Australian personal property securities law [2nd edition.] 9780409342635, 0409342637, 9780409342642, 0409342645

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Australian Personal Property Securities Law Second Edition

Anthony Duggan Honourable Frank H. Iacobucci Chair, Faculty of Law, University of Toronto Professorial Fellow, Melbourne Law School

David Brown Associate Professor and Co-Director, Regulation of Corporations Insolvency and Taxation Unit, Adelaide Law School, University of Adelaide

LexisNexis Butterworths Australia

2016

AUSTRALIA

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LexisNexis, Miamisburg, OHIO National Library of Australia Cataloguing-in-Publication entry Author: Title: Edition:

Duggan A J. Australian personal property securities law. 2nd edition. 9780409342642 (hbk). ISBN: 9780409342635 (pbk). 9780409342659 (ebk). Notes: Includes index. Security law — Australia. Personal property Subjects: — Australia Other Authors/Contributors: Brown, David. Dewey Number: 346.940666 © 2016 Reed International Books Australia Pty Limited trading as LexisNexis. First edition, 2012. This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Inquiries should be addressed to the publishers. Typeset in Adobe Garamond Pro and Univers LT Std. Printed in China. Visit LexisNexis Butterworths at www.lexisnexis.com.au

Foreword to the First Edition The modern law of secured transactions in personal property began, as one would expect, in the United States with the appearance, some 60 years ago, of Article 9 of the Uniform Commercial Code. This was the first formulation of principles and rules to adopt a unitary concept of “security interest” based on function rather than form and abolishing the distinction between security in the traditional sense and title-retention devices serving a security purpose. Brilliant in its conception it became adopted throughout the United States and was imported into Canada in the shape of Personal Property Security Acts, similar legislation being adopted by New Zealand in 1999 and Australia a decade later. New Zealand had the advantage of being a unitary jurisdiction, whereas the other three countries had to produce legislation that would replace a myriad of State or Provincial laws. Each jurisdiction, though following the Article 9 template, has reworked the text to fit its own conditions, an unsurprising development given that the amount of detail now loaded into Article 9 has made it almost impenetrable for all but the specialist. If Article 9 is unrivalled for its complexity, the Australian PPSA is unmatched for its length, running to an amazing 343 sections, incorporating numerous amendments since it was first enacted. The adoption of the Act is in no small measure due to the dogged and Herculean efforts of the late Professor David Allan, who alas did not live to see the culmination of his endeavours. Faced with such a massive piece of legislation practising lawyers, banks and others involved with personal property security will find themselves in need of an up-to-date fully comprehensive guide through the statutory provisions. Happily one is at hand. Australian Personal Property Securities Law, available in both book and electronic form, is a work of astonishing erudition. Written by two outstanding scholars, Professors Anthony Duggan, of the University of Toronto Faculty of Law, and David Brown of the University of Adelaide Law School, it takes the reader step by step through what are often complex, and sometimes controversial, provisions, noting significant departures from comparable legislation elsewhere and combining

rigorous legal analysis with a deep understanding of secured transactions practice and of the economic rationale of personal property security. Instead of plunging the reader straight into an examination of the Act the book takes time to explain the pre-Act state of the law and the forms of security then in use, following the example of Grant Gilmore in his great two-volume work Security Interests in Personal Property. The two authors are equally at home with the New Zealand and Canadian legislation, which enables them to identify all the more readily the strengths and weaknesses of the Australian PPSA. Replete with helpful examples this work, in explaining the statutory provisions with great clarity, addresses typical problems and offers practical solutions. In short, it is a book which caters equally for the needs of the scholar and the practising lawyer. It is an indispensable vade mecum for those involved or interested in the subject and I have no doubt that it will enjoy great success. Roy Goode Oxford 28 July 2012

Preface to the First Edition The Personal Property Securities Act 2009 (Cth) (PPSA), which came into effect on 30 January 2012,1 is a wholesale reform of the law governing secured transactions in personal property and it represents a major step in the development of Australian commercial law. The PPSA affects a wide range of transactions across the commercial spectrum: bank lending, inventory financing, accounts receivable financing, retail and consumer sales, investment dealings and so on. Correspondingly, the PPSA impacts on many aspects of commercial law including banking law, the law of mortgages (as it applies to personal property), sale of goods law, hire-purchase law, intellectual property law, the law relating to assignments, the law of restitution, insolvency law and last, but by no means least, property law. Given the sweep of the statute, it will be impossible for anyone practising, adjudicating or studying in any field of commercial law to avoid for long the task of coming to grips with the new law. Our aim in writing this book is to help ease the transition by providing an accessible but comprehensive account of the reforms. The PPSA is based in part on Canadian provincial legislation which, in turn, derives from Article 9 of the United States Uniform Commercial Code.2 Article 9 is a model statute drafted by the National Conference of Commissioners on Uniform State Laws in collaboration with the American Law Institute and it has been adopted in all States. The result is that United States secured lending law, although primarily a State responsibility, is substantially uniform throughout the country. The same is true in Canada. All the common law provinces and territories have enacted personal property security statutes which, with the exception of the Ontario PPSA,3 are based substantially on a model statute drafted by the Western Canada Personal Property Security Act Committee (now the Canadian Conference on Personal Property Security Law). The Ontario PPSA shares many common features with the Model Act, but there are quite a number of differences in the details.4 New Zealand enacted a personal property securities statute in 1999.5 The New Zealand PPSA closely follows the text of the Canadian Model PPSA, as enacted in

the province of Saskatchewan.6 Australia has elected to take a more free-wheeling approach. The Australian PPSA takes the Canadian Model statute as its starting point, but it departs from the model in numerous significant respects in terms of both drafting and substance. On the other hand, it would be a mistake to treat the Australian PPSA as sui generis and to insist on reading the statute as if it bore no relation to its North American counterparts. The truth is that many of the PPSA’s provisions cannot be properly understood without referring back to either the Canadian Model Act or Article 9 and, with this point in mind, we have incorporated frequent cross-references throughout the book to other statutes in the growing PPSA world family, including the Canadian PPSAs, the New Zealand PPSA and, of course, Article 9. We also draw frequently on cases from these other jurisdictions, Canada in particular, as a means of identifying issues that are likely to arise in Australia and providing some guidance as to how Australian courts might approach them. For ease of exposition, we have used the Saskatchewan version of the Canadian Model PPSA as our main point of reference for Canadian law and this is the reason for the frequent citations throughout the book to the Saskatchewan PPSA. The Saskatchewan PPSA was the logical choice for this purpose, given that it was the model for the New Zealand PPSA and the inspiration, if not quite the model, for the Australian statute. The PPSA is a novel and complex statute and the reader’s first, or even second and subsequent, encounters with it may be a daunting experience. Unlike the ordinary run of statutes, it is not possible to read the PPSA from cover to cover and come away with a working knowledge of what it is about. The PPSA has its own internal logic which requires mastery before its secrets can be unlocked. The key concepts of attachment and perfection and the relationship between them are part of this logic. Attachment and perfection are simply old wine in new bottles, in other words, they are no more than new and economical means of expressing wellestablished common law principles. But there is a tendency for the novelty of the expressions to mask the familiarity of the ideas they represent and this can be offputting for newcomers to the statute. The various PPSA priority rules and the relationship between them are another frequent source of confusion. The rules are for the most part easy to apply in practice, but they can be hard to understand in the abstract. We have attempted to compensate for the PPSA’s abstractions and complexities by framing each chapter of the book around a series of short practical examples designed to illustrate the application of particular provisions. We have also tried, as far as possible, to identify and explain the policies underlying the different parts of the statute. Policy considerations loom large in the PPSA context because,

whereas pre-PPSA law depended to a great extent on doctrinal distinctions between forms of secured transaction, the PPSA is openly policy-driven. It follows that much of the statute is difficult to understand without an appreciation of the policy objectives the law makers had in mind. In this connection, the PPSA is very much in the tradition of American legal realism, inherited from Article 9, and it may require some adjustment on the part of readers who are more accustomed to formalism in legal analysis. The division of labour between us was as follows: Tony Duggan wrote Chapters 1–11, 12.1–12.73 of Chapter 12, Chapter 14 and Chapter 17; David Brown wrote 12.74–12.80 of Chapter 12, and Chapters 13, 15 and 16. Earlier versions of Chapters 6 and 8 were published, respectively, in the Melbourne University Law Review and the Sydney Law Review.7 We are grateful to the Melbourne University Law Review and the Sydney Law Review for permission to re-publish. We also owe a substantial debt to Bruce Whittaker (Ashurst, Melbourne) who took collegiality to a new level by generously reading a substantial part of the manuscript in draft and making numerous invaluable comments. Last, but certainly not least, we would like to thank Emma Hutchinson and her production team at LexisNexis Butterworths for their efficiency in pushing this project through the pre-publication process at lightning speed and our copy editor, Megan Hutchison, for her superb work on the manuscript. Needless to say, all errors are ours. Anthony Duggan David Brown 31 July 2012

1. 2. 3. 4. 5. 6. 7.

Or, to be precise, at 11.59 pm on 29 January 2012. United States Uniform Commercial Code — Secured Transactions [Article 9]. Personal Property Security Act, RSO 1990, c P-10 (Ontario PPSA). For a fuller account, see Ronald C C Cuming, Catherine Walsh and Roderick J Wood, Personal Property Security Law, Irwin Law, Toronto, 2005, pp 8–11. Personal Property Securities Act 1999 (NZ) (New Zealand PPSA). Personal Property Security Act, RSS 1993, c P-6.2 (Saskatchewan PPSA). Anthony Duggan ‘A PPSA Registration Primer’ (2011) 35 Melbourne University Law Review 865; ‘Romalpa Agreements Post-PPSA’ (2011) 33 Sydney Law Review 645.

Preface to the Second Edition It is three years since the publication of the first edition of this book and close to four years since the Personal Property Securities Act 2009 (Cth) (PPSA) commenced operation. Undoubtedly, the most significant development since the PPSA came into force was the release, on 18 March 2015, of the Statutory Review Report mandated by PPSA s 343.1 The Report is 530 pages long and makes 349 recommendations for improving the statute and the register. We have incorporated in this new edition comprehensive references to the Statutory Review’s recommendations, along with critical analysis where appropriate. PPSA case law is starting to emerge and there are encouraging signs that that the courts will be open to looking at Canadian and New Zealand PPSA cases and secondary materials as guides to decision-making in the Australian context. There may have been some grounds for concern on this front in the early days of the legislation because the Australian PPSA is different in so many respects from the Canadian and New Zealand versions, and the courts might have taken the view that these differences make it unsafe to rely on Canadian and New Zealand sources. Fortunately, at least in some of these early cases, the courts appear to have been able to separate the similarities from the differences and to identify where the overseas authorities might be relevant. Perhaps the most important decision to date is Re Maiden Civil (P&E) Pty Ltd,2 where the court, relying extensively on Canadian and New Zealand case law and secondary sources, clarified the meaning of the attachment provisions (PPSA s 19) in their application to leases and also discussed various other provisions. Other interesting cases include Warehouse Sales Pty Ltd (in liq) v LG Electronics Australia Pty Ltd3 and Re Renovation Boys Pty Ltd,4 both dealing with the buyer in ordinary course provision (PPSA s 46); Re Arcabi Pty Ltd,5 dealing with the application of the statute to commercial consignments and Central Cleaning Supplies (Aust) Pty Ltd v Elkerton6 (on the application of the transitional provisions in PPSA Ch 9 to standard form retention of title arrangements). These cases are all discussed

in the text. Also referred to are: Citadel Finance Corporation Pty Ltd v Elite Highrise Services Pty Ltd (No 3)7 (acceptance of security agreement by conduct); Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd8 and Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd9 (application of statute limited to security interests created by agreement); Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd10 (application of seriously misleading error provisions in PPSA ss 164 and 165); Pozzebon v Australian Gaming and Entertainment Ltd11 (perfection by registration); Relux Commercial Pty Ltd v Doka Formwork Pty Ltd12 (attachment; acceptance of security agreement by conduct); SFS Projects Australia Pty Ltd v Registrar of Personal Property Securities (No 2)13 (Registrar’s power to restore data incorrectly removed from the register); White v Spiers Earthworks Pty Ltd14 (constitutionality of PPSA s 276); NCO Finance Australia Pty Ltd v Australian Pacific Airports (Melbourne) Pty Ltd15 (priorities between competing transitional security interests); and Federal Republic of Brazil v Durant International Corporation 16 (a Privy Council case on the doctrine of tracing). There has also been a significant number of cases dealing with the application of s 588FL of the Corporations Act 2001 (Cth) (effectiveness of an unperfected or late perfected security interest in a company’s insolvency proceedings). The more important of these cases are discussed in Chapter 13 of the text (Insolvency Law and the PPSA). Apart from discussion of, or reference to, the cases mentioned above, there are also frequent references in the text to the growing body of Australian journal literature on the PPSA, with critical analysis where appropriate. Parts of the text, in particular Chapters 5 (Perfection), 6 (Registration) and 10 (Transfers of Collateral) have been substantially rewritten to incorporate discussion of points that have occurred to us, or been drawn to our attention, since the first edition, to reflect changes in our thinking on certain issues and to improve the flow of the discussion. On 15 May 2015, Australia acceded to the Cape Town Convention on International Interests in Mobile Equipment (aircraft), and legislation giving effect to the Convention in Australia came into operation on 1 September.17 We have included in Chapter 16 (Aircraft Security Interests and other International Developments) an account of the Convention’s main provisions, with particular reference to their application in Australia. The Statutory Review Report is mostly devoted to making specific recommendations for reforming the statute and the register. But the report also makes the more general findings that: (1) levels of awareness of the Act remain low, particularly among the small business community; and (2) stakeholders continue to

have trouble understanding the Act. As noted in the preface to the first edition, in writing this book we have tried to make the PPSA as understandable as possible by framing each chapter around a set of short, practical examples, by identifying and explaining the policy considerations behind key provisions and by comparing and contrasting the main parts of the statute with prior law. With these features in mind, we hope that this second edition may prove useful, not only to courts, practitioners and law students, but also to stakeholders who have had trouble coming to grips with the new law. For the most part, this edition states the law as available to us at 31 July 2015, though we have managed to include discussion of several more recent developments. One development that we were not able to account for in the text concerns proposed changes to the Corporations Act 2001 (Cth) and the taxation laws aimed at abolishing the Australian Company Number (ACN) as an identifier for corporations and substituting the Australian Business Number (ABN). The purpose is to facilitate the setting up of new businesses by reducing the number of business identifiers. The changes will take effect on 1 July 2016 and will affect all companies registered on or after that date: see Treasury Legislation Amendment (Repeal Day) Bill 2015 (Cth) Sch 1. These changes will affect the PPSA registration requirements as they apply to corporate grantors (discussed in Chapter 6), but only with respect to newly registered companies. The division of labour between us was as follows: Tony Duggan wrote Chapters 1–11, 12 (12.1–12.73), 14 and 16 (16.1–16.21), and David Brown was responsible for Chapters 12 (12.74–12.80), 13, 15 and 16 (16.22–16.34). We would like to thank Hayley Moore and her production team at LexisNexis Butterworths and our copyeditor, Louise Scahill for her efficiency, patience and attention to detail. Anthony Duggan David Brown Spring equinox, 2015

1. 2. 3. 4.

Bruce Whittaker, Review of the Personal Property Securities Act 2009: Final Report (Commonwealth of Australia, 2015), available at . Re Maiden Civil (P&E) Pty Ltd; Albarran v Queensland Excavation Services Pty Ltd [2013] NSWCS 852 (S Ct NSW). [2014] VSC 644 (S Ct Vic). [2014] NSWSC 340 (S Ct NSW).

5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

[2014] WASC 310 (S Ct WA). [2015] VSCA 92. [2014] NSWSC 1926 (S Ct NSW). [2014] VSCA 326 (Vic C of A). [2014] VSC 217 (S Ct Vic). [2013] NSWSC 1741 (S Ct NSW). [2014) FCA 1034 (Fed Ct of Aust). [2014] VSC 570 (S Ct Vic). [2014] FCA 987 (Fed Ct Aust). [2104] WASC 139 (S Ct WA). [2014] FCCA 2274. [2015] UKPC 35. Mobile Equipment (Cape Town Convention) Act 2013 (Cth).

Table of Cases References are to paragraphs numbers

356477 British Columbia Ltd v CIBC (1998) 157 DLR (4th) 682 (BCCA) .… 3.23 369413 Alberta Ltd v Pocklington [2001] 4 WWR 423 (Alta CA) .… 10.24, 10.29, 10.32 547592 Alberta Limited (Receivership), Re (1995) 10 PPSAC (2d) 62 (ABQB) .… 10.30 994814 Ontario Inc v RSL Canada Inc and En-Plas Inc (2005) 14 CBR (5th) 134 (ONSC) .… 4.12, 4.16, 4.17 A Access Cash International Inc v Elliot Lake Inc & North Shore Corp for Business Development (2000) Carswell Ont 2824; 1 PPSAC (3d) 209 (ONSC) .… 3.8, 12.9 Adelaide Capital Corp v Integrated Transportation Finance Inc (1994) 16 OR (3d) 414 (Ont Sup Ct Justice, Gen Div) .… 6.49, 6.63 Agricultural Commodity Corp v Schaus Feedlots Inc [2001] OJ No 2908 .… 10.28 Agricultural Credit Corp of Saskatchewan v Pettyjohn (1991) 79 DLR (4th) 22 (SKCA) .… 8.9, 8.12, 11.18, 11.20, 11.21, 11.23 Akron Tyre Company Pty Ltd v Kittson [1967] VR 231 .… 1.20 Alberta Pacific [1996] 1 WWR 552 .… 10.24 Alberta Pacific Leasing Inc v Petro Equipment Sales (1995) 10 PPSAC (2d) 69 (ABQB) .… 10.31 Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 .

… 8.39, 9.19, 9.20 Amalgamated Roofing Ltd v Chris Larsen Ltd [1990] 1 NZLR 185 .… 7.35 Apex Gold Pty Ltd, Re [2013] NSWSC 881 .… 13.16 Appleyard Capital Pty Ltd, Re [2014] NSWSC 782 .… 13.16, 13.17 Arcabi Pty Ltd (Receivers and Managers Appointed) (in liq), Re; Ex p Theobald & Herbert [2014) WASC 310 .… 3.8, 3.9, 3.31, 3.38, 3.39 Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339 (HL Scot) .… 8.16 Armstrong, Re [1895] 1 IR 87 .… 7.35 Artistic Builders Pty Ltd v Elliott & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16 .… 12.41, 12.79–12.81 Associated Alloys Pty Ltd v ACN 001 452 106 (2000) 202 CLR 588 .… 11.6, 11.7 Atlas Industries v Federal Business Development Bank (1983) 3 PPSAC 39 (SKQB) .… 4.28 Australian Central Credit Union v Commonwealth Bank of Australia (1990) 54 SASR 135 .… 1.38, 6.7 — v — (1991) ASC 56–037 .… 1.38 Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 13 ACLR 261 . … 12.24 B Baden Delvaux & Lecuit v Société Général pour Favoriser le Développement du Commerce [1993] 1 WLR 509 .… 10.17, 10.44, 10.45 Bank of Credit and Commerce International SA (No 8), Re [1998] AC 214 (HL) . … 2.35, 3.54 Bank of Montreal v Innovation Credit Union [2010] 3 SCR 3 .… 1.22 Bank of Nova Scotia v IPS Invoice Payment System Corporations (2010) 101 OR (3d) 352 (ONSC) .… 11.34, 11.37 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL) .… 3.12, 3.69, 3.71

Barclays Bank plc, Re [2012] NSWSC 1095 .… 13.16, 13.17 Battlefords Credit Union Ltd v Ilnicki (1991) 82 DLR (4th) 69 (SKCA) .… 8.28 Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Limited (2008) 246 ALR 361 .… 3.19 Benedict v Ratner 268 US 353 (1925) .… 1.34 Bishopsgate Investment Management Ltd v Homan [1995] Ch 211 .… 11.19 Black Opal IP Pty Ltd, Re [2013] NSWSC 1225 .… 13.17 BMP Global Distribution Inc v Bank of Nova Scotia [2009] 1 SCR 504 .… 11.24 Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 .… 9.19 Broad v Commissioner of Stamp Duties [1980] 2 NSWLR 40 .… 2.35, 3.54 Business Development Bank of Canada v D’Eon Fisheries Limited 2015 NSSC (S Ct Nova Scotia) .… 4.33 C Caisse populaire Desjardins de l’Est de Drummond v Canada [2009] 2 SCR 94 .… 3.14, 3.55–3.57, 3.59 Camco Inc v Olson Realty (1979) Ltd (1986) 50 Sask R 161 .… 10.25, 10.27 Cardel Leasing Ltd v Maxmenko (1991) 2 PPSAC (2d) 302 (ON Gen Div) .… 14.51 Cardinia Nominees Pty Ltd, Re [2013] NSWSC 32 .… 13.16 Carrafa, Goutzos & Lofthouse (as liquidators of Relux Commercial Pty Ltd) (in liq) v Doka Formwork Pty Ltd [2014] VSC 570 .… 3.33, 4.29, 13.12, 13.13 Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92 .… 15.11, 15.12 Charge Card Services Ltd, Re [1987] Ch 150 .… 2.35 Chiips Inc v Skyview Hotels Ltd (1994) 116 DLR (4th) 385 (ABCA) .… 8.48 Chrysler Credit Canada Ltd v Royal Bank of Canada [1986] 6 WWT 338 (SKCA) .… 8.23 CIF Furniture Limited, Re 2011 ONCA 34 .… 7.34–7.36

Cinema Plus Ltd v Australia and New Zealand Banking Group Ltd (2000) 49 NSWLR 513 .… 2.35 Citadel Financial Corporation Pty Limited v Elite Highrise Services Pty Limited (No 3) [2014] NSWSC 1926 .… 4.29 Clark Equipment of Canada Ltd v Bank of Montreal [1984] 4 WWR 519 (MBCA) .… 4.34, 8.15, 8.36 Clough Mill Ltd v Martin [1985] 1 WLR 111 .… 9.20 Comeau’s Sea Foods Ltd v Canada (Minister of Fisheries and Oceans) [1997] 1 SCR 12 .… 2.46 Commercial Bank of Australia v Friedrich (1991) 5 ASCR 115 .… 12.24 Commercial Credit Corporation Limited v Harry Shields Limited (1981) 32 OR 703 (ONCA) .… 3.45 Commissioner of Inland Revenue v Stiassny [2012] NZCA 93 .… 1.22 Commonwealth v Tasmania (1983) 158 CLR 1 .… 15.2 Credit Suisse Canada v 1133 Yonge Street Holdings Ltd (1996) 28 OR (3d) 670 (ONSC) .… 4.47 — v — (1998) 41 OR (3d) 632 (ONCA) .… 4.50–4.52, 4.54, 4.55, 11.32 Cybernetic Servs Inc, Re 252 F3d 1039 (9th Cir, 2001) .… 14.34 D Dearle v Hall 38 ER 475; (1828) 3 Russ 1 (Ch) .… 3.28, 5.7, 15.36 Devaynes v Noble; Clayton’s Case (1816) 1 Mer 572; 35 ER 781 .… 8.22, 11.21, 11.25, 11.26 Douglas Financial Consultants Pty Ltd v Price [1991] 1 Qd R 243 .… 1.38, 6.10 Dunphy v Sleepyhead Manufacturing Co Ltd [2007] NZCA 241; 3 NZLR 602 . … 4.44, 13.28 Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2014] VSCA 326 .… 3.45, 4.12 E

Enviro Pallets (NSW) Pty Ltd, Re [2013] QSC 220 .… 13.16, 13.17 Esanda Ltd v Burgess [1984] 2 NSWLR 139 .… 1.28 Euroclean Canada Inc v Forest Glade Investments Ltd (1985) 16 DLR (4th) 289 (ONCA) .… 8.47, 8.48 Expo International Pty Ltd v Chant [1979] 2 NSWLR 820 .… 12.83 F Fairbanx Corp v Royal Bank of Canada (2010) 319 DLR (4th) 618 (ON CA) .… 3.25, 3.29, 6.55, 6.58, 6.59, 7.18 Fairline Boats Ltd v Leger (1980) 1 PPSAC 218 (ONSC) .… 10.24 Farm Credit Corporation v Gannon [1993] 6 WWT 736 (SKQB) .… 8.31 Federal Republic of Brazil v Durant International Corporation [2015] UKPC 35 . … 8.9, 11.20, 11.21 Flexi-Coil Ltd v Kindersley District Credit Union Ltd (1993) 107 DLR (4th) 129 (SKCA) .… 10.75, 11.19 Flintoft v Royal Bank of Canada [1964] SCR 631 .… 10.3 Florgale Uniforms Pty Ltd v NAB (2004) 51 ACSR 699; 11 VR 54 .… 12.80, 12.81 Ford Motor Credit Co of Canada Limited v Central Motors of Brampton Limited (1982) 38 OR (2d) 516 (ONCJ) .… 10.29 Fortson Pty Ltd v Commonwealth Bank of Australia (2008) 100 SASR 162 .… 12.80, 12.81 Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd [2013] NSWSC 1741 .… 6.55, 6.65 G Gamer’s Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236 .… 10.55 GC Parking Ltd v New West Ventures Ltd (2004) BCSC 706 .… 12.24 GE Canada Equipment Financings GP v ING Insurance Company of Canada

(2009) 94 OR (3d) 312 (ONCA) .… 3.62, 3.66 GE Capital Australia v Davis (2002) 180 FLR 250 .… 12.80 GE Capital Canada Acquisitions Inc v Dix Performance [1995] 2 WWR 738 (BCSC) .… 4.32–4.34 Gerrard, Re (2000) 20 CBR (4th) 90 (NSSC) .… 8.25 Gibbston Downs Wines Limited v Perpetual Trust Limited [2013] NZCA 506 .… 3.29, 5.43, 6.51, 7.32, 7.33 Gibbston Downs Wines Limited and RFD Finance No 2 Limited v Perpetual Trust Limited [2012] NZHC 1022 .… 7.16 Gibson v Stockco Limited [2010] NZHC 2398 .… 10.27, 10.29 Giffen, Re [1998] 1 SCR 1 .… 5.60, 13.4 Gimli Auto Limited v BDO Dunwoody Limited (1998) 160 DLR (4th) 373 (ABCA) .… 14.27, 14.28 Goldcorp, Re [1995] 1 AC 74 (PC) .… 11.19 Graham v Portacom New Zealand Ltd [2004] 2 NZLR 528 .… 4.18 Grant v YYH Holdings Pty Ltd [2014] NSWCA 360 .… 2.7 Gray v Royal Bank of Canada (1997) 143 DLR (4th) 179 (BCSC) .… 4.16 Greyvest Leasing v Merkur (1994) 8 PPSAC (2d) 203 .… 12.24, 12.81 Guardian Securities Ltd, Re [1984] 1 NSWLR 95 .… 13.17 H Hallett’s Estate, Re; Knatchbull v Hallett (1880) 13 ChD 696 (CA) .… 11.25 Harper v Minister for Sea Fisheries (1989) 168 CLR 314 .… 2.42 Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1994) 8 BPR 15,581 .… 12.79 Healy Holmberg Trading Partnership, The v Grant [2012] NZLR 61 (CA) .… 4.42, 7.5 Heidelberg Canada Graphic Equipment Ltd v Arthur Andersen Inc (1993) 7 BLR (2d) 236 (ON Gen Div) .… 4.13

Helby v Matthews [1895] AC 471 .… 1.27 Hewlett Packard Australia Pty Ltd v GE Capital Finance Pty Ltd [2003] FCAFC 256 .… 13.17 Hickman Equipment (1985) Ltd, Re [2003] NJ No 86 .… 4.33 Hobbs v Petersham Transport Co Pty Ltd (1971) 124 CLR 220 .… 3.38 Holroyd v Marshall (1861–62) 10 HLC 191 .… 1.19, 1.32 Hopkinson v Rolt (1861) 9 HLC 514; 11 ER 829 .… 7.24 HSBC Bank Canada v Kupritz (2011) BCSC 788 .… 12.24 I Industrial Acceptance Corporation v Firestone Tire & Rubber Company of Canada Limited [1971] SCR 357 .… 9.3 Industrial Progress Corp Pty Ltd v Wilson [2013] WASC 225 .… 15.11 Investa Properties Pty Limited v Westpac Property Funds Management Limited [2001] NSWSC 1089 .… 13.17 Investec Bank (Australia) Ltd v Glodale Pty Ltd (2009) 71 ASCR 615 .… 12.80, 12.81 iTrade Finance Inc v Bank of Montreal [2011] 2 SCR 360 .… 1.22, 4.12, 4.14, 4.15 J James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62 .… 11.28 John Deere Credit Inc v Standard Oilfield Services Inc (2000) 16 CBR (4th) 227 (ABQB) .… 7.16 Jones v Gordon [1877] 2 App Cas 616 .… 10.45 Joplin Brewery Co Ltd, Re [1902] 1 Ch 79 .… 13.17 Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570 .… 12.80 J S Brooksbank and Company (Australasia) Ltd v EXFTX Ltd (in rec and liq) [2009] NZCA 122 .… 4.16

K Kubota Canada Ltd v Case Credit Ltd (2005) 253 DLR (4th) 171 (ABCA) .… 8.48 L Lambert, Re (1994) 20 OR (3rd) 108 (ONCA) .… 6.55, 6.61 Law Society of Upper Canada v Toronto-Dominion Bank (1998) 169 DLR (4th) 353 (ONCA) .… 11.27, 11.28 Lee v Butler [1893] 2 QB 318 (CA) .… 1.26, 3.22, 10.54 Lehman Brothers International (Europe), Re [2012] UKSC 6; [2010] EWCA Civ 917 .… 16.28 M MacDonald v Canadian Acceptance Corp Limited [1955] 5 DLR 344 (ONCA) . … 10.30 McEntire v Crossley Brothers [1895] AC 457 .… 1.25 MacEwen Agriculture Centre Inc v Beriault (2002) 61 OR (3d) 63 (ONSC) .… 4.25, 4.27 MacPhee Chrevolet Buick GMC Cadillac Ltd v SWS Fuels Ltd 2011 NSCA 35 (NSCA) .… 8.31 Maiden Civil (P & E) Pty Ltd, Re; Albarran v Queensland Excavation Services Pty Ltd; Richard Albarran and Bruce Alexander Pleash [2013] NSWSC 852 .… 3.36, 4.18, 4.19, 4.24, 12.23, 12.26, 13.4, 14.1, 14.28, 15.20, 15.22 Mallicoat v Volunteer Finance (1966) 3 UCC 1035 (Tennessee CA) .… 12.24 Marac Finance Limited v Greer [2012] NZCA 45 .… 3.60 Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] 4 VR 559 .… 15.12 N National Westminster Bank v Spectrum Plus [2005] 2 AC 680 (HL) .… 13.22 NCO Finance Australia Pty Ltd v Australian Pacific Airports (Melbourne) Pty Ltd

[2014] FCCA 2274 .… 15.17, 15.37 New World Screen Printing (cob) New World Print v Xerox Canada Ltd [2003] BCJ No 2559 (BCSC) .… 4.34 New Zealand Bloodstock Leasing Ltd v Jenkins [2007] NZHC 336 .… 8.28 Noriega, Re (2003) 42 CBR (4th) 274 (ABQB) .… 6.48 North Platte State Bank v Production Credit Association of North Platte 200 NW 2d 1 (S Ct Neb, 1972) .… 8.9 North Shore City Council v Stiassny [2008] NZCA 522 .… 3.13 Northwest Equipment Inc v Daewoo Heavy Industries America Corp (2002) 3 PPSAC (3d) 101; [2002] 6 WWR 444 (ABCA) .… 10.30, 12.24 O OBG v Allan [2008] 1 AC 1 (HL) .… 11.37 Ontario (Securities Commission) v Greymac Credit Corporation (1986) 55 OR (2d) 673, 30 DLR (4th) 1 (ONCA) .… 11.26 — v— [1988] 2 SCR 172 .… 11.26 ORIX New Zealand Limited v Milne [2007] NZHC 507 .… 10.27, 10.36 P Peachdart Ltd, Re [1984] Ch 131 .… 9.20 Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 6 CLR 676; 13 CLR 676 .… 12.79, 12.83 Perimeter Transportation Ltd, Re 2010 BCCA 509; (2010) 327 DLR (4th) 31 (BCCA) .… 5.46, 10.7 Portbase Clothing Ltd, Re [1993] Ch 388 .… 7.35 Pozzebon (Trustee) v Australian Gaming & Entertainment Ltd [2014] 1034 .… 13.12 R R v Doucette [1960] OR 407 (ONCA) .… 12.36

Rabobank v McAnulty [2011] NZCA 212 .… 3.38, 4.16, 4.17 Raymond Darzinskas, Re (1981) 34 OR (3d) 782 (ONSC) .… 5.10 Rektor, Re (1983) 47 CBR (NS) 267 (Ont HCJ) .… 3.62 Renovation Boys Pty Ltd, Re [2014] NSWSC 340 .… 10.36, 10.39 Robert Simpson Company Limited, The v Shadlock and Duggan (1981) 31 OR (2d) 612 (ONSC) .… 7.17, 7.18 Royal Bank of Canada v 216200 Alberta Ltd (1987) 51 Sask R 147 (SKCA) .… 10.34, 10.36, 10.37, 10.41, 10.42 — v General Motors Acceptance Corporation of Canada Ltd (2006) 274 DLR (4th) 372 (NFCA) .… 7.35 — v Radius Credit Union Ltd [2010] 3 SCR 38 .… 7.15 — v Sparrow Electric Corp [1997] 1 SCR 411 .… 4.52, 4.54, 4.55 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (JC) .… 10.45 S Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217 .… 3.12, 4.12, 6.78 Saulnier v Royal Bank of Canada [2008] 3 SCR 166 .… 2.43, 2.45, 2.46, 2.48, 12.29 SFS Projects Australia Pty Ltd v Registrar of Personal Property Securities [2014] FCA 846 .… 6.79, 15.28 Shallcross v Community State Banks Trust Co 434 A 2d 671 (NJ Sup Ct 1981) . … 7.19 Simpson and Walton v New Zealand Associated Refrigerated Food Distributors Limited [2006] NZCA 349 .… 6.48, 6.64 Skinner v Jeogla (2001) 37 ACSR 106 .… 12.80, 12.81 — v — (2009) 71 ASCR 71 .… 12.81 Smith v ANL Ltd (2000) 204 CLR 493 .… 15.2 Sogelease Australia Ltd v Boston Australia Ltd (1991) 26 NSWLR 1 .… 15.36

Sperry v Canadian Imperial Bank of Commerce (1985) 17 DLR (4th) 236 (ONCA) .… 7.16, 8.48 Spittlehouse v Northshore Marine Inc [1994] 18 OR (3d) 60 (ONCA) .… 10.42 Stelco, Re (2005) 253 DLR (4th) 524 .… 3.63, 3.64 Stephanian’s Persian Carpets Ltd, Re (1980) 34 CBR (NS) 35 .… 3.8 Stevenson v GMAC Leaseco Ltd (2003) 227 DLR (4th) 154 (NBCA) .… 6.55, 6.61, 7.18 Stiassny v Commissioner of Inland Revenue [2012] NZCA 93 .… 10.74 — v North Shore Council [2008] NZCA 522 .… 3.12 Stockco Ltd v Gibson and Stiassny [2012] NZCA 330 .… 4.31, 5.51, 10.21, 10.24, 10.27, 10.29, 10.31, 10.32 Strategic Finance Ltd (in rec and in liq) v Bridgman [2013] NZCA 357 .… 2.29, 13.23 T Tailby v Official Receiver (1888) 13 App Cas 523 .… 1.19, 1.32 Telstra Corporation Ltd v Commonwealth (2008) 234 CLR 210 .… 15.2 Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 .… 12.41 Tubbs v Ruby 2005 Ltd [2010] NZCA 353 .… 10.21, 10.30 Twinsectra Ltd v Yardley [2002] 2 AC 164 (HL) .… 3.69, 10.45 Twyne’s case 3 Co Rep 806, 76 Eng Rep 809 (Star Chamber, 1601) .… 5.4–5.7 U Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646 .… 12.80 Unisource Canada Inc v Laurentian Bank of Canada (2000) 47 OR (3d) 616 (ONCA) .… 8.28, 8.31 V Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277 .… 14.52

W Warehouse Sales Pty Ltd (in liq) & Lewis and Templeton v LG Electronics Australia Pty Ltd [2014] VSC 644 .… 10.23, 10.33, 10.37, 10.38, 10.47 West v Williams [1899] 1 Ch 132 (CA) .… 7.24 Wheatland Industries (1900) Ltd v Baschuk (1994) 8 PPSAC (2nd) 247 (Sask QB) .… 8.11 White v Spiers Earthworks Pty Ltd [2014] WASC 139 .… 5.60, 15.2, 15.21

Table of Statutes All references are to paragraph numbers

Commonwealth Air Services Act 1995 .… 3.47, 16.11 Anti-Money Laundering and Counter-Terrorist Financing Act 2007 (AML-CTF Act) .… 6.28–6.30 Banking Act 1959 s 9 .… 2.34 Bankruptcy Act 1966 .… 3.74, 13.3 Pt IX .… 13.33, 13.35 Pts IX–XI .… 13.1 Pt X .… 13.33, 13.35 s 5 .… 13.34, 13.35 s 44 .… 13.34 s 54L .… 13.34 s 58 .… 13.34 s 64ZA(5) .… 13.34 s 90 .… 13.34 ss 90–92 .… 13.34 s 94 .… 13.34 s 153(3) .… 13.34 s 185C .… 13.35

s 188A .… 13.35 s 204 .… 13.35 s 207 .… 13.35 s 301 .… 13.11 s 302 .… 13.11 Bills of Exchange Act 1909 .… 10.76 s 34 .… 5.15 Cheques Act 1986 .… 10.76 Civil Aviation Act 1988 .… 16.4 Civil Aviation Regulations 1988 .… 16.4 Commonwealth Inscribed Stock Act 1911 s 6 .… 3.45 Commonwealth of Australia Constitution Act s 51(xvii) .… 13.1, 15.41 s 51(xx) .… 1.47 s 51(xxxi) .… 5.60, 15.2 s 51(xxxvii) .… 1.51 s 109 .… 10.54 Competition and Consumer Act 2010 .… 4.5 Copyright Act 1968 s 196(4) .… 2.50 Corporations Act 2001 .… 1.24, 9.19, 10.18, 12.24, 13.23, 14.3 Ch 2K .… 1.20, 2.38, 4.25, 5.21, 6.4, 6.7, 6.17, 7.17, 11.4 Ch 5 .… 13.1, 13.28, 13.32 Pt 5 .… 13.30 Pt 5.2 .… 12.17, 12.77, 13.29

Pt 5.3A .… 13.3, 13.31 s 9 .… 12.17, 12.77, 12.79, 13.29 s 51 .… 13.20 s 51A .… 13.20 s 51C .… 13.22, 13.24, 13.26, 13.27 s 51D .… 13.32 s 51F .… 13.28, 13.29, 13.31 s 53 .… 13.30 s 124(1)(f) .… 13.22 ss 180–185 .… 12.79 s 252 .… 7.24 s 262(1) .… 15.26 s 262(1)(j) .… 11.4 s 263 .. 13.12, 15.35 s 263(1) .… 15.26 s 265(2) .… 15.26 s 265(8) .… 15.26 s 266 .… 13.4, 15.24, 15.26 s 266(4) .… 13.16, 13.18 s 266(6) .… 13.7 s 279 .… 8.18 s 280 .… 6.17, 7.19, 15.35 ss 280–281 .… 11.4 s 416 .… 12.77 s 420 .… 12.78 s 420A .… 12.17, 12.49, 12.79, 12.81

s 420A(1) .… 12.79 s 420A(2) .… 12.79 s 420B .… 12.82 s 422B .… 13.22 s 430 .… 12.80 s 433 .… 12.83, 13.22, 13.28 s 433E .… 13.22 s 435B .… 13.31 s 436C .… 13.31 s 441EA .… 13.32 s 441JA .… 13.32 s 459C .… 13.22 s 465 .… 13.30 s 471B .… 13.30 s 473(10) .… 13.30 s 474 .… 13.30 s 475(8) .… 13.30 s 477 .… 13.30 s 478 .… 13.30 s 485(3) .… 13.30 s 504(2) .… 13.30 s 513A .… 13.30 s 513A–513C .… 13.3 s 513C .… 13.3 s 561 .… 12.55, 13.22, 13.28 s 588FJ .… 13.12, 13.22

s 588FL .… 11.44, 13.1, 13.2, 13.12, 13.13, 13.19, 13.30, 15.40, 16.15 ss 588FL–588FM .… 13.18 s 588FL(2)(b)(ii) .… 13.15 s 588FL(2)(b)(iv) .… 13.16 s 588FL(5) .… 13.14 s 588FM .… 13.12, 13.16–13.18 s 588FN .… 13.14 s 588FO .… 13.14 s 1070A(4) .… 14.46 s 1501A .… 13.31 s 1502 .… 15.21 s 1506 .… 15.24 Designs Act 2003 .… 2.38 Insurance Act 1973 .… 3.47 International Interests in Mobile Equipment (Cape Town Convention) Act 2013 s 7 .… 16.1 s 8 .… 16.1 International Interests in Mobile Equipment (Cape Town Convention) Rules 2014 .… 16.19 Judicature Act s 25(6) .… 3.29 Life Insurance Act 1995 s 200 .… 3.62 s 201 .… 3.62 Loans Redemption and Conversion Act 1921 s 5 .… 3.45 National Consumer Credit Protection Act 2009

Pt 5 .… 12.14 s 4 .… 12.14 s 5 .… 12.14 s 7 .… 12.14 s 9(3) .… 12.14 s 42 .… 4.24 s 42(1) .… 4.27 s 43 .… 4.24 s 44 .… 4.8 ss 44–50 .… 4.5 s 44(1) .… 4.30 s 44(2) .… 4.30, 4.35 s 45 .… 4.6, 8.14 s 48 .… 1.12 s 50 .… 3.68, 3.73 s 88 .… 12.34 s 89 .… 12.34, 12.60 s 91 .… 12.31, 12.37 ss 94–96 .… 12.37 s 99 .… 12.37 s 102 .… 12.14, 12.45, 12.50 s 102(4) .… 12.59 s 103 .… 12.50 s 104 .… 12.14, 12.45, 12.50, 12.58 s 104(3) .… 12.14, 12.53 s 105 .… 12.14, 12.58

s 106 .… 12.50 s 107 .… 4.10 s 135 .… 10.95, 10.99 s 204(1) .… 12.14 Sch 1 [National Credit Code] .… 1.12, 1.29, 1.42, 3.68, 3.73, 4.5, 4.6, 4.8, 4.10, 4.24, 4.27, 4.35, 8.14, 10.95, 10.99, 12.3, 12.14, 12.15, 12.31, 12.34, 12.37, 12.45, 12.50, 12.58, 12.59 Navigation Act 1912 .… 3.47 Offshore Minerals Act 1994 .… 2.40, 2.41, 3.78 Offshore Petroleum and Greenhouse Gas Storage Act 2006 .… 2.40, 2.41, 3.78 Patents Act 1990 .… 2.38, 6.7, 14.33 s 187 .… 14.33 s 189 .… 2.50 s 189(2A) .… 14.33 Patents Act 1999 .… 1.38 Payment and Netting Systems Act 1998 .… 10.76 Payment Systems and Netting Act 1998 .… 3.49 Personal Property Securities Act 2009 .… 1.1, 1.6, 1.9, 1.10, 1.12, 1.13, 1.15, 1.20, 1.22, 1.24, 1.29, 1.37, 1.38, 1.41, 1.42, 1.50, 1.53, 2.3, 2.9, 2.10, 2.18, 2.19, 2.26, 2.38, 2.39, 2.42, 2.43, 2.45, 2.47, 2.49, 2.55, 3.3–3.5, 3.13, 3.16, 3.20–3.22, 3.35, 3.37, 3.55, 3.59, 3.64, 4.15, 4.49, 4.52, 4.53, 5.6, 5.7, 5.9, 6.2, 6.3, 6.6, 6.8–6.11, 6.16, 6.20, 6.23, 6.29, 6.32, 6.33, 6.41, 6.58, 7.24, 7.31, 8.4, 8.39, 9.4, 9.6, 9.20, 10.25, 10.34, 10.40–10.42, 10.53, 11.3, 11.18, 11.20, 11.22, 11.23, 11.30, 12.2, 12.5, 12.8, 13.16, 13.20, 13.21, 13.26, 13.28, 13.31, 13.32, 13.34, 13.35, 14.53, 15.3, 16.3, 16.7, 16.29–16.31, 16.34 Ch 2 .… 12.70 Ch 4 .… 2.53, 3.17, 3.19, 3.30, 3.44, 3.77, 4.3, 4.4, 4.20, 12.1, 12.3, 12.4, 12.6, 12.7, 12.11–12.18, 12.20, 12.21, 12.23, 12.26, 12.27, 12.31–12.35, 12.42, 12.54, 12.55, 12.61, 12.69, 12.70, 12.76, 12.83, 13.29, 14.51, 15.18

Ch 4, Div 3 .… 12.35, 12.61, 12.62, 12.65 Ch 5 .… 6.1 Ch 9 .… 6.28, 15.1, 15.11 Pt 2.1 .… 13.25 Pt 2.3 .… 13.25 Pt 2.5 .… 2.56, 9.21, 10.11, 10.54, 10.63, 10.69, 10.71, 10.88, 11.1, 11.13 Pt 2.6 .… 4.3, 7.1, 7.21 Pt 3.2 .… 9.1 Pt 3.3 .… 9.1, 16.14 Pt 3.4 .… 9.1, 9.17–9.19, 9.32, 11.12 Pt 4 .… 1.18, 3.10, 3.31, 12.17, 12.25 Pt 4.3 .… 12.17 Pt 4.3, Div 4 .… 4.2, 9.12, 12.35, 12.41, 12.46, 12.61, 12.62 Pt 5.3 .… 6.42 Pt 5.6 .… 6.45, 6.53, 6.75, 6.78 Pt 5.7 .… 6.79 Pt 5.9 .… 15.21 Pt 7.2 .… 14.2, 14.4–14.6, 14.8–14.12, 14.17, 14.29, 14.43, 14.51, 16.25 Pt 7.3, Div 2 .… 1.51 Pt 7.4 .… 2.44 Pt 8.2 .… 3.30 Pt 8.4 .… 5.54 Pt 9.3 .… 15.4 Pt 9.4 .… 15.30 Pt 9.4, Div 2 .… 15.41 Pt 9.4, Div 6 .… 15.19

Pt 9.5 .… 6.46, 15.6 s 2 .… 15.4 s 3(1) .… 3.67 s 6 .… 14.2–14.4, 14.6, 14.7 s 6(1) .… 14.3 s 6(1)(b) .… 14.3, 14.4, 14.7, 14.51 s 6(1A) .… 14.3, 14.43 s 6(1A)(b) .… 14.3 s 6(2) .… 14.6, 14.40, 14.51 s 6(2)(a) .… 14.3, 14.34 s 6(2)(b) .… 14.3, 14.5 s 6(2)(c) .… 14.3 s 6(2)(d) .… 14.3 s 6(2)(e) .… 14.3, 14.33 s 7 .… 14.3 s 8 .… 1.14, 2.1, 3.1, 15.9 s 8(1) .… 3.12, 3.14, 3.51 s 8(1)(a) .… 3.44 s 8(1)(b) .… 3.45, 3.46 s 8(1)(c) .… 3.45, 3.46, 3.67 s 8(1)(d) .… 3.49–3.54, 3.57 s 8(1)(e) .… 3.49, 3.53 s 8(1)(f) .… 3.60, 3.72, 4.47 s 8(1)(f)(ii) .… 3.61 s 8(1)(f)(iv) .… 3.73 s 8(1)(f)(v) .… 3.62, 3.65–3.67

s 8(1)(g) .… 3.74 s 8(1)(h) .… 3.69, 3.71 s 8(1)(i) .… 2.40 s 8(1)(j) .… 3.75, 3.76 s 8(1)(ja) .… 3.77 s 8(1)(jb) .… 3.68 s 8(1)(jc) .… 3.45 s 8(1)(k) .… 2.41 s 8(1)(l) .… 2.40, 3.78 s 8(2) .… 3.45, 3.51, 3.61 s 8(5) .… 3.75 s 8(6) .… 3.77 s 10 .… 1.11, 2.1, 2.2, 2.4, 2.11, 2.15–2.17, 2.22, 2.25, 2.28, 2.29–2.32, 2.34, 2.37, 2.40, 2.41, 2.44, 2.52, 2.54, 3.1, 3.8, 3.24, 3.29, 3.31, 3.32, 3.39, 3.40, 4.9, 4.10, 4.13, 4.22, 4.27, 4.30, 4.31, 5.35, 6.34, 6.38, 6.48, 6.54, 7.25, 8.2, 8.43, 9.5, 10.5, 10.14, 10.47, 10.48, 10.56, 10.58, 10.62, 10.68, 10.80, 10.86, 11.9, 11.15, 11.16, 12.13, 12.70, 13.1, 13.25, 14.3, 14.33, 14.41, 15.7, 15.8, 15.12, 15.21, 15.41 s 12 .… 1.30, 3.1, 3.45, 4.12, 8.1, 8.7, 11.7, 11.11, 13.27, 14.21, 15.8, 15.9 s 12(1) .… 3.1, 3.2, 3.6, 3.11, 3.14, 3.15, 3.24, 3.34, 3.71 s 12(1)(h) .… 3.9 s 12(1)(j) .… 3.24 s 12(2) .… 3.2, 3.6, 3.10, 3.11, 3.14, 3.24, 3.72 s 12(2)(b) .… 4.45 s 12(2)(h) .… 3.8, 3.9, 3.31 s 12(2)(i) .… 3.33, 3.34 s 12(2)(j) .… 3.24 s 12(2)(l) .… 3.55, 3.57

s 12(3) .… 1.30, 2.32, 3.1, 3.8, 3.10, 3.24, 3.31, 3.39, 3.42, 4.20, 7.44, 7.46, 8.33, 8.34, 10.7, 12.7, 13.4 s 12(3)(a) .… 2.30, 2.32, 2.34, 3.7, 3.24, 3.26, 5.44, 8.43, 10.8, 10.78, 11.37, 11.45, 15.31 s 12(3)(b) .… 3.9, 3.31, 3.32, 10.56, 15.32 s 12(3)(c) .… 3.33 s 12(3A) .… 3.54 s 12(4) .… 2.35, 3.54, 5.23 s 12(5) .… 3.1, 3.40 s 12(6) .… 3.1, 3.41, 3.42, 7.32 s 13 .… 1.30, 3.33, 3.38, 3.39 s 13(1)(e) .… 13.8 s 13(3) .… 3.39 s 13.85 .… 3.39 s 14 .… 8.7, 8.25, 9.29 s 14(1) .… 8.7, 8.11 s 14(1)(a) .… 8.7, 8.8, 8.34 s 14(1)(b) .… 8.8, 8.10, 8.28 s 14(1)(c) .… 8.33, 8.34 s 14(1)(d) .… 8.34 s 14(2) .… 8.11, 8.14 s 14(2)(c) .… 8.14 s 14(2A) .… 8.14 s 14(3) .… 8.15–8.17 s 14(4) .… 8.15, 8.18–8.21 s 14(5) .… 8.26, 8.27, 8.30–8.32 s 14(6) .… 8.23, 8.27

s 14(6)(a) .… 8.23 s 14(6)(b) .… 8.23 s 14(6)(c) .… 8.24 s 14(6)(c)(ii) .… 8.23 s 15 .… 2.25 s 15(1) .… 2.25, 16.28 s 15(2) .… 2.20 s 15(2)–(5) .… 2.25 s 15(7) .… 2.20 s 15(7)(a) .… 2.25 s 18 .… 4.1 s 18(1) .… 4.2, 4.3, 4.5, 4.55, 15.13 s 18(2) .… 1.32, 4.6, 4.8, 4.22 s 18(3) .… 4.6 s 18(4) .… 4.9, 7.25, 8.6 s 18(5) .… 4.10 s 19 .… 1.36, 3.29, 4.1, 4.3, 4.11, 4.48, 8.1, 12.26, 14.11, 14.15, 14.49, 15.14 s 19(1) .… 4.11, 10.55 s 19(2) .… 1.32, 4.11–4.13, 4.16, 4.21, 4.45, 9.8, 10.55 s 19(3) .… 4.3, 4.23, 4.45 s 19(4) .… 4.23, 4.45–4.47 s 19(5) .… 4.17–4.19 s 19(6) .… 4.18 s 20 .… 3.29, 4.1, 4.6, 4.11, 4.24–4.26, 4.29, 4.36, 4.41–4.44, 5.1, 5.8, 7.5, 8.1, 14.15, 15.10, 15.13, 15.14 s 20(1) .… 4.11, 5.8 s 20(2) .… 4.26, 4.27, 4.30, 4.31, 4.35

s 20(2)(b) .… 4.38, 4.46 s 20(3) .… 4.29 s 20(4) .… 4.36 s 20(5) .… 4.35 s 20(6) .… 4.40, 11.32 s 21 .… 2.35, 3.29, 4.24, 4.26, 4.46, 5.1, 5.8, 7.5, 11.43, 15.14, 15.17 s 21(1) .… 3.29, 4.42, 5.1, 7.8, 13.6 s 21(1)(a) .… 15.15 s 21(2) .… 3.29, 5.1 s 21(2)(a) .… 5.2, 5.21 s 21(2)(b) .… 4.43, 5.8, 5.20 s 21(2)(c) .… 5.2, 5.22, 16.23 s 21(2)(c)(i) .… 3.58 s 21(2)(c)(v) .… 5.35 s 21(3) .… 5.1 s 21(4) .… 5.1, 6.18, 7.7, 7.28, 8.35 s 22 .… 5.13 s 22(1) .… 5.12, 5.14, 5.39 s 22(2) .… 7.9 s 22(2)–(4) .… 5.13, 5.39 s 22(4) .… 5.13 s 24 .… 4.26, 10.62 s 24(1) .… 5.10 s 24(3) .… 5.12 s 24(4) .… 5.15 s 24(5) .… 2.12, 5.17, 5.18, 10.80

s 24(6) .… 5.19, 5.20 s 25 .… 2.35, 3.58, 5.23, 5.24 ss 25–29 .… 5.22, 15.17 s 26 .… 2.21, 5.25, 5.27, 5.28, 5.32 s 26(4) .… 5.26 s 27 .… 2.20, 2.21, 5.25, 5.28, 5.29, 5.32, 10.62, 10.64 s 27(2) .… 5.28 s 27(3) .… 5.29 s 27(4) .… 5.30 s 27(5) .… 5.31 s 27(6) .… 5.32 s 28 .… 5.35, 5.36 s 29 .… 5.34 s 29(1) .… 5.34 s 29(2) .… 5.34 s 31 .… 3.65, 8.43, 9.18, 11.2, 11.14, 11.15, 11.24 s 31(1) .… 11.8, 11.17 s 31(1)(a) .… 10.38, 11.10, 14.49 s 31(1)(b) .… 10.71 s 31(1)(b)–(e) .… 10.38, 11.10 s 31(2) .… 11.32 s 31(3) .… 11.13–11.15, 11.37 s 31(3)(a)(ii) .… 11.13 s 31(4) .… 11.11 s 31(5) .… 11.11 s 31(6) .… 11.11

s 32 .… 1.36, 3.65, 4.40, 5.46, 7.38, 10.3, 10.21, 11.2, 11.12, 11.34, 11.36 s 32(1) .… 4.40, 4.48, 5.46, 5.47, 10.1, 10.3, 10.5, 10.10, 10.19, 10.33, 10.38, 10.39, 10.48, 10.49, 10.54, 10.58–10.60, 10.72, 10.88, 10.93, 10.95, 10.105, 10.106, 11.1, 11.7, 11.24, 11.31, 11.34 s 32(1)(a) .… 5.45, 11.31 s 32(1)(b) .… 11.31–11.33 s 32(2) .… 11.34, 11.35, 11.38 s 32(3) .… 11.34 s 32(4) .… 11.35 s 32(5) .… 11.46, 11.50 s 33 .… 5.39, 9.22, 10.5, 10.10, 11.2, 11.39, 11.40, 11.43 s 33(1) .… 11.44 s 33(1)(a) .… 11.39 s 33(1)(a)–(c) .… 11.39 s 33(1)(b) .… 11.42, 11.47 s 33(1)(c) .… 10.58, 11.31, 11.43 s 33(2) .… 10.68, 11.39, 11.44, 11.45 s 34 .… 5.39, 5.41, 5.47, 5.48, 5.51–5.53, 6.67, 7.38, 7.40, 7.44, 7.46, 10.2, 10.19, 10.23, 10.33, 10.49, 10.51, 10.68–10.70, 11.14, 14.38, 14.39 s 34(3) .… 5.47 s 35 .… 5.11, 5.14, 5.39, 5.41, 7.10 s 35(7) .… 7.12 s 36 .… 5.37, 5.38, 5.41 s 36(1) .… 5.37 s 37 .… 10.4, 10.7, 10.88, 10.93, 10.96, 10.100, 10.101, 10.105 ss 37–38 .… 10.88 s 37(1) .… 10.89, 10.91–10.96, 10.100, 10.101, 10.104–10.106

s 37(1)(c) .… 10.91 s 37(1)(d) .… 10.101 s 37(2) .… 10.91 s 38 .… 5.39, 10.4, 10.90, 10.97, 10.99–10.101, 10.105 s 38(1) .… 10.89, 10.95, 10.97–10.101, 10.103, 10.104 s 38(2) .… 10.98, 10.101 s 38(3) .… 10.98, 10.104 s 38(4) .… 10.98, 10.104 s 39 .… 5.39, 14.2, 14.18, 14.20–14.23, 14.38 s 39(1) .… 14.19, 14.21 s 39(3) .… 14.19, 14.21 s 39(3)(b)(ii) .… 14.19 s 39(4) .… 14.20 s 40 .… 5.39, 14.2, 14.26, 14.38, 14.39, 14.41 s 42 .… 10.11 s 42(a) .… 10.10, 10.58 s 42(a)(ii) .… 10.21 s 42(b) .… 10.6, 10.8, 10.21, 10.58, 10.63, 10.67 s 43 .… 10.3–10.6, 10.8, 10.10–10.12, 10.14, 10.16, 10.17, 10.58, 14.1 ss 43–52 .… 10.5 s 43(1) .… 3.36, 5.1, 5.46, 5.59, 10.5–10.10, 10.56 s 43(2) .… 10.5 s 44 .… 6.36–6.38, 6.74, 10.11–10.14, 10.16, 10.17, 10.71 ss 44–52 .… 10.3, 10.4 s 44(1) .… 10.11–10.13, 10.51 s 44(2) .… 10.11

s 45 .… 6.37, 10.14, 10.17, 10.19 s 45(1) .… 10.5, 10.14–10.17, 10.46 s 45(2) .… 10.17, 10.44, 10.46 s 45(2)(a) .… 10.17 s 45(2)(c) .… 10.16 s 45(3) .… 10.5, 10.13, 10.16, 10.19, 10.20, 10.23, 10.46, 10.51 s 45(4) .… 10.44, 10.46 s 46 .… 5.45, 5.47, 5.51, 7.38, 7.43, 8.13, 10.19, 10.20, 10.44, 10.45, 10.47, 10.59, 11.13, 14.12 s 46(1) .… 10.5, 10.21–10.24, 10.27, 10.29–10.31, 10.33, 10.37, 10.39, 10.43, 10.44, 10.46, 10.48, 10.49, 10.56, 10.69, 10.70, 10.88, 10.93, 10.95, 10.105, 10.106, 12.27 s 46(2) .… 10.21, 10.46 s 46(2)(a) .… 10.21, 10.43, 10.93 s 46(2)(b) .… 10.21, 10.44 s 46(3) .… 10.21 s 47 .… 2.53, 3.77, 10.50 s 47(1) .… 10.5, 10.48–10.52 s 47(2) .… 10.48, 10.50 s 47(2)(b) .… 10.52 s 48 .… 10.5, 10.58–10.60, 10.73 s 48(c) .… 15.21 s 49 .… 10.61 ss 49–51 .… 10.61 s 50 .… 2.21, 10.5, 10.62, 10.63, 10.67 s 50(1) .… 10.62–10.64 s 50(2) .… 10.62, 10.65

s 50(3) .… 10.62 s 51 .… 2.21, 10.5, 10.63, 10.65, 10.66, 10.67 s 51(1) .… 10.65, 10.67 s 51(1)(a) .… 10.67 s 52 .… 5.40, 5.52, 5.53, 6.72, 10.5, 10.19, 10.23, 10.33, 10.49, 10.51, 10.68–10.70, 11.14, 11.45, 14.22 s 52(1) .… 10.68 s 52(2) .… 2.53, 10.68 s 53 .… 6.38, 10.71 s 53(2) .… 10.71 s 53(3) .… 10.71 s 55 .… 3.51, 3.58, 6.68, 6.69, 7.1–7.3, 7.17, 7.19, 7.21, 7.38–7.40, 7.42, 7.45, 8.6, 8.10, 8.33, 8.42, 9.21, 9.22, 9.29, 10.5, 10.6, 10.22, 10.47, 10.82, 11.45, 11.50, 15.14, 15.30, 15.35 ss 55–57 .… 10.63 s 55(1) .… 7.2 s 55(2) .… 5.3, 7.14, 7.15, 8.33, 15.33, 15.41 s 55(3) .… 3.28, 3.36, 3.38, 4.12, 5.59, 6.58, 7.13, 7.16, 7.17, 8.10, 12.28, 14.18, 14.25, 14.38, 14.50, 15.31 s 55(4) .… 5.3, 5.42, 5.43, 6.17, 7.4–7.6, 7.9, 7.16, 7.17, 7.28, 7.38, 8.33, 8.45, 9.21, 9.28, 11.37, 11.46, 14.19–14.21, 15.32 s 55(5) .… 4.42, 5.3, 6.17, 7.4–7.6, 7.8, 7.9, 7.16, 8.33, 9.21, 9.28, 11.37, 11.46, 14.19–14.21, 15.32 s 55(5)(b) .… 5.1 s 55(6) .… 7.11, 11.46 s 56 .… 5.41, 5.42, 6.70, 7.11, 7.12, 11.44, 15.15 s 56(1) .… 6.70 s 56(2) .… 15.16

