AN INTRODUCTION TO THE PERSONAL PROPERTY SECURITIES … · 2017. 7. 20. · 2 Profile: Maryanne Loughnan practises in most areas of commercial dispute in the superior courts. She

AN INTRODUCTION TO THE

“PERSONAL PROPERTY SECURITIES ACT”

Thursday May 3rd 2012

A seminar presented by members of Gordon & Jackson’s List

Chair: Maryanne Loughnan SC

Presenters: Paul Duggan Chris Furnell

GORDON & JACKSON Barristers’ Clerks 205 William Street Melbourne 3000 Dx 94 Melbourne Vic Ph 9225 7333 www.gordonandjackson.com.au

GORDON & JACKSON

DISCLAIMER OF RESPONSIBILITY

The provision of seminar papers by Gordon & Jackson is a free service provided for members of the legal profession. It is not intended nor recommended that the seminar papers and the information contained in them be used by members of the public. Gordon & Jackson, the members of List S and the authors of the seminar papers do not accept responsibility for the information or opinions contained in the seminar papers. No guarantee, undertaking or warranty is provided concerning the accuracy, completeness or currency of the information provided in the seminar papers or for any damage sustained by any person as a result of any reliance placed on such information. As the law is constantly evolving and subject to change it is very likely that the information contained in the seminar papers may be out of date even shortly after publication.

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Maryanne B Loughnan SC Owen Dixon Chambers West

525 Lonsdale Street Melbourne Victoria

T: + 61 3 9225 8146 M: 0407 882 780 E: [email protected] ___________________________________________________________________ Signed Victorian Bar Roll 1989 Appointed Senior Counsel 2008 Admitted to the Legal Profession 2 Nov 1983 Nationally Accredited Mediator 7 Nov 2009 Qualifications LL.B (Melb)

Primary Practice Areas

Commercial Law

Banking & Finance

Competition and Consumer Law

Credit Law

Equity/Trusts

Insurance

Leases

Professional Negligence

Securities

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Profile: Maryanne Loughnan practises in most areas of commercial dispute in the superior courts. She has a depth of experience in all aspects of work associated with matters in her primary practice areas including drafting of pleadings, advice, injunctions, mediation, trial preparation and the conduct of trials and appeals. She is available to conduct and appear in matters, or act as mediator, in all jurisdictions including interstate.

She has worked closely with in-house counsel, particularly on a direct briefing basis for banking and finance matters.

Her general approach to dispute resolution is that she advises and assists the litigation team on how to best maximise the effect of its preparation for trial by the timely gathering of the best evidence. She has a particular speciality in obtaining the thorough proofing of witnesses and the settling of their affidavits of evidence. These tasks are performed with her active interaction and integration with the members of the litigation team. She is experienced working with large teams of lawyers and counsel.

Equally she advises on grounds of, and appears in, appeals.

She has a special interest in banking and finance disputes and was the Chair of the Banking and Finance Section of the Commercial Bar Association of Victoria from 2005 to 2011. She often accepts briefs outside her primary practice areas after discussion with her prospective instructor.

From 12 February 2009 liability limited by a scheme approved under Professional Standards Legislation - Professional Standards Act 2003 [Vic]

(Click on the links below to access cases or papers)

Cases

Cases in which Maryanne Loughnan has appeared/advised include the following:

2009 - 2011 - Supreme Court of New South Wales - Commercial List – acting for plaintiff in claim for $45 million involving interests in oil exploration projects – charge over shares - defence of estoppel - settled eve of trial

Henderson's Automotive Technologies Pty Ltd (in liq) v Flaton Management Pty Ltd (2011) 84 ACSR [2011] 93; VSCA 167 - restitution – set-off – equitable lien

http://www.austlii.edu.au/au/cases/vic/VSCA/2011/167.html

Iphostrou & Iphostrou and Ors (No 4) [2011] FamCA 220 (31 March 2011)

- application for disqualification – apprehension of bias

http://www.austlii.edu.au/au/cases/cth/FamCA/2011/220.html

Foster James Pty Ltd v Dalton (2010) 28 VR 204

Westpac Banking Corporation v Rothschild – Supreme Court of Victoria -2010 - claim for mortgage debt of $5 million – married woman’s equity – settled eve of trial

http://www.austlii.edu.au/au/cases/vic/VSCA/2011/167.html

http://www.austlii.edu.au/au/cases/cth/FamCA/2011/220.html

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Smolle v Australia and New Zealand Banking Group Limited [2008] FCA 1065

http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2008/1065.html?stem=0&synonyms=0&query=title(smolle%20)

Smolle v Australia and New Zealand Banking Group Limited [2007] FCA 1673


Gheorghiu v Perpetual Trustees Victoria Ltd [2007] VSCA 83 http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSCA/2007/83.html?stem=0&synonyms=0&query=title(gheorghiu%20)

Commonwealth Bank of Australia v Damianos & Anor [2007] VSC 442

http://www.austlii.edu.au/au/cases/vic/VSC/2007/442.html

Westpac Banking Corporation v Dimopoulos [2006] VSC 10 http://www.austlii.edu.au/au/cases/vic/VSC/2006/10.html

Wenczel v Commonwealth Bank of Australia [2006] VSC 324


Zaparenkov v Perpetual Trustees Vic Ltd (Credit) [2006] VCAT 2147

http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VCAT/2006/2147.html?stem=0&synonyms=0&query=zaparenkov

Skosples v Perpetual Trustees Victoria Limited & Ors [2004] VSC 422


Thomas v Southcorp Australia Pty Ltd (No 2) [2004] VSC 50


Thomas v Southcorp Australia Pty Ltd [2004] VSC 34


Costa Vraca Pty Ltd v Bell Regal [2003] FCA 65

http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2003/65.html?stem=0&synonyms=0&query=title(bell%20regal%20)

Commonwealth Bank of Australia v White (No. 7) [2003] VSC 344


Commonwealth Bank of Australia v McArthur [2003] VSC 31


Commonwealth Bank of Australia v Aspenview Productions and Ors [2001] VSC 444


Commonwealth Bank of Australia v Aspenview Productions and Ors [2001] VSC 499


Commonwealth Bank of Australia v Aspenview Productions Pty Ltd and Ors [2001] VSC 499


Commonwealth Bank of Australia v McKinnon [2001] VSC 193, Byrne J – trial – misrepresentation – sale under value

Commonwealth Bank of Australia v White (No 3) [2000] VSC 259






http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSCA/2007/83.html?stem=0&synonyms=0&query=title(gheorghiu%20)

http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSCA/2007/83.html?stem=0&synonyms=0&query=title(gheorghiu%20)

















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Burchell v Golden Wood Pty Ltd (No 2) [2000] VSC 485

http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSC/2000/485.html?stem=0&synonyms=0&query=title(golden%20wood%20)

Burchell v Golden Wood Pty Ltd [2000] VSC 86


Hunter v Croner-Tyco Toys Pty Ltd (Unreported VSC, Gillard J, 23 July 1998 BC9804537)

Dellios V Westpac Banking Corporation – (Unreported Beach J, 30 April 1997, BC9701654)

Commonwealth Development Bank of Australia v Karastavrou (Unreported VSC, Beach J, 12 November 1996, BC9605500)

Commonwealth Bank of Australia v Wallis & Graham (1995) ATPR 41-387; BC9507324

Victorian Bar Memberships and Roles

Member of the Executive Committee of the Commercial Bar Association of Victoria - 2007 to 2010

Chair of the Banking and Finance Section of the Commercial Bar Association of Victoria - 2005 to 2011

Advocacy Training Coach, Victorian Bar Readers’ Course 2009 and continuing

Chair Gordon & Jackson List Committee - 2009 to 2010

Co-developer of the website of the Commercial Bar Association of Victoria at http://www.commbar.com.au

Founding Chief Editor of the Commercial Bar Association of Victoria Newsletter May 2007 to March 2010

Team leader and co-author of the Submission of the Victorian Bar on 23 April 2009 to the Inquiry by the Senate Committee into the Personal Property Securities Bill 2009

Publications

Procedure with Caution, November 2011 85(11) LIJ, p36 - Summary judgment and the Civil Procedure Act 2010 (Vic)

http://www.liv.asn.au/News-and-Publications/Law-Institute-Journal/Archived-Issues/LIJ-November-2011/Procedure-with-caution

