SECURITY INTERESTS AND THEIR PRIORITIES

Transcription

1 SECURITY INTERESTS AND THEIR PRIORITIES BY BLAIR PLEASH PARTNER OF HALL CHADWICK Chartered Accuntants and Business Advisrs Sydney Melburne Brisbane Level 40 Level 14 Level 4 2 Park Street 440 Cllins Street 240 Queen Street Sydney NSW 2000 Melburne VIC 3000 Brisbane QLD 4000 Perth Darwin Adelaide Level 11 Level 1, Suite 11 Level St Gerges Terrace Smith Street 25 Grenfell Street Perth WA 6000 Darwin NT 0800 Adelaide SA

2 CONTENTS Persnal Prperty... 3 Key Terms... 4 Serial Numbered Prperty... 6 Registering a Financing Statement... 7 Pririty... 8 PMSI s Deeds f Pririty Timing f Registratin PPSA and different Classes f Assets Remving an Invalid Security Interest Enfrcing yur Security Cases Glssary Annexures Serial Numbers Financing Statement Review

3 SECURITY INTERESTS AND THEIR PRIORITIES Intrductin This paper is intended t prvide an intrductin t security interests and their pririties. This necessarily entails a review f the Persnal Prperty Securities Act (PPSA) which came int effect n 30 January The Persnal Prperty Securities Register (PPSR) was intrduced t replace a number f registers administered by varius gvernment agencies with a new single registry. These included ASIC register f charges and mtr vehicle registers. The PPSR prvides fr a ntice based system f registratin. Unlike the Trrens system f registratin fr dealings in land in Australia, the PPSR is nt determinative f legal title nr is it a register f security agreements. The PPSR prvides little mre than ntice t third parties that a secured party claims a security in the relevant grantrs persnal prperty. The PPSA is a highly cmplex law and specialist advice shuld always be sught n any particular circumstance. 1. Persnal Prperty Sectin 10 f the PPSA prvides that persnal prperty means prperty (including a licence) ther than: a) Land; r b) A right, entitlement r authrity that is: i) Granted by r under a law f the Cmmnwealth, a State r a Territry; and ii) Declared by that law nt t be persnal prperty fr the purpses f this act. Persnal prperty includes the fllwing: Tangible gds such as mtr vehicles, aircraft, livestck and plant and equipment. Intangible gds such as intellectual prperty, designs patents and trademarks; Debts, grwing crps; Shares, units and debt securities. Exclusins Items which are excluded frm the ambit f the legislatin. The PPSA des nt apply t an interest that is prvided fr by the creatin r transfer f an interest in land. Rights entitlements r authrity that is granted by r under the general law r by statute in relatin t the cntrl use r flw f water. 3

4 A lien charge r ther interest in persnal prperty that arises under statute; A lien charge r ther interest in persnal prperty that arises by peratin f the general law e.g. mechanic s lien Fixtures gds that are affixed t land, but d nt include crps. A security interest in persnal prperty taken by a licenced pawnbrker, if the cllateral is valued at less than r equal t $5,000 and the interest arises in the rdinary curse f a licenced pawnbrker business, and wuld nt apply t prperty that may r must be described by serial number in a registratin. State and Federal carve uts Apprximately 160 statutry licences have been declared by the states nt t be persnal prperty e.g. taxi, liqur, fishing and gaming machine licences. Persnal prperty is basically any srt f prperty that is nt land, buildings and fixtures. 2. Key Terms The PPSA includes a number f cncepts the understanding f which assists with a cmprehensin f the scheme f registratin the act prvides fr: Security Interest Sectin 12(1) f the PPSA prvides that A security interest means an interest in persnal prperty prvided by a transactin that in substance secures payment r perfrmance f an bligatin (withut regard t the frm f the transactin r the identity f the persn wh has title t the prperty). Sectin 12(2) prvides examples f transactins that may give rise t security interests fr the purpses f the PPSR: A fixed charge; A flating charge; A chattel mrtgage; A cnditinal sale agreement (including an agreement t sell subject t retentin f title) A hire purchase agreement; A pledge; A trust receipt; A cnsignment (whether r nt a cmmercial cnsignment); A lease f gds (whether r nt a PPS lease) fr example a finance lease; An assignment A transfer f title; 4

5 A flawed asset arrangement. In additin the act expressly specifies particular types f transactins that cnstitute deemed security interests by way f Sectin 12(3) i.e.: The interest f a transferee within a transfer f an accunt r chattel paper; The interest f a cnsignr wh delivers gds t a cnsignee under a cmmercial cnsignment (defined in sectin 10); and The interest f a lessr r bailr f gds under a PPS lease. Attachment Sectin 19 deals with attachment. This is ne f the three steps t having a fully perfected and enfrceable security interest. 1) A security interest is enfrceable against a grantr in respect f particular cllateral nly if the security interest has attached t the cllateral; 2) A security interest attaches t cllateral when: Cllateral a. The grantr has rights in the cllateral r the pwer t transfer rights in the cllateral t the secured party; and b. Either i. Value is given fr the security interest ii. The grantr des an act by which the security interest arises. Is defined as persnal prperty t which a security interest is attached and in relatin t a registratin includes persnal prperty described by the registratin (whether r nt a security interest is attached t the prperty). Perfectin A security interest is perfected if: The security is attached t the cllateral; The security interest is enfrceable against a third party; and One f the fllwing applies: 1. Fr any cllateral, a registratin is effective with respect t the cllateral; r 2. Fr any cllateral, the secured party has pssessin f the cllateral (ther than pssessin as a result f seizure r repssessin); r 3. Fr the fllwing kinds f cllateral, the secured party has cntrl f the cllateral; 5