s 57 .… 7.1, 7.21, 7.22, 7.38, 15.39 s 57(1) .… 5.27, 5.33, 7.21, 10.64, 11.49 s 57(2) .… 7.22 s 57(2A) .… 5.24, 11.49–11.51 s 57(3) .… 7.21 s 58 .… 4.9, 7.1, 7.25, 7.26, 7.28, 8.6, 16.9 s 59 .… 7.1, 7.36, 7.37 s 60 .… 5.43, 5.45, 5.47, 7.33, 8.29, 8.32 s 61 .… 4.3, 7.1, 7.3, 7.30, 8.46 s 61(1) .… 7.29 s 61(2)(a) .… 7.32 s 61(2)(b) .… 7.29 s 62 .… 2.56, 6.52, 8.2, 8.3, 8.10, 8.20, 8.22, 8.28, 8.30–8.32, 8.34, 8.35, 8.38, 8.40, 8.41, 8.43, 8.44, 9.21, 10.80, 11.7, 11.47, 12.63 ss 62–64 .… 7.2, 8.1 s 62(2) .… 8.45 s 62(3) .… 8.41, 11.47 s 62(3)(b) .… 8.31, 8.35 s 63 .… 8.41, 8.42, 12.63 s 64 .… 8.43–8.45, 10.80, 11.46, 11.48 s 64(3) .… 8.44 s 66(1) .… 7.38, 7.42 s 66(1)(c) .… 7.39 s 66(1)(d) .… 7.38 s 67 .… 5.49, 5.50, 7.1, 7.38–7.40, 7.42–7.46, 8.40, 11.14, 14.39 ss 67–68 .… 7.44, 7.45 s 68 .… 5.50, 7.38, 7.40, 7.42–7.45

s 68(1) .… 7.40, 7.41, 7.45 s 68(2) .… 7.40, 7.41, 7.45 s 68(2)(d) .… 7.45 s 69 .… 10.58, 10.73, 10.74 ss 69–72 .… 7.2, 10.4 s 69(1) .… 10.72, 10.73 s 70 .… 5.15, 5.34, 5.36, 10.75, 10.76, 10.86, 11.19 s 71 .… 1.51, 5.16, 5.17, 10.22, 10.80, 10.85, 10.102 s 71(1) .… 10.80–10.82 s 71(2) .… 10.80, 10.81, 10.83, 10.84 s 71(2)(b) .… 10.84 s 71(3) .… 10.80 s 72 .… 10.86, 10.87 s 73 .… 3.46, 3.61 s 73(1) .… 3.46–3.48 s 73(1)(d) .… 3.67 s 73(2) .… 3.47 s 73(3) .… 3.47 s 73(4) .… 3.47 s 73(6) .… 3.61 s 73(7) .… 3.48 s 73(8) .… 3.48 s 74 .… 4.46, 5.59 s 75 .… 2.35, 3.58, 5.23, 5.24, 11.50 s 76 .… 10.4, 10.88, 10.89, 10.94–10.96, 10.99 s 76(1) .… 10.100, 10.103

s 76(2) .… 10.101, 10.102, 10.104 s 76(2)(a) .… 10.103 s 76(2)(b)(i) .… 10.101 s 76(2)(b)(ii) .… 10.101 s 76(3) .… 10.95, 10.105–10.107 s 77 .… 1.51, 14.2 s 77(2) .… 14.40 s 77(3) .… 14.40, 14.48 s 77(4) .… 14.40 s 79 .… 5.47, 10.3, 12.75 s 79(2)(b) .… 10.103 s 80 .… 3.27, 3.49, 3.51, 12.70 s 80(1)(a) .… 12.71 s 80(1)(b) .… 5.24, 12.72 s 80(3) .… 12.73 s 80(4) .… 12.73 s 80(5) .… 12.73 s 80(6) .… 12.73 s 80(7) .… 2.33, 3.27, 12.67, 12.69, 12.74 s 80(8) .… 3.27, 12.74, 13.25 s 81 .… 2.33, 12.75, 16.27 s 84 .… 2.5, 4.22, 9.1, 9.34 s 84(1) .… 9.33 s 84(2) .… 8.34 s 84A .… 4.22 s 84A(1) .… 2.5, 9.33

s 84A(2) .… 2.7 s 85 .… 4.22, 7.2, 8.50, 9.34 s 86 .… 4.22, 7.2, 8.50 s 88 .… 9.5 ss 88–97 .… 9.1 s 89 .… 9.7–9.11 s 90 .… 9.10 s 90(a) .… 9.10, 9.11, 9.13 s 90(b) .… 9.10, 9.13 s 90(c) .… 9.11 s 90(d) .… 9.12 s 91 .… 9.9 s 91(a) .… 9.9 s 92 .… 9.14 s 93 .… 9.14 s 94 .… 9.14 ss 95–97 .… 9.14 s 95(1) .… 9.15 s 95(2) .… 9.15 s 95(2)(b) .… 9.15 s 95(3) .… 9.15 s 95(4) .… 9.15 s 95(5) .… 9.15 s 95(6) .… 9.15 s 95(7) .… 9.15 s 96 .… 9.16

s 97 .… 9.16 ss 98–103 .… 9.1, 9.17 s 99(1) .… 9.17, 9.21, 9.22, 9.24 s 99(2) .… 9.17, 9.18 s 100 .… 9.21, 9.22, 9.28, 9.29 s 101 .… 9.23, 9.25, 9.31 s 102 .… 9.31 s 102(1) .… 9.24 s 102(2) .… 9.25–9.27 s 102(3) .… 9.27 s 102(4) .… 9.26, 9.31 s 103 .… 9.29 s 103(a) .… 9.30 s 103(b) .… 9.29 s 105 .… 4.37, 4.38, 4.39 s 105(1) .… 4.38 s 105(2) .… 4.38, 4.39, 6.47 s 106 .… 2.50 s 109(1) .… 12.7 s 109(2) .… 12.11, 14.51 s 109(3) .… 12.12 s 109(5) .… 2.53, 12.13, 12.14, 12.19, 12.38, 12.46, 12.47, 12.62 s 110 .… 12.12, 12.15, 12.31 s 111 .… 7.20, 12.12, 12.16, 12.23, 12.42, 12.47, 12.48 s 111(1) .… 12.23–12.25 s 111(2) .… 12.23, 12.25

s 112 .… 12.26 s 112(1) .… 12.26–12.29 s 112(1)(a) .… 12.26 s 112(2)(a) .… 12.26 s 112(2)(b) .… 12.26 s 112(3) .… 2.48, 12.29, 12.46 s 113 .… 12.12, 12.30 s 114 .… 12.12, 12.31 s 115 .… 2.53, 4.3, 12.36, 12.59 s 115(1) .… 12.15, 12.16 s 116 .… 12.17, 12.18, 13.29 s 116(1) .… 13.29 s 116(2) .… 12.17 s 116(4) .… 12.17, 13.29 s 117 .… 3.61, 12.13, 12.14, 12.19–12.22, 12.33 s 118 .… 3.61, 12.13, 12.14, 12.19–12.22, 12.33 s 119(1) .… 12.14 s 119(2) .… 12.14 s 120 .… 2.32, 12.13, 12.66–12.69, 12.71, 12.72 s 120(2) .… 12.69 s 120(3) .… 12.67 s 120(4) .… 12.67 s 120(5) .… 12.67 s 120(6) .… 12.46 s 121(1)–(3) .… 12.68 s 121(4) .… 12.67

s 121(5) .… 12.67 s 123 .… 9.14, 12.35, 12.36, 12.41, 12.66, 12.76 s 123(1) .… 12.35, 12.36, 12.37 s 123(2) .… 12.35 s 123(3) .… 12.35 s 123(4) .… 5.8 s 124 .… 12.35 s 125 .… 12.35, 12.41, 12.42 s 126 .… 12.13, 12.14, 12.38 s 127 .… 12.39, 12.44, 12.64, 12.68 s 127(2) .… 12.39 s 128 .… 12.14, 12.33, 12.46–12.50, 12.59, 12.65, 12.66 s 128(2)(b) .… 12.13, 12.14 s 128(2)(c) .… 12.13, 12.14 s 128(3) .… 12.46 s 128(4) .… 12.46 s 128(6) .… 2.48, 12.29 s 129 .… 12.13, 12.14, 12.43, 12.47, 12.49 s 130 .… 12.14, 12.39, 12.43–12.45, 12.47 s 131 .… 12.14, 12.16, 12.17, 12.23, 12.47–12.50 s 132 .… 12.14, 12.51–12.53 s 132(3)(e) .… 12.52 s 133 .… 12.26, 12.28, 12.40, 12.54–12.56 s 134 .… 12.13, 12.14, 12.63, 12.65 s 135 .… 12.63–12.65 s 136 .… 12.64

s 136(2) .… 12.65 s 136(3) .… 12.64 s 136(4) .… 12.64 s 136(5)(b) .… 12.64 s 137 .… 12.44, 12.43, 12.47, 12.63, 12.65 s 138 .… 12.43, 12.47, 12.65 s 138B .… 12.76 s 138C .… 12.76 s 140 .… 12.12, 12.14, 12.16, 12.21, 12.40, 12.52, 12.54–12.57, 12.58, 12.66, 12.67, 12.83 s 140(1) .… 12.67, 12.83 s 140(1A) .… 12.55 s 140(2) .… 12.55 s 140(2)(a) .… 3.45 s 140(2)(f) .… 11.13 s 140(4) .… 12.55 s 140(5) .… 12.55, 12.56 s 140(7) .… 12.55 s 141 .… 12.64 s 142 .… 9.16, 12.44, 12.59, 12.65 s 142(2) .… 12.59 s 143 .… 12.44, 12.60, 12.65 s 144 .… 9.15, 12.33, 12.43, 12.51, 12.63 s 150 .… 6.12, 6.42 s 150(2) .… 6.66 s 151 .… 6.17, 6.42–6.45, 6.49, 6.64, 7.6 s 151(1) .… 6.44, 6.45

s 152 .… 14.7 s 153 .… 6.46, 15.23, 15.24 s 153(1) .… 4.39, 6.12, 6.22, 6.25, 6.27, 6.35, 6.36, 6.46, 6.47, 6.50–6.52, 7.32, 8.35, 8.43, 9.22, 11.39, 15.7 s 153(2) .… 6.50 ss 155–158 .… 6.53 s 156 .… 6.53 s 157 .… 6.53 s 160 .… 6.42, 8.6 s 160(2) .… 15.28 s 161 .… 6.17, 6.42 s 162 .… 5.43 s 163(1) .… 6.70 s 164 .… 6.38, 6.48, 6.54, 6.56, 6.58, 6.65, 7.18, 8.35, 10.12, 15.25 s 164(b) .… 6.56, 6.60 s 164(1)(a) .… 6.55, 6.57, 6.62, 6.65 s 164(1)(b) .… 6.52, 6.54–6.57, 6.62 s 164(2) .… 6.56, 6.59 s 164(3) .… 6.63, 6.64 s 165 .… 6.38, 6.48, 6.54, 6.65, 7.18, 8.10, 8.35, 10.12, 15.25 s 165(a) .… 6.54, 6.55, 6.62 s 165(b) .… 6.54–6.57, 6.61 s 165(c) .… 6.52, 6.54 s 165(d) .… 6.54, 6.65 s 166 .… 5.41, 6.30, 6.72–6.74, 10.68 s 166(i)(a)(ii) .… 10.68 s 167 .… 6.77

s 170 .… 6.26 s 171 .… 6.25, 6.26 s 172 .… 6.26, 6.40 s 172(1) .… 6.40 s 172(2) .… 6.40 s 173 .… 6.40 s 174(1) .… 6.26 s 176B .… 6.40 s 178 .… 6.64, 6.67, 6.75, 6.76, 7.6 s 179 .… 6.76 s 180 .… 6.76 s 180(2) .… 6.76 s 181 .… 6.76 s 182 .… 6.76 ss 183–188 .… 15.28 s 184 .… 6.79 s 185 .… 6.79 s 186 .… 6.79 s 194 .… 15.21 s 207 .… 1.51 ss 233–241 .… 14.2 s 234(1) .… 14.8, 14.10, 14.12 s 234(2) .… 14.10 s 235 .… 14.31, 14.46 s 235(1) .… 14.3, 14.15, 14.46 s 235(2) .… 14.3, 14.46

s 235(3) .… 14.43 s 235(3)–(5) .… 14.3, 14.26, 14.44 s 237 .… 14.13, 14.14, 14.16 s 238 .… 14.4, 14.13 ss 238–240 .… 14.13 s 238(1) .… 14.13, 14.15, 14.17, 14.26, 14.31, 14.44, 14.49 s 238(1)–(2A) .… 14.26, 14.32 s 238(1)–(3) .… 14.30 s 238(1A) .… 14.16–14.18, 14.23–14.25, 14.26 s 238(2) .… 14.24–14.26 s 238(2)(b) .… 14.25 s 238(3) .… 14.17, 14.26–14.29, 14.33 s 238(3)(c) .… 14.25 s 238(4) .… 14.28, 14.30, 14.35 s 238(5) .… 14.35 s 239 .… 14.4–14.6, 14.13, 14.31, 14.32, 14.43 s 239(1) .… 14.13, 14.31, 14.37, 14.44, 14.49 s 239(2) .… 14.31, 14.37–14.40, 14.50 s 239(3) .… 14.31, 14.33 s 239(3)(a) .… 14.33 s 239(3)(b) .… 14.33 s 239(3)(c) .… 14.33, 14.34 s 239(4) .… 14.31, 14.36, 14.37 s 239(5) .… 14.31, 14.36, 14.37 s 239(6) .… 14.31 s 240 .… 14.4, 14.13, 14.31, 14.41–14.43

s 240(1) .… 14.44, 14.45, 14.47 s 240(1)–(3) .… 14.41 s 240(2) .… 14.44 s 240(3) .… 14.45–14.47, 14.49 s 240(4) .… 14.40, 14.47, 14.48 s 240(4)–(5) .… 14.41 s 240(5) .… 14.40, 14.45, 14.47, 14.48 s 240(6) .… 14.41, 14.47 s 240(7) .… 14.41, 14.47 s 241 .… 14.49, 14.50 s 241(1) .… 14.49 s 241(2) .… 14.50 s 241(3) .… 14.49 s 245(4) .… 3.76 s 252B .… 15.2, 15.26 s 254 .… 8.32, 12.23, 13.1, 13.18 s 254(1) .… 3.29, 10.54, 10.55, 10.57 s 254(2)(a) .… 2.44 s 255 .… 13.18 s 256 .… 10.76, 16.1 s 257 .… 4.33 s 257(2) .… 4.2, 4.4, 4.5 s 257(3) .… 4.2 s 258 .… 12.14 s 264 .… 3.29 s 267 .… 3.36, 3.43, 4.25, 4.44, 5.10, 5.38, 5.45, 5.59, 5.60, 6.60, 9.22, 10.5, 13.2, 13.3, 13.4, 13.8, 13.11, 13.12, 13.15, 13.18, 13.30, 13.33, 15.2,

15.40, 15.41, 16.15 ss 267–269 .… 13.1 s 267(1) .… 13.9, 13.10, 13.12 s 267(1)(b) .… 13.3 s 267(2) .… 13.4–13.8 s 267(3) .… 13.7, 13.14 s 267A .… 13.5, 13.8–13.11, 13.30 s 268 .… 3.43, 13.4, 13.8, 13.14 s 268(1) .… 13.8, 13.11 s 268(1)(aa) .… 13.9 s 268(1)(b) .… 13.10 s 268(2) .… 13.10 s 269 .… 3.36, 13.4, 13.8, 13.11, 13.14 s 269(2) .… 13.11 s 271 .… 6.40, 12.26, 12.36, 12.49 s 275 .… 4.25, 5.43, 5.55, 5.56, 5.58, 6.48, 6.64 ss 275–278 .… 6.13 s 275(1) .… 5.55, 5.57, 5.58 s 275(1)(a) .… 5.58 s 275(2) .… 5.55 s 275(5) .… 5.58 s 275(6) .… 5.58 s 275(6)(a) .… 5.58 s 275(6)(b) .… 5.58 s 275(6)(c) .… 5.58 s 275(7) .… 5.58

s 275(9) .… 5.55, 5.56 s 275(9)(d) .… 5.56 s 277 .… 5.57 s 278 .… 5.57, 5.58 s 279 .… 5.57 s 280 .… 5.57, 5.58, 7.17 s 282 .… 5.57 s 293 .… 8.31, 8.35 s 293(1)(a) .… 8.35 ss 295–300 .… 10.17 s 296 .… 10.17 ss 296–300 .… 5.51 s 297 .… 10.17, 10.18, 10.44, 13.7 s 298 .… 10.18 s 299 .… 10.47 s 300 .… 5.15, 10.18, 10.54, 10.81 s 306 .… 15.1, 15.20 s 306(2) .… 15.4 s 307 .… 15.7, 15.8 s 308 .… 15.7, 15.9 s 308(a) .… 15.9 s 308(b)(i) .… 15.9 s 308(b)(ii) .… 15.9 ss 309–310 .… 15.1 s 310 .… 15.4, 15.9 ss 310–318 .… 1.49

s 311 .… 15.10, 15.13 s 314 .… 15.18 s 315 .… 15.5 s 318 .… 13.27, 15.6 s 320(1) .… 15.30 s 320(3) .… 15.30 s 321 .… 15.9, 15.14, 15.30, 15.41 s 322 .… 15.15, 15.17, 15.31, 15.32, 15.35, 15.37, 15.41 s 322(1) .… 15.7, 15.10, 15.15, 15.16, 15.22, 15.31–15.33, 15.40, 15.41 s 322(2) .… 15.16, 15.38 s 322(2)(a) .… 15.22 s 322(2)(d) .… 15.16, 15.17 s 322(2)(f ) .… 15.16 s 322(3) .… 15.20, 15.22 s 322A .… 15.39 s 323 .… 15.35, 15.37, 15.41 s 324 .… 13.1, 15.41 s 324(2) .… 15.41 s 330(a) .… 15.21 s 332 .… 15.19, 15.20 s 332(c) .… 15.26 s 333 .… 15.22 s 333(1) .… 15.21, 15.24 s 334 .… 15.28 s 336 .… 15.5 s 337 .… 15.25, 15.26

s 337A .… 15.29 s 338 .… 13.27, 15.6 s 339 .… 13.27, 15.6 s 339(1) .… 13.27 s 339(2) .… 13.27 s 339(3) .… 13.27 s 339(4) .… 13.27 s 339(5) .… 13.27 s 340 .… 13.22, 13.24, 13.25 ss 340–341A .… 13.22–13.25 s 340(2) .… 13.24, 13.25 s 340(4) .… 13.24, 13.25 s 340(4A) .… 13.24 s 340(5) .… 13.24 s 341(1) .… 13.25 s 341(1A) .… 13.25 s 341(1B) .… 13.25 s 341(2)–(4) .… 13.25 s 341(3) .… 13.25 s 341A .… 13.24, 13.25 s 341A(1)(b) .… 13.25 s 343 .… 1.52 cl 2 .… 4.47, 4.50 cl 7 .… 4.47, 4.50, 4.51 Personal Property Securities Amendment (Deregulatory Measures) Act 2015 .… 13.8 Personal Property Securities (Approved Form) Instrument 2011 .… 9.15, 12.43,

12.63 s 5 .… 6.42 s 6 .… 6.53 s 7 .… 6.53 s 8 .… 6.26 s 9 .… 6.26 Personal Property Securities (Consequential Amendments) Act 2009 Sch 2 .… 2.38 Personal Property Securities (Corporations and Other Amendments) Act 2010 s 3 .… 15.21 Sch 1 .… 15.21 Personal Property Securities (Corporations and Other Amendments) Act 2011 s 3 .… 13.31 Sch 1 .… 13.31, 15.35 Personal Property Securities Regulations 2010 .… 6.1 reg 1.4(1A) .… 2.40, 3.78 reg 1.4(1B) .… 2.40, 3.78 reg 1.6 .… 6.25, 6.33, 6.47, 6.48 reg 1.7 .… 6.25, 6.47, 10.14, 10.19 reg 1.9 .… 3.33 reg 2.1 .… 10.14, 10.19 reg 4.1 .… 12.14, 12.45, 12.50, 12.53, 12.58, 13.24 reg 5.3(d) .… 15.21 reg 5.5 .… 4.31, 8.35, 8.43, 9.5, 9.22, 11.39 reg 9.2 .… 15.20, 15.22 Sch 1 .… 6.47, 15.24

Sch 1, Pt 1 .… 6.46 Sch 1, Pt 4 .… 6.46 Sch 1, cl 1.2 .… 6.27, 6.28 Sch 1, cl 1.3 .… 6.33 Sch 1, cl 1.4 .… 6.34 Sch 1, cl 1.5 .… 6.33, 6.34 Sch 1, cl 1.6 .… 6.34 Sch 1, cl 2.1 .… 6.47 Sch 1, cl 2.2 .… 6.25, 9.5 Sch 1, cl 2.2(1)(a) .… 6.35 Sch 1, cl 2.2(1)(c) .… 6.36 Sch 1, cl 2.2(3)(a) .… 6.25 Sch 1, cl 2.2(3)(b) .… 6.25 Sch 1, cl 2.2(3)(c) .… 6.25 Sch 1, cl 2.2(3)(d) .… 6.25 Sch 1, cl 2.2(3)(e)–(h) .… 6.25 Sch 1, cl 2.3 .… 4.31, 6.47, 8.43, 9.22 Sch 1, cl 2.4 .… 1.39 Sch 1, cl 3.1 .… 8.35 Privacy Act 1988 .… 6.40 Shipping Registration Act 1981 .… 2.10 Trade Marks Act 1995 .… 2.38 Pt 11 .… 2.50 s 22(1) .… 2.50 s 22(2) .… 2.50

Australian Capital Territory Civil Law (Property) Act 2006 s 201 .… 7.46, 7.52, 10.14, 11.30, 12.28

New South Wales Bills of Sale Act 1898 .… 1.24, 6.4 Fisheries Management Act 1994 .… 2.41 Local Government Act 1993 .… 2.41 Mining Act 1992 .… 2.41 Personal Property Securities (Commonwealth Powers) Act 2009 .… 1.51 Registration of Interests in Goods Act 1986 .… 1.38 s 8(3)(b) .… 10.15 Registration of Interests in Goods Act 2005 .… 6.4 Security Interests in Goods Act 2005 s 3 .… 1.24

Northern Territory Agents Licensing Act 1979 .… 2.41 Auctioneers Act 1935 .… 2.41

Queensland Bills of Sale and Other Instruments Act 1955 .… 3.26 s 2(1) .… 1.38 s 6(5) .… 1.38 s 6D .… 1.24, 6.4 Motor Vehicles and Boats Securities Act 1986 .… 6.10 Personal Property Securities (Commonwealth Powers) Act 2009 .… 1.51

Property Law Act 1974 s 82 .… 7.24

South Australia Coastal Protection Act 1972 .… 2.41 Personal Property Securities (Commonwealth Powers) Act 2009 .… 1.51 Wilderness Protection Act 1992 .… 2.41

Tasmania Conveyancing and Law of Property Act 1884 s 38 .… 7.24 Fisheries Act 1959 .… 2.42 Personal Property Securities (Commonwealth Powers) Act 2010 .… 1.51

Victoria Casino Control Act 1991 .… 2.41 Chattel Securities Act 1981 .… 1.24, 6.4 Chattel Securities Act 1987 .… 6.10, 15.37 s 3(5) .… 10.17 s 6 .… 2.9, 3.76 s 7(1A) .… 10.15 s 7(2) .… 10.19 s 7(7) .… 10.71 s 10 .… 7.24 Credit Act 1984 .… 12.3 Electricity Industry Act 2000 .… 2.41 Fisheries Act 1995 .… 2.41

Gambling Regulation Act 2003 .… 2.41 Goods Act 1958 .… 10.53 s 3 .… 2.6 s 3(1) .… 10.35 s 6 .… 10.34 s 22 .… 10.35 s 23 .… 10.35 s 24 .… 1.23 s 30 .… 10.55 s 31 .… 10.54 s 65 .… 10.57 s 67(1) .… 10.57 s 67(2) .… 10.57 Hire-Purchase Act 1959 .… 12.3 s 16 .… 12.5 s 27 .… 2.9 Instruments Act 1958 Pt VI .… 1.24, 6.4 Pt IX .… 3.26, 6.4 Personal Property Securities (Commonwealth Powers) Act 2009 .… 1.51 Personal Property Securities (Statute Law Revision and Implementation) Act 2010 s 4 .… 2.9 Property Law Act 1958 s 94 .… 7.24 s 134 .… 3.29 s 199(1)(a) .… 10.17

Racing Act 1958 .… 2.41

Western Australia Chattel Securities Act 1987 s 6 .… 2.9 s 10 .… 7.24 Personal Property Securities (Consequential Repeals and Amendments Act 2011 s 34 .… 2.9

INTERNATIONAL Canada Alberta Personal Property Security Act RSA 2000, c.P-7 .… 1.41 British Columbia Personal Property Security Act SBC 1989 c.36 s 10 .… 4.32 s 18 .… 4.33 British Columbia Personal Property Security Act RSBC 1996, c.359 .… 1.41, 1.46 s 7(6) .… 14.30 Canadian Bankruptcy and Insolvency Act RSC 1985, c B-3 .… 2.43 Canadian Personal Property Security Acts .… 1.46, 2.2, 2.6, 2.9, 2.29, 3.1, 3.4, 3.14, 3.26, 3.54, 3.55, 3.76, 4.11, 6.16, 6.23, 10.24, 10.64, 11.16, 12.6, 13.2, 13.4, 14.10, 14.12, 14.14, 14.35, 16.30 Canadian Securities Transfer Acts .… 10.64, 16.28 Fisheries Act 1985 RSC 1985, c F-14 .… 2.43 Income Tax Act RSC 1985 c.1 .… 4.52 s 227(4) .… 4.52 s 227(5) .… 4.52 Manitoba Personal Property Security Act CCSM, c.P35 .… 1.41

New Brunswick Personal Property Security Act SNB 1993, c.P-71 .… 1.41, 6.61, 16.33 Newfoundland and Labrador Personal Property Security Act SNL 1998, c.P- 7.1 . … 1.41 Northwest Territories Personal Property Security Act SNWT 1994, c.8 .… 1.41 Nova Scotia Personal Property Security Act SNS 1995–96, c.13 .… 1.41, 2.43 Nunavut Personal Property Security Act SNWT 1994, c.8 .… 1.41 Ontario Personal Property Security Act RSO 1990, c.P-10 .… 1.41, 6.11, 11.34 s 1(1) .… 2.25, 3.34 s 1(2) .… 5.25, 5.29, 5.30 s 4(1)(a) .… 3.67 s 4(1)(c) .… 3.66, 3.67 s 4(1)(d) .… 3.77 s 11(2)(a)(i) .… 4.30 s 20(1)(a)(i) .… 4.12, 6.58 s 20(1)(b) .… 5.10 s 20(1)(c) .… 14.1 s 22(1) .… 5.8, 5.9 s 22.1 .… 5.25, 5.29, 5.30 s 25(2) .… 11.40 s 28(5) .… 6.38 s 30(6) .… 7.12 s 33(1) .… 8.36 s 44(1) .… 15.27 s 46(4) .… 6.58, 7.18 s 46(6) .… 7.18 s 64 .… 15.2

Patents Act RSC 1985, c.P-4 s 49 .… 14.34 s 49(3) .… 14.34 s 49(4) .… 14.34 Prince Edward Island Personal Property Security Act RSPEI 1988, c.P-3.1 .… 1.41 Saskatchewan Factors Act RRS 1978, c.F-1 .… 10.57 Saskatchewan Personal Property Security Act SS 1993, c.P-62 .… 1.41, 1.46, 1.50, 1.53, 14.4, 16.33 s 2(y) .… 3.33 s 2(z) .… 2.40 s 2(1) .… 2.52 s 2(1)(hh) .… 11.8, 11.13 s 2(1)(jj) .… 8.34 s 2(1)(l) .… 2.6 s 2(1)(m) .… 11.15 s 2(1)(qq) .… 3.44 s 2(1)(t) .… 4.9 s 2(1)(u) .… 9.5 s 3 .… 3.24 s 3(1) .… 3.11 s 3(2) .… 3.34 s 4(1) .… 3.72 s 4(1)(a) .… 3.45 s 4(1)(b) .… 3.62 s 4(1)(bi) .… 3.62 s 4(1)(e) .… 3.60 s 4(1)(f ) .… 3.60

s 4(1)(g) .… 3.74 s 5 .… 14.42, 14.45, 14.48 s 5(1) .… 14.15 s 5(3) .… 4.18 s 6 .… 14.24 s 7 .… 14.29, 14.42 s 7(1) .… 14.26 s 7(2) .… 14.26, 14.31 s 7(3) .… 14.38 s 7(4) .… 14.40 s 7.1 .… 14.42, 14.43 s 8(1) .… 14.52 s 8(2) .… 14.11 s 10(1) .… 4.27 s 10(1)(d) .… 4.30 s 12(1)(c) .… 4.12 s 18 .… 5.55 s 18(1) .… 5.55 s 18(3) .… 5.57 s 19 .… 5.1 s 20(2) .… 10.5, 13.2 s 20(3) .… 14.1 s 21 .… 13.11 s 21(1) .… 12.32 s 23(1) .… 5.41 s 23(2) .… 5.43

s 24(1) .… 5.2, 5.8 s 24(3) .… 5.19, 5.20 s 28(1) .… 11.34 s 28(2) .… 11.39 s 28(3) .… 11.39 s 29 .… 10.88 s 29(1)(a) .… 10.91 s 29(6) .… 10.101, 10.102 s 29(7) .… 10.105, 10.106 s 30(2) .… 10.21 s 30(3) .… 10.48, 10.50 s 30(4) .… 10.48 s 31 .… 11.19 s 31(1) .… 10.58 s 31(2) .… 10.74 s 31(4) .… 10.75 s 31(5) .… 10.86 s 31(7) .… 10.80, 10.102 s 31.1 .… 10.62 s 33 .… 5.47 s 34(3) .… 8.36 s 34(6) .… 8.43 s 34(10) .… 8.23 s 35 .… 7.11, 7.12 s 35(3) .… 11.46 s 35(4) .… 6.38

s 35(8) .… 7.38, 7.39 s 35(9) .… 7.43 s 38 .… 9.1 s 39 .… 9.1 s 40(2) .… 3.41 s 41(2)(b) .… 12.72 s 41(3)–(6) .… 12.73 s 41(7)–(8) .… 12.74 s 41(9) .… 12.75 s 50(2) .… 6.77 s 51(1) .… 5.48 ss 55–58 .… 14.2 s 55(3) .… 12.31 s 55(4)–(6) .… 12.19 s 55(7) .… 12.30 s 56(1) .… 12.17 s 56(3) .… 12.16 s 58(2) .… 12.38 s 59(6) .… 12.44 s 59(13) .… 12.47 s 59(14) .… 12.54 s 60(2) .… 12.56 s 60(3) .… 12.51 s 60(5) .… 12.57 s 61 .… 12.61 s 61(2) .… 12.65

s 61(6) .… 12.65 s 62(1)(a) .… 12.59 s 62(1)(b) .… 12.60 s 64 .… 12.17 s 65(3) .… 7.20, 12.23, 12.24 s 65(4) .… 7.20 s 96 .… 10.65 Saskatchewan Sale of Goods Act RS 1978 c.S-1 s 26(1.1) .… 10.55 s 26(4) .… 10.54 Securities Transfer Act 2005 SO 2006, c.8 Pt VI .… 2.25 Pt VII .… 2.26 s 1(1) .… 2.25 s 23 .… 5.25, 5.29 s 24 .… 5.30 Securities Transfer Act SS 2007 c.S-42.3 s 1(1) .… 10.62 s 45 .… 14.43 s 68 .… 5.19 s 68(1) .… 5.19 Yukon Personal Property Security Act RSY 2002, c.169 .… 1.41

New Zealand Companies Act 1993 .… 13.21, 13.28 s 313 .… 13.23

Sch 7, cl 2 .… 13.23 Mercantile Law Act 1908 s 3(1A) .… 10.57 Personal Property Securities Act 1999 .… 1.41, 1.45, 1.46, 1.53, 2.2, 2.6, 2.29, 3.1, 3.4, 3.76, 3.77, 4.11, 6.16, 6.38, 7.32, 13.2, 14.10, 14.35, 14.52, 16.30, 16.32 s 16 .… 3.37, 13.23 s 16(1) .… 2.52, 8.34, 11.8, 11.13, 12.32 s 17(1)(b) .… 3.34 s 17(3) .… 3.14 s 23 .… 3.60 s 23(a) .… 3.44 s 23(b) .… 3.45 s 23(c) .… 3.54 s 23(e)(i) .… 3.60 s 23(e)(ii) .… 3.60 s 23(e)(vi) .… 3.62 s 23(1) .… 3.72 s 23(1)(e)(v) .… 3.74 s 25(1) .… 12.23, 12.24 s 26 .… 14.4, 14.15, 14.24, 14.42, 14.45, 14.48 ss 26–33 .… 14.2 s 26(1)(b) .… 14.25 s 26(1)(c) .… 14.14 s 27 .… 14.18 s 29 .… 14.5, 14.26 s 30 .… 14.5, 14.26, 14.29, 14.31, 14.42

s 31 .… 14.38 s 32 .… 14.40 s 36(1) .… 4.27 s 36(1)(b) .… 4.12 s 36(1)(b)(i) .… 4.30 s 40 .… 4.21 s 41 .… 5.1, 5.2 s 41(1) .… 5.8 s 42 .… 5.41 s 45(2) .… 11.34 s 46 .… 11.39, 14.50 s 47 .… 11.39 s 52 .… 10.5, 14.16 s 53 .… 10.21 s 53(2) .… 10.54, 10.57 s 54 .… 10.48, 10.50 s 66 .… 7.8 s 66(a) .… 3.38, 14.50 s 66(b) .… 7.11 s 68 .… 11.46 s 69 .… 5.43, 7.33 s 70(3) .… 3.41 s 74 .… 8.39 s 75A .… 8.43 ss 78–81 .… 9.1 ss 82–86 .… 9.1

s 87 .… 5.47 ss 87–91 .… 5.48 s 88 .… 7.38, 7.39 s 88(2) .… 7.43 s 94 .… 10.58 s 95 .… 10.74 s 96 .… 10.75 s 98 .… 10.80 s 99 .… 10.86 s 106 .… 12.17 s 111 .… 12.38 s 121 .… 12.65 s 161 .… 6.77 s 172 .… 6.33 s 173 .… 6.40 s 174 .… 6.40 s 179 .… 5.57 Sale of Goods Act 1908 s 27(2A) .… 10.54

Palau Secured Transactions Act 2012 .… 16.30

United Kingdom Bills of Sale Act 1854 .… 1.24 Factors Act 1889 .… 14.11 s 9 .… 1.26

Sales Goods Act .… 14.11

United States Patent Act 35 USCS ss 1–376 .… 14.34 s 261 .… 14.34 Uniform Commercial Code .… 12.3 Art 8 .… 2.25, 2.26, 16.28 Art 9 .… 1.11, 1.34, 1.41–1.46, 2.2, 2.25, 2.26, 3.11, 3.21, 3.26, 3.54, 3.62, 3.66, 4.11, 4.21, 5.1, 5.17, 5.24, 5.35, 5.60, 6.14, 6.16, 6.30, 6.45, 7.21, 7.26, 7.38, 8.15, 8.25, 8.36, 8.41, 8.43, 8.45, 9.5, 10.78–10.80, 10.84, 10.85, 11.50, 11.51, 12.6, 12.16, 12.19, 12.31, 13.2, 14.34, 16.25, 16.29, 16.31, 16.34 Pt 5 .… 2.25, 2.26 s 1-201 .… 3.4 s 1-201(37) .… 12.8 s 8-102(17) .… 2.26 s 8-106 .… 5.25 s 9-102 .… 5.60 s 9-102(b) .… 2.26 s 9-103(b)(2) .… 8.25 s 9-103(e) .… 8.23 s 9-103(f)(1) .… 8.15 s 9-103(f)(2) .… 8.15 s 9-103(f)(3) .… 8.26 s 9-103(g) .… 8.25 s 9-104 .… 3.21, 5.24 s 9-104(a) .… 2.40

s 9-105 .… 5.17 s 9-106 .… 5.25 s 9-107 .… 5.35 s 9-109(a)(3) .… 10.78 s 9-109(c)(1) .… 14.34 s 9-109(d)(10) .… 3.54 s 9-135 .… 7.39 s 9-203(b)(2) .… 4.21 s 9-205 .… 1.34 s 9-308 .… 10.79 s 9-312 .… 7.26 s 9-314 .… 3.21 s 9-317(a)(2) .… 5.60 s 9-322(c) .… 11.51 s 9-324 .… 8.41 s 9-324(b) .… 8.36, 8.43 s 9-325 .… 7.38, 7.42 s 9-327 .… 3.21, 7.21, 11.50 s 9-327(3) .… 5.24, 11.50 s 9-327(4) .… 5.24 s 9-330 .… 10.79, 10.80 s 9-330(a)(2) .… 10.80 s 9-371(a)(2) .… 13.2 s 9-503 .… 6.30 s 9-509 .… 6.45 s 9-601(c) .… 12.31

s 9-602 .… 12.16 s 9-604 .… 12.19 International Covenants, Treaties and Agreements Convention on International Interests in Mobile Equipment (aircraft) .… 16.1, 16.23, 16.25, 16.27 Ch 3 .… 16.16 Chs IV–VII .… 16.7 Ch IX .… 16.21 Art 1 .… 16.3, 16.11, 16.13 Art 2 .… 16.2, 16.3 Art 3 .… 16.4 Art 4 .… 16.4 Art 5(1) .… 16.5 Art 5(2) .… 16.5 Art 5(3) .… 16.5 Art 6 .… 16.5 Art 7 .… 16.6 Art 8 .… 16.16, 16.18 Art 8(1) .… 16.16 Art 8(4) .… 16.19, 16.20 Art 8(5) .… 16.20 Art 8(6) .… 16.16, 16.20 Art 9 .… 16.17 Art 9(1)–(3) .… 16.17 Art 9(3) .… 16.20 Art 9(4) .… 16.16, 16.17, 16.20 Art 9(5) .… 16.16

Art 10 .… 16.16, 16.18 Art 11 .… 16.16 Art 12 .… 16.20 Art 13 .… 16.20 Art 14 .… 16.20 Art 15 .… 16.20 Art 19(1) .… 16.7 Art 19(2) .… 16.7 Art 19(3) .… 16.7 Art 19(4) .… 16.7 Art 20 .… 16.7 Art 20(2) .… 16.11, 16.12 Art 20(3) .… 16.8 Art 21 .… 16.7 Art 25(1) .… 16.8 Art 25(2) .… 16.8 Art 25(4) .… 16.8 Art 29 .… 16.11 Art 29(1) .… 16.9 Art 29(2) .… 16.9 Art 29(3) .… 16.10 Art 29(4) .… 16.10 Art 29(5) .… 16.12 Art 29(6) .… 16.13 Art 29(7) .… 16.14 Art 30(1) .… 16.15

Art 30(2) .… 16.15 Art 39 .… 16.11 Art 40 .… 16.11 Art 41 .… 16.3 Art 54 .… 16.16, 16.18 Art 55 .… 16.20 European Bank for Reconstruction and Development (EBRD) Model Law (the Model Law) Art 5.2 .… 16.29 Art 9 .… 16.29 Art 17.2 .… 16.29 Hague Convention on the Law of Intermediated Securities 2006 .… 16.28 Luxembourg Protocol .… 16.22 Model Inter-American Law on Secured Transactions and its Model Registry Regulations 2009 .… 16.32 Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment .… 16.1 Ch III .… 16.7 Art I .… 16.2, 16.14 Art 1 .… 16.2, 16.21 Art III .… 16.2, 16.3 Art IV(1) .… 16.4 Art IV(3) .… 16.21 Art V .… 16.3 Art V(1) .… 16.6 Art VII .… 16.6 Art VIII .… 16.5

Art IX .… 16.19, 16.21 Art IX(2) .… 16.19 Art IX(3) .… 16.20, 16.21 Art IX(4) .… 16.16 Art IX(5) .… 16.19 Art IX(6) .… 16.19 Art XI .… 16.21 Art XI(8) .… 16.21 Art XIII .… 16.19 Art XIII(1) .… 16.19 Art XIII(2) .… 16.19 Art XIII(3) .… 16.19 Art XIII(4) .… 16.19 Art XXX(1) .… 16.5, 16.19 Art XXX(3) .… 16.21 Space Protocol .… 16.23 UNCITRAL Legislative Guide on Secured Transactions .… 14.2, 14.10, 14.12, 14.14, 14.50, 14.53 Rec 210, Alt B .… 14.35, 14.36 UNIDROIT Convention on International Factoring 1988 .… 16.27 UNIDROIT Convention on International Financial Leasing 1995 .… 16.27 UNIDROIT Convention on Substantive Rules for Intermediated Securities 2009 (Geneva Securities Convention) .… 2.19, 16.25, 16.28 Art 1(c) .… 2.25 Art 9 .… 2.25, 2.26 Art 24 .… 2.25, 2.26 UNIDROIT Model Law on Leasing 2008 .… 16.27

United Nations Convention on the Assignment of Receivables in International Trade 2001 (Receivables Convention) .… 14.13, 16.27, 16.33 Art 22 .… 14.32

Contents Foreword to the First Edition Preface to the First Edition Preface to the Second Edition Table of Cases Table of Statutes Chapter 1

Introduction Secured and Unsecured Credit Unsecured Credit Secured Credit The Function of Security Pre-PPSA Categories and Forms of Security Interest Consensual and Non-consensual Security Interests Two-party Transactions and Three-party Transactions Real and Personal Property Securities Possessory and Non-possessory Security Interests Mortgages and Hypothecations Legal and Equitable Security Interests Transfer-based Security Interests and Title Retention Arrangements Fixed and Floating Security Interests The History of The Australian PPS Reforms The Statutory Review

Chapter 2

Personal Property and its Classifications Introduction Goods Financial Property Introduction

Chattel Paper Currency Documents of Title Investment Instruments Negotiable Instruments Intermediated Security Intangible Property Introduction Accounts ADI Accounts Intellectual Property Licences Commercial Property and Consumer Property Inventory and Non-Inventory Personal Property Chapter 3

The Scope of the Statute Introduction The Substance Test Introduction Title Retention Arrangements Consignments Trusts Flawed Asset Arrangements Other Cases The Interpretation Function Deemed Security Interests Accounts and Chattel Paper Consignments PPS Leases Exceptions Licences Subordination Agreements Bills of Lading Security Interests Arising by Operation of Law Set-off Land Dealings Insurance Contracts and Annuities

The Quistclose Trust Other Exclusions Chapter 4

Attachment and Writing Requirements Introduction General Rules about Security Agreements Security Agreement After-acquired Property Future Advances Enforcement Expenses Attachment Introduction Agreement Value Rights in the Collateral Postponement of Attachment The Writing Requirement Introduction Writing Signature Collateral Description Implied References to Intellectual Property Rights Proceeds Consequences of Non-compliance Floating Charges

Chapter 5

Perfection Introduction The Function of Perfection Perfection by Possession Introduction Constructive Possession Goods Possessed by Bailee Negotiable Instruments Electronic Chattel Paper Investment Instruments Perfection by Registration

Perfection by Control ADI Accounts Intermediated Securities Investment Instruments Uncertificated Negotiable Instruments and Letter of Credit Rights Temporary Perfection Loss and Continuity of Perfection Transfer of Security Interest Transfer of Collateral Access to Details Of Security Agreement Consequences of Failure to Perfect Chapter 6

Registration Introduction Pre-PPSA and PPSA Registration Compared Introduction Unification Centralisation Notice Filing Computerisation Registration Renewals Searching the Register Grantor’s Name (Grantor Details) Searches and Serial Number Searches Grantor’s Details Searches — Individual Grantor Grantor’s Detail Searches — Corporate Grantor Grantor’s Details Searches — Other Serial Number Searches — Consumer Property Serial Number Searches — Commercial Property Restrictions on Access to the Register Follow-up Inquiries Registering a Financing Statement The Mechanics of Registration Registration Errors Registration Amendments Changes in Grantor’s Details and Other Particulars

Amendment Demands Chapter 7

The Default Priority Rules Introduction The Section 55 Priority Rules Competing Perfected Security Interests Reperfected Security Interests Perfected Security Interest versus Unperfected Security Interest Competing Unperfected Security Interests The Irrelevance of Notice The Section 57 Priority Rules Future Advances Introduction The Law Policy Considerations Subordination Agreements Circular Priorities The Double Grantor Rules

Chapter 8

Purchase Money Security Interests Introduction Policy Considerations The Meaning of ‘Purchase Money Security Interest’ Seller pmsis and Lender pmsis Exceptions Mixed PMSIs and Non-PMSIs Allocation of Payments Refinancings and Consolidations PPS Leases Requirements for Super-Priority Competing PMSIs PMSI in Accounts as Proceeds Subordination Agreements Security Interests in Crops and Livestock

Chapter 9

Accessions, Commingled Goods and Crops Introduction Accessions

Introduction The Meaning of ‘Accession’ The Priority Rules Removal of Accession Processed or Commingled Goods Introduction Continuation and Perfection of Security Interest Priority between Competing Claims to End Product Crop Security Interests Chapter 10

Transfers of Collateral Introduction Unperfected Security Interests Perfected Security Interests Serial-numbered Collateral Special Rules for Motor Vehicles Sale or Lease in the Ordinary Course of Business Low-value Transactions Interface with Other Laws Currency Investment Instruments and Intermediated Securities Temporarily Perfected Security Interests Subrogation Creditor Payments, Negotiable Instruments, Chattel Paper and Negotiable Documents of Title Creditor Payments Negotiable Instruments Chattel Paper Negotiable Documents of Title Returned and Repossessed Goods Introduction Returned Goods — Reattachment of Security Interest Returned Collateral — Accounts and Chattel Paper Priority of Security Interests in Returned Goods

Chapter 11

Proceeds Introduction

The Pre-PPSA Position The Meaning of Proceeds Introduction Second and Subsequent Generation Proceeds The Dealing Requirement The Grantor’s Interest Limitation Identifiable or Traceable Personal Property Attachment of Security Interest to Proceeds Introduction The Secured Party’s Cumulative Entitlements Proprietary and Personal Claims Perfection and priorities Introduction Other Methods of Perfection Priorities Chapter 12

Enforcement of Security Interests Introduction Scope of PPSA Chapter 4 Deemed Security Interests Goods Located Outside Australia Investment Instruments and Intermediated Securities Consumer Transactions Contracting Out Receivers Security Interests in Personal Property and Land 371 General Rules Commercially Reasonable Manner Limitation on Secured Party’s Rights Non-merger Cumulative Rights and Remedies Default Notice Requirements Notice Before Enforcement Seizure of Collateral Introduction Methods Permitted by Law

Apparent Possession Higher and Lower Ranking Secured Parties Disposal of Collateral Timing of Disposal Notice before Disposal Methods of Disposal Statement of Account Following Disposal Purchaser’s Title Distribution of Collateral Disposal Proceeds Redemption and Reinstatement Retaining Collateral Introduction Notice Requirements The Consequences of the Remedy Objections and Related Matters Collection Rights Introduction Notice Requirements Notification and Non-notification Transactions The Account Debtor’s Rights Crops and Livestock Corporations Act 2001 (Cth) Part 5.2 Chapter 13

Insolvency Law and the PPSA Introduction Insolvency and The Effect of Non-Perfection Introduction The PPSA Provisions The Corporations Act Provisions Consequential Amendments to Corporations Act Introduction Circulating Security Interests PPSA Retention of Title Property Possessory Security Interests Personal Insolvency

Chapter 14

Conflict of Laws

Introduction The Territorial Reach of The PPSA The scope of PPSA Part 7.2 Security Interest in Goods The Main Rules Relocation of Goods The Destination of Goods Rule The Mobile Goods Rule Security Interests in Ships Security Interests in Intangible Property The Main Rules Intellectual Property ADI Accounts Relocation of Grantor Priority of Security Interest if no Foreign Register Security Interests in Financial Property and Letter of Credit Rights Introduction Validity Rules Perfection Rules Proceeds Enforcement of Security Interests Chapter 15

Transitional Matters Introduction Initial Application of Act Registration Commencement Time Registration Fixed and Floating Charges Transitional Provisions Introduction Transitional Security Agreement Transitional Security Interest Enforceability Attachment Perfection Perfection by Possession Enforcement of Transitional Security Interests

Migrated Security Interests Introduction Migration Time Transitional Registers Perfection Errors and Deficiencies in Migrated Data Priorities Introduction Transitional vs Non-transitional Security Interests Perfected Transitional vs Perfected Non-transitional Security Interests Unperfected Transitional vs Unperfected Non-transitional Security Interests Perfected Security Interest vs Unperfected Transitional Security Interest Disputes between Competing Perfected, or Competing Unperfected, Transitional Security Interests Control Insolvency Chapter 16

Aircraft Security Interests and Other International Developments Introduction Aircraft Security Interests Application of Convention Interpretation and Applicable Law Formal Requirements Registration Priorities Effect of Insolvency Default Remedies Other Protocols Other International Initiatives Introduction UNCITRAL Legislative Guide on Secured Transactions UN Convention on the Assignment of Receivables in International Trade

UNIDROIT Convention on Substantive Rules for Intermediated Securities EBRD Model Law on Secured Transactions Regional and National Initiatives

Index

[page 1]

CHAPTER 1 Introduction INTRODUCTION 1.1 This book is about the Personal Property Securities Act 2009 (Cth) (PPSA), which is a wholesale reform of the Australian law relating to security interests in personal property. This chapter: (1) outlines the differences between secured and unsecured credit and discusses the function of security; (2) identifies the main prePPSA types of security and quasi-security transactions; and (3) provides a short history of the PPSA reforms, with reference to the main underlying objectives.

SECURED AND UNSECURED CREDIT Unsecured Credit 1.2 If a creditor (Creditor) lends money and the debtor (Debtor) fails to repay the loan according to the terms of the contract, Creditor will have an action against Debtor for the money. If the money is lent without any stipulation as to the time of repayment, the transaction gives rise to a present debt which is repayable at once without any demand. Typically, though, the parties will either agree that the loan is repayable on demand or they will fix a time for repayment. Where the loan is repayable on demand, the debt does not become due until Creditor makes a valid demand. (A bank overdraft is an example of a loan that is commonly repayable on demand.) If the loan is made for a specified period (‘term loan’), repayment is due at the end of the period and, as a general rule, there is no need for Creditor to make a demand. The parties may agree on repayment by instalments. Consider the following simple case. Example 1. Creditor lends Debtor $100 for 12 months on an unsecured basis. The $100 is repayable, with interest charges of $20, by 12 equal monthly instalments of $10. Debtor makes the first three repayments on time but misses the fourth one.

What is Creditor’s remedy? Subject to any specific provision in the contract itself, the answer depends on whether Debtor’s breach is a repudiation of the

contract. To establish a repudiatory breach, Creditor must prove that Debtor intended to dishonour the contract as a whole — in other words, that Debtor is not both ready and able to repay the remaining instalments. In that case, [page 2] Creditor may accept Debtor’s breach as a repudiation and bring the contract to an end. Creditor may then sue Debtor to recover the outstanding amount of the loan principal plus accrued interest charges and also loss of bargain damages (if any). Typically, loss of bargain damages for breach of a loan contract represent the difference between the interest charges Creditor would have earned if the contract had run its full term and the interest Creditor can earn by re-lending the money to another borrower for the balance of the term. 1.3 In most cases, Debtor’s failure to pay a single instalment on time is not itself proof of an intention to dishonour the contract as a whole. In other words, subject to any contrary provision in the contract, late payment of a loan instalment is not normally a repudiation. This means that Creditor does not have the option immediately of bringing the contract to an end, but is limited to an action for the missed instalment. Alternatively, Creditor may serve a notice on Debtor requiring Debtor to pay the missed instalment within a reasonable time. The consequence is to make time essential. Debtor’s failure to pay within a reasonable time after the date of the notice is a repudiatory breach and Creditor may then bring the contract to an end. 1.4 The loan contract may include an essential time stipulation — that is, a provision making the time for repayment an essential term. In that case, Creditor may treat Debtor’s late payment as a repudiatory breach without the need for any notice of demand. Alternatively, the contract may include an acceleration clause — that is, a provision saying that if Debtor breaches the contract or other named events happen (for example, Debtor becomes bankrupt), the whole outstanding loan balance plus interest charges become immediately due and payable. Creditor may then sue for the accelerated amount as a debt due. The advantage of an acceleration clause is that it allows Creditor to sue Debtor for the total amount outstanding without having to prove that Debtor has repudiated the loan contract as a whole and without the need for Creditor to serve a notice of demand on Debtor making time of the essence.1

1.5 The unsecured creditors’ remedies outlined above are personal remedies. They give Creditor a money claim against Debtor but they do not themselves give Creditor rights in Debtor’s property. Assume Creditor obtains a judgment against Debtor, but Debtor fails to pay. There are various methods for the enforcement of judgment debts. These include execution against Debtor’s goods or other personal property, execution against land, garnishment, charging orders and receivership. The process of execution against goods, the most commonly used alternative for the enforcement of judgment debts, involves the issue of a writ directing the sheriff to seize Debtor’s goods to the value of the debt, sell them and pay the proceeds to Creditor in satisfaction of the debt. [page 3]

Secured Credit 1.6 Example 2. Creditor lends Debtor $100 for 12 months. The $100 is repayable, with interest charges of $20, by 12 equal monthly instalments of $10. Debtor gives Creditor a security interest in Debtor’s truck to secure repayment of the loan. Debtor makes the first three repayments on time but misses the fourth one.

What are Creditor’s options? Creditor has the same personal remedies as in Example 1. Assume there is an acceleration clause in Creditor’s contract with Debtor. As a consequence of Debtor’s default, the total outstanding loan balance is now immediately due and payable. Creditor can sue Debtor for this amount. However, the security agreement gives Creditor another option. Instead of suing Debtor for the outstanding loan balance, Creditor may enforce its security interest in the truck. Typically, this will involve seizure (repossession) and the sale of the truck — the sale proceeds being applied to pay down the outstanding loan balance. If the sale proceeds are insufficient to cover the debt, Creditor may sue Debtor on their personal obligation for the shortfall. The details are discussed in Chapter 12. Creditor’s right to enforce its security interest in the truck is a real remedy. It is a real remedy in the sense that it is exercisable against a specific asset belonging to Debtor. By contrast, as mentioned earlier, a personal remedy gives Creditor a money claim against Debtor, but it does not itself give Creditor a property right in any of Debtor’s assets.2 1.7 Assume that, in Example 1, Debtor becomes bankrupt while the loan is still

outstanding. The total value of unsecured creditors’ claims, including Creditor’s loan, is $1000. There are no other claims on the estate. Debtor’s only asset is a truck worth $100. In bankruptcy, all unsecured creditors’ claims are stayed, including partly completed execution proceedings. In return, each unsecured creditor is given the right to lodge a proof of claim with Debtor’s trustee in bankruptcy, which entitles it to share in the bankruptcy distribution on a pari passu basis, in other words proportionately to the size of its claim. On the figures given above, each unsecured creditor will receive 10 cents in the dollar and Creditor’s share will be $10. Now assume that, in Example 2, Debtor becomes bankrupt while the loan is still outstanding. The total value of all creditors’ claims, including Creditor’s secured loan, is $1000. There are no other claims on the estate and Creditor is the only secured creditor. Subject to certain limitations which are not presently relevant, the bankruptcy stay does [page 4] not bind secured creditors and so Creditor may enforce its security interest.3 The result is that Creditor will recover $100, the full value of its claim, leaving the unsecured creditors with nothing. As these simple illustrations indicate, one function of security is to protect the secured creditor against the risk of the debtor’s insolvency and this protection comes at the expense of the unsecured creditors.4

The Function of Security 1.8 To re-state, in functional terms, a security interest is a property right which makes available to the creditor one or more of the debtor’s assets5 as a source of payment if the debtor defaults. There are three main advantages of a security interest, all stemming from the proprietary character of the entitlement. First, a security interest gives the secured party priority over unsecured creditors if the debtor becomes bankrupt or goes into liquidation. Second, a security interest gives the secured party a self-help remedy which avoids the time and trouble of suing the debtor and taking steps to enforce any unpaid judgment. Third, and in the same connection, a secured creditor can use the threat of enforcing its security interest as a form of discipline to discourage the debtor from defaulting in the first place; a secured creditor’s threat of repossession may have a greater impact on the debtor than an unsecured creditor’s threat of legal proceedings, not least because the threat

of repossession is more immediate. 1.9 For all these reasons, security increases the probability of repayment and it reduces the risk of lending. As some finance economists have pointed out, however, this cannot itself be a sufficient explanation for the prevalence of secured lending because, while security reduces the secured lender’s risk, it correspondingly increases the risk faced by the debtor’s unsecured creditors. Therefore, while a secured creditor may offer the debtor a lower interest rate in return for the reduced risk, the unsecured lenders will increase their rates to compensate for the higher risk they face as a result of the secured creditor’s priority. Other things being equal, the premium charged by the unsecured creditors will exactly match the discount offered by the secured creditor so that the debtor’s aggregate interest bill remains unchanged. In other words, secured lending looks at best like a zero-sum game, and so there is no obvious reason why a debtor would agree to give security. As it happens, once the transaction and monitoring costs associated with security are taken into account, secured lending appears to be worse than a zero-sum game, and so there are good reasons for debtors not to give security. On the other hand, secured lending [page 5] is ubiquitous and so there appears to be an embarrassing mismatch between theory and practice. This is the so-called ‘secured lending puzzle’.6 There is a voluminous body of literature devoted to solving the puzzle but, while numerous different explanations have been suggested, there is no clear winner among them.7 For present purposes, there is no point in pursuing the debate. The PPSA’s unambiguous mission is to facilitate secured lending and it is premised on the assumption that security is beneficial. This position may or may not ultimately be borne out in the theoretical literature, but the purpose of this text is to provide a descriptive and analytical account of the legislation, and so its underlying premise must be taken as given.

PRE-PPSA CATEGORIES AND FORMS OF SECURITY INTEREST Consensual and Non-consensual Security Interests

1.10 A security interest may be consensual or non-consensual. A consensual security interest is a security interest created by agreement between the secured party and the security giver. A non-consensual security interest is a security interest that arises by operation of law. A familiar example is the common law repairer’s lien,8 but non-consensual security interests can also be created by court order or statute. The distinction between consensual and non-consensual security interests remains relevant post-PPSA because, for the most part, the PPSA applies only to consensual security interests. Exceptions to this statement are discussed in 3.45–3.48.

Two-party Transactions and Three-party Transactions 1.11 A consensual security interest may be given by the debtor to the secured party. This is the typical two-party transaction. However, sometimes, the security interest may be given by a third party to secure performance of the debtor’s obligations to the secured party. The PPSA is drafted with this distinction in mind. It refers to the party who gives the security interest as the ‘grantor’ and the party who owes the secured obligation as the ‘debtor’.9 In a [page 6] case where, for example, A makes B a loan and B gives A a security interest to secure repayment, B is both the debtor and the grantor. In a case where A makes B a loan and C gives A a security interest to secure B’s obligation, B is the debtor and C is the grantor. However, because the statute is concerned predominantly with the security aspect of the transaction, references to ‘the grantor’ are much more common than references to ‘the debtor’. The statute only refers to ‘the debtor’ in contexts where the obligation secured by the security interest is directly in issue. 1.12 There are several possible variations on the three-party scenario outlined above. For example, instead of providing a security interest in support of B’s obligation, C may simply offer a personal assurance of payment, in the form of a guarantee. A simple contract of guarantee does not give the lender a proprietary claim against the guarantor, but only personal rights, and so the PPSA does not apply. Suppose, however, that C gives A a security interest to secure C’s personal obligation under the contract of guarantee. Does the PPSA apply to a security interest that secures a secondary obligation owing to the secured party?10 The

definitions of ‘grantor’ and ‘debtor’ draw no distinction between primary and secondary secured obligations, and so the statute applies on the footing that, in this case, C is both the debtor and the grantor.11

Real and Personal Property Securities 1.13 Security may be given over any kind of property, both real (land) and personal (property other than land). The PPSA only applies to security interests in personal property, not land. Personal property includes tangible property, such as goods, negotiable instruments, documents of title and certificated securities, and also intangible property, such as accounts, intellectual property and statutory and contractual licences. The PPSA applies to all forms of personal property.12 The statute defines ‘personal property’. It also separately defines each type of personal property and establishes a classification system which is central to the operation of the statute at large. These matters are discussed in Chapter 2. [page 7]

Possessory and Non-possessory Security Interests 1.14 A possessory security interest, or pledge, involves transferring possession of tangible property, such as goods or documents, from the grantor to the secured party, coupled with an express or implied right of sale if the debtor defaults. Pawnbroking is the most familiar example.13 Outside the pawnbroking context, the pledging of goods is no longer common. Documentary pledges, however, play an important role in short-term financing. The documentary pledge usually involves negotiable instruments, corporate securities or documents of title. A non-possessory security interest is conceptually the reverse of the possessory variety. In the case of a possessory security interest, the grantor transfers possession to the secured party, but not title. It is true that the secured party has a right of sale, but this derives from the terms of the contract and not from the fact that the secured party acquires title to the collateral.14 By contrast, in the case of a non-possessory security interest, the grantor transfers to the secured party either title or some lesser proprietary interest, but not possession, on the understanding that, if the debtor defaults, the secured party may take control of the collateral, realise its value and help itself to payment out of the proceeds. Pre-PPSA, the mortgage and the charge were the standard

forms of non-possessory security. 1.15 The distinction between possessory and non-possessory security interests remains relevant post-PPSA, primarily because it is reflected in the different methods of perfection recognised by the statute. Perfection is the term the PPSA uses to describe publication of a security interest. Possession is one method of perfection. Possession publicises a security interest in the sense that the secured party’s possession should alert third parties to the existence of the security interest. Registration is an alternative method of perfection. Registration publicises a security interest in the sense that it gives third parties a means of confirming whether or not the grantor has clear title to its assets. Possession and registration are alternative methods of perfection in the sense that, if the secured party has perfected its security interest by possession, as a general rule there is no need for it to also perfect by registration, while if the secured party has perfected by registration it can safely leave the collateral in the grantor’s hands at least for as long as the debtor is not in default.15 These matters are discussed further in Chapter 5. [page 8]

Mortgages and Hypothecations 1.16 A mortgage is a transfer by the grantor to the secured party of title to the collateral, subject to a covenant that the secured party will transfer the collateral back once the mortgage debt is paid. In other words, the mortgage is a form of conditional assignment. During the currency of the mortgage, the secured party holds title to the collateral while the grantor simply has an equity of redemption. The equity of redemption is a function of the grantor’s right to specifically enforce the secured party’s covenant to reconvey the collateral, coupled with the maxim ‘equity deems as done what ought to be done’. The mortgagee’s historical remedy was foreclosure. Foreclosure is a court order which extinguishes the equity of redemption and allows the secured party to retain the collateral in satisfaction of the debt. An alternative remedy is the power of sale, which the mortgagee may acquire by agreement, court order or statute. In contrast to foreclosure, exercise of the power of sale does not extinguish the mortgage debt and this means that, as a general rule, the debtor remains personally liable for any shortfall. The conceptual basis of the mortgagee’s power of sale is ownership; the mortgage transfers title to the mortgagee and a right of sale is one of the incidents of ownership.

