Credit law: general notes

Personal Property Securities Act 2009 (Cth)

  • The PPSA made fundamental changes to the taking of security over personal property for repayment of loans or other contractual obligations.
  • The PPSA replaced more than 70 different statutes across all Australian jurisdictions that dealt with registration of different types of securities include:
    • motor vehicles;
    • bills of sale;
    • ship mortgages;
    • company charges;
    • crop liens; and
    • stock mortgages.
  • The principal objective of the PPSA was to consolidate the legislation into a single national regime.
  • The PPSA’s main provisions took effect from 30 January 2012.
  • The PPSA is largely modelled on Canadian and New Zealand legislation, and all have the United States’ Uniform Commercial Code art 9 as their common basis.

Overview of the PPSA

  • The PPSA provides for the registration of security interests in personal property.
  • ‘Security interest’ and ‘personal property’ are defined broadly in the PPSA.
  • The PPSA sets down requirements to be satisfied for a security interest to be enforceable against the grantor of the security interest and against third parties.
  • An important issue arises where a grantor of a security interest gives security to multiple lenders using the same property.
  • In some circumstances a third party may acquire the property free from the security interest which had earlier been given by the grantor (such as a debtor in return for a loan).

Main concepts of the PPSA

The meaning of ‘security interest’

  • A security interest is an interest in personal property provided for by a transaction that in substance secure a payment or performance of an obligation: s 12(1).
    • This focuses on the substance rather than the form.
  • Under s 12(2), examples of security interests included in the definition are, where they secure payment or performance of an obligation:
    • chattel mortgages;
    • conditional sale agreements;
    • hire-purchase agreements;
    • leases of goods;
    • pledges;
    • trust receipts;
    • consignments;
    • fixed and floating charges;
    • assignments or transfers of title.
  • Under s 12(3), security interests extend to three classes of transaction, regardless of whether they secure in substance the payment or performance of obligations:
    • transfers of accounts and chattel papers;
    • commercial consignments of goods; and
    • certain leases and bailments of goods.
  • The PPSA does not apply to certain specified security interests, regardless of these interests securing in substance the payment or performance of obligations, such as:
    • liens that arise by operation of law: s 8(1)(b); and
    • security interests in fixtures: s 8(1)(j).
  • The PPSA applies to security interests given by corporations, partnerships, other legal entities and individuals.

The meaning of ‘personal property’

  • Personal property is any kind of tangible or intangible property other than real property.
    • This includes licences: s 9.
    • Examples include:
      • motor vehicles;
      • household goods;
      • business inventory;
      • intellectual property;
      • company shares.

Enforcement, attachment and perfection of security interests

  • Personal property is known as ‘collateral’ if it is the subject of a security interest.
  • A security interest is enforceable against a grantor in respect of particular collateral (such as personal property used to secure a loan) when it attaches to the collateral: s 19(1).
    • Under s 19(2) two requirements must be met:
      • the grantor must have rights in the collateral or have power to transfer rights to the secured party; and
      • either value is given for the security interest or the grantor does an act by which the security interest arises.
  • Under s 20, a security interest will generally be enforceable against a third party in respect of particular collateral only if the security interest is attached to the collateral and one of the following applies:
    • the secured party has possession of the collateral;
    • the secured party has perfected the security interest by control; or
    • the security agreement is evidenced in writing and is:
      • signed by the grantor; or
      • adopted or accepted by the grantor by an act or omission that reasonably appears to be done with the intention of adopting or accepting the writing.
  • The written evidence must contain a description of the particular collateral or a statement that a security interest is taken in all of the grantor’s present and after-acquired property (or specifying excluded property).
  • A security interest is perfected when the secured party has done all they can do to protect their security interest from competing security interests.
  • Under s 21, a security interest will generally be perfected in relation to collateral if it has attached to the collateral and is enforceable against and third party, and:
    • the secured interest is registered in the Personal Property Securities Register;
    • the secured party has possession of the collateral (other than as a result of seizure or repossession); or
    • for certain kinds of collateral (such as bank accounts and investment instruments), the secured party has control of the collateral.
  • The PPSA contains provisions to deal with the priority between competing security interests in collateral.
    • Priority rules apply when the same personal property is subject to two or more security interests.
    • If the debtor defaults, the rules determine the order of priority in which collateral is to be applied to meet the claims of various secured parties.
    • A perfected security interest has priority over an unperfected security interest in the same collateral: s 55(3).
      • A security interest in personal property that is registered in the Personal Property Securities Register will take priority over an interest that has not been registered or perfected by possession or control.
      • A later security interest that has been registered will take priority.
    • Priority between unperfected security interests in the same collateral is determined by the order of attachment so that the first takes priority over the last: s 55(2).
    • Priority between two or more security interests that are perfected is determined by the time perfection occurred: ss 55(4)–(5).
      • If two security interests have been perfected by registration, the first-in-time will take priority, but if the secured party takes possession of the collateral before another security interest has been registered, the party with possession will take priority.
    • The PPSA confers ‘super priority’ on security interests perfected by control.
      • Such a security interest takes priority over all other secured interests in the same collateral: s 57(1).
  • A security interest is a ‘purchase money security interest’ (‘PMSI’) when the secured party has provided the finance required by the grantor to acquire the collateral, such as:
    • security interests that secure an obligation to the seller to pay the purchase price (such as property sold on a retention-of-title basis);
    • security interests that secure an obligation to a secured party in relation to new value (a new debt) provided by the secured party to allow the grantor to acquire the collateral;
    • certain leases and bailments of goods; and
    • commercial consignments of goods.
  • The holder of a PSMI has ‘super priority’ in respect of the collateral because the security interest has a higher priority than other security interests in the same collateral granted by the same grantor that is perfected by either possession or registration: s 62.