6 i. An API accunt; ii. iii. iv. An intermediated security; An investment instrument; A negtiable instrument that is nt evidenced by a certificate; v. A right evidenced by a letter f credit must be presented n claiming payment r requiring the perfrmance f an bligatin; vi. Satellites and ther space bjects. Perfectin by pssessin Sectin 24(1) f the PPSA prvides that a secured party will nt have pssessin f persnal prperty if the prperty is in the actual r apparent pssessin f the grantr r debtr r anther persn n their behalf. Perfectin by pssessin is nt always practical as ften the very purpse f the transactin being secured is t cnvey pssessin t the grantr i.e. a lease. Where a security interest can be perfected by mre than ne methd and prvided it is cntinuusly perfected, it will retain pririty frm the time the security interest was first perfected. Where a secured party prpses t perfect its security interest by pssessin it is recmmended t als perfect by registratin. Perfectin by cntrl Perfectin by cntrl is nly available t the defined classes f prperty. A secured party that perfects its security interest by cntrl has pririty ver any ther security interest in the same cllateral that is perfected by any ther means. Secured parties that are able t perfect a security interest by cntrl shuld als seek t perfect by registratin. This addresses the pssibility that a secured party inadvertently relinquishes its perfectin by cntrl. Perfectin by registratin Perfectin by registratin is the mst cmmn frm f perfectin. 3. Serial Numbered Prperty The PPS Regulatins prescribe that a registratin fr the fllwing classes f cllateral when described as cnsumer prperty must be a registratin that describes the cllateral by serial number. Hence a valid registratin must be specific t the cllateral and crrectly use the right kind f serial number: a) Aircraft b) Intangible prperty (that is a design, patent, plant breeders right, trade mark r a licence ver any f these intangible prperty); c) Mtr vehicles; 6

7 d) Watercraft; and e) Aircraft that is an aircraft engine, air frame, helicpter r small aircraft, when described as cmmercial prperty, must be described by serial numbers. Cnsumer prperty is defined as persnal prperty held by an individual that is nt persnal prperty held fr carrying n an enterprise t which an ABN has been allcated. The fllwing may be registered by serial number. (It is nt bligatry t make a serial number specific registratin but failure t d s will expse the secured party t lss f title t the cllateral if the grantr deals with it wrngfully): Cmmercial prperty that is Mtr vehicle; Watercraft; Certain intangible prperty (patents) trademarks, plant breeders rights. Cmmercial prperty is defined as persnal prperty ther than cnsumer prperty. A summary f the classes f cllateral in respect f serial numbered prperty and the apprpriate serial number that must be included in the financing statement is annexed t this paper. Whilst this cmmercial prperty may be described by serial number, it is recmmended that secured parities take steps t describe these classes f cllateral with the apprpriate serial number if available and cnsider als perfecting by cnstituting a master r general type f registratin at the cmmencement f the cmmercial relatinship which prvides fr all supplies pursuant t the relatinship i.e. cmmercial credit agreement. The basis fr this apprach is that if there are any errrs in the specific registratin, then the master registratin may retain a psitn f perfectin fr the secured party in an inslvency, althugh a general registratin wn t prtect against wrngful sale by the grantr. 4. Registering a Financing Statement Unlike the ASIC register f charges there is n requirement t ldge a security agreement dcument n the PPSR. Rather a financing statement is ldged n the PPSR t indicate a secured party is asserting a secured interest ver a grantrs prperty. Sectin 153 f the PPSA prvides the relevant infrmatin which must be included in a financing statement r financing change statement. The rules are cmplex and full f exceptins s the fllwing is general nly. Grantr One f the mst critical aspects in relatin t perfecting a security interest by registratin n the PPSR is crrectly and accurately identifying the grantr f the security interest. 7

8 Crpratins The mst typical identifier f a cmpany is its ACN. Trustee Where the cmpany grantr is the trustee f a trust, the particular that needs t be included in a financing statement is the ABN f the trust. Partnership The particular that needs t be included in a financing statement is the ABN f the partnership. If the partnership des nt have an ABN, regard shuld be had t the identificatin criteria f the individual parties. Individuals The mst cmmnly accessible wuld be an individual driver s licence. Hwever a financial institutin wuld likely have access t AMF CTF search results and wuld be bliged t ldge a financing statement against the individual grantrs details which appear as a cnsequence f thse search results. As nted abve, the apprpriate identificatin in respect f a cmpany grantr is its ACN. Ldging a financing statement by reference t the grantr cmpany s name r its ABN des nt satisfy the statutry requirements, ntwithstanding the ACN may be incrprated in the ABN. This is the scenari which ccurred in (One Steel Manufacturing Pty Ltd Administratrs Appinted [2017] NSWSC) which resulted in the relevant registratin being ineffective and the relevant cllateral vesting in the grantr. Nrmally, searches f the PPS register shuld be way f: ACN ABN Grantrs name T ensure all ptential security interests claimed are identified. Hwever, registratins that are against the wrng grantr identifier are prbably ineffective - as in Onesteel. An annexure is included t the paper which is intended t assist secured parties with a review f required infrmatin t be included in a financing statement. 5. Pririty Put simply, unless therwise prvided under the legislatin: a. perfected interests have pririty ver unperfected interests; and 8

