Commercial
Transactions
Module 11b
Security over Personal Property
Summer 1415
©MNoonan2009
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.
©MNoonan2009
Title and security
Under the old law, title was often retained as part of
a financing in order to maintain priority. E.g. car
leasing arrangements, supplier ROT clauses.
Bailment was often used to displace the usual rule
(SOGA) that risk prima facie passes to buyer with
transfer of title, so that buyer had legal and
economic risks prior to obtaining title.
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.
©MNoonan2009
Commercial Finance & Security
In order to understand the concept of security and the
application of the PPSA, it is first necessary to understand
the methods of financing a commercial enterprise, so that
one can see the interaction between and relative legal
positions of actors such as:
 Banks and principal financiers and security holders
 Entities that finance the purchase price of new items e.g.
cars, trucks, machinery via leasing/hiring
 Suppliers not be paid at the time of supply.
 Customers who may not have taken delivery/paid
 Receivers of insolvent enterprises
 Insurers
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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 old law, this was very difficult because although
there were registers, there were a myriad of different
ones for different types of property, different types of
entities, whether Commonwealth or State laws governed
the situation. Some forms of property were not covered
at all, so there could be no register of those security
interests.
©MNoonan2009
The 2011 main 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)
©MNoonan2009
Problems with old 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
©MNoonan2009
Priorities
1. Generally
2. Within systems
3. Between systems and non-registerable
securities.
©MNoonan2009
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.
©MNoonan2009
Companies-priorities
Owners, title holders not creditors prior to PPSA.
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
©MNoonan2009
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.
©MNoonan2009
Circulating asset
Note that post PPSA the distinction between fixed and
floating disappears for most purposes:
There are securities over:
 Circulating Assets (mostly previous floating charge)
 Non circulating assets
They might still be called floating and fixed charges, but
they will be dealt with in accordance with PPSA
concepts for purposes of law relating to security over
personal property.
©MNoonan2009
Companies-priorities
It can be seen from previous list that creditors would
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 sometimes arose with characterisation of
charges.-e.g. book debts-is a charge over book
debts fixed or floating?
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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
©MNoonan2009
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.
©MNoonan2009
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
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
The New Regime
STUDENTS PLEASE NOTE
Any and all examination questions will proceed
on the assumption that the Personal Property
Securities Act 2009 (Cth) has been in force for
the entire time of any facts referred to.
©MNoonan2009
The new regime
Focus:
1.
2.
3.
4.
5.
6.
7.
The overall scheme
What is a security and what is not ?
Purchase money security interests PMSI
PPS Leases
The position of Liens
Priorities between different types of interests
When a buyer can take free of a security interest
We are concerned with personal property securities over tangible
personal property and are not covering securities over bank
deposits, shares or other intangibles.
©MNoonan2009
Personal Property Securities
Act 2009 & Regulations
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.
Searchable online. Refer to website.
Notification register only. No copies of documents.
Some conceptual changes and new terminology
Sets out priority rules.
©MNoonan2009
Review of PPSA
Because of the dramatic change to the law and the effect on
business, a Review is underway (July 2014 to date), to
assess the impact of the PPSA on business, and scope for
efficiencies in administration.
Changes affecting title to goods have shocked many
businesses and many have not absorbed the changes in
time to protect themselves and their operations from loss.
Particular submissions can be seen on
http://www.ag.gov.au/Consultations
©MNoonan2009
Other jurisdictions
As the PPSA is new in Australia, there are only a
few decided cases on it.
However, similar legislation has existed in NZ and
Canada for some time.
As a result, there are decisions in those
jurisdictions on sections similar to the Australian
provisions which may be referred to because the
reasoning may be persuasive when our judges
are considering our provisions.
©MNoonan2009
The setting
Active company or other entity conducting trade, business or providing
service, information.
Usually has a banker, who may or may not also provide general finance,
secured or unsecured.
Some equipment or stock may be leased or on floorplan (bailment)
from a different financier.
There may be liens arising in the course of business-possessory
(bankers, repairers, carriers, solicitors), statutory, equitable.
They may lease items to customers, associates.
Individual transactions may create securities for their duration. E.g.
purchase of a business with time to pay for stock and retention of
title until paid for.
©MNoonan2009
How might Real Estate Transactions be
affected by PPSA?
Examples:
Abandoned goods clauses in leases which permit a
landlord to retain and sell abandoned goods
…security for outstanding rent?
Taking security over “tenants fixtures”
Clauses in mortgages assigning rents or insurance
Bailment arrangements in construction e.g. scaffolding
Security deposits?
Temporary sheds etc in place during construction projects
Law may override restrictions on assignment of debts in
agreements.
Rights including “Step in Rights” in construction contracts.
