Commercial
Transactions
Module 11
Security over Personal Property (2)
Summer Session 200809
Registration Systems & Priorities
Registration Systems
We will look at 3 systems which provide for registration of securities on a Public
Register so as to put third parties on notice of obligations. Students should know
which securities can and should be registered, those which cannot be registered,
those which might be required to be registered depending on drafting/effect,
formalities required, consequences of registration and non registration.
Corporations Act for eligible charges by Companies
Registration of Interests in Goods Act (for interests in boats and MVs)
Security Interests in Goods Act (charges by non-companies over tangible goods
and replacing Bills of Sale Act)-commenced March 2006
Priorities
When there is more than one security holder, it is often necessary to work out
who has priority as there may not be enough assets to satisfy everyone.
Generally
Competing Interests Under the same Registration System
Competing Interests under different Registration Systems
Registration Systems
1. Corporations Act
2. Registration of Interests in Goods Act
3. Security Interests in Goods Act
Concern with existing State and
Federal registration systems
 It is not possible to register interests over some classes of property e.g. many










intangibles, retention of title clauses.
Coverage varies from jurisdiction to jurisdiction e.g. boats not covered in
REVs in all states.
Dual registration may be necessary e.g. Corp +Revs in Tasmania.
Technical compliance may affect validity e.g. agricultural mortgage in
particular form.
Interaction of registration systems can deliver complex outcomes e.g. failure
to register under Corp law does not affect validity but technical non
compliance with state law will.
Mandatory registration can be difficult to manage e.g. security holder must
anticipate whether collateral might be moved to another state
May be a need to register in more than one state
May be a need to search in more than one state
Registration may be cumbersome..e.g. paper lodgement rather than
electronic
Registers may not be available for searching on line
May be costly for parties not involved to take proper precautions
Charges Required To Be Registered Corporations Law
s. 262 (1) Subject to this section, the provisions of this
Chapter relating to the giving of notice in relation to, the
registration of, and the priorities of, charges apply in
relation to the following charges (whether legal or equitable)
on property of a company and do not apply in relation to
any other charges:
(a) A floating charge on the whole or a part of the property,
business or undertaking of the company;
(b) A charge on uncalled share capital;
(c) A charge on a call on shares made but not paid;
(d) A charge on a personal chattel, including a personal chattel
that is unascertained or is to be acquired in the future, but not
including a ship registered in an official register kept under an
Australian law relating to title to ships;
Charges Required To Be Registered - Corporations
Law cont.
(e) A charge on goodwill, on a patent or licence under a patent,
on a trademark or service mark or a licence to use a trade mark
or service mark, on a copyright or a licence under a copyright or
on a registered design or a licence to use a registered design;
(f) A charge on a book debt;
(g) A charge on a marketable security, not being;
(i) A charge created in whole or in part by the deposit of a
document of title to the marketable security; or
(ii) A mortgage under which the marketable security is
registered in the name of the chargee or a person nominated by
the chargee;
(h) A lien or charge on a crop, a lien or charge on wool or a
stock mortgage;
(j) A charge on a negotiable instrument other than a marketable
security.
Charges Required To Be Registered - Corporations
Law cont.
s. 262 (2) The provisions of this Chapter mentioned in
subsection (1) do not apply in relation to:
(a) a charge, or a lien over property, arising by operation of law;
(b) a pledge of a personal chattel or of a marketable security;(c)
a charge created in relation to a negotiable instrument or a
document of title to goods, being a charge by way of pledge,
deposit, letter of hypothecation or trust receipt;
(d) a transfer of goods in the ordinary course of the practice of
any profession or the carrying on of any trade or business; or
(e) a dealing, in the ordinary course of the practice of any
profession or the carrying on of any trade or business, in
respect of goods outside Australia.
Lien over property arising by
operation of law
Airservices Australia v. Canadian Airlines International Ltd
(1999) HCA 62
Canadian leased a plane to Compass Airlines.
When the latter went into receivership, Canadian
tried to take back its plane; only to discover that
there was a statutory lien under the Civil Aviation
Act for $2,888,740.97 for unpaid charges and
penalties for landing fees, maintenance, traffic
control etc. Airservices would not release the plane
until they were paid. CAA had its own Statutory Lien
register.
Charges Required To Be Registered - Corporations
Law cont.
s. 262(3). The reference in paragraph (I)(d) to a charge on a
personal chattel is a reference to a charge on any article
capable of complete transfer by delivery, whether at the
time of the creation of the charge or at some later time, and
includes a reference to a charge on a fixture or a growing
crop that is charged separately from the land to which it is
affixed or on which it is growing, but does not include a
reference to a charge on:
(a) a document evidencing title to land
(b) a chattel interest in land;
(c) a marketable security;
(d) a document evidencing a thing in action; or
(e) stock or produce on a farm or land that by virtue of a
covenant or agreement ought not to be removed from the farm
or land where the stock or produce is at the time of the creation
of the charge.
Definition Of Charge - S.9 Corporations Law
“Charge”
Means a charge created in any way and includes
a mortgage and an agreement to give or execute
a charge or mortgage, whether on demand or
otherwise.
Sally Anne Horsley v. Phillips Fine Art Auctioneers
Pty Ltd - SCNSW 31.07.95 No. 3211/92
Concerns gifts, bills of sale, conversion.
Anthony Spies and his brother Carl lived with their parents in The Swifts.
Their company Minjar purchased this property in Darling Point from the
Catholic Church in 1986. It executed a Mortgage back. In the same year
Carl and Anthony as Mortgagor executed an Ordinary Bill of Sale over
certain antique furniture and chattels in favour of the Church.
Anthony Spies claimed the 1986 BS was discharged in 1987. Court found
it more probably than not that it was paid out (32). The evidence was slim
but an inference was raised by the fact that there was a later BS granted
by Carl alone (the 1990 BS) to secure unpaid interest from the mortgage
over ... “all furniture and furnishings mow and hereafter situated in the
premises known as The Swifts ...” ... same furniture as in the 1986 BS.