1.17 A charge does not transfer title to the secured party. A charge is no more than a right in the secured party to force a sale of the collateral if the debtor defaults and to take the sale proceeds in full or partial satisfaction of the debt. The right would be no more than a personal one, except for the application of the maxim ‘equity deems as done what ought to be done’. The effect of the maxim is to give the secured party an equitable proprietary interest in the collateral commensurate with its right to force a sale. Meanwhile, and in contrast to the mortgage, the grantor retains title. As this analysis indicates, the chargee’s natural remedy is the power of sale and, in contrast to the mortgage, there is no right of foreclosure because title is with the grantor. The secured party’s power of sale derives not from ownership — again, because title lies with the grantor — but expressly or by implication from the terms of the parties’ agreement. In other words, while the mortgage is a transfer form of security, the charge — in common with the pledge — is a hypothecation.16 A significant difference between the charge and the pledge, of course, is that the charge is typically a non-possessory form of security interest. 1.18 Post-PPSA, the distinction between transfer and hypothecary forms of security interest no longer matters. The PPSA abolishes the old forms of security interest and instead creates a statutory security interest, the incidents of which stay constant whatever form of agreement the parties happen to choose. The statute does not prevent parties from continuing to use mortgage or other old-style security language but, however they write their contract, the security interest they end up with will still be the statutory one. The [page 9] statutory security interest bears a closer resemblance to the charge than it does to the mortgage in that it does not depend on transfer of title to the secured party, but acts simply as an encumbrance in the secured party’s favour giving the secured party a claim on the collateral if the debtor defaults. On the other hand, parts of the statute are clearly inspired by mortgage law. In particular, the enforcement provisions in PPSA Ch 4 borrow heavily from the mortgage remedy scheme. For example, they give the grantor a statutory equivalent of the mortgagor’s right of redemption, and they give the secured party a statutory right of foreclosure as an alternative to the power of sale. The enforcement provisions are discussed in Chapter 12.

Legal and Equitable Security Interests 1.19 A mortgage may be legal or equitable in character. A legal mortgage involves the transfer of legal title to the collateral. An equitable mortgage may be created in various ways; for example: (1) a contract to give a legal mortgage passes an immediate beneficial interest in the collateral, provided the collateral is sufficiently identifiable (this is again on the basis of the maxim ‘equity deems as done what ought to be done’); (2) a legal mortgage of future property passes an equitable interest to the secured party as soon as the grantor acquires the asset and without the need for any further action on the secured party’s part;17 and (3) a transfer to the secured party of an equitable interest — for example, a beneficiary’s interest in trust property — takes effect as an equitable mortgage. Another example of case (3) is the transfer to Secured Party 2 (SP2) of the grantor’s equity of redemption in collateral already mortgaged to Secured Party 1 (SP1). This creates an equitable second mortgage in favour of SP2 which is subordinate to SP1’s legal first mortgage. In the case of a charge — leaving aside statutory charges — the secured party’s interest is always an equitable one. 1.20 Pre-PPSA, the distinction between legal and equitable security interests was important because, leaving aside pre-PPSA statutory interventions, it was a key factor in the determination of disputes involving competing third party claims to the collateral. Example 3. SP1 takes a legal mortgage of Grantor’s printing press. Later, Grantor mortgages the press a second time, this time to SP2. SP2’s mortgage is also a legal mortgage. Grantor defaults and SP1 and SP2 both claim the press.

As indicated above, pre-PPSA statutory measures (for example, the state and territory bills of sale legislation or the registration of charges provisions in Ch 2K of the Corporations Act 2001 (Cth) and their predecessors) may have applied here. But leaving this possibility aside, the courts would have turned to the common law for a solution and, at common law, the basic rule was nemo [page 10] dat quod non habet (‘one cannot give what one does not have’).18 Applying this rule to the facts of Example 3, since Grantor has already transferred legal title to SP1, they cannot transfer it again to SP2. All Grantor has left to give SP2 is their equity

of redemption and so that is all SP2 gets. The upshot is that SP2 holds a second mortgage over the press, subordinate to SP1’s claim. 1.21 Now assume that, in Example 3, SP1’s security interest took the form of a charge rather than a mortgage. Since the charge gives SP1 only an equitable interest, SP2 can rely on the rule that a bona fide purchaser of legal title for value and without notice defeats a prior equitable interest in the same property.19 Applying this rule to the facts of Example 3, SP2 may have priority over SP1. On the same basis if, instead of mortgaging the press to SP2, Grantor had sold it outright to Buyer, Buyer would obtain clear title provided they bought the press for value, in good faith and without notice of the prior charge in SP1’s favour. 1.22 In the PPSA context, the distinction between legal and equitable interests is irrelevant, to the extent that the statute does not even bother to characterise the security interest it creates in these terms. Instead, the statute enacts detailed priority rules for cases like Example 3 and its variants discussed above. The PPSA priority rules do not turn on the nature of the secured party’s interest and they would be unworkable if they did. This is because, as explained in 1.16–1.18 above, the PPSA security interest is a generic one and so, in Example 3, post-PPSA, SP1’s and SP2’s security interests are juridically equivalent.20 The PPSA provisions relevant to a case like Example 3 turn instead on variables such as: (1) whether either or both SP1 and SP2 perfected their security interests by registration; (2) if they both perfected by registration, the order in which they did so; and (3) if one or both perfected by a method other than registration, the order of the perfecting events. [page 11] The basic PPSA priority rules are discussed in Chapter 7. In the case of a dispute between a secured party and a transferee of the collateral for value, the main variables are whether: (1) the collateral is inventory or, say, equipment; (2) the secured party consented to the transfer; and (3) the secured party had perfected its security interest so that the transferee was in a position to find out about it before contracting with the grantor. The PPSA rules governing transferees are discussed in Chapter 10.

Transfer-based Security Interests and Title Retention Arrangements

1.23 The forms of security interest so far discussed are all, at least in a loose sense, transfer-based transactions: a mortgage involves the transfer of legal or equitable title to the secured party, the pledge depends on transfer of possession and the charge involves the transfer, or grant, to the secured party of an equitable interest in the collateral commensurate with the power of sale. In Anglo-Australian law, these were the main recognised forms of security in the strict sense. Example 4. SP, a dealer, agrees to sell Customer a truck for $40,000. Customer does not have the cash and SP agrees to finance the purchase over 12 months in return for a $2000 charge. Customer agrees to pay SP the $42,000 by equal monthly instalments, but SP wants security for payment.

There are various ways the parties could structure the transaction. One option would be for SP to lend Customer the money, sell the truck to Customer outright and take a mortgage or charge over the truck to secure repayment of the loan. An alternative option would be for SP to include in the contract of sale a provision reserving title in the truck until Customer has paid all the instalments. Customer gets immediate possession of the truck, but ownership stays with SP for the duration of the payment period. If Customer defaults, SP can assert its right of retained ownership and take back the truck. This form of transaction is commonly known as a ‘conditional sale agreement’, or a ‘reservation of title agreement’. The legal basis for it is to be found in the sale of goods legislation, which allows a seller to reserve title in the goods pending fulfilment by the buyer of agreed conditions.21 1.24 As the above discussion indicates, the conditional sale agreement is a close functional equivalent of the mortgage or charge. The main difference is that the mortgage and the charge both involve ‘an interest “granted” by the debtor to their creditor over assets the debtor already owns or will own’.22 A conditional sale agreement is not a security interest in this sense because the seller’s claim to the goods depends not on any grant by the buyer but, rather, on the seller retaining title to goods it has owned all along.23 This [page 12] formal distinction drawn by pre-PPSA law between security interests in the ‘strict sense’ and title retention arrangements is reflected in earlier statutory initiatives, including the bills of sale legislation, which enacted a scheme for the registration of chattel mortgages and the like, but did not apply to conditional sale agreements and related forms of transaction,24 and the registration of charges provisions in the

Corporations Act which applied to a mortgage or a charge given by a company over certain types of collateral including goods, but not the purchase by a company of goods on reservation of title terms. 1.25 As it happens, the limited scope of the bills of sale legislation was a significant factor in the development of title retention arrangements, and a short historical digression might be in order at this point. The publication objective behind the bills of sale legislation was a sound one, but the procedures for registration were cumbersome and often unworkable from the secured party’s point of view. This problem was compounded by the requirement for regular registration renewals and compounded further in those jurisdictions where the statute provided that a bill of sale was invalid unless registered.25 These features encouraged efforts to avoid the legislation, and the conditional sale agreement was an early manifestation of the trend. In McEntire v Crossley Brothers,26 the House of Lords confirmed that, because the legislation defined ‘bill of sale’ in terms of an ‘assurance’ (or transfer) of chattels, it did not apply to title retention arrangements. 1.26 However, that was not quite the end of the story because financiers quickly found that, having avoided the Scylla of the bills of sale legislation, they were at risk from the Charybdis of the Factors Acts. The first of the Factors Acts was enacted in England in 1823, and amendments followed in 1825, 1842 and 1877. The Factors Act 1889 added to and consolidated the previous law, and versions of this legislation were adopted in all the Australian states and territories. The primary purpose of the legislation was to protect a buyer of goods from dealings with nonowners in a variety of circumstances. One of the cases the legislation addressed was the ‘buyer in possession’ scenario where [page 13] a buyer, having agreed to purchase goods, took delivery before obtaining title and later resold to a person with no knowledge of the true owner’s claim. The legislation provided, by way of exception to the nemo dat rule, that in a dispute between the original owner and the sub-buyer, title went to the sub-buyer and the original owner’s claim was extinguished.27 In Lee v Butler,28 the English Court of Appeal held that the buyer in possession provision applied to a conditional sale agreement exposing a conditional seller to the risk of the buyer’s fraud.

1.27 The hire-purchase agreement is closely similar to the conditional sale agreement. The difference is a purely formal one, namely that, in a hire-purchase agreement, the customer has a right to terminate the agreement at any point by returning the goods to the supplier. However, in Helby v Matthews,29 the House of Lords held that this feature was sufficient to put the transaction outside the reach of the buyer in possession provision. The reasoning was that, since the customer was not committed to purchasing the goods until the end of the payment period, the agreement could not be characterised as a sale from the outset. On the contrary, it was simply a hiring agreement coupled with an option to purchase exercisable upon payment of the last instalment at which point the customer lost their right of termination. Since, up to that point, there was no sale, the customer could not be described as someone who ‘has bought or agreed to buy’ the goods, and so the buyer in possession provision did not apply. In summary, the reason for the rise of hire-purchase was that it allowed the financier to have its cake and eat it too: to avoid the buyer in possession provision, while at the same time not becoming subject to the bills of sale laws. And, to repeat, hire-purchase agreements and conditional sale agreements avoided the bills of sale legislation for the same reason: being title retention arrangements, they lacked the essential ‘assurance’ component. In other words, they were not, in the eyes of the law, security agreements.30 Example 5. SP rents a car with a cash price of $40,000 to Customer for a term of 48 months at a monthly rental of $1000. The agreement gives Customer an option to buy the car at the end of the 48 months for a nominal sum.

Example 5 is a simple illustration of a hire-purchase agreement. The case demonstrates the functional equivalence of hire-purchase with the conditional sale agreement. It is true that, in contrast to the conditional sale agreement, Customer is not legally committed to buying the car until they exercise the option at the end of the term. However, they are financially committed because it can be inferred from the nominal option price that the 48 monthly rental payments are really instalments on the purchase price, and [page 14] so if Customer declined to exercise the option they would be sacrificing their investment. 1.28 A hiring agreement without an express option to purchase is not formally a

hire-purchase agreement.31 However, there are various ways of structuring a simple hiring agreement, or lease, to achieve the same effect. Example 6. SP leases a car with a cash price of $40,000 to Customer for a term of 48 months at a monthly rental of $750. The agreement sets the car’s residual value at $12,000. The residual value is the parties’ estimate of what the car will be worth at the end of the four years. The agreement includes a liquidated damages clause which provides that, at the end of the lease, SP will sell the car on the market and Customer must pay SP the difference between the resale price and the residual value.

This is a simple example of a finance lease. The transaction is not formally a hire-purchase agreement because there is no express option to purchase. But it is functionally equivalent to a hire-purchase agreement from both parties’ perspectives. As in Example 5, Customer has a strong financial incentive to purchase the car at the end of the term because, come what may, they will be liable to SP for an amount equivalent to the $40,000 cash price plus $8000 finance charges. And from SP’s point of view, the transaction is as good as a sale because, again come what may, it is bound to recover the full cash price plus charges. This type of transaction, or some variation of it, is popular in many jurisdictions because it offers income tax advantages in cases where Customer is proposing to use the leased goods for business purposes.32 For many years — until the accounting rules changed — the finance lease was also popular with companies as a form of offbalance-sheet financing.33 1.29 The conditional sale agreement, the hire-purchase agreement and the finance lease are all members of the title retention family and, pre-PPSA, were commonly referred to as ‘quasi-securities’.34 This expression served to emphasise both the functional equivalence of title retention arrangements and security interests in the strict sense and also the formal differences between them. By and large, prePPSA law focused more on the formal differences than the functional similarities and this approach manifested itself, for example, in the limited scope of the prePPSA registration statutes discussed earlier. The issue was also important in the remedies context. If an agreement creates a security interest in the strict sense, the grantor has a right to redeem the collateral and also an interest in any surplus following repossession and sale of the collateral by the secured party.35 The hirepurchase legislation made inroads into this distinction by giving the hirer rights on repossession, which were more or less equivalent to the rights of a mortgagor. However, [page 15]

the hire-purchase legislation did not apply unless the agreement entitled or obliged the hirer to purchase the goods and, in any event, most states repealed their hirepurchase laws following the enactment of the Consumer Credit Code.36 1.30 The PPSA abolishes the distinction between quasi-security and security in the strict sense. The statute applies to every transaction which, regardless of form, in substance secures performance of an obligation, and the definition of ‘security interest’ in PPSA s 12 specifically refers to a conditional sale agreement, a hirepurchase agreement and a lease of goods.37 The result is to put all these forms of transaction on the same legal footing as the conventional forms of security interest; in other words, to take the ‘quasi’ out of ‘quasi-security’. All the provisions of the statute, including the registration provisions, apply to title retention arrangements in more or less the same way they apply to any other form of security. The application of the statute to all transactions, which in substance secure performance of an obligation, is discussed further in Chapter 3.

Fixed and Floating Security Interests 1.31 Example 7. Grantor carries on a retailing business and it wants to borrow money from SP to finance its operations. Grantor has fixed assets, including plant and equipment. It also has circulating assets, specifically: (1) its stock-in-trade (‘inventory’) and (2) its accounts receivable (‘accounts’). Grantor’s inventory and accounts are circulating assets in the sense that, unlike fixed assets, Grantor does not intend them to remain in the business. Grantor’s intention is to turn them over to generate new wealth: sales of inventory generate accounts; collection of accounts generates liquid proceeds (cash and the like); the proceeds allow Grantor to purchase new inventory, and the cycle starts again.

Can circulating assets be used as collateral? There are two potential problems: (1) the after-acquired property problem and (2) the right of disposal problem.

The after-acquired property problem 1.32 Circulating assets circulate and so SP’s security interest must cover not just the inventory Grantor has in stock at the date of the security agreement but also Grantor’s future inventory. Likewise, it must cover not just Grantor’s present accounts but future ones as well. This raises the question, how can Grantor give SP an interest in property that Grantor does not presently own? At common law, the nemo dat rule was a major obstacle to dealings in future

[page 16] or after-acquired property: the common law could not conceive of a seller or mortgagor passing title in goods it did not yet own. However, equity came to the rescue. Assume that (pre-PPSA) SP and Grantor enter into a security agreement on Date 1 covering Grantor’s present and after-acquired inventory. On Date 2, Grantor takes delivery of a new batch of inventory (the ‘new inventory’). At common law, SP has no interest in the new inventory on Date 1 because, at that point, Grantor has nothing to transfer: nemo dat quod non habet. Nor does SP acquire any interest on Date 2 without some further act of assurance on Grantor’s part. In equity, SP likewise acquires no interest on Date 1. However, SP may acquire an interest on Date 2 as soon as the new inventory comes into Grantor’s hands, provided it has given value in exchange for Grantor’s promise of a security interest. The reason is that these circumstances attract the maxim ‘equity deems as done what ought to be done’ and so the court will step in to enforce the parties’ bargain.38 The upshot, pre-PPSA, is that by virtue of the Date 1 agreement, SP on Date 2 acquires an equitable security interest in the new inventory without the need for any further assurance on Grantor’s part. Post-PPSA, the equitable doctrine no longer applies, but the PPSA specifically permits a security interest in after-acquired property and the security interest ‘attaches’ automatically when the grantor acquires the asset in question.39 The PPSA attachment rules are discussed in Chapter 4.

The right of disposal problem 1.33 Where the collateral is circulating assets — for example, inventory — the security agreement must either expressly or by implication give Grantor a right to dispose of the collateral in the ordinary course of business. The reason is that if SP’s security interest prevents Grantor from selling its inventory, then the inventory will lose its circulating character and Grantor’s business will likely grind to a halt. The same is true if SP and Grantor enter into a receivables financing agreement on a non-notification basis.40 In that case, it will be self-defeating if SP’s security interest prevents Grantor from collecting its accounts and putting the proceeds back into the business. This raises the question, how can Grantor give SP a security interest in its inventory, accounts and the like, but at the same time reserve a right of disposal? 1.34 In Benedict v Ratner,41 the United States Supreme Court struck down a non-notification receivables financing agreement on the ground that a transfer of

property which reserves a right of disposal to the transferor is void as against [page 17] Grantor’s creditors under the fraudulent conveyance laws. The parties cannot have it both ways. Either Grantor intends to assign the collateral to SP or it does not. The reservation to Grantor of a right of disposal is inconsistent with an intention to assign. Grantor must either give up ‘dominion’ over the collateral or run the risk of a court concluding that the assignment is not a genuine one. To escape the decision, future lenders were forced into exercising dominion over their security. What came to be the standard practice in non-notification receivables financing was for the assignor to remit the collection proceeds daily to the assignee, subject to reremittance to the assignor at a later date. The reasoning in Benedict v Ratner applied equally to inventory financing agreements and, again, to avoid the decision, financiers were forced to exercise dominion over the collateral in a variety of ways. These practices persisted in the United States until the advent of Art 9 of the Uniform Commercial Code, which abolished the dominion rule and reversed Benedict v Ratner.42 1.35 Anglo-Australian law took a different path. English courts developed the floating charge in response to the right of disposal problem and the Australian courts followed suit. The floating charge is an equitable charge, typically over assets such as inventory and accounts and their proceeds. As noted earlier, a charge is a form of hypothecation. It gives SP the right to claim payment out of a particular fund or asset belonging to Grantor. What makes the floating charge distinctive is that, until Grantor defaults, the charge does not attach to any particular asset. Instead it ‘floats’ over Grantor’s shifting mass of assets. While the floating charge remains in this suspensory state, Grantor is free to deal with the collateral, subject to any restrictions the agreement may stipulate. There is no interference with SP’s rights because SP has no rights to any specific asset. The picture changes if Grantor defaults. Subject to the terms of the security agreement, default causes the floating charge to ‘crystallise’. Crystallisation brings the suspensory state of the charge to an end. It converts the floating charge into a fixed charge over whatever collateral Grantor happens to own at that point and it deprives Grantor of its freedom to deal with the collateral. SP’s usual remedy upon crystallisation is to appoint a receiver.43 The receiver’s function is to take control of Grantor’s business, collect in and

liquidate the collateral and pay over the sale proceeds to SP in full or partial satisfaction of Grantor’s debt. 1.36 The PPSA abolishes the floating charge concept. This does not mean that it is no longer possible to take a security interest in circulating assets. On the contrary, the statute expressly contemplates the possibility. Post-PPSA, a security interest in circulating assets, such as inventory or accounts, takes effect as a fixed security interest coupled with an express or implied licence [page 18] for the grantor to deal with the asset in the ordinary course of business. The security interest attaches to each item of new collateral as the grantor acquires it, becomes unattached when the grantor disposes of the assets in the ordinary course of business and attaches simultaneously to the disposal proceeds.44 The application of the statute to security interests in circulating assets is discussed further in Chapters 4 and 11.

THE HISTORY OF THE AUSTRALIAN PPS REFORMS 1.37 As will be evident from the foregoing account, the pre-PPSA law of secured transactions in Australia was a patchwork system of statutory initiatives supplemented by common law and equitable principles. There were numerous forms of security and quasi-security interest, and the tendency was for the law to regulate them according to their form rather than their substance. In other words, the rules varied depending on factors which, for the most part, had no sound basis in policy or business convenience. 1.38 For example, some transactions were subject to a registration requirement but others were not. In this sense the commitment to registration for the publication of security interests was insufficient. There were numerous registration statutes directed at particular types of transaction, particular types of collateral and particular types of debtor, while registration requirements for the same types of transaction commonly varied from state to state.45 In this sense, the commitment to registration was excessive. In short, there were both gaps and overlaps in the prePPSA registration requirements; in some cases, there was no provision for

registration at all,46 while in other cases the same security interest had to be registered more than once.47 [page 19] 1.39 Some registration statutes contained priority rules for resolving competing claims to collateral, while others did not. Where there was no provision for registration, or where the relevant registration statute did not include priority rules, the common law applied. The statutory priority rules varied from one statutory scheme to another so that, at this level, too, there was no coherent pattern of regulation and, in cases where registration statutes overlapped, transactions were potentially subject to conflicting sets of priority rules.48 The non-statutory priority rules were an uneasy mix of common law and equitable inputs codified and modified in part by the Factors Acts and sale of goods legislation. 1.40 The same lack of coherence was evident in the remedies context. As mentioned earlier, in the case of a security interest in the strict sense, a defaulting grantor had a right to redeem the collateral by paying out the secured party in the period following repossession and before sale. Furthermore, the grantor was entitled to any surplus following the secured party’s repossession and sale of the collateral. Subject to some non-comprehensive statutory exceptions,49 the grantor of a quasisecurity interest did not enjoy these rights. 1.41 The Australian PPSA is based in part on Canadian legislation,50 and also on Art 9 of the United States Uniform Commercial Code. It is similar to the New Zealand PPSA, which preceded the Australian reforms by 10 years or so,51 though the New Zealand statute adheres more closely to the Canadian model. In common with the PPSA family at large, the Australian PPSA applies to every transaction which in substance creates a security interest, without regard to the actual form the parties choose, and it addresses every aspect of secured lending, including the formal requirements for security agreements, publication of security interests, priority between competing claims to [page 20]

collateral and remedies for default. At each of these stages, the statute enacts a more or less common set of rules for all secured transactions. There are special rules for certain cases, but these rule variations are dictated by considerations of policy and business convenience rather than by matters of form. 1.42 The PPSA’s substance over form approach to the regulation of secured transactions is by no means entirely novel in Australia. Article 9-type reforms were recommended by the Molomby Committee as long ago as 1971, in the context of a comprehensive review of the consumer credit laws.52 The committee’s proposals were not acted on at the time, but they were not entirely unproductive. The Molomby Committee Report eventually led to the enactment of new consumer credit laws, which included provisions relating to the enforcement of consumer security interests. The new legislation adopted the Art 9 substance over form philosophy and the definition of ‘security interest’ was based loosely on the Art 9 version. This feature has survived through several major overhauls of the consumer credit legislation and it remains in the current, now federal, version.53 1.43 The Molomby Committee proposals also led to the enactment of the state laws governing registration of security interests in motor vehicles, and these had a number of features borrowed from the Art 9 model, including: (1) a generic concept of security interest, similar to the credit laws; (2) a registration system based on the concept of notice filing rather than document filing;54 and (3) in two states — Victoria and Western Australia — adoption of the key Art 9 concepts of ‘attachment’ and ‘perfection’. 1.44 However, the Molomby Committee’s broader recommendations for wholesale personal property securities law reform were pre-empted by amendments to the registration of charges provisions in the companies legislation, which introduced rules for determining priorities between competing charges. The registration of company charges provisions, as amended, fell far short of what the Molomby Committee had in mind because they dealt only with the registration issue and not the full range of matters covered by Art 9. Furthermore, they were limited to corporate security interests and they applied only to some forms of security interest and selected types of collateral. The legislation provided for document filing rather than notice filing and the priority rules were modelled, not on Art 9, but on the legislation governing registration of title deeds for general law land. In short, the reforms were outmoded from their inception. 1.45 In 1988, the New Zealand Law Commission published a report

recommending the adoption in New Zealand of personal property securities [page 21] legislation based on Art 9.55 This led ultimately to the enactment of the Personal Property Securities Act 1999, which came into force in 2002.56 In the meantime, in May 1990, the Australian Law Reform Commission (ALRC) was given a reference on the topic of personal property securities by the Commonwealth AttorneyGeneral. The reference included the object of harmonising personal property securities law between Australia and New Zealand, and it directed the ALRC to take account of the New Zealand Law Commission’s report. The Law Reform Commissions of New South Wales (NSWLRC), Victoria (VLRC) and Queensland (QLRC) were also given references on the topic by their respective AttorneysGeneral with the idea that the four commissions would cooperate in the production of a joint report. 1.46 As the project developed, however, disagreements surfaced between the participants and these turned out to be unresolvable. In August 1992, the VLRC and the QLRC decided to go it alone and publish their own discussion paper.57 A week later the ALRC’s discussion paper, written in conjunction with the NSWLRC, appeared.58 This was followed by a report, published in May 1993.59 As it happens, there was substantial common ground between the four commissions, and they all subscribed to the case for reform. The main points of disagreement related to drafting issues and whether the reforms should be enacted at the federal or state level. On the drafting issue, the QLRC and VLRC view was that the new Australian laws should be modelled on one or other of the Canadian PPSAs,60 adopting the Canadian text except where modifications were necessary to cater for policy differences or differences in Australian background law. A radically new drafting approach would mean loss of the opportunity for Australia to take advantage of the Art 9 and Canadian PPSA case law and literature, it would create needless uncertainty and it would increase the risk of mistakes in the drafting process. New Zealand saw the light on this front from the outset: the original New Zealand draft Bill used the then current British Columbia PPSA as a model, while the New Zealand PPSA, as eventually enacted, closely follows the Saskatchewan PPSA. On the other hand, the ALRC opted to re-invent the wheel. Its 1993 report included a draft Bill which the ALRC described as ‘based on the Article 9

approach’, [page 22] but ‘adapted to meet the needs of Australian jurisdictions’.61 In truth, though, the draft Bill was not simply a modification of Art 9. It was radically different legislation.62 Canadian experts, invited to comment on earlier versions of the draft Bill, concluded that the proposed system was so different from the North American model that it was inaccurate to describe it as being based on Art 9 at all.63 The final version of the draft Bill did not address these criticisms, and the ALRC made no serious attempt in its report to justify Australia taking such a radically different tack. In these circumstances, the VLRC and QLRC concluded that they could not subscribe to the ALRC’s proposals. 1.47 The other point of disagreement related to constitutional matters. The ALRC is a federal body, charged with the oversight of federal laws. Not surprisingly, given this mandate, it favoured implementation of the proposed reforms at the federal level. The sticking point was that comprehensive personal property securities legislation lay beyond the reach of the Federal Parliament. The best that could be achieved, or so the thinking went at the time, was legislation covering security interests given by companies, based on the power of the Parliament to make laws with respect to corporations.64 On this basis, the ALRC recommended the enactment of the proposed reforms in the corporations legislation by way of substitution for the provisions governing registration of company charges. Its hope was that the states would enact mirror-image statutes to cover security interests given by debtors other than companies. But this scheme would require uniform legislation enacted simultaneously in all the states and territories together with intergovernmental cooperation in the design of a centralised registration system, and the ALRC made no suggestions for coordinating the enterprise. 1.48 The QLRC and VLRC’s proposal was for a cooperative arrangement, supported by an inter-governmental agreement, along the lines of the template approach that was used, for example, to secure uniform state and territory consumer credit laws in the mid-1990s.65 This would involve the selection of a lead state to draft and enact a model PPSA which would then be adopted by all the other states and territories on a uniform basis. The model statute would cover security interests given by corporate and non-corporate debtors alike. There would be a single

national register of security interests, established as part of the cooperative arrangement, and this would serve as the register for each of the state and territory laws. 1.49 Unsurprisingly, the Law Reform Commissions’ disagreement scared off governments and stakeholders alike, and neither the ALRC’s proposals, nor [page 23] those of the VLRC and QLRC, were ever acted on. The cause might have been lost forever at that point had it not been for the unflagging efforts of the late Professor David Allan at the Bond University Law School to keep the issue alive.66 The years went by without Allan’s endeavours bearing any visible signs of fruit, but at last in early 2005 he managed to catch the ear of the then Commonwealth AttorneyGeneral Philip Ruddock.67 An invitation to address the Standing Committee of Commonwealth and state Attorneys-General followed, and this set in motion a process which led to the publication of an Exposure Draft Personal Property Securities Bill in 2008, a revised version of which was enacted in December 2009.68 The statute commenced operation on 30 January 2012.69 1.50 In contrast to the ALRC draft Bill published 16 years earlier, the PPSA does substantially track Canadian law. Like the New Zealanders before them, the Australian drafters took the Saskatchewan PPSA as a model. On the other hand, there are many more departures from the model in the Australian PPSA than there are in the New Zealand version. The differences, which will be identified at appropriate points in the following chapters, are at the level of both drafting and policy. The 2008 Exposure Draft Bill was more dramatically different from the Saskatchewan model. Following recommendations made by the Senate Standing Committee on Legal and Constitutional Affairs, however, the Bill was substantially redrafted to remove some of its more idiosyncratic features.70 1.51 The PPSA is a federal statute and the constitutional issue which so divided the Law Reform Commissions has been addressed by the referral of state powers to the Commonwealth pursuant to para 51(xxxvii) of the Commonwealth Constitution.71 This solution is much better than the ALRC’s proposal because it allows for the enactment of a comprehensive statute and the

[page 24] establishment of a single, comprehensive register of personal property security interests without regard to the corporate status of the grantor. The solution is also better than the VLRC and QLRC’s proposal because it avoids the costs of the complex inter-governmental arrangements required for the achievement and maintenance of uniform laws at the state and territory level.72 The fact that the Australian PPSA is a federal one represents a significant advance on Canada, which has 13 separate provincial and territory PPSAs and PPS registers, and the United States which has 50. This feature of the Australian reforms is discussed further in Chapter 6.

THE STATUTORY REVIEW 1.52 PPSA s 343 provides that the Minister (the Attorney-General) must commission a review of the Act after three years of operation. The review was announced on 14 April 2014 and Bruce Whittaker, a Melbourne solicitor, was appointed to conduct the review. The terms of reference required the submission of an interim report by 31 July 2014 covering the statute’s impact on small business and a final report by 30 January 2015. The interim report was delivered on the date required by the terms of reference and was released to the public on 15 August 2014.73 The final report was delivered on 27 February 2015 and tabled in Parliament on 18 March 2015.74 The final report is 530 pages long and makes 349 recommendations for improving the statute and the register. The report is now under consideration by the Attorney-General’s Department, and at the time of writing it remains unclear what the next steps will be and when they will be taken. Some of the review’s most important recommendations require changes to the registry technology. At this stage, it is unclear what these changes will cost and whether the government will be prepared to pay. The review’s main recommendations are identified and discussed in the following chapters. 1.53 Most of the report is devoted to making specific recommendations for reform. But it also makes the alarming findings that: (1) levels of awareness [page 25]

of the Act remain low, particularly among the small business community; (2) stakeholders continue to have trouble understanding the Act; and (3) parties are finding compliance difficult, with the registration requirements being a particular cause for concern in this respect.75 The report acknowledges there will always be transitional costs associated with major law reforms, but it goes on to say that ‘the levels of frustration and anxiety revealed in the submissions go beyond mere “teething problems” ‘.76 Canadians did not experience this level of difficulty when their PPSAs were introduced, nor did the New Zealanders, so it needs to be asked why the Australian experience has been different. One of the main factors must surely be the length and complexity of the Australian PPSA. As indicated above, the statute is based loosely on the Saskatchewan PPSA, but it departs from the model in numerous significant respects. The review makes this point as follows: The developers of the Act appear to have endeavoured to produce a ‘best of breed’ piece of personal property securities legislation, by picking out the best elements of the off-shore models and then adding additional detail in an effort to explain more clearly [and] exactly what is required. Rather than helping Australian businesses, however, this has had the effect of creating very specific and detailed operational requirements. It limited flexibility and required changes to operating practices in order to align them with the structures required by the new rules.77

Added to these difficulties with the statute itself, there are some serious design flaws in the register, the consequences of which have been to make the registration and search processes unnecessarily complex and to generate significant levels of uncertainty as to both the validity of registrations and the reliability of search results: see Chapter 6. The report cites as further additional factors the widespread lack of awareness of the statute and the use in the statute of unfamiliar terminology imported from overseas.78 But these factors were also in play during the early days of the New Zealand PPSA and they did not prevent the New Zealanders from managing the transition to the new law.79 So the decisive factors in Australia must lie in the drafting of the statute and the design of the register. Most of the review’s specific [page 26] recommendations are aimed at correcting these problems. If implemented properly, most of the proposed reforms should alleviate stakeholder concerns. But proper implementation depends on the government being willing to do things differently next time round. Specifically, as the review itself recommends, there needs to be

substantially more consultation in the drafting process, closer attention paid to the practical and commercial implications of the legislation and a greater receptiveness on the part of the Office of Parliamentary Counsel to private sector inputs.80

1. 2.

3. 4. 5. 6. 7.

8. 9.

10. 11.

12.

13. 14.

15.

For a fuller account, see Hugh Beale, Chitty on Contracts, 31st ed, Sweet & Maxwell, London, 2012, Vol II, ch 38. This account assumes a two-party transaction, as in Example 2. The two-party transaction is the typical case, but sometimes a third party may provide the security in support of Debtor’s obligation: see 1.11–1.12 below. This variable does not affect the basic principles stated in the text except that, in the case of a three-party transaction, Creditor’s real remedy (repossession of the truck) will be exercisable against the third party, whereas its personal remedy (the action for any shortfall) will be exercisable against Debtor. Post-PPSA, the most important limitation is that Creditor’s security interest must be perfected at the date of Debtor’s bankruptcy: see further Chapter 5 and Chapter 13 of this text. For a fuller account, see Christopher Symes and John Duns, Australian Insolvency Law, 3rd ed, LexisNexis Butterworths, Sydney, 2015. Or a third party’s assets: see above note 2. See Alan Schwartz, ‘Security Interests and Bankruptcy Priorities: A Review of Current Theories’ (1981) 10 Journal of Legal Studies 1. For a summary of the main arguments and citations to the leading contributions, see Anthony Duggan, ‘Personal Property Securities and Third Party Disputes’ in Michael Gillooly (ed), Securities over Personalty, Federation Press, Sydney, 1994, pp 236–44. For a more recent review, see John Armour, ‘The Law and Economics Debate about Secured Lending: Lessons for European Lawmaking?’ (2008) 5 European Company and Financial Law Review 3. See Edward I Sykes and Sally Walker, The Law of Securities, 5th ed, Law Book Company, Sydney, 1993, pp 739–40. PPSA s 10, ‘debtor’, ‘grantor’. This terminology is unique to the Australian PPSA. The other PPSAs, and Art 9, use the expression ‘debtor’ to describe both the secured party and the party who owes the secured obligation. This usage works well in the typical two-party case where the party who gives the security interest is also the party who owes the secured obligation, but in the three-party context ‘debtor’ must do double duty, referring to both B and C. See Ronald C C Cuming, Catherine Walsh and Roderick J Wood, Personal Property Security Law, 2nd ed, Irwin Publishing, Toronto, 2012, pp 14–15, discussing the issue in the Canadian context. Compare with National Consumer Credit Protection Act 2009 (Cth) Sch 1 [National Credit Code] s 48 which prohibits third-party mortgages as security for consumer credit contracts. The provision catches the three-party arrangement described in 1.11 above, but not the alternative arrangement described in 1.12. For discussion, see Anthony Duggan and Elizabeth Lanyon, Consumer Credit Law, Butterworths, Sydney, 1999, para 6.2.18. Subject to certain exclusions, in particular statutory licences, which are declared by the licensing statute not to be personal property for the purposes of the PPSA, and water rights. See 2.40–2.44 and 3.75 of this text. A security interest taken by a licensed pawnbroker is outside the scope of the PPSA: PPSA s 8. See Chapter 3. The pledgee has been described as holding a ‘special property’, or limited legal interest, in the asset but with title remaining in the pledgor: Louise Gullifer (ed), Goode on Legal Problems of Credit and Security, 5th ed, Sweet & Maxwell, London, 2013, para 1.47. Possession and registration are not the only methods of perfection provided for by the statute. The other

16. 17. 18.

19. 20.

21. 22. 23. 24.

25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37.

methods are identified and discussed in Chapter 5. The term ‘hypothecation’ reflects the point that the law implies, or ‘hypothesises’, the grantor’s right of sale. Holroyd v Marshall (1861–62) 10 HLC 191; Tailby v Official Receiver (1888) 13 App Cas 523. A chattel mortgage could be structured to avoid the bills of sale legislation: see Akron Tyre Company Pty Ltd v Kittson [1967] VR 231, discussed in Anthony Duggan and Elizabeth Lanyon, Consumer Credit Law, Butterworths, Sydney, 1999, para 1.1.8. See above note 8, at pp 386–97. See Bank of Montreal v Innovation Credit Union [2010] 3 SCR 3; Commissioner of Inland Revenue v Stiassny [2012] NZCA 93 at [56] and [57]. As explained in the text, within the framework of the PPSA itself, the distinction between legal and equitable interests is irrelevant. However, the distinction may continue to matter outside the PPSA context, for example where a PPSA security interest comes into conflict with a non-PPSA interest (such as a statutory claim) and the dispute is subject to non-PPSA priority rules. In cases like this, the PPSA security interest should be treated as legal in nature on the basis that it is at least in part a creature of statute: see Jacob S Ziegel and David L Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed, Butterworths, Toronto, 2000, p 116. See also, iTrade Finance Inc v Bank of Montreal [2011] 2 SCR 360 (competition between PPSA security interest and prior equitable non-security interest in the same asset), discussed in 4.14–4.22 of this text. For a detailed account in the Australian context, see John G H Stumbles, ‘The PPSA: The Extended Reach of the Definition of the PPSA Security Interest’ (2011) 34 University of New South Wales Law Journal 448. See, for example, Goods Act 1958 (Vic) s 24. Hugh Beale, Michael Bridge, Louise Gullifer and Eva Lomnicka, The Law of Personal Property Security, 2nd ed, Oxford University Press, Oxford, 2012, para 7.03. See above note 22, at para 5.03. The first Bills of Sale Act was enacted in England in 1854. A second statute was enacted in 1882. Legislation modelled on these enactments was introduced in all the Australian states, but not on any uniform basis. For a detailed analysis, see above note 8, at chs 12 and 13. For a complete list of citations, see Commonwealth of Australia Standing Committee of Attorneys-General, Review of the Law on Personal Property Securities: Options Paper (Commonwealth of Australia, Canberra, April 2006), Attachment B [SCAG Options Paper]. The bills of sale provisions in Instruments Act 1958 (Vic) Pt VI were repealed by the Chattel Securities Act 1981 (Vic). The Bills of Sale Act 1898 (NSW) was replaced by the Security Interests in Goods Act 2005 (NSW), which extended the registration requirement to title retention arrangements, but expressly excluded hire-purchase and conditional sale agreements: see s 3. By contrast, the Bills of Sale and Other Instruments Act 1955 (Qld) was expressly extended to such transactions: see s 6D. See above note 11, at para 1.1.8. [1895] AC 457. Factors Act 1889 (UK) s 9. [1893] 2 QB 318. [1895] AC 471. For a fuller account, see above note 11, at para 1.1.6. Esanda Ltd v Burgess [1984] 2 NSWLR 139. For details, see above note 11, at para 13.1.2. See above note 11, at para 13.1.2. For example, see above note 22, at paras 1.03 and 1.31–1.37. See above note 22, at para 1.03. Now superseded by the National Credit Code: National Consumer Credit Protection Act 2009 (Cth) Sch 1; see above note 25, Attachment B, para B5. The statute also applies to a lease of goods in certain circumstances, whether or not it in substance secures

38. 39. 40. 41. 42. 43.

44. 45. 46.

47.

48. 49.

50.

51. 52.

performance of an obligation: PPSA subs 12(3) and s 13. See Chapter 3 of this text. Tailby v Official Receiver (1888) 13 App Cas 523; Holroyd v Marshall (1861–62) 10 HLC 191. PPSA subss 18(2) and 19(2). The PPSA uses the term ‘attachment’ to describe the point at which the secured party acquires an enforceable security interest: see Chapter 4 of this text. That is, on terms that the account debtors are not notified of the agreement between SP and Grantor and on the understanding that Grantor will continue to collect the accounts until notified by SP. 268 US 353 (1925). Uniform Commercial Code — Secured Transactions s 9-205. There was no rule against the secured party enforcing the charge itself, but it was not recommended because of the strict ‘anti-waste’ rules which nineteenth-century courts applied against the chargee. Receivership provisions in the charge agreement overcome this difficulty by deeming the receiver to be the debtor’s agent. PPSA ss 19 and 32. For details, see above note 24, Attachments B and D. For example, hire-purchase except: (1) in Queensland, where ‘bill of sale’ was defined to include a hirepurchase agreement (Bills of Sale and Other Instruments Act 1955 (Qld) ss 2(1) and 6(5)); and (2) hirepurchase agreements covering motor vehicles, and in some states certain other serial-numbered goods as well, which were subject to the legislation governing registration of security interests in motor vehicles (for example, Registration of Interests in Goods Act 1986 (NSW)). There were two types of overlap problem: (1) where the same security interest was subject to different registration statutes in the same jurisdiction; and (2) where there was corresponding legislation in more than one state and each state had a separate register. An example of case (1) was the interaction between the registration of charges provisions in the corporations statute and the registration requirements in the Patents Act 1999 (Cth): see John V Swinton, ‘Security Interests in Intellectual Property in Australia’ in Howard P Knopf (ed), Security Interests in Intellectual Property, Thomson Canada, Toronto, 2002, p 377. Another example was the overlap between the registration of company charges provisions in the corporations statute and the legislation governing registration of security interests in motor vehicles: see Australian Central Credit Union v Commonwealth Bank of Australia (1990) 54 SASR 135, reversed (1991) ASC 56-037. An example of case (2) were the first-generation state laws governing registration of security interests in motor vehicles: see Douglas Financial Consultants Pty Ltd v Price [1991] 1 Qd R 243. See the cases cited above in note 47. Most notably, the hire-purchase statutes and the consumer credit laws. The hire-purchase statutes did not apply to a hiring agreement where the hirer was not expressly obliged or entitled to purchase the goods and, in any event, most states repealed their hire-purchase statutes following enactment of the consumer credit laws. The consumer credit laws, for their part, are more comprehensive in terms of the range of transactions they cover, but they only apply if the grantor is a consumer. Personal Property Security Act RSA 2000, c.P-7 (Alberta); Personal Property Security Act RSBC 1996, c.359 (BC); Personal Property Security Act CCSM, c.P35 (Manitoba); Personal Property Security Act SNB 1993, c.P-71 (New Brunswick); Personal Property Security Act SNL 1998, c.P-7.1 (Newfoundland and Labrador); Personal Property Security Act SNWT 1994, c.8 (Northwest Territories); Personal Property Security Act SNS 1995–96, c.13 (Nova Scotia); Personal Property Security Act SNWT 1994, c.8 (Nunavut); Personal Property Security Act RSO 1990, c.P-10 (Ontario); Personal Property Security Act RSPEI 1988, c.P-3.1 (Prince Edward Island); Personal Property Security Act 1993, SS 1993, c.P-62 (Saskatchewan); Personal Property Security Act RSY 2002, c.169 (Yukon). The Canadian provincial PPSAs are substantially uniform, with the exception of Ontario. The Australian law-makers worked mainly from the Saskatchewan PPSA, but there are only minor differences between the Saskatchewan PPSA and the PPSAs in the other provinces apart from Ontario. Personal Property Securities Act 1999 (NZ). Committee of the Law Council of Australia, Report to the Attorney-General for the State of Victoria on Fair Consumer Credit Laws (1971), chs 5.9–5.15 (Molomby Committee).

53. 54. 55.

56.

57.

58. 59. 60. 61. 62. 63. 64. 65. 66.

67. 68. 69. 70. 71.

72.

73. 74.

National Consumer Credit Protection Act 2009 (Cth) Sch 1. See Chapter 6 of this text. New Zealand Law Commission, A Personal Property Securities Act for New Zealand (Report No 8, 1989). The NZLC report built on work previously done for the Commission by two consultants: John Farrar and Mark O’Regan, Reform of Personal Property Security Law: A Report to the Law Commission (NZLC Preliminary Paper No 6, 1988). For a fuller account, see Anthony Duggan and Michael Gedye, ‘Personal Property Security Law Reform in Australia and New Zealand: The Impetus for Change’ (2009) 27 Penn State International Law Review 655. Queensland Law Reform Commission and Law Reform Commission of Victoria, Personal Property Securities Law: A Blueprint for Reform (QLRC Discussion Paper No 39 and VLRC Discussion Paper No 28, August 1992). Personal Property Securities (ALRC Discussion Paper No 52, NSWLR Discussion Paper No 28, 1992). Personal Property Securities (ALRC Report No 64, 1993). See above note 50. See above note 59, at para 4.17. For more detail, see Anthony Duggan, ‘Personal Property Security Law Reform: The Australian Experience to Date’ (1996) 27 Canadian Business Law Journal 176 at 182–4. Letter from Professor Ronald Cuming to ALRC dated 17 November, 1992; letter from Professor Jacob Ziegel to ALRC dated 25 November 1992. Australian Constitution para 51(xx). See above note 11, at para 1.2.6. Professor Allan’s efforts are detailed in Craig Wappett, ‘Background and Overview of PPSA’ in Craig Wappett, Steve Edwards and Bruce Whittaker, Personal Property Securities in Australia (LexisNexis looseleaf), para 1.900. See above note 56, at pp 657–8, where the details are related. For a fuller account, see above note 66 at para 1.900. PPSA ss 310–318 provide that the various parts of the statute operate prospectively from the commencement date. Commonwealth of Australia Senate Standing Committee on Legal and Constitutional Affairs, Report on the Exposure Draft of the Personal Property Securities Bill 2008 (March, 2009). The scheme is supported by an agreement entered into between the Commonwealth and state governments: Inter-Governmental Personal Property Securities Law Agreement (2 October, 2008). The inter-governmental agreement is reflected in PPSA Pt 7.3 Div 2, which deals with the constitutional basis of the statute. Acting pursuant to the inter-governmental agreement, each state has passed legislation referring its jurisdiction over PPSA matters to the Commonwealth. See, for example: Personal Property Securities (Commonwealth Powers) Act 2009 (NSW); Personal Property Securities (Commonwealth Powers) Act 2009 (Qld); Personal Property Securities (Commonwealth Powers) Act 2009 (SA); Personal Property Securities (Commonwealth Powers) Act 2010 (Tas); Personal Property Securities (Commonwealth Powers) Act 2009 (Vic). But there is a jurisdictional downside to the model that has been adopted. Because the PPSA is a Commonwealth statute, cases heard under it involve the exercise of federal jurisdiction. Commonwealth Constitution ss 71 and 77 provide for the vesting of federal jurisdiction in federal and state courts, but they do not permit the exercise of federal jurisdiction by non-judicial or quasi-judicial bodies, such as Commercial and Consumer Claims Tribunals. PPSA s 207 vests jurisdiction over PPSA matters in the various federal and state courts, but not tribunals. This limitation has access to justice implications, particularly for PPSA cases involving consumers: see above note 66, at para 1.4500. Bruce Whittaker, Review of the Personal Property Security Act 2009: Interim Report, Commonwealth of Australia, 2014, available at . Bruce Whittaker, Review of the Personal Property Security Act 2009: Final Report, Commonwealth of

75. 76. 77. 78. 79.

80.

Australia, 2015, available at (‘Statutory Review: Final Report’). Statutory Review: Final Report, ch 3. Paragraph 3.3.2. Paragraph 2.4.2. Paragraph 3.2.3. See Mike Gedye, ‘Practitioner Attitudes to the PPSA’ (2012) 4 New Zealand Law Journal 118, reporting the results of an informal survey of legal practitioners 10 years after the enactment of the New Zealand PPSA: ‘Overall, practitioners preferred the new law to the old by more than 20 to 1’ and ‘furthermore, from those respondents who might be considered to confront this area of law most often (banking and finance lawyers, insolvency lawyers and others who self-identified as very frequent users of the law), none believed that the prior law was better and that the Act should not have been passed’. Statutory Review: Final Report, para 10.1.2.

[page 27]

CHAPTER 2 Personal Property and its Classifications INTRODUCTION 2.1 The Personal Property Securities Act 2009 (Cth) (PPSA) applies to security interests in personal property, subject to some exceptions in s 8. This chapter deals with the meaning of personal property and its classifications. The s 8 exceptions are discussed in Chapter 3. PPSA s 10 defines ‘personal property’ to mean property other than land or a statutory entitlement that is declared by the statute in question not to be personal property for the purposes of the PPSA. 2.2 The PPSA divides personal property into four main categories: 1. 2. 3. 4.

goods; financial property; intermediated securities; and intangible property.

It divides financial property into five sub-categories: 1. 2. 3. 4. 5.

chattel paper; currency; documents of title; investment instruments; and negotiable instruments.

Intangible property is a residual or catch-all category and it means any personal property that does not fit under any of the other three main categories.1 The most important examples of intangible property are: •

accounts;

•

ADI accounts;2 [page 28]

•

intellectual property; and

•

licences.

This catch-all definition of intangible property means the classification scheme is comprehensive, in the sense that it captures every kind of personal property except for the statutory entitlements referred to in the definition of ‘personal property’. The PPSA classification scheme is important because, while many of the PPSA provisions apply across the board, without regard to differences in collateral type, there are some special rules for particular types of collateral or collateral-type groupings and the classification scheme reflects these differences. For example, the rules governing a transferee’s claim to the various types of financial property are different from the rules governing a transferee’s claim to, say, goods, and this explains why the statute groups the various types of financial property together and also why it puts financial property and goods into separate categories. The comprehensive application of the PPSA to all kinds of personal property is a feature the Australian PPSA has in common with the Canadian and New Zealand PPSAs and also Art 9 of the United States Uniform Commercial Code. Furthermore, many of the specific property types the Australian statute refers to feature in the other statutes as well, though sometimes under slightly different names: goods, intangible property, chattel paper, investment instrument, and so on. 2.3 The classification scheme in the Australian PPSA, however, is different in some important respects from the scheme the other statutes employ, and the reader must be careful to keep these differences in mind when consulting case law or secondary materials from other PPSA jurisdictions. The other statutes divide personal property into seven categories: goods, documents of title, chattel paper, instruments (‘negotiable instruments’ in the Australian PPSA), money (‘currency’ in the Australian PPSA), investment property (‘investment instrument’ in the Australian PPSA) and intangibles (‘intangible property’ in the Australian PPSA). In the other statutes, security entitlements (‘intermediated securities’ in the Australian PPSA) are a sub-category of investment property, whereas the Australian PPSA treats them as sui generis.3 On the other hand, the Australian PPSA groups investment instruments with chattel paper, currency, documents of title and

negotiable instruments under the heading ‘financial property’, and there is no equivalent grouping in the other statutes. The other statutes divide ‘goods’ into three sub-categories: inventory, equipment and consumer goods. The Australian PPSA takes a different approach. It divides personal property into commercial property and consumer property and it implicitly subdivides commercial property into inventory and non-inventory personal property. The main implication of the Australian approach is that references [page 29] in the statute to inventory are not limited to goods and, likewise, consumer protection provisions in the statute apply whether the collateral is goods or some other type of personal property: see 2.52–2.56. In contrast to the other statutes, the Australian PPSA does not have a specific sub-category for equipment and the term ‘equipment’ does not appear in the statute. However, as indicated above, the statute does distinguish between inventory and non-inventory commercial property, and equipment is the most obvious example of non-inventory commercial property. The balance of this chapter discusses the various types of personal property and their statutory groupings in more detail.

GOODS 2.4 PPSA s 10 defines ‘goods’ to mean personal property that is tangible property. It goes on to say that the expression includes crops, livestock, wool, extracted minerals, and satellites and other space objects, but that it does not include financial property or an intermediated security. Financial property and intermediated securities are the other categories of tangible property in the statutory classification scheme, and the purpose of the closing words of the definition is to make it clear that the categories are mutually exclusive. 2.5 ‘Crops’ are separately defined to mean crops that have not yet been harvested, including unharvested agricultural products and trees (but only if the trees are personal property). The upshot is that, for the purposes of the statute, a growing crop is personal property and not part of the land. The aim is to facilitate crop security interests and subs 84A(1) supplements the definition by making it clear that a security interest may attach to crops while they are growing. Section 84 enacts a rule for resolving competing claims between a secured party with a security

interest in a growing crop and a third party holding an interest in the land on which the crop is growing.4 2.6 The definition of ‘crops’ includes growing trees, but only if they are personal property. At common law, growing trees form part of the land and do not become goods until they are severed.5 Given this, when, if ever, will a growing tree be personal property? The PPSA does not address this question, but a clue to the answer can be found in the Canadian PPSAs from which [page 30] the Australian definition of ‘crops’ was taken. The Canadian definition is more expansive than the Australian version: it provides that crops includes trees, but only if, for example, the trees are being grown as nursery stock or are intended to be replanted in another location for reforestation purposes.6 Fruit growing on trees is a crop within the meaning of the first part of the definition. Timber that has already been cut is not a crop, but it is captured by the words ‘personal property that is tangible property’ in the definition of goods. 2.7 ‘Livestock’ is defined to include the usual array of farm animals, the unborn young of these animals and the as yet unrealised products of livestock, such as wool on the sheep’s back. The upshot is that, for the purposes of the statute, an unborn calf, for example, is an item of personal property separate from the mother, and that wool on the sheep’s back, and the like, is personal property legally distinct from the animal itself. The aim is to facilitate security interests in these types of collateral and subs 84A(2) supplements the definition by making it clear that a security interest may attach to wool on a sheep’s back, for example, before the sheep is shorn.7 2.8 ‘Goods’ also includes minerals, but, as the definition indicates, only after they have been extracted. Until extraction, minerals form part of the land. Finally, the definition refers to satellites and other space objects, the purpose being to avoid any issues that might otherwise arise from the fact that these assets may not be located on earth. 2.9 In the Canadian PPSAs, ‘goods’ is also defined to include fixtures, and the legislation enacts special rules for disputes between a secured party with a security interest in a fixture and a third party with an interest in the land on which the fixture is located. The Australian and New Zealand PPSAs both omit the fixtures

provisions. This is unfortunate because it means both countries have passed up a golden opportunity to reform and simplify the common law rules governing competing fixtures claims.8 The omission is also anomalous because in both countries the PPSAs do address the analogous cases of security interests in growing crops and security interests in accessions. Section 6 of the Chattel Securities Act 1987 (Vic) deals with competing claims to fixtures, and this provision continues to apply [page 31] post-PPSA.9 However, there are no corresponding provisions in the other states or territories.10 2.10 A ship is goods within the meaning of the PPSA and the statute applies to a security interest in a ship in the same way it applies to other security interests. The Shipping Registration Act 1981 (Cth) has been amended so that it no longer applies to ship mortgages. The purpose is to avoid overlap with the PPSA registration requirements and priority rules, and the effect is to make the PPS register the sole register for security interests in ships.11

FINANCIAL PROPERTY Introduction 2.11 PPSA s 10 defines ‘financial property’ to mean chattel paper, currency, documents of title, investment instruments and negotiable instruments.

Chattel Paper 2.12 ‘Chattel paper’ is defined, essentially, to mean one or more documents that evidence both a monetary obligation and a security interest in or lease of specific goods.12 Example 1. Dealer is a motor vehicle dealer. She enters into a hire-purchase agreement for the supply of a truck to Grantor. Later, Dealer assigns the hire-purchase agreement to Bank.

The hire-purchase agreement is chattel paper within the meaning of the statute. Applying the words of the definition, it is a document that evidences a monetary obligation (Grantor’s obligation to pay the hire-purchase

[page 32] instalments) and a security interest in specific goods (Dealer’s reserved title is a security interest for the purposes of the Act13). Assume that, in Example 1, instead of supplying the truck to Customer on hire-purchase terms, Dealer had sold the truck to Customer outright, giving Customer a loan to finance the purchase and taking a security interest in the truck to secure repayment. The loan and the security agreement might be in separate documents or they might be combined in a single document. Either way, the documentation is chattel paper; in the first case, the chattel paper is represented by two documents, while in the second case it is represented by one. Chattel paper will typically be in hard-copy form, but the statute also makes provision for electronic chattel paper.14 2.13 Chattel paper is personal property in its own right, distinct from the collateral it relates to. This means, as Example 1 indicates, that Dealer can trade the chattel paper, for example, or offer it as collateral to a third party. In Example 1, following the assignment, Bank effectively takes over Dealer’s rights against Customer: it becomes entitled to the stream of payments generated by the hirepurchase agreement and it takes over Dealer’s security interest which it can enforce against Customer if necessary. Suppose that, instead of assigning the chattel paper to Bank, Dealer gave Bank a security interest in the chattel paper in support of a loan. In that case, if Grantor defaulted on the loan, Bank could rely on the chattel paper as a source of repayment. Specifically, Bank could take over the collections from Customer and, if Customer defaulted on their obligations under the hirepurchase agreement, Bank could repossess the truck. 2.14 One implication of this analysis is that chattel paper may generate two levels of competing claims. Example 2. Dealer is a motor vehicle dealer. She enters into a hire-purchase agreement for the supply of a truck to Grantor. On Date 1, Dealer assigns the hire-purchase agreement to SP1. On Date 2, Dealer assigns the chattel paper a second time to SP2. On Date 3, Grantor fraudulently sells the truck to Buyer. SP1 and SP2 locate the truck and they both claim it from Buyer.

In resolving this dispute, the first step is to determine SP1’s and SP2’s competing claims to the chattel paper. The rules governing competing claims to chattel paper are discussed in 10.77–10.85 of this text. The second step is to determine the competing claims to the truck between SP1 or SP2 on the one hand and Buyer on the other. The rules governing the competing claims of a secured party holding a security interest in goods and a subsequent purchaser of the goods

are discussed in 10.52 of this text. 2.15 In the PPSA taxonomy, chattel paper is distinguishable from an account. PPSA s 10 defines ‘account’ to mean a monetary obligation (whether or not earned by performance) that arises from: (a) a disposing of [page 33] property; or (b) granting rights or providing services in the ordinary course of business. Examples include accounts receivable (or book debts) and credit card receivables: see further 2.29–2.33 below. According to the statutory definition, an account is the monetary obligation itself. By contrast, the statute defines ‘chattel paper’ to mean the writing that evidences the chattel paper holder’s entitlement. In other words, chattel paper is tangible personal property, whereas an account is intangible personal property. In this respect, chattel paper is analogous to a bill of lading or a negotiable instrument: a bill of lading is a document of title to the goods it represents; a negotiable instrument is like a document of title to the underlying obligation owed by the party liable on the instrument; and chattel paper is like a document of title to the underlying secured obligation. It is for this reason that the statute groups chattel paper, documents of title and negotiable instruments together under the heading ‘financial property’.15 The Statutory Review has recommended deletion of the chattel paper concept from the statute on the ground that chattel paper financing arrangements are uncommon in Australia.16

Currency 2.16 ‘Currency’ is defined to mean currency authorised as a medium of exchange by the law of Australia or any other country.17 The reference is mainly to cash. In commercial usage, cheques, bank deposits and the like are often treated as being equivalent to cash. The PPSA differentiates these items from currency: for example, in the PPSA context a cheque is a negotiable instrument and a bank deposit is an ADI account. A secured party may have a claim to currency (cash) as original collateral or as the proceeds of collateral. Proceeds claims are discussed in Chapter 11. Example 3. SP takes a security interest in all Grantor’s present and after-acquired inventory. Grantor defaults and SP appoints a receiver. On the default date, Grantor has $10,000 cash in its office safe.

To claim the cash, SP must prove that it is proceeds of inventory. Suppose that, instead, SP’s security interest is in all Grantor’s present and after-acquired personal property. In this case, SP has a claim to the cash as original collateral and this avoids the need to establish where the cash originated.

Documents of Title 2.17 ‘Document of title’ is defined in s 10 to mean: a writing addressed by or to a bailee: (a) that covers goods in the bailee’s possession that are identified or are fungible portions of an identified mass; and

[page 34] (b) in which it is stated that the goods identified in it will be delivered: (i) to a named person, or to the transferee of that person; or (ii) to the bearer; or (iii) to the order of a named person.

2.18 The most common example of a document of title is an order bill of lading issued by a carrier. The document of title’s main distinguishing feature is its transferability. A document of title carries with it the right to claim from the bailee the goods to which the document relates and, correspondingly, a transfer of the document carries with it a transfer of the right to delivery of the underlying goods. A document of title is analogous to a negotiable instrument: a document of title evidences ownership of goods, while a negotiable instrument evidences ownership of a money obligation. For PPSA purposes, a document of title is an item of personal property in its own right and so it can be taken as collateral independently of the goods that it relates to. Example 4. Grantor obtains an order bill of lading from Carrier in Grantor’s name. SP lends Grantor $10,000 and takes a security interest in the bill of lading to secure repayment. To facilitate the transaction, Grantor endorses the bill of lading and delivers it to SP.

If Grantor defaults, SP can enforce its security interest by presenting the bill of lading to Carrier and taking possession of Grantor’s cargo. Conversely, to regain access to the cargo, Grantor must repay the loan and have SP endorse and deliver the bill of lading back to them.