9 b. pririty between perfected interests amngst themselves, and unperfected interests amngst themselves, is determined n a first-in-time basis. Earlier in Time Unperfected Unperfected Perfected Perfected Later in Time Unperfected Perfected Unperfected Perfected When cnsidering default pririties there are tw cnsideratins: 1. Are the interests like are they f the same character. If a pririty cntest invlves tw unlike security interests then the reslutin f any pririty dispute is nt likely t be referable t timing 2. If the interests are like interests the issue f timing will be critical - Which interest attached first where bth security interests were unperfected at the relevant time; - Which interest was perfected first. The mst cmmn therwise prvided securities under the legislatin relates t cllateral the subject f cntrl r Purchase Mney Security Interests ( PMSI ) Pririty Interest Example First Secnd Statutry interest, recgnised by Sectin 73 f the PPSA r declared t be s Sectin 73 Interests in sme types f prperty that are declared by the PPSA t have pririty ver ther perfected PPSA security interests Sectins 69, 70, 71, 72 A charge arising under prceeds f crime legislatin The hlder f a negtiable dcument f title (eg a bill f lading) Third Furth Security Interests in Cntrllable Prperty perfected by Cntrl Sectin 57 A nn-pmsi in an accunt as riginal cllateral, subject t sme cnditins Sectin 64 An ADI Accunt A security interest in bk debts thrugh a factring arrangement. Fifth Sixth Seventh A PMSI in inventry r its prceeds Sectin 62(2) A PMSI in persnal prperty ther than inventry Sectin 62(3) A PMSI in cllateral r prceeds granted t a seller, lessr r cnsignr has pririty ver any ther PMSI granted by the same grantr in the same cllateral sectin 63 A retentin f title situatin, nce the gds are in the pssessin f the purchaser. A PMSI in equipment prvided fr a ship, such as a radar r GPS. A PMSI granted t Widgets Pty Ltd under a retentin f title will have pririty ver the PMSI granted t East Bank Pty Ltd wh prvided the depsit fr the same cllateral. Eighth Pririty is generally granted t the hlder f an riginal security interest in the event f a dispute fllwing transfers f cllateral sectins 34, 67 and 68 These rules recgnise the pririty f the hlder f the riginal security interest, fr example if an asset leaves the jurisdictin (becming un- attached) and then becmes re- attached at a later date. 9

10 Ninth Tenth Under default pririty rules, generally pririty will be determined by the rder f the pririty times fr the respective security interests Sectin 55(4) Perfected security interests take pririty ver unperfected security interests Sectin 55(3) Party A registers their interest in Party B registers their interest in the same prperty in Party A will take pririty. Party A registers their interest in Party B des nt register their interest but btained their interest in the prperty befre Party A. Party A still takes pririty since they have perfected their interest. Eleventh Executin creditrs take pririty ver unperfected security interests Sectin 74(1) and (4) Party A des nt register their interest. Party B des nt register their interest. Party A btains judgement fr a debt and issues executin against the grantr. Party A takes pririty. Twelfth Pririty f unperfected security interests is determined by the rder f attachment Sectin 55(2) Party A enters int a security agreement with Party B and Party C. Party B s agreement agrees t defer attachment fr 12 mnths. Party C s agreement des nt. Party C will take pririty. 6. PMSI s Anther benefit f the regime is a purchase mney security interest (PMSI) which is a particular type f security interest. A PMSI is distinguished frm a standard security interest in tw main ways: its manner f creatin and the pririty it receives relative t ther security interests in the same cllateral. A PMSI is a security interest in cllateral that secures the assistance prvided by the secured party t the grantr t enable their purchase r acquisitin f rights in the cllateral. Sectin 14(1), PPS Act. Certain deemed security interests are als PMSIs including leases and cnsignments. A PMSI is likely t arise in fur main scenaris. Firstly, a PMSI will arise where funds are prvided by a financer r ther lender t a grantr fr the purchase f the persnal prperty. This is the mst cmmn transactin that gives rise t a PMSI and cvers such transactins as purchases f mtr vehicles where finance is prvided at the pint f sale. Secndly, a PMSI will arise where the secured party has advanced persnal prperty and all r part f the purchase price remains utstanding. The mst cmmn transactins in which this ccurs are supply by retentin f title clause. This typically invlves the transfer f pssessin f cllateral with title nly passing after the full payment price is paid. Thirdly, a PMSI will arise in a PPS lease transactin. A PPS lease is defined in the Persnal Prperty Securities Act 2009 (Cth) as a lease r bailment f gds (see belw) r a term r terms f tw years r mre. Bth financing leases and peratinal leases can fall within the definitin f PPS lease, althugh the frmer are likely als t be security interests in substance anyway. Finally, a PMSI will arise in a cnsignment transactin. PMSIs typically arise in cmmercial rather than cnsumer transactins. Other than where a mtr vehicle is the cllateral, a PMSI will nt arise in prperty that the grantr intends t use fr persnal dmestic r husehld purpses, Sectin 14(2)(c), PPSA Act. Nte that this exclusin als applies t bats and aircraft. 10