Islamic Banking - Borrowing and Investing out of Haraam's Way (2010) 48(4) LSJ 62 with Douglas Drummond

http://www.commbar.com.au/uploads//Publications/Banking%20and%20Finance/Article__Islamic_Banking_-_Loughnan.Drummond.pdf

Case Note - Bofinger v Kingsway Group Ltd (2010) 25(7) BLB 115

http://www.commbar.com.au/uploads//Publications/Banking%20and%20Finance/Bofinger__v_Kingsway_Group__-_Website-_Case_Note_M_Loughnan.pdf





http://www.commbar.com.au/



http://www.commbar.com.au/uploads/Publications/Banking%20and%20Finance/Article__Islamic_Banking_-_Loughnan.Drummond.pdf

http://www.commbar.com.au/uploads/Publications/Banking%20and%20Finance/Article__Islamic_Banking_-_Loughnan.Drummond.pdf

http://www.commbar.com.au/uploads/Publications/Banking%20and%20Finance/Bofinger__v_Kingsway_Group__-_Website-_Case_Note_M_Loughnan.pdf

http://www.commbar.com.au/uploads/Publications/Banking%20and%20Finance/Bofinger__v_Kingsway_Group__-_Website-_Case_Note_M_Loughnan.pdf

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Conference and Seminar Papers

Litigation for In-House Counsel - Managing For the Critical Success Factor - Legalwise Seminar – September 2010

Litigation Strategies – Masterclass presented to Australian Corporate Lawyers Association by the Commercial Bar Association of Victoria, May 2010

Understanding and Managing the Driving Forces that Lead to Conflict - paper presented to the National Conference of the Australian Corporate Lawyers Association, November 2009

The Legal and Commercial Roles of In-house Counsel – paper presented at the Leo Cussen Institute – March 2009

Deposits under Sale of Land Contracts - paper presented to the Victorian Bar, July 2007

Breach Notification Requirements of Australian Financial Services Licensees - paper presented to the Victorian Bar, March 2007

Cheques – Breach of Mandate – Developments Since National Australia Bank Ltd V Hokit (1996) 39 ANWLR 377 - paper presented to the Victorian Bar, November 2004

http://www.docstoc.com/docs/72428350/Maryanne-Loughnan---COMMERCIAL-BAR-ASSOCIATION-BANKING-AND-FINANCE-

Consequences of the Accreditation of Financial Advisers and others by Banks - paper presented to the Victorian Bar, May 2003

April 2012



Paul Duggan has practised as a commercial litigation barrister with Gordon & Jackson since the

list’s inception. He has recently started a blog about commercial litigation at

http://pauldugganbarrister.com. His résumé is attached to this paper.

Liability limited by a scheme approved under the Professional Standards Act 2003

AN INTRODUCTION

TO THE

PERSONAL PROPERTY SECURITIES ACT 2009

Paul Duggan

3 May 2012

Introduction

1. The Personal Property Securities Act (PPS Act) establishes an Australia-wide regulatory

scheme for the registration and regulation of security interests in personal (meaning

essentially non-real estate) property.

2. The PPS Act defies easy summation. Some of it is a repackaging and codification of

earlier law while other parts introduce concepts that are both important and entirely new to

Australian law. New concepts and familiar ones alike are described in new technical

terminology.

3. This paper is intended principally to be a hard-copy companion to today’s oral

presentation. Both the presentation and the paper are intended as brief and broad

introductions to a large and complex area. Much has been omitted for reasons of brevity.

The PPS Act itself is frequently set out under paired headings such as “main rule” and

“exception.” 1 This is emblematic of the qualifications, limitations and complications that

1 See for example Part 2.5 of the PPS Act where these paired subheadings are employed in each of sections 43, 44,

46, 47, 50, 51 and 52.

Paul Duggan -

An Introduction to the PPS Act 3 May 2012

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riddle the PPS regime and make the broad-brush summaries in this paper a risky substitute

for close consultation of the PPS Act itself.

Insolvency 101 revisited - background to the PPS Act

4. Securities in both real and personal property tend to be of academic interest only until a

party involved with that property becomes insolvent. Then the nature and strength of any

security interest instantly takes on a crucial significance in determining which creditors are

to be paid and which are to be left partly or even entirely out of pocket.

5. A person or company is insolvent when he/she/it is unable to pay their debts as and when

they fall due.2 Insolvency law usually intervenes at this point. Different outcomes are

possible but the most common ones are that insolvent individuals become bankrupt and

insolvent companies are placed into liquidation. Either way, the policy motivation behind

the legal insolvency mechanism employed is to provide an equal, fair and orderly

procedure for handling of the insolvent’s affairs and ensuring the creditors receive an equal

and equitable distribution of the debtor’s assets.3 This ‘equal and equitable distribution’

goal is known as the pari passu principle. It is one of the key principles of insolvency law

although it is subject to many exceptions.

6. Chief among those exceptions (for current purposes at least) is that secured creditors are

not confined (as against unsecured creditors) to receiving an ‘equal and equitable’

distribution of the debtor's assets. A secured creditor will take priority over unsecured

creditors to the extent of the security held by the creditor. Hence a bank that holds a

mortgage over an otherwise penniless bankrupt's mortgaged property can typically be

confident that it will be repaid the monies owing to it from the proceeds of the sale of that

2 see section 122(1) Bankruptcy Act; section 95A Corporations Act. This is the "cash flow" or "commercial" test of

insolvency. In some situations the "balance sheet" or "absolute" test of insolvency might be more appropriate but

that issue will not be explored here. See Keay and Murray Insolvency Personal and Corporate Law and Practice Law

Book Company 2002 at p 12 for a discussion with these concepts. 3 A cynic’s version appears in Blake Odgers, W & Poland, H (Eds). A Century of Law Reform. Macmillan and Co Ltd,

London. 1901, at page 14 where bankruptcy is defined as 'The state of things which exists when, a man being

unable to pay his debts, his solicitor and an accountant divide all his property between them.’

Paul Duggan -


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property even in circumstances where the bankrupt’s other creditors might each be left to

collect (as between each other) an ‘equal and equitable’ share of nothing at all. In the

language of insolvency law, the secured creditors will take priority over the unsecured

creditors.

7. A secured creditor is a creditor holding a ‘security’ interest in another’s property – that is

an interest in property which secures an obligation. (A familiar example is the common

home mortgage whereby a bank holds an interest in the borrower’s property as collateral

for repayment of the home loan. That collateral is there as back-up to satisfy repayment of

the bank loan in the event that the borrower fails to.)

8. This thumb-nail refresher illustrates the enormous financial and legal significance in any

insolvency of the reliable and convenient identification of:

a) secured property;

b) secured creditors; and

c) the nature and extent of the interests secured.

9. The PPS Act attempts to create a one-stop shop regime for capturing and making this

information available to interested parties. Whether it accomplishes its objective or not the

PPS Act will change the way these securities disputes are approached and resolved.

PPS Act will affect most businesses and many individuals

10. The PPS Act deserves a wider legal audience than just insolvency and banking and finance

types.

11. Overwhelmingly Australian businesses are financed by credit of one variety or another –

overdrafts, leases, hire-purchase, factoring, floor-plan financing, extended terms of trade,

margin lending, retention of title clauses, crop liens, and sales by consignment are just

some examples.

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12. It follows that almost any litigation lawyer acting for or against any business or business

people in civil litigation needs to be conversant with at least the potential implications (if

not the entire detail) of the PPS Act. Some examples:

a) Family lawyers cannot efficiently litigate the division of the matrimonial asset pool

efficiently without identifying the extent of that asset pool. Where that asset pool

includes any form of small business – a corner shop, a farm, a dentist’s practice – its

realizable value might be eroded or increased by reference to encumbrances on

personal property within the business’s apparent ownership registered pursuant to the

PPS Act.

b) Precisely the same considerations are likely to arise for wills and estate lawyers

involved in Part IV applications under the Guardianship and Administration Act;

c) Any firm with commercial clients is inevitably going to be asked for advice when

clients’ customers become insolvent. Are years-old retention of title clauses still

enforceable? Are clients otherwise entitled to withhold (or even retake) possession of

widgets for which they have not been paid? Or are those widgets now the property of

the liquidator / bankrupt estate?

d) Clients’ ability to obtain finance might be constrained by security interests registered

against them in the PPS Register. The very existence and breadth of such PPS

Register registrations is hence another potential subject of litigation.4

13. What follows is an introduction to some (but certainly not all) of the key terms and

concepts underpinning the new PPS system.

