Commercial
Transactions
Module 11
Security over Personal Property
Summer Session 2010-11
©MNoonan2011
This presentation and Copyright therein is the
property of Maureen Noonan and is prepared
for the benefit of students enrolled in the
Commercial Transactions course conducted by
the Law Extension Committee and is available
for their individual study. Any other use or
reproduction, including reproduction by those
students for sale without consent is prohibited.
©MNoonan2011
Title and security
Under the existing/old system, title is often
retained as part of a financing in order to
maintain priority. E.g. car leasing arrangements,
supplier ROT clauses.
The PPSA adopts a substance rather than form
approach. While ownership retains its legal
form, in certain cases, registration and other
acts are required to retain priority.
©MNoonan2011
Title and the ability to create
security
One must have the right to create a security in
order to be successful.
In Sally Anne Horsley the antique furniture had
already been gifted to the mother when the
son tried to create security over it….so he had
no capacity to do so.
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
Registration systems
A means of putting others on notice of a situation.
The idea is that others can look after themselves if they
have a means of knowing the situation.
Under the existing/old law, this is very difficult because
although there are registers, there are a myriad of
different ones for different types of property, different
types of entities, whether Commonwealth or State laws
govern the situation. Some forms of property are not
covered at all, so there can be no register of security
interests.
©MNoonan2011
Existing/Old Registration Systems & Priorities
Registration Systems
We will look briefly at 3 current systems which provide for registration of securities
on a Public Register so as to put third parties on notice of obligations-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
©MNoonan2011
The 2011 main
existing/old
Registration Systems
1. Corporations-Corporations Act (Cth)
2. MVs and Boats-Registration of Interests in Goods Act (NSW)
3. Non company other-Security Interests in Goods Act (NSW)
4. IP-Patents Act, Trade Marks Act. (Cth)
©MNoonan2011
Existing Registration Systems
Why are we studying them when a new system is
coming in 2011?
Because the underlying legal concepts are
important and many do not change.
We have to deal with transactions and issues
under the current system for up to another 10
years.
Some aspects of existing systems continue.
©MNoonan2011
Problems with existing State and
Federal registration systems
 It is not possible to register interests over some classes of property e.g. many
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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
©MNoonan2011
Existing Registration systems
Students may notice that the newer systems e.g. REVS,
legislation has moved more to substance over form-in NSW,
usually by leaving the meaning of “security” alone and in
accord with general law meaning-but creating a “registrable
interest”, which might include both securities according to
the general law, and other types of structures that might not
strictly be called a “security” (e.g. a lease).
The PPSA moves further still towards substance over form
by describing many of these structures as a “security
interest”…. but note exclusions.
©MNoonan2011
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;
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
The Registration System for MVs & Boats
Registration of Interests in Goods Act (NSW)
This act provides a system in which “registrable” 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.
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
The Registration System for MVs & Boats
Registration of Interests in Goods Act (NSW)
“Registrable 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.
©MNoonan2011
RIGA and REVs
Note that pursuant to ss. 9, 10 a purchaser is not
obliged to search REVs if they buy from a motor
dealer, but must if they buy privately…in order to
buy the car free of registrable interests.
A similar concession has been carried over into
the new regime under PPSA.
©MNoonan2011
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
©MNoonan2011
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
©MNoonan2011
Security Interests in Goods Act
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.
©MNoonan2011
Security Interests in Goods Act
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.
©MNoonan2011
Security Interests in Goods Act
The location of the Register for Security Interests in
Goods.
This is 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.
©MNoonan2011
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.
©MNoonan2011
"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.
©MNoonan2011
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)."
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
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
©MNoonan2011
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©MNoonan2011
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]
©MNoonan2011
Priorities
1. Generally
2. Within systems
3. Between systems and non-registerable
securities.
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
Companies-priorities
Owners, title holders not creditors in current system
The usual order for creditors 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
©MNoonan2011
FIXED and FLOATING charges.
What is the difference?
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.
©MNoonan2011
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?
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
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
©MNoonan2011
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.
©MNoonan2011
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
©MNoonan2011
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 Patents 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.
©MNoonan2011
Notice
Is registration on one system (incorrectly)
notice to a chargor who registers on
another (the correct register)?
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
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.
©MNoonan2011
The New Regime
STUDENTS PLEASE NOTE
Any and all examination questions for Summer
2010-11 will proceed on the assumption that
the new regime is in force and not the
existing/old regime.