11 PMSIs and pririties A secured party with a PMSI may benefit frm a super-pririty which defeats all ther security interests in the cllateral. This includes security interests created and registered befre the PMSI Sectin 63, PPSA Act. Certain registratin requirements must be cmplied with in rder fr the PMSI t benefit frm the super-pririty. Fr example, ABC Pty Ltd grants an all PAP security interest t Bankcrp Pty Ltd wh duly registers this security interest. At a subsequent time ABC Pty Ltd receives a supply f inventry n a retentin f title basis frm Supply-2 -U Pty Ltd which is als registered. ABC Pty Ltd subsequently becmes inslvent. The effect f the super-pririty is that the PMSI held by Supply-2-U Pty Ltd defeats the security interest f Bankcrp Pty Ltd. The ratinale fr this pririty rule is that the earlier secured party shuld nt benefit by having recurse t assets f the grantr that wuld nt have been acquired ther than with the assistance f the subsequent financier. If the subsequent PMSI secured party did nt have the super-pririty, they may nt have advanced the mney r assistance necessary fr the grantr t acquire the cllateral and develp their business further. REMEMBER A PMSI WILL ONLY RESULT IN A SUPER PRIORITY FOR THE OUTSTANDING PURCHASE PRICE PORTION. Registratin requirements T receive a super-pririty a PMSI must be registered within specific timeframes. These vary accrding t the type f persnal prperty and its intended use by the grantr. These timeframes are as fllws: Where the cllateral is inventry: Where the cllateral is nt inventry: Where the cllateral is tangible prperty The security interest must be registered befre the time the grantr btains pssessin f the cllateral. The security interest must be registered within 15 business days f the grantr btaining pssessin f the cllateral. Where the cllateral is intangible prperty The security interest must be registered befre the time the PMSI attaches, r is created, ver the inventry. The security interest must be registered within 15 business days f the grantr btaining pssessin n the time f attachment, r creatin, f the PMSI. Inventry is defined under the act as persnal prperty that, in the curse r furtherance f an enterprise t which an ABN has been allcated, is held by the persn fr sale r lease r has been leased by the persn as lessr r is held t be prvided under a cntract fr services, r has been prvided, r is held as raw materials r wrk in prgress r held, used r cnsumed by the persn as materials. A PMSI that is nt registered within these timeframes is still validly created hwever will nt benefit frm the PMSI super-pririty. The secured party cntinues t have a security interest and the default pririty rules apply in Sectin 55, PPSA Act. 7. Deeds f Pririty In additin t the pririty rules prvided fr by the PPSA, a party wh hlds a first pririty security interest ver particular cllateral can vluntary subrdinate its pririty psitin by agreement Sectin 61 f the PPSA. This can ccur when a financier takes security ver a particular class f cllateral, which wuld be therwise subject t a general security interest i.e. invice finance. 11

12 Accrdingly the PPSR is nt the final say with respect t the pririty f security interests as pririty deeds are nt required t be registered i.e. the ntice f underlying security interest is registered. Given the shrt timing requirements f the Act fr registratin and the ptentially disastrus cnsequences f failure t register in time r at all releases f particular interests shuld be cnsidered prir t taking r creating a security interest and nt a later stage. Emplyee Entitlements In the event a cmpany passes int sme frmal inslvency event the pririty rights f a secured creditr t certain classes f assets may be deferred t utstanding emplyee entitlements. i.e. Sectin 433 f the Crpratins Act in the case f receivership and Sectin 556 f the Crpratins Act in the case f liquidatin. Sectin 433 prvides that a receiver (r mrtgagee in pssessin) appinted t a cmpany must use circulating assets t pay utstanding entitlements in pririty t any amunt wing t the secured creditr. The relevant emplyee entitlements are: Wages; Superannuatin cntributins; Superannuatin guarantee charges; Leave payments; and Retrenchment payments. Sectin 340 f the PPSA defines circulating assets and it will generally include: Accunts; Prceeds f inventry; Currency; Inventry; Negtiable instruments; and Prperty the granter is permitted t transfer in the curse f its business free f the security interest. That is if a cmpany was free t use, sell r transfer the asset withut breaching the terms f its security deed, it is likely the asset is a circulating asset. Fixed Charge ver Bk Debts Secured creditrs have attempted t circumvent the effect f these prvisins by terms which purprt t create a nn-circulating charge r fixed charge ver bk debts but a circulating security ver their prceeds. The current state f the authrities wuld appear t indicate that such attempts wuld be invalid unless the charge perated as a fixed charge in practice i.e. a prvisin f the security deed prvides fr the prceeds t be paid int an accunt cntrlled by the secured creditr and this is in fact what tk place. 12

13 Natinal Westminster Bank plc v Spectrum Plus Ltd [2005] 2 AC680 Assignment f bk debts Assignments f bk debts under factring r discunting arrangements d have the effect r taking bk debts utside the reach f these prvisins. A prperly assigned bk debt is nt the prperty f the cmpany the debt and its prceeds belng t the secured creditr. Accrdingly the debtrs subject t such arrangements are utside the scpe f these prvisins. FEG The Cmmnwealth Department f Jbs and Small Business administers the FEG scheme and effectively subrgates t the pririty psitn f emplyees upn making advances under that scheme. The Department has been increasingly active in scrutinising distributins f charged assets by receivers and secured creditrs t ensure its pririty rights are recgnised. Accrdingly secured creditrs and their receivers shuld be cnscius f strict adherence t the pririty rules prvide by these prvisins. 8. Timing f Registratin Crpratin Where the grantr is a cmpany fr the purpses f the Crpratins Act, the secured party has 20 business days frm the date f the security agreement t register an effective financing statement n the PPSR. In accrdance with Sectin 588FK(2)(b)(ii) f the Crpratins Act, if a security interest is perfected by registratin mre than 20 business days after the security agreement such interest is liable t vest in the crprate grantr if it enters int external administratin within six mnths frm the date f the registratin. Individuals Unlike crprate grantrs prvided the individual is nt bankrupt the secured party can perfect its security interest at any time prir t such events. PMSIs A secured party seeking t take advantage ver the super pririty cnfirmed by a PMSI must cmply with the timeframes fr registratin f a PMSI interest. Having said that if the secured creditr registers late, it will still be a valid registratin f a security interest, it will just nt take the benefit f the super - pririty status f the PMSI. Extensins f Time Sectin 588FM f the Crpratins Act enables a secured party t make applicatin t extend the time fr payment where the secured party has failed t ldge a financing statement in respect f a PPSA interest in time. Sectin 588FM(2) prvides the curt may extend the time fr registratin if satisfied. The failure t register was accidental r due t inadvertence r sme ther sufficient curse; 13