Tread carefully

14. The PPS Act itself comprises more than 300 pages. Even then, it is not a stand-alone

document. Depending upon the particular PPS Act issue you are considering you might

4 See PPS Act at Part 5.6 re demands for amendments to the PPS Register and Chapter 6 re judicial proceedings

generally.

Paul Duggan -


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also need to consult the various regulations made under the PPS Act, the Corporations Act

(particularly the amended provisions relating to charges) and the various state acts

referring relevant state powers to the Commonwealth (which generally contain their own

carve-outs).5

15. The scope of the legislation should be appreciated. It is intended to change (in whole or

part) the effects of approximately 70 different statutes Australia-wide that formerly dealt

with discrete types of securities. Better known Victorian acts affected by the new regime

include:

a) The Goods Act 1958;

b) The Chattel Securities Act 1987;

c) The Fisheries Act 1995; and

d) The Motor Vehicle Traders Act 1986.

16. The PPS Act introduces new concepts and much new terminology. One text6 on the PPS

Act starts by essentially urging readers to put aside any prior knowledge of personal

property securities as there is no direct correlation between the new PPS Act regime and its

various predecessors. Attempting to marry up old security concepts to the new PPS Act

ones might impede rather than assist understanding of the new system accordingly.

The PPS Register is central to the PPS Act scheme (but not always conclusive)

17. The PPS Act creates the Personal Property Securities Register7 (“PPS Register”) as an

internet-based, one-stop shop for registration of security interests. Registration of security

interests will generally - but not always - determine priorities in insolvency situations.8

5 See for example the Personal Property Securities (Statute Law Revision and Implementation) Act 2010 (Vic) which

excludes some mining-related rights etc from the definition of ‘personal property’ for PPS Act purposes. 6 Cseti Understanding Personal Property Securities Law CCH 2010 at page 1.

7 See section 147 of the PPS Act.

8 The priority rules are set out at Part 2.6 of the PPS Act.

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18. While the PPS Register might be likened to Torrens-type land registration the similarities

are passing. The most obvious distinction between the two registers is that the Torrens

system registers ownership of property while the PPS Register looks only to registration of

security interests. (Whether you have any clear or encumbered title to ‘Greenacre’ will be

apparent to anyone doing a title search on ‘Greenacre’. By contrast, if you have clear title

to your car there should be no security interest registered against it hence (absent other

relevant security interests) both you and your vehicle will be invisible to anyone searching

for either on the PPS Register.

19. Although the PPS Register is the centerpiece of the PPS Act and its contents are

admissible evidence of the existence of a security interest9 crucially there will be some

instances where powerful security interests are not disclosed by a register search. Parties

relying on a single search of the PPS Register will occasionally be misled as a

consequence. Examples of this obvious hazard include:

a) Where a security interest is ‘perfected’ by control10 rather than by registration;11

b) Where ‘temporary perfection’ is automatically accorded by circumstances;12 and

c) Where a ‘silent PMSI’ temporarily exists.13

Fundamental concept # 1 – personal property

20. Inevitably some lay people particularly will understand the reference to ‘personal

property’ in the PPS Act’s title as limiting the Act to ‘household’ or ‘consumer’ property.

This is fundamentally wrong. The Act does contain provisions which are specific to

“personal, domestic or household property”14 but the Act is in reality directed much more

at commerce and industry than the ‘mum and dad’ end of the economy.

9 See section 174(1) of the PPS Act.

10 See section 57(1) of the PPS Act.

11 As to the separate but related concepts of ‘possession’ and ‘control’ see Part 2.3 of the PPS Act.

12 See for example sections 34, 35, 36 and 39 of the PPS Act.

13 See section 63(c) which permits a PMSI to be registered up to 15 business days after a grantor takes possession

of the relevant collateral. 14

See example section 47 of the PPS Act which deals with purchase of such property free of security interests

where, inter alia, the property is worth less than $5000.

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21. "Personal property" does not mean “consumer property." It means almost any property at

all - tangible or intangible - that is not either -

a) Land; or

b) Excluded from the operation of the PPS Act by the PPS Act itself or by some other

Commonwealth or state statute.15

22. Motor vehicles, household goods, business inventory, intellectual property, accounts

receivable and company shares are thus all obvious examples of relevant personal

property. One less obvious category which is specifically provided for is "satellites and

other space objects."16

Fundamental concept # 2 – ‘security interest’

23. The PPS Act does not define ‘security’ or ‘securities’ but uses the term instead the defined

term “security interest” -

A security interest means an interest in personal property provided for by a

transaction that in substance secures payment or performance of an obligation

(without regard to form of the transaction or the identity of the person who has title

to the property).17

24. Examples offered by the Act18 of security interests include:

a) Fixed and floating charges;

b) Agreements to sell subject to retention of title;

c) Leases of goods;

d) Hire-purchase agreements;

e) Consignments; and

15

see definition of "personal property" in section 10 of the PPS Act and, for some sample exclusions, section 8 of

the PPS Act and the Personal Property Securities (Statute Law Revision and Implementation) Act 2010 (Vic) (which

carves some mining-related rights etc in Victoria from the definition of ‘personal property’ for PPS Act purposes). 16

see section 21(2)(c)(vi) of the PPS Act. 17

see section 12 (1) of the PPS Act. 18

see section 12 (2) of the PPS Act.

Paul Duggan -


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f) Chattel mortgages.

25. There will be others. Two examples not referred to in the PPS Act that occur to me are

floor-plan financing (widespread in the car sales industry whereby floor stock is owned by

a financier rather than by the dealership ostensibly selling the vehicles) and margin lending

(where banks and others lend investors money on security of shares held by those

investors).

26. A surprising further example should be highlighted to litigators particularly. Section 148

sets out the data that the PPS Register is to contain and permits the prescription of further

classes in the regulations. Buried at Regulation 5.3(c) of the Personal Property Securities

Regulations 2010 is the prescription for the purposes of the PPS Register of:

…personal property that is subject to an order of a court or tribunal (however

described) that:

(i) prevents or restricts a person dealing with the property; or

(ii) enforces another court order (however described); or

(iii) orders the sale or other disposal of all or part of the property.

27. Thus it seems that Mareva injunctions, asset preservation orders and orders for seizure and

sale (to name just some examples) can (and should) now all be registered on the PPS

Register.

Other basic terminology

28. Property which is (or is intended to be) the subject of a security interest is “collateral”.19

A security interest “attaches”20 to collateral when a person (eg a credit provider) gives

value for acquiring the security interest and in return gains rights in that collateral. A

person granting a security interest in the collateral (ie the borrower, debtor, guarantor of

borrower/debtor) is referred to in the Act as a grantor.21

19

see section 10 PPS of the Act. 20

see section 19 PPS of the Act. 21

see section 10 of the PPS Act.

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29. The resulting security interest is enforceable against third parties when that interest has

attached to the collateral and either -

a) the secured party has possession or control of the collateral;22 or

b) the secured party has otherwise perfected that interest.23

Strive for ‘perfection’

30. "Perfection" is the means by which a security interest in collateral is made known to the

world so that third parties (such as potential purchasers of that collateral and/or other

prospective creditors) can be alerted to the existence of the security interest in that

collateral and organise their affairs vis-a-vis the grantor and the collateral accordingly.