©MNoonan2011
The new regime
-coming October 2011
For the Summer 2011 Semester, students should
concentrate on the PPSA and:
1. Floorplan arrangements (including treatment of
ROT clauses) and company charges.
2. Differences between the new regime when
compared with the current/old system.
Any problem examination question in Summer
2010-11 would involve 1. Any short question
would involve 2.
©MNoonan2011
Personal Property Securities
Act 2009
See www.ag.gov.au/pps for more information
Creates a single national register incorporating current
Corporations Charges Register, REVs, IP, State non
corporation registers.
Legislation ceding powers to Commonwealth and
consequential changes going through.
Will be searchable online.
Notification register only. No copies of documents.
Some conceptual changes and new terminology
Sets out priority rules.
©MNoonan2011
PPSA-company charges
Floating charges remain, but distinction between
floating and fixed re priorities disappears with
registration.
Conceptually a fixed charge becomes a security
interest attached to an asset that is a non
circulating asset.
Floating charge becomes a security interest
attached to a circulating asset.
©MNoonan2011
Stages in taking security
 Attachment-requirements for creation as
between parties
 Perfection-requirements for efficacy against third
parties
 Priority-situation and rules for determining
outcome where there are competing interests
©MNoonan2011
Perfection and Priority
Registration systems
Registration of securities on a public
access register is seen as a way of alerting
others to the extent to which an entity has
financed activities. A new lender or
business partner/supplier can therefore
protect themselves by searching the
Register.
©MNoonan2011
The floorplan arrangement
Car dealers (and many other retailers) cannot afford to own all stock.
A Manufacturer sells cars to a Financier who, in turn, provides the cars to a
Dealer Limited pursuant to a Bailment agreement entitling the Dealer to
display them and sell them to third party purchasers (be they other dealers
or end customers). The floor plan bailment documentation contains a
retention of title (ROT) clause in favour of the financier until the Dealer pays
them for that vehicle.In other words, the Financier owns the cars until the
Dealer sells them to someone else and pays the Financier.
Often, a Bank or other financier who provides general banking and finance
facilities, has a fixed and floating charge “over all present and after acquired
property” of a Dealer to secure those lines of credit. These charges may be
entered into, before or after floorplan arrangements.
Customers who come into the dealership and agree to purchase a car often
need finance. That customer usually pays a deposit and either borrows the
rest from a financier (giving security over the car) or, the dealer sells the car
to the financier who then leases it to the customer. In the first situation, the
customer owns the car. In the second situation, title to the car is with the
financier.
©MNoonan2011
The floorplan arrangement
 How does this sample arrangement operate under the
existing/old law?
 How does this arrangement operate under the new
regime?
 What must each party do to protect it’s interests?
 What is the outcome for each person if the Dealer sells
the car to a purchaser, but does not account for the
proceeds to the Financier?
©MNoonan2011
Floor plan arrangements
Manufacturer makes car
Manufacturer sells to Financier (F) and title passes
to F. F provides the car to Dealer (A) for on sale to third parties (either
consumers or other dealers) on title retention basis (ROT clause)…
Currently this is not a charge (so if A is a corporation, not registrable on
ASIC Corporations Register) and not registrable on REVs…it is a bailment
by F to A
But under new PPS register, to obtain a perfected security interest, F must
register. To obtain PMSI super priority, F must register PMSI interest. The
agreement must be in writing signed by the grantor to be effective against
third parties.
©MNoonan2011
PPSA s. 12
meaning of Security Interest
(1) A security interest means an interest in relation to
personal property provided for by a transaction that, in
substance secures payment or performance of an
obligation (without regard to the form of the transaction
or the identity of the person who has title to the
property).
Note: For the application of this Act to interests, see
section 8.
i.e. function/substance over form
Section 12(2) makes the functional approach clear
©MNoonan2011
PPSA s. 12(2)
(2) For example, a security interest includes an interest in relation to
personal property provided by any of the following transactions, if the
transaction, in substance, secures payment or performance of an
obligation:
(a) a fixed charge;
(b) a floating charge;
(c) a chattel mortgage;
(d) a conditional sale agreement (including an agreement to sell subject
to retention of title);
(e) a hire purchase agreement;
(f)
a pledge;
(g) a trust receipt;
(h) a consignment (whether or not a commercial consignment);
(i)
a lease of goods (whether or not a PPS lease);
(j)
an assignment;
(k) a transfer of title;
(l)
a flawed asset arrangement.