Investment Instruments 2.19 ‘Investment instrument’ is defined to include shares, company and government debentures and bonds, derivatives, foreign exchange contracts, assignable options related to investment instruments, interests or units in managed investment schemes, financial products traded on a market or exchange, and any other financial product that is prescribed by the regulations. The definition excludes documents of title, intermediated securities and negotiable instruments.18 Documents of title and negotiable instruments are separate sub-categories of financial property, and the purpose of these exclusions is to make it clear that the sub-categories are mutually exclusive. Intermediated securities are a separate category of personal property and the purpose of this exclusion is to make it clear that investment instruments and intermediated securities are in different, mutually exclusive categories. This aspect of the PPSA classification scheme is counterintuitive; intermediated securities are a form of investment and locating them in a different part of [page 35] the classification scheme from financial products at large and investment instruments in particular is a recipe for confusion.19 2.20 An investment instrument may be in either certificated or uncertificated form. This is made clear by PPSA s 27, dealing with control of investment instruments, which provides expressly for both certificated and uncertificated investment instruments. A share in a company represented by a share certificate is an example of an investment instrument in certificated form, while a share in a company not represented by a share certificate is an example of an investment instrument in uncertificated form. But there is an important exception for uncertificated shares and other securities on the CHESS system.20 CHESS is a clearing house electronic subregister operated by ASX Settlement Pty Ltd and its function is to facilitate the electronic transfer of uncertificated shares and other securities. The CHESS subregister forms part of every Australian listed company’s principal register of securities. All listed companies are required to participate in CHESS unless the law of a foreign jurisdiction precludes participation. As originally enacted, the PPSA classified securities on the CHESS system as investment instruments. But the statute was amended in 2011 to reclassify CHESS securities as

intermediated securities instead. This was achieved by amending the definition of ‘intermediary’ in subs 15(2) to include a person who is licensed to operate a clearing house and settlement facility, and amending the definition of ‘securities account’ in subs 15(7) to include a record of holdings and transfers of interests in financial products that is maintained by a clearing house.21 2.21 At the conceptual level, the wisdom of this move is questionable, because securities on the CHESS system are directly held investments and it makes more sense to group them with other directly held investments under the investment instrument heading, rather than grouping them with indirectly held investments under the intermediated securities heading.22 On the other hand, in some contexts, at any rate, the point may not matter much. For example, both security interests in investment securities and security interests in intermediated securities can be perfected by control: see 5.25–5.33 of this text. The difference is that a security interest in intermediated securities is subject to the control rules in PPSA s 26, whereas a security interest in [page 36] an investment instrument is subject to the control rules in s 27. The 2011 amendments enacted an additional method of obtaining control, which caters specifically for security interests on the CHESS system: see further in this text at 5.25–5.27. If the statute classified CHESS securities as investment instruments, then s 27 would have been the appropriate place to locate this provision. However, the decision to reclassify CHESS securities as intermediated securities means that the provision is located in s 26 instead.23

Negotiable Instruments 2.22 ‘Negotiable instrument’ is defined to mean bills of exchange, cheques, promissory notes and certain other writings that evidence a right to payment of currency.24 The definition excludes certain rights to payment in connection with interests in land, and also documents of title and intermediated securities. The purpose of the latter exclusions is to preserve the integrity of the statutory classification scheme. As in the case of currency, a secured party may have a claim to cheques and the like as either original collateral or as proceeds. Typically, a claim to

cheques and the like as original collateral will arise where the security interest is in all the grantor’s present and after-acquired personal property and the grantor holds unbanked cheques on the date of its default.25

INTERMEDIATED SECURITY 2.23 There are two types of holding system for publicly traded investment instruments (shares, debentures and the like): the longstanding direct holding system and the more recent indirect holding system.26 In the direct holding [page 37] system, the investor’s entitlement derives from a direct legal relationship between the investor and the issuer of the investment instrument, and it is reflected in the issuer’s records. An investment instrument may be in either bearer or registered form and it may be certificated or uncertificated. A certificated investment instrument in bearer form is transferred in the direct holding system by delivery from the transferor to the transferee. A certificated investment instrument in registered form, and likewise an uncertificated investment instrument, is transferred in the direct holding system by the execution of a transfer document and registration of the transferee in the issuer’s books as the new owner. 2.24 The indirect holding system consists of a multi-tiered network of intermediaries, including central depositories, clearing houses, banks and brokers. The issuer issues securities to the first-tier intermediary which holds them in a securities account on behalf of the second-tier intermediary. The second-tier intermediary, in turn, holds its position in the first-tier intermediary’s securities account on behalf of the third-tier intermediary, and so on down the chain. An investor who wants to purchase, say, shares in the indirect holding system will pay their broker who, in turn, will credit the amount of the payment to a securities account maintained by the broker in the investor’s name. This gives the investor a direct holding in the broker’s securities account with the intermediary immediately above the broker and consequently an indirect holding in the securities accounts maintained by all the other intermediaries in the chain back to the original issuer. So, in contrast to the direct holding system, the investor’s entitlement is recorded, not in the issuer’s books but, rather, in the records of the broker. While the investor’s entitlement is reflected in the securities account, there is typically no

appropriation of specific investments to individual customers. To dispose of an investment in the indirect holding system, the investor simply instructs their broker who will then debit the investor’s account and pay back the investor.27 The main advantages of the indirect holding system are that: (1) it substantially reduces both the volume and movement of paper involved in the issue and transfer of securities; (2) it lowers the risk of loss or theft of negotiable securities; and (3) it facilitates the book-entry transfer of securities between customers of the same intermediary.28 2.25 In PPSA terminology, the product an investor acquires in the direct holding system is an ‘investment instrument’ (with the exception of CHESS securities which the PPSA classifies as intermediated securities), while the product of an investment in the indirect holding system is an ‘intermediated [page 38] security’.29 PPSA subs 15(1) defines ‘intermediated security’ to mean the rights of a person in whose name an intermediary maintains a securities account.30 The application of s 15 to CHESS securities is discussed in 2.19–2.21 above. The following account deals with the application of the provision to indirectly held securities. The statute defines ‘securities account’ to mean, in relation to indirectly held securities, an account to which interests in financial products may be credited or debited.31 In contrast to comparable overseas legislation, however, the PPSA gives no indication of what the account-holder’s rights might be, and so the courts will have to fall back on the common law for the answer.32 2.26 Article 8 of the United States Uniform Commercial Code deals with the law relating to investment securities at large, leaving Art 9 to deal with the secured lending aspect of investment securities in particular. Article 8 s 8–102(17) defines ‘security entitlement’ (or intermediated security in Australian PPSA parlance) to mean the rights and property interests of an entitlement holder with respect to a financial asset specified in Pt 5, and this definition is incorporated by reference into Art 9.33 Article 8 Pt 5 confers on the entitlement holder (investor) a bundle of proprietary rights as follows: • •

protection in the intermediary’s bankruptcy against the claims of the intermediary’s general creditors; a pro rata proprietary interest in all interests in the relevant financial asset

held by the securities intermediary, but enforceable only against the immediate intermediary. In addition, the statute imposes on the intermediary various duties enforceable by the entitlement holder, including duties to: obtain and maintain a financial asset in sufficient quantities to meet all relevant claims from the intermediary’s entitlement holders; obtain payments or distributions made by the issuer and account for them to the entitlement holder; and comply with the entitlement holder’s directions to the intermediary.34 [page 39] 2.27 It has been argued that the common law position at least approximates the United States statutory solution.35 The key points are as follows: • •

•

•

•

•

The intermediary is a trustee for its customers who are the beneficial coowners of the pool of securities held on their behalf. The first-tier intermediary holding direct from the issuer has legal title to the securities, while a second-tier intermediary is simply an equitable co-owner of the pool of securities held by the first-tier intermediary and the secondtier intermediary, in turn, holds its equitable interest as sub-trustee for the third-tier intermediary and so on. The effect of co-ownership is that, if the intermediary becomes insolvent, the securities held for its customers belong in equity to them and do not form part of the intermediary’s estate. An intermediary owes a duty to its customers to hold sufficient quantities of each issue of securities to meet their entitlements, and, if there is any shortfall, the co-ownership interests of its customers abate proportionately. The investor has various personal rights, including the right to have the intermediary collect dividends and other distributions and account for them to the investor and to vote in accordance with the investor’s instructions. The investor’s right of co-ownership and other rights is, or should be, treated as a separate bundle of rights exercisable only through and against the investor’s own intermediary.

The last point is important because the intermediary at each level is likely to be

unaware of lower-tier customers and, in any event, ‘it could not be expected either to reveal information about its own customer in breach of its duty of confidentiality or to concern itself with the lower-tier customer’s rights so as to inhibit its obedience to transfer instructions given by its own customer’.36 The limitation is consistent with the general law of trusts, which in most cases limits a beneficiary under a sub-trust to claims against their own trustee and precludes them from taking action against the head trustee.37 In summary, the position at common law seems to be that: … subject to the terms of the agreement between him and the securities intermediary, the credit of securities to a customer’s securities account entitles him to a co-ownership interest in a bundle of rights held by the intermediary itself (from its own intermediary or, if none, from the issuer direct), coupled with a personal right to the delivery or transfer, or re-delivery or re-transfer, of the deposited securities and consequent restoration of the customer’s direct link with the issuer, but no rights against any other intermediaries.38

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INTANGIBLE PROPERTY Introduction 2.28 PPSA s 10 defines ‘intangible property’ to mean personal property (including a licence) that is not financial property, goods or an intermediated security. Intangible property is a residual, or catch-all, category which brings in all types of personal property falling outside the other three main categories. The most important examples of intangible property are accounts, ADI accounts, intellectual property and statutory and contractual licences.

Accounts 2.29 PPSA s 10 defines ‘account’ to mean a monetary obligation (whether or not earned by performance) that arises from: (a) disposing of property; or (b) granting rights or providing services in the ordinary course of business. If the monetary obligation is payable in Australia, it makes no difference whether the account debtor is located in Australia.39 The definition excludes ADI accounts (bank accounts), chattel paper, intermediated securities, investment instruments and negotiable instruments. These are all species of personal property that comprise, or could be said to comprise, a monetary obligation, and they are excluded from the definition

of accounts to avoid overlap between categories and sub-categories in the PPSA classification scheme. Chattel paper, investment instruments and negotiable instruments are all sub-categories of financial property, and their exclusion from the definition of accounts helps to ensure that the categories of intangible property and financial property remain mutually exclusive. Likewise, the exclusion of intermediated securities from the definition of account maintains mutual exclusivity between the categories of intangible property and intermediated securities. In the Canadian and New Zealand PPSAs, the definition of ‘account’ extends to bank accounts, on the basis that a bank deposit creates a monetary obligation owing by the bank to the customer. By contrast, the Australian PPSA treats bank accounts as a separate sub-category of intangibles, called ADI accounts’. ADI accounts are excluded from the definition of ‘accounts’ to ensure that the two sub-categories are mutually exclusive. The main reason for this approach is that the statute enacts special perfection and priority rules for security interests in ADI accounts, which do not apply to accounts at large. 2.30 As a consequence of PPSA para 12(3)(a), the statute applies not only to a security interest in an account, but also to the interest of the transferee following the outright transfer of an account: see 3.24–3.30 of this text. This is significant because it means that the PPSA provisions governing attachment, formalities, perfection and priorities apply, and the pre-PPSA common law and equitable rules governing assignments of choses in action [page 41] do not apply: see further, 3.29 of this text. But because an ADI account is not an ‘account’ as defined in s 10, it is outside the scope of para 12(3)(a). It follows that the PPSA does not apply to the outright transfer of an ADI account, and the common law and equitable rules continue to govern. The same point applies with respect to all choses in action which are not accounts as defined in s 10. 2.31 Accounts receivable, or book debts, are perhaps the most obvious example of an account as defined in s 10. For example, suppose a wholesaler sells goods to a customer on 90-day terms; the customer’s payment obligation is an account within the meaning of para (a) of the definition. Or suppose a plumber provides services to a customer and sends a bill requiring payment within 30 days; here the customer’s payment obligation is an account within the meaning of para (b). In both cases, the

statute refers to the customer (or obligor) as the ‘account debtor’. Accounts of this type are different from chattel paper because, while an account, like chattel paper, comprises a monetary obligation, chattel paper has a security interest component as well. In other words, when A assigns an account to B, what B acquires is the monetary obligation represented by the account. On the other hand, when A assigns chattel paper to B, what B acquires is both the monetary obligation the chattel paper represents and also the security interest given by the account debtor to secure performance of the obligation. 2.32 Another example of an account covered by para (b) of the definition is credit card receivables.40 In the typical credit card scheme, the card issuer pays the merchant for goods or services the customer buys from the merchant, and the customer incurs a debt to the card issuer either at that point or when the merchant’s bank reimburses the merchant and collects payment from the card issuer on the customer’s account. The customer’s debt is a monetary obligation arising from the rights or services (the provision of credit) granted or provided by the card issuer to the customer in the ordinary course of the card issuer’s business.41 It is less clear whether loans in general fall under para (b). A loan probably does not qualify as the provision of a service, but it may involve the granting of a right on the basis that ‘most forms of financial accommodation are preceded by an agreement recording the facility’s terms which, subject to the terms of the agreement, vest in the recipient of the facility a right to receive the accommodation’.42 The question matters in particular because the PPSA applies to a transfer of accounts whether or not the transfer secures payment or performance of an obligation: see 2.30 above. If a loan obligation is not an account, subs 12(3) will not apply and so an outright transfer of a [page 42] loan obligation would not be subject to the statute.43 On the other hand, even if the loan obligation is not an account, it still falls within the definition of ‘intangible’ and so the statute would apply to a security interest taken in the obligation.44 2.33 Subject to the foregoing, the definition catches all monetary obligations whether or not earned by performance. In other words, the definition contemplates the assignment of future as well as present debts, and of payment entitlements contingent on the performance of obligations by the account creditor.45 The

contract creating the account may include an anti-assignment clause, which is a provision prohibiting the creditor from assigning the account to a third party. There are various reasons why the account debtor might insist on such a provision: (1) to avoid the risk of having to pay twice by inadvertently overlooking a notice of assignment and mistakenly paying the assignor; (2) to preserve its rights of set-off and the like; and (3) to avoid exposure to an assignee it does not know.46 At common law, an anti-assignment clause is valid. The account debtor is not obliged to recognise the assignee’s title and they may refuse to deal with the assignee and continue making payments to the assignor.47 PPSA s 81 reverses this rule. It provides that an anti-assignment provision is unenforceable against third parties, but it gives the account debtor a damages claim against the assignor (transferor) for any loss to the account debtor caused by breach of the provision.48 There are two competing policies at stake in this connection. The first is freedom of contract between the transferor and the account debtor, and the other is the importance of facilitating security interests in accounts. PPSA s 81 reflects the second policy. The provision is particularly significant in the context of block assignments, which involve the transfer of multiple accounts, because it avoids the need for the transferee to check every contract, before accepting it, for possible anti-assignment provisions. [page 43]

ADI Accounts 2.34 An ADI account’ is an account, such as a savings account or term deposit, held with an authorised deposit-taking institution. An authorised deposit-taking institution is a company authorised to carry on banking business in Australia under s 9 of the Banking Act 1959 (Cth).49 This definition excludes foreign banks. It follows that an account held with a foreign bank is not an ADI account for the purposes of the PPSA. Nor is it an ‘account’ as defined in PPSA s 10: see 2.29 of this text. But it is an ‘intangible’ and, subject to the conflict of laws rules discussed in Chapter 14 of this text, the statute applies to it on that basis. Because a foreign bank is not an ADI, it does not have the benefit of the special perfection and priority rules that apply to security interests in an ADI: see 2.35 of this text. PPSA para 12(3)(a) provides that the statute applies, not only to a security interest in an account, but also to the interest of a transferee under an outright transfer of an

account: see 2.30 above. An ADI account is not an ‘account’ as defined in PPSA s 10, and so it is outside the scope of para 12(3)(a). Likewise, para 12(3)(a) would not apply to the transfer of a foreign bank account.50 2.35 A secured party may hold a security interest in the grantor’s ADI account as either original collateral or proceeds. Example 5. SP has a security interest in Grantor’s inventory perfected by registration. SP sells an item of inventory to Customer and banks Customer’s payment.

Here SP has a security interest in Grantor’s ADI account as proceeds of the original collateral, provided the funds remain traceable. The tracing rules relevant to cases like this are discussed in Chapter 11. SP’s entitlement may also be subject to competing security interests in the ADI account, including a security interest held by the ADI itself. Pre-PPSA, the validity of so-called ‘charge-back arrangements’ was unsettled in Australia.51 In England, until the House of Lords decision in Re Bank of Credit and Commerce International SA (No 8) [BCCI],52 charge-back arrangements were ineffective.53 The concern was that a bank could not take a security interest in its customer’s credit balance because [page 44] an account in credit represents a debt owing by the bank to the customer and it is conceptually impossible to take a security interest in one’s own indebtedness.54 But charge-backs were widespread in the banking industry and so conceptual integrity was at odds with commercial imperatives. In the BCCI case, the House of Lords came down on the side of commercial imperatives, holding that charge-back arrangements were permissible. PPSA subs 12(4) is a statutory rule to the same effect; it provides that an ADI may take a security interest in an ADI account that is kept with the ADI. Assume that, in Example 5, the bank (ADI) has a security interest in Customer’s account to secure a loan from ADI to Customer. If Customer defaults, ADI and SP may both lay claim to the ADI account. PPSA s 21 provides for perfection by control of a security interest in an ADI account and s 25 enacts an automatic control rule in favour of ADIs: in other words, the ADI has control of the ADI account simply because it is an ADI. Section 75 provides that a perfected security interest held by an ADI in an ADI account has priority over any other perfected security interest in the same account. The result is that, in the case under discussion, ADI has priority over SP. This is a risk that inventory financiers and

others will have to take into account when deciding whether to do business with the grantor, and, if so, on what terms. 2.36 The ADI will enforce its security interest by taking money from the disputed account and applying it in satisfaction of the outstanding loan obligation. This remedy is functionally equivalent to the banker’s right of set-off or combination of accounts. The relationship between set-off and charge-back arrangements, in the PPSA context, is discussed in Chapter 3 of this text.

Intellectual Property55 2.37 Intellectual property is another species of intangible property. PPSA s 10 defines ‘intellectual property’ by reference to the most common types of intellectual property rights: design rights, patents, trade marks, plant breeders’ rights, circuit layout rights and copyright.56 The definition is not exhaustive: for example, it does not include trade secrets, internet domain names or unregistered trade marks. It follows that these items are not ‘intellectual property’ for the purposes of the statute. In the PPSA scheme, however, intellectual property is simply a sub-category of intangible property, and items that do not qualify as personal property under the intellectual property sub-heading may still do so under the general intangible property heading. In cases like this, the outcome will turn on whether the court, applying general law principles, considers the entitlement to be a proprietary [page 45] one or as simply conferring personal rights on its holder.57 The holder of an intellectual property right may license another person to exercise the right. An intellectual property licence is also a species of intangible property. The PPSA’s application to licences is discussed in 2.40–2.50 below. The Statutory Review has recommended deleting the definition of ‘intellectual property’. The consequence of this amendment is that the general law meaning of ‘intellectual property’ would apply instead, allowing ‘the Act to keep pace with the general law meaning, as it might develop over time’.58 2.38 The Patents Act 1990 (Cth), Trade Marks Act 1995 (Cth) and Designs Act 2003 (Cth) establish specialist intellectual property registers primarily to determine ownership of the intellectual property rights in question. In addition to providing

for registration of ownership, the statutes also permit registration of other interests including licences and security interests and some of the statutes enact priority rules for resolving competing claims.59 Pre-PPSA, there was a complex set of interactions between these provisions and the provisions relating to the registration of charges in Ch 2K of the Corporations Act 2001 (Cth).60 The Patents Act, Trade Marks Act and Designs Act have all been amended to prevent overlap between the PPSA and the intellectual property registration schemes.61 As a consequence of these antioverlap provisions, it will still be possible to register a security interest in the relevant intellectual property register, but doing so will no longer affect the rights of the registered owner to deal with the intellectual property. In other words, postPPSA, disputes involving one or more security interests in intellectual property are subject exclusively to the PPSA priority rules and this, in turn, gives the secured party an incentive to register its security interest in the PPS register even if it also registers in the relevant intellectual property register.62 On the other hand, the specialist intellectual property registration [page 46] provisions will continue to govern disputes between competing claims other than security interests, such as competing ownership claims or the claim of a licenceholder against a new owner following transfer of the underlying intellectual property right. 2.39 This aspect of the Australian PPSA reforms represents another significant advance on the Canadian and United States positions. In both those countries, rationalising the interaction between secured transactions law and intellectual property law has proved to be a major challenge, at least partly because the secured transactions laws are a provincial (state) responsibility, while the intellectual property laws are a federal responsibility and it is difficult to coordinate reforms at both levels.63 A by-product of Australia’s decision to enact a federal PPSA was that it resolved the coordination problem.

Licences Introduction 2.40 PPSA s 10 defines ‘licence’ to mean: (a) a right, entitlement or authority to

(i) manufacture, produce, sell, transport or otherwise deal with personal property, (ii) provide services or (iii) explore for, exploit or use a resource; and (b) an intellectual property licence. The definition applies to both statutory and contractual licences and it applies whether or not the licence is exclusive and whether or not its transfer is subject to restrictions. The definition excludes a licence that is not transferable. It also excludes a statutory licence that is declared by its governing statute not to be personal property for the purposes of the PPSA.64 2.41 One of the conditions on which the states and territories agreed to refer their powers to the Commonwealth for the establishment of a national PPS [page 47] regime was that the states and territories would retain control over state and territory statutory licences and that each state and territory would have the power to remove any of its licensing schemes from the PPSA’s reach.65 The PPSA drafters clearly took this commitment seriously, because the exclusion by declaration limitation is repeated in the definition of ‘personal property’ and repeated again in para 8(1)(k). Unsurprisingly, governments have been swift in responding to this thrice-issued invitation to shelter their licensing statutes from the application of the PPSA: the Commonwealth, along with every state and territory, has enacted amendments to selected licensing statutes declaring the licence not to be personal property for PPSA purposes.66 The Commonwealth list includes the Offshore Minerals Act 1994 and the Offshore Petroleum and Greenhouse Gas Storage Act 2006. The New South Wales list includes the Fisheries Management Act 1994, the Local Government Act 1993, the Mining Act 1992 and others. The Victorian list includes the Casino Control Act 1991, the Electricity Industry Act 2000, the Fisheries Act 1995, the Gambling Regulation Act 2003, the Racing Act 1958, and so on. Several jurisdictions, in addition to declaring certain licences not to be property for PPSA purposes, have also amended other statutes declaring the licence to be non-transferable and therefore outside the PPSA s 10 definition. Examples include the South Australian Coastal Protection Act 1972 and Wilderness Protection Act 1992, and the Northern Territory Agents Licensing Act 1979 and Auctioneers Act 1935.67

Statutory licences68 2.42 The proprietary status of statutory licences at common law is unsettled. In Harper v Minister for Sea Fisheries,69 Mason CJ and Deane and Gaudron JJ, in a joint judgment, characterised a commercial abalone licence issued pursuant to the Fisheries Act 1959 (Tas) as ‘a privilege’ comparable to a profit a prendre. But they also said that the licence ‘is an entitlement of a new kind created as part of a system for preserving a limited public natural resource’.70 Brennan J, in a separate judgment, held that the licence confers on [page 48] a licensee ‘a privilege analogous to a profit a prendre in or over the property of another’.71 The profit a prendre analogy suggests that the licensee’s entitlement has proprietary characteristics, but neither judgment unequivocally stated that the entitlement was a proprietary one. Furthermore, the case was concerned with the constitutional validity of the licence fee and the relevance of the court’s statements in other contexts is uncertain. 2.43 By contrast, in Saulnier v Royal Bank of Canada,72 the Supreme Court of Canada was confronted squarely with the question whether a fishing licence issued pursuant to the Fisheries Act 198573 was property within the meaning of the Canadian Bankruptcy and Insolvency Act74 and ‘personal property’ within the meaning of the Nova Scotia PPSA.75 The court answered ‘yes’ to both questions. The reasoning can be summarised as follows: (1) whether a statutory licence is property depends on the context in which the question is asked; (2) the purpose of the bankruptcy laws is ‘to regulate the orderly administration of the bankrupt’s affairs, keeping a balance between the rights of creditors and the desirability of giving the bankrupt a clean break’;76 (3) the purpose of the PPSA is to ‘facilitate financing by borrowers and the protection of creditors’;77 (4) having regard to these objectives, the court should take a robust approach to the meaning of property in the bankruptcy and PPSA contexts; and (5) a fishing licence is analogous to a profit a prendre and, although the analogy is not exact, it is sufficient to justify the conclusion that a licence is property at least for the purposes of the bankruptcy laws and the PPSA. This reasoning overlooks the fact that not all statutory licences have the same profit a prendre characteristic as fishing licences. For example, it would be difficult to sustain the profit a prendre analogy in relation to a taxi licence, a licence

to run a nursing home or a production quota. By the same token, the policy considerations the court raised in support of its conclusion apply to statutory licences at large and are not limited to licences which, like a fishing licence, have profit a prendre characteristics. In summary, while Saulnier clarifies the law so far as fishing licences and the like are concerned, the decision is ambivalent with regard to other types of licence. 2.44 At one level, the definition of ‘licence’ in Australian PPSA s 10 resolves this uncertainty. The definition makes it clear that a statutory licence is personal property for the purposes of the statute, unless: (1) the licence is non-transferable; or (2) the licensing statute declares the licence not to be personal [page 49] property for the purposes of the PPSA. In other words, subject to these two exceptions, every statutory licence is personal property for the purposes of the PPSA, whether or not the licence has profit a prendre characteristics. On the other hand, as indicated above, there are numerous exclusions; for example, all states (except Tasmania) and the Northern Territory have declared that fishing licences are not to be regarded as personal property for the purposes of the PPSA. What are the consequences? PPSA para 254(2)(a) provides that the PPSA is not intended to exclude or limit the concurrent application of a concurrent law to the extent that the law has the effect of providing for whether ‘a matter or other thing that is created, arises or provided for under the concurrent law’ constitutes personal property. The implications seem to be as follows: (1) the fishing licence is not personal property for the purposes of the PPSA and so the PPSA does not apply to a security interest in the licence; (2) the general law applies to determine whether the fishing licence is personal property for other than PPSA purposes; (3) if the fishing licence is personal property at general law then, subject to any restrictions imposed by the licensing statute, the licence-holder may use the licence as collateral; (4) any such security interest would not be subject to the PPSA; and (5) questions concerning the validity of the security interest, perfection, priorities and enforcement would be subject to any relevant provisions in the licensing statute and otherwise the general law.78 On the other hand, if instead the licensing statute provides that the licence is non-transferable, the consequences seem to be as follows: (1) the licence is not personal property for the purposes of the PPSA and so it

cannot be used as collateral for a PPSA security interest; (2) the common law applies to determine whether the licence is personal property for other than PPSA purposes; and (3) given that the licence is non-transferable, a court is likely to conclude that it is not property at common law and therefore it cannot be used as collateral for a security interest outside the PPSA. In summary, while at first glance the definition of ‘licence’ in PPSA s 10 appears to clarify the law, closer examination reveals that it adds new layers of complexity. 2.45 The rush by governments to take advantage of the exclusions in the definition was apparently inspired by concerns that allowing security interests in a statutory licence might compromise the public policy underlying the [page 50] licensing statute and, in particular, undermine the licensing authority’s power to determine who may hold a licence.79 Given the range of statutes in issue, it is impossible to test the strength of these concerns across the board. However, it is reasonable to suppose that in at least some cases the concerns were misplaced and that governments may have misunderstood the implications of allowing licences to be used as collateral. The Statutory Review has recommended that the federal, state and territory governments reconsider the provisions allowing governments to remove licences from the scope of the Act.80 Example 6. Grantor runs a commercial fishing business and he holds a fishing licence from the relevant government authority. SP makes a loan to Grantor and takes a security interest in all Grantor’s present and after-acquired personal property. Grantor ends up in financial difficulty and SP appoints a receiver. The receiver is keen to sell Grantor’s business on a going-concern basis because this will bring in higher returns than a piecemeal sale of Grantor’s assets. On the other hand, the business is worthless without the licence.

Example 6 is based on the facts of Saulnier. The receiver’s power to transfer the licence depends on whether the licence is personal property. This is because the PPSA, reflecting basic common law principles, does not allow security interests in purely personal entitlements and also because SP’s security agreement restricts its security interest to Grantor’s personal property. As the court in Saulnier explained, there are two main policy considerations underlying the treatment of licences as personal property. The first is the importance of facilitating the provision of credit in cases like Example 6. The second is the need to maintain the integrity of the licensing scheme. In Saulnier, the court expressed the first consideration this way:81

[A] commercial fisher with a ramshackle boat and a licence to fish is much better off financially than a fisher with a great boat tied up at the wharf and no licence. Financial institutions looking for readily marketable loan collateral want to snap up licences issued under the federal Regulations, which in the case of the lobster fishery can have a dockside value that fluctuates up to a half million dollars or more. Fishers want to offer as much collateral as they can to obtain the loans needed to acquire the equipment to enable them to put to sea.

2.46 The court addressed the second consideration as follows: Canada’s fisheries are a ‘common property resource’, belonging to all the people of Canada. Under the Fisheries Act, it is the Minister’s duty to manage,

[page 51] conserve and develop the fishery on behalf of Canadians in the public interest … Licensing is a tool in the arsenal of powers available to the Minister under the Fisheries Act to manage fisheries.82

By implication, the cost of treating a fishing licence as personal property lies in the danger of fettering the Minister’s discretion. 2.47 However, the court goes on to point out that there is no such danger. The reason is that the PPSA gives the secured party no greater rights than the grantor himself had. The grantor holds the licence subject to the Minister’s discretion as provided by the licensing statute and, likewise, the grantor’s right to transfer the licence is subject to the Minister’s discretion. Therefore, the secured party’s rights to hold and transfer the licence are also at the Minister’s discretion: It may well be that in the course of a [receivership] the fishing licence will expire, or has already expired. If so, the [receiver] will have the same right as the original holder of an expired licence to go to the Minister to seek its replacement, and has the same recourse (or the lack of it) if the request is rejected. The [grantor] can transfer no greater rights than he possesses. The [receiver] simply steps into the shoes of the [grantor] and takes the licence ‘warts and all’. (emphasis added)83

2.48 These three passages signify an at least implicit cost-benefit analysis: allowing the licence to be used as collateral is important for facilitating fishers’ access to credit; given the ‘warts and all’ limitation, there are no costs in terms of potentially compromising the policy of the licensing statute, and therefore the law should facilitate security interests in fishing licences.84 This reasoning can be generalised to statutory licensing schemes at large and it calls into question at least some of the Australian statutory exemptions outlined above. The ‘warts and all’ principle is reflected in PPSA subs 112(3) which provides that a secured party may only seize, purchase or dispose of a licence subject to the terms and conditions of the licence and any applicable laws. Subsection 128(6) repeats the point.

Contractual licences 2.49 Example 7. Grantor runs a manufacturing business which involves the use of patented technology developed by Licensor, the patent-holder. Licensor has given Grantor a licence to use the technology. SP makes a loan to Grantor and takes a security interest in all Grantor’s present and after-acquired personal property. Grantor ends up in financial difficulty and SP appoints a receiver.

[page 52] The receiver is keen to sell Grantor’s business on a going-concern basis, but the business is useless without the patent licence.

This case raises a parallel set of issues to Example 6. In Example 6, the competing policy considerations were the importance of facilitating the provision of credit on the one hand, and the public policy underlying the licensing statute on the other. In Example 7, the competing policy considerations are the importance of facilitating the provision of credit on the one hand, and freedom of contract on the other. The licence in Example 7 may be exclusive or non-exclusive and, either way, it may be non-transferable.85 If so, it falls outside the PPSA definition. Alternatively, the licence may be transferable subject to Licensor’s consent. In that case, it falls within the PPSA definition and it is subject to SP’s security interest. However, the ‘warts and all’ limitation lessens the impact of this conclusion. SP acquires rights in the licence, but these can be no greater than the rights Grantor held. In particular, if SP wants to transfer the licence, it must obtain Licensor’s consent. Presumably SP will take account of the risk that Licensor might not consent in the course of deciding whether to transact with Grantor in the first place. 2.50 Suppose that in Example 7, before the receiver is appointed, Licensor transfers the patent to Transferee. PPSA s 106 provides that, in a case like this, if Grantor ‘continues to hold the licence after the transfer’, SP’s security agreement is binding on Transferee to the same extent as it was binding on Licensor. Licensor will not be bound by the security agreement unless it is a party and typically this will not be the case. It follows that s 106, as currently drafted, will hardly, if ever, apply. What the drafter may have meant to say is that the security interest is binding on the transferee to the same extent as it was binding on the licensor. The extent to which the licensor is bound by the security interest depends on the terms of the licence agreement and, in particular, on any restrictions there may be on

transferring the licence (see 2.49 above). The intended effect of s 106 may have been that the transferee of the intellectual property is bound by the provisions, if any, in the licence agreement relating to transfer of the licence and that it cannot impose new and more favourable conditions of its own. But the transferee could not change the terms of the licensing agreement without the licensee’s (grantor’s) consent. Furthermore, s 106 does not apply unless the grantor continues to hold the licence after the transfer. This requirement will not be satisfied if the transfer of the intellectual property extinguishes the licence, and the question as to whether a licence runs with the intellectual property is governed by the intellectual property laws, [page 53] not the PPSA.86 The Statutory Review has recommended that, after further consultation with stakeholders, the government consider repealing s 106.87

COMMERCIAL PROPERTY AND CONSUMER PROPERTY 2.51 The classification scheme described in 2.1–2.50 above divides personal property according to type. The statute also employs two other classification schemes which divide personal property by reference to how the grantor uses, or intends to use it. The first of these use-based classifications distinguishes between consumer property and commercial property, while the second distinguishes between inventory and non-inventory personal property. 2.52 PPSA s 10 defines ‘consumer property’ to mean personal property held by an individual, other than personal property held in the course or furtherance, to any degree, of carrying on an enterprise to which an ABN (Australian Business Number) has been allocated. ‘Commercial property’ means personal property other than consumer property. The other PPSAs draw a distinction, not between consumer and commercial property, but between consumer goods, inventory and equipment, and they define ‘consumer goods’ to mean goods used or acquired primarily for personal or domestic purposes.88 This means that goods may be consumer goods even if the grantor uses them partly for business purposes, so long as the business use is not the primary one. By contrast, in Australia, business use to

any degree means that the collateral is not consumer property. So, for example, if the grantor acquires a motor vehicle for home use, but occasionally also uses it for business trips, the car is not consumer property. On the other hand, the definition implies an element of continuity, and so one or two isolated business trips would probably not tip the balance. [page 54] 2.53 The commercial property–consumer property distinction is particularly important in the registration context because the registration requirements and, in particular, the rules governing financing statement contents vary depending on whether the collateral is consumer property: see Chapter 6 of this text. PPSA Ch 4, which deals with the enforcement of security interests, also distinguishes between consumer and commercial transactions, but it does not rely on the commercial property–consumer property distinction. Instead, it identifies a consumer transaction by reference to whether the grantor uses the collateral predominantly for personal, domestic or household purposes.89 The heading for subs 109(5) refers to this type of collateral as ‘household property’, but that expression is not used in the statutory text. The enforcement provisions are discussed in Chapter 12. The Statutory Review has recommended abolishing the distinction between consumer property and commercial property and deleting the definitions.90 The reasons for this proposal are explained in 6.38–6.39 of this text.

INVENTORY AND NON-INVENTORY PERSONAL PROPERTY 2.54 PPSA s 10 defines ‘inventory’ to mean commercial property (whether goods or intangible property) which is: (a) held by a person for sale or lease or is out on lease from that person; (b) held by a person to be provided under a contract for services or has been so provided; (c) held by a person as raw materials or as work in progress; or (d) held, used or consumed as materials. Examples include a retailer’s stock-in-trade (para (a)), a builder’s building materials (para (b)), a manufacturer’s raw materials, component parts and partly completed products (para (c)), and a firm’s office supplies (stationery, pens and the like) or pesticides a farmer acquires to spray their crops (para (d)). Paragraph (d) refers to property that is held, used or consumed as materials. It is clear from the wording that property is not inventory

just because it is used in a business. So, for example, a furniture dealer’s delivery van is not inventory because, while it is used in the business, it is not used as materials. 2.55 In the other PPSAs, inventory is a sub-category of ‘goods’ and so personal property other than goods cannot be inventory. In the Australian PPSA, inventory is a sub-category of personal property and so this limitation does not apply. The opening words of the definition, however, limit inventory to goods and intangible property. The result is that financial property and intermediated securities cannot be inventory. So, for example, investment securities held for sale by a dealer are not inventory. On the other hand, intellectual property might qualify as inventory because it is intangible [page 55] property. So, for example, if a dealer sells goods containing an embedded software program, any intellectual property rights associated with the software program would qualify as inventory, along with the goods themselves. 2.56 The distinction between inventory and personal property other than inventory is important in the context of the rules in PPSA s 62 governing the priority of purchase money security interests: see Chapter 8 of this text. It is also important in the context of the transferee protection rules in PPSA Pt 2.5: see Chapter 10 of this text.

1. 2. 3. 4.

5.

6. 7.

PPSA s 10, ‘intangible property’. In essence, an ‘ADI account’ is an account kept with an ADI (authorised deposit-taking institution) that is payable on demand or at some time in the future. See PPSA s 10 for the full definition. That is, as a category of their own. See 9.33 of this text. Compare the pre-PPSA state and territory laws creating a special security interest for growing crops. For details, see Edward I Sykes and Sally Walker, The Law of Securities, 5th ed, Law Book Company, Sydney, 1993, pp 714–28. Compare with the sale of goods legislation, which defines ‘goods’ expansively to include things attached to or forming part of the land that are agreed to be severed before sale or under the contract of sale: see, for example, Goods Act 1958 (Vic) s 3 (emphasis added). See, for example, Saskatchewan PPSA s 2(1)(l). Compare the pre-PPSA state and territory laws governing wool liens and livestock mortgages. For details, see above note 4, at pp 676–713. See also Grant v YYH Holdings Pty Ltd [2014] NSWCA 360, holding that, at common law, the progeny of sheep are not the same property as the parent animals (disapproving older authorities to the contrary); in the course of his judgment, Basten JA commented that the

8. 9.

10.

11.

12.

13. 14. 15. 16. 17. 18. 19.

20. 21. 22. 23.

24.

25. 26.

conceptual basis for this approach also underpins the PPSA definition of ‘livestock’ (at [84]). See above note 4, at pp 829–30. See Personal Property Securities (Statute Law Revision and Implementation) Act 2010 (Vic) s 4. Chattel Securities Act 1987 (Vic) s 6 derives from Hire-Purchase Act 1959 (Vic) s 27 (the Hire-Purchase Act was repealed in 2008). For discussion, see Anthony Duggan, Simon Begg and Elizabeth Lanyon, Regulated Credit: The Credit and Security Aspects, Law Book Company, Sydney, 1989, para 7.3.36. Chattel Securities Act 1987 (WA) s 6 was a corresponding provision, but it has been repealed: Personal Property Securities (Consequential Repeals and Amendments) Act 2011 (WA) s 34. The Statutory Review has recommended that the federal, state and territory governments explore developing a fixtures regime along the lines of the Canadian model: Bruce Whittaker, Review of the Personal Property Securities Act 2009: Final Report (Commonwealth of Australia, 2015), para 4.5.10.2 (‘Statutory Review: Final Report’). Parliament of the Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property Securities (Consequential Amendments) Bill 2009, paras 7.27–7.48. For an account of the pre-PPSA law governing ship mortgages, see above note 4, at pp 728–9. The definition also refers to one or more writings that evidences a monetary obligation and a security interest in specific intellectual property or a specific intellectual property licence. The definition excludes documents of title, intermediated securities, investment instruments and negotiable instruments. These are the other sub-categories of financial property and the purpose is to make it clear that the subcategories are mutually exclusive. See Chapters 1 and 3 of this text. PPSA subs 24(5): see Chapter 5 of this text. See further, Anthony Duggan, ‘Chattel Paper’ (2013) 41 Australian Business Law Review 214. Statutory Review: Final Report, para 4.3.3. See also above note 15. PPSA s 10. It also excludes certain rights to payment in connection with interests in land. The reason for taking this approach may have been to facilitate Australia’s adoption, down the track, of the Unidroit Convention on Substantive Rules for Intermediated Securities (Geneva, October 2009) (the Geneva Securities Convention 2009). The Explanatory Memorandum sheds no light on the matter: Commonwealth of Australia, House of Representatives, Personal Property Securities (Corporations and Other Amendments) Bill 2010, paras 9.47–9.50. CHESS is an acronym for Clearing House Electronic Subregister System. See Parliament of the Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property Securities (Corporations and Other Amendments) Bill 2011, Sch 2, paras 24–26. The distinction between the direct and indirect holding systems is discussed in 2.23–2.37 below. But see PPSA ss 50 (Taking investment instrument free of security interest) and 51 (Taking intermediated security free of security interest), where the decision to reclassify CHESS securities as intermediated securities does matter: see 10.66 of this text. The Statutory Review has recommended reclassifying CHESS securities as investment instruments: Statutory Review: Final Report, para 5.3.4.5. See PPSA s 10. The Statutory Review has recommended deleting the definition, with the intended consequence that the general law meaning of ‘negotiable instrument’ would apply: Statutory Review: Final Report, para 7.6.13.1. The definition of ‘negotiable instrument’ currently includes letters of credit. The proposed change would mean that letters of credit are no longer ‘negotiable instruments’ for the purposes of the statute and therefore they would no longer be ‘financial property’. Given that they are not financial property, they would fall under the definition of ‘goods’ and they would be subject to the statute on that basis. The Review does not address the implications of this outcome. PPSA s 10 defines ‘writing’ to include electronic forms of communication and so, for the purposes of the statute, a negotiable instrument includes an instrument evidenced by an electronic record. The Statutory Review reports that the indirect holding system is not well established in Australia, but that the CHESS system serves similar commercial objectives: Statutory Review: Final Report, para 5.3.4.

27.

28. 29.

30. 31. 32. 33. 34. 35. 36. 37. 38. 39.

40. 41. 42. 43. 44.

45. 46. 47. 48. 49. 50.

However, as noted above, the CHESS system works within the direct holding system and so the following account of the indirect holding system does not apply to it. For a fuller account, see Louise Gullifer (ed), Goode on Legal Problems of Credit and Security, 5th ed, Sweet & Maxwell, London, 2013, paras 6-07–6-08. And see generally, Louise Gullifer and Jennifer Payne (eds), Intermediated Securities: Legal Problems and Practical Issues, Oxford, Hart Publishing, 2010. See above note 27, at para 6-07. The expression derives from the Geneva Securities Convention. In Arts 8 and 9 of the United States Uniform Commercial Code, the expression used is ‘security entitlement’. The Canadian securities transfer statutes also use the expression ‘security entitlement’: see, for example, Securities Transfer Act SO 2006, c.8 s 1(1) and Ontario PPSA s 1(1). Subsections 15(2)–(5) define ‘intermediary’, providing, among other things, that only certain institutions may act as intermediaries. Paragraph 15(7)(a). Compare with Geneva Securities Convention 2009 Art 1(c). ‘Financial product’ means shares, bonds and other financial instruments or financial assets: PPSA s 10, ‘financial product’. Compare Uniform Commercial Code, Art 8 — Investment Securities, Pt 5; Securities Transfer Act SO 2006, c.8 Pt VI; Geneva Securities Convention 2009 Arts 9 and 24. Article 9 s 9-102(b). The Canadian provinces have enacted corresponding legislation: see, for example, Securities Transfer Act SO 2006 Pt VII. Compare Geneva Securities Convention 2009 Arts 9 and 24. See above note 27, paras 6-16–6-22. See above note 27, at para 6-18. See above note 27, at para 6-18. See above note 27, at para 6-21. A ‘monetary obligation’ is an existing legal obligation on another party to pay an identifiable monetary sum on an ascertainable date: Strategic Finance Ltd (in rec and in liq) v Bridgman [2013] NZCA 357 at [83]. See the example appended to PPSA s 10, ‘accounts’. See Anthony Duggan and Elizabeth Lanyon, Consumer Credit Law, Butterworths, Sydney, 1999, paras 1.3.11–1.3.16. John G H Stumbles, ‘The Impact of the Personal Property Securities Act 2009 on Assignments of Accounts’ (2013) 37 Melbourne University Law Review 415 at 423. Another reason why the question matters is that the collection remedy provided for in PPSA s 120 applies only if the collateral is an account, chattel paper or a negotiable instrument: see 12.67–12.69 of this text. The Statutory Review has recommended amending the definition of ‘account’ to specify that ‘it is limited to monetary obligations of the types that commercially would be described as being the transferor’s “trade receivables” or “book debts” ’, and that it does nor capture corporate loans. The main argument is that the application of subs 12(3) to the transfer of obligations other than trade receivables might take parties by surprise. This is not very convincing, as the Review itself appears to recognise in its further recommendation that ‘the Government should separately consider expanding the definition of “account” to cover monetary obligations at large’: Statutory Review: Final Report, para 4.3.2.2. Jacob S Ziegel and David L Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed, Butterworths, Toronto, 2000, pp 7–8. See above note 27, at para 3-39. See above note 27, at para 3-39. PPSA subs 80(7) protects the account debtor from the risk of double liability following the transfer of an account: see 3.27 of this text. PPSA s 10, ‘ADI’, ‘ADI account’. The Statutory Review has recommended replacing the expression ‘ADI account’ with a more generic term, such as ‘bank account’ which would be defined to include deposit-taking institutions that are not ADIs such as foreign banks: Statutory Review: Final Report, para 5.3.7.1.

51.

52. 53. 54. 55.

56.

57.

58. 59. 60. 61. 62.

63.

64.

65. 66.

Broad v Commissioner of Stamp Duties [1980] 2 NSWLR 40; compare Cinema Plus Ltd v Australia and New Zealand Banking Group Ltd (2000) 49 NSWLR 513. See Diccon Loxton, ‘One Flaw Over the Cuckoo’s Nest — Making Sense of the “Flawed Asset Arrangement” Example, Security Interest Definition and Set-Off Exclusion in the PPSA’ (2011) 34 University of New South Wales Law Journal 472 at 495–6; John Stumbles, ‘Personal Property Security Law in Australia: A Comparison’ (2011) 51 Canadian Business Law Journal 425 at 435–8. [1998] AC 214 (HL). Re Charge Card Services Ltd [1987] Ch 150. See above note 27, at para 3-12. For a fuller account see John V Swinson and Jessica Howley, ‘Intellectual Property and the Personal Property Securities Act’ in Craig Wappett, Steve Edwards and Bruce Whittaker, Personal Property Securities in Australia (LexisNexis looseleaf), ch 4.9. The definition also refers to the right to be a party to proceedings in relation to the rights listed in the text. So, for example, a right to sue a third party for intellectual property infringement is personal property for the purposes of the statute and may be used as collateral for a security interest: see above note 55, at para 4.9.150. See above note 55, at para 4.9.150. For a discussion of the distinction between property and personal rights in the PPSA context, see Anthony Duggan, ‘In the Wake of the Bingo Queen: Are Licences Property?’ (2009) 47 Canadian Business Law Journal 225. Statutory Review: Final Report, para 9.3.4.2. See Robert Burrell and Michael Handler, ‘The PPSA and Registered Trademarks: When Bureaucratic Systems Collide’ (2011) 34 University of New South Wales Law Journal 600. See John V Swinson, ‘Security Interests in Intellectual Property in Australia’ in Howard P Knopf (ed), Security Interests in Intellectual Property, Thomson Canada Limited, Toronto, 2002, p 377. Personal Property Securities (Consequential Amendments) Act 2009 (Cth) Sch 2. Parliament of the Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property Securities (Consequential Amendments) Bill 2009, paras 6.1–6.50 (‘Explanatory Memorandum’). The secured party may want to register in the special intellectual property register in order to receive notifications of interests and to take advantage of the hearing and submissions procedures the legislation provides for: Explanatory Memorandum at paras 6.5 and 6.35. See also above note 59, at pp 616–7. See, for example, Law Commission of Canada, Leveraging Knowledge Assets: Reducing Uncertainty for Security Interests in Intellectual Property, Government of Canada, Ottawa, 2004; Thomas M Ward and William J Murphy, ‘Security Interests in Intellectual Property Under US Law: The Existing Dissonance and Proposed Solutions’ in Knopf (ed), above note 60 at p 455. In addition, PPSA para 8(1)(i) excludes from the scope of the statute a right, entitlement or authority that is granted by or under the general law, or a law of the Commonwealth, a state or territory in relation to the control, use or flow of water. PPSA para 8(1)(l) excludes an interest of a kind prescribed by the regulations; interests in an authority, lease, licence or permit created under the Offshore Minerals Act 1994 (Cth) and the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) have been prescribed: Personal Property Securities Regulations 2010 (Cth) subregs 1.4(1A) and (1B). The Statutory Review has recommended deleting the reference to licences in the definition of ‘personal property’ on the grounds that: (1) it is clear that a licence qualifies as personal property and the statute does not need to say so (this point is debatable); and (2) the current wording unjustifiably restricts the application of the statute to licences which are transferable: Statutory Review: Final Report, para 4.4.3. In the latter connection, compare Saskatchewan PPSA s 2(z), which limits the meaning of ‘licence’ to a licence which is transferable and Uniform Commercial Code s 9-104(a), which has the opposite effect. Inter-Governmental Personal Property Securities Law Agreement (2 October, 2008) cl 3. See further, John G H Stumbles, ‘The PPSA: The Extended Reach of the Definition of the PPSA Security Interest’ (2011) 34 University of New South Wales Law Journal 448 at 461–3.

67.

68.

69. 70. 71. 72. 73. 74. 75.

76. 77. 78.

79.

80. 81. 82. 83. 84. 85. 86.

This is just a sampling. For a complete list, see Craig Wappett and Deborah Overstead, ‘Licences and Authorities’ in Craig Wappett, Steve Edwards and Bruce Whittaker, Personal Property Securities in Australia (LexisNexis looseleaf) at para 4.11.750. For a detailed summary of Commonwealth, state and territory licensing statutes, the removal of certain licences from the scope of the PPSA and the application of the PPSA to licences that have not been removed from its scope, see above note 67 at ch 4.11. (1989) 168 CLR 314. See above note 69, at [2]. See above note 69, at [19]. [2008] 3 SCR 166. RSC 1985, c F-14 (Revised Statutes of Canada). RSC 1985, c B-3. Personal Property Security Act SNS 1995–1996 c 13. In contrast to the Australian PPSA, the Nova Scotia statute does not specifically refer to licences and so it is for the courts to decide whether a licence constitutes personal property. See above note 72, at [17]. See above note 72, at [51]. A possible alternative argument is that the PPSA codifies the law of secured transactions and, subject to PPSA Pt 7.4, it deals exhaustively with security interests in personal property. Consequently, there is no scope for the creation of a non-PPSA security interest in an entitlement that is personal property at general law, but not within the meaning of the PPSA. However, PPSA para 254(2)(a) appears to foreclose this argument. Moreover, some of the background papers explicitly acknowledge that the effect of a declaration in the licensing statute is not to preclude security interests altogether; it is simply that the secured party cannot register its security interest in the PPS register and that the PPSA priority rules and enforcement provisions would not apply: see, for example, Explanatory Notes to the Personal Property Securities (Ancillary Provisions) Bill 2010 (Qld), paras 2 and 3. See, for example, Explanatory Notes to the Personal Property Securities (Ancillary Provisions) Bill 2010 (Qld), para 3: the purpose is to ensure that ‘the state’s administration of the rights can continue without being hindered by a security interest that could otherwise be registered under the Commonwealth PPS Act’; and para 4: the purpose is to ensure that the state ‘retains control over these statutory licences’. See also, above note 67, at paras 4.11.50–4.11.500. Statutory Review: Final Report, para 4.4.6. See above note 72, at [13]. [2008] 3 SCR 166 at [14], quoting Comeau’s Sea Foods Ltd v Canada (Minister of Fisheries and Oceans) [1997] 1 SCR 12 at [37]. See above note 72, at [50]. For a fuller account of the Saulnier case, see the article above at note 57. In the case of an exclusive licence, the licensor promises that it will not grant a licence to others. For example, so far as patent licences are concerned, the question turns on whether the licence is registered in the Register of Patents. If it is, it will bind the patent transferee, but otherwise the transferee will obtain clear title to the patent provided it transacted in good faith, for value and without notice of any fraud on the patentee’s part: Patents Act 1990 (Cth) s 189. So far as copyright licences are concerned, the governing provision is in Copyright Act 1968 (Cth) subs 196(4): a copyright licence binds every successor in title to an interest in the copyright to the same extent as the licence was binding on the grantor. See generally, above note 52. So far as trade mark licences are concerned, the key provisions are Trade Marks Act 1955 (Cth) Pt 11, which allows for the voluntary recording in the Trade Marks Register of licences and other interests, subs 22(1), which provides that the registered owner of a trade mark may, ‘subject only to any rights vested in another person’, deal with the trade mark as its absolute owner, and subs 22(2), which provides that the section does not protect a person who deals with the registered owner otherwise than as a purchaser in good faith for value and without notice of any fraud on the owner’s part.

87. 88. 89.

90.

For a critical analysis of these provisions, see above note 60 at pp 399–402. Statutory Review: Final Report, para 9.3.4.4. See, for example, New Zealand PPSA s 16(1), ‘consumer goods’; Saskatchewan PPSA s 2(1), ‘consumer goods’. See, for example, PPSA subs 109(5) and s 115. See also PPSA s 47 (Taking personal, domestic or household property free of security interest) and subs 52(2) (Taking personal property free of temporarily perfected security interest), discussed in 10.48–10.52 and 10.68–10.70 of this text. Statutory Review: Final Report, para 6.2.1.2.

[page 57]

CHAPTER 3 The Scope of the Statute INTRODUCTION 3.1 The Personal Property Securities Act 2009 (Cth) (PPSA) applies to security interests in personal property. The meaning of personal property was discussed in Chapter 2. This chapter deals with the meaning of ‘security interest’. The governing provision is s 12, which provides in part as follows: (1) A security interest means an interest in 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). (2) For example, a security interest includes an interest in 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);1 (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 PPSA lease); (j) an assignment; (k) a transfer of title;2 (l) a flawed asset arrangement.

[page 58] ‘Interest in personal property’ is defined in s 10 as including a right in the personal property. This provision, read in conjunction with subs 12(1), could be interpreted as meaning that, for the purposes of the Act, a security interest is not limited to proprietary rights in the collateral but may extend to personal rights as well. It is clear, having regard to the history and purpose of the legislation, that a security interest depends on having a proprietary interest and, to avoid doubt on this score, the Statutory Review recommends repeal of the definition of ‘interest’.3 Subsection 12(3) provides that ‘security interest’ also includes certain interests whether or not the transaction concerned, in substance, secures payment or performance of an obligation. In other words, the provision makes certain transactions subject to the statute even though they are not secured transactions. These so-called ‘deemed security interests’ are as follows: (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.

Subsections 12(5) and (6) set out some exceptions. A longer list of exceptions can be found in s 8. The balance of this chapter discusses these provisions in more detail.

THE SUBSTANCE TEST Introduction 3.2 PPSA subss 12(1) and (2) give statutory expression to the policy described in Chapter 1 of this text. The PPSA applies to every transaction that in substance creates a security interest, without regard to the form a particular transaction might happen to take, and it enacts a more or less common set of rules for all secured transactions. There are special rules for particular cases, but these rule variations are based on considerations of policy and business convenience, not formal distinctions. The consequence is to make the forms of transaction described in Chapter 1 irrelevant. Parties may continue to use one or other of the old forms if they choose, but formal considerations no longer determine legal outcomes. Indirectly, therefore, the PPSA abolishes the old forms and substitutes a generic security interest, the incidents of which are shaped by the rules the statute enacts for the various stages of

the transaction. 3.3 The PPSA security interest most closely resembles the pre-PPSA hypothecation. The security interest may be possessory (as in the case of the prePPSA pledge) or non-possessory (as in the case of the pre-PPSA charge), but, in contrast to the mortgage, it does not depend on transfer of title. The [page 59] implications become apparent when the secured obligation is discharged. At common law, when a mortgage debt is repaid, the secured party must re-transfer the collateral in order to discharge the mortgage. By contrast, if the security interest is in the form of a hypothecation, it is automatically discharged upon performance of the secured obligation.4 The PPSA security interest is the same as the hypothecation in this respect. Consequently, the statute makes no provision for re-transfer of the collateral following discharge because there is no need.5 The upshot is that a PPSA security interest gives the secured party a right of access to the collateral in the event of default but, subject to this, title to the collateral remains in the grantor — even if the security agreement is in the form of a mortgage.

Title Retention Arrangements 3.4 The same is true if the security agreement is in the form of a conditional sale agreement. In the United States, this point is made explicitly: s 1-201 of the Uniform Commercial Code provides that the retention or reservation of title by a seller of goods is limited in effect to a reservation of a security interest. There is no corresponding provision in any of the Canadian PPSAs or in the Australian and New Zealand PPSAs, but the point is implicit. In particular, ‘there is no basis for the conclusion that, under the PPSA, the nature or quantum of the security interest involved is any different from that which the seller would have if he had “taken” a security interest in the property sold after transferring title to the buyer’.6 The PPSA equates conditional sale agreements with other forms of security interest because they are functionally equivalent: in all cases, the objective is to give A an interest in B’s asset that would allow A to access the asset if B (or a third party) defaulted on an obligation owing to A.7 Because the PPSA equates the conditional sale agreement with the traditional forms of security interest, and because the PPSA security

interest approximates the hypothecation concept, it follows that, for the purposes of the PPSA, the buyer under a conditional sale agreement is assumed to acquire rights in the collateral at the point of sale and the seller’s interest is limited to the right of access described above.8 As discussed in Chapter 1, the main attraction of the conditional sale agreement pre-PPSA was that it avoided the bills of sale legislation. However, the PPSA supersedes the bills of sale laws and so this consideration is no longer relevant. [page 60] 3.5 Having reached this stage of the analysis, it becomes easy to see why the PPSA also applies to hire-purchase agreements: a hire-purchase agreement is functionally equivalent to a conditional sale agreement. The difference between the two transactions is a purely formal one, namely that, in the case of a hire-purchase agreement, the customer is under no legal obligation during the payment period to purchase the goods. But from the perspective of both the supplier and the customer, the result is the same in both cases because a hire-purchase agreement builds in strong financial incentives for the customer to maintain the payments and exercise the purchase option at the end of the term. As discussed in Chapter 1, the main reason for the popularity of hire-purchase was that it avoided the Factors Acts (the buyer in possession provision). However, the PPSA displaces the buyer in possession provision,9 and so the rationale for hire-purchase has largely disappeared. 3.6 The hire-purchase agreement is a form of goods lease. Its distinguishing characteristic is the express option the hirer has to purchase the goods at the end of the term and the transaction is structured to maximise the probability that the hirer will complete the payments and exercise the option.10 However, there are other ways of structuring a lease agreement to achieve the same economic result. For example, if the term of the lease is equivalent to the commercially useful life of the goods, the transaction is substantially the same as a sale: it is true that the customer never formally acquires title, but if the goods are effectively valueless at the end of the term the lessor is unlikely to want them back. Correspondingly, the payments are likely to reflect the fact that the goods will be valueless at the end of the term and so they will be calculated to compensate the lessor for the original value of the goods and also the time factor associated with the customer’s having use and possession of the goods on a deferred payment basis. Another example is the

transaction described in Chapter 1, Example 6, renumbered here as Example 1. Example 1. SP leases a car with a cash price of $40,000 to Customer for a term of 48 months at a monthly rental of $750. The agreement sets the car’s residual value at $12,000. The residual value is the parties’ estimate of what the car will be worth at the end of the four years. The agreement includes a liquidated damages clause which provides that, at the end of the lease, SP will sell the car on the market and Customer must pay SP the difference between the resale price and the residual value.

As explained in Chapter 1, this transaction is formally distinguishable from a hire-purchase agreement because there is no express option to [page 61] purchase. However, it is functionally equivalent to a hire-purchase agreement and, therefore to a conditional sale, because it contains strong financial incentives for Customer to buy the car at the end of the term. The substance test in PPSA subs 12(1) dictates that transactions like this should be subject to the statute and this explains the express reference to a lease of goods in subs 12(2). 3.7 On the other hand, not every goods lease is a disguised conditional sale agreement. A familiar counter-example is the short-term rental (for example, car hire agreements). Another example is the operating lease where the customer leases the goods, typically for an extended period but less than the useful life of the asset, in return for periodic payments and on the understanding that the goods will be returned to the lessor at the end of the term. In cases like this, the customer is under no obligation to buy the goods and, while in some cases the lessor may give the customer an opportunity to purchase, there are no inbuilt incentives for them to accept. Correspondingly, the rental payments represent the cost of the customer’s possession and use of the goods over the term and there is no purchase price component. On the basis of the substance test, transactions like this would not be subject to the statute. However, subs 12(3) extends the application of the statute to all lease agreements, whether or not in substance they secure payment or performance of an obligation, if the term is one year or more. The reasons for subs 12(3) are discussed in 3.34–3.36 below.

Consignments 3.8 PPSA para 12(2)(h) provides that the statute applies to a consignment which in substance secures payment or performance of an obligation, while subs 12(3)

extends the application of the statute to any commercial consignment whether or not the transaction in substance secures payment or performance of an obligation.11 ‘Consignment’ is not defined in the PPSA and the term tends to be used loosely in commercial circles. In Re Arcabi Pty Ltd,12 the court quoted with approval the following statement from a Canadian case: In its simplest terms, a consignment is the sending of goods to another. An arrangement whereby the owner sends goods to another on the understanding that such other will sell the goods to a third party and remit the proceeds to the owner after deducting his compensation for effecting the sale is an example of a consignment agreement.13

[page 62] In Re Arcabi, the court, drawing on another Canadian case, went on to list the following characteristics of a consignment: (a) the merchant is the agent of the supplier; (b) title to the goods remains in the supplier; (c) title passes directly from the supplier to the ultimate purchaser and does not pass through the merchant; (d) the merchant has no obligation to pay for the goods until they are sold to a third party; (e) the supplier has the right to demand the return of the goods at any time; (f) the merchant has the right to return unsold goods to the supplier; (g) the merchant is required to segregate the supplier’s goods from his own; (h) the merchant is required to maintain separate records; (i) the merchant is required to hold sale proceeds on trust for the supplier; (j)

the goods are shown as an asset in the books and records of the supplier and are not shown on the books and records of the merchant as an asset; and (k) the supplier has the right to stipulate a fixed or floor price.14

3.9 The following is a simple example of a consignment agreement as described above. Example 2. Importer is in the business of importing carpets from the Middle East. Dealer is a carpet retailer. Importer delivers a shipment of carpets to Dealer for sale on Importer’s behalf. The terms are that title to the carpets remains with Importer, Dealer acts as Importer’s agent when selling the carpets and Dealer must account to Importer for the proceeds of sale.

The consignment agreement has a retention of title element and so it might be tempting to conclude that it is in substance a conditional sale agreement. However, Dealer is under no obligation to purchase and pay for the carpets. On the contrary, the express or at least implied understanding is that, if Dealer cannot sell the

carpets, he will return them to Importer. So, while it is true that Importer retains title, the purpose is not to secure payment or performance of an obligation but, rather, to facilitate the return of the carpets if needs be. In Re Arcabi Pty Ltd, the court expressed this point by saying that:15 … [if] an item [is] sold on consignment, an obligation on the part of [Dealer] to pay [Importer] would follow but title would have passed to the third party purchaser. If the item [is] not sold the title [remains] with [Importer] and there is no obligation on the part of [Dealer] to pay [Importer].