31. Perfection will usually be achieved in one of three ways:

a) possession24 or control of the collateral itself (which is the paramount form of

perfection);25

b) registration of the security interest on the PPS Register;26 or

c) in some cases, automatic temporary perfection in particular circumstances.27

32. A perfected security interest will generally rank ahead of an unperfected security interest

in an insolvency.28 Where two perfected security interests compete ‘first in, best dressed’

will apply.29

22

see section 20(1) of the PPS Act but note that possession of collateral will often ipso facto constrain the

grantor’s ability to economically utilise that collateral. (Eg A truck financier would quite thwart the very purpose of

a hire purchase agreement if it financed the acquisition of a truck and then refused to release possession of it to

the trucking business [grantor] on whose behalf it in fact had acquired the truck.) 23

see section 20 and 21 of the PPS Act. 24

see section 21(2)(b) of the PPS Act. 25

see section 57(1) of the PPS Act (but note the limitation imposed on it by section 322A). 26

see section 21(2)(a) of the PPS Act. 27

see section 21(1)(a) of the PPS Act. 28

see section 55(3) of the PPS Act. 29

see section 55(5) of the PPS Act.

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Not even perfection is perfect

33. Don’t be misled by the lay meaning of ‘perfection’. A security interest that has achieved

‘perfection’ in PPS Act terms does not simply by reason of its ‘perfection’ ensure that the

security interest holder will succeed in enforcing its interest in the event of the debtor’s

insolvency.

34. The principal hazards are:

a) defects of form and/substance (including drafting and clerical errors) in lodging PPS

Register registrations;

b) prior30 registered security interests in the same collateral (remember ‘first in – best

dressed.’31) and

c) prior or subsequently registered Perfected Purchase Money Security Interests

(PMSI).

35. This is important. A perfected security interest can still be trumped by a subsequently

registered PMSI.

The ‘super priority’ of the PMSI

36. A PMSI is a security interest granted to an entity that in substance provides the purchase

money for the particular collateral concerned.32 PMSI holders will hence typically be -

a) a vendor selling on terms whereby it retains title pending payment of the balance of

the purchase price;

b) a financier who provided value for the purchase of the collateral;

c) a lessor or bailor under a PPS lease; or

d) a consignor who delivers property on a commercial consignment.

31

see section 55(5) of the PPS Act – competing ‘perfected’ interests is likely to be a common phenomenon. 32


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37. After actual possession or control of collateral, the PMSI is the holy grail of the PPS Act.

A PMSI confers a ‘super priority’ on the secured party and will usually take precedence

over any security interest which has not been effected by control of the collateral.33 The

‘super-priority’ principle is important and means that a PMSI will generally trump a lesser

registered security interest (for example an all-assets floating charge) even if that lesser

interest was registered first in time.

38. The public policy rationale for the ‘super priority’ of PMSI is twofold:

a) earlier creditors should not benefit by having potential recourse to assets which the

grantor might not have been able to acquire but for the assistance of the subsequent

financier; and

b) but for this ‘super priority’ the PMSI-secured creditor might well be deterred by an

existing security interest from advancing to the grantor the money or assistance the

grantor requires to develop the grantor’s business further.

39. A PMSI can lose its ‘super-priority’ if it is not appropriately and promptly registered on

the PPS Register.34

Retention of title (aka ‘Romalpa clauses’) and PMSIs

40. Property is frequently sold or leased on the basis that the buyer takes possession of the

item concerned without acquiring legal title to it until full payment is made. Under the PPS

Act such arrangements create a security interest in the property leased or sold. If such

security interests are not registered on the PPS register the vendor/lessor’s rights in that

property may be lost in the event that the buyer/hirer becomes insolvent. Accordingly,

supply and lease agreements need to be reviewed with an eye to both ensuring that:

a) the retention of title provisions effectively create security interests for the purposes

of the PPS Act (which will be the usual case); and

33

see section 62 of the PPS Act. 34


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b) that following execution of these agreements the resulting security interests are

promptly and effectively registered in the PPS Register (failing which they will be

effectively useless as security interests and the collateral will be lost to the liquidator

in the event of the grantor’s liquidation.)35

Enforcement rights and remedies for secured parties

41. The first step in enforcement of a security interest upon default remains seizure of the

collateral.36 That collateral may then be retained37 or sold for the best price reasonably

obtainable/market value38 after the observance of notice requirements in the interim.39

42. Anyone purchasing the collateral takes it free of all security interests and also of any claim

the grantor might otherwise have in it.40 The proceeds from sale are distributed amongst

secured and unsecured creditors in order of priority with any residue returned to the

grantor.41

Taking personal property free of security interests

43. The PPS Act sets out ten main rules dealing with how and when a purchaser can acquire an

interest in property free of a prior security interest in that property.42 Inevitably they are all

subject to exceptions but the first rule43 is illustrative:

A buyer or lessee of personal property, for value, takes the personal property free of an unperfected security interest in the property.

35




see sections 128 - 131 of the PPS Act. 39

see sections 130 PPS Act and section 135 of the PPS Act. 40


see section 140(2) of the PPS Act. 42

see Part 2.5 of the PPS Act. 43

43(1) of the PPS Act.

Paul Duggan -


13

44. This puts an onus on security holders to register their security interests on the PPS Register

unless their interest is already otherwise perfected. Put simply, perfect your security

interest or risk losing it if the collateral to which it is attached is sold to a third party.

Registration is voluntary but desirable

45. The most common form of perfection will be registration on the PPS Register. Registration

is not compulsory but it does confer three obvious benefits:

a) registration will generally define the priority status that a security interest has

relative to other interests in the same collateral;

b) registration should ensure that the security interest survives the insolvency of the

grantor rather than the collateral being realised and distributed among all creditors as

part of the insolvent estate; and

c) registration of a security interest in collateral will generally protect that interest as

against third parties who might otherwise purchase the property from its apparent

owner (typically the grantor) for value and thereby extinguish the interest of any

unregistered security holders in that collateral.44

46. Registration of security interests is intended to be relatively quick, simple, and cheap

although the complexities of the ‘simple’ registration system might well discourage or

defeat less sophisticated security interest holders particularly from effectively registering

their security interest entitlements.

47. Security interest holders might neglect to or choose not to register their security interests

properly or at all. They will face two obvious consequences:

a) They will rank with unsecured creditors in insolvencies; and

b) They will risk loss by sale of their collateral to unsuspecting third parties.

44

43(1) of the PPS Act.

Paul Duggan -


14

48. A security interest can be registered on the PPS Register by an application supported by

specific information45 and a payment of between $7 and $14546 (depending on the nature

and duration of the particular registered security interest. Once a security interest is

registered notice of that registration must be given to the grantor.47

49. The PPS Register is a public document accessible via the internet. For a small fee (eg

$3.70 for a motor vehicle search) it may be searched for details of security interests

registered against particular grantors and/or types of property.48

Priorities

50. The PPS Act sets out priority rules. The default rules in summary are:49

a) a perfected security interest takes priority over an unperfected security interest;

b) priority between two or more perfected security interests is determined in favour of

an earlier perfected security interest over a later one;

c) priority between two or more unperfected security interests is determined in favour

of an earlier attached security interest over a later one.

51. These are the default rules only. They yield to more specific priority rules found

throughout the PPS Act such as those relating to PMSIs.50

Non-security interests are not changed by PPS Act

52. The PPS Act revises the rights of security interest holders as between each other. It does

not otherwise revise Corporations Act / Bankruptcy Act priorities in insolvencies (eg

45

see section 153 of the PPS Act 46

See table of fees at http://www.ppsr.gov.au/AbouttheRegister/AboutFees/Pages/default.aspx 47


some privacy-motivated constraints apply to access - see section 172 of the PPS Act and some forms of property

capable of being identified by serial number (eg motor vehicles, aircraft, patents) will only be searchable by those

serial numbers and not by the identity of the grantor. 49


see Part 2.6 of the PPS Act generally

Paul Duggan -


15

unsecured creditors, outstanding employee entitlements etc are not affected by the PPS

Act). Such other creditors will in all likelihood be neither helped nor hindered by the new

regime.

53. This comes back to the concept of security interests. A creditor owed money but without

any lawful entitlement to seize particular property from the debtor's possession is on first

principles an unsecured creditor. That creditor will generally have no security interest

capable of registration under the PPS Act.