14 The failure t register is nt f such a nature as t prejudice the psitin f creditrs and sharehlders; r It is just and equitable t grant relief 9. PPSA and different Classes f Assets The cncept f a general security agreement r All Pap under the PPSA is the equivalent f a fixed and flating charge under the previus cmmn law regime. Hwever there is a range f financing ptins ver specific asset classes which have been addressed under the act, t prvide such financiers with certainty and ensure such asset based lending is prvided the necessary pririty ver a general security agreement. 1. Receivables Finance nn purchase mney security interest Receivables finance entails an assignment f the Cmpany s receivables t the incming financier ie the receivables are n lnger the prperty f the cmpany and under the cmmn law regime were effectively utside the scpe f prperty which a cmpany culd effectively ffer as security t an alternative financier. Under the PPSA regime there is the ptential fr a pririty dispute between an invice financier and a ROT supplier with respect t the prceeds f sale f inventry. Sectin 64 f the Act addresses this scenari wherein a security interest granted, fr new value, in an accunt that is the prceeds f inventry, will have pririty t the accunt. The new value security interest is nt a PMSI as it has nthing t d with the purchase price. A persn prviding new value must give ntice f 15 business days prir t the security interest attaching r being registered. 2. Stck/Retentin f title Intrductin Retentin f title is a cntractual mechanism which is intended t alter the cmmn law psitin that title passes n delivery ie title t persnal prperty is reserved with the seller until such time as its paid fr. Sectin 3 f the PPSA states A security interest is an interest in persnal prperty prvided fr by a transactin that secures payment r the perfrmance f an bligatin Accrdingly ROT supplies are subject t the PPSA regime. The mechanism by which ROT suppliers are prvided pririty ver prir general security interest hlders is by way f the purchase mney security interest ( PMSI ) s called super pririty A purchase mney security interest is: A security interest in cllateral t the extent that it secures all r part f its purchase price; r Security interest taken by a persn wh gives value fr the purpse f enabling grantr t acquire rights in cllateral t the extent that the value is applied t acquire thse rights; r The interest f a lessr r bailr under a PPSA lease; 14

15 The interest f a cnsignr under a cmmercial arrangement Accessin / Cmmingling Under the previus regime attempts t assert ROT against stck which became fixed t ther assets r were cmmingled t create an entirely new prduct were ften stuck dwn as attempts t create unregistered changes. Accessin Sectin 10 f the PPSA prvides that accessin means gds that are installed in r affixed t ther gds (which are readily identifiable) unless bth the accessin and the ther gds are required r permitted t be described by serial number. A security interest in gds that becme an accessin t ther gds cntinues in the gds that acceded. The default pririty rule is that a perfected security interest in an accessin (perfected prir t the gds acceding) has pririty ver a claim made by a persn with an interest in the whle. Where a secured party has an interest in the accessin and has nt perfected prir t them becming an accessin pririty is affrded t a perfected interest ver the whle. Cmmingling Sectin 10 f the PPSA prvides gds that are cmmingled include gds that are mixed with ther gds such that the riginal gds are indiscernible upn being prcessed r cmingled. A perfected security interest in gds that subsequently becmes cmmingled cntinues in the cmbined prduct and is t be treated as a perfected security interest in the cmbined cllateral. The fllwing pririty rules apply t multiple security interests in the same prduct r mass. In the event f Perfected security interest cntinuing in a prduct r mass Mre than 1 perfected security interest cmbined in the same prduct r mass Mre than 1 unperfected security interest cmbines in sme prduct r mass Pririty Rules Perfected security interest has pririty ver an unperfected security interest currently in same prduct r mass Each perfected security interest share in the prduct / mass accrding t the prprtin f their secured amunts After any perfected security interests, each security interest share in the prduct accrding t prprtin f their secured amunts * NB the value f the security is determined n the day they became part f the new prduct Security interest ver prceeds Retentin f title clauses in supply agreements have develped wherein nt nly d they attempt t retain title t the stck the subject f the supply agreement, they attempt t trace title int the prceeds f sale f unpaid stck. Under the previus regime a number f cases struck dwn such prvisins as amunting t a unregistered charge which was vid against subsequently appinted administratrs/liquidatrs in accrdance with Sectin 266 f the Crpratins Act. 15

16 T be effective a fiduciary relatinship had t be established between buyer and seller such that the prceeds f sale were held n trust by the purchaser n behalf f the unpaid seller, thereby remving it frm the prperty f the cmpany, which culd be subject t a charging clause. (Assciated Allys Pty Ltd V ACN Pty Ltd (in liq) and Anr (2000) HCA 25.) Under the PPSA it is pssible t have a security interest ver prceeds f sale withut the need fr a separate security interest (Sectin 52). Pursuant t Sectin 31(1) f the Act prceeds means identifiable r traceable persnal prperty f the types set ut therein. A security interest in the riginal cllateral will attach t prceeds f that cllateral unless the security agreement prvides therwise. Ntwithstanding the capacity t secure prceeds the cmmercial reality f enfrcing / identificatin f mixed prceeds, will cntinue t be an issue in the PPSR regime. T have an effective security interest ver prceeds f the riginal cllateral ie stck. Must be perfected by registratin and; Must describe prceeds Plant & Equipment financing/hire Intrductin Hire business (secured party) wns equipment PPS lease security interest Interest declared by grantr Grantr (hirer) Security interest ver all assets cmpetes with hire business security (bank interest) PPS Lease Sectin 13(1) riginally prvided that: A PPS lease means a lease r bailment f gds Fr a term f mre than ne year; r Fr an indefinite term (even if the lease r bailment is determinable by any party within a year f entering int the lease r bailment); Fr a term f up t ne year that is autmatically renewable r that is renewable at the ptin f ne f the parties, fr ne r mre terms if the ttal f all the terms might exceed ne year; r 16