In other words, there is no point at which Importer’s title and Dealer’s payment obligation coincide. The commercial explanation for the [page 63] arrangement is that it allows Dealer to acquire inventory without the risk of being left with surplus stock; and it gives Importer access to Dealer’s customer base and knowledge of the market free from the risk of Dealer’s insolvency.16 On the other hand, a transaction which is in form a consignment may have additional features which give it the character of an in-substance security agreement. For instance, assume that, in Example 2, the agreement between Importer and Dealer incorporates a guarantee provision requiring Dealer to pay Importer for any unsold carpets. Now Dealer is in substance committed to paying for the carpets, one way or another, and so the transaction does have indications of a conditional sale agreement. By virtue of PPSA para 12(2)(h), the statute applies in this second case because the transaction is a consignment which in substance secures payment or performance of an obligation. Returning to the first case, this transaction is not a consignment which in substance secures payment or performance of an obligation and so para 12(1)(h) does not apply; but, as noted above, para 12(3)(b) extends the application of the statute to every commercial consignment whether or not the transaction in substance secures payment or performance of an obligation. This provision is discussed in 3.31–3.32 below. 3.10 The typical floor plan arrangement is a type of consignment. The floor plan arrangement is an inventory financing technique commonly used in the motor vehicle industry. Under a floor plan arrangement, either the vehicle manufacturer or a financier associated with the manufacturer will provide the vehicles to the dealer on bailment terms. As in the case of Example 2 above, the manufacturer or the financier retains title, but the dealer has authority to display the vehicles for sale on

its showroom floor. When the dealer makes a sale, the manufacturer or financier will transfer title in the car to the dealer so that the dealer can complete the transaction.17 As in the case of the carpet example, an alternative way of structuring the transaction would be for the dealer to sell the cars as agent for the manufacturer or financier, rather than on its own account. But the disadvantage of this approach from the manufacturer’s or financier’s perspective is that it exposes them to liability, as principals, for any misrepresentations or other wrongful conduct on the dealer’s part in the course of negotiations.18 Depending on the details of the particular transaction, the floor plan arrangement may be a consignment that in substance creates a security interest, in which case it will be subject to the [page 64] Statute by virtue of subs 12(2) or it may be a true consignment, but the statute will still apply by virtue of subs 12(3).19

Trusts 3.11 PPSA subs 12(2) provides that ‘security interest’ includes a trust receipt if the transaction in substance secures payment or performance of an obligation. This is a carry-over from Art 9. Trust receipt financing was a pre-Art 9 form of inventory financing in the United States, which involved the secured party releasing the collateral to the debtor in return for a trust receipt signed by the debtor indicating that it holds the collateral on trust for the secured party.20 With the exception of Ontario, the Canadian PPSAs also include a reference to any trust that in substance secures payment or performance of an obligation.21 Aside from the reference to trust receipts, there is no mention of trusts in PPSA subs 12(2). However, this is not significant because the items in subs 12(2) are no more than examples of the general principle stated in subs 12(1). It follows that, despite the absence of any express provision, a trust that in substance secures payment or performance of an obligation will be subject to the statute. 3.12 In most cases, the trust does not have this characteristic. It is true that the trustee holds title to the trust assets subject to the beneficiary’s interest and that the trustee owes obligations to the beneficiary under the terms of the trust. However, a security interest depends on a debtor–creditor relationship and, in the usual case,

the trust lacks this element. Trusts are most commonly used either for asset management purposes or for the supervised transfer of wealth, rather than access to credit. The split of entitlements between trustee and beneficiary facilitates these objectives. To state the difference another way, the beneficiary does not hold equitable title to the trust assets to secure an obligation independently owed by the trustee. On the contrary, the beneficiary’s interest is a manifestation of the trustee’s obligations: historically, the trust derives from the availability of specific performance to enforce the trustee’s obligations combined with the maxim ‘equity deems as done what ought to be done’. The maxim applies to give the beneficiary an equitable proprietary interest in anticipation of the remedy. The reasoning is the same even in the case of a trustee for debenture-holders because, although here the trust property comprises a security interest, the trustee is not a party to the security agreement. The purpose of the trust is not to secure obligations owing to the debenture-holders, but to facilitate the administration of the security agreement and enforcement of the security interest on the debenture-holders’ [page 65] behalf.22 By the same token, a Quistclose trust is not in substance a security interest.23 If there were any doubt on that score, PPSA subs 8(1) removes it by expressly excluding the Quistclose trust from the operation of the statute: see further, 3.69–3.71 below. 3.13 On the other hand, the parties may cast their security agreement in the form of a trust and, in this case, the PPSA will apply. Example 3 provides a simple illustration. Example 3. SP makes a loan to Grantor. Grantor transfers property to Trustee on trust for Grantor but, if Grantor defaults on the loan, on trust for SP.

A variation on the same theme would be for Grantor to transfer the property to SP to be held on trust for Grantor on terms that the property will vest in SP absolutely if Grantor defaults.24

Flawed Asset Arrangements 3.14 A flawed asset arrangement is an arrangement between a debtor and a creditor imposing conditions on the debtor’s repayment obligation.25

Example 4. Customer deposits money with Bank on terms that the deposit is repayable only when Customer has discharged its obligations to Bank on other accounts.

At common law, a flawed asset arrangement, by itself, does not create a security interest because it gives Bank no rights in the deposit, but simply a contractual right to withhold payment.26 Bank’s flawed asset arrangement is effective in Customer’s insolvency. Customer’s payment right against Bank is limited by the flawed asset restriction and the insolvency administrator’s rights against Bank are subject to the same restriction. But the reason is not that Bank has a proprietary interest in the deposit. The point is simply that Customer does not qualify for payment unless it discharges its obligations to Bank and [page 66] the insolvency administrator’s entitlement is correspondingly bounded. PPSA subs 12(2) includes flawed asset arrangements in the definition of security interest and, at first glance, this seems to mark a reversal of the common law position.27 However, the reference to flawed asset arrangements must be read subject to the opening words of the subsection which make it clear that the listed items are security interests for the purposes of the statute only if they in substance secure payment or performance of an obligation. The clear implication is that not every flawed asset arrangement is subject to the statute, but only those that in substance create security interests. This raises the question as to what additional features might convert a flawed asset arrangement from a purely contractual one into a secured transaction. A leading case in point is the Supreme Court of Canada’s decision in Caisse populaire Desjardins de l’Est de Drummond v Canada,28 which suggests that, if set-off rights are added to the mix, this may affect the characterisation. The Drummond case is discussed in 3.55–3.56 below, in connection with the subs 8(1) provision governing set-off. The Statutory Review has recommended removal of the reference to flawed asset arrangements in subs 12(2) on the ground that it causes unnecessary confusion.29 But this change would not affect the application of the statute because, as indicated above, the transactions listed in subs 12(2) are simply illustrative of the general proposition stated in subs 12(1) that a security interest means any interest in personal property that in substance secures payment or performance of an obligation. If, in a particular case, a flawed asset arrangement can be characterised in this way, the statute will apply. This point is demonstrated by the Drummond case itself, where the relevant legislation made no specific reference to flawed asset

arrangements, but the court held that the transaction in question was in substance a security agreement.

Other Cases Guarantee 3.15 A guarantee is a promise by A to B that if C fails to pay a debt owing to B, A will pay instead. A guarantee reduces the risk of lending by providing B with an alternative source of payment if C defaults. It shares this feature in common with a security interest. But a simple guarantee is not a security interest because it gives B only a personal right of action against A and it lacks a proprietary dimension. PPSA subs 12(1) makes it clear that, to qualify as a security interest for the purposes of the statute, the interest must be ‘in personal property’. The case will be different, however, if A gives B an interest [page 67] in A’s personal property to secure C’s payment obligation to B or, alternatively, to secure A’s own obligation to B under the contract of guarantee.30

Negative pledge 3.16 Negative pledge clauses are commonly found in floating charge or all asset security agreements. A negative pledge is a promise by the debtor not to create a security interest in favour of a third party or not to create any such security interest that would rank in priority to or pari passu with the creditor’s own security interest.31 The terminology may be a source of confusion because ‘pledge’ in this context simply means a promise or covenant whereas, as discussed in Chapter 1, pre-PPSA, ‘pledge’ also meant a possessory security interest. A negative pledge, at least in its pure form, is not a security interest because, as in the case of a guarantee, it gives the creditor only personal rights against the debtor: the creditor can sue for an injunction to restrain breach of the provision or for damages following a breach, but the negative pledge provision itself does not give the creditor rights in the debtor’s property.32

Deposits 3.17 In contracts of sale, the buyer is often required to pay a deposit at the outset of the transaction. A deposit is typically required where the seller’s performance is to take place after the contract date and the purpose is to reduce the risk to the seller that the buyer may default on their obligation when the time for payment arrives. As a general rule, if the buyer defaults, the seller is entitled to keep the deposit and this prospect gives the buyer an added incentive to complete their side of the bargain. Does a deposit give the seller a security interest in the amount of the payment? At first glance, it might be tempting to think so, because whether the payment is in the form of cash, a cheque or credit card, it is personal property that the buyer transfers to the seller for the purpose of securing the buyer’s payment obligation to the seller. However, there is at least one important difference between a deposit and a PPSA security interest. A PPSA security interest continues only until the secured obligation has been performed. At that point, the security interest is extinguished and the grantor obtains or regains unencumbered title to the collateral. Conversely, the secured party is entitled to assert its rights against the collateral only if the grantor defaults, and, if the value of the collateral exceeds the amount of the secured obligation, the secured party must account to the grantor for the surplus: see PPSA Ch 4, discussed in Chapter 12 of this text. Typically, the seller is not required to refund a deposit when the buyer discharges their obligation but will instead credit the funds towards the purchase price. Furthermore, if the buyer defaults, the seller may keep [page 68] the whole of the deposit and is not required to account for any surplus. The analysis is the same whether or not the seller is required to hold the deposit on trust for the purchaser pending completion of the sale. But if there is no trust requirement, the position is even clearer because in that case the funds belong to the seller and the seller is free to use them as it likes, subject to a personal obligation to repay the buyer an equivalent sum if the seller itself defaults. The seller’s right to treat the funds as their own is inconsistent with the funds being collateral. For these reasons, a deposit is not a transaction which in substance secures payment or performance of an obligation and so the PPSA does not apply.33

Sale and repurchase agreements 3.18 Sale and repurchase agreements, or ‘repos’, are a common method of raising short-term finance in the securities industry. In essence, the repo involves the sale by A to B of securities subject to an agreement that A will repurchase equivalent securities from B at a later date at a price equal to the original sale price with a separate additional payment (the ‘repo rate’) which is B’s charge for providing the facility. The sell/buyback is a similar arrangement, except that the repo rate is factored into the repurchase price and not charged separately.34 Superficially, the repo resembles a secured loan. In both cases: (1) B gives A value, usually in the form of an advance; (2) A undertakes to repay the advance along with a premium for the use of the money (that is, interest); and (3) A gives B a proprietary interest on the understanding that A will get back the property or its equivalent when A repays B.35 3.19 The critical difference, however, is that, in the case of a security interest, the secured party obtains only a limited interest in the collateral and title remains with the grantor. Performance of the secured obligation terminates the security interest and gives the grantor clear title. Correspondingly, the secured party may sell the collateral, but only if the grantor defaults, and the secured party must account to the grantor for any surplus following the sale.36 By contrast, in the case of a repo, the transferee (B) typically acquires title to the securities and is free to deal with them regardless of whether the transferor (A) is in default. Correspondingly, A retains no interest in the securities following the transfer and it has no more than a contractual right to purchase equivalent securities from B on the settlement date. For these reasons, the typical repo is not a transaction that in substance secures payment or [page 69] performance of an obligation and so the PPSA does not apply.37 This outcome is consistent with the pre-PPSA position, where the courts typically accepted such transactions at face value: see, for example, Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Limited.38 3.20 Stock lending is a transaction that resembles the repo, but it has a different commercial purpose. The repo is driven by A’s need for cash, whereas the stock loan is driven by B’s need for the securities in order to cover a short position in the

market. In the typical stock lending transaction, A sells the securities to B on the understanding that B will re-transfer equivalent securities at a later date and A charges B a fee for the service. In industry circles, A is regarded as having ‘loaned’ the securities to B, but this is a colloquialism and, from a legal perspective, the transaction is a sale and repurchase.39 Stock lending itself does not in substance create a security interest because the purpose of the transfer is not to secure an obligation owing by A to B. However, A may require collateral from B, typically in the form of other securities or a cash deposit, to secure B’s re-transfer obligation. The agreement may allow A to enforce its claim to a cash deposit by way of set-off in the event of B’s default and, in that case, the PPSA will not apply: see 3.49–3.54 below. Alternatively, the agreement may provide that A has a security interest in the deposit, and in that case the transaction will be subject to the PPSA. The most important practical implication if the PPSA applies is that A must register a financing statement to perfect its security interest, otherwise it will lose priority to any competing perfected security interest. Furthermore, even if A does register a financing statement, its security interest will be subordinate to any earlier perfected security interest in the collateral: see Chapter 7 of this text. 3.21 Revised Art 9 of the Uniform Commercial Code addresses this issue by providing for perfection by control of a security interest in a deposit account.40 A secured party has control of a deposit account if: (1) the secured party is the bank with which the deposit account is maintained; (2) the secured party enters into a control agreement with the debtor (grantor) and the bank under which the bank agrees to comply with the secured party’s instructions for disposing of the funds in the account without any further consent by the debtor; or (3) the secured party takes over the account.41 A security interest in a deposit account perfected by control has priority over any competing [page 70] security interest that is perfected otherwise than by control.42 The Australian PPSA also provides for perfection by control of a security interest in a deposit account (ADI account), but only by the bank (ADI) with which the account is maintained: see 5.23–5.24 of this text. In other words, registration is the only method of perfection open to a secured party other than the ADI itself. On the other hand, as indicated above, A can avoid the PPSA registration requirement and priority rules

by relying on the law of set-off rather than claiming a security interest.

The Interpretation Function 3.22 One further implication of the substance test is that the terminology the parties use in their agreement does not determine the character of the transaction. Pre-PPSA law was similar in this respect. Courts would not be beguiled by the labels the parties themselves attached to their agreement and, where appropriate, would look behind the words for indications of the parties’ actual intentions. An example is Lee v Butler,43 which involved a contract for the supply of goods on title retention terms. The document was headed ‘hire-purchase agreement’ and it referred to the customer as ‘the hirer’ and described the payments as ‘rentals’. Nevertheless, the court held that the agreement was a contract of sale because it committed the customer to purchasing the goods. In this limited sense, pre-PPSA law took a substance over form approach. The difference is that, pre-PPSA, the courts’ concern was simply with the legal characterisation of the transaction: in other words the question was, ‘What form does this transaction take?’ By contrast, in the PPSA context, the concern is with the function of the transaction: in other words, the question is, ‘Regardless of form, is this transaction functionally equivalent to a security interest?’44 Post-PPSA, the issue in a case like Lee v Butler would be not, ‘Is the agreement a contract of sale or hire?’ but, rather, ‘Is it in substance a security agreement?’ The latter version of the question is no more susceptible to the parties’ choice of words than the pre-PPSA version. 3.23 This proposition cuts both ways. On the one hand, the parties cannot avoid the application of the statute simply by asserting or implying that their transaction is not a security agreement. On the other hand, the parties do not have to use any particular form of words to create a security interest, but they must make their intentions clear. If the agreement is ambiguous, the court will have to decide. A good example is 356477 British Columbia Ltd v CIBC.45 The debtor took out a loan with Bank 1 and it used the money to acquire a 40 per cent holding in a business venture (the Georgian Court Joint Venture). Subsequently, SP made a loan to the debtor which was used to pay out Bank 1. The key provision in the loan agreement was cl 8 which, [page 71]

paraphrasing, read as follows: ‘in consideration for the loan, [the debtor] agrees with [SP] to pay [SP] all funds derived from [the Georgian Court Joint Venture]’. The reference was to the debtor’s 40 per cent share of the joint venture’s future earnings. SP assumed that this provision gave it a security interest in the future earnings and it registered a financing statement in the PPS register. Subsequently, Bank 2 acquired an interest in the debtor and it brought an action to have SP’s registration discharged on the ground that SP did not have a security interest and that cl 8 gave SP only a personal claim against the debtor. The court rejected this construction, preferring to read cl 8 instead as meaning: ‘[the debtor] agrees to pay [SP] out of the funds derived from [the Georgian Court Joint Venture].’ A promise to repay the lender from a named fund is tantamount to a charge on the fund and so SP held a security interest in the joint venture earnings to secure repayment of the loan.

DEEMED SECURITY INTERESTS Accounts and Chattel Paper 3.24 PPSA para 12(2)(j) provides that a security interest includes an interest in personal property under an assignment that in substance secures payment or performance of an obligation. ‘Assignment’ is not defined, but the reference is to the transfer of accounts or chattel paper.46 Paragraph 12(3)(a) provides that a security interest also includes the interest of a transferee under a transfer of an account or chattel paper, whether or not the transaction in substance secures payment or performance of an obligation.47 ‘Transfer’ is not defined, but, in keeping with the underlying PPSA philosophy, it should be read as meaning every transaction which in substance is a transfer. So, for example, a declaration of trust over an account or chattel paper is a transfer on the basis that it notionally transfers title from the account creditor in its personal capacity to the account creditor in its capacity as trustee.48 [page 72] Example 5. Grantor is a retailer. It sells goods to Customer for $100 on 90-day terms. SP lends Grantor $100 at $10 interest and Grantor transfers Customer’s account to SP to secure repayment of SP’s loan.

Example 5 is a simplified illustration of a transfer (or assignment) that secures payment or performance of an obligation. The effect of the transaction is that if Grantor defaults on SP’s loan, SP can look to Customer’s account as an alternative

source of payment. The transaction may involve a single account, as in Example 5, or it may involve a block of accounts or all Grantor’s present and after-acquired accounts. But the basic principles are the same regardless of the number of accounts involved. In Example 5, Customer’s obligation to Grantor involves a one-time payment. However, there could be multiple payments involved and Customer’s relationship with Grantor may be an ongoing one. This would be the case if, for example, the sale to Customer was on instalment terms. The following variation on the facts of Example 5 suggests another possibility: Grantor offers a credit card facility, Customer purchases the goods using their credit card and Grantor transfers its credit card receivables, including Customer’s account, to SP as security for a loan. Again, though, the basic principles are the same regardless of the number of payments involved and whether or not the relationship between Grantor and Customer is an ongoing one. Example 6. Grantor is a retailer. It sells goods to Customer for $100 on 90-day terms. Grantor transfers Customer’s account to SP in return for a payment of $90.

This case resembles Example 5. The difference is that this time there is no loan involved and the transfer does not secure any obligation owing by Grantor to SP. Instead, the transaction is an outright sale of Customer’s account to SP. Because the transaction does not in substance secure payment or performance of an obligation owing to SP, it is not a security interest within the meaning of subs 12(1) or (2). However, it is still subject to the statute by virtue of subs 12(3). 3.25 The transactions in Examples 5 and 6 serve a similar commercial function: they both enable Grantor to use its outstanding accounts to raise immediate cash and they both return a $10 profit to SP. One difference relates to the distribution of risk: in Example 5, Grantor bears the risk of Customer’s non-payment because, if Customer defaults, SP still has its personal right against Grantor under the loan agreement. By contrast, in Example 6 the risk is on SP because it has acquired the account outright. But suppose that in Example 6 the transfer was on a ‘with recourse’ basis; in other words, Grantor guaranteed Customer’s payment. The recourse provision shifts the risk back to Grantor and moves the transaction in Example 6 even closer to the one in Example 5. This is one of the justifications for extending the operation of the statute to non-security transfers. A second consideration is that the potential for third-party deception is the same whether the transaction is an outright transfer or a security transfer. The reason is that Grantor retains apparent

[page 73] control of Customer’s account despite the transfer and so third parties may not be aware of SP’s interest. Bringing outright transfers under the statute makes them subject to the registration scheme and gives third parties a facility for finding out about them: see Fairbanx Corp v Royal Bank of Canada.49 3.26 There is a third consideration, which is historical. PPSA para 12(3)(a) derives, via the Canadian PPSAs, from Art 9. Before the enactment of Art 9, many states had accounts receivable statutes which applied to both outright and security assignments and Art 9 simply continued the tradition.50 This consideration is relevant to Australia because, pre-PPSA, two states, Victoria and Queensland, had legislation requiring registration of assignment of book debts which, in common with the pre-Art 9 laws in the United States, drew no distinction between outright and security assignments.51 3.27 In Example 5, SP and Grantor may transact on either a notification basis or a non-notification basis. In the first case, Grantor’s customers are notified of the transfer and directed to pay their accounts to SP. In the second case, the customers are not notified unless and until Grantor defaults against SP. At that point, SP may direct customers with outstanding accounts to pay SP itself, instead of Grantor, and it may also require Grantor to account for payments it has already collected.52 Likewise, in Example 6, the parties may transact on either a notification or nonnotification basis; in the latter case, the account debtors continue making payments to the transferor (Grantor) who in effect acts as collection agent for the transferee (SP). PPSA subs 80(7) protects Customer against the risk of having to make double payments. It provides, in effect, that the account debtor (Customer) may continue paying Grantor until notified otherwise. It also gives Customer the right to require proof of the transfer and provides that Customer may continue [page 74] making payments to Grantor if SP fails to comply within five business days.53 This and other aspects of s 80 are discussed further in Chapter 12 of this text. 3.28 By and large, the PPSA applies to the outright transfer of an account or chattel paper in the same way it applies to true security interests. It follows that, in

Example 6, SP must register a financing statement. Otherwise it may be at risk if, for example, Grantor transfers the account again to a second transferee.54 The PPSA marks a significant departure from prior law in this respect. Pre-PPSA, priority between competing successive assignments of the same account was governed by the rule in Dearle v Hall.55 According to the rule in Dearle v Hall, priority turned on the order in which the competing assignees notified the account debtor of the assignment, subject to the qualification that the first assignee to give notice would not obtain priority if it had actual or constructive knowledge of the competing assignment at the time of its transaction with the account debtor. Post-PPSA, the rule in Dearle v Hall no longer applies and the PPSA priority rules apply instead.56 The PPSA priority rules turn on variables such as whether one or both the competing security interests were perfected and, if they were both perfected, the order of the perfecting events: see further, Chapter 7 of this text. Priority outcomes under the PPSA do not depend on notice to the account debtor, though notifying the account debtor may be important for other reasons: see 3.27 above. 3.29 Pre-PPSA, a chose in action (including an account) could be assigned either in equity without formalities or at law by complying with the formal requirements set out in the Australian equivalents of Judicature Act subs 25(6).57 The main Judicature Act requirements were that: (1) the transfer must be in writing under the hand of the assignor; and (2) the account debtor must be given notice in writing of the assignment. Needless to say, an assignment in equity gave the assignee equitable title to the chose in action, while an assignment at law gave the assignee legal title. So far as accounts are concerned, the PPSA abolishes the pre-PPSA forms of assignment and consequently also the pre-PPSA distinction between legal and equitable assignments. Under the PPSA, there is only one form of assignment (transfer), the formal requirements for which are to be found in the s 19 attachment provision and the s 20 provisions governing written security agreements.58 [page 75] Specifically, to transfer an account under the PPSA, the following requirements must be satisfied: (1) there must be an agreement; (2) the transferee must give value;59 (3) the transferor must have rights in the account; and (4) the transfer agreement must be evidenced by writing that is (a) signed or otherwise adopted by the transferor and (b) describes the account:60 see further, Chapter 4 of this text.

Not all choses in action are accounts as defined in PPSA s 10. For example, an ADI account is not an account: see 2.34 of this text. The PPSA does not apply to the outright transfer of a chose in action which is not an account and the common law and equitable rules discussed above remain relevant to this extent. 3.30 For reasons that will be explained in Chapter 12 of this text, the enforcement provisions in PPSA Ch 4 do not apply to the outright transfer of an account. The vesting provisions in PPSA Pt 8.2, which relate to the status of an unperfected security interest in the grantor’s insolvency proceedings, also do not apply to outright transfers: see Chapter 13 of this text.

Consignments 3.31 PPSA para 12(2)(h) provides that ‘security interest’ includes an interest in personal property under a consignment (whether or not a commercial consignment) if the transaction in substance secures payment or performance of an obligation. Paragraph 12(3)(b) provides that ‘security interest’ also includes the interest of a consignor who delivers goods to a consignee under a commercial consignment whether or not the transaction in substance secures [page 76] payment or performance of an obligation.61 Section 10 defines ‘commercial consignment’ to mean a consignment where the consignor and consignee both deal in goods of the relevant kind in the ordinary course of business.62 The definition excludes an agreement involving the delivery of goods to an auctioneer for sale and also cases where the consignee is generally known to its creditors to be selling or leasing goods for others.63 Reading these provisions together, the statute applies to: (1) a commercial or non-commercial consignment if the transaction in substance secures payment or performance of an obligation; and (2) a commercial consignment whether or not the transaction in substance secures payment or performance of an obligation. As with the other subs 12(3) deemed security interests, the enforcement provisions in Pt 4 do not apply to non-security commercial consignments. 3.32 In some cases, it may not be readily apparent whether the transaction is a true consignment or a disguised security agreement. Extending the application of

the statute to both cases avoids litigation on the question.64 This is one explanation for para 12(3)(b). Another is that the potential for third-party deception is the same in both cases because either way the consignee’s possession of the goods may create an appearance of ownership.65 Bringing true consignments within the scope of the statute makes them subject to the registration provisions and this counteracts the ostensible ownership problem. The ostensible ownership justification explains why the definition of ‘commercial consignment’ in s 10 excludes cases where the consignee’s status as such is notorious. The reason for limiting the extended application of the statute to commercial consignments is to avoid private individuals being taken by surprise. This is particularly important in the case of a one-off consignor who may be unaware of the PPSA registration requirements. But the same might be said of some regular consignors, such as artists. If an artist regularly consigns their work to a dealer for sale, the transactions are [page 77] likely to be ‘commercial consignments’ within the meaning of PPSA s 10 and so the PPSA applies, even though the artist might be taken by surprise to discover that it does.66 The definition of ‘commercial consignment’ currently excludes the case where ‘the consignee is generally known to the creditors of the consignee to be selling or leasing goods of others’. The Statutory Review has recommended changing this provision to read ‘the consignee is or should generally be known to be selling or leasing goods of others’. Art galleries are, or should be, generally known to take works on consignment and, on this basis, the consignment of a painting or the like to a gallery would not be a commercial consignment within the meaning of the Act.67

PPS Leases Introduction 3.33 PPSA para 12(2)(i) provides that ‘security interest’ includes an interest in personal property under a lease of goods (whether or not a PPS lease) if the transaction in substance secures payment or performance of an obligation. Paragraph 12(3)(c) provides that a security interest also includes the interest of a lessor or bailor of goods under a PPS lease, whether or not the transaction in

substance secures payment or performance of an obligation. ‘PPS lease’ is defined in s 13 to mean a lease or bailment of goods for a term of more than one year. The definition extends to transactions which are in substance or potentially for a term of more than one year, including a lease or bailment for an indefinite term,68 a lease or bailment which is for a term of up to one year but which is automatically renewable, and a lease or bailment for a term of up to one year where the lessee or bailee remains in possession after the expiration of the formal term.69 The definition excludes transactions where the lessor or bailor is not in the business of leasing or bailing goods.70 [page 78] It also excludes bailments where the bailee provides no value. In summary, subject to the exceptions just mentioned, the statute applies to: (1) a lease of goods, regardless of the term, if the transaction in substance secures payment or performance of an obligation; (2) a lease of goods for a term of more than one year whether or not the transaction in substance secures payment or performance of an obligation; and (3) a bailment of goods for a term of more than one year, whether or not the transaction in substance secures payment or performance of an obligation.

Lease of goods for term of more than one year 3.34 All the Canadian PPSAs, and likewise the New Zealand PPSA, apply to a non-security lease of goods if the term is for more than one year.71 In Ontario, the rationale for bringing non-security leases within the scope of the statute was to avoid litigation over the distinction between a true lease and a security lease.72 The reason for the one-year cut-off rule was to exclude short-term rentals such as the hire of a car for the weekend. The premise was that if the rental is a short-term one, it is less likely to be a disguised security agreement, or at least less likely to generate litigation on that score.73 The measure does not altogether eliminate the true lease/security lease distinction because, as in Australia, the statute’s enforcement provisions do not apply to deemed security interests. However, since the issue only arises in the enforcement context, it is likely to generate much less litigation than if it affected the application of the statute across the board.

3.35 In the other Canadian provinces, the rationale was different. A true lease, in common with a security lease, raises ostensible ownership concerns, and bringing true leases within the scope of the statute makes them subject to the PPSA registration requirements.74 The reason for excluding short-term leases — transactions where the term is a year or less — was presumably [page 79] that, although short-term transactions may also raise ostensible ownership concerns, it would not be cost-effective to subject them to a registration requirement. The Australian approach could be explained on either of the two bases discussed above. 3.36 Example 7 illustrates one of the main practical implications of the PPSA’s application to lease agreements. Example 7. Lessor sells and rents heavy equipment. Contractor wins a two-year government contract to build a new road. Contractor leases a bulldozer from Lessor for the duration of the contract at a monthly rental of $500 and on the understanding that Contractor will return the bulldozer to Lessor at the end of the two years.

The contract between Lessor and Contractor is a true lease — it does not in substance secure payment or performance of an obligation owing by Contractor to Lessor. Nevertheless, it is a PPS lease and so the statute applies. Consequently, Lessor should register a financing statement. Otherwise it will be at risk if, for example, Contractor wrongfully sells the bulldozer to a third-party transferee or gives a security interest in the bulldozer to a third-party financier.75 Failure to register may also put Lessor’s interest at risk if Contractor becomes bankrupt or goes into liquidation during the currency of the lease.76

Bailments 3.37 A possible objection to the ostensible ownership argument for bringing true leases within the scope of the statute is that the ostensible ownership concern is not limited to leases; it is an issue with all transactions that involve separation of ownership from possession. Therefore, there is an element of arbitrariness in selecting the goods lease for special treatment without also addressing the other cases. On the other hand, the wider the net is cast to address the ostensible ownership concern, the further the statute strays from its mandate to regulate

secured transactions. The Australian PPSA apparently opts to cast a wide net by including bailments within the definition of PPS lease. In doing so, it follows the New Zealand PPSA example, where ‘lease for a term of more than one year’ is defined to include bailments.77 [page 80] 3.38 In Rabobank v McAnulty,78 the New Zealand Court of Appeal, interpreting the New Zealand provision, observed that ‘bailment is a much broader concept than lease: ‘[u]nder modern law, a bailment arises whenever one person (the bailee) is voluntarily in possession of goods belonging to another person (the bailor)’.79 In the Rabobank case, a syndicate owned a racehorse which it decided to put out to stud. The syndicate entered into a standing arrangement with a stud farm, under which the farm agreed to stable and look after the horse and also arrange service nominations. Rabobank had loaned money to the farm and held a perfected security interest in all the farm’s present and after-acquired personal property. The farm ended up in financial difficulty and Rabobank claimed the horse as part of its collateral. The bank’s argument ran as follows: (1) the agreement between the syndicate and the farm was a bailment for a term of more than one year and so the PPSA applied; (2) the syndicate had not registered a financing statement and so its deemed security interest was unperfected; and (3) an unperfected security interest is subordinate to a perfected security interest in the same collateral.80 The court agreed that the transaction was a bailment, but held that it was not subject to the statute because the definition of ‘lease for a term of more than one year’ by implication excludes transactions where the bailor is not regularly engaged in the business of bailment.81 In Australia, there is an express exception to this effect in the definition of ‘PPS lease’ and so the result would have been the same if the Australian PPSA had applied.82 3.39 PPSA subs 13(3) enacts a second exception. It provides that a bailment is a PPS lease only if ‘the bailee provides value’. Section 10 defines value to mean ‘any consideration sufficient to support a simple contract’. Subsection 12(3) is ambiguous. It may mean: (1) value provided by the bailee for the bailment; or (2) value provided by the bailee at large.83 If the first reading is correct, the delivery of a motor vehicle for repair, for example, would not be a PPS lease because it is the bailor (the vehicle owner), not the bailee (the repairer) which provides value for the

bailment. On the same basis, warehousing agreements, shipping contracts and the like would fall outside the definition. In most bailments, it is the bailor, not the bailee who provides value for the bailment. The most obvious counter-example is the goods lease, but the s 13 definition [page 81] catches goods leases anyway. It follows that if subs 13(3) is read as referring to value the bailee provides for the bailment, it effectively negates the references to bailment in the main part of the definition. On the other hand, if subs 13(3) is read as referring to value provided by the bailee at large, it has the effect of bringing all bailments within the scope of the definition because the bailee always provides value in one sense or another: the repairer carries out repairs, the warehouse-keeper offers a storage facility, the shipping company provides transportation services, and so on. Subsection 13(3) is clearly intended to limit the meaning of ‘PPS lease’, but on this second construction it imposes no limitations at all. In summary, it is hard to make sense of the provision on either reading.84 From a policy perspective, however, the first interpretation is preferable. One of the main reasons for extending the statute’s application to PPS leases is to address ostensible ownership concerns by subjecting such transactions to the PPSA registration regime. But many, perhaps most, bailments do not give rise to ostensible ownership concerns. For example, most people would realise that vehicles in a repairer’s shop are unlikely to belong to the repairer; that goods held in storage do not belong to the warehouse-keeper; and that cargo does not belong to the shipping company. Therefore, it is hard to justify bringing such transactions within the scope of the PPSA. The Statutory Review has recommended removing the references to bailment from s 13.85

EXCEPTIONS Licences 3.40 Subsection 12(5) provides that a security interest does not include a licence. PPSA s 10 defines ‘licence’ to mean a right, entitlement or authority to: (1) manufacture, produce, sell, transport or otherwise deal with personal property; (2) provide services; or (3) explore for, exploit or use a resource. It is hard to see how a licence in this sense could be a security interest and so subs 12(5) may be unnecessary. The proposition that a licence is not a security interest should not be

confused with the proposition that a licence is personal property and may be the subject of a security interest: see Chapter 2 of this text.

Subordination Agreements 3.41 Subsection 12(6) provides, in effect, that a subordination agreement is not per se a security agreement.86 A subordination agreement might be [page 82] entered into between two or more unsecured creditors, A and B, both with claims against C, under which A agrees to postpone or subordinate its claim to B. Alternatively, the agreement may involve two or more secured creditors, A and B, under which A agrees to surrender its priority position to B.87 Instead of contracting with B, A may agree with C that, if C becomes insolvent, B’s claim should be paid first or, if A and B hold competing security interests in the same collateral, that B’s security interest should have priority. Subsection 12(6) addresses all these permutations. The following discussion focuses on subordination agreements between unsecured creditors. Subordination agreements between competing secured creditors are discussed in 7.29–7.33 of this text. 3.42 There are two main subordination methods: the turnover subordination and the contractual subordination.88 In a turnover subordination, A agrees to turn over to B all recoveries it receives in respect of its own claim. In a contractual subordination, A agrees that its claim is not payable until B has been paid in full. In the case of a turnover subordination, there is a subsidiary question regarding the nature of B’s entitlement. Depending on the terms of the agreement, there are four main possibilities: (1) B may have no more than a personal right of action against A for recovery of its claim; (2) A may hold its claim on trust for B; (3) B may have a security interest in A’s claim for the amount of B’s claim; or (4) A may have assigned its claim to B. In Cases (2), (3) and (4), B has a proprietary interest in A’s claim and the PPSA may apply. In PPSA terminology, A’s claim is an account (being the money obligation owing by C). In Case (3), B holds a security interest in the account and the PPSA applies on that basis. The PPSA may also apply in Case (2), but only if the trust in substance creates a security interest: see 3.11–3.13 above. Case (4) involves an outright transfer of the account from B to A and so it

creates a deemed security interest within the meaning of PPSA subs 12(3). Subsection 12(6) does not foreclose the application of the statute in Cases (3) and (4). It simply creates a presumption that the subordination agreement is a Case (1) type. The upshot is that the statute may apply, but only if there are clear indications in the subordination agreement that the parties intended B to have either a security interest or title.89 In the case of a contractual subordination, B has simply a personal claim against C and so the PPSA does not apply. 3.43 In the case of a turnover subordination, the characterisation of B’s claim will be relevant if A becomes insolvent. If B has simply a personal claim against A for recovery of A’s claim against C, it will rank as an unsecured creditor in A’s bankruptcy or liquidation and will be entitled to recovery on a pro rata basis. On the other hand, subject to the operation of the PPSA, a [page 83] proprietary claim will give B priority over A’s general creditors. The implication is that if A and B enter into a turnover subordination with the intention of giving B either a security interest in, or title to, A’s claim, B should register a financing statement to perfect its security interest, naming A as the grantor.90 Otherwise, subject to PPSA s 268, B’s security interest may be ineffective in A’s bankruptcy or liquidation.91

Bills of Lading 3.44 PPSA para 8(1)(a) provides that the statute does not apply to the interest of a seller who has shipped goods to a buyer under a negotiable bill of lading to the order of the seller or their agent, unless the parties have otherwise evidenced an intention to create a security interest in the goods.92 Reservation of title in this manner is commonly used to ensure payment: the shipping company’s obligation is to release the cargo to the party named in the bill of lading and the seller takes the bill of lading in their own name on the understanding that the seller or their agent will transfer the bill into the buyer’s name upon receipt of payment. Given the reservation of title component, this type of transaction at least superficially resembles a conditional sale agreement. On the other hand, under the typical conditional sale agreement, the seller continues to reserve title after the goods have

been delivered, whereas with an order bill of lading, title will normally pass before delivery. As a matter of commercial practice, the bill of lading per se has not been regarded as creating a security interest and the exception in para 8(1)(a) continues this understanding. One consequence of the exclusion is that the enforcement provisions in PPSA Ch 4 do not apply. This is important because the enforcement provisions were not drafted with bills of lading in mind.93 Another consequence is that, in the normal case, the seller does not have to worry about registering a financing statement. On the other hand, the exception in para 8(1)(a) is limited to the title reservation component in a bill of lading. The provision does not prevent a bill of lading from being used as collateral and, if this is done, the statute will apply: see 2.17–2.18 of this text.

Security Interests Arising by Operation of Law 3.45 PPSA s 12 limits the application of the statute to a security interest ‘provided for by a transaction’. In other words, subject to the limited exceptions discussed below, the PPSA only applies to consensual security interests. To reinforce this point, PPSA paras 8(1)(b) and (c) provide that the statute does not apply to a security interest or other interest in personal property arising [page 84] by operation of law.94 Paragraph (b) applies to statutory liens, while para (c) applies to common law liens. Statutory liens include both government liens and liens in favour of private creditors. An example of a statutory government lien is a security interest in favour of a government for unpaid taxes created by the relevant taxation statute. Examples of private liens created or regulated by statute include the warehouse operator’s lien and the unpaid vendor’s lien.95 Examples of common law liens include the repairer’s lien, the innkeeper’s lien and the solicitor’s lien over documents.96 The landlord’s right of distress for unpaid rent is not itself a lien, but a lien arises once the right is exercised, and in Canada the courts have held that the PPSA does not apply.97 In Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd, it was held that a defendant’s payment into court to secure a stay on the execution of a judgment debt pending an appeal did not give the plaintiff a security interest to which the PPSA applied; the payment into court gave rise to a charge in the plaintiff’s favour, but the charge was created by the court order

imposing the stay; in other words, it arose by operation of law and not as the result of a transaction between the parties.98 3.46 The foregoing is subject to s 73, which regulates priorities between a PPSA security interest and a security interest excluded from the statute by para 8(1)(b) or (c).99 Example 8. SP has a security interest in Grantor’s motor vehicle perfected by registration. Grantor delivers the car to Repairer for the supply and installation of a new braking system. Repairer completes the work, but Grantor does not pay the bill and Repairer refuses to return the car. Grantor defaults against SP who claims the car from Repairer.

The repairer’s lien is a possessory one and it is lost if the repairer gives back the goods.100 In Example 8, Repairer still has the car and so the possession requirement is satisfied. The question, though, is whether Repairer’s lien is [page 85] valid against SP. PPSA subs 73(1) enacts a priority rule for cases like this: it provides that Repairer has priority over SP unless the repair work, to Repairer’s knowledge, constituted a breach of the security agreement between SP and Grantor. Typically repair work will not breach the security agreement. On the contrary, there is likely to be a provision in the security agreement requiring Grantor to keep the collateral in good repair and so Grantor would be in breach of the security agreement if it failed to have any necessary repair work done. The practical implication of subs 73(1) is that SP must pay the repair bill if it wants the car. This outcome makes sense from a commercial perspective because otherwise SP would benefit from an increase in the value of its collateral without paying for it. Furthermore, a rule favouring SP would increase repair costs across the board and this might disadvantage lenders by discouraging some borrowers from keeping the collateral in good repair. 3.47 Subsection 73(1) is limited to cases where the non-PPSA security interest arises in relation to providing goods or services in the ordinary course of business and it was the interest-holder who provided the goods or services. The provision also only applies in the absence of any Commonwealth, state or territory law establishing a different priority rule. Subject to this last qualification, the provision would apply to a repairer’s lien, as illustrated by Example 8, and also, for example, to a warehouse operator’s lien and a solicitor’s lien for documents. On the other

hand, subs 73(1) would not apply, for example, to a government lien for unpaid taxes or the like because here the lien does not arise in relation to providing goods or services in the ordinary course of business. However, subs 73(2) may be relevant. Subsection 73(2) relates to ‘statutory interests declared by law’; it applies where the statute that creates the non-PPSA security interest contains a priority rule; and it provides, in effect, that the other statute’s priority rule applies if, and only if: (1) the other statute declares that PPSA subs 73(2) applies; and (2) the statutory interest arises after the declaration takes effect.101 By implication, if the other statute does not contain a priority rule or there is no subs 73(2) declaration in force, the courts must look to the common law for a solution.102 [page 86] 3.48 Subsections 73(7) and (8) relate to ‘interests arising under the general law’ other than in cases where subs 73(1) applies. They provide that the relevant Minister may establish a priority rule by legislative instrument; any such priority rule will apply in the absence of any Commonwealth statute establishing a different priority rule and provided that, in any particular case, the general law interest arises after the instrument comes into effect. By implication, if there is no Commonwealth statute in point, and no subs 73(8) legislative instrument, the common law will govern.103

Set-off104 Introduction 3.49 Paragraph 8(1)(d) provides that the statute does not apply to any right of set-off or combination of accounts. Paragraph (e) excludes various transactions governed by the Payment Systems and Netting Act 1998 (Cth). Paragraph 8(1)(d) is subject to s 80 which, among other things, provides that if an account or chattel paper is transferred, the transferee’s rights are subject to any defence the account debtor may have had against the transferor by way of set-off.

Meaning of set-off 3.50 In general terms, set-off is ‘the right of a debtor who is owed money by his

creditor on another account or dealing to [ensure] payment of what is owed to him by setting this off in reduction of his own liability’.105 Example 9. Dealer is a timber merchant. It offers volume rebates to its customers which are calculated and paid at the end of each financial year. Customer has bought substantial quantities of timber from Dealer during the current financial year and will qualify for the volume rebate. In April, Dealer sells Customer one further quantity of timber for $100 on 90-day terms. On June 30, Dealer does the rebate calculations and determines that Customer is entitled to $95.

Example 9 is a simple illustration of one scenario where the doctrine of set-off applies. Set-off avoids the need for Customer to pay Dealer $100 for the April delivery and then for Dealer to pay the $95 rebate to Customer. Instead, Customer can set off the $95 against the $100 they owe Dealer and simply pay Dealer $5. Setoff has insolvency implications similar to those of a security interest. Assume that, in Example 9, Dealer goes into liquidation with both amounts still unpaid. Customer can assert their right of set-off against Dealer’s liquidator.106 The result is that Customer obtains payment in [page 87] full of their $95 rebate claim. In the absence of set-off, Customer would have had to pay $100 to the liquidator and file a proof of claim for the $95, and Customer’s claim would rank equally for payment with the claims of all other unsecured creditors. In summary, Customer’s right of set-off triggers a $95 wealth transfer from Dealer’s unsecured creditors to Dealer and this outcome is the same as if Customer had taken a security interest from Dealer to secure payment of the $95. At common law, however, a right of set-off does not create a security interest. Setoff is no more than ‘a right to set up one personal claim against another in reduction or discharge of the defendant’s liability’.107 PPSA para 8(1)(d) preserves this common law distinction. 3.51 Assume that, in Example 9, Dealer has transferred all its present and future accounts to SP. Can Customer assert its right of set-off against SP? If the PPSA applied, the answer might depend on whether Customer had registered a financing statement to perfect its security interest and, if so, whether they registered before SP.108 But, as a result of PPSA para 8(1)(d), the PPSA does not apply, except for s 80. Applying subss 80(1) and (2), Customer may assert their right of set-off against SP unless the contract between Grantor and Customer contains a cut-off clause, by which Customer agrees not to assert their right of set-off against a third party such

as SP.109

Types of set-off 3.52 Example 9 involves one type of set-off, known as ‘legal set-off’, or ‘statutory set-off’. Other types of set-off include equitable set-off and contractual set-off. The requirements for legal set-off are that: (1) both debts must be for liquidated amounts; and (2) they must be mutual, in other words they must arise between parties in the same right.110 On the other hand, there is no requirement for any transactional connection between the debts. Equitable set-off may be asserted even if one or both debts is for an unliquidated amount. On the other hand, the debts must derive from the same contract or at least from closely connected contracts so that it would be inequitable to deny the defendant a right of set-off. Contractual set-off, as its name suggests, derives from an express provision in the parties’ agreement and its scope and limitations are subject to the terms of the provision. The banker’s right of combination, also referred to in para 8(1)(d), applies in the case where a customer has, say, two accounts with their bank, one showing a credit balance and the other a debit balance; it allows the bank to combine the accounts, in effect helping [page 88] itself to payment of the customer’s debt on the one account from the credit balance in the other.111 The right of combination reflects general banking practice, which is to treat the customer’s dealings with the bank as part of one overall account and the customer’s individual accounts as simply ledger entries recording different components of the overall account balance. 3.53 Netting, to which PPSA para 8(1)(e) applies, is a form of set-off particularly common in the finance and derivatives industries. Netting often, though not necessarily, involves multiple parties and the objective is to consolidate mutual claims into a single net balance.112 The mutual obligations may all be monetary obligations or, alternatively, some or all the obligations may be non-monetary ones (for example, to deliver commodities or securities). In the latter case, the netting process will involve the conversion of the non-monetary obligations into money amounts so that they can be set off against one another. The netting function may

be performed by the parties themselves, or there may be an intermediary involved, such as a clearing house or settlement agent.113 However, despite these variables, netting and set-off are conceptually related and the thinking behind PPSA paras 8(1)(d) and (e) is basically the same.

Set-off and charge-backs 3.54 The New Zealand PPSA also contains a provision excluding set-off, as does Art 9, but the Canadian PPSAs do not.114 Grant Gilmore, the architect of Art 9, opposed the exclusion on the ground that the point was so obvious it did not need stating: ‘one might as well exclude fan-dancing’.115 But Gilmore reckoned without the charge-back. As Goode points out, the distinction between contractual set-off and security has become blurred by the legal recognition of charge-backs. A chargeback is a security interest taken by a creditor in its own indebtedness.116 Example 10. Bank gives Grantor a line of credit (Account A). Grantor places $200,000 with Bank on a five-year fixed-term deposit (Account B). To secure Grantor’s obligations on Account A, Bank takes a security interest in Account B.

In Re Bank of Credit and Commercial International SA (No 8) [BCCI case],117 the House of Lords gave its imprimatur to charge-back arrangements.118 PPSA subss 12(3A) and (4) are statutory provisions to the same effect. Assume [page 89] that, in Example 10, Grantor defaults on its Account A obligations and Bank decides to enforce its security interest. The only possible method of enforcement is a book-entry debit to Account B. But, as it happens, this is also exactly the step Bank would take to enforce its right of combination.119 In other words, the charge-back is functionally indistinguishable from set-off. This realisation creates a particular dilemma in the PPSA context: given the PPSA’s commitment to substance over form, how is it possible to reconcile the provisions in subss 12(3A) and (4) (indicating that the statute applies to charge-backs), with para 8(1)(d) (indicating that the statute does not apply to set-off or the combination of accounts)? As at common law, the only solution may be to fall back on the labels the parties themselves apply.120 In other words, if the parties describe their transaction as a security agreement, it would be treated for the purposes of the PPSA as a charge-

back arrangement and therefore subject to the statute by virtue of subss 12(3A) and (4). On the other hand, if the parties use set-off terminology, PPSA para 8(1)(d) would apply and so the transaction would fall outside the statute. This approach is at odds with the statute’s overall substance over form philosophy, but it is hard to see any other way of making sense of both subss 12(3A) and (4) and para 8(1)(d).

Set-off plus flawed asset 3.55 As indicated earlier, PPSA para 12(2)(l) provides that a flawed asset arrangement is a security interest if, in substance, it secures payment or performance of an obligation. A flawed asset arrangement itself is simply a personal right to withhold payment until agreed conditions have been fulfilled, and so it is not in substance a security interest. But if the parties combine a flawed asset arrangement with set-off rights, the analysis may be different. Example 11. Bank gives Grantor a line of credit (Account A). Grantor places $200,000 with Bank on a five-year fixed-term deposit (Account B) on conditions stating that the deposit is non-transferable and that it may not be redeemed before the maturity date. Grantor enters into an agreement with Bank on the following terms: ‘Grantor undertakes to maintain and consents to the withholding by Bank of the Account B deposit as long as all amounts due on Account A have not been fully repaid and as long as the line of credit has not been cancelled’. Bank also has a right of set-off, in other words, a right to combine the two accounts at its election.

Example 11 is loosely based on the Drummond case.121 There the Supreme Court of Canada held, by a majority, that the arrangement in substance [page 90] created a security interest in [Bank’s] favour. While recognising that a bare right of set-off does not create a security interest, the majority held that ‘the five-year term and the maintenance and retention of the $200,000 deposit, as well as [Grantor’s] agreement not to transfer or negotiate the deposit and [the fact] that the deposit could only be used as security with [Bank]’ made a difference.122 The reason was that, ‘in the absence of these encumbrances on [Grantor’s] deposit, [Grantor] could have withdrawn the deposit at any time. Should it have done so and still been indebted to [Bank], [Bank’s] right of set-off would be ineffective’. The effect of the encumbrances was to ensure [Grantor’s] continuing indebtedness to [Bank] and this preserved [Bank’s] right of set-off. In summary, a bare right of set-off is not a

security interest because ‘no specific property secures payment’.123 On the other hand, the combination of set-off rights with ‘encumbrances placed on [Grantor’s] claim against [Bank]’ supplies this missing element.124 3.56 The Drummond decision was subject to a strong dissent. According to the minority, the essential requirement for a security interest is that it must involve the creation of a property right in the disputed asset, and not simply a personal right to compel performance of an obligation. While conceding that a bare right of set-off may be similar to a security interest in some of its effects, the minority stressed that it does not give the creditor any property rights and so it cannot be a security interest. Moreover, a flawed asset arrangement creates no more than a personal obligation to maintain the account and it is not possible to produce a property right simply by combining two or more personal obligations. A fixed-term deposit is functionally equivalent to a flawed asset: given the fixed-term nature of the arrangement, the bank has the right to withhold repayment until the end of the term. The majority judgment in the Drummond case could be read as meaning that a right of set-off exercisable against a fixed-term deposit should always be characterised as an in-substance security interest. But the better view is that a security interest arises only if, as in the Drummond case itself, the set-off rights and the flawed asset are agreed to as part of the same overall transaction and the purpose of the fixed-term deposit is to provide a source of funds for the lender’s repayment.

The implications in Australia 3.57 What are the implications of the Drummond case for Australia? The Australian PPSA, in para 12(2)(l), suggests that a flawed asset arrangement may create a security interest and, if so, the statute applies. On the other hand, para 8(1) (d) suggests that a right of set-off does not create a security interest and so the statute does not apply. However, the statute does not address the case where the arrangements are combined. This creates a tension between [page 91] paras 8(1)(d) and 12(2)(l) and the courts will have to decide which takes precedence. A plausible response would be to read para 8(1)(d) as meaning that the Act does not apply to a right of set-off standing alone. On this basis, the Act might

still apply if, as in the Drummond case, the right of set-off is part of a larger transaction, which also includes a flawed asset arrangement and the purpose in substance is to secure payment or performance of an obligation. 3.58 In any event, the set-off/flawed asset question matters less in Australia than it does in Canada. In Canada, if the transaction in Example 11 does create a security interest, Bank will have to register a financing statement and it will be subject to the PPSA priority rules. Assume that, in Example 11, Grantor has earlier given SP a security interest in all its present and after-acquired personal property. SP has registered a financing statement. Bank subsequently registers a financing statement to perfect its security interest in Grantor’s deposit. In a dispute between SP and Bank over SP’s deposit, SP will have priority because it was the first to register.125 On the other hand, if the transaction does not create a security interest, Bank may rely on its set-off rights. The Australian PPSA provides for perfection by control of a security interest in an ADI account. The statute enacts an automatic control rule in favour of ADIs and it provides that a perfected security interest held by an ADI in an ADI account has priority over any other perfected security interest in the same account.126 The result is that, even if the transaction in Example 11 does create a security interest, Bank will not have to register a financing statement and it will have automatic priority over all competing security interests. In summary, Bank’s priority position relative to SP is at least as strong as if the arrangement had been characterised as a set-off rather than as creating a security interest.127

The triple cocktail 3.59 In cases like Example 11, in addition to providing for the flawed asset arrangement and set-off rights, the agreement may also expressly give Bank a security interest in the Account B deposit. This type of arrangement is commonly known as a ‘triple cocktail’, and a question it raises is whether Bank [page 92] may pick and choose between the menu of remedies the agreement provides for. For example, assuming Bank’s right of set-off is not re-characterised as a security interest, may Bank assert the right rather than relying on its express security

interest? The question has an unreal air about it because, as indicated above, the remedies are functionally equivalent: whichever option Bank pursues, the method of enforcement will be to make a debit entry in Account B. This means that the only way of telling which option Bank has chosen is by reference to Bank’s own statement of intentions. Nevertheless, despite the functional equivalence of the remedy options, there may be circumstances where Bank will prefer one over the other.128 The BCCI case and Drummond both suggest that Bank should be free to nominate its preferred remedy and that the courts will respect the nomination.129 There is no reason why the position should be different in the PPSA context.130

Land Dealings 3.60 PPSA para 8(1)(f) provides that the statute does not apply to the creation or transfer of an interest in land or to the creation of a right to payment in connection with an interest in land if the contract specifically identifies the land.131 So, for example, the statute does not apply to a land mortgage, nor does it apply to: (1) an assignment of a land mortgage; (2) an assignment of the mortgagee’s right to payment under a land mortgage; or (3) a security interest in rents from specifically identified properties. In Marac Finance Limited v Greer,132 SP1 held a mortgage over two rental properties which gave the debtor a licence to collect the rents so long as it was not in default. SP2 held a PPSA security interest in all the debtor’s present and after-acquired personal property. When the debtor defaulted, the parties each claimed the rental income. New Zealand PPSA s 23 is similar to Australian PPSA para 8(1)(f), and the court held that SP1’s claim to the rents was excluded from the PPSA by s 23. Accordingly, the PPSA priority rules did not [page 93] apply and land law governed instead. As a matter of land law, SP1’s mortgage had priority and SP1 became entitled to the rents once it revoked the debtor’s right to collect them. The court identified the policy reasons in support of this conclusion as follows:133 [T]here is sense in giving the land mortgagee the better right to rents than the personal property mortgagee. The ability of the mortgagee to get the rent in the event of a default by the mortgagor is an important aspect of the funding of tenanted properties. If the land mortgagee does not have a first ranking PPSA security interest it will have to enter into a complex priority arrangement with the prior PPSA security interest-holder. All that adds complexity to the transaction which, in turn, may lead to an

increased cost of funds for the debtor.

3.61 The exclusion is subject to subs 8(2), which provides that PPSA ss 73, 117 and 118 apply to the transactions in question. Section 73 applies to disputes involving a PPSA security interest and a competing security interest created by statute or arising by operation of law: see 3.45–3.48 above. Subsection 73(6) applies where the disputed collateral is property to which subpara 8(1)(f)(ii) applies (certain rights to payment in respect of land) and it provides that the non-PPSA security interest has priority. Sections 117 and 118 establish a regime for the enforcement of a security interest in both land and personal property and they are discussed further in Chapter 12.

Insurance Contracts and Annuities 3.62 PPSA subpara 8(1)(f)(v) provides that the statute does not apply to the transfer of an interest or claim in a contract of annuity or policy of insurance, except the transfer of a right to an insurance payout for loss of, or damage to, collateral or its proceeds.134 A contract of annuity is ‘a contract under which a stated sum of money is payable at regular intervals from a fund or source in which the annuitant has no further property beyond the right to claim payment’.135 An annuity may be payable under a contract of insurance, but companies other than insurance companies may offer annuities as well. Subparagraph 8(1)(f)(v) is not limited to annuities payable under contracts of insurance.136 Example 12. Grantor is entitled to an annuity which pays her $1000 per month. SP makes Grantor a loan of $10,000 and takes a security interest in the annuity to secure repayment. Grantor defaults on the loan repayments and SP demands that future annuity payments be redirected to it.

The exception in subpara 8(1)(f)(v) applies and the security agreement between SP and Grantor is not subject to the PPSA. The explanation for the [page 94] exclusion of insurance interests varies. The drafters of the original Ontario PPSA rationalised it on the ground that ‘the insurer maintains records of title and claims to policies and contracts issued by it and that there was no need for a separate registry’.137 On the other hand, the explanation for the equivalent provision in Art 9 was that ‘such transactions are often quite special, do not fit easily under a general

commercial statute and are adequately covered by existing law’.138 These explanations are not particularly convincing and they gloss over the importance of an effective publication mechanism for security interests in insurance claims and the like: see GE Canada Equipment Financings GP v ING Insurance Company of Canada.139 In any event, the explanations fail to address the exclusion for contracts of annuity at large.140 3.63 The breadth of the exclusion is illustrated by the Ontario Court of Appeal’s decision in Re Stelco,141 dealing with insurance premium funding arrangements. Insurance premium funding works as follows. Insurance policies against fire, theft, property damage and so on are for a fixed term, usually 12 months. The insured pays the premium upfront and that buys 12 months coverage. At the end of the 12 months, the insured pays another premium to renew the policy and that buys another 12 months cover. Assume the insured cancels the policy part way through the term. Typically the policy will give the insured a right to a refund for the unearned part of the premium. For example, if the insured cancels the policy three months in, they will normally get back 75 per cent of the premium. If they cancel nine months in, they will [page 95] get back 25 per cent. The premium refund entitlement is assignable. Insurance premium funding is a method of financing the premium where the financier takes a security interest in the premium refund entitlement. Typically, the insured gives the insurer a down payment. The financier pays the rest. The insured agrees to repay the financier by instalments over the life of the policy. The agreement provides that, if the insured defaults, the financier may cancel the policy and claim the premium refund. The instalments are calibrated to the declining value of the premium refund. For example, if the insured defaults three months in, the 75 per cent premium refund will be just enough to cover the nine months instalments still owing. Likewise, if the insured defaults nine months in, the 25 per cent premium refund will be just enough to cover the three months instalments still owing. 3.64 In Re Stelco, the court held that the premium financing agreement was a transfer of an interest under a policy of insurance, the interest being the insured’s right to terminate the policy and claim a premium refund. The implication of the decision is that ‘the assignment of any money the payment of which arises out of or

is associated with an insurance contract to which the assignor is a party is not an assignment within the scope of the PPSA’.142 The court itself was clearly concerned about the implications of its decision for the publication of these security interests. The financier argued that there was no harm to public policy because its security interest was only in the unearned premiums, not the policy itself. The court’s response was that other lenders may have ‘an interest in knowing if the insurance policy could be cancelled and unearned premiums remitted to the financier’. The court went on to say that ‘the exemption from the PPSA and its policy of providing notice to lenders about the state of the assets in which they will take security should not be taken as a licence to keep lenders in the dark about the actual state of affairs’. To remedy the situation, the court indicated that the insurance premium financier should make sure that the policy contains a clear notation of its interest.143 But the courts are not well placed to enforce requirements of this nature and, in any event, a notation on the policy is no substitute for public registration.144 3.65 Example 13. SP has a security interest in Grantor’s car perfected by registration. Grantor insures the car with Insurer. Grantor defaults against SP, but, before SP can recover the car, Grantor is involved in a collision and the car is a write-off. SP claims the insurance money.

Example 13 is covered by the closing words of subpara 8(1)(f)(v): the PPSA applies because SP’s claim relates to compensation for loss of its collateral. [page 96] PPSA s 32 provides that if collateral gives rise to proceeds, SP’s security interest attaches to the proceeds and s 31 defines proceeds to include a right to an insurance payment as compensation for loss of the collateral.145 Therefore, SP is entitled to the insurance payout. 3.66 Example 14. Grantor runs a car and truck rental business. SP holds a security interest in Grantor’s rental fleet. Grantor rents one of its trucks to Customer who insures it with Insurer. The policy names Customer as the insured and Grantor as the loss payee, but it makes no mention of SP. The truck is stolen from Customer and Insurer pays out Grantor. The truck is later recovered and Insurer claims the truck as salvage. SP also claims the truck, relying on its security interest.

Example 14 is based on GE Canada Equipment Financing GP v ING Insurance Company of Canada,146 where the issue was whether the Ontario PPSA governed

the dispute between SP and Insurer or whether s 4(1)(c), which corresponds with subpara 8(1)(f)(v) of the Australian PPSA, removed the case from the scope of the statute. The court, relying in part on cases decided under Art 9, held that para 4(1) (c) is limited to the case where the transfer in question gives rise to a security interest in the disputed policy or claim and that, since Insurer’s claim to the trucks was not a security interest, para 4(1)(c) was inapplicable. This led the court to conclude that the PPSA applied after all, but then it became necessary to identify the governing PPSA priority rule. The judgment runs off the rails at this point, though ultimately the court reached the right conclusion, namely that SP was entitled to the trucks ahead of Insurer.147 3.67 In Australia, the end result would be the same, but there is a simpler way of getting there. Even if the courts conclude that PPSA subpara 8(1)(f)(v), like s 4(1) (c) of the Ontario PPSA, only applies if both competing claims are security interests, the case will still fall outside the PPSA. The reason is that Insurer’s right to the truck depends on its common law right of subrogation; in other words, it is an interest in personal property that arises by operation of the general law. Therefore, para 8(1)(c) takes Insurer’s interest outside the scope of the PPSA and the doctrine of subrogation applies instead.148 Subrogation means that when an insurer pays out on an insurance claim, the insurer takes over rights belonging to the insured. Subrogation is a derivative right; in other words, the insurer steps into the insured’s shoes and the result is that the insurer acquires no better claim than the insured themselves had. [page 97] In Example 14, Grantor held the truck subject to SP’s security interest and Insurer inherited the truck subject to the same encumbrance.149 3.68 Paragraph 8(1)(jb) excludes superannuation interests from the operation of the statute. According to the Explanatory Memorandum, the provision ‘implements the Government’s income retirement policy, which prevents holders of interests in superannuation funds from using those interests as security for loans and other obligations not related to retirement income’.150

The Quistclose Trust

3.69 Under PPSA para 8(1)(h), the statute does not apply to a trust over some or all of an amount provided by way of financial accommodation to a person, if that person is required to use the amount in accordance with a condition under which the financial accommodation is provided. The reference is to the so-called ‘Quistclose trust’.151 3.70 Example 15. Lender makes a loan to Borrower to finance the purchase of property. It pays the money to Lawyer, Borrower’s solicitor, subject to Lawyer’s undertaking to retain the funds until Borrower purchases the property and not to allow the funds to be used for any other purpose.