Transitional arrangements

54. The PPS Act came into operation on 30 January 2012. It applies to security interests that

are created after that date but also to security interests that predate it. For this purpose pre-

30 January 2012 security interests from the PPS Register’s various predecessors (eg

ASIC’s Register of Company Charges and Victoria's Register of Motor Vehicle Securities)

have been migrated to the PPS Register automatically. This migration is accompanied by a

"temporary perfection" regime51 directed at ensuring that no security interest valid under

the various old systems is prejudiced by the introduction of the new. But note the

temporary nature of this safeguard. An older security interest not perfected under the PPS

Act before 30 January 2014 will on that date become ‘unperfected’ (and hence be both

subordinate to security interests perfected in accordance with the PPS Act and exposed to

the risk of unauthorized sale of collateral to third parties).

Further reading

55. As you would hope from an internet-based service the Personal Property Securities

Register itself provides a helpful range of fact sheets, forms and information on its website

– http://www.ppsr.gov.au

51

see sections 320 – 323 of the PPS Act

Paul Duggan -


16

56. In preparing this paper I have been particularly assisted by two text books on the PPS Act:

a) Del Cseti’s ‘Understanding Personal Property Securities Law’ (CCH) 2010; and

b) Lionel Meehan’s ‘The PPS Guide’ (Woof Creative) 2011.

57. Cseti’s book is good but I found Meehan’s better. Inevitably (given their publication dates)

both are quite unburdened by Australian judicial authorities on the subject.

Conclusion

58. The PPS Act brings a new system of security interest regulation to Australia. Much of it

(such as issues concerning accession, processing and comingling of secured goods,

circulating security interests (floating charges) and transfers of accounts and invoice

finance (factoring) and PPS leases) has not been touched upon in this paper.

59. Even this selection of omissions hints at the new lexicon introduced by the PPS Act.

Beneath its novel terminology some of the PPS Act system is more familiar than it sounds

but other parts are entirely fresh to Australian eyes. But none of it is easy. For better or

worse, it will keep very many lawyers and accountants employed for the foreseeable

future.

Paul Duggan Barrister Owen Dixon Chambers West Melbourne 3 May 2012

Paul Duggan BA, LLB

Chambers: Room 304, Owen Dixon West

Admitted: 1992

Signed Bar Roll: 1996

Phone: (03) 9225 6840

Mobile: 0411 259 589

Facsimile: (03) 9225 7907

E-Mail: [email protected]

Jurisdictions: Victoria, New South Wales, the federal jurisdictions and Northern Ireland.

Paul appears mainly in the Supreme Court, the County Court and VCAT (particularly its Retail Tenancies, Domestic Building, Real Property and Civil Claims lists) but is also available for work in the federal and interstate jurisdictions. Paul is a nationally accredited mediator. He has a wide commercial practice and particular experience in disputes involving: -

• Retail leases;

• Commercial leases;

• Partnerships;

• Franchises (acting both for franchisors and franchisees);

• Farming enterprises (such as supply and share farming disputes);

• Building - both commercial and residential;

• Insurance;

• Corporate and personal insolvency;

• Management and agency agreements; and

• Partition and sale of land. Paul's blog can be found at http://pauldugganbarrister.com . Before coming to the Bar, Paul had two careers:

• A total of 4 years as a solicitor at Dunhill Madden Butler and then Arthur Robinson & Hedderwicks; and

• 6 years as a journalist with publications including 'The Herald' and 'The Age'.

Paul's interests outside the law include skiing, farming, bushwalking and learning German from his

four kids.

PPS Act introduction-Chris Furnell Page 1

AN INTRODUCTION TO THE PERSONAL PROPERTY SECURITIES ACT 2009

Introduction

The PPS Act has downsides for those that don’t observe it. On the other hand, if observed, it has

upsides. It should enhance the capacity to obtain funding using personal property as security. It can

also lead to improved protection from bad debts by, for example, effectively improving the capacity

of suppliers under retention of title clauses to gain access to a customer’s debtors and reducing the

risk of payments to them having to be repaid as voidable transactions.1

Irrespective, however, of whether the upsides outweigh the downsides, it is in place and it is a major

change.

According to the LPLC:

“Of all the recent legislative reforms, this one stands out as the one that has the most

obvious potential to lead to more claims being made against practitioners, because:

1. A huge number of businesses face the risk of significant losses in the future if they ignore

the PPS Reform.

2. The PPS Act is a complicated piece of legislation and can be very counter-intuitive for

lawyers.

3. The PPS Reform entails a fundamental change in the law of personal property, and cuts

across many established and well known legal principles.

4. The PPS Reform is similar to the GST in that it has the potential to give rise to some sort of

issue or question for consideration in virtually every transaction in any area of legal

practice.“2

In this seminar I will try to clarify some (but certainly not all) matters concerning:

• Why and when your client might want you to conduct searches of the PPS register.

• Searches of the register.

• What you might want to do if a search reveals a security interest over property.

1 S588FA Corporations Act 2001 defines unfair preferences by reference only to unsecured debt. Note

perfected security interest can, however, vest in a company’s liquidator if, for example, they are

perfected within 6 months of commencement of winding up-588FL(4) 2 Personal Property Securities Act 2008 (Cth)-Background and Key Concepts-LPLC publication 15 June 2011


• What information you might want to gather if you take on the task of perfecting a client’s

security interest by registering a financing statement.

• What you might want to consider if you take on the task of overseeing your client’s

registration.

• How personal property security interests line up against charges.

• Transitional arrangements.

Why and when search-some points

If you or your client is buying or leasing personal property, you might first want to conduct a search

of the PPS register to check whether the property is encumbered.

Whether you will want to conduct a search may depend on the circumstances in which the property

is to be acquired.

Generally, if personal property is being acquired from a person in the ordinary course of the person’s

business of selling or leasing such property, you or your client will take free of any (even perfected)

security interest over the property given by the seller.3 (This will be so unless you have actual

knowledge that the sale or lease is a breach of a security agreement or the goods may be described

by serial number and are being acquired as inventory.4)

Generally, if your client is acquiring personal property other than in the ordinary course of the

supplier’s business and the property is of some significance, you will want to conduct a search.5 This

is because your client will want to know whether there are any perfected security interests over the

property and registration of a financing statement on the PPS register is the way in which security

interests are generally perfected. (Note, however, registration is only one way of obtaining

perfection. Hence, a security interest perfected by possession will not be discoverable by a search.)6

If there are perfected security interests you will, presumably, seek their release (discussed below).

If the search does not reveal any perfected security interests, you should be protected (to an extent)

because:

• An acquirer of personal property for value usually takes the property free of unperfected

security interests unless he or she was party to the transaction providing for the security

3 S46-note, however, a security interest over property given by a person from whom the seller acquired

the relevant property might survive. 4 Actual and constructive knowledge concepts are elaborated upon at ss297-299

5 I am ignoring acquisitions of personal household or domestic property worth less than $5000-see s47

6 S21


interest (noting, again, however, that perfection can be achieved other than by

registration).7

• A buyer or lessee of personal property that may be described by serial number will (unless

the property is being acquired as inventory) acquire such property free of security interests

if a relevant search by reference only to the serial number would not reveal the interest8

(although this will generally not apply to protect from transitional security interests a

purchase or lease undertaken before the end of January 2014).9

Searches-some points

In order to conduct a search you will generally need accurate customer information (customer

name, ABN in the case of a partnership, ACN in the case of a company, name and date of birth in the

case of an individual).

In terms of searching:

• The PPS register is accessible at www.ppsr.gov.au

• Records from more than 70 databases and security interests recorded on 23 registers were

moved onto the one system. Glitches in the move have arisen.

• The PPS register provides for a number of types of search criteria; principally, grantor, serial

number (for property that may or must be described by serial number, such as cars, boats

and certain IP) and registration number. Most searches will be by grantor.

• In terms of individuals, the name used should be the name and date of birth on the person’s

licence. Nevertheless, as the register only recognises a single name, it has been

recommended that searches also be conducted of individual name variants such as “Chris”,

“Christopher”; “Sam”, Samuel”.

• In terms of companies, ASIC’s register of charges has generally migrated into the PPS register

by reference to each chargor’s ABN, rather than its ACN. This issue is apparently expected to

be resolved by 11 May 2012 but in the meantime it has been recommended that searches

be conducted by reference to each of three criteria; ABN, ACN and company name.

7 S43

8 S44

9 PPS regulation 2.2 expands this so as to afford protection to those purchasing vehicles from licensed

motor vehicle dealers


(Apparently, in some cases, the three different searches have revealed different security

interests for the same entity.)