Sally Anne Horsley v. Phillips Fine Art Auctioneers
Pty Ltd - SCNSW 31.07.95 No. 3211/92 cont (2)
This coincided with the principal mortgage being discharged and a
refinancing by Minjar with St George. BS transferred to St George in
1992. St George seized the furniture.
Anthony claims a half interest and sues in conversion. He had to show
that he had title to the furniture, that St George converted it and he
suffered quantified loss and damage. St George contends that Anthony
failed to establish any of these and that prior to the grant of the BS, the
furniture had been gifted to their mother in 1987.
Anthony gave evidence of the gift to his mother in 1987 (33). See later
paragraphs for discussion of an effective gift … delivery 53-83,84, 85, 86,
87.
The Registration System for MVs & Boats
Registration of Interests in Goods Act (NSW)
This act provides a system in which security interests
relating to prescribed goods (currently only motor vehicles
and boats) can be placed on the Public Register.
The Register is maintained by the Department of Fair
Trading and is known as REVS - The Register of
Encumbered Vehicles. It can be accessed online and
students are encouraged to look at the material provided
by the Department of Fair Trading.
The Registration System for MVs & Boats
Registration of Interests in Goods Act (NSW)
“Security Interest” in relation to goods means an interest or
power: a) reserved in or over an interest in the goods; or
b) created or otherwise arising in or over an interest in the
goods under a Bill of Sale, mortgage, charge, trust or power
by way of security for the payment of a debt or other
pecuniary obligation or the performance of any other
obligation but does not include any interest or a power
reserved or created or otherwise arising under a lease or hire
purchase agreement or an agreement excluded by this
definition by the regulations.
The Registration System for MVs & Boats
Registration of Interests in Goods Act (NSW)
“Registerable Interest” in relation to goods means:
a) The interest in the goods of the person to whom is
owed the obligation of which the performance is secured
by a security interest to which the goods are subject.
b) The interest in the goods of the lessor of the goods.
c) The interest in the goods of the owner under a hire
purchase agreement relating to the goods; or
d) Any other prescribed interest in the goods whether
arising under the Law of NSW or of a participating State.
Purchase of Cars or Boats that are Subject to A
Registerable Interest
Students are expected to have a good working knowledge of Sections 9 and
10 of the Act so that they are able to determine issues such as the following:
a) Whether a particular interest is a registerable interest and should be
registered under the Act.
b) How a perspective purchaser of a car or boat can protect their interests
and avoid purchasing a car that belongs to, or is encumbered to someone
else.
c) The position of a purchaser who has purchased-from a dealer- a car or
boat that belongs to someone else or is affected by a security interest of
someone else.
d) The position of a purchaser who has made a private purchase of a car or
boat that belongs to someone else or is encumbered.
e) The position of a financier who has an interest in a car or boat in both
situations of registration and non-registration of a registerable interest.
Register Encumbered Vehicles
extract from DFT
Statistically, there is a one in five chance that a vehicle offered for private sale
will be carrying a debt for which the new owner could become liable.
The Register of Encumbered Vehicles (REVS) is a service provided by the
Office of Fair Trading that can tell you whether or not a vehicle is recorded as
encumbered. Encumbered means that there could be money owing on the car or
that the registered operator may not own the vehicle outright. REVS can also
check if the vehicle is required for an RTA inspection or whether the vehicle
has money owing on it, been reported as stolen, been recorded as de-registered,
or been recorded as a repairable or non-repairable write-off
Always purchase a REVS search certificate when REVS tells you the vehicle is
not encumbered (cost = $10). This will provide confirmation of your inquiry
and offer legal protection against the vehicle being repossessed by a creditor
due to a previous owners unpaid debt.
Security Interests in Goods Act
An attempt to provide registration for security
interests not covered by the Corporations Actgiven by individuals and partnerships
Only partial…IP, intangibles not covered
Differs from State to State
Security Interests in Goods-non companies
The Old Regime
The Security Interests in Goods Act has repealed
The Bills of Sale Act 1898
This act distinguished traders bills of sale and ordinary bills of sale.
Unregistered traders bills were absolutely void and conferred no security,
Unregistered ordinary bills were valid as between grantor and grantee but
void as against certain judgement creditors. The aim of registration was to
prevent third parties from being misled into believing that the goods to
which the bill related were unencumbered.
The Liens on Crops and Wool and Stock Mortgages Act 1898
This act enabled the land holder to give a preferable lien over crops, an
owner of sheep to grant a preferable lien over wool and an owner of sheep,
cattle or horses the ability to grant a stock mortgage. Its aim was to
overcome doubts at common law about the efficacy of securities granted
over goods that were still in the course of production
Security Interests in Goods-non companies
The New Regime
a)
b)
c)
d)
e)
f)
g)
The objects of the Security Interests in Goods Act are:
To modify existing law by removing the outdated distinction between
traders bills and ordinary bills.
Make registration optional rather than mandatory.
Remove the need for constantly renewing registration.
Registration will generally confer priority over unregistered interests
and subsequently registered interests, but a failure to register will not
result in invalidity.
Registration of agricultural securities will create mortgages over
existing and future crops and wool, instead of liens over growing
crops.
Agricultural mortgages are extended beyond sheep, cattle and
horses.
Aquaculture mortgages will be permitted.
Security Interests in Goods-non companies
The New Regime
The term Security Interest in relation to goods (whether existing or
future) is defined to mean interest or power:
a) reserved in or over an interest in the goods; or
b) created or otherwise arising in or over an interest in the goods
under a bill of sale, mortgage, charge, trust or power by way of
security for the payment of a debt or other pecuniary obligation or the
performance of any other obligation but is defined not to include:
- a letting of goods with an option to purchase
- an agreement for the purchase of goods by instalment
- any other hiring agreement
- any other agreement, arrangement, instrument or circumstance
prescribed by the regulations.