Example 15 is based on Twinsectra Ltd v Yardley.152 There the House of Lords characterised the transaction as a transfer of the funds by Lender to Lawyer on trust for Lender, subject to a power of appointment for the agreed purpose. The result was that Lender held beneficial title to the funds pending exercise of the power of appointment. Exercise of the power of appointment would terminate the trust and extinguish Lender’s beneficial interest, thereby allowing Lawyer to release the funds for payment to Borrower’s vendor. This type of arrangement has some characteristics in common with a security interest. For example, if Borrower became insolvent while the trust was still in place, Lender, relying on its beneficial interest, would be entitled to recovery of the funds in full ahead of Borrower’s unsecured creditors. 3.71 In other respects, though, the Quistclose trust looks very different from a conventional security interest. PPSA subs 12(1) defines ‘security interest’ to mean an interest in personal property that in substance secures payment or [page 98] performance of an obligation. In Example 15, Lender’s interest is its beneficial title to the funds in Lawyer’s hands. Lender’s title is extinguished once the funds are applied to the agreed purpose, but Borrower remains liable to repay the loan. It follows that the purpose of the trust is not to secure Borrower’s payment obligation, but rather to ensure fulfilment of the agreed purpose.153 More significantly, the PPSA is premised on the assumption that the grantor has a residual interest in the collateral and that once the secured obligation has been performed she will become the unencumbered owner. But, in Example 15, Borrower never acquires beneficial ownership of the funds: while the trust is in place, Lender has the beneficial

ownership and when the agreed purpose is fulfilled, title to the funds vests in the payee. In other words, Borrower ‘is simply a conduit through whom the advance is channelled to carry out the purpose of the trust; its title is the bare legal title of a trustee, not the beneficial owner of a secured debtor’.154 For these reasons, the PPSA would not apply to a Quistclose trust in any event; para 8(1)(h) simply reinforces the point.

Other Exclusions Accounts-related exclusions 3.72 As a consequence of PPSA subs 12(3), the statute applies not just to a security interest in accounts, but to an outright transfer as well. With this provision in mind, para 8(1)(f) excludes from the statute a number of accounts-related transactions, as follows:155 • • • • •

a transfer of an unearned right to payment under a contract to a person who has agreed to take over the transferor’s obligations under the contract; a transfer of an account for collection purposes; a transfer of an account or negotiable instrument to satisfy a pre-existing indebtedness; a sale of an account or chattel paper as part of the sale of a business unless the seller remains in control of the business after the sale; and a transfer of the beneficial interest in a monetary obligation (account) to the transferee on trust for the transferor.

In all these cases, the exclusion is warranted because the potential for third-party deception is minimal.156 [page 99] 3.73 Subparagraph 8(1)(f)(iv) excludes any transfer of present or future remuneration (including wages, salary, commission, allowances or bonuses) payable to an individual as an employee or a contractor. This provision is in line with the prohibition in the consumer credit laws of security interests in employee remuneration.157

Bankruptcy-related exclusions 3.74 Paragraph 8(1)(g) excludes various interests created under the Bankruptcy Act 1966 (Cth), including the interest of a bankruptcy trustee who has taken control of the bankrupt debtor’s property. There is a corresponding provision in all the Canadian PPSAs and also the New Zealand statute,158 but it ‘only states the obvious’ because there is nothing in form or substance about the vesting of property in a bankruptcy trustee that would assimilate the trustee’s title to a security interest.159

Water rights 3.75 Paragraph 8(1)(j) excludes any right, entitlement or authority, both common law and statutory, in relation to the control, use or flow of water. Subsection 8(5) extends the exclusion to rights against another person to receive or otherwise gain access to water. According to the Explanatory Memorandum, subs 8(5) is aimed at the case of rights held in water that are derived from contract; for example, where an intermediary, such as an operator of irrigation infrastructure, has the licence to water and is responsible for distributing it to producers.160 According to the Statutory Review, there are two main types of water rights: water access entitlements and irrigation rights. Water access entitlements are provided for by statute and they give the holder perpetual access to a share of the water in a given water system. In 2004, the states and territories agreed on a blueprint for water reform, the National Water Initiative (NWI). The NWI stipulates that water access entitlements should be tradeable, capable of being mortgaged and recordable on publicly accessible water registers. By contrast, irrigation rights are mostly contractual in nature. For example, an Irrigation Infrastructure Operator (IIO) holding a water access entitlement may sell shares in the entitlement to its members or customers (irrigation rights). The Statutory Review, while recognising the political sensitivities involved, recommends that the PPSA exception should be limited to (1) irrigation rights; and (2) water access entitlements that are registrable as envisaged in the NWI agreement.161 [page 100]

Fixtures

3.76 Paragraph 8(1)(j) provides that an interest in a fixture is not a security interest for the purposes of the statute. The New Zealand PPSA also does not apply to a security interest in a fixture. On the other hand, all the Canadian PPSAs extend to fixtures and they enact a set of priority rules for competing claims involving the holder of a security interest in the fixture and a person with an interest in the land on which the fixture is situated: see 2.9 of this text. There were apparently concerns in New Zealand and Australia that incorporating in the PPSA priority rules for disputes involving competing claims to fixtures might interfere in some way with the land laws. However, these fears are not borne out by the Canadian experience.162 The Statutory Review has recommended that governments give further consideration to the establishment of a fixtures regime along the lines of the Canadian model.163

Pawnbroking 3.77 Paragraph 8(1)(ja) provides that, subject to the requirements listed in subs 8(6), the statute does not apply to a security interest taken by a pawnbroker. The requirements are that: the pawnbroker is licensed; the taking of the security interest is authorised by the licence and is otherwise lawful; the security interest is taken in the ordinary course of the pawnbroker’s business; and the pawnbroker believes, and it is actually the case, that the market value of the collateral is $5000 or less. According to the Explanatory Memorandum, the reason for the exclusion is that pawnbrokers are extensively regulated by state and territory legislation.164 The Ontario PPSA likewise excludes pawnbroking transactions,165 but the other Canadian PPSAs exclude pawnbrokers only from the enforcement provisions of the statute. Under this approach, regulation of the rights of pawnbrokers and their customers inter se is left to the pawnbroking statutes, but the PPSA applies to determine competing third-party claims. This is significant because ‘property pawned could very easily be subject to a prior PPSA security interest’.166 The Australian approach either overlooks this possibility or downplays the concern. Pawnbroking transactions are not excluded from the New Zealand PPSA. The Statutory Review has recommended that pawnbrokers should be made subject to the PPSA, with the exception of the enforcement provisions in Ch 4.167 [page 101]

Licences 3.78 Paragraph 8(1)(l) provides that the statute does not apply to an interest prescribed by the regulations; licences and related interests created under the Offshore Minerals Act 1994 (Cth) and the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) have been prescribed.168

1.

2. 3. 4. 5.

6. 7. 8. 9. 10.

11. 12. 13. 14. 15. 16. 17.

18. 19. 20.

The Statutory Review recommends that this provision be amended to read: ‘an agreement to sell subject to retention of title’. The reason is that the expression ‘conditional sale agreement’ is said to have fallen out of use in Australia: Bruce Whittaker, Review of the Personal Property Securities Act 2009: Final Report (Commonwealth of Australia, 2015) at para 4.2.3 (‘Statutory Review: Final Report’ ). There is no corresponding provision in the Canadian and NZ PPSAs and the Statutory Review recommends that para (k) be deleted: Statutory Review: Final Report, para 4.2.3.5. Statutory Review: Final Report, para 4.2.2. Ronald C C Cuming, Catherine Walsh and Roderick J Wood, Personal Property Security Law, 2nd ed, Irwin Law, Toronto, 2012, p 119. The statute does make provision for discharge of a registration following performance of the secured obligation, but discharge of a registration is not to be confused with discharge of the security interest itself: see Chapter 6. See above note 4, at p 123. See above note 4, at p 124. See above note 4, at p 123. See further, 10.54 of this text. One of the key ingredients is that the option price will typically be a nominal one, or at least substantially less than the market value of the goods at the end of the term. The implication is that the rental payments comprised a substantial purchase price component and so the hirer would be sacrificing their investment if they did not exercise the option: see above note 4, at pp 130–1. ‘Commercial consignment’ is defined in PPSA s 10. The application of the statute to commercial consignments is discussed in 3.31–3.32 of this text. Re Arcabi Pty Ltd (Receivers and Managers Appointed (in liq); ex parte Theobald & Herbert [2014) WASC 310. See above note 12, at para 31, quoting Re Stephanian’s Persian Carpets Ltd (1980) 34 CBR (NS) 35. Re Arcabi Pty Ltd [2014] WASC 310 at [32], quoting Access Cash International v Elliot Lake Inc & North Shore Corp for Business Development (2000) Carswell Ont 2824 at [21]. [2014] WASC 310 at [48]. See above note 15, at [49]. The Access Cash Management case suggests that a transaction is not a consignment if title does not pass directly from the consignor to the ultimate purchaser, but instead passes through the merchant: see text at note 14 above. But particularly having regard to the PPSA’s substance over form philosophy, it is hard to see why this variable by itself should make a difference: either way, the underlying commercial purpose of the arrangement is as described in 3.9 of this text. See Bruce Whittaker, ‘Inventory Financing’ in Craig Wappett, Steve Edwards and Bruce Whittaker, Personal Property Securities in Australia (LexisNexis looseleaf), para 4.1.500. Except that the provisions governing enforcement of security interests in PPSA Pt 4 do not apply to subs 12(3) deemed security interests: see 3.24–3.39 below; and see further Chapter 12 of this text. See Grant Gilmore, Security Interests in Personal Property, Little Brown & Co, Boston, 1965, vol 1, ch 4.

21. 22.

23. 24.

25. 26.

27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38.

39. 40. 41. 42. 43. 44. 45. 46.

47.

See, for example, Saskatchewan PPSA s 3(1). Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217 at [102]–[104]; Stiassny v North Shore Council [2008] NZCA 522 at [29]. See generally, Jacob S Ziegel and David L Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed, Butterworths, Toronto, 2000, p 69. Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL). See above note 4, at pp 140–1. See also North Shore City Council v Stiassny [2008] NZCA 522, indicating that if the purpose of stipulating for a trust obligation is to provide security against the possibility of the debtor’s contractual default, ‘the trust obligation would properly be regarded as a security interest’: at [31]. Louise Gullifer (ed), Goode on Legal Problems of Credit and Security, 5th ed, Sweet & Maxwell, London, 2013, para 1-23. See above note 25. For an account of the nature, purpose and history of flawed asset arrangements, see also Diccon Loxton, ‘One Flaw Over the Cuckoo’s Nest — Making Sense of the “Flawed Asset Arrangement” Example, Security Interest Definition and Set-Off Exclusion in the PPSA’ (2011) 34 University of New South Wales Law Journal 472 at 473–85. There is a similar provision in the New Zealand PPSA (s 17(3)), but not the Canadian PPSAs. [2009] 2 SCR 94. Statutory Review: Final Report, para 4.2.3.6. See above note 25, at para 1-06. See above note 25, at para 1-24. See above note 25, at paras 1.76–1.83 for a fuller account with reference to the various types of negative pledge provision. See generally, G J Tolhurst, Tony Coburn and Alan Peckham, ‘Security Interests at the Margins’ (2012) 40 Australian Business Law Review 241 at 259–62; Statutory Review: Final Report, para 4.5.15. See above note 25, at para 6-27. Jeanne L Schroeder, ‘Repo Madness: The Characterization of Repurchase Agreements under the Bankruptcy Code and the UCC’ (1996) 46 Syracuse Law Review 999 at 1017. See PPSA Ch 4, discussed in Chapter 12 of this text. See above note 35, at pp 1017–26. (2008) 246 ALR 361. See also above note 25, at para 1-41; Hugh Beale, Michael Bridge, Louise Gullifer and Eva Lomnicka, The Law of Personal Property Security, 2nd ed, Oxford University Press, Oxford, 2012, para 7.66; Statutory Review: Final Report, para 4.5.16. See above note 25, at para 6-27; see above note 38, at para 7.69. See also Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Limited (2008) 246 ALR 361 at [3]–[7] per Finkelstein J. United States Commercial Code — Secured Transactions s 9-314. United States Commercial Code — Secured Transactions s 9-104. United States Commercial Code — Secured Transactions s 9-327. [1893] 2 QB 318 (CA). See above note 25, at para 1-04. (1998) 157 DLR (4th) 682 (BCCA). Contrast PPSA subs 12(3) which refers to the ‘transfer of an account or chattel paper’. The switch from ‘assignment’ in subs 12(1) to ‘transfer’ in subs 12(3) is clumsy drafting, but it was inherited from the Canadian PPSAs: see, for example, Saskatchewan PPSA s 3. The Statutory Review has recommended substituting ‘transfer’ for ‘assignment’ in para 12(1)(j): Statutory Review: Final Report, para 4.2.3.4. For ease of exposition, the following discussion focuses on accounts, but most of what is said applies equally to chattel paper. However, as noted below, the policy rationale for para 12(3)(a) in its application to chattel paper is somewhat different from the rationale for its application to accounts. The Statutory Review has recommended that the concept of chattel paper be removed from the Act: see 2.15 of this text. The definition of ‘grantor’ in PPSA s 10 includes a transferor of an account or chattel paper. ‘Account’

48.

49. 50. 51.

52.

53. 54. 55. 56. 57. 58.

59. 60.

61.

and ‘chattel paper’ are defined in PPSA s 10: for discussion see 2.12–2.13 and 2.29–2.33 of this text. See above note 4, at p 157; above note 22, at p 66. Contrast Statutory Review: Final Report, para 4.3.2.6, expressing misgivings on this score. See also para 4.3.2.5, recommending the exclusion of novations from the application of subs 12(3). (2010) 319 DLR (4th) 618 (ON CA) at [11]–[14]. See above note 20, at p 308. Instruments Act 1958 (Vic) Pt IX (repealed in 1997); Bills of Sale and Other Instruments Act 1955 (Qld). The historical factor seems to have been the primary motivation for the Art 9 provision extending the application of the statute to non-security assignments: see above note 20, at p 308. On the other hand, Cuming, Walsh and Wood suggest that in Canada the ostensible ownership concern was the main factor: see above note 4, at pp 155–6. They go on to say that, in the case of chattel paper, the thinking was a little different: methods of dealing with this type of property and the priority issues that arise when it is dealt with, for the most part, are the same whether the interest of the transferee is that of a secured party or a buyer. For this reason, sales of chattel paper are included in all Acts with the result that the regime applicable to security interests in chattel paper applies with equal effectiveness to sales of chattel paper: see above note 4, at p 158. In this connection, SP has both a personal claim for the amounts collected and also a proprietary claim. It has a proprietary claim on the basis that the collections are proceeds of its original collateral (the accounts). However, the proprietary claim will be lost if the collections are no longer identifiable or traceable in Grantor’s hands. Proceeds claims are discussed in Chapter 11. PPSA subs 80(8) provides that a payment made in accordance with subs (7) discharges the account debtor’s liability to the extent of the payment. PPSA s 55(3) provides that an unperfected security interest is subordinate to a perfected security interest in the same collateral. See further Chapter 5. (1828) 3 Russ. 1 (Ch.). See John G H Stumbles, ‘The Impact of the Personal Property Securities Act on Assignments of Accounts’ (2013) 37 Melbourne University Law Review 415 at 437–40. (Imp) 36 & 37 Vict C 66. See, for example, Property Law Act 1958 (Vic) s 134. The Statutory Review overlooks this point: Statutory Review: Final Report, para 4.3.2.4. It does not follow from what is said in the text that the assignment of an equitable interest in an account is no longer possible. On the contrary, this can be achieved in compliance with PPSA s 20 by a written agreement that describes the ‘collateral’ as ‘equitable title to [the specified account]’, or some similar formulation. The voluntary transfer of an account continues to be governed by the common law and equitable rules described above. PPSA s 254(1) provides that, as a general rule, the PPSA is not intended to exclude or limit the concurrent operation of state and territory laws. But s 264 provides that state and territory laws are excluded to the extent that they restrict or otherwise affect the operation of PPSA s 19 (attachment) or 21 (perfection). Section 21 provides that, for perfection of a security interest, the s 19 attachment requirements and the s 20 writing requirements must be complied with and the secured party must have taken one or other of the perfecting steps listed in s 21(2). In combination, these provisions exclude the pre-PPSA laws governing assignments because: (1) the requirements for a valid assignment at law and in equity are different from the requirements in PPSA ss 19 and 20; (2) s 21(1) makes compliance with the s 19 attachment requirements and the s 20 writing requirement conditions of perfection; and (3) s 264 excludes state and territory laws which restrict or otherwise affect the operation of ss 19 and 21. In Canada, it is accepted that the PPSAs displace the pre-PPSA common law and equitable rules governing assignments: see, for example, above note 22, at p 68, though courts occasionally overlook the point (see, for example, Fairbanx Corporation v Royal Bank of Canada (2010) 319 DLR (4th) 618 (ONCA); Gibbston Downs Wines Limited v Perpetual Trust Limited [2013] NZCA 506)). See also Stumbles, above note 56, presupposing that the pre-PPSA distinction between common law and equitable assignments still applies. The definition of ‘grantor’ in PPSA s 10 includes a person who receives goods under a commercial

62.

63.

64. 65. 66.

67. 68. 69.

70.

71. 72.

73. 74. 75.

consignment. In Re Arcabi Pty Ltd [2014] WASC 310, coin collectors consigned rare coins and notes to a consignee for sale. The consignee’s receivers sent a questionnaire to the consignors asking whether they regularly dealt with rare coins and notes in the course of their business. The court accepted the consignors’ responses as evidence on the point. In Re Arcabi Pty Ltd [2014] WASC 310 at [56], the court cited Canadian cases in support of the following propositions: (1) the knowledge is not limited to the knowledge of a particular creditor, but the persons who may be expected to deal with the consignee as creditors; and (2) the knowledge may be established through objective evidence, including signage at the consignee’s premises or proof of a general understanding in the community where the consignee carries on business. In this connection, the court relied on the fact that Arcabi advertised the consignment facility in its promotional material. It also accepted as evidence answers to questionnaires administered by the receivers to Arcabi’s creditors. See above note 4, at pp 136–8. See above note 4, at pp 155–6. The government has released an information sheet alerting artists to this issue: Australian Government, Artists — What You Should Know About the PPS Register, available at . Statutory Review: Final Report, para 4.3.4.2 (emphasis added). See, for example, Carrafa, Goutzos & Lofthouse (as liquidators of Relux Commercial Pty Ltd) (in liq) v Doka Formwork Pty Ltd [2014] VSC 570. Compare, for example, Saskatchewan PPSA s 2(y). The Statutory Review has recommended amending the definition so that it covers a lease for an indefinite term only if the lease in fact continues for more than one year: Statutory Review: Final Report, para 4.3.5.4. It also excludes a lease of consumer property as part of a lease of land (as in the case where a tenant leases furnished premises) and any transaction prescribed by the regulations. The regulations exclude pooling arrangements from the definition of ‘PPS lease’: Personal Property Securities Regulations 2010 (Cth) reg 1.9. The Explanatory Statement describes a pooling arrangement as ‘a lease/hire arrangement where fungible equipment is passed between users and eventually returned to the owner’. It gives the following example: The owner of pallets leases those pallets to a lessee on terms that are for an indefinite period and which permit the sublease of pallets to third parties. The lessee may then sublease those pallets as part of the transportation of its goods (stored on the pallets) to a third party who is then free to use those pallets for its own purposes. The pallets may be similarly subleased or transferred many times before being returned to the owner: Commonwealth of Australia, Explanatory Statement on Select Legislative Instrument 2011 No 176, Item 4. See, for example, Saskatchewan PPSA s 3(2); New Zealand PPSA s 17(1)(b). Amendments extending the Ontario PPSA to all leases for a term of more than one year were enacted in 2006. Before then, the statute applied only to a lease that in substance secured payment or performance of an obligation and the distinction between so-called true leases and security leases generated a considerable volume of litigation: see above note 22, at pp 57–63. The reform belatedly implemented a 12-year-old recommendation made by the Canadian Bar Association, Ontario: Submission to the Minister of Commercial and Consumer Relations Concerning the Personal Property Security Act and the Repair and Storage Liens Act (June 1993), pp 3–7. On the other hand, a short-term lease that, as it happens, does in substance secure payment or performance of an obligation will be subject to the statute by virtue of PPSA subs 12(1) and para 12(2)(i). See above note 4, at pp 155–7. See PPSA subs 43(1) discussed in Chapters 5 and 10 of this text, and PPSA subs 55(3), discussed in Chapter 5. Example 7 is similar to the facts of Re Maiden Civil (P&E) Pty Ltd; Albarran v Queensland Excavation Services Pty Ltd [2013] NSWSC 852, except that in Maiden the lease was a security lease. The lessor failed to register a financing statement. The lessee (grantor) gave a security interest in the equipment

to another financier which registered a financing statement. In resolving the priority dispute between these competing interests, the court, consistently with the analysis above, held that: (1) for the purposes of the PPSA, the lessor’s interest in the goods was a security interest; and (2) the lessor’s failure to register a financing statement resulted in its security interest being subordinated to the competing perfected security interest. 76. See PPSA ss 267 and 269, discussed in Chapters 5 and 13 of this text. 77. New Zealand PPSA s 16. 78. [2011] NZCA 212. 79. Rabobank at [21] per O’Regan JA, quoting from Laws of New Zealand, ‘Bailment’ (LexisNexis NZ) at [1]. In the Australian context, see Hobbs v Petersham Transport Co Pty Ltd (1971) 124 CLR 220 at 238, defining a ‘bailment’ as where a bailor delivers the goods to the bailee upon a promise, express or implied, that they will be delivered to the bailor or dealt with in a specified way. See also Re Arcabi Pty Ltd [2014] WASC 310 at [18], citing Hobbs in connection with PPSA s 13. 80. New Zealand PPSA s 66(a); see Australian PPSA subs 55(3). 81. The provision actually reads ‘lease for a term of more than 1 year … does not include … a lease by a lessor who is not regularly engaged in the business of leasing goods’, but the court read in references to bailment. 82. See Re Arcabi Pty Ltd [2014] WASC 310. 83. Re Arcabi Pty Ltd [2014] WASC 310 at [26]. 84. The Explanatory Memorandum sheds no light on the intended meaning. It says simply that s 13(3) ‘reflects the typical bailment situation as one in which the person who obtains possession of the property (the bailee) provides the value’: see Parliament of the Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property Securities (Corporations and Other Amendments) Bill 2010 at para 9.46. 85. Statutory Review: Final Report, para 4.3.5.3. 86. Compare New Zealand PPSA s 70(3) and Saskatchewan PPSA s 40(2). 87. See Chapters 7 and 8 for further discussion of this type of provision. 88. See Philip Wood, The Law of Subordinated Debt, Sweet & Maxwell, London, 1990, paras 2.3–2.5. 89. See above note 4, at pp 148–50. 90. See Chapter 6 of this text. 91. PPSA s 267. The operation of ss 267 and 268 is discussed in Chapter 13. 92. Compare New Zealand PPSA para 23(a) and Saskatchewan PPSA para 2(1)(qq), defining ‘security interest’. 93. See above note 4, at pp 173–4. 94. Compare New Zealand PPSA s 23(b); Saskatchewan PPSA s 4(1)(a). See also PPSA para 8(1)(jc), which provides that the statute does not apply to a charge created by Commonwealth Inscribed Stock Act 1911 (Cth) s 6 or Loans Redemption and Conversion Act 1921 (Cth) s 5. These provisions create charges over the Consolidated Revenue Fund to secure payment of Treasury bonds and other Commonwealth debt instruments: see Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property Securities (Corporations and Other Amendments) Bill 2010, para 9.21. 95. See Edward I Sykes and Sally Walker, The Law of Securities, 5th ed, Law Book Company, Sydney 1993, pp 741–2, 746. 96. See above note 95, at pp 737–49. 97. See, for example, Commercial Credit Corporation Limited v Harry Shields Limited (1981) 32 OR 703 (ONCA). In Australia, the landlord’s right of distress has been substantially curtailed by statute. For details, see above note 95, at pp 94–5. 98. [2014] VSCA 326, especially at [116] per Santamaria JA, quoting with approval the first three sentences in 3.45 of this text (3.42 of the first edition). 99. See PPSA subs 8(2). PPSA paras 8(1)(b) and (c) are also subject to para 140(2)(a); for discussion, see Chapter 12 of this text. 100. See above note 95, at p 742.

101. Subsections 73(3) and (4) make special provision for the case where the other statute is a Commonwealth enactment. They provide that the relevant Minister may make the declaration by legislative instrument and that the legislative instrument may also determine priority. Examples include: Air Service Act 1995 (Cth) (lien for unpaid navigation fees); Navigation Act 1912 (Cth) (liens for unpaid wages of seamen and such); Insurance Act 1973 (Cth) (priority of a statutory charge of a judicial manager of an insurance company for remuneration and allowances). For discussion, see John G H Stumbles, ‘The PPSA: The Extended Reach of the Definition of the PPSA Security Interest’ (2011) 34 University of New South Wales Law Journal 448 at 460–1. 102. Except where the other statute is a Commonwealth enactment and the relevant Minister has exercised their power under PPSA subs 73(3) and (4) to determine a priority rule by legislative instrument. See generally, Commonwealth of Australia, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009, paras 2.164 and 2.165; Explanatory Memorandum on the Personal Property Securities (Consequential Amendments) Bill 2009, paras 8.72–8.73. 103. See Explanatory Memorandum on the Personal Property Securities (Consequential Amendments) Bill 2009, paras 8.72-8.73. 104. See generally, Rory Derham, Derham on the Law of Set-off, 4th ed, Oxford University Press, Oxford, 2010. 105. See above note 25, at para 7-01. 106. See above note 25, at paras 7-76–7-89. 107. See above note 25, at para 7-14. 108. The basic priority rules for disputes between competing security interests are in PPSA s 55; in the case of two security interests both perfected by registration, priority turns on the order of registration, while in the case of a perfected security interest in competition with an unperfected security interest, the perfected security interest has priority: see Chapter 7 of this text. 109. Section 80 is discussed further in Chapter 12. 110. For example, a debt owing by A to B in A’s capacity as trustee cannot be set off against a debt owing by B to A personally. 111. See above note 25, at paras 7-32–7-35. 112. See above note 25, at para 7-09. 113. See above note 25, at paras 7-09 and 7-17–7-21. 114. New Zealand PPSA s 23(c); United States Uniform Commercial Code — Secured Transactions s 9109(d)(10). 115. See above note 20, at p 316. 116. See above note 25, at para 1-20. 117. [1998] AC 214. 118. Compare Broad v Commissioner for Stamp Duties (NSW) [1980] 2 NSWLR 40. See 2.34–2.35 of this text. 119. See above note 25, at para 1-20. 120. See above note 25, at para 1-20. 121. Caisse populaire Desjardin de l’Est de Drummond v Canada [2009] 2 SCR 94. Drummond was not a PPSA case, but the reasoning applies in a PPSA context. The case was on appeal from Quebec and so the relevant background law was civilian law. But this makes no difference because the relevant civilian law principles were the same as the common law. For a fuller account of the Drummond case, see Anthony Duggan, ‘Some Canadian PPSA Cases and Their Implications for Australia and New Zealand’ (2010) 38 Australian Business Law Review 161 at 162–6. 122. Caisse populaire Desjardin de l’Est de Drummond v Canada, above note 121, at [30]. 123. See above note 121, at [33]. 124. See above note 121, at [36]. See also, above note 104, at paras 16.106–16.107, endorsing this analysis. 125. Compare Australian PPSA s 55. 126. PPSA subpara 21(2)(c)(i), s 25 and s 75 respectively: see 2.34–2.35 of this text. These rules are limited to

127.

128. 129.

130. 131. 132. 133. 134. 135. 136. 137.

138. 139.

140.

141. 142. 143.

the case where the security interest in the ADI account is held by the ADI itself (that is, the charge-back scenario). A third party cannot perfect a security interest in an ADI account by control: see further, Chapter 5. On the other hand, the characterisation of the transaction may affect Bank’s rights in Grantor’s voluntary administration or liquidation: see John G H Stumbles, ‘Personal Property Security Law in Australia and Canada: A Comparison’ (2011) 51 Canadian Business Law Journal 425 at 437–8; see also above note 26, at pp 516–7. The characterisation of the transaction also continues to matter in cases where the grantor’s counterparty is not an ADI. In these cases, if the transaction gives rise to a security interest, the counterparty will not have the benefit of the control provisions, and registration will be the only method of perfection available to it: see above note 26, at p 518. For examples, see above note 106, at para 16.94. The agreement in the Drummond case was a triple cocktail. [Grantor] was liable to the federal government for unpaid taxes. The taxation statute created a deemed trust over a defaulting taxpayer’s property to secure payment of the unpaid tax and it provided that the deemed trust had priority over any competing security interest in the same collateral. The Crown claimed [Account B], relying on its statutory rights. [Bank] also claimed [Account B], relying not on its express security interest but its right of set-off. If [Bank] had relied on its security interest, it would have been defeated by the priority rule in the taxation statute. By asserting its right of set-off instead, [Bank] hoped to avoid the priority rule (to no avail, as it turned out). Nevertheless, the case proceeded on the basis that [Bank] was free to choose between the menu of remedy options set out in the agreement. See John G H Stumbles, ‘Personal Property Security Law in Australia and Canada: A Comparison’ (2011) 51 Canadian Business Law Journal 425 at 437–8. Compare New Zealand PPSA s 23(e)(i) and (ii) and, for example, Saskatchewan PPSA s 4(1)(e) and (f). [2012] NZCA 45. See above note 132, at [50]. Compare New Zealand PPSA s 23(e)(vi) and, for example, Saskatchewan PPSA s 4(1)(b) and (bi). See above note 4, at p 165, citing Re Rektor (1983) 47 CBR (NS) 267 (Ont HCJ). See above note 4, at p 165. Fred M Catzman, Personal Property Security Law in Ontario, Carswell, Toronto, 1976, p 35, quoted in Ziegel and Denomme, above note 22, at p 82. In Australia, ss 200 and 201 of the Life Insurance Act 1995 (Cth) provide for the assignment of life policies, both outright and by way of mortgage or trust. Among other things, the provisions require registration of the assignment in a register of assignments kept by the life company. Section 201 provides that no notice of any mortgage or trust is to be endorsed on the policy. There are no corresponding provisions for other types of insurance. See above note 20, at p 82. (2009) 94 OR (3d) 312 (ONCA). See also Andrew Verstein, ‘Bad Policy for Good Policies: Article 9’s Insurance Exclusion’ (2011) 17 Connecticut Insurance Law Journal 287 reporting that ‘the insurance policy exception never enjoyed enthusiastic support from the drafters of the UCC. The written reflections of the Reporters indicate neither serious policy commitments to this exclusion, or even a concerted industry opposition to its inclusion’ (at 307). The exclusion ‘causes interests in … insurance policies to tumble down the rabbit hole into the pre-statutory common law’ (Verstein, at 291) and ‘the current law grants priority in an uncertain and inefficient manner, to the detriment of secured parties, insureds and insurers alike’ (Verstein, at 292). The Statutory Review has recommended restricting the exception in para 8(1)(f)(v) to life insurance policies that are registrable under the Life Insurance Act 1995 (Cth) ss 200 and 201, but it also recommends that the government consider bringing life insurance policies within the Act: Statutory Review: Final Report, para 4.5.7. (2005) 253 DLR (4th) 524. See above note 4, at p 166. See above note 141, at [31].

144. 145. 146. 147. 148. 149.

150.

151. 152. 153.

154. 155. 156. 157. 158. 159. 160. 161. 162.

163. 164.

165. 166. 167. 168.

See above note 139, at pp 315–7. Proceeds claims are discussed in Chapter 11 of this text. (2009) 94 OR (3d) 312 (ONCA). See Anthony Duggan, ‘Some Canadian PPSA Cases and Their Implications for Australia and New Zealand’ (2010) 38 Australian Business Law Review 161 at 166–71. The priority rule in PPSA subs 3(1) does not apply: see para 73(1)(d). This avenue was not open to the court in the GE Canada Equipment case. Australian PPSA para 8(1)(c) provides that the statute does not apply to any lien, charge or other interest in personal property that is created, arises or is provided for by the operation of the general law, whereas the Ontario PPSA para 4(1) (a) excludes only ‘a lien given by statute or rule of law’. Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property Securities (Corporations and other Amendments) Bill 2010, at para 9.20; National Credit Code s 50. The Statutory Review has recommended repeal of this exemption: Statutory Review: Final Report, para 4.5.12. Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL). [2002] 2 AC 164 (HL). See Michael Bridge, Roderick MacDonald, Ralph Simmonds and Catherine Walsh, ‘Formalism, Functionalism and Understanding the Law of Secured Transactions’ (1999) 44 McGill Law Journal 567 at 610. See above note 153, at p 611. See also Jamie Glister, ‘The Role of Trusts in the PPSA’ (2011) 34 University of New South Wales Law Journal 628 at 640–3. Compare New Zealand PPSA s 23(1) and Saskatchewan PPSA s 4(1). See above note 4, at p 172. The Statutory Review has recommended deletion of these provisions: Statutory Review: Final Report, para 4.5.8. National Credit Code s 50. New Zealand PPSA s 23(1)(e)(v) and, for example, Saskatchewan PPSA s 4(1)(g). See above note 22, at p 86. See above note 150, at para 9.15. Statutory Review: Final Report, para 4.5.9. See PPSA subs 245(4), which appears to contemplate adding fixtures provisions to the statute at some later date. Chattel Securities Act 1987 (Vic) s 6, which continues to apply post-PPSA, deals with competing claims to fixtures; there are no corresponding provisions in the other states or territories. Statutory Review: Final Report, para 4.5.10.2. See above note 150, at para 9.18. The $5000 cut-off figure in the Australian provision derives from PPSA s 47, which provides, in general terms, that a consumer purchaser who buys goods for $5000 or less takes them free from any perfected or unperfected security interest: see further, Chapter 10. Ontario PPSA s 4(1)(d). See above note 4, at p 167. Statutory Review: Final Report, para 4.5.11. Personal Property Securities Regulations 2010 (Cth) subregs 1.4(1A) and (1B).

[page 103]

CHAPTER 4 Attachment and Writing Requirements INTRODUCTION 4.1 This chapter deals with: Personal Property Securities Act 2009 (Cth) (PPSA) s 18, which enacts a set of facilitative provisions relating to the contents of a security agreement; s 19, which governs the attachment, or creation, of a security interest; and s 20, which provides that, as a general rule, a security agreement must be evidenced by writing.

GENERAL RULES ABOUT SECURITY AGREEMENTS Security Agreement 4.2 PPSA subs 18(1) provides that a security agreement is effective according to its terms. Subsection 257(2) provides that subs 18(1) is subject to: Commonwealth laws (other than the PPSA itself); state and territory laws; and the general law.1 4.3 Subsection 18(1) reflects the freedom of contract philosophy which permeates the statute: the purpose of the PPSA is to facilitate secured transactions, not to inhibit them, and there are relatively few restrictions on what the parties may agree to. The philosophy stated in subs 18(1) is also reflected in the fact that the PPSA, in large part, comprises default rules: for example, s 19 identifies the point at which a security interest attaches to collateral, but the parties are free to postpone the time of attachment;2 PPSA Pt 2.6 enacts priority rules for competitions between security interests, but the parties may agree on a different priority ranking if they choose;3 and PPSA Ch 4 governs the enforcement of security interests but, with the exception

[page 104] of consumer transactions, the parties may contract around many of these provisions.4 4.4 On the other hand, the statute does impose some mandatory requirements. For example, while the parties may postpone the time for attachment, they cannot waive or vary the substantive attachment requirements. Likewise, while the parties may agree to depart from the statutory priority order, they cannot avoid the rules governing perfection or registration of security interests. And, as indicated above, the enforcement provisions in PPSA Ch 4 are mandatory for consumer transactions. On a literal reading, subs 257(2) could be taken to mean that the parties may contract out of the PPSA altogether, but any such carte blanche would defeat the purpose of the reforms. To avoid this outcome, the bracketed words in subs 257(2) should be read as applying only to the extent that the PPSA specifically preserves the parties’ freedom of contract. 4.5 Subsection 257(2) makes it clear that subs 18(1) is subject to the general law. It follows that the general principles of contract law apply to security agreements, including the law of misrepresentation, the rules governing the parties’ capacity to contract and the doctrine of illegality. Similarly, subs 18(1) is subject to other Commonwealth, state and territory legislation, including the Competition and Consumer Act 2010 (Cth), the National Credit Code and the fair trading laws.5

After-acquired Property 4.6 Subsection 18(2) states that a security agreement may provide for security interests in after-acquired property. Pre-PPSA, a security interest in after-acquired collateral was ineffective at common law without some further act of assurance on the grantor’s part after they acquired the collateral. But in equity, the security interest took effect automatically as soon as the collateral came into the grantor’s hands.6 The PPSA replaces the old common law and equitable doctrines with the simple proposition stated in subs 18(2). By virtue of this provision, read in conjunction with the attachment rules in s 20, a security interest in after-acquired property takes effect automatically when the grantor acquires rights in the collateral.7 Subsection 18(3) puts this point beyond doubt by providing that a security interest in after-acquired property attaches without specific appropriation

by the grantor. At general [page 105] law, an equitable security interest is not as good as a legal one: see 1.19–1.22. But, in the PPSA context, the distinction between legal and equitable security interests does not arise. A PPSA security interest in after-acquired property is qualitatively no different from a security interest in collateral the grantor already owns, and the statutory priority rules do not discriminate between security interests on this basis. 4.7 No particular form of words is required to create a security interest in afteracquired collateral, so long as the parties make their intentions clear. The agreement might specify, for example, that the security interest is in the grantor’s present and after-acquired inventory, or present and after-acquired accounts or all the grantor’s present and after-acquired personal property. 4.8 PPSA subs 18(2) must be read subject to s 44 of the National Credit Code which, in the case of consumer transactions, prohibits blanket security interests (a security interest in all the consumer’s property) and s 45, which prohibits a security interest in future property.8

Future Advances 4.9 Subsection 18(4) provides that a security agreement may provide for future advances. Section 10 defines ‘future advance’ to mean an advance secured by a security interest (whether or not made pursuant to an obligation), if the advance is made after the security agreement was made. There is an element of circularity in these provisions because subs 18(4) depends on the s 10 definition which, in turn, presupposes the proposition in subs 18(4).9 To make sense of the provisions, the courts will have to make allowances for this slip. The relevant point of reference should be the date of the loan contract, not the date of the security agreement. Example 1. SP enters into a loan contract with Grantor on Date 1 promising to advance $100 immediately and $50 on Date 2.

The Date 2 advance is a future advance because it is made after the date of the loan contract pursuant to an obligation in the loan contract. Assume that SP promises to advance the $100 immediately, but reserves a right to withhold the

Date 2 advance. If SP makes the Date 2 advance, it is a future advance even though SP was under no obligation to make it. The same analysis applies in a case where SP opens a line of credit in Grantor’s favour: each drawdown on the line of credit is a future advance within the meaning of the definition even if the agreement gives SP the right to refuse further drawdowns. In Example 1 and its variation, the effect of subs 18(4) is that SP may take a security interest to secure both the Date 1 and Date 2 advances. In the line of credit example, the effect of the provision is that SP may take [page 106] a security interest to secure repayment of the amount outstanding on the line of credit from time to time, even if there is nothing owing at the date of the security agreement. In each case, the security agreement must state expressly that the security interest covers future advances. PPSA s 58 enacts a special priority rule for security interests covering future advances, discussed in Chapter 7 of this text.

Enforcement Expenses 4.10 Subsection 18(5) provides that a security interest is taken to secure reasonable enforcement expenses unless the parties agree otherwise.10 The definition of ‘future advance’ in s 10 includes enforcement expenses. The result is that, subject to any provision in the security agreement to the contrary, the obligations secured by the security interest include the reasonable enforcement expenses a secured party incurs in enforcing its security interest.

ATTACHMENT Introduction 4.11 PPSA s 19 sets out the requirements for attachment of a security interest. While ‘attachment’ may be a new and perhaps initially unfamiliar expression in Australian law, the underlying concept is straightforward and its common law origins are easily identifiable. Broadly speaking, there are three requirements that must be met before a security interest can attach to collateral: (1) there must be a valid security agreement; (2) the secured party must give value for the security interest; and (3) the grantor must have rights in the collateral: subs 19(2). A security

interest is ‘unenforceable’ against both the grantor and third parties unless it has attached: PPSA subss 19(1) and 20(1). The Canadian and New Zealand PPSAs use the same language, as does Art 9 of the United States Uniform Commercial Code, though it is not strictly accurate to say that failure to comply with the requirements for attachment results simply in the security interest being unenforceable. On first principles, the result must be that there is no security interest at all. Section 20 specifies additional requirements which must be satisfied for the security interest to be enforceable against third parties. The following discussion focuses on the s 19 attachment rules. Section 20 is discussed in 4.24–4.36 below.

Agreement 4.12 Subsection 19(2) does not expressly state that a valid security agreement is a requirement for attachment, but the requirement is implicit because s 12 limits the application of the statute to consensual security interests and [page 107] a consensual security interest depends on agreement.11 994814 Ontario Inc v RSL Canada Inc and En-Plas Inc12 is a case in point. SP1 held a security interest in all Grantor’s present and after-acquired personal property, perfected by registration. SP2 negotiated with Grantor for the sale of three machines on conditional sale terms. The documentation referred to the machines being ‘Electrical Safety Approved’. In substance, this was an undertaking by SP2 to modify the machines, as necessary, to obtain the approval of the Ontario Electrical Safety Authority. The machines were delivered to Grantor, but the modifications were never made. SP1 appointed a receiver who claimed the machines. The receiver’s argument was as follows: (1) SP2 had supplied the machines to Grantor under a conditional sale agreement and so SP2 had a security interest; (2) SP2’s security interest was unperfected, whereas SP1’s security interest was perfected; (3) Ontario PPSA s 20(1)(a)(i) provides that an unperfected security interest is subordinate to a perfected security interest in the same collateral.13 The court rejected the argument, holding that SP2’s undertaking to obtain the electrical safety authority’s approval was a condition precedent to the security agreement between SP2 and Grantor. The condition was not satisfied and so there was never any contract. The result was that SP2 did not hold a security interest in the machines; in the absence of a contract the

machines remained SP2’s property and it was entitled to reclaim them on that basis.14

Value 4.13 The second requirement for attachment is that the secured party must give value. Section 10 defines ‘value’ to mean ‘consideration sufficient to support a simple contract [including] an antecedent debt or liability’. Either a loan or the promise of a loan would qualify as value in this sense. The definition also covers the case where SP makes an unsecured loan to Grantor and later takes a security interest. The reason for the value requirement is that without value there is no consideration for the security interest and a valid security agreement depends on consideration. Subsection 19(2) dispenses with the value requirement if ‘the grantor does an act by which the security [page 108] interest arises’. This provision is unique to the Australian PPSA. According to the Explanatory Memorandum, the reason for it is that ‘a security interest could secure an obligation without value being given’.15 There is no further elaboration, and it is unclear what circumstances the drafters had in mind. One possibility is the case where Grantor gives SP a security interest to secure an obligation owing by Debtor: see 1.11–1.12 of this text. However, there is value in this case because SP’s loan or promise of a loan to Debtor is consideration sufficient to support the security agreement between SP and Grantor. The other case the drafters may have had in mind is a security agreement made by deed under seal, where consideration is not required.16 In this context, presumably the grantor’s execution of the deed would be ‘the act by which the security interest arises’.

Rights in the Collateral 4.14 The third requirement for attachment is that the grantor must have rights in the collateral, or at least the power to transfer rights to a secured party. Once again, the explanation is basic: ‘a security interest is a proprietary interest. As such, it requires a subject matter. If the asset does not yet exist, or if the [grantor] has not yet acquired an interest in it, there is nothing to which the security interest can

attach’.17 The grantor must have rights in the collateral, but full ownership is not required. Any proprietary interest will be sufficient. In iTrade Finance Inc v Bank of Montreal,18 the Supreme Court of Canada held that a voidable title satisfied the requirement. In that case, iTrade loaned money to a company controlled by a fraudster. The fraudster appropriated the loan funds and used them to purchase securities which he then pledged to the Bank of Montreal. The court held that the bank acquired an enforceable security interest in the securities because the PPSA attachment requirements were met. In particular, the fraudster had rights in the securities even though he had acquired them with funds fraudulently obtained from iTrade, because, at the time of the pledge agreement, iTrade had not taken steps to avoid the purchases. 4.15 The idea that an interest less than full ownership is sufficient for attachment of a security interest may seem counter-intuitive to lawyers schooled in the notion nemo dat quod non habet (no one can give what they [page 109] do not have): how can the grantor give the secured party a potentially larger interest than they hold themselves? As Cuming, Walsh and Wood point out, however, there are two separate issues in play: attachment and priority. If the grantor has only a limited interest in the collateral, the security interest will attach, but it will attach only to the interest the grantor has.19 So, for example, in the iTrade case, there were two questions: (1) did the bank’s security interest attach to the pledged securities; and (2) if so, did the bank’s claim prevail over iTrade’s interest? As explained above, the court answered the first question in the affirmative. On the second question, it found in the bank’s favour on the ground that iTrade’s claim was an equitable one (based on its right to avoid the purchases), that the bank’s PPSA security interest was a legal interest and that the bona fide purchaser rule applied.20 The same analysis would apply to a security interest given fraudulently by a trustee in trust property. The trustee has sufficient rights in the collateral for attachment of the security interest, but it does not follow that the secured party will prevail over the beneficiaries’ claims. The answer to the second question depends on the bona fide purchaser rule and, in particular, on whether the secured party had notice of the trust at the time of its agreement with the trustee.21 4.16 The implication of this analysis is that even a bare right of possession may

be sufficient to support attachment of a security interest.22 In the En-Plas case, discussed in 4.12 above, the receiver argued that SP2 held an unperfected security interest in the machines which was subordinate to SP1’s perfected security interest. The trial judge rejected the argument, holding that, in the absence of a security agreement between Grantor and SP2, SP2 remained the owner and it did not hold a security interest. The decision focused on whether SP2 held a security interest in the machines, but it did not discuss whether SP1’s security interest extended to the machines and, if so, whether it prevailed over SP2’s claim to the machines as owner. This second question became the main focus when the case was taken on appeal.23 The appeal court held that because the security agreement between Grantor and SP2 was never concluded, Grantor had no rights in the machines; the machines belonged to SP2. Therefore, SP1’s security interest did not attach to the machines and SP1 [page 110] had no claim to them. The decision implies that bare possession is insufficient for attachment purposes.24 4.17 However, the En-Plas case can be explained by reference back to the point that a security interest attaches only to the rights the grantor actually has; if the grantor has limited rights in the collateral, such as bare possession, the security interest attaches only to those rights. Applying this analysis to the facts of the EnPlas case, the court could have reached the same result by reasoning that SP1’s security interest did attach to the machines, but only to the extent of Grantor’s limited interest and ‘a possessory title is good against the whole world except the true owner’.25 Rabobank v McAnulty,26 discussed in 3.38 above, supports this approach. The case concerned the bailment of a racehorse to a stud farm. The bank held a perfected security interest in all the stud farm’s present and after-acquired personal property and it claimed the horse as part of its collateral. One of the issues was whether the stud farm had sufficient rights in the horse to support attachment of the bank’s security interest. The court held that it did, but that the bank’s security interest attached only to the rights in the horse held by the stud farm, ‘which are the rights of a bailee only under the terms of the agreement’.27 4.18 Example 2. SP1 has a security interest in all Grantor’s present and after-acquired personal property

perfected by registration. Grantor acquires a harvesting machine from SP2 on hire-purchase terms. Grantor later defaults against SP1 and SP2 and they both claim the machine.

The threshold question is whether SP1’s security interest attaches to the machine, given that the transaction between SP2 and Grantor is in the form of a title retention arrangement. PPSA subs 19(5) addresses the issue. It provides that, for the purposes of the attachment requirements, a grantor has rights in goods that are leased or bailed to the grantor under a PPS lease, consigned to the grantor, or sold to the grantor under a conditional sale agreement when the grantor obtains possession of the goods. The provision appears to suggest that Grantor’s rights comprise its right of possession and no more.28 On this basis, it has been argued in a number of cases that, since Grantor has only a possessory interest, they cannot give SP1 any larger rights in the collateral.29 But this argument confuses the attachment issue with the priorities issue. The conclusion that SP1’s security interest attaches to the [page 111] machine establishes only that SP1 has a claim to it. It does not establish the strength of SP1’s claim relative to SP2’s competing claim, which turns on the PPSA priority rules. The Maiden Civil case suggests an alternative way of analysing cases like Example 2.30 In Maiden Civil, the court, relying on Canadian and New Zealand authorities, held that, in a case like Example 2, the grantor’s rights are not confined to possessory rights and that ‘as against [the grantor’s] secured creditors, [the grantor has] rights of ownership in the goods sufficient to permit a secured creditor to acquire rights in priority to those of [SP2]’.31 More specifically, in cases like Example 2, ‘the lease is treated as a security agreement and the lessee is treated as the owner of the leased goods for registration and priority purposes’.32 It follows from this analysis that, in a case like Example 2, Grantor has rights in the collateral not by virtue of being in possession, but by virtue of deemed ownership: for the purposes of the PPSA perfection and priority rules, SP2 is deemed to have sold the equipment to Grantor and taken or retained a security interest to secure payment.33 On this basis, subs 19(5) is not, strictly speaking, necessary and it is revealing that in the Maiden Civil case itself, the provision was not central to the court’s analysis. Subsection 19(5) is also potentially misleading, because it could be read as implying that possession is sufficient for attachment purposes only in the cases it refers to and that, in other cases, the grantor must have additional rights or, at least, ‘the power

to transfer rights’. But this cannot be right, for the reasons explained above. Furthermore, the suggestion that bare possession is insufficient for attachment purposes raises the question whether other kinds of property right, less than full ownership, may also be insufficient. If this question were open, it would promote litigation on whether a given property right is, or is not, sufficient for attachment purposes. By contrast, a rule to the effect that any kind of property right, including bare possession, is sufficient for attachment purposes allows for no argument.34 [page 112] 4.19 Example 3. Lessor sells and rents heavy equipment. Contractor wins a two-year government contract to build a new road. Contractor leases a bulldozer from Lessor for the duration of the contract at a monthly rental of $500 and on the understanding that Contractor will return the bulldozer to Lessor at the end of two years. SP holds a security interest in all Contractor’s present and after-acquired personal property perfected by registration. Contractor defaults against SP which claims the bulldozer.

As discussed in Chapter 3, the contract between Lessor and Contractor is a PPS lease and so the statute applies. The attachment analysis is the same as for Example 2. One approach is to start with PPSA subs 19(5). Applying this provision, Contractor has rights in the bulldozer sufficient for SP’s security interest to attach. However, this conclusion does not determine SP’s claim to the bulldozer. It simply opens the way for application of the PPSA priority rules and, as explained in Chapter 8, these favour Lessor, provided Lessor registers a financing statement within the time the statute prescribes. The alternative approach, as indicated by the Maiden Civil case, is to bypass subs 19(5) altogether and instead rely on Contractor’s deemed ownership as the basis for attachment. 4.20 The PPSA applies to an outright transfer of an account or chattel paper: subs 12(3). If Grantor has sold its accounts to SP, does it still have rights in them for the purpose of the attachment requirements? The PPSA deems a transaction like this to be a security agreement in order to subject it to the statutory registration requirements. As part and parcel of this presumption, Grantor must be treated as having retained ownership of the accounts, with SP simply holding a security interest.35 On this basis, Grantor clearly, albeit presumptively, has rights in the collateral.36 However, this conclusion itself tells us nothing about SP’s rights relative to third parties; that question depends on the PPSA priority rules and one of the relevant variables in this connection is whether SP has registered a financing

statement.37 The conclusion that Grantor has rights in the accounts matters only in this context. For all other purposes, SP is the owner. In particular, the enforcement rules in PPSA Ch 4 do not apply to outright transfers because in this context it would be contrary to the substance of the transaction to treat SP as simply holding a security interest. 4.21 PPSA subs 19(2) provides that, for attachment purposes, the grantor must either have rights in the collateral ‘or the power to transfer rights’. The [page 113] quoted phrase appears in Art 938 and all the other PPSAs except the New Zealand PPSA.39 The purpose is to make it clear that attachment does not depend on the grantor having an interest in the collateral which is commensurate with the security interest taken by the secured party. According to two United States commentators, the phrase ‘limits the application of nemo dat by allowing for circumstances in which a debtor can transfer rights (create a security interest in rights) that the debtor does not have’.40 However, this rationalisation conflates the attachment question with the priorities question. Once it is recognised that less turns on the attachment question than is commonly supposed, the way is paved for a more robust construction of ‘rights in the collateral’ which makes the additional wording (‘power to transfer rights’) unnecessary.41 4.22 Subsection 18(2) allows for security interests in after-acquired property. The grantor can have no rights in collateral it has not yet acquired, but it obtains rights upon acquisition and the secured party’s security interest will attach at that point. PPSA s 84A enacts special rules in this regard for security interests in growing crops and the products of livestock. It provides that a security interest may attach to crops while they are growing and that a security interest may attach to the products of livestock before they become proceeds (for example, wool on the sheep’s back). Section 84A must be read with PPSA s 10, which provides that growing crops and the products of livestock are goods for the purposes of the statute. The objective is to facilitate the use of crops and livestock products as collateral separate from the land on which the crop is growing or the livestock from which the product is sourced: see 2.5–2.7 of this text.42 PPSA s 84 governs disputes between a person holding a crop security interest and the mortgagee or lessor of the land on which the crops are growing: see 9.33–9.34 of this text. PPSA s 85 governs priorities between

competing security interests in a crop, and s 86 enacts a parallel rule for competing security interests in livestock: see 8.50 of this text.

Postponement of Attachment 4.23 A security interest attaches to collateral once the last of the requirements discussed above has been satisfied. So, for example, if the security interest is in collateral the grantor already owns, it will attach as soon as the agreement is in place and the secured party gives value in the relevant sense. On the other [page 114] hand, if the security interest is in after-acquired property, it will not attach until the grantor acquires the collateral. PPSA subs 19(3) provides that the parties may postpone the time for attachment. However, they must be clear about their intentions. In particular, the use of floating charge language in a security agreement is not a sufficient indication that the parties intend to postpone attachment to the date of crystallisation: PPSA subs 19(4). This issue is discussed further in 4.45–4.55 below, in connection with the application of the attachment rules to security interests in circulating assets.

THE WRITING REQUIREMENT Introduction 4.24 PPSA s 20 provides that, as a general rule, a security agreement must be evidenced by writing that is either signed by the grantor or adopted or accepted by the grantor by an act or omission that reasonably appears to be done with the intention of adopting or accepting the writing. The document must contain a description of ‘the particular collateral’ or a statement that the security interest is in all the grantor’s present and after-acquired property or in all the grantor’s present and after-acquired property except as specified. Failure to comply with these requirements will result in the security interest being unenforceable against third parties. On the other hand, provided the requirements for attachment have been satisfied, the security interest will remain enforceable between the parties themselves.43 Section 21 sets out the requirements for perfection of a security interest: see 5.1 of this text. One of the requirements is that the security interest

must be enforceable against third parties. An unperfected security interest is liable to be defeated by certain third party claims: see 5.59–5.60 of this text. It follows that if the secured party fails to comply with s 20, a party with a competing claim to the collateral may defeat the security interest by relying either on s 20 or, alternatively, on the argument that the security interest is unperfected.44 4.25 Section 20 is a Statute of Frauds-type measure. The aim is to enable third parties to confirm the existence of the security interest.45 Example 4. Grantor owns a herd of cattle. She becomes bankrupt and her trustee in bankruptcy claims the herd as part of the bankruptcy estate. Grantor tells her trustee that SP has a security interest in the herd and SP supports this claim.

[page 115] How can the trustee confirm the existence of SP’s security interest? The obvious first step would be for the trustee to conduct a PPS register search because, even if SP does have a security interest, it will be ineffective in the bankruptcy proceedings unless SP has registered a financing statement.46 On the other hand, if SP has registered a financing statement, this does not itself establish the existence of the security interest. The reason is that, in contrast to some pre-PPSA registration statutes, including the Corporations Act 2001 (Cth) Ch 2K, and the state and territory bills of sale statutes, the PPSA does not require lodgment of the actual security agreement as part of the registration process. Instead, the secured party is required simply to submit summary details of the transaction, in the form of the financing statement. Moreover, the statute allows the secured party to register a financing statement before any security agreement is concluded. The result is that registration serves as no more than a warning to third parties that the secured party might have a security interest in the disputed collateral. These matters are discussed further in Chapter 6. Returning to Example 4, even if SP did register a financing statement, they may have done so shortly before Grantor became bankrupt and without the parties ever having concluded a security agreement. The s 20 writing requirement compensates for this uncertainty by giving the trustee — and other third parties — a means of corroborating SP’s claim.47 4.26 The writing requirement does not apply if the secured party has possession of the collateral or if it has perfected its security interest by control. The reason for the first exception is that the secured party’s possession is sufficient corroboration of

its claim and so there is no need to impose a writing requirement as well. The concept of perfection by control is discussed in Chapter 5. For present purposes, it is sufficient to note that, in most contexts, control is analogous to possession and so if the secured party has taken control of the collateral in the relevant sense, this corroborates its claim. Possession, in the context of s 20, means actual physical possession by the secured party: constructive possession of collateral that remains in the actual possession of the grantor is insufficient: PPSA s 24. This limitation is consistent with the policy underlying s 20: constructive possession does not corroborate the secured party’s claim to a security interest and, in this regard, it is no substitute for either actual possession or a written document.48 [page 116]

Writing 4.27 Subsection 20(2) provides that the security agreement must be ‘evidenced by writing’.49 The choice of words makes it clear that the parties do not have to reduce the whole of their contract to writing and that, in common with the Statute of Frauds, a note or memorandum is sufficient.50 The writing must identify the parties and indicate the parties’ intention to create a security interest, it must be signed by the grantor and it must contain a description of the collateral. The parties may use more than one document, provided that the documents are sufficiently connected by reference.51 4.28 Atlas Industries v Federal Business Development Bank52 is instructive in this connection. The bank held a perfected security interest in all [the grantor’s] present and after-acquired personal property. Atlas was a manufacturer. The [grantor] gave Atlas four successive purchase orders for the manufacture and supply of equipment parts. The orders were signed by an employee on the [grantor’s] behalf. Atlas filled the four orders, but the [grantor] never paid. The [grantor] also defaulted against the bank, which threatened to enforce its security interest by appointing a receiver. At this point, Atlas wrote out invoices for the four deliveries and sent them to the [grantor]. On each invoice, Atlas stamped a statement saying that it had reserved title in the goods as security for payment and, for good measure, it added the statement ‘This is a security agreement’. Atlas applied to the court for an order declaring that it held a security interest in the goods and that it had priority over the bank. The court rejected Atlas’s claim on the ground that there was no security

agreement because the [grantor] never agreed to the creation of a security interest; the statements Atlas wrote on the invoices were simply unilateral declarations on its part. The court went on to hold that, even if there was a security agreement, it did not comply with the writing requirements, which stipulate that the [grantor] must sign the agreement. In the present case, the only documents the [grantor] ever signed were the work orders and these said nothing about a security interest. The Atlas case is a good example of the [page 117] mischief the writing requirement is aimed at: Atlas was trying to shore up its claim against the bank by creating the appearance of a security agreement and the attempt failed, in effect, for lack of evidence to corroborate Atlas’s assertion.

Signature 4.29 To comply with s 20, the writing must be signed by the grantor.53 Alternatively, the writing may be ‘adopted or accepted by the grantor by an act or omission that reasonably appears to be done with the intention of adopting or accepting the writing’. This alternative requirement is unique to the Australian PPSA. The provision was included to accommodate the practice surrounding retention of title agreements. A supplier of goods on retention of title terms will commonly not require the customer’s signature; instead, the supplier will send the prospective customer a copy of its trading terms, including the retention of title provision, with the stipulation that any subsequent supplies to the customer will be made on those terms. The understanding is that, by ordering the goods, the customer ‘adopts or accepts’ the written terms.54

Collateral Description 4.30 Subsection 20(2) provides that the writing must contain a description of the ‘particular collateral’.55 Section 10 defines ‘description’ to mean: (a) in the case of a particular item of personal property — a description that identifies the item, or that identifies a class to which the item belongs; or (b) in the case of a class of personal property — a description that identifies the class, including a description that identifies the class by identifying a larger class of personal property that wholly includes the class.

The following examples are appended to the definition: Example 1. A description that identifies the collateral as “sheep” (a type of livestock) is sufficient to identify collateral that is sheep wool (a product of

[page 118] livestock, which is a class of collateral wholly included in the larger class of “sheep”).56 Example 2. A description that identifies collateral as “fruit” is sufficient to identify collateral that is apples.

The other PPSAs are differently worded. For example, the Ontario PPSA requires a ‘description of the collateral that is sufficient to enable it to be identified’,57 the Saskatchewan PPSA requires a description of the collateral ‘by item or kind’,58 while the New Zealand PPSA combines both approaches by requiring ‘an adequate description of the collateral by item or kind that enables the collateral to be identified’.59 Given these different formulations, cases decided in one PPSA jurisdiction may carry less weight in the other jurisdictions than they otherwise would, but they may still provide some guidance to courts in interpreting the Australian provisions.60 4.31 Example 5. Grantor owns a fleet of trucks. It agrees to give SP a security interest in one of the trucks. Grantor signs a security agreement which describes the collateral as ‘motor vehicle’.