• Also in terms of companies, approximately 6000 ASIC charges have not migrated successfully

to the PPS register. As ASIC cannot now migrate them, each relevant chargee has to do it, a

process that need not be completed until the end of January 2014 (given that transitional

security interests are deemed to be perfected for up to two years from commencement of

the PPS regime). Pending completion of that process a person acquiring property from a

company will not be able to confidently ascertain from a search of the PPS register whether

the company can deliver title free from charges in place prior to February 2012 . Given this,

the LIV recommends that its members exercise caution and, potentially, seek warranties or

statutory declarations as to clear title from vendor companies. It might also be useful to

check whether the company you are dealing with is subject to one of the non-migrated

charges. The ASIC website includes a list of charges yet to migrate; see.

http://www.asic.gov.au/asic/asic.nsf/byHeadline/Some%20charges%20not%20migrated%20

to%20PPSR?opendocument

• If a search reveals that a company is subject to a subsisting charge that has migrated from

the ASIC charges register, it might not be accurate. Approximately 38000 satisfied charges

migrated from the ASIC register and appear on the PPS register as current. Whether a charge

is satisfied can be checked by looking to a document entitled “ASIC satisfied charges data”

available at

http://www.ppsr.gov.au/EventUpdates/Announcements/Pages/default.aspx

• If a search reveals that a company is subject to a subsisting charge that has migrated from

the ASIC charges register and you want to deal with the secured party (because, for

example, you want to enter into priority arrangements), care needs to be taken that you are

dealing with all the secured parties. ASIC charges with more than one chargee have been

migrated with only one secured party in the secured party group. This affects, apparently, up

to around 26000 registrations. Options to deal with this issue are identified at the web

address specified in the preceding paragraph.

Once a search is completed, a search certificate can be downloaded.


A search of the register in relation to individuals can only be conducted, and the information

derived on a search can only be used, for certain purposes (such as to disclose whether personal

property to be purchased is described in a registration).10

If a search reveals that the personal property being acquired is subject to a security interest, to try

and obtain clear title, you will need to obtain a release and undertaking to amend registration from

each secured party.

As to the form of that document, the LPLC has referred to a pro-forma formulated by the finance

industry and available at http://www.bankers.asn.au/Submissions/Personal-Property-

Securities/Personal-Property-Securities-Information-and-Protocols

As is implicit in such a document, a purchaser will be relying on each relevant secured party to

honour his or her undertaking.

This will mean checking after a purchase to ensure that they have and, if not, issuing to them an

amendment demand requiring the secured party to issue a financing change statement to either

remove its registered financing statement or amend it to remove the relevant property as collateral

subject to it.11

Financing statement information-some points

In terms of practice, the LPLC has made a number of recommendations in relation to the taking and

maintenance of personal property security interests.

Whether these recommendations are of direct relevance to you may depend on the extent to which

you agree, on behalf of your clients, to register financing statements and to thereafter maintain

them. (As will be recalled, financing statement registration is often a requirement in order to perfect

registration of a security interest and, thereby, preserve and protect the interest of the holder in the

security interest against third parties and the grantor, on its insolvency. In this regard, title to

personal property now is likely to be treated as just another security interest, liable to be defeated if

not perfected.12)

10

S172 11

S178 12

Waller v New Zealand Bloodstock [2006] 3 NZLR 629 at [47]; s55-note, as mentioned previously, that,

generally, a buyer takes free of an unperfected security interest [s43], a buyer of property that may be

described by serial number takes free of a security interest if a search of the serial number would not

disclose the security interest [s44]; a buyer of property sold in the ordinary course takes free of any

security interest [s46].


If that is not agreed, you might wish to make this plain in your retainer letters.

If it is agreed, as noted by the LPLC, registering a financing statement, relative to registration of a

charge with ASIC, entails more risk as the process is more complex and scope for error enlarged.

A financing statement needs to include a variety of information, such as:

• Whether the property is commercial or consumer property. (This is the first thing the PPS

register asks when seeking to register a financing statement.)

• Whether the security interest is a transitional one (that is, essentially, whether it arose

before February 2012).

• The relevant secured party group number.

• The class which best describes the relevant collateral. The classes of collateral

are13agriculture; aircraft; all present and after-acquired property; all present and after-

acquired property, except (property that might be described in the free text field of the

statement or in an attachment); financial property; intangible property; motor vehicles;

other goods; watercraft.

• The identifier which the client wants to be used when notice is given to it about the relevant

registration.

• Grantor details (comprising, as previously indicated, customer name, ABN in the case of a

partnership, ACN in the case of a company, name and date of birth in the case of an

individual).

• If the collateral is commercial property, whether it includes inventory and whether or not it

is subject to the secured party’s control.14

• The end time of registration. For consumer property (or property described by serial

number), it can be no later than seven years after registration. For other property, there

need be no stated end time but the fee for registration is much larger. Otherwise, the stated

end time can be no later than 25 years after registration.

13

Cl2.3, Schedule 1 to the Regulations 14

S341


• Whether the security interest is a PMSI.

The one transaction might trigger a need for multiple statements. For example:

• A financing statement is restricted to one class of collateral.15 Hence, multiple statements

are required if the collateral is of multiple classes (although multiple registrations can be

effected by the one application).

• Multiple financing statements might be required where the security is both a PMSI and a

non-PMSI security. As will be recalled, securities capable of being a PMSI include security

interests “to the extent that” they secure the purchase price of collateral (such as arise

under retention of title provisions), the interest of a lessor or bailor of goods under a PPS

lease, the interest of a consignor under a commercial consignment16 and security interests of

financiers of collateral17, unless the collateral is not described by serial number and the

purchaser, lessee, bailee or consignee intends to use it predominantly for personal domestic

or household purposes.

While the one transaction might trigger multiple registrations, similarly, multiple transactions can,

potentially, be addressed by the one registration. This is because a single registration can perfect

multiple security interests.18 Each supply to the one customer under, say, a retention of title

provision should be able to be addressed by the one registration.

If you access the register reasonably often you presumably have, or will, set up an account. If you set

up an account, you will have (or will receive) a login which, depending on your requirements, can be

used by a number of users.

In order to create a registration, a secured party needs to establish a secured party group in relation

to which a number and an access code will be issued so that details of the group can be changed.

By using such a group, a secured party only needs to enter its details once, rather than each time it

creates a registration in the register. (Whether you will want to be the address for service for

notifications from the register to a secured party group will depend, I suspect, on the scope of your

retainer.)

15

S153 16

Essentially, consignment transactions the parties to which deal in goods of the relevant kind in the

ordinary course of business unless the consignee is generally known to its creditors to be selling or leasing

goods of others 17

S14 18

S21(4)


There are risks in getting a statement wrong. For example, a financing statement will not be

effective (and, hence, the risks of not having a security interest perfected will arise) if:

• It contains a seriously misleading defect.

• A search of the register would not be capable of disclosing the registration because

(essentially) the grantor’s details are wrong or the serial number of the collateral is wrong.

• The security interest is described as a PMSI when it is not.19

Moreover, care needs to be taken that the statement is accurate as the PPS Act can be contravened

by registering a statement when there are no reasonable grounds to believe that the person

described in it as the secured party is or will become a secured party in relation to the collateral

described in it.20

Oversight of registration-some points

Registering a financing statement is only part of the deal if responsibility for registration and

maintenance is taken on. For example, after registration, the secured party will receive (and,

presumably, need to store safely):

• A statement verifying registration. The secured party might then become obliged to include

information from that statement in a particular notice to be given to the grantor of the

security interest.21

• A token enabling the registering party to amend or discharge the registration. That token

will need to be retained for subsequent use.

For businesses that acquire security interests in personal property the LPLC recommends adoption of

a number of business procedures that can be broken down temporally; before and after a relevant

transaction is entered into.

Before a transaction is entered into the LPLC recommendations include putting in place procedures

that:

• Ensure provision up-front of accurate customer information so as to facilitate financing

statement registration (customer name, ABN in the case of a partnership, ACN in the case of

a company, name and date of birth in the case of an individual).