Security Interests in Goods-non companies
The New Regime
The location of the Register for Security Interests in
Goods.
This will be located with the Registrar General in the same
way that the Bills of Sale Register was kept with the Registrar
General.
For more information, see the website.
What “goods”are covered?
goods" means any chattels personal, fixtures or other things capable of
complete transfer by delivery (whether immediately or at any future
time), but does not include any of the following:
(a) title deeds, negotiable instruments, choses in action or chattel
interests in real estate,
(b) shares or interests in the stock, funds or securities of any of the
following:
(i) a Government (whether of this State or otherwise),
(ii) the Crown or a body representing the Crown (whether in right of this
State or otherwise),
(c) shares or interests in the capital or property of a body corporate
(wherever constituted),
(d) access licences in respect of water granted under the Water
Management Act 2000,
(e) any other thing prescribed by the regulations for the purposes of this
definition.
"registrable security instrument"
For the purposes of this Act, a security instrument is a
"registrable security instrument" if:
(a) the instrument states the name and address of each
grantor and the name of the holder of the security interest
concerned, and
(b) the instrument includes a description of the goods to
which the security interest relates to the extent to which the
goods are ascertainable at the time of the execution of the
instrument, and
(c) the instrument has been duly executed by each grantor,
and
(d) in the case of an agricultural goods mortgage--the
instrument otherwise complies with the requirements of Part
2.
Agriculture
(1) In this Act:"agricultural goods" means any of the following:
(a) crops, (b) fish, (c) stock, (d) wool.
"agricultural goods mortgage" means any of the following:
(a) an aquaculture fish mortgage, (b) a crop mortgage,
(c) a stock mortgage (including a wool mortgage).
"aquaculture" has the same meaning as in section 142 of the
Fisheries Management Act 1994
."crop" includes the following:
(a) wheat, maize, canola, sorghum, barley, oats, lucerne, grass
(whether for hay or grain), cotton, tobacco, rice, sugar-cane and any
other kind of agricultural produce,
(b) oranges, grapes (whether as fruit or for wine or spirit) and any other
kind of fruit or horticultural produce.
"crop mortgage" means a mortgage over crops that is granted as
provided by section 7
"stock" includes any sheep, goats, cattle, horses, swine, poultry,
alpacas, llamas, ostriches or other animals (except fish)."
Crop Mortgages
7. Creation of crop mortgages
(1) A person may grant a mortgage as provided by this section (a "crop
mortgage") over any crops that grow or are grown on land by way of
security for payment of a debt or other pecuniary obligation in
circumstances where the person:
(a) owns the land, or
(b) has exclusive possession of the land and a right to harvest crops that
grow or are grown on the land, or
(c) holds a lease over the land granted under the Western Lands Act
1901 (whether or not the lease confers exclusive possession of the
land) and has a right to harvest crops that grow or are grown on the
land, or
(d) is entitled under a sharefarming agreement with the owner or lessee
of the land to crops (or a share of the crops) that grow or are grown
on the land and has obtained the written consent of the owner or
lessee to grant the mortgage.
Crop Mortgages cont (2).
(2) A crop mortgage may extend to any or all of the following:
(a) crops that are growing on the land concerned during the period of
the mortgage,
(b) crops to be sown or planted on the land concerned by the
mortgagor during the period of the mortgage,
(c) crops that grow on the land concerned in the ordinary course of
nature during the period of the mortgage.
(3) A crop mortgage must:
(a) be in the prescribed form, and
(b) be duly executed by the mortgagor, and
(c) describe or otherwise identify the crops to which the mortgage is to
apply, and
(d) describe or otherwise identify the land on which the crops
concerned are growing or will grow, and
(e) specify a period for its duration in accordance with subsection (5),
and
(f) be registered within the period of 45 days after its execution.
Crop Mortgage
I, [name of mortgagor] of [address of mortgagor], (the "Mortgagor") grant a
mortgage as provided by the Security Interests in Goods Act 2005 in respect of
the crops described in the Schedule in favour of [name of mortgagee] of
[address of mortgagee] (the "Mortgagee").
This mortgage is granted as security for the payment by the Mortgagor of the
following:
1 [state debt or other pecuniary obligations for which mortgage granted]
2 *The provisions set out in the memorandum of covenants, registered in the
General Register of Deeds as number [specify number of memorandum], are
included as part of this mortgage subject to the following:(a) *[specify any
alterations to or omissions from provisions] (b) This mortgage has effect for the
period specified in the Schedule commencing from the date of its registration.
Dated: [state date of execution] Signed by or on behalf of the Mortgagor:
[Mortgagor's or attorney's signature] in the presence of: [witness's name]
[witness's address] [witness's signature]
1 Crop to which mortgage relates
[describe crops to which mortgage relates or will relate]
2 Land to which mortgage relates
[describe land on which the crops are growing or are to grow]
3 Duration of the mortgage [specify period for duration of the mortgage, including
any renewal rights]
Stock mortgage/*Wool mortgage
I, [name of mortgagor] of [address of mortgagor], (the "Mortgagor") grant a
mortgage as provided by the Security Interests in Goods Act 2005 in respect of
the *stock/*wool/*stock and wool described in the Schedule in favour of [name of
mortgagee] of [address of mortgagee] (the "Mortgagee").
This mortgage is granted as security for the payment by the Mortgagor of the
following:1 [state debt or other pecuniary obligations for which mortgage
granted]2 *The provisions set out in the memorandum of covenants, registered
in the General Register of Deeds as number [specify number of memorandum],
are included as part of this mortgage subject to the following:(a) *[specify any
alterations to or omissions from provisions](b) This mortgage has effect for the
period specified in the Schedule commencing from the date of its
registration.*This mortgage *extends/*does not extend to [state any limitations on
or extensions on the provisions of section 12 (5) or (6) of the Security Interests in
Goods Act 2005].