17 Fr a term f up t ne year, in a case in which the lessee r bailee with the cnsent f the lessr r bailee retains uninterrupted (r substantially uninterrupted) pssessin f the leased r bailed prperty fr a perid f mre than ne year after the day the lessee r bailee first acquired pssessin f the prperty (but nt until the lessee s r bailee s pssessin extends fr mre than ne year. In May 2017 the Persnal Prperty Securities Amendment (PPS Leases) Act made tw changes t Sectin 13. The alteratin f the reference t mre than ne year t mre than tw years ; and An amendment t sectin 13(1)(d) which effectively prvides than an indefinite lease / bailment nly becmes a PPS lease after mre than 2 years f substantially uninterrupted pssessin have expired. The amendment act des nt apply retrspectively i.e. it nly applies t leases entered int after 19 May 2017 and accrdingly the riginal definitin f PPS lease will be applicable t arrangements entered int prir t that date. Hire business need PMSI super pririty t defeat banks and ther financiers with general security wh perfect earlier than they d. Hires are PMSIs unless they are sale and lease backs. Accrdingly if a lease r hire f gds fits the PPS lease definitin it is caught by the PPSA and subject t its pririty rules with respect t perfectin and registratin. Ownership des nt allw an escape frm the cnsequences f incrrect r late registratin r nn-registratin. Timing f Registratin fr PMSI super pririty Cllateral is gds (tangible prperty) The security interest must be registered within 15 business days f the grantr btaining pssessin f the cllateral Hwever it is imprtant t ensure the cllateral is nt cnsidered inventry in the hands f the grantr as therwise the pririty / registratin rules with respect t inventry will apply. Inventry has a wide definitin in sectin Remving an Invalid Security Interest An invalid security interest can be remved withut the requirement t g t Curt. In rder t remve a security interest the fllwing steps are required: 1. An Amendment Demand is issued t the secured party by the party wishing t remve the security interest; 2. An Amendment Demand is prvided t PPSR; 3. The PPSR will issue an Amendment Ntice t the Secured Party and assesses any respnse received; and 4. The PPSR will make decisin n whether t remve An Amendment demand is a written demand t a secured party that is made by a persn with an interest in the subject cllateral, relates t a registratin which is in respect f a security interest in the subject cllateral; and requires the secured party t amend a registratin t end the effective registratin; r mit particular cllateral frm the descriptin. 17

18 The recmmended cntents f an amendment demand are: 1. This statement: This is amendment demand which is prvided under sectin 178 f the Persnal Prperty Securities Act Date. 3. The secured party s name. 4. The secured party s address fr service. 5. The PPSR registratin number. 6. The Giving f Ntice Identifier (if applicable). 7. The amendment that is demanded and the reasn it is authrised, with reference t sectin 178 f the PPS Act. Amendment Statement If 5 business days have elapsed since the Amendment Demand was given and the secured party has nt respnded r their respnse did nt include cmpliance with the demand, the party wh sent the Amendment Demand may give an Amendment Statement t the Registrar. Amendment Ntice Fllwing receipt f an Amendment Statement which is cmplete and nt therwise defective, the Registrar will give an Amendment Ntice t the secured party as sn as reasnably practicable. The secured party may respnd t the amendment demand as set ut in the Amendment Ntice, within the perid stipulated by the Amendment Ntice. The amendment ntice will: 1. State the amendment demanded. 2. Invite the secured party t respnd befre the end f: 2.1. Five business days after the ntice is given; r 2.2. A lnger perid apprved by the Registrar, (the respnse perid ) In general the respnse perid will be 5 business days. Hwever, a lnger perid may be apprved if apprpriate. Registrar s Decisin Pursuant t sectin 181 f the PPS Act, at the end f the respnse perid the Registrar must register a financing change statement t amend the registratin in accrdance with the amendment demand, unless the Registrar suspects n reasnable grunds that the amendment is unauthrised. The Registrar may als register a financing change statement amending the registratin in accrdance with the amendment demand befre the expiratin f the respnse perid if: 1. The secured party has respnded; and 2. The Registrar has n reasn t believe that the secured party intends t give any further respnse. 18

19 11. Enfrcing yur Security Seizure f cllateral A secured party with a perfected security interest may seize cllateral under Sectin 123 f PPSA by ntice t the grantr. Higher pririty parties may give written ntice requiring the secured party in pssessin t pass pssessin. Enfrcing party must cmply with ntice within: 5 business days; Such further time as is reasnable in the circumstances; r Such further perid as is allwed by the curt under Sectin 293. A higher pririty party must pay the enfrcing party the amunt f any reasnable expenses incurred in enfrcing security. The enfrcing party must give the higher pririty party evidence if the amunt f any prceeds frm the dispsal f the cllateral is less than the reasnable expenses then this amunt will be wing t the enfrcing party. If payment is nt made it becmes an enfrceable debt. The enfrcement rules generally dn t apply t PPS leases unless they are als in substance securities. 12. Cases Applicatin f PPSA An initial threshld issue t the PPSA is whether it even applies t the transactin under cnsideratin. It is a system f registratin f asserted security interests, nt a mechanism fr reslutin f wnership disputes. Chellia v NSW Plice [2-18] NSWSC 557 Backgrund In March 2015 Mr Hall left an unregistered mtr vehicle t Mrs Hall in his will. The mtr vehicle was a rare 1970 s Lambrghini Espada. Mrs Hall discvered the vehicle was stlen in June Mr Chelliah had purchased the vehicle frm a third party persn in February 2016 and registered a security interest n the PPSR i.e. there were n ther security interests registered against the vehicle. The Dispute Mr Chelliah argued the fllwing exceptins applied t the cmmn law principal that a purchaser des nt acquire title r wnership frm smene wh des nt hld title Sectin 45 f the PPSA prvides that a buyer f a mtr vehicle takes that vehicle free frm any security interest if searching immediately befre the time f sale by reference nly t the serial number wuld nt disclse a registratin. Sectin 27 f the sale f Gds Act 1923 (NSAW) prvides where a seller had a vidable title, the buyer acquires a gd title prvided they purchased the gds in gd faith. 19