©MNoonan2011
PPSA s. 12(3),(3A) and (4)
(3) A security interest also includes the following interests in relation to personal
property, whether or not the transaction concerned, in substance, secures payment or
performance of an obligation:
(a)
the interest of a transferee under a transfer of an account or chattel paper;
(b)
the interest of a consignor who delivers goods to a consignee under a
commercial consignment;
(c)
the interest of a lessor or bailor of goods under a PPS lease….which includes a
floorplan arrangement.
(3A)
A person who owes payment or performance of an obligation to another person
may take a security interest in the other person’s right to require the payment or the
performance of the obligation.
(4) Without limiting subsection (3A):
(a)
an account debtor, in relation to an account or chattel paper, may take a
security interest in the account or chattel paper; and
(b)
an ADI may take a security interest in an ADI account that is kept with the ADI.
©MNoonan2011
PPSA s.12(5) and (6)
(5) A security interest does not include:
(a) a licence; or
(b) an interest of a kind prescribed by the regulations for the purposes of
this section.
(6) A security interest is not created only by an agreement or undertaking to do
either of the following:
(a) to postpone or subordinate a person’s right to payment or
performance of all or any part of a debtor’s obligation to another person’s
right to payment or performance of all or any part of another of the debtor’s
obligations;
(b) to postpone or subordinate all or any part of a secured party’s rights
under a security agreement to all or any part of another secured party’s
rights under another security agreement with the same grantor.
©MNoonan2011
Note the position of liens
PPSA does not cover…..
See section 8 of PPSA for full list, which includes:
(b) (other than s. 73)A lien, charge or any other interest in personal
property, that is created, arises or is provided for under a law of the
Commonwealth (other than this Act), a State or a Territory unless the
person who owns the property in which the interest is granted
agrees to the interest.
(c) (other than s. 73) a lien, charge, or any other interest in personal
property, that is created, arises or is provided for by operation of the
general law.
(d) (other than s. 80) Any right of set-off or right of combination of
accounts…
©MNoonan2011
Deemed security interests
Note that in some cases, certain transactions are
deemed to be security interests even if they do not
secure payment or the performance of obligations.
e.g.


lease for more than one year
transfer of receivables.
How does this differ from current legal situation?
©MNoonan2011
Definitions
See Dictionary in section 10.
Often the full definition is given there. Where there
is a special section providing a definition, there is
reference to that section. E.g. “attaches” has the
meaning given by section 19.
©MNoonan2011
Parties to transactions
A person who provides credit (who may be called financier,
consignor, lessor, bailor, transferor) known as a
“secured party”.
Person who has the interest in the property is “grantor”
Person who owes money or performance of obligation will
be “debtor”.
“grantor” and “debtor” will be same person, other than in
complex financing arrangements.
Property subject to a security interest is referred to as
“collateral”
©MNoonan2011
Rights between the parties
While agreements set out the rights between
parties and while the PPSA may not change the
nature of those agreements and the legal rights
created by them, the rules about validity, priority,
insolvency and enforcement in the PPSA can
enhance, negate or affect the value of those
rights.
e.g. the nemo dat rule, general law rules of priority
©MNoonan2011
PPS Lease
Is our floorplan arrangement a PPS lease?
See s.13 for definition:
A PPS lease means a lease or bailment of goods;
(a)
For a term of more than one year; or
(b)
For an indefinite term
(c)
For a term of up to one year that is automatically renewable….
(d)
For a term of up to one year,, in a case in which the lessee or bailee, with the
consent of the lessor or bailor, retains uninterrupted..possession…..for a period of
more than one year
(e)
For goods that may or must be described by serial number in accordance with the
regulations…..(which includes MVs)..for 90 days or more or less than that but
automatically renewable for terms which might be 90 days or more.
But only if part of business…etc in (2)
Floorplan bailments are therefore PPS leases. Clear from policy perspective that
legislature wants them to be treated as PPS leases. They may also be
commercial consignments, but perhaps only special types would be. See
definition of commercial consignments.
©MNoonan2011
Purchase Money Security Interest
PPS lease also a PMSI
See definition PMSI s. 14 PPSA.