Dated: [state date of execution] Signed by or on behalf of the Mortgagor:
[Mortgagor's or attorney's signature] in the presence of: [witness's name]
[witness's address] [witness's signature]
1 *Stock and wool/*stock/*wool to which mortgage relates [describe stock
and/or wool to which mortgage relates or will relate]
2 Land on which stock concerned to be kept [describe land on which stock
concerned are being kept or are to be kept]
3 Duration of the mortgage [specify duration of mortgage, including renewal rights]
Aquaculture fish mortgage
I, [name of mortgagor] of [address of mortgagor], (the "Mortgagor") grant a mortgage
as provided by the Security Interests in Goods Act 2005 in respect of the fish
described in the Schedule in favour of [name of mortgagee] of [address of
mortgagee] (the "Mortgagee").This mortgage is granted as security for the
payment by the Mortgagor of the following:1 [state debt or other pecuniary
obligations for which mortgage granted]2 *The provisions set out in the
memorandum of covenants, registered in the General Register of Deeds as
number [specify number of memorandum], are included as part of this mortgage
subject to the following:(a) *[specify any alterations to or omissions from
provisions](b) This mortgage has effect for the period specified in the Schedule
commencing from the date of its registration.
Dated: [state date of execution] Signed by or on behalf of the Mortgagor: [Mortgagor's
or attorney's signature] in the presence of: [witness's name] [witness's address]
[witness's signature]
1 Fish to which mortgage relates [describe fish to which mortgage relates or will
relate]
2 Land or water source to which mortgage relates [describe land or water source
on or in which fish are being cultivated or are to be cultivated]
3 Duration of the mortgage [specify period for duration of the mortgage, including
any renewal rights]
Priorities
1. Generally
2. Within systems
3. Between systems and non-registerable
securities.
Priorities
1. Equities being equal, first in time of creation prevail.
2. Equities being equal, preference given to legal over
equitable.
Subject to special rules, etc., for:
 Purchasers without notice.
 Fraud, estoppel and gross negligence.
 Dearle v. Hall.
 Statutory registration rules.
 Bankruptcy and Liquidation Statutes.
 Provisions re “tacking”.
 Marshalling of assets.
Factors affecting priorities
 Whether in or out of bankruptcy or liquidation
 Type of grantor of security. If Co, subject to
Corporations Act. Otherwise, State law.
 Form of security-possessory or non-possessory
and in case latter, whether grant or title
reservation.
 Type of property-tangible, intangible-statutory
scheme applicable?
 Where secured property is situated-law may differ
from State to State.
Security Interests in Goods-non companies
The New Regime
Effect of registration under the Security Interests in Goods
Act on priority of security interests.
Clause 31 sets out rules governing the determination of priority
unless the holders have agreed otherwise.
A registered security interest will generally rank in priority over an
unregistered security interest. However, an unregistered security
interest will rank in priority if the holder of the unregistered interest
takes possession of the goods before the registered interest is
registered.
An earlier registered security interest ranks in priority over a later
registered security interest.
s.31 Priority of security interests
(1) A registered security interest in goods ranks in priority over any
unregistered security interest in the same goods with respect to all
debts and other pecuniary obligations (including contingent
obligations) and all other obligations secured under the registered
security interest.
(2) Registered security interests in the same goods rank in priority in the
order in which they are registered with respect to all debts and other
pecuniary obligations (including contingent obligations) and all other
obligations respectively secured under them whenever arising.
(3) However, an unregistered security interest in goods ranks in priority
over a registered security interest in the same goods if the holder of
the unregistered security interest takes possession of goods before
the registered security interest is registered.
(4) The order of priority of security interests established by this section is
subject to any agreement between the holders of the security interests
concerned.
(5) This section has effect subject to section 11 (Effect of crop mortgages
on sharefarming agreements).
Companies-priorities
The usual order in case of insolvency--1. Fixed charges, mortgages
2. Preferential creditors (including employees)
3. Floating charges
4. Unsecured creditors
5. Subordinated (unsecured) creditors
6. Equity claimants-preference shareholders
7. Equity claimants-ordinary shareholders
8. Equity claimants-deferred shareholders
Order Of Priority Of Charges - Corporations Law
General rules in relation to registered charges:
A registered charge has priority over subsequent registered
charge s.280(1)(a).
A registered charge has priority over a prior unregistered
charge s. 280(1)(b).
A registered charge has priority over an unregistered charge
created after the creation of the registered charge s. 280(1)(c).
Exceptions to general rule:
If subsequent charge created before the prior registered
charge, and chargee of subsequent charge can prove that the
prior registered chargee had notice of the subsequent
registered charge at the time the prior registered charge was
created s. 280(1)(a) and 280(2).
Order Of Priority Of Charges - Corporations Law
Exceptions to general rule cont.:
The holder of a floating charge will be deemed to have conceded priority to
a subsequently registered fixed charge created before the crystallisation of
the floating charge, unless ASIC has been notified of any term of the
floating charge that prohibits or restricts the company from creating
subsequent fixed charges s. 279(3).
A registered charge loses its priority over a prior unregistered charge if the
prior unregistered chargee can prove that the registered chargee had notice
of the earlier unregistered charge when he/she took the registered charge
s. 280(1)(b) and 280(2).
s. 278(2) provides that having notice includes constructive notice. A person
has constructive notice of a prior interest if the existence of that interest
would have come to that person's attention upon making the inquiries and
investigations that a reasonable person, acting prudently in their own
interests would have made. Aust. Central Credit Union v. Commonwealth
Bank of Aust. (1991) 9 ACLC 396,402.
Priorities example - Company Charges
A) Chargor Ltd borrowed $50,000 from Chargee Bank, secured by a
floating charge over all its assets. The charge was registered with ASIC
under s. 262. There was no negative pledge prohibiting the creation of
future charges.
B) Chargor Ltd then borrowed $25,000 from Absolute Finance secured by
a registered fixed charge over Asset #1.