20 Decisin The curt held that the PPSA did nt apply n the facts. A security interest prtected under the PPSA must have been acquired in circumstances where in substance the transactin secures the payment r perfrmance f an bligatin. Ms Hall acquired wnership f the vehicle as a result f her husbands will, she did nt have a security interest fr the purpses f the PPSA and it fllwed the PPSA did have any applicatin t the circumstances. Implicatins Registering an interest n the PPSR des nt f itself, establish any rights t wnership f prperty. The taking free prvisins f the PPSA will nt assist a third party acquirer f stlen gds against the claims f the true wner. THC Hlding Pty Limited v CMA Recycling Pty Limited [2014] Backgrund The first defendant (CMA) entered int a cntract t supply 5,800 metric tnnes f scrap metal t the plaintiff (THC) fr shipment; CMA was unable t prvide the entire quantity f scrap metal required, s THC surced the shrtfall in scrap metal frm a third party by way f a carg swap. It was agreed that CMA wuld surce the shrtfall f the scrap metal t supply t THC at a later date; By 22 July 2014, CMA had surced the shrtfall f scrap metal and kept the scrap metal in its yard. THC paid fr the shrtfall f the scrap metal n 29 July 2013; On 2 August 2014, Adminis tratrs were appinted t CMA. The Dispute THC ntified the Administratrs that THC wned the shrtfall f scrap metal lcated at CMA s yard. On 19 September 2013, THC applied fr an injunctin restraining the sale f the shrtfall f scrap metal. The Administratrs had sld the shrtfall f scrap metal eight days earlier than THC s applicatin fr injunctive relief. The Law Sectin 442C (1) f the Act - Prhibitin n dispsal f encumbered prperty states: - The Administratr f a cmpany under administratin r f a deed f cmpany arrangement must nt dispse f: (a) Prperty f the cmpany that is subject t a security interest; r (b) Prperty (ther than PPSA retentin f title prperty) that is used r ccupied, r is in the pssessin f, the cmpany but f which smene else is the wner r lessr. Sectin 442C (2) f the Act - Limitatin n subs (1) states that: 20

21 Implicatins Subsectin (1) des nt prevent a dispsal: (a) In the rdinary curse f the cmpany business; r (b) With the written cnsent f the secured party, wner r lessr, as the case may be; r (c) With the leave f the curt. The Curt determined that THC became the wner f the gds fr the purpses f Sectin 442C f the Act under the relevant sale f gds legislatin nce the shrtfall f the scrap metal was ascertained by its accumulatin n 22 July 2014; The Curt fund that THC was nt a secured party under Sectin 442C f the Act as THC s interest did nt secure the payment r perfrmance f an bligatin as required under the PPSA; As THC was the wner f the gds, the Administratrs breached Sectin 442C f the Act by selling the gds withut meeting the requirements fr dispsal as stipulated in Sectin 442C(2) f the Act; CMA was a bailee fr reward f the gds and thus it wed a fudiciary duty t THC t nt act in a manner that preferred CMA s interests ver THC s; The Administratrs were liable in their participatin and prcurement f CMA s breach f fiduciary duty; Administratrs need t be mindful f ptential claims t prperty which is in the pssessin f the Cmpany. Particularly if the Administratrs are n ntice f a claim against prperty. In such circumstances the Administratrs need t cmply with Sectin 442C(2) f the Act prir t any dispsal f such prperty. This case is a salutary reminder that the PPSA legislatin des nt exist in a vacuum and inslvency practitiners cannt ride rughshd ver existing sale f gds and Crpratins Act requirements. Perfected and Nn Perfected Interests Maiden Civil (P&E) Pty Limited & Ors v Queensland Excavatin Services Pty Limited & Ors The intrductin f the PPSA in Australia led t significant cncern amngst business wners, financiers and varius stakehlders n what rights they have under the legislatin and requirements t ensure their rights are prtected. One f the first decisins made by the Supreme Curt f New Suth Wales with respect t the PPSA was in the matter f Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers f Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavatin Services Pty Ltd & Ors [2013] NSWSC 852. The Supreme Curt f New Suth Wales dealt primarily with the rights f lessrs, lessees and third party financiers n assets t which all claimed an interest. The decisin is cnsistent with thse previusly made in Canada and New Zealand and cnfirm that the unregistered interest f a lessr will vest in an inslvent lessee and may be secndary t thse f a third party financier wh has registered their security interest ver the lessee. Backgrund In May 2010 and August 2010 Queensland Excavatin Services Pty Ltd ( QES ) purchased caterpillar machinery via finance frm Esanda and Westpac Fllwing the purchase, QES leased the machinery t Maiden Civil (P&E) Pty Ltd ( Maiden ) 21

22 In May 2012 Maiden used this machinery as part f security t surce a lan frm a third party financier ( FFS ) In July 2012, fllwing a default n the lan FFS appinted Richard Albarran and Blair Pleash as Receivers and Managers ver Maiden The Dispute The Receivers and Managers argued that the machinery vested with Maiden as per the prvisins f the PPSA, that FFS had a pririty security interest with respect t the machinery and accrdingly they were entitled t deal with the machinery QES argued that it had a prir security interest ver the machinery and any claim by Maiden, FFS and the Receivers and Managers was secndary t theirs The Decisin Breretn J ruled in favur f the Receivers and Managers and rdered QES t deliver the machinery t the Receivers and Managers In cming t this decisin Breretn J systematically wrked thrugh a number f key issues within the PPSA as fllws QES was the wner f the machinery but this is nt relevant as the matter revlved arund PPSA pririties. Bth QES and FFS had a security interest in the machinery hwever the security interest f FFS had pririty ver QES s as it had been perfected whereas QES s had nt. 22