(1) A PMSI means…
(a) A security interest taken in collateral, to the extent that it secures all
or part of its purchase price;
(b) A security interest taken in collateral by a person who gives value for
the purpose of enabling the grantor to acquire rights in the collateral,
to the extent that the value is applied to acquire those rights;
(c) The interest of a lessor or bailor of goods under a PPS lease;
(d) The interest of a consignor who delivers goods to a consignee under
a commercial consignment.
See rest of definition for exceptions and clarifications.
©MNoonan2011
Super priority
Remember PMSI and super priority?
What is super priority?
See s. 62 PPSA
Why does a perfected PMSI get this?
Usually inventory/circulating assets and background
financier generally content that this finance is provided
in addition to general financing by another lender.
Old ROT situation, so enables a similar priority, done
differently.
©MNoonan2011
The stages for PMSI
 Attachment-written agreement or possession
by secured party.
 Perfection- registration.
 Priority-Super priority over other security
interests accorded by act if correctly attached
and perfected.
©MNoonan2011
Attachment
A security interest will be effective according to its terms,
and may cover after acquired property. S. 18
It will only be effective against the grantor if it has attached
to collateral.s.19-when grantor has rights in collateral, can
transfer it to secured party, value given or security interest
otherwise arises….a grantor has rights in goods leased or
bailed to grantor under a PPS lease, consigned to grantor
or…when grantor obtains possession.
In case of floorplan, grantor has at least a possessory
interest and supplier has given value by virtue of supply.
©MNoonan2011
Perfection
Main rule See s. 21. Idea is to make position visible to those who might
otherwise deal with grantor.
Perfection provides protection against third parties and against loss in
an insolvency of grantor.
A security interest in particular collateral is perfected if:
(a) The security interest is temporarily perfected, or otherwise
perfected, by force of this Act; or
(b) All of the following apply:
(i) The security interest is attached
(ii) The security interest is enforceable against a third party
(iii) Subsection (2) applies….registration, possession…in certain cases
control.
Perfection by possession is not practical for floorplan arrangements, so
registration is the main way PPS lease PMSIs will be perfected.
©MNoonan2011
Enforceability against third
parties.
s.20 PPSA for general rule
(1) A security interest is enforceable against a third
party…only if;
(a) The security interest is attached to the collateral; and
(b) One of the following applies;
(i) The secured party possesses the collateral; See s. 24 for
what possession means…actual or apparent…
(ii) The secured party has perfected the security interest by
control
(iii) A security agreement that provides for the security interest
covers the collateral in accordance with (2)..(in writing signed
by grantor or adopted by act and it contains description and
statement that a security interest is taken)
©MNoonan2011
Enforceability against third
parties
So, Financier in Floor plan example
Under section 20, for attached security interest of
Financier to be enforceable against third parties,
financier must have possession, control
or security agreement in writing.
As it is not going to have possession or control of
the cars, written security agreement in accordance
with s. 20(2) essential to protect rights of financier.
©MNoonan2011
Third party rights
Third parties can take free of a security interest in a number of situations
s.43- if they buy or lease for value they take free of unperfected security
interests. Therefore critical that financier perfects interest.
S.44…buyer or lessee can take free of security interest if search by serial
number only would not disclose registration that perfected security
interest. Regulations propose that goods described by reference to serial
number in PPS registration process…aircraft, MVs and watercraft….Must
be so described if “consumer property”.
s.45 Two special rules for MVs
s.46 sales or leases in ordinary course of business…protects customers of
dealers…does not apply where buyer/lessee holds goods as inventory
s. 47 Special rule for low value domestic and household property…value not
more than $5,000…does not apply to property which must be described
by serial number or if actual knowledge.
©MNoonan2011
Third party rights s.44 example
Person A owns a number of collectable motor vehicles in
the course of running a business of hiring out vehicles
for special events. A secures a loan from Bank B against
the vehicles. B perfects its security interest by registering
against all of A’s motor vehicles but does not register
each MV individually by serial number. Person C buys
one of the MVs from A. A search of the PPS Register by
serial number would not disclose that B has a security
interest. C would take interest in MV free of B’s security
interest.
Example from Explanatory Memorandum
Rule does not apply if buyer or lessee holds as inventory or
buyer or less was a party to security.