C) Chargor Ltd then borrowed another $10,000 from Simpson Finance
secured by a registered fixed charge over Assets #1,2,&3.
Chargor Ltd then goes into liquidation.
Priorities example - Company Charges (2)
The order of payment is as follows:





The floating charge in A takes priority except over a later registered
fixed charge: see s. 279.
The registered fixed charge in Loan B will take priority over the prior
floating charge with respect to Asset #1.
Loan B takes priority over Loan C as it is first in time. See s. 280.
The fixed charge in Loan C will not defeat the prior registered fixed
charge under Loan B over Asset #1.
The fixed charge in Loan C will take priority over the registered
floating charge in Loan A.
Companies-priorities
Back again to the usual order in case of insolvency1. Fixed charges, mortgages
2. Preferential creditors (including employees)
3. Floating charges
4. Unsecured creditors
5. Subordinated (unsecured) creditors
6. Equity claimants-preference shareholders
7. Equity claimants-ordinary shareholders
8. Equity claimants-deferred shareholders
What is the difference between fixed and
floating charges?
When a charge is taken, no transfer of ownership. A particular asset is
set aside so if chargor fails to pay, chargee is entitled to receive and
apply proceeds of sale against the liability.
Fixed charge given over a specific piece or pieces of property.
A floating charge “floats” over the assets until it crystallises and
becomes fixed in accordance with terms of charge.
A fundamental difference is right of the chargor to deal with the asset
during the charge. Under a floating charge, chargor can deal with it in
ordinary course of business until crystallisation. Where a fixed
charge given, no right to deal with it without consent chargee.
Companies-priorities
It can be seen from previous list that creditors will
make a considerable effort to be a secured creditor
in order to get to top of list.
However, there is some pressure to leave a
company debtor free to use secured property in the
ordinary course of business-- to generate cash flow
to service the debt.
A problem can sometimes arise with characterisation
of charges.-e.g. book debts-is a charge over book
debts fixed or floating?
Assignment of book debts-factoring
Distinguish an assignment from a charge
A Legal assignment must comply with s. 12 of the
Conveyancing Act. Assignee is then the “owner”
of the debt and questions of priority do not arise.
An equitable assignment for value need not satisfy
notice to debtor requirement, but may lose priority
to an assignment where notice has been given. It
can be by way of security, but may lose priority to
a registered charge.
Legal Assignment
Must be absolute assignment..outright transfer, not by way of security or
conditional.
Must be in writing under hand of assignor
Must be express notice in writing to the debtor, stating the fat of the
assignment, the name of the assignee, date of assignment and
amount of the debt.
Advantages
No consideration is required, Assignee can sue in their own name
Debtor can safely pay assignee, Legal interest obtained for value and
without notice of earlier equitable interests will have priority ahead of
them.
Disadvantages
Identity assignee known, stamp duty payable, must be whole debt (not
part) and not by way of security.
Equitable assignments of book debts
Clear expression of intention to assign required
Subject matter must be identified with certainty
Where consideration, effective from time it is paid
Assignor continues to be “owner”, so assignee is trustee.
Advantages
No notice required (may be defeated by person who takes later interest
but gives notice first if they have no notice of earlier interest-can protect
by taking charge over legal interest retained and register with ASIC),
may be conditional, by way of security, part only, writing is not required if
supported by consideration, and if done correctly stamp duty not payable
Disadvantages
Assignor must be a party to any enforcement action, assignee takes
interest subject to equities arising before notice (including rights of set off
or counterclaim by debtor) and can lose priority to another assignee who
gives notice before them.
The trouble with book debts
Effectiveness of fixed charge over book debts upheld in 1979 decision of Siebe
Gorman & Co Ltd. v. Barclays Bank Ltd (1979) 2 Lloyd’s Rep 142 and later in
1986 Supreme Court Ireland Re Keenan Bros Ltd (1986) BCLC 242
PC in Agnew disagreed with Siebe decision and found charge in Agnew only a
floating charge because debtor could use proceeds in ordinary course of
business.
The Hof L in National Westminster Bank plc v. Spectrum Plus Limited (2005)
UKHL confirmed lower decision of High Court of England-if a charge permits
the chargor to deal with any proceeds of realisation of book debts in ordinary
course of business until some further step is taken, charge is floating,
irrespective of how parties classified it.
Although these decisions are persuasive and not binding in Australia, if applied,
for a charge over book debts to be fixed, chargee must have control over book
debts and proceeds.
Agnew v. Commissioner of Inland Revenue & 0rs.
Re Brumark Investments Limited
(2001) UKPC 28-see text extract
NOTE--persuasive but not binding in Australia.
Was a charge over uncollected book debts, which left company free to
collect them and use the proceeds in the ordinary course of business a
fixed charge or a floating charge?
The debenture deed sought to create a fixed charge on book debts
outstanding when Receivers appointed, and proceeds of debts they
collected. Prior to their appointment, the company was free to collect
them and use proceeds in ordinary course. However, it could not assign
or factor them.
The question was whether the right to collect debts and deal with
proceeds free from security meant that charge on uncollected debts,
while being described as fixed was nevertheless floating until it
crystallised by appointment Receivers
Agnew cont.
The Privy Council traced history floating charge paying particular
attention to book debts.Useful for students as it should enable them to
get good understanding of both. The extract in text is suitable for study.
Their Lordships concluded that the freedom to deal with charged assets
without the consent of the holder of the charge made it a floating charge.
They found it was clear from description attached that they intended to
create a fixed charge over uncollected debts and floating charge over the
proceeds. They had to deal with the question of whether a receivable
could be separated from its proceeds-a single security interest or 2?
And, whether a charge on book debts necessarily takes effect as a
single and indivisible charge on the debts and proceeds, or 2 different
charges.
They concluded property and its proceeds are 2 different assets.
