Register or perish: the Personal Property Securities Act and its impact on art dealings
Rebecca Laubi, Senior solicitor
If you consign your artworks to a gallery, new laws make it important for an artist to register their ownership or risk losing all if the gallery goes under.
In the September 2011 issue of ART+law, we examined at length the impact of a gallery's insolvency on the artists it represented and provided some practical guidance as to how artists could protect themselves against the consequences of their gallery's insolvency and liquidation (see Rebecca Laubi, "Don’t get the blues when your gallery is in the red", referred to below as "Don't get the blues"). The article outlined the need for clear records of consignment when the gallery operates on a consignment basis as well as the necessity to document any retention of title in the situation where the gallery in fact purchases artworks directly from the artist and sells them on to clients in its own name. It also mentioned the possible requirement under the Personal Property Securities Act 2009(Cth)("Act") for artists to register certain dealings into the Personal Property Securities Register.
The Act's operation will presumably begin in early 2012, and artists should be prepared to either comply with requirements of the Act or risk losing any security interest arising under the Act. This article should provide them some basic guidance.
The Personal Property Securities Act 2009 (Cth)
Under the Act, a personal property security is an interest in personal property arising from a transaction that secures payment of money or performance of an obligation. Personal property is any tangible or intangible property other than land, for example goods (such as artworks), motor vehicles, equipment, intellectual property, etc. For example, if you purchase a car with money loaned by your bank, the bank will usually require the car to serve as security for the repayment of the loan, with the right to repossess the car if you fail in your payment obligations.
Currently, different laws apply at federal and state or territory level to different types of personal property. Returning to the example above, most states have some type of register that holds information about motor vehicles used as security for a loan from a bank, finance company, credit union or other credit provider. As soon as the bank has registered its interest in your car into the relevant register, such as the Vehicle Securities Register in Victoria or South Australia or the Register of Encumbered Vehicles (REVS) in NSW, that interest can be opposed to anyone. This means that if you sell your car before complete repayment of the loan, the bank's interest will take priority over that of the purchaser and the bank will be able to repossess the car from that person.
The Act reforms the law on security interest in personal property by providing for a single legislative system and register for all security interest at Commonwealth level, and by deeming certain transactions as security interests which require compliance with the Act.
Under a consignment arrangement, the artist delivers (or consigns) artworks to the gallery with the understanding that the gallery will sell the artworks on the artist's behalf. The gallery does not acquire any property rights (or title) in the artworks consigned, which remain the artist's property.
Under the current law, the consigned artworks escape the reach of the liquidator if the gallery becomes insolvent and goes into liquidation, because they are not property of the gallery. The artist can assert his property rights and regain possession of the consigned artworks provided he can evidence the consignment, as the case may be (see "Don't get the blues"). The Act, however, considers consignments to be security interests even though they do not secure money. As a result, a security interest arises, known as a "purchase money security interest" if an artist delivers artworks (in which he retains title) to his gallery for the gallery to sell, and the artist must meet certain requirements, described below, in order to ensure the security interest is effective.
Sale of artworks with retention of title
In situations where the gallery in fact purchases artworks directly from the artist and sells them on to clients in its own name, Arts Law recommends that artists should ensure they retain title to their artworks before the gallery has fully paid the agreed purchase price, for example under a sale subject to retention of title. Property in the artworks does not pass from the artist to the gallery if the parties agree that the contract is made only once payment is completed, or that property passes only upon full payment of the purchase price. This means that in liquidation proceedings the artworks will not be considered as part of the gallery's assets over which the liquidator can exercise control. The Act, however, treats the property interest in the artworks that the artist retains through the retention of title as a security interest or purchase money security interest ("PMSI"). This PMSI must meet certain requirements to ensure the artist's rights are protected.
Perfection of security interests
The artist must "perfect" the security interest in order to retain its benefits. Perfection preserves the security. It is essential to secure the artist's security interest in the event of a gallery's insolvency. Unless they have perfected their security interest, artists will lose it and become unsecured creditors on any appointment of a liquidator to their insolvent gallery, ranking with all other unsecured creditors (see Aaron Taranto and Nic Giannantonio, "The Death of Shock and its Impact on Australian Artists", ART+law September 2010 and "Don't get the blues").
Further, perfection is also important to preserve the artist's security interest against third parties, for example purchasers of their artworks. This is because one of the functions of the Act is to protect buyers of personal property if they are unaware of an existing security interest by extinguishing the security interest at the time of the purchase. Perfection, however, puts the buyer on notice of the secured party's interest. This means that if a collector purchases a painting to which a security interest attaches from a gallery working with the artist on a consignment basis, the collector will acquire will take the collateral (i.e. the painting) free of security interest if it has not been perfected by registration. As a result, the artist will have no claim against the buyer if the gallery fails to transfer the purchase price for the painting to the artist.
The Act provides for various methods of perfection, the relevant one in relation to the situations described above being by registration of the security interest into the national Personal Property Securities Register ("PPSR").
Attachment and enforceability against third parties are preliminary steps toward perfection. Attachment is required to enforce a security interest against a grantor, that is the individual or organisation who grants a security interest over personal property to a secured party; for example, the consignee receiving goods under a consignment is a grantor. Attachment occurs when the security interest is created in the collateral, i.e. in the personal property to which the security interest is attached (for example the artworks) from some binding relationship between the parties. Enforceability against third parties requires attachment and additional requirements, most commonly satisfied by entering into a written security agreement that describes the collateral. The use of Arts Law's sample Consignment Agreement, Artists and Gallery Agreement (long term) or Sale of Artwork Agreement (which includes a retention of title under clause 6) might be an effective way of complying with this requirement.
Other than ensuring that an artist's security interest survives the gallery's insolvency and is enforceable against purchasers, the benefit of perfection by registration is to define the priority status of the security interest in relation to any other security interest in the same collateral.
Under the Act, default priority rules apply upon registration, which provide that: a perfected security interest has priority over an unperfected one and an earlier perfected security interest has priority over a later perfected priority interest. As a result, artists would be well advised to perfect their security interests by registration as soon as possible to ensure that a security interest attaching later to the collateral, for example if a bank has a security interests in relation to the gallery's stockroom to secure a loan, does not take priority over his interest.
There are exceptions to the default priority rules under the Act in relation to security interests that qualify as purchase money security interests ("PMSIs") as PMSIs give the secured party a form of "super priority" under the Act. As a result, an artist who has registered a security interest arising from the delivery of artworks to his gallery on a retention of title basis would have priority over the security interest attaching to the gallery's stockroom registered earlier by a bank. In the event of the gallery's insolvency, the artist's interest would take precedence over that of the bank in relation to the relevant artworks, i.e. those supplied by the artist. The artist would, however, not be protected if he had failed to perfect the PMSI by registration.
Modes of registration
The Act establishes the PPSR as an electronic register, allowing for simple, quick and cheap online registration of security interests. The PPSR will be managed by the Insolvency and Trustee Service Australia ("ITSA") but has its own website with many resources such as fact sheets.
According to the PPSR, a single financing statement may be registered to perfect multiple security interests in multiple artworks provided for by multiple consignment agreements; There is no need to make separate registrations for each artwork or each commercial consignment if the grantor (consignee, i.e. the gallery) is the same.
As at December 2011, the cost of registering a financing statement on the PPSR has not been finalised but it will vary upon the registration period selected. Registrations up to 7 years duration are, however, expected to be $7.40 (against an anticipated $130.00 for registrations with unlimited duration).