19

S165 20

S151 21

S157


Such information might not be required, however, where the relevant property is required

to be registered by serial number (cars/boats/certain IP/licences over the IP) and is

consumer property (that is, held by an individual other than in the course or furtherance of

carrying on an enterprise).

In any event, the information obtained from customers who are individuals should extend to

information designed to ascertain whether the relevant property is, or is not, to be held in

the course or furtherance of an enterprise to which an ABN has been allocated (that is,

whether it is consumer property).

• Ensure unequivocal acceptance is obtained of the relevant security agreement, such as the

terms of trade providing for retention of title. (A security agreement includes writing

evidencing the creation of a security agreement.)

Proof of acceptance is important. Generally, a security interest with respect to personal

property is only enforceable against third parties,22 and is only capable of being perfected,23

when the security interest has attached to the property (which happens when, say, a

purchaser takes possession of goods sold subject to a retention of tile provision)24 and a

security agreement which provides for the security interest (that is, it arises under the

security agreement) covers the property.

A security agreement will generally only cover property if:

o It is in writing and is either signed by the grantor or (“by an act, or omission, that

reasonably appears to be done with the intention of adopting or accepting the

writing”) adopted or accepted by the grantor.

o It describes the collateral subject to it or includes a statement that it covers all

present and after acquired property (or all present and after acquired property

except certain property).25 If collateral is described as inventory, note that the

security interest is likely to cease to be perfected when the grantor ceases to hold

the property as inventory.

• Ensure PMSI securities are registered within the tight time frame provided for their

registration (if they are to gain super priority).26

22

S20 23

S21 24

S19 25

S20 26

S14-note PMSIs do not extend to property to be used predominantly for personal domestic or

household purposes unless the property may be described by serial number


Generally, priority between perfected security interests is determined by the order of

perfection27 unless it is a PMSI which has been perfected within a certain time frame.28 Such

a PMSI has priority over another, non PMSI, perfected security interest if the financing

statement is registered before the grantor obtains possession (where the relevant goods are

inventory29) or within 15 business days of the grantor obtaining possession (where the

relevant goods are not inventory), as long as the financing statement states that the interest

is a PMSI and the security interest is given by the same grantor.

Accordingly, if your client is supplying goods that constitute inventory of the customer on

retention of title terms, the financing statement needs to be registered before possession of

the goods is taken. If it is, your client should succeed, say, against a bank that has a

perfected security interest over all present and after acquired property (except insofar as

the bank’s security is a PMSI also on the basis that it has given value for the purpose of

enabling the customer to acquire the inventory, that is, provided funding for the inventory).

• Ensure other security interests given by a company are registered within 20 business days.

This is because a security interest is liable to vest in a grantor company that is being wound

up or to which an administrator is appointed unless perfected and registered either more

than 6 months before the wind up or appointment or within 20 business days of the relevant

security agreement coming into force.30

• Ensure that there is capacity to identify goods supplied under an unpaid invoice.

Your client’s security interest will extend to the proceeds realised on re-supply of the goods

your client supplied unless the disposal of the goods was expressly or impliedly authorised.31

For your client to be able to trace into proceeds, however, it will be necessary for your client

to identify that the relevant book debt arose as a result of a re-supply of goods supplied by

your client for which he or she has not been paid (noting that “proceeds” includes

identifiable or traceable personal property derived from a dealing with collateral, but,

generally, only if the grantor has an interest in the proceeds).32

27

S55 28

S62 29

Essentially, property held as raw materials or for on-sale or lease by an enterprise to which an ABN has

been allocated 30

S588FL Corporations Act 2001-note this does not, generally, apply to commercial consignments or PPS

leases of property identified by serial number-s588FN 31

S32-proceeds are automatically captured by a security agreement-s20(6) and a security interest in them

is generally perfected when the security interest in the original collateral is perfected-s33F 32

S31


This security interest in proceeds will be lost if the re-supply occurs in the ordinary course of

your client’s customer’s business. In such a case, the relevant buyer or lessee will take the

goods free of your client’s security interest (absent the buyer or lessee having actual

knowledge that the sale or lease is a breach of your client’s security agreement or the goods

being capable of description by serial number and the buyer or lessee acquires them as

inventory).33

Even where the security interest in proceeds is so lost, however, it would be desirable to be

able to identify goods supplied under an unpaid invoice because, while the security interest

might not subsist, your client will be subrogated to the customer’s right to be paid for the

on-supply.34

Another reason for being able to identify goods supplied under an unpaid invoice relates to

accessions (that is, goods installed in or affixed to other goods).

In essence, a security interest over goods can trace not only into proceeds but also into

other goods to which your client’s goods become affixed. In such a case, usually, the

security interest of your client will have priority over any security interest a person has in

the goods, as a whole.35 The example used by the LPLC involves a suppy of a truck gearbox

under a retention of title clause. Even after the gearbox is installed in a truck, the

supplier will continue to have a security interest in the gearbox and may have priority

over a person with an interest in the whole truck (something that could prove a

nightmare for the financier of the truck).

Again, however, for the gearbox supplier to take advantage of this, he or she will need

to be able to identify that the invoice for the relevant gearbox has not been paid.

Lastly, your client will want to be able to identify goods (or at least what happened to

goods) supplied under an unpaid invoice because of the right to effectively trace into goods

into which your client’s unpaid goods have been incorporated.

In this regard, a security interest in goods survives the goods being incorporated into a

larger product or mass.36

After a transaction is entered into the LPLC recommendations include putting in place procedures

that provide for:

33

S46 34

S53 35

S89 36

S99


• Renewal of financing statements at the end of their registration period (noting the inclusion

of end dates in financing statements). There is an icon on the PPS register for renewing

registrations.

• A capacity to address requests for information from the grantor and certain others (such

as a person with a security interest in the same collateral). The information requested

can include a copy of the relevant security agreement and a statement as to the amount

secured and terms of its payment.37

A secured party generally needs to respond to such

requests within 10 business days of their receipt38

(although a response might not be

required if the secured party is bound by a confidentiality agreement under which it is

agreed not to disclose the information, the agreement was made before the relevant

security agreement and the “debtor” is not then in default under the security

agreement).

• Amendment of financing statements when details change (such as contact details). This can

be achieved through the registration of financing change statements.39 There is an icon on

the PPS register for amendments.

• Registration of financing change statements amending each relevant registration so as to

end its effect after the security becomes unperfected by reason of, say, the customer having

paid all outstanding amounts, promptly or (where the collateral is consumer property or

registered by serial number) within 5 business days of the security becoming unperfected.40

There is an icon on the PPS register for discharging registrations.

• A capacity to address amendment demands. In particular, a person with an interest in

collateral described in a registered financing statement can demand that the relevant

secured party issue a financing change statement either to end registration or to remove

certain collateral from the registration.41

• A capacity to monitor who is in actual possession of the relevant property. As previously

indicated, in some circumstances a security interest can be lost on disposal of collateral to

37

S275 38

S277 39

S150 40

S167 41

S178


third parties. Where collateral subject to a perfected security interest is transferred and the

security interest is not lost, however, a perfected security interest arises, but it is

temporary.42 The period of this temporary perfected security interest is up to two years but

will be shorter if, within the two year period, the secured party gets actual or constructive

notice of the transferee’s details (in which case the secured party has 5 business days to re-

perfect its interest by an amendment to its registration). During the period in which a

temporary perfected security interest applies, a buyer or lessee for value from the

transferee can take the relevant property free of the security interest.43

• Recognition of those PPS Act requirements and rights that have been contracted out of in

relation to each relevant security interest registration.44 The Act provides for certain

enforcement rights, including seizure (by any method permitted by law),45 disposal and

retention of collateral. (Clients need to be aware that such rights arising under the Act are

required to be exercised both honestly and in a commercially reasonable manner.46) Where

property is commercial property, most of those enforcement rights can be contracted out

of. (Further, those rights cease to apply when a receiver has been appointed.47)

PPS compared to charges-some points

Rather than employ a special form of words (such as assign, mortgage or charge), in order to create

a security interest, a security agreement need only contain words to the effect that the grantor

grants a security interest in the personal property covered by the agreement. It can be expressed to

cover after acquired property and future advances.48

The PPS Act does not employ concepts used in connection with charges, such as “floating” or

“crystallisation”.