Acquiring personal property free of security interests

  • The PPSA provides for situations in which personal property may be acquired by a third party free of a security interest.
  • A buyer or lessee of personal property for value takes the personal property free of an unperfected security interest in the property (such as where the interest has not been registered): s 43.
  • A buyer or lessee of personal property takes the property free of a security interest under s 44 if:
    • the regulations provide that the personal property of that kind may or must be described by serial number in a registration; and
    • searching the register immediately before the time of sale or lease by reference to the correct serial number would not disclose the registration of the security interest.
  • A buyer or lessee for value of a motor vehicle takes the motor vehicle free of a security interest under ss 45(1), (3) if:
    • the regulations provide that motor vehicles of that kind may or must be described by serial number (see the definition of motor vehicle in Personal Property Securities Regulations 2010 (Cth) reg 1.17); and
    • searching the register between the start of the previous day and the time of sale or lease would not disclose the registration of the security interest, or the seller or lessor is in a class of persons prescribed by the regulations (that is, holds a licence to deal or trade in motor vehicles: Personal Property Securities Regulations 2010 (Cth) reg 2.2).
      • This definition includes all motor vehicles that have been assigned vehicle identification numbers under the Motor Vehicle Standards Act 1989 (Cth) or have been assigned a manufacturer’s number: Personal Property Securities Regulations 2010 (Cth) reg 2.1.
      • This does not apply if the buyer or lessee has actual or constructive knowledge of the security interest or that the sale or lease constitutes a breach of the security agreement: PPSA s 45(2), (4).
        • The bona fide purchaser of a motor vehicle from a car dealer will normally acquire the vehicle free from the security interest created over the vehicle.
  • A buyer or lessee of personal property takes the personal property free of a security interest given by the seller or lessor if the personal property was sold or leased in the ordinary course of the seller or lessor’s business of selling or leasing personal property of the kind: s 46.
    • The does not apply if the buyer or lessee has actual knowledge that the sale or lease constitutes a breach of the security agreement.
  • A buyer or lessee of personal property for value that the buyer or lessee intends to use predominantly for personal, domestic or household purposes takes the property free of a security interest if the market value given is not more than $5,000 or other prescribed amount in the regulations: s 47.
    • This does not apply if the personal property is of a kind that the regulations provide may or must be described by serial number in a registration, or the buyer or lessee has actual or constructive knowledge that the sale or lease constitutes a breach of the security agreement.
  • A person who buys an investment instrument (such as shares or debentures) in the ordinary course of trading on a prescribed financial market takes the investment instrument free of a security interest: s 49.

Rights of secured parties

  • The PPSA contains provisions concerning the rights of secured parties where a transferee takes personal property from a transferor (who gave the security) free from the security interest in the property.
    • The rights of the secured party are subrogated to the rights (if any) of the transferor, including the transferor’s right to receive any part of the purchase price for the property which has not been paid.
      • However, payment of the purchase price by the transferee before receiving notice of the secured party’s right discharges the obligation of the transferee to the extent of the payment: s 53.

Enforcement of security interests

  • The PPSA includes detailed enforcement provisions dealing with the seizure, disposal and retention of collateral in the event that the debtor defaults on the secured obligations: pt 4 ss 108–144.
    • Many of the provisions can be excluded by agreement when the collateral is not used predominantly for personal, domestic or household purposes: s 115.
  • All rights, duties and obligations which arise in relation to the enforcement provisions must be exercised honestly and in a ‘commercially reasonable manner’: s 111.
    • The provisions do not apply to property in the hands of receivers or receivers and managers: s 116.

Relationship to the National Credit Code

  • Where collateral is used for consumer purposes and the National Credit Code (sch 1 of the National Consumer Credit Protection Act 2009 (Cth)) applies to the security interest, the PPSA and the NCC will operate concurrently and a secured party will have to comply with both: PPSA s 119.
  • Where both contain similar provisions relating to enforcement, a secured party who has complied with the relevant provision of the NCC is taken to have complied with the corresponding obligation in the PPSA: PPSA s 119(2).

The Personal Property Securities Register

  • The PPSA provides for the establishment and maintenance of a Personal Properties Securities Register: s 147.
  • A person may apply to register what is referred to as a ‘financing statement’ with respect to a security interest or certain personal property: s 150.
    • The financing statement can be registered before any secured transaction takes place.
    • In general, a financing statement will contain information that includes:
      • details of the secured party;
      • the grantor’s details (unless the collateral is consumer property and is required to be described by serial number);
      • an address for service of notices on secured parties;
      • a description of the collateral (particularly whether it is consumer or commercial property); and
      • the period of registration.
  • Registration for consumer property or property described by serial number may be made for up to seven years and renewed for further periods of up to seven years.
    • Commercial property may be registered for an indefinite period, or for a term of up to 25 years and subsequently renewed: s 153.
  • On application to the Registrar, a person may be given access to search the register provided that it is for an authorised purpose: ss 170–173.
    • The register can be searched by reference to either the grantor’s details (which will disclose security interests registered against the grantor) or, in the case of serial-numbered property, the unique serial number referable to that property (such as a motor vehicle): s 171.
      • The grantor’s details will not be registered if the security interest relates to collateral that is serial-numbered consumer property.
  • The register is a single online register for all personal property securities in Australia.
  • Registration is not mandatory, nor is there a time limit for registering an interest.
    • Failure to register (thus to perfect) a security interest will have consequences for the secured party should an issue of priority of competing interests arise.
      • Additionally, the PPSA invalidates unperfected security interests (but not deemed security interests that are unperfected) on the bankruptcy, winding up or administration of the grantor: ss 267, 267A, 268.
        • See also: Albarran v Queensland Excavation Services Pty Ltd (2013) 277 FLR 337.