©MNoonan2011
Special rules for MVs
s.45
Buyer or lessee can take free of security interest if they
give new value,
obtain their interest from the grantor and at a time between
the day before the sale or lease and the time the sale or
lease took place a search by serial number would not
disclose the interest.
Or
if the seller/lessor is a person prescribed by
regulations….draft regulations provide that dealers
covered by state or territory MV dealer licensing
schemes are to be prescribed persons.
©MNoonan2011
s. 45 Example
In our floorplan example, Financier purchased MVs from
Manufacturer and permits Dealer to retain them at its
dealership for sale. Financier registers its security interest
in each vehicle. Customer wants to buy a car with finance
provided by Bank. Neither Customer nor bank needs
search PPS register as Dealer is a licensed Motor Dealer
and they acquire the car free of Financier’s security
interest. Note rule does not apply if buyer or lessee holds
vehicle as inventory or has actual or constructive
knowledge. See also regulations.
©MNoonan2011
s. 45 Notice example
D is motor vehicle dealer. Bank A has perfected a security
interest in all vehicles at showroom by registering each
vehicle against serial number. Security agreement
obliges D to sell vehicles for amount determined by
formula with minimum price of $x. T is an associate of D,
though not a MV Dealer, and is aware D is obliged to sell
vehicles for at least $x. D sells MV to T for amount
significantly less than $x. T would not acquire the MV
free of A’s security interest.
Example from Explanatory Memorandum.
©MNoonan2011
s.47 Example
P buys a chainsaw at a garage sale for
$2,000 with the intention to use it in her
hobby workshop. P is not aware of any
security interest in the chainsaw. The market
value is less than $5,000. P takes the
chainsaw free of any security interest.
Example from Explanatory Memorandum
©MNoonan2011
Priorities
Very complex rules in PPSA.
For Summer 2010-2011, students should
focus on floorplan example and parties
in that example and priorities between
them.
See ss. 54-64
©MNoonan2011
Priority
 Where a debtor defaults, there is a competition
between various parties interested in obtaining
items belonging to debtor to satisfy obligations.
 E.g. Liquidator, banks who provide overall
facilities and services, finance companies who
have financed inventory, machinery etc by
leasing, floorplan arrangements, factors who
have financed working capital by taking interests
in receivables, customers, suppliers.
©MNoonan2011
Priority between interests
s.55
Unless otherwise provided:
(a) Perfected interests have priority over
unperfected interests; and
(b) priority between perfected interests amongst
themselves and unperfected interests
amongst themselves, is determined on a firstin-time basis
©MNoonan2011
Priority between unperfected
security interests
s.55 (2)
Priority between unperfected security interests in
the same collateral is to be determined by the
order of attachment of the security interests
©MNoonan2011
Priority between perfected and
unperfected security interests
s.55(3)
A perfected security interest in collateral
has priority over an unperfected security
interest in the same collateral
©MNoonan2011
Priority for perfection
(4) Priority between 2 or more security interests in collateral that are
currently perfected is to be determined by the order in which the
priority time for each security interest occurs.
(5) For the purposes of (4) the priority time..is, subject to (6), the
earliest of
(a) Registration time
(b) The time security interest is perfected by possession or control
(c) The time the security interest is temporarily perfected, or
otherwise perfected, by force of this Act.
(6) A time is a priority time…only if…the security interest remains
continuously perfected….see s.56 for continuous perfection
©MNoonan2011
Priority and PMSIs
s.62
PMSI has priority over a perfected security interest granted
by same grantor in same collateral but which is not a
PMSI if
The PMSI is in inventory or its proceeds…the PMSI is
perfected by registration at the time…for inventory that is
goods….the grantor obtains possession…or for any other
kind of inventory..the PMSI attaches to the inventory
and…the registration that perfects the PMSI states in
accordance with item 7 of the table in s. 153, that the
interest is a PMSI
For other than inventory see. S. 62(3)
For priority between competing PMSIs.
©MNoonan2011
Priority and control
Note that security interests perfected by control have the
highest priority
e.g. a security interest held by an ADI in an ADI account
with the ADI has priority over any other security interest
in the ADI account. An ADI has control over an ADI
account held with the ADI (s.25). Only the ADI with
which an ADI account is held my perfect a security
interest in the ADI account by control (s.21). A security
interest perfected by control has priority over any other
security interest in the same collateral (s.57).