Example 5 raises two possibilities. The first is that Grantor and SP have not agreed on which truck is to be offered as collateral. If that is the case, the contract will fail for uncertainty of subject matter.61 The second possibility is that the parties may have verbally agreed on the collateral, but failed to reflect the specifics in their security agreement. The question then is whether the non-specific collateral description, ‘motor vehicle’, is sufficient for the purposes of PPSA subs 20(2). The statute is unclear on this point. On the one hand, the requirement in subs 20(2) is for a description of the particular collateral. This wording suggests that the description in Example 5 may be insufficient because it does not identify the particular vehicle the parties have in mind. On the same basis ‘truck’ would be insufficient unless the agreement also identified the particular truck, for example by reference to its vehicle identification number. On the other hand, the definition of ‘description’ in s 10 points in the opposite direction. It suggests that a description which identifies the class to which the item belongs is sufficient. The provision does

not indicate what constitutes a class for this purpose, but the examples [page 119] appended to the definition give some indication of what the drafters had in mind. Furthermore, the Regulations do specify classes for the purposes of the collateral description in the financing statement and a description by reference to one of these classes may be sufficient for the purposes of subs 20(2).62 On this basis, the collateral description in Example 5 would be sufficient. How should the courts choose between these opposing outcomes? 4.32 In GE Capital Canada Acquisitions Inc v Dix Performance,63 SP leased some equipment to the debtor (grantor), including a category that was described in the security agreement as ‘shelving’. It was argued that this description was insufficient to satisfy the writing requirements in the British Columbia PPSA64 because it did not allow a third party to identify the piece or pieces of equipment in question; the description failed to specify whether the shelving was metal or wooden, its colour, type or nature or its identity by manufacturer part, model or serial number. The argument implies that, for a description to satisfy the writing requirement, it must be possible to specifically identify the collateral simply by looking at the security agreement and without reference to extraneous materials. 4.33 The court rejected both the argument and its implication, relying in part on the statutory procedure enabling searchers to direct follow-up inquiries to the secured party. Among other things, the statute allows an interested party to demand a written approval or correction of an itemised list indicating which items in the demand are collateral.65 (There is a similar provision in s 257 of the Australian PPSA.) In the Dix case, the court reasoned that in creating a procedure whereby an interested party could obtain specific information about the collateral, the legislature had signalled its intention to ‘set the threshold for identification of the property secured at a relatively low level’.66 This part of the decision suggests that a collateral description is sufficient if, whether alone or in conjunction with extraneous materials, it enables a third party to corroborate the existence of the security interest. The court also suggested67 that, ‘when interpreting commercial legislation of this nature and where it is consistent with the wording of the statute, the court should try to achieve the objectives of simplicity and certainty’ and that, ‘in striving for simplicity, judicial interpretation should minimise [as far as] possible

the cost of regulatory compliance … and the generation of post-filing litigation challenging such compliance’. In other words, the courts [page 120] should take a liberal approach when assessing the adequacy of a collateral description to prevent parties with competing claims to the collateral from relying on technical arguments to defeat the secured party’s security interest. These considerations are equally relevant in the Australian context, and they suggest the answer to the question Example 5 raises. Re Hickman Equipment (1985) Ltd is also relevant.68 In that case, the word ‘vehicles’ was held to be a sufficient description of an equipment dealer’s entire inventory, including various loaders, excavators, bulldozers, earth-moving and paving equipment, as well as cars and trucks.69 4.34 Other cases consistent with the Dix approach include Clark Equipment of Canada Ltd v Bank of Montreal,70 where the security agreement described the collateral as ‘all products’, which it defined to mean ‘all new equipment and machinery manufactured or offered for sale by [Clark] and used equipment or machinery of the same general type whether or not manufactured or offered for sale by [Clark]’. The court held that the description was adequate, even though an interested party would have to make further inquiries to identify the actual goods Clark supplied. Similarly, in New World Screen Printing (cob) New World Print v Xerox Canada Ltd,71 the collateral was described as ‘all present and future office equipment and software supplied or financed from time to time by the secured party (whether by lease, conditional sale or otherwise) whether or not manufactured by the secured party or any affiliate thereof’ and, again, the court held that the description was adequate.72 4.35 Subsection 20(2) provides that if the security interest is in all the grantor’s present and after-acquired property, a statement to that effect is a sufficient description.73 Likewise if the security interest is in all the grantor’s present and after-acquired personal property except specified items or classes, a statement to that effect, identifying the exceptions, is sufficient. By extension, if the security interest is in all the grantor’s present and after-acquired accounts or inventory, it should be sufficient to describe the collateral as ‘accounts’ or ‘inventory’. Subsection 20(5) confirms this proposition by providing that a provision describing the collateral as ‘inventory’ is sufficient, so long as the grantor holds the property as inventory.

[page 121] Example 6. Grantor is a motor vehicle dealer. SP takes a security interest in Grantor’s inventory and the security agreement describes the collateral as ‘inventory’. Grantor subsequently removes a vehicle from its showroom to use as a demonstration model.

When Grantor removes the car from its stock, it ceases to be inventory and so it is no longer covered by the security agreement, since the security agreement limits the collateral to inventory. If SP wants to keep its security interest in the car, it will need to amend the security agreement to provide that the collateral includes not just inventory, but the demonstration model as well.74 4.36 Subsection 20(4) provides that describing the collateral as ‘consumer property’ or ‘commercial property’ is insufficient without further elaboration by reference to item or class. One reason is that these descriptions are simply too broad, having regard to the corroborative function of the writing requirement. A second and related reason is that the meaning of both expressions turns on whether or not the grantor holds the property for commercial purposes, and so, to identify the relevant collateral, a third party would have to investigate how the grantor is using it.75 It is true that the definition of inventory also turns on the grantor’s particular use, but it will usually be obvious to a third party which property in the grantor’s possession is held as inventory and so there will be no need to investigate.76

Implied References to Intellectual Property Rights 4.37 PPSA s 105 addresses the case where goods are sold in combination with intellectual property rights as, for example, where the goods have an embedded computer program, the intellectual property in which is owned by its developer. It provides as follows: (1) This Act applies to intellectual property rights (including rights exercisable under an intellectual property licence) in relation to goods, in the same way as it applies to the goods, if: (a) the exercise by a secured party of rights in relation to the goods arising under a security agreement necessarily involves an exercise of the intellectual property rights; and

[page 122] (b) the payment or obligation secured by the security interest is (in addition) secured by a security interest that is attached to the intellectual property rights. (2) For the purposes of this Act, if a registration perfects a security interest in goods mentioned in subsection (1), the following descriptions are taken to include a description of the intellectual property rights concerned, or of an intellectual property licence required to exercise those rights: (a) a description of the goods in the security agreement; (b) the registered description of the goods; (c) a description of the goods included in a notice under this Act. The Explanatory Memorandum gives the following example: GrantA owns a factory that produces car parts using robots whose only function is to manufacture those particular car parts. The process used to manufacture the car parts was patented by GrantA. GrantA obtains a loan from BankA and received value for a security interest. The security agreement refers to ‘the robots’. BankA registers the security interest. GrantA defaults under the security agreement. BankA enforces the security agreement. The security agreement only refers to a security interest in robots, but the court determines that the security interest extends to the patent to the extent required to permit the robots to operate. The exercise of BankA’s rights to the robots under the security agreement necessarily involves the use of the patent rights exploited in the robots. BankA’s security interest will therefore be enforceable against both the robots and the patent.77

4.38 Section 105 addresses two related issues: (1) the collateral description in the security agreement (subs 105(1)); and (2) the collateral description in the financing statement (subs 105(2)). The first issue arises because the security agreement may not specifically say that the security interest extends to intellectual property rights associated with goods. A court may be prepared to imply that the security interest extends to the intellectual property rights, but, applying para 20(2)(b), the security interest may be unenforceable against third parties because it does not describe the intellectual property. (The example in the Explanatory Memorandum overlooks the point that non-compliance with para 20(2)(b) makes the security interest unenforceable against third parties, but not against the grantor itself.) On the other hand, it could be argued that the requirement for a description of ‘the particular collateral’ in relation to the intellectual property is satisfied by the description of the goods. The reason is that if the intellectual property is associated with the goods in

the manner envisaged by subs 105(1), a reasonable person would assume that a security interest in the goods extended to the associated intellectual property. [page 123] On this basis, subs 105(1) may be unnecessary. The Statutory Review has recommended repealing the provision.78 4.39 Subsection 105(2) addresses the concern that the collateral description in the financing statement may not specifically cover the associated intellectual property rights, and so the security interest may be unperfected in relation to the intellectual property rights. The provision appears to mean that a description of the goods satisfies the collateral description requirement in PPSA subs 153(1) in relation to both the goods and the associated intellectual property rights, and there is no need to refer specifically to the intellectual property rights.79 It could be argued by implication from subs 153(1) and the collateral description rules that the collateral description ‘goods’ includes intellectual property rights associated with the goods in the manner s 105 envisages. This is because a reasonable person is likely to assume that a security interest in the goods necessarily extends also to associated intellectual property rights. It follows that subs 105(2) may be unnecessary and it is telling that there is no corresponding provision in any of the other PPSAs or Art 9. The Statutory Review has recommended repealing the provision.80

Proceeds 4.40 Subsection 32(1) provides that if collateral gives rise to proceeds, the security interest extends to the proceeds. Subsection 20(6) complements this provision by providing that a security interest in proceeds is enforceable against a third party, whether or not the security agreement contains a description of the proceeds. Section 32 is discussed further in 4.48 below and in Chapter 11.

Consequences of Non-compliance 4.41 Non-compliance with the s 20 writing requirement means that the security interest is unenforceable against third parties. Example 7. SP makes a loan to Grantor, takes a security interest in Grantor’s herd of cattle to secure repayment and registers a financing statement. The agreement is in writing, but Grantor does not sign

it. Later, Grantor sells the cattle to Buyer without SP’s consent. SP finds out about the sale and claims the cattle back from Buyer.

The requirements for attachment are satisfied in this case because there is clearly an agreement, SP has given value and Grantor has rights in the collateral. Therefore, the security agreement is enforceable against Grantor. But because the parties have not complied with the s 20 writing requirement, the security interest is not enforceable against Buyer and so SP cannot reclaim the cattle. [page 124] 4.42 Example 8. On Date 1, SP1 makes a loan to Grantor, takes a security interest in Grantor’s herd of cattle to secure repayment and registers a financing statement. The agreement is in writing, but Grantor does not sign it. On Date 2, Grantor gives a security interest in the same cattle to SP2 pursuant to a written and signed security agreement and SP2 registers a financing statement. On Date 3, SP1 discovers the missing signature and has Grantor sign their security agreement. Grantor defaults against SP1 and SP2 and they both claim the cattle.

PPSA subs 21(1) makes both attachment and compliance with the s 20 writing requirements conditions for the perfection of a security interest: see Chapter 5 of this text. It follows that, in Example 8, SP1’s security interest does not become perfected until Date 3, when Grantor supplies the missing signature, even though SP1 registered a financing statement on Date 1. However, PPSA subs 55(5) provides, in effect, that in a competition between two registered security interests, priority turns not on the order of perfection but on the order of registration: see Chapter 7 of this text. Applying this provision to Example 7, SP1 has priority over SP2 even though SP2 was the first to perfect.81 Some commentators have argued that the first to register rule should not apply in cases like this, and that, to obtain priority, SP1 must satisfy the writing requirement before SP2’s security interest attaches. The thinking is that the writing requirement would be undermined if SP1 can comply with it after the fact. On the other hand, one of the advantages of the first to register rule is that it provides a bright line approach to the resolution of priority disputes. Introducing the proposed qualification would make the outcome of priority disputes less predictable and it would increase litigation.82 Furthermore, as discussed in Chapter 6, the statute permits registration in advance of a concluded security agreement. The implication is that if SP1 registers before SP2, SP1 has priority over SP2 even if SP2 concludes its security agreement with Grantor before

SP1’s own security agreement is in place. It would be anomalous if a different rule applied in a case like Example 8. 4.43 Assume that, in Example 8, Grantor never does provide the missing signature, but SP1 repossesses the herd on Date 3. PPSA subs 20(1) makes it clear that possession is a substitute for a signed agreement: see 4.26 above. Repossession is sufficient for this purpose.83 It follows that SP1’s security interest becomes enforceable against third parties on Date 3, SP1’s security interest is perfected at that point and, applying the first to register rule, SP1 has priority over SP2. The point of this example is to demonstrate that while, as discussed in Chapter 5, repossession is insufficient to perfect a security interest [page 125] by possession, repossession is sufficient for the purposes of of subs 20(1). As indicated in 4.26 above, the Statutory Review has recommended amending subs 20(1) in this connection. 4.44 As Examples 7 and 8 indicate, a purchaser of the collateral and a competing secured party are both third parties within the meaning of s 20. An execution creditor also qualifies as a third party, so does the grantor’s trustee in bankruptcy. If the grantor is a company in liquidation, however, the liquidator is not a third party. The reason is that, whereas in bankruptcy the property of the debtor passes to the trustee, in winding-up proceedings the liquidator takes over control of the company from the board of directors, but the assets remain vested in the company and the change of control does not make the company a different legal person.84 Consequently, non-compliance with the writing requirement does not make the security interest unenforceable against the liquidator. An administrator in voluntary administration proceedings is in the same position. It follows that a liquidator or an administrator cannot rely directly on PPSA s 20. But they obtain the benefit of the provision indirectly because if SP fails to comply with s 20, its security interest will be unperfected and s 267 provides that, as a general rule, SP cannot assert an unperfected security interest in the grantor’s insolvency proceedings.

FLOATING CHARGES 4.45 PPSA subs 19(3) allows the parties to postpone attachment beyond the date

the security interest would attach if subs 19(2) applied. Paragraph 12(2)(b) makes it clear that the statute applies to floating charges, but subs 19(4) provides that the use of floating charge language in a security agreement does not itself indicate an intention to postpone the time of attachment. Subsection 19(3) is a particular application of the proposition discussed in 3.2 that the PPSA does not dictate any particular form of security agreement, that parties may continue using pre-PPSA forms if they want to, but that the parties’ choice of form does not affect legal outcomes as determined by the statute. 4.46 As discussed in Chapter 1, pre-PPSA the floating charge was the primary mechanism for taking a security interest in circulating assets, such as the grantor’s present and after-acquired accounts or inventory. The defining characteristic of the floating charge is that it does not attach to any particular asset until the grantor defaults. This is critical because, while the charge is in its suspensory state, the grantor is allowed to sell its inventory in the ordinary course of business, to collect in its accounts and to put the collection proceeds back into the business. The grantor can deal with the collateral in these ways because the secured party has no immediate claim on any of its assets. But the picture changes when the grantor defaults and the floating charge crystallises. Crystallisation converts the floating charge into a fixed charge which attaches [page 126] to every item of collateral the grantor owns at that point. Crystallisation terminates the grantor’s freedom to deal with the collateral because any dealing after that point would be inconsistent with the secured party’s fixed charge. The effect of PPSA subs 19(4) is that if the parties use a floating charge form of agreement, this does not signify an intention to postpone attachment to the date of crystallisation. Example 9 illustrates the significance of the point. Example 9. SP enters into a security agreement covering all Grantor’s present and after-acquired personal property. The agreement is in floating charge form. On Date 1, the parties sign the agreement and SP registers a financing statement. On Date 2, Grantor acquires a new item of factory equipment. On Date 4, Grantor defaults and SP appoints a receiver. In the meantime, on Date 3, T, a judgment creditor, levies execution against the Date 2 equipment and the sheriff seizes the item.

Who has priority for the Date 2 equipment, SP or T? The starting point is PPSA s 74, which provides that an unperfected security interest is subordinate to an execution creditor who has seized the collateral: see Chapter 5. The next step in the

analysis involves s 21, which defines perfection. Section 21 provides, among other things, that a security interest remains unperfected until it has attached; in other words, attachment is a prerequisite for perfection. In Example 9, when does SP’s security interest attach to the Date 2 equipment? Applying pre-PPSA floating charge logic, the answer would be Date 4, which is when the security interest crystallised. On that basis, SP would be unperfected on Date 3, which is when T acquired its interest in the equipment and so T would have priority. On the other hand, applying the PPSA attachment rules in subs 20(2), SP’s security interest attached on Date 2, which was when SP acquired rights in the equipment: see 4.14–4.22 above. SP’s security interest is perfected at that point and therefore, since SP holds a perfected security interest on Date 3, which is when T appears on the scene, s 74 does not apply and SP has priority. PPSA subs 19(4) indicates that the second of these analyses is the correct one. 4.47 Subsection 19(4) provides statutory confirmation of the ruling in Credit Suisse Canada v 1133 Yonge Street Holdings Ltd,85 a leading Canadian case on the application of the PPSA to floating charge-style security agreements. Example 10 recites the facts of the case, modified slightly for the Australian context.86 Example 10. Grantor is a retailer. SP makes a loan to Grantor and Grantor gives SP a security interest in its present and after-acquired accounts to secure

[page 127] repayment. Grantor defaults and SP serves a notice of intention to enforce its security interest. At the time of the default notice, Grantor is holding $500,000 of customer payments in its bank account and SP claims these funds as proceeds of the accounts. Clause 2 of the parties’ security agreement assigned to SP the right to all the present and future accounts. Clause 7 provided that ‘until notified to the contrary in writing, Grantor shall be entitled to all the accounts’.

Clauses 2 and 7 appear contradictory: cl 2 suggests that the accounts belonged to SP, but cl 7 suggests that SP was to have no claim to any of the accounts or their proceeds until Grantor defaulted and SP served notice. Grantor argued as follows: (1) cls 2 and 7 can be reconciled by reading the agreement as a floating charge over the present and future accounts; (2) the floating charge crystallised on the date SP served the default notice; and (3) because the bank deposit represented the proceeds of accounts collected prior to crystallisation, it was not subject to SP’s security interest. The trial judge rejected this argument, holding that the PPSA attachment rules in effect abolish the floating charge. In its place, the statute creates a fixed

security interest which attaches as and when the [grantor] acquires rights in the collateral. In the present case, the security interest attached to each account at the point it became owing and so SP’s claim extended to both the pre-notice and postnotice accounts and their proceeds. It is true that the statute allows the parties to postpone the time of attachment, but clear language is required — the courts will not infer the parties’ intention to postpone attachment simply from the fact that they have used a floating charge form of agreement. 4.48 The implication of this reasoning is that, because of the PPSA attachment rules, a security interest in the grantor’s present and after-acquired inventory or accounts is a fixed security interest, not a floating one. But, if this is right, it revives the fundamental question addressed in 1.33 of this text: if SP has a fixed security interest in each account or each item of inventory, how can this be reconciled with the freedom the grantor needs to deal with its inventory and accounts in the ordinary course of business? The answer lies in PPSA subs 32(1) which provides, in effect, that if collateral gives rise to proceeds, (a) the security interest continues in the proceeds unless the secured party authorised the dealing, and (b) it attaches to the proceeds. Assume that SP takes a security interest in Grantor’s present and afteracquired inventory. Applying the attachment rules in s 19, SP’s security interest attaches to each new item of inventory when Grantor acquires it. Applying the first part of subs 32(1), when Grantor makes a sale in the ordinary course of business, SP loses its security interest in the item sold and the customer obtains clear title. The reason SP loses its security interest in the sold item is that the collateral is inventory and so SP will have authorised Grantor’s sale to the customer, either expressly or by implication. This must be the case, because Grantor’s business would grind to a halt unless it can give its customers clear title and this outcome would be in neither party’s interest. Applying the second part [page 128] of subs 32(1), following the sale to customer, SP’s security interest attaches to the proceeds. So, for example, if the customer pays by cheque, SP’s security interest attaches to the cheque; if the customer agrees to pay on 90-day terms, SP’s security interest attaches to the account. Retracing these steps: SP begins with a fixed security interest in the inventory item; it loses this interest when Grantor sells the item but, in its place, it gets a fixed security interest in the sale proceeds. If SP uses

the sale proceeds to buy new inventory, this will start the cycle all over again: SP loses its security interest in the sale proceeds but, in its place, obtains a fixed security interest in the new inventory. 4.49 To recapitulate: the PPSA replaces the floating charge with a fixed security interest which attaches successively to circulating assets as and when the grantor acquires them. One practical implication of this reform is that if SP wants a security interest in the grantor’s circulating assets, floating charge language is not required. All the agreement needs to say is that Grantor gives SP a security interest in its present and after-acquired inventory or its present and after-acquired accounts or all the grantor’s present and after-acquired personal property (as the case may be), and the statute does the rest. 4.50 The Credit Suisse case went on appeal to the Ontario Court of Appeal, which agreed with the trial judge’s analysis of the attachment provisions in their application to floating charge forms of agreement, but disagreed with his actual disposition of the case: Credit Suisse Canada v 1133 Yonge Street Holdings Ltd.87 The agreement clearly contemplated that Grantor was ‘entitled to’ the accounts until SP served notice and the trial judge failed to reconcile this aspect of the agreement with his conclusion in SP’s favour. In other words, he gave insufficient weight to cl 7. The Court of Appeal read cl 7 as a type of release: under cl 2, read in combination with the PPSA attachment rules, the security interest attached in the manner the trial judge described, only to be instantaneously released under cl 7 subject to the service of a cl 7 notice. On this reading, SP had no claim to the prenotice accounts or their proceeds. 4.51 The trouble with the Court of Appeal’s approach is that it may have given too much weight to cl 7, eroding SP’s collateral in the process. The challenge in all cases like this is to strike a balance between SP’s need to be sufficiently collateralised if Grantor defaults against the freedom Grantor needs to deal with the collateral in the ordinary course of business. On the Court of Appeal’s reading in the Credit Suisse case, the agreement struck a balance that leaned in Grantor’s favour. This may or may not have been what the parties actually intended. If not, there are various ways the parties might have worded the agreement differently to achieve the outcome they wanted. For example, instead of saying that Grantor was ‘entitled to’ all pre-notice accounts, they might have said something along the lines of the following: ‘until otherwise notified in writing, Grantor may dispose of or deal with the accounts in the ordinary course of business’.

[page 129] 4.52 In Royal Bank of Canada v Sparrow Electric Corp,88 the bank entered into a security agreement with the grantor (Debtor), covering all Debtor’s present and after-acquired property. The agreement included a provision along the lines of the one just mentioned: ‘until default Debtor may, in the ordinary course of Debtor’s business, lease or sell inventory’. The agreement also required Debtor to pay all taxes. Debtor defaulted and the bank appointed a receiver who proceeded to sell Debtor’s assets, including inventory. Debtor was in default under the Income Tax Act89 for failing to remit payroll tax deductions, and the Crown claimed the inventory sale proceeds on the basis that they were subject to the statutory deemed trust created by s 227(4) and (5) of the Income Tax Act. The Crown argued that a security interest in circulating assets — inventory, accounts and so on — is a floating security interest and, as such, is subordinate to a later fixed security interest or lien that attaches before crystallisation. The Supreme Court of Canada rejected this argument, confirming the conclusion in the Credit Suisse case that the PPSAs abolish the floating charge, replacing it with a fixed security interest which attaches to circulating assets as and when the debtor acquires rights in each new item. On this basis, the bank’s security interest had already attached to the disputed inventory by the time the Crown’s deemed trust was in place and so the Crown could not claim to be first in time. 4.53 The Crown’s alternative argument was that: (1) the provision quoted above gave the debtor an implied licence until default to deal with inventory and its proceeds in the ordinary course of business; (2) the ordinary course of business includes payment of taxes; and (3) therefore by implication the provision subordinated the bank’s security interest to the Crown. The court agreed unanimously with the Crown’s characterisation of the provision as an implied licence, but it went on to hold, by a majority, that the provision did not subordinate the bank’s security interest to the Crown. All the bank agreed to was that if the debtor did in fact use the proceeds of inventory to pay taxes, the payment would be valid and the Crown would take the money free from the bank’s security interest. It does not follow that the bank loses priority to the disputed funds simply because it might have used them to pay taxes. The PPSAs all provide that where collateral gives rise to proceeds, the security interest continues in the collateral unless the secured party expressly or impliedly authorised the dealing and it extends to the proceeds. Iacobucci J for the majority, having drawn attention to this

provision, explained its application in the present context as follows:90 In accordance with this provision, the result of a sale of inventory is to give the purchaser an unencumbered interest in the inventory and the licensor a continuing security interest in the proceeds of the sale. It is only if the debtor subsequently uses the proceeds to satisfy an obligation to a third party that

[page 130] the proceeds will be removed from the scope of the licensor’s security interest in them. Accordingly, what a security agreement with a licence to sell creates is a defeasible interest; but the event of defeasance is the actual sale of the inventory and the actual application of the proceeds against an obligation to a third party.

4.54 Returning to the Credit Suisse case, if the agreement had said that ‘until otherwise notified in writing, Grantor may dispose of or deal with the accounts in the ordinary course of business’, or words to that effect, then, in the wake of the Sparrow case, it would probably be characterised as giving the secured party a fixed security interest attaching to each account as it is generated coupled with an implied licence for Grantor to deal with the accounts in the ordinary course of business. The effect of the licence is that if Grantor did actually spend the money in the ordinary course of business — for example, in the payment of wages — the employees would take the payments free of SP’s security interest. On the other hand, if Grantor retained the funds, they would remain subject to the security interest and available to SP on Grantor’s default. In short, the bank deposit would go to SP. 4.55 PPSA subs 18(1) provides that a security agreement is effective according to its terms. The Credit Suisse and Sparrow cases are a particular application of this provision. As discussed in 4.2–4.5 above, freedom of contract is a fundamental PPSA principle. In this spirit, the PPSAs facilitate security interests in circulating assets and it is for the parties themselves to define both the reach of the security interest and the scope of the grantor’s freedom to deal with the collateral in the ordinary course of business. In the Credit Suisse case, the court gave the security interest a limited reach, but this was a function of the agreement itself, not the statute. As the Sparrow case indicates, a different choice of words may change the result.

1.

But not to the extent that any such law requires the registration of a security agreement, the registration of the assignment of a security interest or compliance with other formal requirements or to the extent that it

2. 3. 4. 5.

6. 7.

8. 9. 10. 11.

12. 13. 14.

15.

16.

17. 18. 19. 20. 21. 22.

23. 24.

restricts the PPSA attachment and perfection requirements: PPSA subs 257(3) and Div 4. PPSA subs 19(3); see 4.11–4.23 below. PPSA s 61; see Chapter 7 of this text. PPSA s 115; see Chapter 12 of this text. Note, in particular, National Credit Code ss 44–50, which prohibit or restrict certain types of mortgage as security for consumer credit contracts. For discussion, see Anthony Duggan and Elizabeth Lanyon, Consumer Credit Law, Butterworths, Sydney, 1999, paras 6.2.14–6.2.22. See 1.32 of this text. Subject to fulfilment of the other requirements for attachment: see 4.11–4.23 below. Contrast National Credit Code s 45, which restricts consumer security interests in future property in the consumer credit context: see above note 5, at para 6.2.15. There is an exception for purchase-money security interests: see Chapter 8 of this text. Contrast, for example, Saskatchewan PPSA s 2(1)(t): ‘… “future advance” means an advance, whether or not made pursuant to an obligation …’. Compare National Credit Code s 107, limiting enforcement expenses to amounts reasonably incurred. The other PPSAs, at least obliquely, do include the need for an agreement in the requirements for attachment. See, for example, Saskatchewan PPSA s 12(1)(c); New Zealand PPSA s 36(1)(b). The proposition stated in the text was confirmed in Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2014] VCSA 326; see, especially, [116] per Santamaria JA. See also Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217 at [99], relying on iTrade Finance Inc v Bank of Montreal [2011] 2 SCR 360. (2005) 14 CBR (5th) 134 (ONSC). Compare Australian PPSA subs 55(3), discussed in Chapter 7 of this text. There was a second issue, which the decision overlooked, namely whether SP1’s security interest attached to the machines and, if so, whether it prevailed over SP2’s claim to the machines as owner. The decision went on appeal to the Ontario Court of Appeal, where the second issue was the main focus: 994814 Ontario Inc v RSL Canada Inc and En-Plas Inc (2006) 20 CBR (5th) 163; see 4.16- 4.18 below. Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property Securities Bill 2009, para 2.8. (This statement is not reproduced in the Replacement Explanatory Memorandum: Commonwealth of Australia, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009.) In Canada, the courts have been prepared to stretch the statutory definition of ‘value’ to cover the case of a deed under seal: Heidelberg Canada Graphic Equipment Ltd v Arthur Andersen Inc (1993) 7 BLR (2d) 236 (ON Gen Div). The Australian approach may have been motivated by a desire to avoid this strained construction. Ronald C C Cuming, Catherine Walsh and Roderick J Wood, Personal Property Security Law, 2nd ed, Irwin Law, Toronto, 2012, p 247. [2011] 2 SCR 360. See above note 17, at pp 247–8. The PPSA did not govern the dispute because, although the bank’s claim was subject to the PPSA, iTrade’s was not. See above note 17, at pp 247–8. See above note 17, at p 248; ‘any type of proprietary interest is sufficient (including a right of possession)’. There is support in the Canadian case law for this proposition: see, for example, Gray v Royal Bank of Canada (1997) 143 DLR (4th) 179 (BCSC). Compare Bruce Whittaker, ‘The Scope of “Rights in the Collateral” in Section 19(2) of the Personal Property Securities Act 2009 (Cth) — Can Bare Possession Support Attachment of a Security Interest?’ (2011) 34 University of New South Wales Law Journal 524. 994814 Ontario Inc v RSL Canada Inc and En-Plas Inc (2006) 20 CBR (5th) 163 (ONCA). For a New Zealand case to the same effect, see J S Brooksbank and Company (Australasia) Ltd v EXFTX Ltd (in rec and liq) [2009] NZCA 122.

25. 26. 27. 28. 29. 30. 31. 32. 33.

34. 35. 36.

37. 38. 39. 40. 41. 42.

43.

44. 45.

46. 47. 48.

49.

See above note 17, at p 248. [2011] NZCA 212. See above note 26, at [11]. Subsection 19(6) aims to dispel this idea by providing that subs (5) ‘does not limit any other rights the grantor may have in the collateral’, but the message does not come through very clearly. See, for example, Graham v Portacom New Zealand Ltd [2004] 2 NZLR 528, and cases discussed there. Re Maiden Civil (P&E) Pty Ltd; Albarran v Queensland Excavation Services Pty Ltd [2013] NSWSC 852. Re Maiden Civil (P&E) Pty Ltd [2013] NSWSC 852 at [28], referring to Graham v Portacom New Zealand Ltd [2004] 2 NZLR 528. Re Maiden Civil at [28], quoting from Graham v Portacom New Zealand Ltd [2004] 2 NZLR 528 at [19]. This issue appears to have created more anxiety in Australia than it has in other PPSA jurisdictions: see the discussion in Bruce Whittaker, Review of the Personal Property Securities Act 2009: Final Report (Commonwealth of Australia, 2015), para 5.1.2 and Annexure C (‘Statutory Review: Final Report’). The Statutory Review tentatively supports the analysis in the text, but without dismissing alternative viewpoints (see para. 5.1.2.2). The Review does not mention the Maiden Civil case and the authorities cited there, which clearly support the analysis in the text. The Statutory Review has recommended that subs 19(5) should be amended to address these issues: see para 5.1.2.2. See above note 17, at pp 258–9. For a different analysis, see John G H Stumbles, ‘The Impact of the Personal Property Securities Act on Assignments of Accounts’ (2013) 37 Melbourne University Law Review 415 at 448–52, but acknowledging that the difference ‘may merely be one of language’ (at p 457). See Chapter 7 of this text. United States Uniform Commercial Code — Secured Transactions s 9-203(b)(2). See New Zealand PPSA s 40. See Steven L Harris and Charles W Mooney Jr, ‘Using First Principles of UCC Article 9 to Solve Statutory Puzzles in Receivables Financing’ (2010–2011) 46 Gonzaga Law Review 297 at 302. The Statutory Review has recommended deleting the reference to ‘the power to transfer rights’: Statutory Review: Final Report, para 5.1.3. These features of the statute replicate pre-PPSA state and territory laws relating to livestock mortgages and wool and crop liens. For details of the pre-PPSA legislation, see Edward I Sykes and Sally Walker, The Law of Securities, 5th ed, Law Book Company, Sydney, 1993, ch 14. Compare with National Credit Code s 42, dealing with consumer transactions: as a general rule, a mortgage must be in the form of a written mortgage document signed by the debtor; non-compliance makes the mortgage unenforceable. See also s 43 (mortgagor to receive copy of document). For discussion, see above note 5, paras 6.2.22–6.2.26. See Re Maiden Civil (P&E) Pty Ltd; Albarran v Queensland Excavation Services Pty Ltd [2013] NSWSC 852 at [41]. See MacEwen Agriculture Centre Inc v Beriault (2002) 61 OR (3d) 63 (ONSC) at [31]: ‘[the purpose] is to enable one creditor to be able to identify that another creditor has a security interest in identifiable collateral’. PPSA s 267. See Chapters 5 and 13 of this text. PPSA s 275 gives the searcher a right, subject to certain limitations, to ask for a copy of the security agreement: see 5.54–5.58 of this text. See generally, above note 17, at pp 266–7. The Statutory Review has recommended amending subs 20(1) to make it clear that possession as a result of seizure or repossession is not sufficient for the purposes of the provision: Statutory Review: Final Report, para 5.3.2.1. This would bring subs 20(1) into line with the provisions governing perfection by possession in s 21: see 5.8 of this text. Contrast New Zealand PPSA s 36(1), which provides that the debtor must ‘[sign] a security agreement’; see also, for example, Saskatchewan PPSA s 10(1). See also National Credit Code subs 42(1), requiring

50. 51.

52. 53. 54.

55.

56.

57. 58. 59. 60.

61. 62.

63. 64. 65. 66. 67. 68. 69.

70. 71.

that a mortgage be ‘in the form of a written mortgage document’. The writing may be in electronic form: PPSA s 10, ‘writing’. See above note 17, at pp 268–9 and cases cited there; see also MacEwen Agriculture Centre Inc v Beriault (2002) 61 OR (3d) 63 (ONSC). The Statutory Review has recommended amending subs 20(2) to confirm that the writing does not have to include all the terms of the security agreement, but only the fact that a security interest is being created and a description of the collateral; see para 5.2.2. The Review has recommended a further amendment to make it clear that, if the collateral is transferred to a new grantee, the subs 20(2) writing requirements do not have to be complied with again: Statutory Review: Final Report, para 5.2.3. (1983) 3 PPSAC 39 (SKQB). PPSA subs 20(3) specifies various methods of signature relevant to the case where the writing is in electronic form. See Carrafa, Goutzos & Lofthouse (as liquidators of Relux Commercial Pty Ltd) (in liq) v Doka Formwork Pty Ltd [2014] VSC 570 at [48]; see also Citadel Financial Corporation Pty Limited v Elite Highrise Services Pty Limited (No.3) [2014] NSWSC 1926, where the grantor paid the secured party a cheque in response to an offer in writing to supply goods on retention of title terms; the court held that by paying the cheque, the grantor adopted the writing. See generally, Bruce Whittaker, ‘Retention of Title Clauses under the Personal Property Securities Act 2009 (Cth)’ (2010) 21 Journal of Banking and Finance Law and Practice 273 at 277–80. Compare with National Credit Code subs 44(1): ‘a mortgage which does not describe or identify the property which is subject to the mortgage is void’. Subsection 44(2) prohibits a mortgage over all the mortgagor’s property. This follows from the definition of ‘livestock’ in s 10, which provides that livestock includes the products of livestock before they become proceeds (for example, the wool on a sheep’s back before the sheep is shorn): see 2.4–2.7 of this text. Ontario PPSA s 11(2)(a)(i). Saskatchewan PPSA s 10(1)(d). New Zealand PPSA s 36(1)(b)(i). The Statutory Review has recommended amending subs 20(2) by deleting the reference to ‘a description of the particular collateral’ and substituting ‘a description of the collateral sufficient to enable it to be identified’: Statutory Review: Final Report, para 5.2.2. See, for example, Stockco Ltd v Gibson and Stiassny [2012] NZCA 330. Personal Property Securities Regulations 2010 (Cth) reg 5.5 Sch 1 cl 2.3. The relevant classes are: (a) agriculture; (b) aircraft; (c) all present and after-acquired property; (d) all present and after-acquired property, except; (e) financial property; (f) intangible property; (g) motor vehicles; (h) other goods; (i) watercraft. See further, 6.47. [1995] 2 WWR 738 (BCSC). Personal Property Security Act SBC 1989 c.36 s 10. Personal Property Security Act SBC 1989 c.36 s 18. See above note 63, at [8] per Brenner J. See above note 63, at [14]. [2003] NJ No 86. But Re Hickman has been criticised as ‘[going] too far’: Cuming, Walsh and Wood, above note 17, at p 274. The same authors are also critical of the view that the follow-up inquiry facility ‘validates the use of ambiguous collateral descriptions that makes ascertainment of the collateral impossible without extrinsic evidence of subjective intent’: at p 275. See also Business Development Bank of Canada v D’Eon Fisheries Limited 2015 NSSC (S Ct Nova Scotia), endorsing this view and discussing the Canadian authorities in some detail. [1984] 4 WWR 519 (MBCA). [2003] BCJ No 2559 (BCSC).

72. 73. 74.

75. 76.

77. 78. 79.

80. 81. 82. 83. 84. 85. 86.

87. 88. 89. 90.

These and other cases are discussed in above note 17, at pp 271–6. Compare with National Credit Code subs 44(2), prohibiting a mortgage over all the mortgagor’s property. The Statutory Review has recommended repealing subs 20(5) on the ground that it is ‘unhelpful’: Statutory Review: Final Report, para 5.2.2. The Review does not discuss what the implications of this change might be for cases like Example 6. See above note 17, at p 275. See above note 17, at p 275. For discussion of the commercial property–consumer property and inventory–non-inventory personal property distinctions, see 2.51–2.56 of this text. The Statutory Review has recommended repealing subs 20(4) on the ground that it is ‘unhelpful’: Statutory Review: Final Report, para 5.2.2. The Review does not discuss what the implications of this change might be for the corroborative function of the s 20 writing requirement. Parliament of the Commonwealth of Australia, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009, para 3.30 (‘Replacement Explanatory Memorandum’). Statutory Review: Final Report, para 9.3.4.3. As the Act is presently drafted, this would be impossible anyway, because intellectual property and goods are different collateral classes and a registration may not cover more than one collateral class: see 6.47 of this text. Statutory Review: Final Report, para 9.3.4.3. See The Healy Holmberg Trading Partnership v Grant [2012] NZLR 61 (CA). The competing arguments are set out in Cuming, Walsh and Wood; see above note 17, at pp 244–6. Contrast PPSA para 21(2)(b), which provides for perfection by possession, but expressly excludes repossession: see 5.8 of this text. See, for example, Dunphy v Sleepyhead Manufacturing Co Ltd [2007] NZCA 241; 3 NZLR 602. (1996) 28 OR (3d) 670 (ONSC). In the actual case, the [grantor] was a commercial property owner and the collateral was the present and future rents from the property. In Australia, the PPSA does not apply to a security interest in income from real property: para 8(1)(f) (see 3.60–3.61 of this text). In Example 10, retail accounts are substituted for rents to make the fact situation relevant for Australia. This modification does not affect the substance of the decision. (1998) 41 OR (3d) 632. [1997] 1 SCR 411. RSC 1985 c.1. See above note 88, at [94].

[page 131]

CHAPTER 5 Perfection INTRODUCTION 5.1 Personal Property Securities Act 2009 (Cth) (PPSA) s 21 governs the perfection of a security interest. It provides that a security interest is perfected if: (1) it has attached to the collateral; (2) the s 20 writing requirements have been complied with; and (3) the secured party has taken one or other of the perfection steps listed in subs 21(2), namely registration of a financing statement, taking possession of the collateral or assuming control over the collateral.1 These steps may be taken in any order: subs 21(3). In other words, the secured party may take the relevant subs 21(2) step either before or after the security interest attaches and the s 20 requirements are complied with. Whatever the sequence of events, the security interest is only perfected when all the requirements have been met. This point is somewhat obscured because, in common with Art 9 of the United States Uniform Commercial Code and the other PPSAs (in Canada and New Zealand), the Australian PPSA from time to time refers to a security interest ‘perfected by registration’, ‘perfected by possession’, or ‘perfected by control’. For example, subs 21(4) provides that ‘a single registration may perfect one or more security interests’.2 It would be easy to fall into the trap of thinking that it is, for example, the act of registration itself that perfects a security interest. However, s 21 makes it clear [page 132] that this is not the case: registration is a necessary condition for perfection, but not a sufficient one. The same is true for possession and control. Example 1 demonstrates the implications of this point. Example 1. On Date 1, SP takes a security interest in Grantor’s herd of cattle and registers a financing statement. The agreement is in writing, but Grantor does not sign it. On Date 2, Grantor sells the cattle

to Buyer. On Date 3, SP discovers the missing signature and has Grantor sign the security agreement. On Date 4, SP learns about the sale and reclaims the cattle from Buyer.

Even though SP1 registered on Date 1, its security interest was not perfected until Date 3 when Grantor supplied the missing signature. It follows that SP’s security interest was unperfected on Date 2, when Grantor sold the cattle to Buyer, and PPSA subs 43(1) provides that a buyer of personal property for value acquires title free of an unperfected security interest. 5.2 Registration can be used to perfect a security interest in any type of collateral: see further, 5.21 below. According to PPSA para 21(2)(a), possession is also an effective method of perfection ‘for any collateral’. But there is an inherent conceptual limitation because intangible personal property cannot be physically possessed and so, for example, a security interest in the grantor’s accounts cannot be perfected by possession.3 Perfection by possession is discussed further in 5.8–5.20 below. Perfection by control is limited to the collateral types listed in para 21(2)(c): see 5.22 below. Broadly speaking, a secured party has control if it is in a position to transfer the collateral to a third party without needing the grantor’s cooperation. The statute also recognises a fourth method of perfection, known as ‘temporary perfection’. In various circumstances, the secured party is given a grace period within which to perfect an as yet unperfected security interest or to re-perfect a security interest that may have become unperfected due to a change of circumstances; the secured party is referred to as being ‘temporarily perfected’ during this period. The rationale for most instances of temporary perfection is that it may not be practicable for the secured party to perfect — or re-perfect — its security interest immediately, for example when the secured party may not initially be aware of the relevant change in circumstances: see further, 5.38–5.40 below. The consequence of failure to perfect is that the security interest may be postponed to, or defeated by, competing claims to the collateral by another secured party, a transferee of the collateral for value, an execution creditor and the grantor’s trustee in bankruptcy, liquidator or insolvency administrator: see 5.59–5.60 below. 5.3 In the PPSA context, ‘perfection’ is a relative concept, not an absolute one.4 In other words, perfection does not make a security interest invulnerable [page 133] against competing third-party claims and it is not a guarantee of priority. A simple

demonstration of this point can be seen in disputes between competing security interests in the same collateral. Both security interests may be perfected, but only one of them can have priority: the tie breaker is in PPSA subss 55(4) and (5), discussed in Chapter 7. The converse proposition is also true: while an unperfected security interest may be more vulnerable, failure to perfect does not necessarily spell defeat at the hands of a third party. For example, in a dispute between competing security interests, both security interests may be unperfected, but only one of them can be subordinated: in this instance, the tie breaker is in PPSA subs 55(2), also discussed in Chapter 7. In summary, perfection of a security interest is neither a necessary nor a sufficient condition for priority against competing claims but, by the same token, perfection is the best protection a secured party can aspire to within the statutory framework.

THE FUNCTION OF PERFECTION 5.4 Broadly speaking, perfection serves a publicity function. Possession is one method of publication and the pledge, the oldest form of security device, was built on this idea: the secured party’s possession of the collateral puts third parties on notice of the secured party’s interest. In Twyne’s case,5 the debtor, Pierce, conveyed a flock of sheep to Twyne as security for a loan but remained in possession. A judgment creditor levied execution against the sheep to enforce payment, and a dispute arose between him and Pierce over who was entitled to the sheep. The court held that the transaction between Pierce and Twyne was a fraudulent conveyance and so it was void against the judgment creditor. According to the law of fraudulent conveyances, if a debtor transfers property with the intention of defeating creditors, the transfer is void. Twyne’s case stands for the proposition that where a debtor transfers ownership of collateral, but remains in possession, there is a presumption of intention to defeat creditors. The thinking was that if the debtor stayed in possession, the transfer cannot have been a genuine one and, therefore, the most likely purpose of the bargain was to defeat creditors. 5.5 A second concern underlying Twyne’s case was that if a debtor transfers property to a lender by way of security, but the lender leaves the debtor in possession, this creates a false appearance of ownership and third parties may be misled. That is exactly what happened in Twyne’s case itself: the judgment creditor assumed Pierce owned the sheep and, acting on the strength of that assumption, he went to the trouble and expense of taking execution proceedings. The decision in Twyne’s case effectively precluded non-possessory security interests. In the wake of

the decision, if a lender wanted a security interest in the debtor’s goods, he had to take possession. In other words, the pledge was the only valid form of security interest in tangible collateral. This may have been a workable rule in an agrarian economy, but it is impractical [page 134] in the modern world because, typically, the debtor needs the goods to earn income to repay the loan. 5.6 In summary, Twyne’s case exposes two competing policy considerations: (1) the need to facilitate non-possessory secured lending; and (2) the need to protect third parties from being misled. Registration provides a way of reconciling these two policies by giving interested third parties the means of discovering a non-possessory security interest in advance of dealing with the collateral. The bills of sale statutes, discussed in Chapter 1 of this text, were an early form of registration statute enacted with this objective in mind. The PPSA registration system is different in both scope and design from the bills of sale system, but the underlying policy objective is the same: see further, Chapter 6 of this text. 5.7 The publicity concern which Twyne’s case highlights is not limited to goods; it applies to all forms of collateral, including intangibles (for example, accounts). The problem is that, while a possession requirement may be feasible for security interests in tangible collateral, the law cannot insist on possession of intangibles. Dearle v Hall6 was an early attempt to facilitate dealings in intangibles. According to the rule in Dearle v Hall, in a competition between two or more assignees of the same chose in action, priority turned in part on which assignee was the first to notify the account debtor of its interest. The rule had the effect of conscripting the account debtor into the role of surrogate register and it gave prospective assignees an incentive to consult the ‘register’. The assumption was that the account debtor would inform the prospective assignee of any prior assignment. Subject to possible dishonesty on the account debtor’s part, their ‘all clear’ to the assignee meant one or other of two things — that there was no prior assignment, or that the prior assignee had failed to give notice — and, either way, the prospective assignee was safe. The rule in Dearle v Hall may have been a workable one for cases involving a single existing debt, but if there were multiple debts, notifying all the account debtors would often have been inconvenient, while if the assignment related to one or more

future choses in action, for obvious reasons, notification was impossible. In Australia, two states — Queensland and Victoria — enacted legislation providing for the registration of assignments of book debts and the PPSA’s comprehensive registration scheme takes over where these early initiatives left off: see 3.24–3.29 of this text.

PERFECTION BY POSSESSION Introduction 5.8 Paragraph 21(2)(b) provides that a secured party may perfect its security interest by taking possession of the collateral, but that repossession or seizure is insufficient for this purpose.7 There is a similar limitation in the [page 135] New Zealand PPSA and all the Canadian PPSAs, except Ontario, where the statute states the opposite rule.8 The thinking in Ontario is that possession meets the publication objective, regardless of the secured party’s reasons for taking possession. The opposing view is, in part, that the Ontario approach compromises the publicity function by allowing the secured party to avoid the consequences of failing to publicise its security interest earlier or to ensure its security interest remained perfected, as the case may be.9 On the other hand, this objection overlooks the point that a financing statement can be registered at any time to perfect or reperfect a security interest, even if the grantor is in default, and so it is hard to see why perfection by possession should not also be permissible following the grantor’s default.10 In this connection, the perfection requirements in PPSA s 21 must not be confused with the writing requirements in PPSA s 20. Subsection 20(1) provides for possession by the secured party as an alternative to compliance with the writing requirement — see 4.26 of this text. As presently drafted, subs 20(1) does not make it clear whether possession includes possession as a result of seizure or repossession. The Statutory Review has recommended amending subs 20(1) to make it clear that possession in these circumstances is not sufficient for the purposes of the provision.11 5.9 A related question is whether, for perfection purposes, the secured party’s possession must be referable to its security interest.

Example 2. SP, a truck dealer, sells a truck to Grantor on conditional sale terms but does not register a financing statement. Grantor returns the truck to SP for a check-up under the manufacturer’s warranty. While the truck is in SP’s possession, Grantor becomes bankrupt.12

Does SP hold a perfected security interest? The Ontario PPSA s 22(1) provides that possession perfects a security interest but only while the disputed item ‘is actually held as collateral’. There is no corresponding provision in the other PPSAs, including the Australian PPSA. On the other hand, the case is at least loosely analogous to the repossession scenario and if repossession is insufficient to perfect a security interest, possession in a case like Example 2 should not be sufficient either.

Constructive Possession 5.10 To perfect a security interest by possession, the secured party must take actual physical possession of the collateral. Constructive possession is insufficient: PPSA subs 24(1). A secured party may acquire constructive [page 136] possession if, for example, the grantor or their agent agrees to hold the collateral as bailee for the secured party. Constructive possession is insufficient to perfect a security interest because it does not meet the publication objective. If the grantor has actual possession of the collateral, there is no outward indication of the secured party’s interest. In Re Raymond Darzinskas,13 the secured party held a security interest in a heavy piece of manufacturing equipment located in the grantor’s factory. The secured party had registered a financing statement, but it contained a misleading error and so the registration was invalid: see Chapter 6 of this text. The grantor defaulted and the secured party sent in a bailiff to repossess the machine. The bailiff served a repossession notice on the grantor’s landlord, but the machine was too heavy for him to take away. Shortly afterwards, the grantor went into bankruptcy and the secured party claimed the machine. Ontario PPSA s 20(1)(b) provides that an unperfected security interest is ineffective against the debtor’s (grantor’s) trustee in bankruptcy.14 The secured party argued that its security interest was perfected by possession when it sent in the bailiff because, as a result of the bailiff’s actions, it acquired constructive possession of the machine. The court rejected the argument, holding that constructive possession is not sufficient to perfect a security interest. In Australia, as in most other PPSA jurisdictions, the

secured party’s argument would have failed on the further ground that repossession is insufficient to perfect a security interest. 5.11 If a secured party perfects its security interest by taking possession of the collateral, but returns the collateral to the grantor for some temporary purpose, the security interest is unperfected during this period unless the secured party takes steps to perfect it by some other method, for example by registering a financing statement. The Explanatory Memorandum gives the following example:15 FinanceA has a security interest in a painting owned by GrantorA. FinanceA perfects the security interest by taking possession of the painting on 1 April 2009. FinanceA returns the painting to GrantorA on 28 April 2009 for a dinner party held by GrantorA. FinanceA resumes possession on 1 May. FinanceA’s security interest ceased to be perfected on 28 April. Perfection of the security interest commenced from 1 May 2009.

There are exceptions to this rule in PPSA s 35 (see 5.14 below) and s 36 (5.37 below).

Goods Possessed by Bailee 5.12 Subsection 22(1) provides four alternative methods for perfecting a security interest in goods held by a bailee, for example a carrier or warehouse [page 137] operator. First, the secured party may register a financing statement: see 5.21 below. Second, the secured party may rely on the bailee’s possession of the goods to perfect its security interest, but only if the bailee holds the goods on the secured party’s behalf. Subsection 24(3) is relevant in this connection. It provides that where goods are transported by common carrier, the grantor acquires possession of them when it takes delivery either itself or through an agent or, alternatively, if the grantor or its agent obtains possession of a bill of lading or other document of title relating to the goods. Once the grantor obtains possession of the collateral in either of these senses, the secured party can no longer rely on the carrier’s possession to perfect its security interest. In the first case, the secured party’s security interest becomes unperfected when the carrier delivers the goods to the grantor or its agent, while in the second case it becomes unperfected when the grantor or its agent obtains the bill of lading, even though the carrier still has physical possession of the goods and may have agreed to hold them on the secured party’s behalf.

5.13 Third, the secured party will have a perfected security interest in the goods if the bailee issues a document of title to the goods in the secured party’s name. This is a form of perfection by possession because, so long as the document of title remains in the secured party’s name, the grantor will be unable to claim the goods from the bailee. Fourth, the secured party has a perfected security interest in the goods if the bailee issues a negotiable document of title, such as a bill of lading, and the secured party has a perfected security interest in the document. There are two methods of perfecting a security interest in a document of title: by registration or by taking possession of the document. In this last connection, subss 22(2)–(4) provide that the security interest is temporarily perfected from the date the bailee issues the document of title until the secured party takes possession of it up to a maximum of five business days. The security interest becomes unperfected at the end of that period unless the secured party takes other steps to perfect it, for example by registering a financing statement. Example 3. Grantor is a clothing manufacturer. On Date 1, Grantor gives SP a security interest in 200 men’s suits stored in its Melbourne warehouse. On Date 2, Grantor delivers the suits to Carrier for shipment to Grantor’s Sydney premises and Carrier issues a bill of lading. At Grantor’s request, Carrier forwards the bill of lading to SP and SP receives it on Date 4. Date 4 marks the end of five business days from Date 2.

The s 22 temporary perfection rule is subject to the proviso in subs 22(4) that the secured party must take possession of the document or otherwise perfect its security interest within the five-day grace period. In Example 3, this requirement is met. Therefore, SP’s security interest is temporarily perfected from Date 2 to Date 4 and it is perfected by possession thereafter. But now assume that SP does not receive the document until Date 5 and SP takes no steps to otherwise perfect its security interest in the meantime. In these circumstances, SP does not obtain the benefit of the temporary perfection [page 138] rule. Consequently, its security interest is unperfected until Date 5 when it obtains possession of the document.16 5.14 As a general rule, if a secured party relies on possession to perfect its security interest, the security interest will become unperfected if the secured party returns the collateral to the grantor, even if just temporarily. Section 35 makes a concession in the case where a secured party has a security interest perfected by possession in

goods, or a negotiable document of title relating to the goods, under subs 22(1) and hands over the goods or the document of title so that the grantor can sell the goods. In this case, the security interest is temporarily perfected for five business days starting from the date the secured party hands over the goods or the document of title. Example 4. Grantor is a clothing manufacturer. On Date 1, Grantor gives SP a security interest in 200 men’s suits stored in its Melbourne warehouse. On Date 2, Grantor delivers the suits to Carrier for shipment to Grantor’s Sydney premises and Carrier issues a bill of lading. SP takes possession of the bill of lading on the same day. On Date 4, Grantor negotiates the sale of the suits to a Sydney retailer and SP returns the bill of lading to Grantor so that Grantor can take delivery of the suits from Carrier. On Date 5, SP registers a financing statement. Date 5 marks the end of five business days after Date 4.

SP’s security interest in the suits is perfected by possession from Date 2, the date it takes possession of the bill of lading, until Date 4, the date it hands over the bill of lading to Grantor; it is temporarily perfected from Date 4 to Date 5; and it is perfected by registration thereafter: see further, 5.41–5.42 below.

Negotiable Instruments 5.15 Subsection 24(4) provides that a person has possession of a negotiable instrument that is not evidenced by an electronic record only if their agent takes physical possession of the instrument. In other words, endorsement of a negotiable instrument without actual delivery does not constitute possession. Subsection 24(4) is relevant to s 70, which enacts a special priority rule for cases involving competing claims to a negotiable instrument. Section 70 mirrors the holder in due course rule in Bills of Exchange Act 1909 (Cth) s 34 and, as discussed in Chapter 10 of this text, it subordinates a perfected security [page 139] interest in a negotiable instrument to the claim of a holder who acquires the negotiable instrument for value and without notice of the security interest.17

Electronic Chattel Paper 5.16 The PPSA applies to both security interests in chattel paper and also outright transfers: see 3.24–3.30 of this text. An actual or deemed security interest in chattel paper may be perfected either by registration of a financing statement or

by taking possession of the chattel paper. Perfection by possession is likely to be the preferred method because PPSA s 71 enacts a special priority rule for competing claims to chattel paper which promotes the interest of a chattel paper financier over the grantor’s general lender, but only if the chattel paper financier takes possession of the chattel paper: see further, Chapter 10. In other words, in the chattel paper context, possession is important not only as a method of perfection, but also a means of achieving super-priority status. 5.17 Subsection 24(5) provides for the case where the chattel paper is in electronic form. Clearly, electronic chattel paper cannot be possessed in the physical sense, but subs 24(5) enacts a special definition of ‘possession’ which applies for the purposes of both the perfection requirements and the priority rule in s 71. It reads as follows: A secured party has possession of chattel paper that is evidenced by an electronic record if, and only if: (a) a single authoritative copy of the record exists which is unique, identifiable and unalterable (except as set out below); and (b) the authoritative copy identifies the secured party as the transferee of the record; and (c) the authoritative copy is communicated to, and maintained by, the secured party or the secured party’s agent; and (d) copies or revisions of the record that change the transferee of the authoritative copy can be made only with the participation of the secured party; and (e) each copy of the authoritative copy (or any copy of such a copy) is readily identifiable as a copy that is not the authoritative copy; and (f) any revision of the authoritative copy is readily identifiable as an authorised or unauthorised copy.

The provision is adapted from Art 9 s 9-105.18 The aim is to stimulate the development of secure systems for the creation and maintenance of electronic chattel paper. However, rather than prescribing the technology parties must use, the provision instead identifies the results the parties must achieve.19 The official comments to Art 9 s 9-105 explain that ‘the drafters’ intention was to allow the [page 140] market to decide what business and technological solutions are appropriate for establishing that they had “control” over [electronic chattel paper]’.20 5.18 Until recently, there was only a limited market for electronic chattel paper in the United States. Winn reports that the global financial crisis in 2008–2009

stalled the adoption of electronic chattel paper, particularly in the automobile industry, but that adoption rates have been on the increase since 2010.21 In Australia, chattel paper is a new concept and there is as yet no developed chattel paper financing industry. On the other hand, securitisations will frequently involve transfers of chattel paper even if, pre-PPSA, the parties may not have described their transaction in these terms. The development of markets for chattel paper at large and electronic chattel paper in particular is something of a chicken-and-egg exercise: the markets will not develop without a legal framework to support them, but in the absence of an established market there may be insufficient demand for the necessary legal rules. PPSA subs 24(5) was presumably enacted with the aim of breaking the circle.22

Investment Instruments 5.19 An investment instrument may be in either certificated or uncertificated form: see 2.19–2.20 of this text. A certificated investment instrument may be in either bearer or registered form. The instrument is in bearer form if it is transferable by delivery and without endorsement. It is in registered form if the certificate specifies the owner’s name and ownership is transferable by registration on the issuer’s books. PPSA subs 24(6) relates to certificated investment instruments in registered form and it provides that a person (‘the possessor’) has possession if: (1) the possessor or a person acting on their behalf has physical possession of the certificate; or (2) the registered owner, being a person other than the grantor or debtor, acknowledges in writing that they hold the investment instrument on the possessor’s behalf. Compare Saskatchewan PPSA s 24(3), which provides that ‘a secured party may perfect a security interest in a certificated security by taking delivery of the certificated security pursuant to s 68 of the Securities Transfer Act’. Securities Transfer Act s 68(1)23 provides that delivery of a certificated security occurs when: (1) the transferee obtains possession; (2) another person obtains possession on behalf of the transferee; or (3) ‘having previously acquired possession of the security certificate, another person acknowledges that [she] holds the security certificate for [the transferee]’. 5.20 Saskatchewan PPSA s 24(3) applies to instruments in both bearer form and registered form. By contrast, Australian PPSA subs 24(6) only applies to [page 141]

instruments in registered form. The provision is poorly drafted and it could be read as precluding perfection by possession of a security interest in a bearer form investment instrument. On the other hand, if the provision is read this way, it would contradict para 21(2)(b), which provides that a security interest in any collateral may be perfected by possession.24 A security interest in an investment instrument may also be perfected by registration or control (see 5.21–5.37 below). Control is a superior method of perfection because it gives the secured party a higher priority status than the other methods.

PERFECTION BY REGISTRATION 5.21 Paragraph 21(2)(a) provides that a security interest in any type of collateral may be perfected by registration. Some pre-PPSA registration statutes, including the state and territory bills of sale statutes and the Corporations Act 2001(Cth) Ch 2K, were based on a document filing system. In other words, to register its security interest, the secured party had to lodge a copy of the security agreement. By contrast, the PPSA register is based on a notice-filing system. In other words, to register its security interest, the secured party submits summary details of the transaction in a document known as the ‘financing statement’. This, and other features of the PPSA registration scheme, are discussed in Chapter 6. In the other PPSA jurisdictions, registration is the most common method of perfection and this will no doubt also prove to be the case in Australia. On the other hand, registration may not always be the best method of perfection. For example, as indicated in 5.16 above, perfection by possession of chattel paper may in some circumstances give the secured party a higher priority status than perfection by registration. Likewise, as discussed in 5.22–5.37 below, perfection by control may give the secured party a higher priority status than other methods of perfection, including registration.

PERFECTION BY CONTROL Introduction 5.22 PPSA para 21(2)(c) provides that a security interest in any of the following types of collateral may be perfected by control: an ADI account; an intermediated security; an investment instrument; an uncertificated negotiable instrument; a right evidenced by a letter of credit; and satellites and other space objects. Sections 25–29 identify what the secured party must do to obtain control in each of these cases

except the last. There are no rules in the statute governing control of satellites and space objects.25 [page 142]

ADI Accounts 5.23 PPSA subs 12(4) confirms the validity of ADI charge-back arrangements by providing that an ADI may take a security interest in an ADI account that is kept with the ADI: see 2.34–2.35 and 3.54 of this text. PPSA s 25 is relevant to this type of transaction. It provides that a secured party has control of an ADI account only if the secured party is the ADI. The provision collapses two propositions: (1) only an ADI with which an ADI account is held can perfect a security interest in the account by control; and (2) if an ADI holds a security interest in a customer’s account, the security interest is automatically perfected by control. In other words, the ADI obtains the benefit of perfection by control simply by virtue of being the ADI with which the account is held. Section 75 provides that a perfected security interest held by an ADI in an ADI account has priority over any other perfected security interest in the same account. 5.24 Example 5. Grantor is a retailer and SP holds a security interest in Grantor’s inventory perfected by registration. Grantor holds a deposit account with Bank. Bank makes a loan to Grantor and takes a security interest in the deposit account to secure repayment. Grantor makes a sale to Customer in the ordinary course of business and deposits the sale proceeds in its deposit account with Bank. There are no other funds in the account and no subsequent movements in the account. Grantor defaults against SP and Bank and they both claim the funds in the deposit account.