A security interest in personal property no longer crystallises but, rather, an interest attaches.49

42

S34 43

S52-this doesn’t apply to the temporary protection afforded to transitional security interests. 44

S115 45

S123 46

S111 47

S116 48

S18-note as PPS Act priority applies to future advances irrespective of notice of a subsequent lender,

priorities for personal property securities and for land securities will differ. 49

S19


It attaches when the grantor has rights to the property (assuming the secured party has given value),

which (in the context of a sale subject to retention of title or a PPS lease) is when the grantor obtains

possession.50

This, however, can be changed by agreement as security agreements take effect in accordance with

their terms.51 Hence, parties can agree that a security interest attaches at a later time, say, at the

time when an event occurs that (in the past) would have bean an event by reason of which a floating

charge would have crystallised.

If a security interest in personal property has attached, a reference in a security agreement made on

or after 1 February 201252 to:

• A floating charge is a reference to a security interest that has attached to circulating assets

(basically, inventory and other property which the secured party has authorised the grantor

to transfer free of the security interest, in the ordinary course of the grantor’s business).

• A fixed charge is a reference to a security interest that has attached to personal property

not being circulating assets.

• A charge is a reference to a security interest that has attached to circulating assets and to

other personal property.53

In any event the Corporations Act 2001 has been amended in an endeavour to ensure that the

treatment afforded to security interests over circulating assets equates to that given to floating

charges.

Hence:

• An administrator can disregard the fact that what was a circulating asset has ceased to be a

circulating asset (much as an administrator can disregard the fact that a floating charge has

become a fixed charge).54

• As with the position that applied to floating charges, employee claims rank in priority to

those of secured parties under circulating asset securities.55

50

Note value means consideration sufficient to support a contract but seems to include, effectively, past

consideration-being an antecedent debt or liability. 51

S18 52

S318 53

S339 54

S442B 55

S562


• A security interest in circulating assets may be void if created within six months of a winding

up.56

Indeed, amendments to the Corporations Act 2001 have been made to try and apply to personal

property securities the position that applied to charges, generally. In this regard:

• A creditor with security over the whole or substantially the whole of a company’s property

will continue to be able to appoint an administrator to the company (albeit now subject to

the security interest having been perfected).57

• A creditor with security will still have its enforcement rights restricted while a debtor

company is in administration.58

• As with the position in relation to other securities, winding up will not generally affect the

rights of a creditor where the debt owed is secured by a PPS Act security interest.59

• Property divisible amongst a company’s creditors would generally not include property in

the company’s possession but to which it does not have title if a security interest has

attached to the property.60 Hence, in essence, property subject to a security interest under

which the secured party retains title will not be available to an obligor’s creditors. This is

qualified, however, where the security interest is not perfected or where the financing

statement is registered out of time61.

The foregoing applies largely to perfected security interests. This is because a security interest that

has not been perfected vests in the grantor when, say, a company commences to be wound up or an

administrator is appointed.62

Transitional

The PPS Act applies in relation to:

• Security agreements made, and security interests arising, on or after 1 February 2012.

• Security agreements in force as at 1 February 2012.

• Security interests provided for in security agreements in force as at 1 February 2012

(essentially, “transitional security interests”).63

56

S588FJ 57

S436C(1A) 58

S440B 59

Ss51E and 471C 60

S51F 61

513AA and 588FL 62

S267 PPS Act-this does not, generally, apply to commercial consignments or PPS leases of property

identified by serial number-s268


While the PPS Act applies to transitional security interests, they also attract special rules. For

instance:

• Such a security interest is enforceable against third parties64 if it would have been

enforceable under the law that applied to the enforceability of security interests before 1

February 2012.65 (Enforceability, however, does not mean that an unperfected transitional

security will have the priority it would have had under the old law.)

• Enforcement rights provided for in the PPS Act cannot be exercised in relation to the

interest.66

Transitional security interests:

• Are deemed to be perfected as from 31 January 2012 until 31 January 2014, unless

perfected earlier, such as by registration under the migrated security interest provisions.67

As a result of those provisions, those transitional security interests that have been migrated

onto the PPS register (such as ASIC charges) are deemed to have been perfected as from 31

January 2012 by registration.

• While perfected, have priority over other security interests perfected after 31 January

201268 (although priority between two perfected transitional security interests is

determined in accordance with the pre-existing law).69

While migrated ASIC charges are perfected by registration, this only applies insofar as registration in

the ASIC register “in relation to the property” was effective.70

Registration in the ASIC register of a charge in relation to some property, however, might not have

been effective. In particular, such registration might not have been effective in relation to certain

securities over shares under the former s262 of the Corporations Act 2001 (such as securities

created by the deposit of title documents). If so, then insofar as such a security was registered with

ASIC then it might need to be re-registered under the PPS Act prior to 31 January 2014 despite its

purported migration to the PPS register.

63

S310 64

S20 65

S311 66

S314 67

S322 68

S320 69

S323 70

S332 PPS Act


Those who had charges or other securities entered in registers that have now closed should be

checking the PPS register to identify the secured party group of migrated security interests that

belongs to them, and then claim that secured party group. This is effected through what has been

called a find and claim process.

If an important part of a client’s migrated security interest (eg, an ASIC charge) was the security it

gave over property that may be described by serial number (such as a patent licence, but not a car or

boat), your client will want to ensure that prior to the end of January 2014 a search of the register by

reference only to serial number would reveal the security interest. This is because a buyer or lessee

of the property would then (generally) take free of the security interest if such a search would not

disclose the security interest.71

Clearly migration does not cover the range of security interests now arising under the PPS Act.

Hence, for example, lessors of personal property under leases in place before February 2012 will

need to consider whether the seek registration before February 2014.

Opining on security interests

The LPLC recommends that firms not give opinions as to title to personal property. In this

regard, the PPS register is not a title register.

The LPLC also recommends that firms not give opinions as to priority of interests in personal

property. The number of qualifications and assumptions that would need to be made is

considered likely to make any opinion meaningless.

Given these recommendations, it is suggested that written retainers identify the consequent

limits on the nature of the role being undertaken in terms of PPS Act advice.

Chris Furnell

3 May 2012

71

S44

Christopher Furnell LL.B, B. Comm.

Chambers: Floor 10, Room 1002, Douglas Menzies Chambers

Year Admitted: 1982

Year Signed Bar Roll: 20thNovember, 2003

Admitted to Practice in: Victoria, New South Wales, Western Australia, Federal Jurisdictions..

Phone: (03) 9225 6971

Mobile: 0419 337 545

Facsimile: (03) 9225 7907

E-Mail: [email protected]

Areas of Practice

o Administrative Law o Banking and Finance o Bankruptcy/Insolvency o Commercial Law o Contract o Corporations (Company) Law o Energy & Resources

o Equity & Trusts o Freedom of Information o Property Law/Sale of Land o State Taxes o Succession o Trade Practices

Chris was admitted to practice in 1982. He has over 20 years broad experience as a commercial lawyer, more than 13 of which was as a partner of one of Australia's largest law firms. He has particular expertise in:

access regime enforcement and interpretation - Chris provided extensive advice to privatized energy utilities and to their regulator, the Essential Services Commission;

the interpretation and enforcement of complex project documentation - Chris acted for the State in relation to the City Link project;

finance -Chris acted for the financiers in the M2 tollway project and Loy Yang B;

capital markets' documentation -Chris acted for the issuer in a recent note issue in the USA and advised on the large scale securitization of a pool of trade receivables;

banking ;

swaps and derivatives -Chris documented a number of the swaps undertaken by a then leading gold producer and has prepared for a bank standard foreign currency swap and option documentation;

administrative law -Chris was for several years a principal legal adviser to a statutory authority and, in that capacity, advised on FOI, tort liability, trade practices liability, procedural fairness and related issues;

state taxation - he has practiced in state taxation for over 20 years.

Chris has authored in excess of 20 publications and has been a member of the Law Institute's state taxes committee since its inception in the late 1980s.

He is also a member of the Law Council's financial services committee.

From 1/07/2008: Professional Standards Act 2003 [Vic] "Liability limited by a scheme approved under Professional Standards Legislation."

mailto:[email protected]

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