NOTE: Security over ADI’s is not examinable in summer
semester 2010-2011. This example is to illustrate
“control”
©MNoonan2011
Priority and control
Under a floorplan arrangement, are the cars
“inventory”? See definition of inventory and
s.341(1B)
Does a secured party have “control” of the cars?
See sections 340 and 341
©MNoonan2011
Inventory
s.10 DEFINITION
Inventory means personal property whether
goods or intangible property) that in the course
or furtherance, to any degree, of an enterprise
to which an ABN has been allocated:
(a) Is held by the person for sale or lease, or has
been leased by the person as lessor; or…….
©MNoonan2011
Inventory and control
s.341(1B) For the purposes of subsection 340(5) and this section;
(a) Inventory has its ordinary meaning; and
(b) (b) the definition of inventory in s 10 does not apply.
Control of inventory
(1) For the purposes of sub s 340(2) a secured party has control of
inventory if:
(a) the secured party and the grantor have agreed in writing that
the grantor:
(i) will specifically appropriate the inventory to the security
interest; and
(ii) will not remove any specifically appropriated inventory
without previously obtaining the specific and express authority of
the secured party to do so; and
(b) the grantor’s usual practice is to comply with the agreement
©MNoonan2011
Priorities-insolvency
s.267 upon insolvency an unperfected security
interest can vest in the grantor. This is a radical
change. Previously under floor plan
arrangements, financiers were entitled to
retrieve bailed goods because they were the
owner. Short term PPS leases of up to a year
are excluded if they are goods that may or must
be described by serial number, which includes
MVs.
©MNoonan2011
Company charges
s. 339 (4)…reference to a fixed charge over
property is taken to be reference to a security
interest that has attached to personal property
that is not a circulating asset
s. 339(5)…reference to a floating charge
….taken to be a reference to a security interest
that has attached to a circulating asset
©MNoonan2011
Company charges
s.340 Meaning of circulating asset
For the purposes of this Act if a grantor grants a security
interest in personal property to a secured party, the
personal property is a circulating asset if
(a) The personal property is covered by (5) unless (2) or (3)
applies or
(b) In any other case-the secured party has given the
grantor express or implied authority for any transfer of the
personal property to be made, in the ordinary course of the
grantor’s business free of the security interest.
©MNoonan2011
Company charges
The exceptions in (2) and (3)
If an effective registration discloses that secured
party has control of the personal property and it
does. For meaning of control see 341.
If personal property is goods and security interest
is perfected by possession
©MNoonan2011
Circulating asset
s.340(5)….current assets
An account that arises from granting a right or providing
services in the ordinary course of a business…
An account that is the proceeds of inventory
An ADI account (other than a term deposit)
Currency
Inventory (note ordinary meaning and not s. 10 definition)
A negotiable instrument
For meaning of control and inventory see. S. 341
©MNoonan2011
Floating charges
Provided an equitable right to enforce against sufficiently
identified /described collateral as and when it came into
existence on crystallisation.
In the meantime other interests could take priority
Under new system, priority between two perfected
interests is date of registration/perfection; otherwise first
in time.
Difficult conceptually to go “back”. See discussion
regarding book debts.
©MNoonan2011
Trade Finance and Securities
The import scenario
Note mix of security interests
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
NOTE: Students in Summer 2010/2011 will not be
examined on this scenario.
©MNoonan2011
Student Question
 Please go over Q2 Part A of the
exam in September 2010
©MNoonan2011
Exam September 2010
Q2 Part A
IRL Limited (IRL) manufactures and sells caravans (the caravans) in NSW. It has a
Distributorship agreement with Greypower Pty Ltd (Greypower), a retailer of the
caravans in NSW. Greypower has a floorplan arrangement (consisting of a
Floorplan Agreement, Bailment Agreement and Fixed and Floating Charge) with
MMI Limited (MMI).
When IRL sold caravans to Greypower, it would send an invoice to Greypower
identifying the goods sold and amounts payable, on the front. On the reverse side
were printed terms and conditions, including one retaining title “until all payments
originating from the business relationship with the dealer are received” and another
clause authorising sale “in the ordinary course of business”.
Greypower would then fax MMI the front and back pages of the invoice and MMI
would pay IRL direct. The Manager of Greypower kept track of the various
transactions and sent spreadsheets to IRL and MMI listing particulars of the
caravans, purchases and payments.
Greypower has gone into voluntary Administration. The Administrator has
discovered that the spreadsheets sent to IRL and MMI do not match.
