Consumer and Commercial Property Under PPSA
A tradie buys a ute with finance secured over the vehicle. Under the Personal Property Securities Act 2009 (Cth) (the PPSA), it may be consumer or commercial property. It will be commercial property if it is purchased by the tradie through a company, or if he buys it as an individual and holds it in the course or furtherance of carrying on a business with an ABN – even if it is not wholly or mainly used for that business purpose. But if there is no ABN for the business, it will be consumer property.
National Credit Code
The distinction between consumer and commercial property is not the same as the difference between credit that is regulated by the National Credit Code (NCC) and unregulated credit. So it is possible to have an NCC regulated credit contract secured by commercial property, or an unregulated credit contract secured by consumer property.
If our tradie borrows funds for personal use against the security of his ute, which he owns personally and uses in a business with an ABN, the loan will be regulated by the NCC, but the property will be commercial property under the PPSA.
If he borrows funds to buy the ute for use in his business but does not have an ABN for the business, the ute will be consumer property under the PPSA, but the loan will not be regulated by the NCC.
Financiers will therefore need to take care in their processes for classifying loans and securities: you will not be able to assume that an NCC loan will always have consumer property as collateral, or that the collateral for an unregulated loan will always be commercial property.
What difference does it make if property is consumer or commercial?
Practically the impact is on registration of your security interest. Every registration, of course, has to identify whether the collateral is consumer or commercial.
- If it's consumer property, the serial number must be used for registration against serial number property such as motor vehicles, while registration by serial number is optional when it is commercial property (except in the case of an aircraft engine, airframe, helicopter or small aircraft).
- If the collateral is consumer property, and required to be described by serial number, you don't include the grantor's details on your registration.
- The consumer/commercial distinction also controls the maximum end time for registration. For consumer property it's 7 years, while for other property it's 25 years or indefinite, unless the collateral is described by serial number on the registration, in which case the maximum end time is the same as consumer property.
- When a registration identifies the collateral as commercial, you have to indicate on the registration whether it may include inventory, and whether it may be subject to control.
Collateral for a security interest could include both consumer and commercial property. If the bank lending to our tradie took a security interest over all his assets (something that would not be permitted for an NCC regulated loan, but would be for an unregulated loan), there could be many items of property that were not used in the business. Where the business had an ABN, property used in his business would be commercial property and the rest would be consumer property. The Personal Property Securities Register (PPS Register) doesn't allow you to tick both consumer and commercial, so the bank would end up having to do 2 registrations, one for the consumer property and one for the commercial property.
If the registration is for commercial property, the secured party need not send notice of the verification statement which confirms registration if the grantor has given a written waiver of their right to receive it. The same does not apply for consumer property – but if consumer property is registered by serial number, notice of the verification statement does not have to be sent to the grantor in any case, because there is no grantor recorded on the registration.
There is another division of property types that is important under the PPSA. This is the line between property that is intended to be used predominantly for personal, domestic or household purposes (we'll call it "PDH Property" for short) and other property.
PDH Property is not the same as consumer property.
Consumer property can include property solely or mainly for business use, where the grantor is an individual without an ABN.
PDH Property can include property that is used partly for business purposes, but only if it is not the predominant purpose.
The PPSA has a definition of "predominantly" in this context. It says that personal property is intended to be used predominantly for personal, domestic or household purposes if it is intended to be used only for those purposes, or is intended to be used for other purposes as well, but is intended to be mostly used for personal, domestic or household purposes.
The PPSA also says that property can never be predominantly for personal, domestic or household purposes if it is acquired as an investment. (That makes you think about how items such as collectibles should be classed, where there is often an element of investment purpose.)
The definition of PDH Property is closer than consumer property to the definition of a regulated credit contract under the NCC.
What difference does it make if property is PDH Property?
PDH Property appears in a number of places in the PPSA.
PMSI: A security interest in PDH Property (except serial number property, such as a motor vehicle) cannot be a purchase money security interest (PMSI). A perfected PMSI security interest has a "super priority" over other perfected security interests. Interestingly, the PPS Register does not allow you to select the PMSI option when you register a security interest on consumer property, except where it is serial number property. The effect is that if you have consumer property collateral that is not PDH Property and not serial numbered, you will be unable to record it as a PMSI, even though the legislation allows for a PMSI in such property. In the case of our ute example, that won't matter, because serial number property can be a PMSI regardless of whether or not it is PDH Property. But for other types of goods that are not serial numbered, such as tools used in a business, it could be an issue (at least in theory). If a bank lent money to the tradie to buy tools when he did not have an ABN, the bank would have a PMSI, but because the collateral is consumer property, it would not be able to record its security interest as a PMSI on the PPS Register. Lenders providing finance to unincorporated small businesses for purchasing such items may want to require an ABN for the business, so that they can record PMSIs.
Taking property free of security interests: PDH Property up to $5,000 in value that is not serial number property will pass free of any security interests to a buyer or lessee for new value, but not if they know it is a breach of a security agreement.
Enforcement: Many of the enforcement provisions of the PPSA can be contracted out by the parties to a security agreement, but only if the collateral is not PDH Property. On the other hand, some of the enforcement provisions do not apply when the collateral is PDH Property. These include the right to enforce against personal property under land laws, the right to take "apparent possession" of collateral, and certain rights relating to disposal of collateral by lease or purchase, and retaining collateral.
Unperfection: For collateral that is PDH Property or registered with a serial number where the security interest becomes unperfected (for example, because of a defective registration) the secured party must apply to register a financing change statement to end the registration within 5 business days after the day when the unperfection occurs.
Amendment demands: A secured party must not require payment to comply with an amendment demand made on the secured party to amend a registration of a security interest if the collateral is PDH Property.
Governing law: The PPSA provides that the governing law for validity and perfection of a security interest in goods is the law of the jurisdiction where the grantor is located when the security interest attaches, if the goods are of a kind that is normally used in more than one jurisdiction, and are not PDH Property.
Secured parties need to understand the difference between consumer and commercial property when registering security interests and collateral. The concept of PDH Property is also important in relation to PMSIs, taking property free of security interests, and enforcement, among other things.