Interests in gaming machines and the Personal Property Securities Act

Interests in gaming machines and the Personal Property Securities Act

By Allan McDougall

July 09, 2013

 This Article first appeared in CLUB LIFE – April 2012

Club managers would be aware that section 74(1) of the New South Wales Gaming Machines Act (2001) prohibits clubs from granting a specific interest in their gaming machines to anyone else. The reference to an “interest” effectively means a security interest like a fixed charge. Section 74(2) relaxes this rule by allowing clubs to grant an interest such as a floating charge over their business operations generally.

Therefore section 74(2) seems to be saying that if a club grants the traditional form of fixed & floating charge (“F&F Charge”), this will not infringe the policy of the Act, provided gaming machines are not specified as falling under the fixed component of the charge.

However, from 30 January this year the Commonwealth government’s new Personal Property Securities Act (2009) (PPSA) has changed the law regarding F&F Charges. Basically, they no longer exist. So the question arises as to what kind of security interest a club can now lawfully grant over its gaming machines?

What is a security interest?

Under the pre-PPSA law an F&F Charge was the prime example of a security interest. Other examples were a mortgage debenture (really the same thing), a bill of sale and a chattel mortgage.

The PPSA replaces the F&F Charge with what is called a General Security Agreement. It has the same intent as an F&F Charge, except that the bank now has direct rights against all the assets specified in it from the beginning.

The PPSA does this as part of an overriding national scheme to harmonise the many overlapping and inconsistent statute laws around the country which deal with the creation and registration of security interests. These security interests apply to “personal property”, which basically means all property other than land and some statutory licences. However, the PPSA goes further than setting up a national security register – it changes the law concerning these interests in a number of respects. One of these changes relates to floating charges.

The floating charge

The original idea behind a floating charge was to permit the chargor/borrower, (now a “grantor” under the PPSA) to continue to trade its business in the normal way despite having granted security over some or all of its business to a chargee (“secured party”) such as a bank. This meant the grantor could continue to make sales and collect proceeds in the normal course, without its secured lender interfering.

In terms of the Act’s reference to a floating charge, a club could be said to “trade” gaming machines by generating receipts from members’ patronage. The receipts would circulate in the club’s business as part of its overall working capital.

Provided nothing went wrong, the floating charge just “hovered” above the working capital assets and the machines, only giving the chargee/bank power to interfere in the chargor’s operations in the event of its default under the F&F Charge.

So, as a result of the section 74(1) prohibition, only when a club defaulted under a floating charge could a club’s gaming machines fall under a fixed charge.

The PPSA abolishes the floating charge and replaces it with the concept of the “circulating security interest”.  Effectively the same idea, except that there is no longer any floating or hovering – the PPSA’s statutory security interest fixes all of a grantor’s assets from the outset.

In addition, the PPSA specifically defines certain classes of personal property to be circulating assets: they are what a business would expect: accounts receivable, inventory, bank accounts, currency and negotiable instruments. No mention of gaming machines.

Therefore, despite section 74, a bank’s security interest will attach immediately to gaming machines, and clubs will not be able to deal them without the bank’s consent. Otherwise they risk being in default under the applicable General Security Agreement.

Conclusion

Gaming machines are not circulating assets under the PPSA, so, despite section 74 of the Gaming Machines Act secured parties such as banks will no longer obtain floating charges but what used to be a fixed charge over the machines.  This they will do via a General Security Agreement, the PPSA’s successor to the F&F Charge.

As a result of the PPSA secured lenders may be in a position to exert greater control over the grantor club’s gaming machines than was previously the case. On the other hand clubs may qualify for more credit support than they previously might have done, given the enhanced security position lenders are now afforded by the PPSA.

For more information contact partners@pigott.com.au

This article is intended to provide general information in summary form on a legal topic, current at the time of publication.  The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.