IRL has claimed 54 caravans that have not been paid for, pursuant to the retention
of title clause in the Distributorship Agreement with Greypower.
MMI claims ownership pursuant to the Floorplan arrangement.
Advise MMI on its position.
©MNoonan2011
September 2010
QA2 cont
This issues in this question concerned title (transfer s.22SOGA), ROT clauses, nemo dat and
exceptions, and security over personal property. Students were expected to apply the existing
law, (rather than PPSA)
THE SITUATION UNDER THE EXISTING LAW
The first task was to analyse the facts
Determine which 54 caravans were at issue…identification numbers…were they still with
Greypower or had they been sold to end customers already? Assume first that they were still
with Greypower and then analyse assuming they had all been sold to customers.
Under the floorplan arrangement between MMI and Greypower, MMI may have had title to the
caravans (paid IRL directly, so more likely), or just security (in which case their payment to IRL
was on behalf of Greypower, who would have had title and given security over the caravans to
MMI). Thorough analysis would have involved both alternatives, but adopting only one of the
two in an answer was sufficient.
Clarify what Q you are being asked.
You are asked to advise MMI as to whether it can claim the 54 caravans….or the competing
claims of IRL or Administrator (for Greypower) would prevail.
©MNoonan2011
Sept 2010, QA2 cont
Under the exising law, MMI would be in the strongest position if it had title to the caravans.
The facts suggest…”when IRL sold caravans to Greypower…”) title went from IRL to
Greypower to MMI. Title passes when the parties intend that it should pass. S. 22 SOGA.
Despite ROT clause, intention likely to be that title passed when individual caravan paid for
and/or sold to end customer. ….because of the way that floorplans work….practical,
authority to sell. Alternatively ROT clause a nonsense because it said one thing while they
did another. See BHP case. ROT clause likely a “charge” because it attempted to retain
title until all payments for all cars received. Void against the administrator unless registered
on ASIC charges register.
MMI would attempt to prove title to individual caravans by matching invoices with
payments. Note that MMI received copies of invoices and made payments direct, so it
should be able to do this from its own records and compare identification numbers to the
physical caravans.
Even if ROT clause effective against Greypower and MMI (unlikely) any end customer
would acquire good title free of previous interests to a caravan due to an exception to the
nemo dat rule (e.g. s.28(1) SOGA, s.5 Factors Act)..
As against the Administrator, if MMI could prove title had passed to it, then no longer
property of Greypower, so MMI would succeed.
If, as part of the floorplan arrangement, title to the caravans passed to Greypower (rather
than MMI), and MMI exercised the fixed and floating charge over them (security rather
than title), unless this were registered on the ASIC register, it would be void as against the
Administrator and the Administrator would be entitled to the caravans and not MMI.
©MNoonan2011
Sept 2010 QA2 cont.
THE SITUATION UNDER THE PPSA
Under the PPSA, the situation would be different. Title would no longer be the main
determinant of rights between the parties. As the PPSA is a national law, it would
cover the field and be applied.
The IRL ROT clause would be a “security interest”. The Floorplan/Bailment
Agreements would also be a “security interest”….PPS Lease and PMSI. The PPSA
would regulate the matter and determine priorities, not title.
In a risk management sense, IRL would be better off selling individual caravans,
insisting on payment immediately, maintaining its own records and keeping out of
the security field. If, for marketing reasons, it provided caravans to Greypower to
display, without payment, this should be under a separate arrangement. Any ROT
clause it used would be a “security interest”. However, if it were not a PMSI, it would
lose out to a properly perfected MMI PMSI anyway.
MMI would have to have a written floorplan agreement, attach and perfect it with
registration to be entitled to priority over other creditors of Greypower under PPSA.
End customers would still be protected against it they met the requirements of s.
43,44,45or 46 of the PPSA.
In the summer semester 2010/2011, no problem Q on this topic would have
facts as complicated as exist in this Q.
©MNoonan2011
Past Exam QuestionsP 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?
In what circumstances will a solicitor have a general
lien over a client’s papers?
Is it possible to give security over Intellectual
Property? What are the dangers for lenders who
accept such security?
©MNoonan2011
Past Exam Questions
 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.
©MNoonan2011
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 you
would you structure an enforceable fixed charge over
book debts for their clients. Please do so.
©MNoonan2011