So you don’t
need a release
of my security
interest?
Another twist in the PPSA
The Personal Property Securities
Act 2009 (Cth) (PPSA) has once
again created an interesting
outcome for financiers.
This time it is when collateral is transferred
with the effect of a financier who, for all
intents and purposes, is registered first
in time, still losing priority. How, you ask?
Section 34 of the PPSA is the answer.
Rules applicable to
transferred collateral
Section 34 of the PPSA relevantly provides
that if collateral is transferred, and at the
time of the transfer a secured party held a
perfected security interest in the collateral,
14
PROCTOR | April 2015
the security interest is temporarily perfected
for the period starting at the time of the
transfer and ending at the earliest of:
(a)the end of the month that is 24 months
after the time of the transfer
(b)if the security interest was perfected
by registration at the time of the transfer,
the end time for the registration (as
registered at the time of the transfer)
(c)if another security interest attaches to
the collateral at or after the time of the
transfer, and the other security interest
is perfected – five business days after
the transfer (if the original secured
party consented to the transfer) or five
business days after the original secured
party acquires the actual or constructive
knowledge required to perfect the original
secured party’s interest by registration.
The unusual outcome arises when a financier
funds the acquisition of the collateral being
transferred and that financier’s security
interest attaches to the collateral.
When does a secured party
acquire actual or constructive
knowledge required to re-perfect
or amend its security interest?
The first question then is when does the
original secured party acquire the required
actual or constructive knowledge (assuming
the original secured party has not consented
to the transfer)?
Under section 297 of the PPSA, a person
has constructive knowledge of a circumstance
if that person would have had actual
knowledge had the person made inquiries
Finance law
Financiers may
find themselves in
an uncomfortable
position when funding
the acquisition of
collateral for transfer.
Ian Dorey explains.
of an honest and prudent person in that
person’s situation or with the person’s actual
knowledge in the person’s situation.
Section 298 of the PPSA then provides
that a company has actual or constructive
knowledge where a director, employee or
agent of the company who is responsible
for acting on behalf of the company, had
that knowledge or:
(a)the circumstance is communicated
to a director, employee or agent, and
(b)if the director, employee or agent
had exercised reasonable care, the
circumstance would have been brought
to the attention of a director, employee
or agent of the company who is
responsible for acting on behalf of
the company in such a circumstance.
One potential issue which could open up
many arguments is whether the employee
who receives notice is an “employee … of
the [Company] who is responsible for acting
on behalf of the [Company] in relation to
such a circumstance”.
How does a secured party
re-perfect or amend its
security interest?
The issue of how the original secured party
re-perfects its interest when it does not
have an agreement with the third party
purchaser also raises some challenges.
For there to be an effective security interest
under the PPSA, on one reading of section
20 the original security holder would need
to have a fresh agreement executed by the
acquiring party. Not an easy task, however,
the leverage available to the original financier
is to state that it will exercise its rights to take
possession of the collateral unless a fresh
agreement is executed by the acquiring party.
The biggest challenge is to achieve all of
this within the five business days of actual
or constructive notice being acquired. It
should be noted that, in other jurisdictions
where similar legislation to the PPSA has been
passed, the time period allowed for a financier
to take the steps to re-perfect is 30 days.
It is also curious that section 293 of the
PPSA does not allow for this time period
to be extended by an order of the court.
PROCTOR | April 2015
15
Finance law
The alternative argument is to rely on the
terms of the agreement with the original
grantor, as the terms may allow a new
financing statement to be lodged for
registration over the collateral in the name
of the new acquirer. Obviously, care needs
to be taken in reviewing the terms to ensure
that the provisions of the relevant agreement
allow this to occur. It is not inconceivable
that the court could become involved in
applications to determine this issue.
Priority rules for
transferred collateral
In order to determine who has priority over
the collateral, attention needs to be turned
to the rules set out in the PPSA.
Section 67 of the PPSA provides that the
transferor-granted interest has priority if:
(a)it was perfected immediately before
the transfer, and
(b)it has been continuously perfected
since the transfer.
Section 68 of the PPSA sets out the
priority rules when there is a break in the
perfection of the transferor-granted interest.
That section does not however apply to
serial-numbered goods.
If the collateral is not a serial-numbered
good (and section 68 applies) then there is
a myriad of circumstances to wade through,
which are not the subject of this article.
If neither section 67 or 68 of the PPSA apply,
the default priority rules in section 55 will apply.
Default priority rules
The default priority rules in section 55 of
the PPSA provide that a perfected security
interest in collateral has priority over an
unperfected security interest in the same
collateral. This means that if the original
secured party does not re-perfect, it will
have an unperfected security interest five
business days from receiving notice and
the new secured party will have priority.
The original secured party’s position is therefore
limited to the equity (if any) that sits in the
collateral, which may be depreciating in value,
even though the debt owing to the new secured
party is presumably decreasing over time.
What does this mean
for financiers?
• You can lose your priority, even if your
security interest is a PMSI.
• Your security interest, if unperfected,
may still be capable of being re-perfected,
though the loss of priority may have a
significant impact on the worth of the
security interest.
• Financiers need to be aware of the different
timeframes that are imposed by section 34,
particularly when they acquire the actual or
constructive knowledge required for it to
perfect its security interest by registration.
One original secured party would still have
a claim against its borrower although, if it
is selling equipment or assets, the chance
of recovery seems unlikely.
Conclusion
Would registration as a
PMSI make a difference?
No. Even if the security interest was
registered as a purchase money security
interest (PMSI), the position would not
change. The PMSI would still become
unperfected pursuant to the provisions
of section 34 of the PPSA.
The alternative to an amendment to
extend the time under section 34 would be
to specifically allow in certain circumstances
the original secured party to perfect by
registering a financing statement over the
collateral in the name of the acquiring party.
There is a distinction between the issue
of priority and whether or not the acquiring
party takes the collateral free of the original
secured party’s security interest.
PROCTOR | April 2015
The practical issue for the original secured
party is that, while it could re-perfect its
interest and then proceed to enforce its
interest in the collateral, the new secured party
could at any time enforce its security interest
and receive the sale proceeds. Even if the
original secured party did enforce its interest,
the original secured party would still be
required to account to the incoming secured
party for the sale proceeds due to the priority
afforded to the incoming secured party.
While this sort of circumstance may be rare,
as generally incoming financiers will still require
a release of any PPSA security interests,
financiers need to be aware of the timeframes
under section 34. It is my view that section 34
should be amended to allow the timeframe
to be extended from five business days to
30 days to allow the original financier to take
appropriate steps to re-perfect or register.
How can the original secured
party enforce its security interest?
16
The acquiring party does not take the
collateral free of the original secured party’s
interest (see section 44 of the PPSA) and
the original secured party may be able to
re-perfect its security interest.
The PPSA continues to create twists and
turns as we journey through this new order.
Ian Dorey is a partner in restructuring and insolvency
at K&L Gates. He is also a member of the Insolvency
and Reconstruction Law Committee of the Business
Law Section of the Law Council of Australia.
Image credits: page 14-15 ©iStock.com/surpasspro,
page 16 ©iStock.com/PKM1