Interests in Gaming Machines and the Personal Property Securities Act

Interests in Gaming Machines and the Personal Property Securities Act

By Allan McDougall

March 21, 2011

 Introduction

Club managers would be aware that section 74(1) of the New South WalesGaming 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. If they do not then no direct rights to the machines have been granted to another party.  On the other hand, granting a specific security interest such as a straight fixed charge over gaming machines would breach the statutory policy.

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?

A security interest is a transaction which obliges the payment of money or the performance of an obligation. 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.

A security interest arising under an F&F Charge effectively gave the secured party, usually a bank, a type of ownership claim on the assets concerned if something went wrong with the borrower. The PPSA replaces the F&F Charge with what is called a General Security Agreement. A General Security Agreement has the same intent, 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 general 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 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 registered club could be said to “trade” gaming machines by deploying them for patronage by members. The receipts generated from this patronage 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, only giving the chargee/bank power to interfere in those operations in the event of the borrower’s default under the F&F Charge.

The public policy behind the Act permitting gaming machines to be secured by no more than a floating charge seems to be the idea that the state’s grant of statutory rights should not be infringed by comparable commercial rights, except in the event of licensee default. This meant that in the normal course, a lender/bank would have only ordinary contractual rights against the chargor/club, that is, no better than an ordinary creditor.

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. Thereafter the chargee/bank would have a kind of ownership-type rights to the machines. It could then, amongst other things, prevent their disposal without its permission.

Dispensing with the floating 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 interests fixes to all of a grantor’s assets from the outset.

So a secured party such as a bank now has an immediate ownership-type claim over the gaming machines. This of course cuts across the policy intent of section 74.

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.

Further, the PPSA goes on to say that for any of the secured property (called “collateral”) to comprise “circulating assets”, the secured party (eg bank) must have expressly or impliedly authorised the grantor (eg a club) to dispose of it in the ordinary course of business.  At first glance this wider notion would not seem to extend to a club’s gaming machines. As it is unlikely that a bank will authorise a club to dispose of its gaming machines in the ordinary course the machines will fall within the grantor’s secured property generally.

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

Conclusion

A club should be able to enter into a General Security Agreement in the normal course of business. Gaming machines are not circulating assets under the PPSA so secured parties such as banks will no longer obtain floating charges but what used to be a fixed charge over the machines. Therefore, as a result of the PPSA secured lenders may be in a position to exert greater control over the grantor club’s gaming machines despite the policy of the Gaming Machines Act.

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 particular matters.