. Mobile parts are each of significant value, and may be financed separately to other parts of the aircraft.
Does a PPS Act security interest have priority over a statutory lien under the Air Services Act 1995 (Cth)?
A statutory lien over aircraft arising under the Air Services Act 1995 (Cth) because a service charge has not been paid in full by the due date, will take priority over a security interest in the same aircraft provided that the lien was incurred first.
Cape Town Convention
The Convention on International Interests in Mobile Equipment (the Convention) and the associated Protocol on Matters Specific to Aircraft Equipment (the Protocol) provide an international system for registration and priority of security interests in aircraft (given their mobility) with the aim of reducing the cost of finance.
Legislation is in place so that the Convention and Protocol will prevail over other Australian laws to the extent of any inconsistency. This ensures that international businesses can be confident that the Convention and Protocol have their full effect in Australia.
It should be noted that, for personal property subject to the Protocol, a security interest in an aircraft asset registered with the International Registry of Mobile Assets will have priority over a registration on the PPSR, even if that registration was registered on the PPSR first. For this reason you should consider creating and checking for registrations on both the PPSR and the International Registry of Mobile Assets.
The International Registry of Mobile Assets can be accessed at www.internationalregistry.aero.
PPS transitional Provisions
For more information on the PPS transitional provisions including transitional security interests and migrated registrations please see ‘Transitional provisions’.
Professional advice recommended
PPS could affect you or your business in a number of different ways. You should seek professional advice in relation to your specific circumstances.
Appendix: Aircraft Protocol definitions
The Aircraft Protocol contains the following definition of ‘aircraft engines’.
‘Aircraft engines’ means aircraft engines (other than those used in military, customs or police services) powered by jet propulsion or turbine or piston technology and:
- in the case of jet propulsion aircraft engines, have at least 1750 lb of thrust or its equivalent, and
- in the case of turbine-powered or piston-powered aircraft engines, have at least 550 rated take-off shaft horsepower or its equivalent, together with all modules and other installed, incorporated or attached accessories, parts and equipment and all data, manuals and records relating thereto.
The Aircraft Protocol contains the following definition of ‘airframes’.
Airframes means airframes (other than those used in military, customs or polices services) that, when appropriate aircraft engines are installed thereon, are type certified by the competent aviation authority to transport:
- at least eight persons including crew, or
- goods in excess of 2750 kilograms
together with all installed, incorporated or attached accessories, parts and equipment (other than aircraft engines), and all data, manuals and records relating thereto.
The Aircraft Protocol contains the following definition of ’helicopters’.
Helicopters means heavier-than-air machines (other than those used in military, customs or police services) supported in flight chiefly by the reactions of the air on one or more power-driven rotors on substantially vertical axes and which are type certified by the component aviation authority to transport:
- at least five persons including crew, or
- goods in excess of 450 kilograms,
together with all installed, incorporated or attached accessories, parts and equipment (including rotors), and all data, manuals and records relating thereto.