23 QES s interest was nt affrded the rights under the transitinal security interest prvisins as it had nt registered its interest in the applicable register prir t the cmmencement date. Key Issues & Findings Wh was the true wner Breretn J ruled that Maiden was the wner f the machinery financed thrugh Esanda as Maiden had been paying mnthly instalments fr the lease and had als paid the balance f the Esanda lan. Breretn J ruled that QES was the wner f the machinery financed thrugh Westpac as QES was cntinuing t invice Maiden fr the lease f the machinery and paying Westpac. Breretn J hwever nted that wnership was nt relevant in the decisin as it was a matter f PPSA pririties. Wh had a Security Interest The lease f the gds frm QES t Maiden was a PPS lease pursuant t Sectin 13 and thus QES had a security interest in the machinery pursuant t Sectin 12(3)(c). Maiden had rights in the machinery t which a security interest culd attach pursuant t Sectin 19(5). When Maiden and FFS entered int the security agreement, Maiden granted FFS a security interest in its assets and thus FFS had a security interest in the machinery pursuant t Sectin 19(2) and was enfrceable against Maiden pursuant t Sectin 19(1). Wh had a Pririty Security Interest FFS had a perfected security interest fr the purpses f Sectin 21(1) f the PPSA. QES did nt have a perfected security interest as it had nt registered n the PPSR. FFS s security interest tk pririty ver QES s security interest as per Sectin 55(3). Did QES have a Transitinal Security Interest QES s interest in the machinery was a transitinal security interest which wuld rdinarily result in QES s interest having pririty t the interest f FFS. Sectin 322(3) prvides exceptins t the transitinal security interest prvisins, in this case being that if the interest was registrable n a register prir t the PPSA cming int effect and was nt registered n this register, the prtectin prvided by Sectin 322 did nt apply. QES s interests in the machinery was that f a lessr and as the machinery was classified as a mtr vehicle in the Nrthern Territry f Australia Registratin f Interests in Mtr Vehicles and Other Gds Act 2008, QES shuld have registered its interest in the Nrthern Territry Register f Interests in Mtr Vehicles and Other Gds. QES had nt registered its interest in this register prir t PPSA cming int effect and thus was nt affrded the rights available under the transitinal security interest prvisins. 23

24 Is there an enfrceable right t pssessin QES asserted that the lease t Maiden had terminated due t varius factrs and that QES had reassumed pssessin, thus limiting the rights Maiden, FFS r the Receivers and Managers culd have t the machinery. Breretn J ruled that as the security interest granted by Maiden t QES in the machinery was unperfected at the time f the Receivership, the security interest belnged t Maiden (Sectin 267(2)). Thus Maiden held the gds subject nly t the perfected security interest f FFS. Cnclusin In cming t his decisin Breretn J has cnfirmed the requirements n lessrs t ensure their rights ver assets are prtected. The mst critical being that perfectin f a security interest is paramunt t ensure the lessr s psitin is maintained ver their assets that are subject t varius leases. Failing t d s can enliven the PPSA prvisins and allw lessees and third party financiers t trump the psitin f the riginal lessr. The case reflects the intentin f the PPSA regime t prvide pririty t registered security interests and thus prvides certainty t the finance cmmunity. It will be a useful precedent with respect t the future interpretatin f the Act. Time f Registratin Pzzebn (Trustee v Australian Gaming and Entertainment Ltd, in the matter f Australian Gaming and Entertainment Ltd (in liq) [2014] FCA 1034 Backgrund On 24 December 2013 Mr and Mrs Pzzebn as jint trustees f the Pzzebn Family Superannuatin Fund (the Applicant) agreed t lend t Australian Gaming and Entertainment Ltd (the Respndent) an amunt f $250,000 (the Lan); There was n dispute regarding the lan r dcuments supprting the Lan; On 19 May 2014 the Applicant registered it s security interest against the Respndent n the Persnal Prperties Securities Register (PPSR); On 26 May 2014 the Respndent was placed int Vluntary Administratin; On 6 June 2014 the Applicant issued a ntice f default in relatin t the Lan; On 1 July 2014 the Respndent entered liquidatin. The Dispute There is n dispute between the parties with respect t whether there has been attachment, enfrceability and perfectin f the security interest; The dispute is whether perfectin has been achieved by registratin alne, which is the view f the Respndent, r als by ther means, which is the view f the Applicant, and the cnsequences this has n the vesting f the security interest 24

25 T vest, registratin time must be after the latest f: 6 mnths befre the critical time; The end f 20 business days after the security agreement came int frce; and The latest f thse tw dates in this scenari is 20 business days after the security agreement came int frce. As registratin ccurred after that date, the security interest vests. The Decisin The security interest is perfected by registratin as per s 21(1)(b) and s 21(2)(a), nting that it is nt perfected by s 21(2)(b); The security interest is subject t s 588FL(2) and s 588FL(4) f the Crpratins Act due t the fllwing: The security interest was registered mre than 20 business days after the security agreement that gave rise t the security interest came int frce; The security interest was registered within six mnths f the appintment f the vluntary administratrs; As the security interest had nt been perfected by either pssessin r cntrl (i.e. nt s 21(2)(b)) the requirements f Sectin 588FL(2)(a)(ii) are met. Accrdingly the security interest was nt valid and enfrceable against the Respndent Implicatins Ensure registratin is dne within the required timeframe t avid any issues regarding the vesting f the security interest; It is best t have perfectin by mre than just registratin, i.e. pssessin r cntrl; Enfrcement and attachment are nt the additinal methds referred t when seeking perfectin fr the purpses f 588FL(2)(a)(ii); Failure t Register a security interest in an inslvency cntext A secured party is required under PPSA t perfect its interest within 20 business days. Hwever, a secured party is nt prhibited frm perfecting their security interest by way f registratin n the PPSR after 20 business days. 25