By Jacob Carswell-Doherty
The introduction of the Personal Property Securities Act 2009 (Cth) (PPSA), which commenced on 30 January 2012, has had a dramatic and far reaching impact on the giving and taking of security over personal property.
The impact has been most drastically felt by owners of personal property who transfer possession of their own personal property into the hands of a “grantor”/third party.
The PPSA is also very relevant for any secured party who takes a security interest to secure the performance of an obligation by a grantor. Cases or transactions which may invoke the PPSA may include:
a) individuals or companies which sell or supply goods on a ‘retention of title’ or ‘hire-purchase’ basis;
b) anyone who holds a fixed or floating charge or other security over the assets of a company or individual; and
c) individuals or companies who lease personal property (not including real estate) to others on a regular basis.
Please note, this list is not exhaustive and you should review the definition of “security interest” found in section 12 of the PPSA for a complete list.
Put simply, the PPSA has dispensed with the previously accepted concept of the right to title of personal property based on common sense notions of ownership.
The now superseded concept of priority of ownership was originally derived from the maxim known as‘nemo dat quod non habet’ (“no one gives what he doesn’t have”).
This concept has been removed and replaced with a system of priority based entirely on registration of a security interest on the Personal Property Security Register (PPSR).
The Supreme Court of New South Wales has recently clarified the rules in relation perfection and priority of security interests registered under the PPSR. The decision was handed down by Justice Brereton on 27 June 2013 In the matter of Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors [2013] NSWSC 852.
This case is the first to give detailed consideration to the various provisions of the PPSA and demonstrates how the PPSA works in practice in resolving priorities between competing security interests.
The proceedings involved competing claims to three (3) Caterpillar-brand tractors (the “tractors”) which had been in the possession, control and use of Maiden Civil (P&E) Pty Ltd (“Maiden”).
In competition for the right to ownership of the tractors were Queensland Excavation Services Pty Ltd (“QES”) and a finance company called Fast Financial Solutions Pty Ltd (“Fast”).
The tractors were originally purchased by QES who then leased them to Maiden pursuant to a hire purchase arrangement. Maiden then sought to obtain finance from Fast. Fast required security for the finance and a general security deed was executed as between Maiden and Fast, with a provision for the creation of a security interest which attached to the tractors. The deed also contained a clause which allowed for the appointment by Fast of a receiver and manager over all of Maiden’s assets and undertakings in the event of default by Maiden in respect to the terms of the finance agreement.
Fast then duly registered their security interest over the tractors on the PPSR.
Maiden defaulted on the terms of the finance agreement in July 2012 and Fast appointed a receiver and manager pursuant to the terms of the general security deed.
The Receiver then sought a declaration from the Court that that Maiden was entitled to possession of the tractors.
QES resisted the application by the Receiver on the basis that it was the true owner of the tractors.
His Honour determined that both QES and Fast held a “security interest” of some kind in, or over, the tractors. However, the question of “true ownership” was largely irrelevant – the case actually turned on the question of priority of each of the competing security interests.
Ultimately, His Honour found that, even if QES would normally have been considered the “true owner” of the tractors, due to the fact that it failed to register its security interest on the PPSA, all of its claims failed in the face of Fast’s “perfected” security interest. Put another way, because Fast registered its security interest on the PPSR, and QES did not, QES lost “ownership” of the tractors.
Fast could take the tractors and sell them to satisfy its debt even though it never actually “owned” them, in the ordinary sense.
QES would merely be entitled to its share of the proceeds of any sale of the tractors in order of priority on the register (i.e. only after Fast had been fully paid).
The implications of this decision is that anyone who wishes to protect their interest in personal property must do so by way of a creation of a valid security interest over the personal property and, most importantly, the perfection of that security interest pursuant to the relevant terms of the PPSA.
Priority
When applying the rules of priority according to the PPSA, Brereton J gave consideration to section 55, which sets out the “default priority rules”. This section, relevantly, sets out the procedure, as follows:
Section 55
(1) …
(2) Priority between unperfected security interests in the same collateral is to be determined by the order of attachment of the security interests.
(3) A perfected security interest in collateral has priority over an unperfected security interest in the same collateral.
(4) Priority between 2 or more security interests in collateral that are currently perfected is to be determined by the order in which the priority time.
What is a security interest?
Section 12 of the PPSA defines a security interest as:
“…an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).”
A security interest may be created in a myriad of different ways and the “form” of the arrangement or transaction is not necessarily the determining factor. Part 1.3, Div. 3 (in particular, section 12(1)-(4)) sets out a lengthy list of transactions which may be captured.
In essence, a security interest will be created in personal property if the substance of the transaction is such that the property may be conceived as “securing the performance of an obligation”.
Attachment
Personal property becomes “collateral” following the “attachment” of the security interest to the personal property.
The procedure for attachment is set out in sections 19 and 20 of the PPSA.
In the Maiden case, the security interest attached to the tractors due to the existence of a general security deed/agreement which clearly identified the tractors by serial number.
Perfection of the security interest
Once a security interest has attached, section 20 of the PPSA provides that the interest ought to be “perfected” either by way of registration on the PPSR, or by way of possession by the secured party of the collateral which is the subject of the security interest.
Once the security interest which has attached to collateral has been perfected, it will have priority over all later perfections.
Insolvency
In the case of insolvency, the question of perfection and priority is vital.
In the event of winding up or bankruptcy, section 267 provides that any unperfected security interest will “vest” in the grantor (i.e. a company/person in the same situation as Maiden). In other words, that personal property will automatically become owned by insolvent company/bankrupt and fall under the control of the liquidator or trustee in bankruptcy and subject to the rules of priority, as set out in the PPSA.
As a general rule, section 20(1) provides that a perfected security interest will be enforceable against third parties (including administrators/liquidators or trustees in bankruptcy) if the secured party is:
a) in possession of the collateral;
b) is in control of the collateral; or
c) there is valid security agreement in existence.
If you hold a security interest, or think that you or your company may hold a security interest, then you must register that interest now.
If you would like to discuss this paper or the case, or if you would like assistance with any of the matters referred to above, then please contact Foulsham & Geddes.
