Understand your hidden exposures with PPSA or risk it all

Failure to understand the implications of the Personal Property Securities Act could be very costly for law firms and clients, writes Ronwyn North.

PPSA is the acronym for the Personal Property Securities Act – and is not to be confused with a test for prostate cancer. Before you tune out at the mention of black letter law, you should know that lawyers and clients are being caught unawares by professional liability claims involving ignorance or mismanagement of PPSA issues. Apart from being a concern in its own right, this emerging claims trend raises doubts about how and how well law practices prepare for and deal with major changes in law and procedure.

Accordingly, all law practices would do well to start 2015 with a robust check for hidden PPSA exposures. Smart law practices will also take the opportunity to review and reflect on how they handled the introduction of PPSA in case there are lessons for how – or how not to – prepare for, embed, reinforce, monitor and troubleshoot other legal practice changes in the pipeline such as Electronic Conveyancing or Legal Profession Uniform Law.

Ignorance no excuse
Ignorance of PPSA can be expensive and could get more costly given uncertainty around the economic outlook for 2015. In a case before Australian courts, an American company leased equipment to an Australian company, seemingly without realising that this created a security interest within the meaning of the PPSA. A security interest needs to be registered for it to prevail against a third party, regardless of whether or not the third party has other notice of the interest.

Unfortunately, the American company – or its advisers – did not know it had to register the interest. When the Australian company collapsed, the liquidator seized the equipment on behalf of creditors such as the bank. Creditors are in line for a $50 million windfall and the American company is incredulous that the rights of creditors trump its rights as owner. If the law of other similar jurisdictions such as New Zealand and Canada is any guide, the Australian courts will be unable to deliver equitable relief. PPSA is a statutory regime and clear in its intention that registration is required for a security interest to prevail.

PPSA introduces a completely new system of security interests and new search and registration procedures on a national basis. The new legal concepts involve new terminology, a prime example of which is that a ‘company charge’ is a thing of the past. The case above is typical of an emerging pattern whereby lawyers or clients have failed to adequately inform themselves and appreciate the far-reaching implications of the new law across many practices areas, not on only those associated directly with banking and finance.

The root cause of the non-registration is that they have failed to systematically assess and evaluate the likely impacts of the new law on the interests of clients, the various legal services offerings and work processes of the law practice. It is beyond the scope of this article to explain the substance of the new law, but suffice it to say that every lawyer needs a working knowledge of PPSA because it fundamentally changes what lawyers learned at law school about rights of ownership and security interests in goods and property that is not real estate.

Common traps
In addition to non-registration, traps fuelling an emerging liability claims trend include:

• late registration – the new period is shorter and there is no ‘grace’ period as there was under the previous regime
• faulty registration – the new online process is neither intuitive nor user friendly. Effective registration requires a mix of detailed administrative accuracy (e.g. right name, spelling of names, boxes ticked) and legal judgment (e.g. interests can be lost if a ‘box’ is wrongly ticked or not ticked due to legal or factual confusion or uncertainty)
• faulty search – the register has some peculiarities and there are issues with data transitioned from legacy systems
• faulty security documentation – beware of ambiguities because drafting and language are not appropriate for the new regime (e.g. they still refer to fixed or floating charges)
• scope of retainer issues and miscommunications with clients as to whether the lawyer or client has responsibility to identify and attend to PPSA issues.

If you are thinking of reviewing your substantive PPSA exposure, here are a few questions to consider:

• Does everyone have a working knowledge of PPSA? How do you know? Who would benefit from a refresher? Do you check the knowledge, or do you have a learning program for new starters?
• Has everyone updated their knowledge of PPSA in the past couple of years? How do you know? How is this knowledge shared across the practice, particularly knowledge of emerging traps?
• Has every practice area or service offering been carefully assessed to consider scenarios under which PPSA issues could arise, as well as those that commonly will or do arise? (PPSA can be relevant not only to commercial areas, but family law and litigation, too)
• Are there good retainer and communication practices in relation to PPSA issues (e.g. as with taxation, assume you are required to address PPSA unless it is specially excluded. Do not assume business clients are PPSA savvy)
• Who is authorised to conduct PPSA searches and registrations? Are they adequately skilled and experienced to make the necessary legal judgments? Are they technology savvy? Do they know the common traps?
• Have precedents been reviewed and updated?
• Who is the PPSA guru or go-to person? Do you need a consultation or referral arrangement with an external specialist firm or barrister?
• Has the review uncovered any ‘ah hah’ moments or new insights that suggest current or closed matters should be reviewed for missed PPSA issues? Should any of these current or closed matters be notified to PI insurers, if only for more abundant caution? (Note: Resist the temptation to engage in a DIY fix as this may compound the problem.)

If you are reflecting further on the process by which the practice conducted or might conduct a significant ‘legal reform’ project, here are a few things to consider:

• Is it a practice-wide project, not ad hoc efforts by individuals?
• Do you have an influential project champion?
• Is there a clear vision and understanding of what is at stake? (e.g. why change? What happens if there is no change, either at all or effectively?)
• Have you made an early enough start; not waiting for the bill to become law?
• Do you have a good project leader, representative project team and project plan?
• Are people across the practice primed for change? (e.g. positive communications and consultations about need, urgency, benefits, potential obstacles and the proposed process and timetable)
• Have you developed effective resources to support the change? (e.g. new policies, testing of new systems or procedures, training , project intranet, updates, FAQ/Q&A) Resources well used?
• Do you have good ‘buy in’; deadlines set and met for steps or stages? Short-term wins?
• Is there planned reinforcement, monitoring and review of the implementation efforts?

The bottom line is that changes in law or practice increase liability risk if the nature and impacts of the change are not well understood and the change process is not well planned and executed. Get 2015 off to a good start by reviewing and, as necessary, reducing your PPSA exposure and anticipating and organising your practice for the next round of legal practice changes. The essence of good risk and change management is further summarised below. Safe practice!

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Risk management essentials
1. What are our risks?
2. What are our controls, safeguards or mitigation strategies?
3. Are those controls, safeguards or mitigation strategies working effectively enough?
See also ISO 31000

Change management essentials
1. Create a climate for change. Communicate vision and urgency. Deploy the right people and resources to make it happen
2. Engage and enable the whole practice, not just the lawyers
3. Implement, reinforce and sustain change
See Kotter and Cohen: The Heart of Change

(Right person(s) leading, managing and accountable for success of risk and change processes?)
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Ronwyn North is the managing director of Streeton Consulting and a qualified lawyer who specialises in consulting to the legal profession on practice management issues, including risk management. She can be contacted at rjnorth@streetonconsulting.com.au.