Agnew cont
Fixed charges over book debts-various possibilities
=Lender taking assignment of each debt and perfecting the security by
giving notice to third parties entitling the lender to collect the debts
itself or
= The Lender taking assignment of debts but refraining from giving
notice until Debtor in default.
First usually commercially impractical. Second usually effective in
creating fixed charge because company not collecting debts for its
own benefit but for the account of the Lender. Hence, proceeds not
available to debtor free of the security.
= Where a bank is involved, a blocked collection account with a bank
can be used.
Spectrum
Spectrum opened an account with NatWest and obtained an overdraft of
£250,000 for working capital. By debenture 30.9.1997, Spectrum
created a charge “by way of specific charge” in favour of NatWest over
book debts to secure moneys due by it to NatWest.
Obligations of Spectrum were
 to pay the proceeds of any book debt into Spectrum’s account with
NatWest
 not to sell, factor, discount or otherwise charge or assign the book
debt in favour of any other person or purport to do so without the
consent of the NatWest; and
 if called on to do so, to execute legal assignments of such book debts.
 NatWest advanced £200,000 by debit to account. Proceeds of book
debts were collected and paid into account reducing overdraft an
Spectrum drew on account as and when it needed to, thereby
increasing overdraft.
Spectrum cont(2)
Spectrum went into voluntary liquidation owing NatWest £156,554.
Liquiators collected and realised book debts £113,484, but refused to
account for them to NatWest. Natwest sought declaration it was fixed
charge and order for Liquidator to account.
Court considered three part test in Agnew
 Nature of rights and obligations parties intended-ordinary account
with no restrictions
 Whether it was intention of parties that charged assets should be
under the control of company or charge holder-book debts under
control of and available for use by Spectrum in ordinary course
 Whether such an intention was consistent with nature of transaction
as describe by label parties had put on it-no specific charge not
consistent with freedom to use
Therefore floating and not fixed charge
Creation of fixed charges over book debts
-the practicalities.
Successful strategies include:
 A prohibition in the charge against the company realising debts itself
whether by assignment or collection without consent of chargeholder.
 More realistically commercially, the chargeholder appoint the
company its agent to collect the debts for its account and on its
behalf.
 Pay into blocked account so money not available as a source of
cashflow. However, blocked account must operate in substance as
well as in name to be effective-chargor must be denied right of access
for withdrawals, any payment out of the account must be at chargee’s
discretion and to be safe a separate decision by the bank on a case
by case basis whether or not to release monies.
Sample problem-Orbis Communications
Orbis Communications Limited (Orbis) provides internet
services to businesses. Nibelheim Industrial Bank (Nibelheim) holds a
floating charge over all business assets. Principal assets comprise
telecommunications and computer equipment, accounts receivable and
cash in an NAB account. The floating charge contains a restrictive covenant
prohibiting Orbis from creating subsequent security interests ranking
equally, or ahead, without consent Nibelheim. An automatic crystallisation
clause in the event of any breach. Menard Finance Limited has agreed to
advance funds to Orbis and take a fixed charge over receivables and
floating charge over bank account-requires Orbis to deal with receivables in
accordance with instructions of Menard. In absence instructions, Orbis must
collect them in ordinary course business and pay them into their bank
account but is otherwise prohibited from dealing with them. Orbis may deal
freely with proceeds in the ordinary course of business prior to the
crystallisation of the Menard floating charge over the bank account. Orbis is
experiencing difficulties. Menard has requested your advice on legal status
of its security interest and its priority vis a vis Nibelheim.
Australian Central Credit Union V. Commonwealth Bank Of
Australia
No 566 of 1989 (1991) SASC 2724
2 people claimed a vehicle owned by KP Randall P/L (KPR P/L)
Mr. R living with Miss L, who was member of Credit Union and eligible to
borrow. Miss L agreed to obtain a loan for Mr. R who authorised her to use
vehicle as security. Miss L disclosed all this to the Credit Union and
obtained a loan of $12,000, paid it to Mr. R who used it for the company.
Miss L signed a Bill of Sale dated 18th September 1987 over vehicle as
security. It named Miss L as grantor and made no reference to company.
Vehicle remained in possession of KPR P/L.
A charge within CCode 1987 s.203 required to be registered . Notice of a
charge required by s. 201(1). KPR P/L did not give notice of Bill of Sale; nor
did credit union pursuant to s. 208 (interested person can give notice). It did
register 22.9.87 on Vehicles Securities Register pursuant to Goods
Securities Act 1986. On 24.11.87 KPR P/L executed Deed of Equitable
Mortgage giving Bank floating charge. Registered as charge under Co
Code. On 10.2.89, company defaulted. Bank took possession.
Securities over IP
Is registration of a security interest granted by a
company over IP under Corporations Act
sufficient to create a valid security interest?
Compare and contrast:
Copyright
Trademarks
Patents
Security interest in a Patent
If a company is granting a charge over a Patent, the Corporations Act
requires it to be registered on the Australian Register of Company
Charges and the Patents Act allows it to be registered.
Should it be registered on both?
Yes, because in many cases the Patents Act provisions will determine
priority.e.g. if there is a priority dispute between an assignment of a
patent and a security interest over the patent, then the Patents Act
would apply because the priority sections of the Corporations Act
only apply to disputes between security interests.
If Ptents Act silent (e.g. in relation to priority disputes not involving a
patentee or between 2 interests not registered anywhere, the priority
rules of the Corporations Act will apply.
Notice
Is registration on one system (incorrectly)
notice to a chargor who registers on
another (the correct register)?
A Patent example
X grants a charge over a Patent to A, and the charge is registered under the
Corporations Act but not in the Patent Office in accordance with the Patents
Act. Later, X assigns the Patent to B who searches the Patent Register, but
not the Corporations Register.
Would A’s security interest take priority over B?
Probably not. Under s. 189 of the Patents Act, X is the patentee and can deal
with the patent as absolute owner and give good title to B provided that B is
”a purchaser in good faith for value and without notice of any fraud on the
part of the patentee”. B had no actual notice because he did not search the
Corporations Register. The Parliament intended that the Patents Register
be the one and only place to look to determine ownership of and whether
security interests exist in Patents, so registration on the Corporations
Register would not be constructive notice.
