Before a party can look at registering or enforcing a security interest, they need to ensure that they have a valid security interest for the purposes of the Personal Property Securities Act Cth 2009 (PPSA). Although this may seem obvious, it is not always clear whether there is a security interest capable of being registered on the Personal Property Securities Register (PPSR).
When it comes to the Personal Property Securities Register (PPSR), we can't help but ask: "It's been six years – what have we learnt?"
To address this, Madgwicks is publishing an informative series of articles over the next few weeks for those of you currently using the PPSR and those who may need to register the occasional dealing. The aim of these 6 articles is to help you better understand how the Personal Property Securities Act (PPSA) applies to you and to avoid the common pitfalls in registration.
In brief
Before a party can look at registering or enforcing a security interest, they need to ensure that they have a valid security interest for the purposes of the Personal Property Securities Act Cth 2009 (PPSA). Although this may seem obvious, it is not always clear whether there is a security interest capable of being registered on the Personal Property Securities Register (PPSR).
What you need to know
- A security interest is defined in the PPSA with specific types of transactions outlined in section 12(2).
- Some legislation specifically excludes certain interests that might otherwise fall within the definition of a security interest under the PPSA, including gaming licences, taxi licences, liquor licences and mining licences.
- Merely being granted a security interest is not in itself enough to give the person (Secured Party) to whom the security interest is granted full protection under the PPSA. The safest way to ensure a security agreement has been created is to have the agreement or act evidenced in writing and signed by the Grantor.
What is a security interest?
A security interest is broadly:
- An "interest" in personal property, includes a right in the personal property. This could be simply a contractual right – it does not need to be a proprietary interest;
- "Personal property" is defined very broadly to mean almost all property other than land (including fixtures attached to the land);
- It includes goods, inventory, motor vehicles, financial property (such as cash and bank accounts), intangible property (such as licences and intellectual property), contractual rights, and proceeds of other personal property;
- Secures payment or performance of an obligation – it cannot be a security interest if the interest is not provided as some kind of security for payment or performance of an obligation.
The following types of transactions are specifically listed in the PPSA (section 12(2)) as being interests that could be security interests, provided that the transactions that provide for those interests in substance secure payment or performance of an obligation:
- a fixed charge
- a floating charge
- a chattel mortgage (e.g. a share mortgage)
- a conditional sale agreement (including an agreement to sell subject to retention of title)
- a hire purchase agreement
- a pledge
- a trust receipt
- a consignment (whether or not a commercial consignment)
- a lease of goods
- an assignment
- a transfer of title
- a flawed asset arrangement
Excluded interests that cannot be security interests
However, some legislation specifically excludes certain interests that might otherwise fall within the definition of a security interest under the PPSA.
These include:
- Rights or entitlements granted by the Commonwealth or any Australian State or Territory which are declared by the law creating them not to be personal property for the purposes of the PPSA.
- Examples include gaming licences, taxi licences, liquor licences and mining licences.
Creating an effective security interest
To have a security interest that is legally enforceable requires some action – merely being granted a security interest is not in itself enough to give the person (Secured Party) to whom the security interest is granted full protection under the PPSA.
The degree of enforceability of a security interest is determined as follows:
- A security agreement is "an agreement or an act by which a security interest is created, arises or is provided for" or some form of "writing evidencing such an agreement or act" (which must be either signed or accepted by the Grantor).
The safest way to ensure a security agreement has been created is to have the agreement or act evidenced in writing and signed by the Grantor.
- For a security interest to be enforceable: the security interest needs to have attached to the personal property (called "Collateral" in the PPSA).
A security interest attaches to Collateral if the Grantor has rights in the Collateral and either:
- accepts money; or
- does some other act by which the security interest arises (for example, the Grantor signs a contract).
This condition is usually fairly easy to satisfy – generally attachment automatically occurs.
The Grantor is generally the person who owns the Collateral (personal property).
- For the security interest to be enforceable by the Secured Party, not just against the Grantor but also against third parties, the security interest must have attached to the Collateral and either:
- the Secured Party must have possession or control of that Collateral; or
- there must be a security agreement that covers the Collateral.
- For the security interest to be enforceable by the Secured Party the security interest must be "perfected". There are three main ways to perfect a Security Interest:
- Possession of the Collateral – this is generally mostly applicable to tangible assets;
- Control of the Collateral – this is generally mostly applicable to financial assets; and
- Registration of the security interest on the PPS Register.
Conclusion
It is important to ensure your documents actually give rise to a security interest. Many times we ask someone, who has registered an interest on the PPSR, for the document evidencing their security interest and they either:
- do not understand the request; or
- rely on documents which do not actually give rise to a security interest.
If your security documentation is not in order, you are unlikely able to enforce your security interest under the PPSA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.