©MNoonan2009
Franchises
A Franchisor might:
 Provide goods on credit to a franchisee
 Lease goods to a franchisee
 Sell a franchise business on a deferred payment basis
 Acquire goods from suppliers on a credit, lease or similar
basis
The Franchisor will most likely have to register their interest
on the PPSA register to protect themselves against losing
priority to another creditor or losing title to their goods.
©MNoonan2009
The construction industry
Assume a principal (P) and a contractor (C), performing earthworks.
 Should the contract be termed a “Security Agreement” to enable P to
protect itself by registering one or more security interests?
 Step in/Take out rights-right for P to take over works if C becomes
insolvent- a security?-should be registered as a security interest
 Is a contractor’s right over temporary works (items on site during
construction, but removed on completion) a “security” and registrable
pending payment?
 ROT clauses? Register or lose item.
 Retention funds-right to hold back funds pending satisfactory
completion of something-a security?
 Confidentiality issues re s. 275-certain “interested persons” may
require secured party to send a copy of a contract.
 Waiver of PPSA obligations contained in Chapter 4-numerous
procedures for notices and enforcement on default?
©MNoonan2009
How might mining transactions
be affected?
Farm in and farm out arrangements where a farmor
retains title to an asset until completion of the
farm-in work
Buyers of assets will need to know when they will
acquire free of security interests
Joint venture agreements may create security
interests under default provisions
Comingled goods
©MNoonan2009
Are Leases securities under PPSA?
Examples:
A lessor of portable buildings for more than 1 yr
Lease of an oil rig
Lease of equipment
Lease of cars
©MNoonan2009
Manufacturers/wholesalers
Supplying goods on ROT terms
Supplying goods on ROT and cross collateralising
Supplying goods on consignment
Leasing equipment (including hire purchase)
Loaning goods to customers or contractors
Storing goods on third party premises
Assigning book debts, receivables or agreements
©MNoonan2009
Ramifications for Insurers
Examples:
PPSA relevant when subject matter of policy is personal property subject
to a security interest. A right to payment of a claim may be subject to
an interest
Subrogation or assigned rights will be subject to any valid security
interest subsisting at the time the insurer’s interest arises
Salvage rights
Claims payments-to whom should the payment be made?
Security interests noted on the policy-if insured denies any security
interest exists, should insurer search anyway?
Policy drafting-an indemnity in favour of the Insurer?
Register searches-should they be done as a matter of course? When?
Professional Indemnity Claims-likely to increase with lawyers taking a
long time to come to terms with new provisions?
©MNoonan2009
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.
©MNoonan2009
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
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
The floorplan arrangement
 How did this sample arrangement operate under the 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?
©MNoonan2009
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)…
Under old law this was 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 PPSA, 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.
©MNoonan2009
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
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
Note the position of liens
Act does not apply to…..(except as provided….)
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…
©MNoonan2009
Note the priority of liens under
certain conditions s. 73
An interest (the priority interest) in collateral has priority over a
security interest in the collateral if:
(a) the priority interest arises….
(i) under a law of the Commonwealth, a State or a Territory, unless
the person who owns the collateral in which the priority interest is
granted agrees to the interest; or
(ii) by operation of the general law: and
(b) the priority interest arises in relation to providing goods or services
in the ordinary course of business; and
(c) the person who holds the priority interest provided those goods or
services; and
(d) no law of the Commonwealth, a State or a Territory provides for the
priority between the priority interest and the security interest; and
(e) the person who holds the priority interest acquired the interest
without actual knowledge that the acquisition constitutes a breach of
the security agreement that provides for the security interest
©MNoonan2009
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?
©MNoonan2009
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.
©MNoonan2009
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”
©MNoonan2009
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
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
The stages for PMSI
 Attachment-written agreement or possession
by secured party.
 Perfection- registration.
 Priority-Super priority to the extent of the
purchase price over other security interests
accorded by act if correctly attached and
perfected.
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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)
©MNoonan2009
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.
©MNoonan2009
One agreement to cover future
orders
 Often businesses supply goods on terms and
conditions that provide for future orders to be
made by purchase order and include retention
of title clauses. E.g. for just in time
manufacturing, regular customers.
 According to Cooper Grace Ward Lawyers
(24/10/12) some liquidators and receivers are
taking the view that each purchase order forms
a separate contract, each contract creates a
new security interest, and so businesses need
to register their interests for EACH supply, or be
unsecured creditors!
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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
©MNoonan2009
Priorities
Rules in PPSA.
See ss. 54-64
©MNoonan2009
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.
©MNoonan2009
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
©MNoonan2009
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
©MNoonan2009
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
©MNoonan2009
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
©MNoonan2009
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.