Prudent course for a person taking security or purchasing a Patent, is of
course, to search both.
Copyright
In Australia, the Copyright Act applies. No formalities are
required to obtain copyright and there is no copyright
register. This creates certain problems in being sure who
is the owner and capable of transferring title or granting a
licence.
An assignment has no effect unless in writing and signed by
the assignor s. 196 CA.
If X transfers a copyright to A and then grants a security
interest in the same copyright to B, B gets nothing
because the prior legal interest of A prevails over the
subsequent legal or equitable interest to B.
If X grants a license to A and then a security interest to B, B
takes subject to A’s license.
Copyright and notice
If an Australian work is registered in the US Copyright Office, are the details on the US
Register (which notes assignments and security interests) notice to Australian
lenders?
e.g.An Australian Co,D, creates a computer game.It registeres this work in the US
Copyright Register and obtains a loan from a US bank, securityed against all copyright
owned by D. USBank regsiters its security interest in the US Copyright Register but
not in the Australian Register of Company Charges. Later, D grans a similar security
interest to OZbank, who searches the Australian Register of Company Charges, finds
nothing and registers its security interest. Is OXbanks security interest subject to
USBanks security interest?
Possible answers: OZbank taken to have constructive notice of the security interest
recorded in the US and so USBank’s charge has priority. Alternatively OZbank taken
to have constructive notice only of security inteests recorded in Australia. Or, because
copyright is territorial, USBank has priority over US copyright and OZbank has priority
over Australian copyright. Result uncertain.
A prudent Australian lender would search the US register and the local company register.
If they were clear, they would require D to register any significant works with the US
Copyright Office and then record the security agreement with the US Copyright Office
against each work, require future works to have the same treatment.
Trademarks
See s. 22…The registered owner of a TM may,
subject only to the register, deal with the TM as
absolute owner.
One should register/search in both Company
Register and TM Register because registration in
the former may provide no protection against a
person with a prior right to the TM as recorded in
the TM register….unless it can act as notice, or
fraud exists.
Australian Central Credit Union V. Commonwealth Bank
Of Australia No 566 of 1989 (1991) SASC 2724 cont (2)
Who is entitled to proceeds of sale of vehicle?
 Valid Bill of Sale and effective to transfer title? No lack of formality…miss
L agent for KPR P/L….Bill of Sale purported to transfer legal title subject to right to
possession and equity redemption…consumer mortgage (Consumer Credit Act).
Nothing to prevent passing of title.
 Is Bill of Sale a charge within Companies Code? Was it a charge on a
personal chattel..i.e. article capable of complete transfer by delivery? Yes,
neither Motor Vehicles Act (scheme for registration ownership) nor other statute
deprive a MV capacity of being transferred by delivery.
Therefore a charge and should have been registered under Co Code.
 A registered charge has priority over unregistered charge created
before it, unless chargee of unregistered charge proves chargee of
registered charge had notice of unregistered charge at time registered
charge created. Was registration under Goods Securities Act
notice?Would reasonable person, acting prudently in own interests have
searched the register? No said majority. Yes, said dissenting Judge.
BLUECORP PTY LTD (IN LIQUIDATION) V. ANZ
(1995) QCA 487 (3.11.95)
This case concerns a fight between Trustee in Bankruptcy of Bluecorp (
formerly Lloyds Ships, a maker of luxury boats) and ANZ, Trustee of
Mirage resorts-for proceeds of sale of Mirage III ($5.3m) Bluecorp sued
ANZ in conversion
Mirage III was a vessel built for Mirage resorts and Qintex. The Contract
for construction between Hover (part of Qintex) and Lloyds 21.6.85. At that
stage they were independent companies. While under construction Qintex
bought around 45% interest in Lloyds
31.7.86 ANZ acquired all but one in the issued units in Port Douglas
Resort Trust and Gold Coast Resort Trust
21.10.86 Lloyds had applied to register Hover as owner but registration
did not proceed
25.5.87 boat completed and handed over to Hover. Normally title would
pass under Sale of Goods Act at this point, but because it was a ship,
needed to be registered under the Shipping Registration Act.
After boat handed over, no attempt to register because of sales tax
worries
BLUECORP PTY LTD (IN LIQUIDATION) V. ANZ
(1995) QCA 487 (3.11.95)
Cont.
3.8.87 charges executed by Hover in favour of Operations and by
Operations in favour of ANZ. Charges registered
May/June 88 “rescission”of sale of ship. 31.8.88 Lloyds issued credit
advice and notified Registrar of Ships it had no interest
Boat registered in name of Lloyds.Lloyds never repaid Hover
13.9.88 boat registered in name of Lloyds
Lloyds mortgaged boat to Partnership Pacific 16.9.88
Bill of sale in blank 20.6.89 to ANZ-filled it in post insolvency.
Decision
Boat being held by Lloyds on trust for whatever entity in the Qintex group
it was decided on. Equitable title to ANZ via the registered charges. Legal
title during 1989 on the facts. Voidable title because of the preference
provisions relating to insolvency, but before avoidance, transfer to ANZ.
Trade Finance and Securities
The import scenario
Bankers Lien
Pledge
Unpaid seller’s lien
Unpaid seller’s right of stoppage in transit
Carriers lien for unpaid freight
Bankers right of set off
Fixed and floating charges over importers assets
Company?
262 charge?
Yes
Goods?
Book
debts?
Other
MV or boat?
Yes
No
IP
Yes
Yes
Yes
Liens
Registered?
Lien, pledge etc
No
No
Yes
Yes
RIGA?
SIGA
Assignment or
security?
Relevant IP law?
Pledges
Ships/Aircraft
Past Exam QuestionsQB3 March 2005
(g) P purchased a second hand car from
UsedCarsRus Pty Ltd. 3 weeks after the purchase
the car was repossessed by a finance company
because the previous owner still owed $4,000.
