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The Department of Home Affairs has issued its draft guidance “Modern Slavery Act 2018: Draft Guidance for Reporting Entities” (Draft Guidance) for the new Modern Slavery Act 2018 (Cth) (the Act).
As you may be aware, the transitional period under the Personal Property Securities Act 2009 (Cth) (PPSA) comes to an end on 31 January 2014.
What is the PPSA Transitional Period?
The PPSA - Background
The PPSA commenced on 30 January 2012 and implemented a single national law creating a uniform approach to personal property securities.
The PPSA provides for a transitional period during which existing security interests over personal property are ‘temporarily perfected’, meaning that such security interests maintain their pre-PPSA priority. This period of protection ends on 31 January 2014.
A security interest is defined under the PPSA as ‘an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation’.
A transitional security interest is defined as a security interest provided for under a security agreement in existence before 30 January 2012.
Accordingly, any security interest which is a transitional security interest which was not previously recorded on one of 23 Commonwealth, State or Territory registers (and as such, was ‘migrated’ across to the Personal Property Securities Register (PPSR) on commencement of the PPSA) will need to be registered on the PPSR before 31 January 2014.
After 31 January 2014, any remaining transitional security interests that have not been registered will no longer have their pre-PPSA priority. This may result in a secured party losing priority to other secured creditors or losing interest in the secured property altogether if the grantor becomes bankrupt or placed into administration or liquidation.
How does this affect joint venture arrangements?
Following the introduction of the PPSA, there has been some debate on whether rights in relation to property that are granted under certain provisions in joint venture agreements commonly entered into in the Australian mining industry constitute an interest in personal property which would then require registration on the PPSR. The most relevant provisions are those dealing with default dilution, buy-out rights and liens.
Although some commentators are of the view that joint venture agreements containing dilution or buy-out rights do not create security interests as such provisions do not secure payment or the performance of an obligation, we are of an alternate view. While this is not a matter that is beyond doubt given the issue has yet to be ruled on by the Courts, we consider it to be the better view. On this basis we consider those security interests should be registered on the PPSR.
As such, if you have entered into a joint venture agreement that contains dilution or buy-out rights and under which personal property will be acquired, or which contains a lien over a defaulting participant’s share of production, we encourage you to register such interests under the PPSA. Again, this is to guard against the risk of a person subsequently acquiring a legal or equitable interest in that personal property without being subject to the security interests created under the joint venture agreement.
In practice, this risk may not be substantial for participants in an exploration joint venture that does not own any, or any significant, personal property (such as mining plant and equipment) but that assessment will need to be considered in light of the circumstances of the specific joint venture.
If you are a party to a joint venture agreement that was entered into prior to 30 January 2012, and that agreement contains dilution or buy-out rights or impose a lien, and has not been registered on the PPSR, we recommend that you lodge a financing statement in order to have such security interests registered on the PPSR by 31 January 2014.
If those security interests are not registered on the PPSR by 31 January 2014, such security interests will no longer have their pre-PPSA priority. This may result in you losing priority to other secured creditors or losing interest in the secured property altogether if the grantor becomes bankrupt, is placed into administration or an order is made or resolution passed for the winding up of the grantor. As such, the creditor with priority (or the administrator or liquidator) could exercise its rights under its security (which would likely include a right to sell the defaulting participant’s interest in personal property) without regard to the other participants’ dilution and buy-out rights.
As the financing statement form can be difficult to complete, please feel free to contact us should you require any assistance.