©MNoonan2009
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. This
example is to illustrate “control”
©MNoonan2009
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
©MNoonan2009
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…….
©MNoonan2009
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
©MNoonan2009
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.
©MNoonan2009
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
©MNoonan2009
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.
©MNoonan2009
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
©MNoonan2009
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
©MNoonan2009
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.
©MNoonan2009
Priorities
Perfected v. unperfected security
Perfected security
Perfected by control v. perfected by
other means (including registration)
Security perfected by control
Perfected by control v. perfected by
control
Perfected by other means v. by other
means
Unperfected v. unperfected
First in time perfection
First in time of continuous
registration and/or possession
First in time of attachment
©MNoonan2009
Maiden Civil (P&E) Pty Ltd & Ors v.
Queensland Excavation Services Pty Ltd
[2013] NSWSC 852
In 2010. QES purchased a wheel loader and 2 excavators
using third party finance, then leased the Equipment to
Maiden. The QES Lease was not in writing but Maiden was
given possession, used it in its civil construction work in NT
and made periodical payment to QES. QES did not register
its interest on NT Register of interests in MV before
30/1/2012, or the PPS Register. In Mar 2012, Maiden
borrowed from Fast Financial and granted it a security
interest over all its assets, including the Equipment. FF
registered that interest on PPS register. In July 2012, FF
appointed receivers to Maiden, and they claimed possession
of the equipment. Judge decided in favour of the Receivers.
©MNoonan2009
Maiden v. QES Reasons for judgement
 QES Lease was a “PPS Lease”=security interest in favour of




QES. ? Query whether enforceable under s. 20 because not in writing.
QES was “transitional security interest”-temporarily
protected for 24 months from 30/1/2012 if registrable on
previous register and so registered.
Not registered on NT Register of MV or PPS, so not
perfected.
Maiden had sufficient rights and interest to grant security in
favour of FF…had attached, was enforceable and perfected
by registration on PPS register.
Note that Judge referred to case law in NZ and Canada re
similar provisions.
©MNoonan2009
Maiden v. QES competing interests
 QES and FF had competing interests
 FF’s interest had been perfected and perfected
security interests have priority over unperfected
security interests
 Irrelevant that QES owned the equipment
 QES’s security interest had “vested” in Maiden
on Maiden’s administration. At this point, QES no
longer had an interest in the Equipment
©MNoonan2009
McCloy v. Manukau Institute of Technology
[2013]NZHC 936
A contractor (M) entered into a contract to carry out works
for the NZ equivalent of an owners corporation of a strata
plan (H).
The contract contained Step in Rights
A Receiver was appointed to M (by BNZ pursuant to
registered security interests) and declined to complete the
works. H terminated the contract and declared it was
lawfully in possession of equipment ( 2 hoists).
The receiver said no, it belongs to M because step in rights
were a security and not registered. Possession did not
qualify for perfection because repossession/seizure not
within NZPPSA.
©MNoonan2009
McCloy v. Manukau Institute of Technology
[2013]NZHC 936
“Step in Rights” typically provide that where an
Administrator, Liquidator or Receiver is appointed
to a contractor and the A, L or R declines to
complete the contracted works: the party for whom
the work is being carried out may terminate the
contract and the contractors equipment becomes
the property of the injured party.
In this case, the contract was the standard NZ
Institute of Architects contract.
©MNoonan2009
McCloy v. Manukau Institute of Technology
[2013]NZHC 936
 It analysed BNZ interest…hoists are tangible
personal property and agreement secured
payment or performance of an obligation to repay
money. Security interest was attached when BNZ
lent money to M and M acknowledged in writing
security given in relation to hoists. Perfected
when financing statement registered.
 Court held Receiver entitled to recover hoists
©MNoonan2009
McCloy v. Manukau Institute of Technology
[2013]NZHC 936
Re H
 What was the effect of the step in rights clause?-It
created a security interest which has not been perfected
and therefore did not have priority over BNZ security.
 Did BNZ expressly or impliedly authorise M to transfer
hoists to H,(negating BNZ security interest)?(45(a)(a)
NZPPSA. See s.32 APPSA) No
 Did M sell the hoists to H in the ordinary course of
business thereby negating BNZ interest? (s.53(1)
NZPPSA. See s. 46 APPSA). No
©MNoonan2009
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.
©MNoonan2009
Student Question
 Please go over Q2 Part A of the
exam in September 2010
©MNoonan2009
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.
©MNoonan2009
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 at the time of the exam, (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.
©MNoonan2009
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.
©MNoonan2009
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.
©MNoonan2009
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?
©MNoonan2009
Past Exam Questions
 Why might it be difficult to enforce a security
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.
©MNoonan2009
Past Exam Questions-short
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.
©MNoonan2009