Does P have a remedy?
(k) In what circumstances will a solicitor have a
general lien over a client’s papers?
Past Exam Questions-short
QB3 September 2003
(h) Is it possible to give security over Intellectual
Property? What types are possible? What are the
dangers for lenders who accept such security?
(j) What is REVS? Who uses it? For what? Under
what legislation? Why?
2005
Describe 2 types of security that are not required to
be registered as a “charge” under the
Corporations Act.
Past Exam Questions




QB3 September 2006
Describe four ways in which the regime created by
the Security Interests in Goods Act NSW 2005 is
different to that existing prior to the commencement
of that Act in March 2006.
Why might it be difficult to enforce a chattel
mortgage over a continuous miner (i.e. a very large
mining machine used in underground coal mining)?
What is a statutory lien? Ensure that you provide an
example.
What is a "consumer mortgage"?
Past Exam Questions-short
QB3 March 2007
(a) Is it possible for a financier who wishes to lend money to
Sylvia and Gino Berutti, Hawkesbury River oyster
farmers, to take security over their oysters? If so, how?
If not, why not?
(c) If S has supplied goods to B under a Retention of Title
clause, does the clause have to be registered under the
corporations Act in order to be valid?
(f) When considering priority issues between competing
securities, is registration on an incorrect Register
nevertheless sufficient notice to prevent a later security
holder from gaining priority over an earlier security?
Past Exam Questions-short
QB3 March 2004
(a) What is a bankers lien?
(k) What is a linked credit provider?
QB3 September 2007
(e) Describe three ways in which liens may arise by
operation of law in a typical manufacturing operation.
(g) A large bank has asked you to recommend how would
you structure an enforceable fixed charge over book
debts for their clients. Please do so.
Exam Q 2A Sept 2005
Sam is in partnership with is father Fred (S&F) in breeding and selling lowline cattle. Because of the drought, they are hand feeding. To guarantee
supply, they have entered into a contract with Sunshine Grains Ltd
(Sunshine). Under the terms of the contract, they have purchased sufficient
feed for the next 2 years, paid $24,000 and agreed on monthly deliveries.
In the 5th month they are contacted by MM accountants who advise that
they have been appointed Receivers and Liquidators to Sunshine.
There is an amount of feed that had been set aside by Sunshine to supply
S&F for a 12 month period. Feed for the 2nd year would have come from
the next harvest, which has not yet occurred. Farmers are, however
contracted to supply grain after the next harvest.
Sunshine was in debt to a machinery provider MP who had a floating
charge over the assets of Sunshine. IT crystallised just prior to the
appointment of MM.
S&F claim the feed set aside for the next 12 months. MP claims it as theirs.
MM have said neither is entitled; that it belongs to them. MM refuses to
refund any of the $24,000.
Advise S&F.
Sept 2005QA2 cont
Question concerned title and securities.
Title..ss.21.21A22 and 23 dealing separately with
Feed Lots 1 and 2…GoldCorp and Carlos
Federspiel…remedies of the buyer.
Securities-floating charge, equitable charge over
contract re 2nd feed lot, the realities of
receivership and priorities.
Remedies: Conversion, bailment, specific
performance re feed lot 1.
March 2005 QA3
Motorparts Limited Mp makes condensers; for local car
industry and for export to China. In order to finance the
purchase of raw materials, the manufacturing operation and
the export trade Mp must borrow money and secure trade
finance.
Mp approaches your client, a financier and tells them the
following are available for use in this
Any interest it may have in raw materials
A registered patent for its condenser with 12 years to run
Contracts with Ford Australia for large orders for 5 yrs
Receivables from Ford and other customers.
Explain to your client the alternatives for how one could
finance Mp while protecting their interests.
Sept 2004 QA3
MS Limited builds boats and entered into a contract on 18/6/02 with OM Limited for
construction of a tug boat. Payment by instalments; aligned with progress in
construction. MS placed an order in Nov 02 for a special propulsion unit with a
specialist engine manufacturer in Canada EE. Payment to be by irrevocable letter of
credit.
MS customer of Bilge Bank (BB) and had granted a fixed and floating charge to it in 99,
which had been duly registered. BB received a copy of the construction contract
between MS and EE which contained a clause purporting to retain title until payment
and an interest in any boat in which the unit was incorporated. BB duly issued a letter
of credit in return for shipping documents. The propulsion unit was loaded onto a ship
in Vancouver on 21/6/2003.
Unfortunately on 5/7/2003 while propulsion unit was still on the water BB notified MS that
the floating charge had become fixed.
The propulsion unit arrived in Australia on 6/7/2003. MS installed it in the tug boat. OM
paid the second last instalment. Only 1/12 equal payments remained outstanding and
was to be paid after launch of the boat.
On 12/7/2003 a Receiver and liquidator was appointed to MS.
EE claims the propulsion unit under the ROT clause. BB claims it under their Charge or
under the Bankers Lien. OM says it is theirs because it is now part of the boat.
Advise the Liquidator on who is entitled to the propulsion unit.
Sept 2004 QA3
Question concerned Title, securities (charge and lien) accessio
Most efficient approach was to analyse via a time line, who had title and when it
passed.
LC=payment and therefore ROT clause ceased operation at this point. Most
student answers missed this.
Possession of Bill of Lading=constructive possession of the unit…lien. BB did
not need to rely on lien because of the fixed charge and because they
released it and it became part of the boat.
Some students were confused between passing of risk and passing of title. E.g.
Vienna Convention deals with former only and latter would need to be
determined by SOGA if not clear from contract.
Likely that OM had not obtained title because something remained to be done to
put the boat in a deliverable state (Launch) supported by instalment structure
of payment. See Rule 1 and Wallace v. Safeway Caravan Mart. Merely an
unsecured creditor. Would have lost out to BB and fixed charge.