Applying PPSA s 25, Bank has a security interest in the deposit account perfected by control. SP also has a security interest in the deposit account as proceeds of its inventory collateral. Applying PPSA s 75, read in conjunction with subs 57(2A),26 Bank has priority over SP regardless of the order in which the competing security interests were perfected. This is a generous concession in favour of the banking industry.27 Article 9 s 9-104 also provides for perfection by control of a security interest in a deposit account and, as in Australia, if the secured party is the bank, perfection by control is automatic. However, the Art 9 concession is less generous in a number of respects. For one thing, under Art 9, perfection by control is not limited to the deposit-taking institution and while, as a general rule, a security

interest held by the deposit-taking institution has priority over a competing security interest in the account, the competing secured party has priority if it obtains control by becoming the bank’s customer with respect to the deposit account.28 For another thing, under Art 9, the bank [page 143] has only limited priority with respect to proceeds of the account, but there is no corresponding limitation in the Australian PPSA: see further, 11.51 of this text. The other PPSAs do not allow for perfection by control of a security interest in a deposit account at all and, in these jurisdictions, perfection by registration is the only option. This means that, in a case like Example 5, Bank would have to register a financing statement and it would lose to SP if SP registered first. But Bank could avoid this result by not relying on its security interest and enforcing its right of setoff instead.29

Intermediated Securities 5.25 PPSA s 26 establishes methods for obtaining control of a security interest in an intermediated security that is credited to or recorded in a securities account.30 As explained in 2.19–2.20, securities on the Clearing House Electronic Subregister System (CHESS) are intermediated securities for the purposes of the statute and so they are subject to the control provisions in s 26, not s 27.31 A secured party may obtain control of an intermediated security in one of three ways.32 The first is by a control agreement made between the secured party, the grantor and the intermediary who maintains the securities account or, alternatively, between the grantor and the intermediary or by an agreement between the grantor and the secured party (notice of which is given to the intermediary). The agreement must provide that: (1) the intermediary will not comply with the grantor’s instructions in relation to the intermediated security without the secured party’s consent; or (2) the intermediary will comply with the secured party’s instructions in relation to the intermediated security without the grantor’s consent. 5.26 The second way for the secured party to obtain control is by having the securities account transferred into its own name, or into the name of another person who acknowledges in writing that they hold the intermediated security on the

secured party’s behalf.33 The third method of obtaining control was added as part of the 2011 PPSA amendments and the purpose is to accommodate CHESS: the secured party may enter into an agreement [page 144] allowing it to initiate or control the sending of electronic messages by which the intermediated security can be dealt with.34 5.27 A security interest in an intermediated security may also be perfected by registration. Control is a superior method of perfection, however, because a security interest perfected by control has priority over a security interest perfected by registration, regardless of the order in which the perfecting events occur: subs 57(1).35 A security interest in an intermediated security cannot be perfected by possession, given the intangible nature of the collateral. However, control, as defined in s 26, is a surrogate for possession and it serves the publication function just as well. The reason is that, whichever method of obtaining control the secured party chooses, the effect is that the intermediary will not permit any dealing in the intermediated security without the secured party’s consent. This means that an interested third party is bound to learn of the security interest in advance of any transaction with the grantor.36

Investment Instruments 5.28 As indicated in 5.19 above, an investment instrument may be in either certificated or uncertificated form, and a certificated investment instrument may be in either bearer or registered form. PPSA s 27 provides for perfection by control of a security interest in an investment instrument in all its variations. However, as explained in 2.19–2.20, securities on the CHESS system are intermediated securities for the purposes of the statute and so they are subject to the s 26 control provisions, not s 27. Subsection 27(2) provides that a secured party has control of an investment instrument if the issuer of the instrument registers the secured party as the registered owner of the instrument. This method of obtaining control is available for uncertificated investment instruments and also certificated investment instruments in registered form. The subs 27(2) heading reads ‘Control over any investment instrument’, but the method subs 27(2) provides for is not appropriate

for investment instruments that are not in registered form. [page 145] 5.29 Subsection 27(3) establishes an alternative method of obtaining control for a security interest in a certificated investment instrument. It provides that the secured party has control if: (1) it has possession of the instrument; and (2) the secured party, or someone acting on its behalf, is able to transfer or otherwise deal with the instrument. The provision does not specify how Condition (2) may be satisfied, but the answer can be found in the general law and also by reference to the Canadian PPSA provisions from which s 27 derives.37 If the investment instrument is in bearer form, Condition (2) is automatically satisfied when the secured party obtains possession. If the investment instrument is in registered form, Condition (2) will be satisfied if the investment instrument is endorsed to the secured party or in blank or, alternatively, if the investment instrument is registered in the secured party’s name. 5.30 Subsection 27(4) establishes two alternative methods of obtaining control for a security interest in an uncertificated investment instrument which allow the grantor to remain registered as the owner. It provides that the secured party has control if there is an agreement in force between the secured party and the grantor, which enables the secured party to control dealings in the investment instrument. There are various ways of achieving this result. One approach would be to enlist the cooperation of the issuer of the investment instrument. In this connection, it is noteworthy that the corresponding provision in other PPSA jurisdictions refers to an agreement between the issuer and the secured party that the issuer will comply with the secured party’s instructions without the grantor’s further consent.38 Another approach seemingly permitted by the Australian provision would be for the grantor to give the secured party a power of attorney, in which case the issuer would not have to be a party to the agreement. If this is what the provision means, it would allow the grantor to give multiple powers of attorney conferring perfection by control on multiple secured parties without any of the competing secured parties having the means of discovering the other interests, whether by directing inquiries to the issuer or otherwise. 5.31 Subsection 27(5) establishes a method of obtaining control for security interests in electronically traded uncertificated investment instruments. The

provision applies where the investment instrument is registered in the name of a third party who is acting as the secured party’s representative or, alternatively, who acknowledges in writing that they hold the investment instrument on the secured party’s behalf and it provides that the secured party may obtain control by entering into an agreement which enables it to initiate or control the sending of electronic messages by which the investment instrument can be dealt with. The application of subs 27(5) in practice is limited because [page 146] CHESS is the main system for electronic dealings in securities; securities on the CHESS system are intermediated securities and therefore not investment instruments. 5.32 Subsection 27(6) confirms that a secured party can achieve perfection via a control agreement even though the grantor is permitted to make substitutions, originate instructions to the issuer or otherwise deal with the investment instrument.39 5.33 A security interest in an investment instrument can also be perfected by registration. In the case of a certificated investment instrument, the security interest may also be perfected by possession. As indicated above, however, if the certificated investment instrument is in bearer form, possession gives the secured party control so that, in this context, the two methods of perfection overlap. Perfection by control is superior to the other methods of perfection because a security interest perfected by control has priority over a security interest perfected by any other method, regardless of the order in which the perfecting events occurred: subs 57(1).

Uncertificated Negotiable Instruments and Letter of Credit Rights 5.34 PPSA subs 29(1) provides for perfection by control of a security interest in an uncertificated negotiable instrument. The secured party has control if: (1) the instrument is transferable in accordance with the operating rules of a clearance house and settlement facility; and (2) there is an agreement in force enabling the secured party, or someone acting on the secured party’s behalf, to control the sending of electronic communications transferring the instrument. Subsection 29(2) confirms that a secured party can achieve perfection via a control agreement even

though the grantor is permitted to make substitutions, originate instructions to the issuer or otherwise deal with the instrument. The s 29 definition of ‘control’ is relevant to s 70 which, as indicated in 5.15 above, enacts a special priority rule for negotiable instruments parallelling the holder in due course rule. In the case of a certificated negotiable instrument, the rule is that a perfected security interest in a negotiable instrument is subordinate to a person who acquires an interest in the negotiable instrument for value and without notice of the security interest and who takes possession of the instrument.40 In the case of an uncertificated negotiable instrument, the rule is the same, except that control is substituted for possession because, given the intangible nature of the collateral, it is incapable of possession.41 [page 147] 5.35 Broadly speaking, a letter of credit is a banker’s assurance of payment against presentment of specified documents. Letters of credit are commonly used in international sales. The buyer obtains a letter of credit from its bank and delivers it to the seller, enabling the seller to rely on the bank’s promise of payment embodied in the letter of credit.42 The PPSA treats the letter of credit as a type of negotiable instrument.43 PPSA subpara 21(2)(c)(v) provides for perfection by control of a security interest not in a letter of credit as such, but in rights evidenced by a letter of credit. Section 28 provides that a secured party has control of this type of collateral if the issuer has consented to assigning the proceeds of a letter of credit to the secured party. If the letter of credit nominates a person other than the issuer as liable on the letter of credit, the secured party must obtain the nominated person’s consent. The provision derives from Art 9 s 9-107.44 The Official Comment on s 9107 explains that letter of credit law and practice distinguish between the transfer of a letter of credit and an assignment of the right to the proceeds. In the case of a transfer, the transferee becomes the beneficiary and acquires the right to draw on the letter of credit. In the case of an assignment, the assignee does not acquire the right to draw on the letter of credit, but the beneficiary agrees to account to the assignee for the proceeds.45 5.36 The s 28 definition of ‘control’ is relevant to PPSA s 70. Example 6. SP has a security interest in all Grantor’s present and after-acquired personal property, perfected by registration. Grantor is the beneficiary under a letter of credit issued by Issuer. Grantor transfers the letter of credit to Purchaser for value. Purchaser takes possession of the letter of credit and had no notice of SP’s security interest.

Purchaser meets the s 70 requirements: (1) it gave value for the purchase; (2) it had no notice of SP’s security interest; and (3) it took possession of the letter of credit. Therefore, applying s 70, purchaser acquires clear title. Example 7. SP has a security interest in all Grantor’s present and after-acquired personal property, perfected by registration. Grantor is the beneficiary under a letter of credit issued by Issuer. Grantor assigns the proceeds of the letter of credit to Purchaser. Grantor retains possession of the letter of credit but obtains Issuer’s consent to the assignment.

[page 148] In Example 7, Purchaser does not take possession of the letter of credit because Grantor will need the letter to obtain payment from Issuer. However, Issuer has consented to the assignment and so Purchaser has control of the letter within the meaning of PPSA s 28. Therefore, as in Example 6, Purchaser meets the s 70 requirements for defeating SP’s security interest. It is true that, unlike in Example 6, Purchaser did not take possession of the letter, but s 70 recognises control as a substitute for possession. 5.37 Section 36 deals with the case where a security interest in a negotiable instrument or an investment instrument is perfected by possession or control. It allows the secured party to give up possession or control for a period of up to five business days to facilitate sale, exchange, presentation, collection, renewal or registration of the instrument and it provides that, during this period, the security interest is temporarily perfected.46

TEMPORARY PERFECTION 5.38 At various points the statute gives the secured party a grace period to perfect an as yet unperfected security interest or to re-perfect a security interest which, for some reason, has become unperfected, and the secured party is deemed to be temporarily perfected during this period. One example is s 36, discussed immediately above. Example 8 illustrates the implications of temporary perfection, by reference to s 36. Example 8. SP holds a security interest in some shares belonging to Grantor. The shares are all certificated investment instruments and SP has perfected its security interest by taking possession of them. On Date 1, SP releases the shares to Grantor so Grantor can sell them. On Date 2, Grantor becomes bankrupt. SP and Grantor’s trustee in bankruptcy both claim the shares, which remain unsold.

PPSA s 267 provides, in general terms, that an unperfected security interest is invalid against the secured party’s trustee in bankruptcy. On Date 2, SP’s security interest is not perfected by possession because SP has returned the share certificates to Grantor. However, if Date 2 is within five business days of Date 1, PPSA s 36 applies, SP’s security interest is temporarily perfected and s 267 does not apply. 5.39 The other temporary perfection rules are as follows: •

Subsections 22(2)–(4) apply where a secured party takes a security interest in goods in the possession of a bailee and they provide that the security interest is temporarily perfected from the date the bailee issues a negotiable document of title to the goods until the secured party takes possession of the document (up to a maximum of five business days) (see 5.12–5.14 above). [page 149]

•

•

•

•

•

•

Section 33 applies where the collateral generates proceeds and it gives the secured party a grace period to perfect its security interest in the proceeds (see Chapter 11). Section 34 applies where Grantor 1 transfers the collateral to Grantor 2 and it gives the secured party a grace period to amend its registration by substituting Grantor 2’s details for Grantor 1’s (see further, 5.47–5.53 below). Section 35 applies where the secured party has a security interest, perfected by possession, in goods or a document of title relating to the goods under subs 22(1) and returns the collateral to the grantor so that they can sell the goods (see 5.14 above). Section 38 gives a transferee of accounts or chattel paper a deemed security interest in returned or repossessed goods which is temporarily perfected for five business days after the goods are returned or repossessed (see 10.97–10.99). Section 39 applies where tangible collateral subject to a foreign security interest is moved to Australia and it gives the secured party a grace period to perfect its security interest in Australia (see further, Chapter 14). Section 40 applies where intangible property or financial property is subject to a foreign security interest and the grantor relocates to Australia, and it

gives the secured party a grace period to perfect its security interest in Australia (see further, Chapter 14). 5.40 PPSA s 52 provides that, as a general rule, a buyer or lessee, for new value, of the proceeds of personal property, or of goods or a negotiable document of title, takes the property free of a temporarily perfected security interest. The purpose of s 52 is to protect an innocent transferee who has no easy means of discovering the temporarily perfected security interest:47 see further, Chapter 10. In this respect, temporary perfection is an inferior method of perfection and a secured party whose security interest is temporarily perfected will have an incentive to shift to another method of perfection as quickly as possible.

LOSS AND CONTINUITY OF PERFECTION 5.41 A security interest perfected by registration may become unperfected if the registration period expires or the registration is discharged. It may also become unperfected if there is a material change in the registration details of the kinds ss 34 and 166 address, and the secured party fails to amend its registration within the grace period those provisions allow: see 5.47–5.53 of this text. Likewise, a security interest perfected by possession or control will become unperfected if the secured party gives up possession or control, except in the limited circumstances provided for by ss 35 and 36. PPSA s 56 confirms [page 150] the point, albeit somewhat obscurely,48 that a secured party may switch from one method of perfection to another and that, if it does so, the security interest remains continuously perfected provided there is no intermediate period when the security interest is unperfected. 5.42 Example 4 above provides an illustration: SP’s security interest in the suits is perfected by possession from Date 2 (the date it takes possession of the bill of lading) until Date 4 (the day it hands over the bill of lading to Grantor); it is temporarily perfected for the five business days from Date 4 to Date 5; and it is perfected by registration thereafter. Applying PPSA s 56, SP’s security interest in the suits is continuously perfected from Date 2, notwithstanding the change in methods of perfection. This point is important because it means that SP’s priority time for

the purposes of the priority rule in subs 55(4) is Date 2: see 7.11–7.12 of this text.

TRANSFER OF SECURITY INTEREST 5.43 PPSA s 60 provides that if a security interest in collateral is transferred, the transferred interest has the same priority immediately after the transfer as it had immediately before the transfer.49 Example 9. On Date 1, Customer acquires a truck from Dealer on conditional sale (retention of title) terms. Dealer registers a financing statement. On Date 2, Dealer transfers the sale agreement (chattel paper) to SP1. On Date 3, Customer gives SP2 a security interest in the truck and SP2 registers a financing statement. On Date 4, Customer defaults and SP1 and SP2 both claim the truck.

The effect of PPSA s 60 is that SP1 inherits Dealer’s perfection and priority status, and so there is no need for SP1 either to register a new financing statement following the assignment or to register a financing change statement substituting the new secured party details. It follows that SP1’s priority time for the purposes of the priority rule in subs 55(4) is Date 1. SP2’s priority time is Date 3, and so, applying subs 55(4) SP1 has priority.50 The justification for [page 151] this outcome is that the assignment does not affect third-party interests. SP2 should have conducted a register search before transacting with Customer on Date 3 and, if it had done so, it would have discovered the security interest. Further inquiries would have revealed that Dealer had assigned the chattel paper to SP1.51 5.44 The corollary of the analysis in 5.43 is that if Dealer’s security interest is unperfected, the security interest remains unperfected following the transfer to SP1. It follows that before transacting with Dealer, SP1 should make sure that Dealer has registered a financing statement or, alternatively, it should register its own financing statement. However, it must be remembered that, in addition to its security interest in the truck, SP1 also has a deemed security interest in the chattel paper by virtue of PPSA para 12(3)(a): see 3.24 of this text. SP1 must perfect its security interest in the chattel paper as protection against the risk that Dealer might transfer the chattel paper a second time to SP3. SP1 cannot rely on the registration of the security interest in the truck to perfect its security interest in the chattel paper. This is because the financing statement will describe the collateral as ‘commercial property — motor vehicle’ and it will identify Customer as the grantor. To perfect its

security interest in the chattel paper, SP1 should register a financing statement which describes the collateral as ‘financial property’ and identifies Dealer as the grantor: see Chapter 6 of this text. Alternatively, SP1 may perfect its security interest by taking possession of the chattel paper from Dealer. In summary, in cases like Example 9 there is a double perfection requirement. SP1 must make sure its security interest in the truck is perfected and, as a separate matter, it must perfect its security interest in the chattel paper. 5.45 Double perfection issues also arise in cases like Example 10. Example 10. Lessor carries on a business of supplying commercial vehicles to transport companies on short- and long-term lease. SP holds a perfected security interest in all Lessor’s present and afteracquired personal property. Lessor leases 10 buses to Lessee pursuant to a PPS lease. Lessor does not register a financing statement. During the currency of the lease, Lessee goes into liquidation. SP and Lessee’s liquidator both claim the buses.

SP’s collateral includes the vehicles Lessor holds as inventory. Since the security agreement presumably contemplates that the vehicles might be leased, presently or in the future, the security interest covers: (1) vehicles not on lease; (2) Lessor’s reversionary interest in vehicles on lease from time to [page 152] time; and (3) rental proceeds.52 Because Lessor’s transaction with Lessee in Example 10 is a PPS lease, Lessor’s reversionary interest in the 10 buses is equated with a security interest for the purposes of the Act. Lessor’s security interest is unperfected and so, applying PPSA s 267, it is ineffective against Lessee’s liquidator and Lessor cannot reclaim the buses. SP’s right to reclaim the buses depends on its security interest in Lessor’s reversionary interest. But given that PPSA s 267 defeats Lessor’s reversionary interest, the knock-on effect is also to defeat SP’s claim.53 To avoid this outcome, SP should have ensured that Lessor’s security interest was perfected. SP’s own registration is not sufficient for this purpose because, to perfect Lessor’s security interest, the financing statement must identify Lessee as the grantor, whereas SP’s financing statement will have identified the grantor as Lessor. SP may have included the vehicles’ serial numbers in its own financing statement, but this makes no difference to the analysis, given the different grantors, because where the collateral is commercial property the financing statement must disclose the correct grantor details even if it also correctly discloses the collateral serial number: see 6.27 of this text. The difficulty SP faces in this connection is that it may be impracticable

to keep up with Lessor’s registrations if vehicles are regularly going in and out of lease. 5.46 Changing the facts of Example 10, assume now that Lessee does not go into liquidation but instead, during the currency of the lease, sells the buses to T. Can SP claim the buses from T? The analysis is basically the same as before. Given that SP authorised Lessor’s lease of the buses to Lessee, SP’s claim is not to the buses themselves, but to Lessor’s reversionary interest. Lessor’s reversionary interest is a security interest for the purposes of the Act. The security interest is unperfected and so it is not effective against T: subs 43(1).54 In other words, Lessee’s sale of the buses to T extinguishes Lessor’s reversionary interest. The knock-on effect is to deprive SP of any claim it might otherwise have had to the buses. The same set of issues arises in the context of sub-leases, in other words where Lessor 1 leases goods to Lessor 2 for sub-lease to Lessor 2’s [page 153] customers. In cases like this, given that Lessor 1 authorises the sub-lease, its (deemed) security interest does not continue in the goods during the term of the sub-lease, but it attaches to Lessor 2’s reversionary interest as proceeds: subs 32(1).55 It follows that any claim Lessor 1 may have to the goods, either against a customer’s trustee or a fourth party transferee from the customer, depends on the perfection of Lessor 2’s deemed security interest.56 The statute should probably be amended to address these concerns. One solution would be to provide that if the leased goods are serial-numbered goods, SP’s (Lessor 1’s) security interest is not prejudiced by Lessor’s (Lessor 2’s) failure to perfect its own security interest, provided SP’s (Lessor 1’s) financing statement correctly states the relevant serial numbers. The thinking is that even though a search against Lessor’s (Lessor 2’s) details will fail to disclose SP’s (Lessor 1’s) security interest, a serial-number search will disclose the security interest and further inquiries should reveal SP’s (Lessor 1’s) interest.57

TRANSFER OF COLLATERAL 5.47 PPSA s 60 applies where the secured party transfers its security interest. Section 34 applies in the obverse case where the grantor transfers its interest in the collateral. PPSA s 79 provides, in effect, that the grantor may transfer its rights in the collateral despite any provision in the security agreement to the contrary.58 This

leads to a range of possibilities: (1) the transfer may take place with the secured party’s consent and on the understanding that the transferee will take title to the collateral free of the security interest; (2) the transfer may take place with the secured party’s consent and on the understanding that the transferee will take title subject to the security interest; (3) the transfer may take place without the secured party’s consent but with the transferee’s knowledge of the security interest and the understanding that they are acquiring the collateral subject to the security interest; and (4) the transfer may take place without the secured party’s consent and with the transferee believing that they will take clear title. Section 34 does not apply in Case (1). It also does not apply in Case (4) if the transfer is in the ordinary course of [page 154] the grantor’s business and the transferee obtains clear title under PPSA s 46: see subs 34(3).59 But the provision does apply in Cases (2) and (3). It also applies in Case (4) if the transferee does not obtain clear title under PPSA s 46 because, for example, the transfer was not in the ordinary course of the grantor’s business. PPSA s 46 is discussed further in Chapter 10 of this text. 5.48 Example 11. SP 1 holds a security interest in Grantor 1’s printing press perfected by registration. Grantor 1 transfers the printing press to Grantor 2 subject to SP1’s security interest and with SP1’s consent.

Section 34 requires SP1 to amend its registration to record the fact that Grantor 2 has taken over the security interest and is the new grantor.60 The reason is that the transfer affects the discoverability of SP1’s security interest. Assume that Grantor 2 later negotiates to give SP2 a security interest in the printing press without disclosing SP1’s security interest. If SP2 searches the register, it will most likely search against Grantor 2’s details. But if SP1 has not amended its registration, the search will not disclose SP1’s security interest. PPSA s 34 implies that SP1’s registration becomes ineffective when Grantor 1 transfers the printing press to Grantor 2, but it provides that SP1’s security interest is temporarily perfected for a period of 24 months from the date of the transfer. However, the provision goes on to say that if another security interest attaches to the collateral at or after the time of the transfer, SP1’s grace period reduces to five business days after the transfer. The purpose of the grace period is to give SP1 time to amend its registration, while at

the same time limiting the potential prejudice to searchers who, until SP1 amends its registration, may have no means of discovering SP1’s security interest. 5.49 The temporary perfection rule means that, provided SP1 amends it registration during the grace period, it will be continuously perfected from the date of its first registration and so its priority position is protected relative to any competing claim to the collateral. Assume that, in Example 11, SP1’s original registration date is Date 1. The transfer from Grantor 1 to Grantor 2 takes place on Date 2. Grantor 2 gives SP2 a security interest in the printing press and SP2 registers a financing statement on Date 3. SP1 amends it registration on Date 4, which is within five business days of Date 2. SP1’s security interest is continuously perfected from Date 1: it was initially [page 155] perfected by registration on Date 1; it was temporarily perfected from Date 2 to Date 4; and it was perfected by registration from Date 4 onwards. On these facts, SP1 has priority over SP2. The governing provision is PPSA s 67, which deals with priority between security interests in transferred collateral. It provides that SP1 has priority over SP2 if SP1’s security interest was perfected immediately before Grantor 1 transferred the collateral to Grantor 2 and has remained continuously perfected thereafter: see further 7.38–7.46 of this text. 5.50 On the other hand, if SP1 fails to amend its registration within the grace period, its security interest will become unperfected at the end of the grace period, and so SP1 will not have the benefit of the priority rule in PPSA s 67. Assume that, in Example 11, SP1’s original registration date is Date 1. The transfer from Grantor 1 to Grantor 2 takes place on Date 2. Grantor 2 gives SP2 a security interest in the printing press and SP2 registers a financing statement on Date 3. Date 7 is the last of the five business days after Date 2. SP1 amends its registration on Date 10. On these facts, SP1’s security interest is not continuously perfected from Date 1: it is originally perfected by registration on Date 1, it is temporarily perfected from Date 2 to Date 7, it is unperfected from Date 8 to Date 10 and it is perfected again by registration thereafter. Consequently, PPSA s 67 does not apply and, subject to PPSA s 68, SP2 has priority over SP1. 5.51 Returning to the original example, assume now that Grantor 1 sells the

printing press to Grantor 2 without SP1’s knowledge or consent. Since SP1 did not authorise the transfer, its security interest continues in the printing press unless PPSA s 46 or one of the other cut-off provisions applies. Moreover, the transaction is likely to be a breach of the security agreement between Grantor 1 and SP1, giving SP1 the right to seize the printing press from Grantor 2. But SP1 may elect not to reclaim the printing press or it may delay taking action. In these circumstances, s 34 provides that SP1’s security interest is temporarily perfected for 24 months from the date of the transfer, subject to the qualification that if another security interest attaches to the collateral at or after the time of the transfer, SP1’s grace period reduces to five business days after SP1 acquired actual or constructive knowledge of the transfer and its details.61 Accordingly, whether or not SP1 consented to the transfer, SP1 notionally has 24 months from the date of the transfer to amend its registration unless a third party acquires a competing security interest in the meantime, in which case the grace period reduces to five business days. However, since SP1 is at risk if a competing security interest does materialise, it has a strong incentive to amend its registration within five business days after learning about the transfer. [page 156] 5.52 Example 12. SP holds a security interest in Grantor 1’s printing press perfected by registration on Date 1. On Date 2, Grantor 1 transfers its interest in the printing press to Grantor 2 with SP’s consent. On Date 3, Grantor 2 sells the printing press to Buyer outside the ordinary course of Grantor 2’s business and without SP’s knowledge or consent. SP amends its registration on Date 4, which is within five business days of Date 2. On Date 5, SP learns about the sale to Buyer and takes steps to recover the printing press.

SP’s security interest is continuously perfected from Date 1: it was initially perfected by registration on Date 1, it was temporarily perfected from Date 2 to Date 4 and it was perfected by registration from Date 4 onwards. Nevertheless, even though SP’s security interest was perfected on Date 3, the date of Grantor 1’s sale to Grantor 2, Buyer takes title to the printing press free of SP’s security interest. The governing provision is PPSA s 52 which provides that, as a general rule, a buyer of goods for new value takes the goods free of a temporarily perfected security interest. The purpose of s 52 is to protect an innocent transferee who has no easy means of discovering the temporarily perfected security interest: see further, Chapter 10 of this text. Assume that, in Example 12, SP does not amend its registration until Date

10, which is more than five business days but less than 24 months after Date 2. On these facts, SP’s temporary perfection does not time out on Date 7, because the shorter grace period is only triggered if another security interest attaches to the collateral. It follows that SP’s security interest is continuously perfected at all relevant times. Nevertheless, PPSA s 52 applies and Buyer takes title to the printing press free of SP’s security interest.62 5.53 As indicated above, s 34 gives the secured party a strong incentive to amend its registration within five days after the date of the collateral transfer or the date it finds out about the transfer, as the case may be. Section 52 gives the secured party an additional incentive to amend its registration sooner rather than later. Even though a resale by Grantor 2 to Buyer does not trigger the shorter s 34 grace period, the secured party will want to amend its registration quickly in order to keep the period of temporary perfection as short as possible. It follows that s 34 is not as generous to secured parties, or as prejudicial to searchers, as it seems at first sight. Section 34 seems unnecessarily complex in this respect: if the practical effect of the provision is that SP must amend its registration within five business days of the relevant date, the provision would be much easier to follow if the drafters had simply made the grace period five business days instead of beating about the bush. [page 157]

ACCESS TO DETAILS OF SECURITY AGREEMENT 5.54 All the methods of perfection identified above are designed only to give interested third parties warning that the secured party may have a security interest in some or all of the grantor’s personal property. If the searcher wants further details, including a copy of the security agreement, they must request them from the secured party. PPSA Pt 8.4 regulates the process. 5.55 According to subs 275(1), any interested person may make a request for information. Subsection 275(9) limits interested persons to the following: the grantor, a competing secured party, the grantor’s auditor, execution creditors and an authorised representative of any of these parties. The list does not include either a prospective secured party (in other words, a lender who is proposing to take a security interest from the grantor) or a prospective transferee (in other words, a

person who is proposing to buy the collateral from the grantor).63 The reason is that it may be hard to tell whether a person claiming to be a prospective lender or purchaser is legitimate or whether they want access to the register for some ulterior purpose.64 What the drafters seem to have in mind is that if a prospective secured party or a prospective transferee wants to make follow-up inquiries, they can ask the grantor to obtain the information on their behalf. However, s 275 does not make this clear.65 5.56 The subs 275(9) list also excludes a person with an existing interest in the collateral other than a competing secured party or an execution creditor (for example, a transferee for value). It follows that the only option open to parties in this category will be to ask the grantor to make the request on their behalf. A prospective execution creditor — in other words, a judgment creditor who is contemplating judgment enforcement proceedings — is in the same position because the reference in subs 275(9) is to current execution creditors only.66 The concern in these cases is that, for obvious reasons, the grantor will be disinclined to cooperate. Another class of searcher who may want to make follow-up inquiries is the grantor’s liquidator, administrator or trustee in bankruptcy. They will want to know that a secured party has a perfected security interest because this information is important for the administration of the estate. Again, liquidators, administrators and trustees are not on the subs 275(9) list, but they presumably qualify as ‘authorised representatives’ of the grantor.67 [page 158] 5.57 A secured party who receives a subs 275(1) request must reply within 10 business days.68 Otherwise, the person making the request may apply to the court for an order compelling compliance.69 As the law presently stands, it is unclear how much information the secured party must supply in response to a request. Subsection 275(1) provides that the searcher may ask for any of the following: (1) a copy of the security agreement; (2) details of the secured obligation; or (3) details of the collateral. The provision suggests that the choice lies with the searcher, not the secured party, so that if, for example, the searcher asks for a copy of the security agreement, the secured party may not respond by providing one or more of the other sets of details instead. The secured party may have a legitimate interest in not giving the searcher the entire agreement — for example, the agreement may contain

confidential information that the secured party wants to protect. PPSA s 278 provides that if a secured party wants exemption from a request to provide details of a security agreement, it may apply to the court.70 A secured party concerned about releasing confidential information could make an application under this provision. The Statutory Review has recommended amending subs 275(1) to make it clear that the secured party does not have to provide an entire copy of the security agreement, but is only required to provide those parts that are relevant to ascertaining the identity of the grantor and the secured party, the identity of the collateral and the obligation secured.71 This proposal would substantially reduce the need for s 278 court applications, but it may swing the pendulum too far in favour of confidentiality at the expense of disclosure. The searcher may have a legitimate interest in finding out about other terms of the security agreement — for example, the interest rate and other charges, the terms of repayment, default events specified in the security agreement and other variables bearing on the grantor’s obligations — but under the proposed amendment the searcher’s right of access would be limited to the information specified in the section. 5.58 The secured party can avoid having to comply with a subs 275(1) request by entering into a confidentiality agreement with the ‘debtor’: subs 275(6)(a).72 The reference to the debtor appears to be a drafting slip (the [page 159] reference should be to the grantor). Subsection 275(7) provides that para 275(6)(a) does not apply if: (1) the confidentiality agreement is made after the security agreement; (2) the debtor (grantor) is in default; (3) the debtor (grantor) authorises disclosure of the information; (4) the grantor requests the information; or (5) the request is made by the grantor’s auditor. Subsection 275(7) appears to have been drafted on the assumption that it is the debtor (grantor), not the secured party, who may want to keep aspects of the security agreement confidential. But in many, if not most cases, the position will be the other way round. In that case, it seems the grantor can override any confidentiality agreement simply by requesting the information itself. In that case, the secured party’s only option would be to apply for a court order under s 278. Section 280 provides that a person who has made a subs 275(1) request may apply to the court if the secured party fails to respond, provides an incorrect or incomplete response or refuses to respond because of subs

275(5) or (6). The searcher might apply for a s 280 order if, for example, the confidentiality agreement is over-reaching or the secured party is withholding information that is demonstrably not confidential. To address the drafting problems outlined above, the Statutory Review has recommended amending para 275(1)(a) and deleting subs 275(7). These amendments would significantly facilitate the use of confidentiality agreements, but confidentiality agreements will become unnecessary if the proposed amendments to subs 275(1) are enacted.

CONSEQUENCES OF FAILURE TO PERFECT 5.59 PPSA subs 43(1) provides that a buyer or lessee of personal property, for value, takes the personal property free of an unperfected security interest in the property: see further, Chapter 10. Subsection 55(3) provides that a perfected security interest in collateral has priority over an unperfected security interest in the same collateral: see further, Chapter 7. Section 74 provides that the interest of an execution creditor in collateral has priority over a security interest in the same collateral that is unperfected when: (1) the execution creditor seizes the collateral; or (2), in any other case, (a) a court order is made in respect of the execution creditor’s outstanding judgment debt or (b) a garnishee order is made in the execution creditor’s favour.73 Section 267 provides, in general terms, that an unperfected security interest is invalid in the grantor’s insolvency proceedings (bankruptcy, liquidation or voluntary administration). With the exception of s 267, all these provisions protect third parties in two ways. First, in a case where the secured party’s failure to perfect its security interest induces a third party to acquire an interest in the collateral, the provisions protect the third party by shifting the loss to the secured party (this is a dispute settlement function). Second, the provisions create incentives for the secured party to perfect its security interest so that third parties can [page 160] discover, in advance of any dealing with the collateral, whether the grantor has clear title (this is a dispute avoidance function). 5.60 The thinking behind PPSA s 267 is different. The grantor’s trustee in bankruptcy or other insolvency administrator is not at risk of loss from the secured party’s failure to publicise its security interest. In other words, unlike a competing

secured creditor, a purchaser or an execution creditor, a trustee in bankruptcy has no personal stake in the disputed collateral. Of course, the trustee needs to know about third-party claims because this information may affect the bankruptcy distribution. On the other hand, the PPSA perfection requirements are not necessary for this purpose because the bankruptcy laws require proof of claims before the trustee can admit them. In Canada, the justification for making an unperfected security interest ineffective in the debtor’s [grantor’s] bankruptcy is tied up with the rights of execution creditors. As indicated above, an unperfected security interest is subordinate to the claim of an execution creditor who has proceeded to the point of seizure. However, the bankruptcy laws provide for a stay of unsecured creditors’ rights, including execution creditors’ claims, at the commencement of the bankruptcy proceedings. In the absence of a provision like Australian PPSA s 267, an execution creditor would be worse off inside the grantor’s bankruptcy than outside the bankruptcy: outside bankruptcy, an execution creditor who has proceeded to the point of seizure will have priority over an unperfected security interest, but inside bankruptcy — in the absence of s 267 — the secured party could enforce its security interest, pro tanto depleting the estate to the detriment of the unsecured creditors, including execution creditors. PPSA s 267, and corresponding provisions in other PPSA jurisdictions, address this distortion by ensuring that the secured party’s unperfected security interest does not prevail inside bankruptcy either. Instead, the asset remains in the estate so that the execution creditors at least obtain a share.74 There is a corresponding provision in Art 9 and in all the PPSAs, except New Zealand. The Art 9 provision is drafted in a way that makes the connection between execution creditors’ rights and the rights of a trustee in bankruptcy explicit. It provides that a security interest is subordinate to the rights of a person who becomes a lien creditor before the security interest is perfected.75 The term ‘lien creditor’ means a creditor who has acquired a lien on the disputed asset by attachment, levy or the like and includes a trustee in bankruptcy.76 Security interests in bankruptcy and other insolvency proceedings are discussed further in Chapter 13.

1.

PPSA subs 21(1) reads as follows: 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 to the collateral; (ii) the security interest is enforceable against a third party;

(iii) subs (2) applies.

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

17. 18. 19. 20. 21. 22.

This wording appears to suggest that the perfection of a temporarily perfected security interest does not depend on attachment or compliance with the s 20 writing requirements. This is unlikely to have been the intention, however, and the provision should be read as meaning that no matter which perfection step the secured party relies on – including temporary perfection – perfection depends on attachment and compliance with the writing requirements. Compare, for example, Saskatchewan PPSA s 19 and New Zealand PPSA s 41. For another example, see para 55(5)(b), referring to a secured party who ‘perfects the security interest by taking possession or control of the collateral’. The Canadian PPSAs specify that perfection by possession is limited to tangible personal property: see, for example, Saskatchewan PPSA s 24(1); compare with New Zealand PPSA s 41. See Ronald C C Cuming, Catherine Walsh and Roderick J Wood, Personal Property Security Law, 2nd ed, Irwin Law, Toronto, 2012, p 297. 3 Co Rep 806, 76 Eng Rep 809 (Star Chamber, 1601). 38 ER 475; (1828) 3 Russ 1 (ChD). See also PPSA subs 123(4). New Zealand PPSA s 41(1); and see, for example, Saskatchewan PPSA s 24(1). Compare Ontario PPSA s 22(1). For other arguments against the Ontario approach, see above note 4, at pp 309–11. Jacob S Ziegel and David L Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed, Butterworths, Toronto, 2000, pp 179–80. Bruce Whittaker, Review of the Personal Property Securities Act 2009 (Commonwealth of Australia, 2015), para 5.3.2.1 (‘Statutory Review’). See above note 10, at p 182, note 26. (1981) 34 OR (3d) 782 (ONSC). Compare Australian PPSA s 267: see 5.59–5.60 below, and see further Chapter 13. Parliament of the Commonwealth of Australia, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009 (Cth) (‘Replacement Explanatory Memorandum’), para 2.32. This point is made clear by the example given in Replacement Explanatory Memorandum, ch 2, para 21: BankA finances DebtA’s purchase of portable steel toilets manufactured in Melbourne. DebtA is located in Sydney, so DebtA arranges for the toilets to be freighted to Sydney. The carrier issues a negotiable document of title and forwards this to BankA. Once BankA receives possession of the negotiable document of title, it has a perfected security interest in the toilets. Where the secured party is able to take possession of the document of title within five business days of its issue, the security interest would be deemed to be perfected from the moment the document of title was issued. (emphasis added) The Statutory Review has recommended amending s 22 to provide that the temporary perfection simply expires at the end of the grace period: Statutory Review: Final Report, para 5.3.12.3. PPSA s 300 provides that a person does not have notice about a registration merely because the data in the registration is available for search in the register. United States Uniform Commercial Code — Secured Transactions s 9-105. See Jane K Winn, ‘Electronic Chattel Paper: Invitation Accepted’ (2010–2011) 46 Gonzaga Law Review 407 at 419. See above note 19, at p 420. For an account of the technological challenges the system-builders must address, see above note 19, at pp 420–2. See above note 19, at pp 425–32. There is no provision for electronic chattel paper in any of the other PPSAs. The Statutory Review has recommended deletion of the chattel paper concept from the Australian PPSA, and subs 24(5) will presumably be repealed if this recommendation is adopted: Statutory Review: Final Report, para 14.3.3.

23. 24. 25. 26. 27.

28. 29. 30. 31. 32.

33. 34. 35. 36.

37. 38. 39.

40. 41. 42. 43.

44. 45. 46.

SS 2007 c.S-42.3. The Statutory Review has recommended amending subs 24(6) to clarify this point: see para 5.3.2.2. The Statutory Review has recommended deletion of the reference in para 21(2)(c) to satellites and space objects: Statutory Review: Final Report, para 5.3.10. Subsection 57(2A) extends the super-priority rule for security interests perfected by control to proceeds claims: see 7.21–7.22 of this text. It is true that, even pre-PPSA, in a case like Example 5, Bank might obtain priority over SP by relying on its set-off rights. However, the Bank’s right of set-off would be lost if it received notice of SP’s security interest before making the loan to Grantor. This principle is now enshrined in PPSA para 80(1)(b): see 12.72 of this text. Uniform Commercial Code subss 9-327(3) and (4). See above note 4, at pp 667-8. For discussion on intermediated securities, see 2.23–2.27 of this text. The Statutory Review has recommended re-classifying CHESS securities as investment instruments: Statutory Review: Final Report, para 5.3.4.5. Compare United States Uniform Commercial Code — Secured Transactions s 9-106 and Uniform Commercial Code — Investment Securities s 8-106. There are similar provisions in the Canadian PPSAs: see, for example, Ontario PPSA ss 1(2), 22.1 and Securities Transfer Act SO 2006, c.8 s 23. Subsection 26(4). There appears to be a drafting slip here: the person should presumably acknowledge that they maintain the securities account on the secured party’s behalf. Parliament of the Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property Securities (Corporations and Other Amendments) Bill 2011, Sch 2, paras 30–32. See Chapter 7 of this text. See Louise Gullifer (ed), Goode on Legal Problems of Credit and Security, 4th ed, Sweet & Maxwell, London, 2009, para 6-28. The Statutory Review recommended amending s 26 to make it clear that an intermediary holding a security interest in its own customers’ intermediated securities may perfect the security interest by control: Statutory Review: Final Report, para 5.3.4.4. It also recommended further inquiry into whether: (1) the definition of ‘intermediated security’ might be simplified; (2) the mechanisms for perfecting by control might be improved to better achieve the PPSA’s publicity objective; and (3) the concept of perfection by control should extend to the cash proceeds of intermediated securities: Statutory Review: Final Report, paras 5.3.4.2, 5.3.4.3 and 5.3.4.6. See, for example, Ontario PPSA ss 1(2), 22.1; Securities Transfer Act SO 2006, c.8 s 23. See, for example, Ontario PPSA ss 1(2), 22.1; Securities Transfer Act SO 2006, c.8 s 24. See Chapter 7 of this text. The Statutory Review has recommended further inquiry into whether the control provisions in ss 26 and 27 could be more closely aligned: Statutory Review: Final Report, para 5.3.6. Or, in the case of a person who acquired the interest in the ordinary course of business, without notice that the acquisition constitutes a breach of the security agreement. The Statutory Review queried the appropriateness of these provisions in the Australian context, but made no firm recommendations: Statutory Review: Final Report, para 5.3.8. See generally, Ewan McKendrick (ed), Goode on Commercial Law, 4th ed, Penguin Books, London, 2010, Pt VII. PPSA s 10 ‘negotiable instrument’. The Statutory Review has recommended deleting the definition of ‘negotiable instrument’: Statutory Review: Final Report, para 7.6.13.1. The consequence would be that, for the purposes of the statute, ‘negotiable instrument’ would bear its general law meaning and letters of credit would no longer be negotiable instruments. United States Uniform Commercial Code — Secured Transactions s 9-107. The Statutory Review queried the appropriateness of these provisions in the Australian context, but made no firm recommendations: Statutory Review: Final Report, para 5.3.9. There is a drafting slip in subs 36(1): the provision is concerned with security interests in instruments, but

47. 48.

49. 50.

51.

52.

53.

54. 55. 56.

57.

58. 59.

60.

twice it refers to the collateral as ‘goods’. See above note 15, at para 2.103. PPSA s 56 derives from Saskatchewan PPSA s 23(1), which is much clearer. It provides: ‘[i]f a security interest is originally perfected pursuant to this Act and is again perfected in some other way pursuant to this Act without an intermediate period when it is unperfected, the security interest is continuously perfected for the purposes of this Act’. There is a corresponding provision in all the other Canadian PPSAs. See also New Zealand PPSA s 42. The Statutory Review has recommended adoption of the Saskatchewan version: Statutory Review: Final Report, para 5.3.14.1. Compare, for example, Saskatchewan PPSA s 23(2) and New Zealand PPSA s 69. In Gibbston Downs Wines Limited v Perpetual Trust Limited [2013] NZCA 506, SP1 initially had priority over SP2, but the parties entered into a subordination agreement. SP1 subsequently assigned its security interest to SP3, and SP2 assigned its security interest to SP4. The question was whether the subordination agreement was binding as between SP3 and SP4. The court held that it was, relying in part on the New Zealand equivalent of Australian PPSA s 60 (New Zealand PPSA s 69). The effect of the provision was that SP3 inherited SP1’s priority status, while SP4 inherited SP2’s priority status. Since, as a result of the subordination agreement, SP2 had priority over SP1, it followed that SP4 had priority over SP3. Although not required to do so, SP1 may want to amend its registration to substitute itself for Dealer as the party of record. This step avoids the need for Dealer to field follow-up inquiries from searchers under PPSA s 275 (as to which, see 5.54–5.58 below). In this connection, PPSA s 162 provides that the secured party may (not must) amend its registration to reflect the transfer of the security interest. Note that SP has no direct claim to vehicles out on lease because, expressly or by implication, it authorised the lease: PPSA para 32(1)(a). If SP had not authorised the transaction then, subject to s 46, its security interest would continue in the buses and its claim would not be dependent on Lessor’s reversionary interest. PPSA s 46 and its application to leases is discussed in 10.7 and 10.21 of this text. The Statutory Review, in its discussion of the issues raised by cases like Problem 10, does not clearly distinguish between cases where SP authorised the lease and cases where it did not: Statutory Review: Final Report, paras 7.3.1– 7.3.3. This analysis derives from first principles. But it could also be tied back to PPSA s 60, on the basis that: (1) Lessor’s reversionary interest in the leased buses is a security interest for the purposes of the Act; (2) ‘transfer’ includes granting a security interest; and (3) pursuant to its security agreement with SP, Lessor transferred (granted a security interest in) its security interest (the reversionary interest) to SP. Applying s 60, SP inherits Lessor’s unperfected status with respect to the buses and so it cannot reclaim them from Lessee’s liquidator. See further 10.5–10.10 below. See 11.31–11.35 below for discussion of s 32. The Statutory Review, in its discussion of this issue, focuses on the case where the sub-lease was unauthorised. In that case, as the Review rightly points out, Lessor 1’s security interest continues in the leased goods and, assuming it is perfected, it will in most cases prevail against third-party claims: Statutory Review: Final Report, para 7.3.1.2. But, as discussed in the text, the analysis is different where Lessor 1 authorised the sub-lease. See Anthony Duggan, ‘Security Interests in Goods Held for Lease: The Double Perfection Requirement’ (2011) 51 Canadian Business Law Journal 85, analysing Perimeter Transportation Ltd (Re) (2010) 327 DLR (4th) 31 (BCCA). The Statutory Review concluded that there had been insufficient time during the review process for consideration of these issues and recommended that the government provide an opportunity for further stakeholder inputs: Statutory Review: Final Report, paras 7.3.1 and 7.3.2. Compare, for example, New Zealand PPSA s 87 and Saskatchewan PPSA s 33. Section 34(3) provides that the provision does not apply in relation to a transfer of collateral if the transferee takes the collateral free of the security interest. In Case (1), the transferee acquires clear title under subs 32(1). In Case (4), the transferee may obtain clear title if s 46 applies. Compare, for example, Saskatchewan PPSA s 51(1) and New Zealand PPSA ss 87–91. In contrast to the

61.

62.

63. 64. 65.

66. 67. 68. 69. 70. 71. 72.

73.

74.

75. 76.

corresponding provision in the other PPSA jurisdictions, s 34 is not expressly limited to the case where the security interest is perfected by registration. Notionally, therefore, the provision might also apply where the security interest is perfected by possession or control. However, if the secured party has possession or control, the grantor will be unable to transfer the collateral and so the issue s 34 addresses does not arise. On the meaning of knowledge and constructive knowledge, see PPSA ss 296–300, discussed in 10.17–10.18 of this text. See also Stockco Ltd v Gibson v Stiassny [2012] NZCA 330 at [98], suggesting that SP1 must at least have knowledge in the relevant sense of Grantor 2’s details so that it can amend its registration. As Examples 11 and 12 indicate, s 34 applies where the grantor sells the collateral, transferring title subject to the security interest. But the provision may also apply where the grantor transfers the collateral on retention of title terms. The reason is that, for the purposes of the statute, a sale on retention of title terms is equated with an outright sale coupled with a security interest in the seller’s favour to secure payment. On the same basis, the provision applies where the grantor transfers the collateral pursuant to a PPS lease. Compare Saskatchewan PPSA s 18, on which the Australian provisions are modelled. See above note 4, at p 230. Saskatchewan PPSA s 18(1) provides that the secured party must send the information to the person making the demand or, if the demand is made by the debtor, to any person at an address specified by the debtor. Compare Australian PPSA subs 275(2), which says simply that a request made under subs (1) must specify an address to which the information requested should be sent. That is, ‘an execution creditor with an interest in the collateral’: para 275(9)(d). The Statutory Review has recommended amending s 275 to address this concern: Statutory Review: Final Report, para 9.3.1.2. The Statutory Review has recommended amending s 275 to clarify this point: Statutory Review: Final Report, para 9.3.1.2. PPSA s 277. Section 278 provides for court applications for exemptions and extensions of time. Section 279 permits the secured party to charge a fee for providing the information. PPSA s 280. If the secured party fails to comply with a court order, the court may make a further order extinguishing the security interest and such other orders as it thinks necessary: s 282. Compare Saskatchewan PPSA s 18(3) and New Zealand PPSA s 179. Statutory Review: Final Report, para 9.3.1.4. Compliance with a searcher’s request is also not required if it would be illegal or in breach of a duty of confidence: paras 275(6)(b) and (c). In the latter connection, the Statutory Review has recommended an amendment to make it clear that the banker’s duty of confidence does not excuse compliance with s 275: Statutory Review: Final Report, para 9.3.1.7. The Statutory Review has recommended rewording the provision so that, if the collateral is seized as part of the execution process, the relevant time would be the time of seizure: Statutory Review: Final Report, para 7.8.2.1. See Re Giffen [1998] 1 SCR 1 at paras [38]–[42]. For further analysis, see Anthony Duggan and Jacob Ziegel, ‘Justice Iacobucci and the Canadian Law of Deemed Trusts and Chattel Security’ (2007) 57 University of Toronto Law Journal 227 at 229–37. In White v Spiers Earthworks Pty Ltd [2014] WASC 139, the Supreme Court of Western Australia rejected an argument that PPSA s 267 contravened s 51(xxxi) of the Australian Constitution, dealing with the acquisition of property on just terms. Uniform Commercial Code — Secured Transactions s 9-317(a)(2). Uniform Commercial Code — Secured Transactions s 9-102.

[page 161]

CHAPTER 6 Registration INTRODUCTION 6.1 Chapter 5 of this text dealt with the various methods of perfecting a security interest. This chapter deals with perfection by registration in particular. The Personal Property Securities Act 2009 (Cth) (PPSA) registration provisions are in Ch 5 of the statute, supplemented by the Regulations.1 Among other things, PPSA Ch 5 provides for the establishment of the register; spells out the mechanics of registration; specifies the various ways of searching the register; provides for changes to registrations; and regulates potential abuses of the register while also addressing privacy concerns. In 6.2–6.22 below, there is a discussion of the main differences between the PPSA registration system and the pre-PPSA registration laws; 6.23–6.41 deal with the rules governing PPSA register searches; 6.42–6.65 deal with the rules governing registration of financing statements; and registration amendments are covered in 6.66–6.79.

PRE-PPSA AND PPSA REGISTRATION COMPARED Introduction 6.2 There are five main differences between the PPSA registration system and pre-PPSA registration laws, which can be grouped under the following headings: • • • • •

unification; centralisation; notice filing; computerisation; and renewals.

Unification 6.3 Pre-PPSA, there were separate registers for different types of secured transaction, some at the federal level and some at the state level. According to the Attorney-General’s Department, there were upwards of 75 separate [page 162] statutes relating to security interests in personal property, administered by at least 30 separate government agencies, and many of these statutes set up registration systems.2 None of these registers was comprehensive: each register only covered certain types of security interest, or security interests given by certain types of debtor, or security interests taken in certain kinds of collateral.3 6.4 For example, the state and territory bills of sale statutes established registration systems for bills of sale,4 but while ‘bill of sale’ was defined to include mortgages and charges, the legislation did not apply to functionally equivalent forms of transaction, most notably conditional sale and hire-purchase agreements.5 Furthermore, the legislation only applied where the collateral was goods.6 By contrast, the registers established by the state and territory motor vehicle securities laws [the REV statutes] applied to all forms of security agreement,7 but most of them only applied if the collateral was a motor vehicle.8 The register of company charges, established by Ch 2K of the Corporations Act 2001(Cth), was more comprehensive than the state and territory bills of sale and REV statutes, but there were still significant gaps. First, the provisions only applied to security interests given by a corporation. So, for example, if the debtor was a sole trader or a partnership and mortgaged factory equipment to secure a loan, the mortgage was not registrable in the company charges register, though it might have been registrable under the relevant state or territory bills of sale laws. Second, the register of company charges covered only some forms of security agreement, specifically mortgages and charges. So, for example, if a company took out a loan to buy equipment and mortgaged the equipment to secure the loan, the mortgage was registrable under Ch 2K. But if the company instead bought the equipment on hire-purchase or conditional sale terms, the agreement would not have been [page 163]

registrable. Likewise, if a company mortgaged or charged its book debts, the agreement was registrable, but if the company assigned its book debts outright, registration was not required even if the assignment was on a ‘with recourse’ basis.9 Third, the scope of Ch 2K was defined in part by reference to the nature of the collateral. For example, the provisions applied to some choses in action, but not others: if a company mortgaged its book debts, the agreement was registrable, but if the company mortgaged its non-trade debts (for example, a bank account) registration was not required. In the same connection, insurance policies were not covered, nor were chattel paper, documents of title or certain intellectual property rights. 6.5 Overlaying these various schemes, there were numerous specialised registers that applied to security interests given in particular kinds of goods or other property. Some of these statutes were originally enacted to facilitate the financing of particular activities, most notably farming. Examples included the registration requirements in most states relating to security interests in livestock, wool on the sheep’s back and growing crops, sugar cane (Queensland) and fruit (South Australia).10 Other measures owed their origins to the fact that there was a title registration system already in place so that provision for the registration of security interests as well was a relatively easy matter. Examples included the registration requirements for ships and patents.11 6.6 This multiplicity of registers was a serious inconvenience. For example, assume SP is negotiating with Grantor, pre-PPSA, for a security interest in all Grantor’s present and after-acquired personal property. SP wants to find out if there are any prior encumbrances. If Grantor is a company, the obvious starting place is the register of company charges but, as explained above, the register of company charges was not comprehensive and it would not necessarily give SP all the information it needed. If Grantor is unincorporated, SP’s job becomes even harder: it could try searching in the bills of sale register, but in most states that would disclose only mortgages and charges, not hire-purchase agreements, conditional sales or leases. It also would not disclose security interests in collateral other than goods. SP could also try searching in the motor vehicle security register, but that would only tell it about security interests in Grantor’s cars and trucks, not other property. If Grantor was a farmer, SP could try searching in the livestock register or the wool register or the sugar cane register; but, again, that would only turn up information about security interests in those particular types of property. 6.7 Some security interests were subject to more than one registration statute.

This compounded the problem described above because, depending on how either the legislature or the courts resolved the overlap, it meant either that the secured party had to register twice over or, alternatively, that searchers [page 164] had to consult both registers. The problem was compounded even further if the priority rules in the two registration statutes conflicted with one another. An example was the interaction between the registration requirements in the Patents Act 1990 (Cth) and the registration of charges provisions in Ch 2K of the Corporations Act 2001 (Cth).12 Another example was the overlap between the registration of company charges provisions in the corporations statute and the legislation governing registration of security interests in motor vehicles.13 6.8 To cut a long story short, the PPSA rolls all these disparate and piecemeal systems into a single register that covers all security interests, regardless of the nature of the collateral, regardless of the form of the security agreement and whether the debtor is a company, some other type of business entity or an individual.

Centralisation 6.9 Pre-PPSA, with the exception of the register of company charges, the main registers, including the bills of sale registers and the registers of motor vehicle security interests, were state and territory-based and this added to the multiple search problem; if the grantor carried on business nationally, and SP wanted to conduct a bills of sale register search, for example, it faced the prospect of separate searches in all the state and territory bills of sale registers. 6.10 Moreover, state-based registration systems raise conflict of laws issues. Example 1. Pre-PPSA, SP takes a security interest in Grantor’s motor vehicle. At the time, the vehicle is located in Victoria and SP registers its security interest in accordance with the Chattel Securities Act 1987. Some time later, Grantor moves the vehicle to Queensland and sells it to T without SP’s knowledge. When SP finds out about the sale, it claims the vehicle back from T.

According to general choice of law principles, the lex situs governs the dispute between SP and T, the lex situs being the law of the place where the vehicle was located at the time Grantor sold it to T (in other words, Queensland). The Motor Vehicles and Boats Securities Act 1986 (Qld) provides, in effect, that a registered

security interest is valid against a third-party purchaser, but the courts read the statute, as it originally stood, to mean ‘registered in Queensland’.14 On this basis, in Example 1, SP’s Victorian registration would not protect it in Queensland. The practical significance of this limitation was that, to be sure of protection Australiawide, a secured party had to register its security interest in every state and territory. If the courts had reached the opposite conclusion, they would have avoided the multiple registration [page 165] problems, but they would have created a multiple search problem instead: a prospective purchaser, like T, would have had to search in every state and territory register if they wanted to be sure of getting clear title. 6.11 Eventually, under pressure from the finance industry, the states and territories got their Acts together and set up a scheme for data-sharing between the motor vehicle security registers. This meant that if SP, in Example 1, registered its security interest in Queensland, the data would be transmitted to Victoria and elsewhere and so SP would not have to go to the trouble of doing multiple registrations in every state and territory. Inter-registry data-sharing was an innovative short-term solution to the conflict of laws problem, but the logical next step was to move the registration system to the federal level and this is precisely what the PPSA achieves. In the wake of the PPSA reforms, a secured party only has to register its security interest once and, likewise, there is only one place searchers need to look. All this is achieved without the messy business of transmitting data between register bases and the complex inter-governmental and legislative arrangements that underpin cooperative ventures like this. An additional feature of the reforms is that because the new national register is supported by a single federal statute, the effects of registration are now uniform Australia-wide. So, for example, in a dispute involving a registered security interest and an innocent third party who has purchased the collateral for value and without notice of the secured party’s claim, the outcome will be the same regardless of variables such as where in Australia the collateral was situated at the time of the sale and where in Australia the parties are located. To summarise, the PPSA: (1) does away with the need for multiple registrations and multiple searches; and (2) ensures uniform outcomes for disputes within Australia involving competing claims to collateral. This represents a

significant advance on the United States and Canada: the first problem looms large in both countries, while the second problem affects Canada in particular, due to the lack of uniformity between Ontario and the other provincial PPSAs.15

Notice Filing Overview 6.12 Most of the pre-PPSA registers used a document filing system. In other words, to register a security interest, the secured party had to lodge a copy of the actual security agreement. By contrast, the PPSA uses a notice filing system. In other words, to register a security interest, the secured party submits a ‘financing statement’: PPSA s 150. The financing statement is a [page 166] short pro forma summary of the transaction, typically in electronic form, which contains prescribed details, including the secured party’s identity and contact details; the grantor’s details;16 a short description of the collateral; if the collateral is serial-numbered goods (for example, a motor vehicle), the serial number;17 the registration period; and a number of miscellaneous items:18 PPSA subs 153(1). 6.13 The aim of the financing statement is not to communicate the terms of the agreement between the secured party and the grantor, but simply to alert searchers to the possibility that the secured party may have a security interest in certain collateral. If a searcher wants to confirm the secured party’s interest or requires details of the security agreement, they must obtain them from the secured party identified in the financing statement. PPSA ss 275–278 facilitate follow-up inquiries of this kind: see 5.54–5.58 of this text. Notice filing has a number of advantages over document filing, including savings on storage costs; lower search costs; improved privacy protection; the opportunity for registration in advance of the security agreement; and the opportunity for blanket registrations (the use of a single financing statement to perfect multiple security interests).

Storage costs 6.14 Notice filing saves on document storage costs, particularly if the register is

paper-based. The point is simple: it is easier to store a single sheet of paper than a whole agreement that may be centimetres thick.19 Technological advances have reduced the storage costs concern. Most PPS registers are now at least partly, if not fully, computerised and it would be a simple enough matter to require lodgment of documents in electronic form, if there were good policy reasons for doing so. But as explained below, there are other considerations that favour notice filing over document filing.

Search costs 6.15 A register search may return a positive result or a negative one. If the result is negative, indicating no registered security interest in the relevant collateral, the searcher need look no further. If the result is positive, indicating one or more registered security interests, the searcher may want more information, such as details of the loan or the terms of the security agreement. A notice filing system allows the searcher to spot a negative result at a glance, whereas under a document filing system the searcher may have to read the [page 167] whole agreement to be sure that the result is negative. In other words, a notice filing system reduces search costs in cases where there is no relevant security interest. On the other hand, it increases search costs in cases where there is a relevant security interest and the searcher requires additional information. The reason is that, under a document filing system, the additional information will be on the register, whereas under a notice filing system the searcher must look for the additional information outside the register.20 So, from a search costs perspective, there are considerations pointing in both directions and the move to a notice filing system depends on the assumption that notice filing achieves a reduction in aggregate search costs (in other words, the costs of searches that return a negative result plus the costs of searches that return a positive result).

Privacy 6.16 Under a notice filing system, there is minimal information on the register

about the parties and the terms of the security agreement, and so notice filing is more compatible with privacy and confidentiality objectives. It is true that the PPSAs allow searchers to make follow-up inquiries which may reveal sensitive information, but the legislature may, if it wishes, limit access to the register and the right to make follow-up inquiries. For example, the statute might provide that only prescribed classes of person may search the register or make follow-up inquiries, or that a person may not search the register or may not make follow-up inquiries other than for prescribed purposes. As discussed in 6.40, the Australian and New Zealand PPSAs contain provisions along these lines, but the Canadian PPSAs do not and nor does Art 9. These differences in approach reflect the difficulty of the trade-off between privacy considerations on the one hand and access to information on the other. It is probably unnecessary to point out that this policy tension is not peculiar to secured transactions law and that it surfaces in a variety of other contexts as well.

Advance registration 6.17 A notice filing system makes it possible for the secured party to register before the security agreement is finalised. Under a document filing system, for obvious reasons, the secured party cannot register until the security agreement is in place. Why might a secured party want to register in advance of the security agreement? The answer is tied up with the way the PPSA priority rules are framed. In all PPSA jurisdictions, the main rule for resolving a competition between security interests perfected by registration is that priority depends on the order of registration and the dates of the respective security agreements make no difference.21 One purpose of this rule is to allow a secured party to reserve its priority position by registering early. [page 168] Example 2. On Date 1, SP1 and Grantor start negotiations for a secured lending agreement. They complete their negotiations and execute the agreement on Date 3. On Date 3, SP1 registers its security interest and releases the loan funds to Grantor. Unhappily for SP1, on Date 2 Grantor signs a security agreement with SP2 covering the same collateral and SP2 registers on Date 2.

Assume these events all took place pre-PPSA, that Grantor is a company and that Ch 2K of the Corporations Act 2001 (Cth) applies. The governing priority rule is in s 280 which provides that, subject to a qualification which is not presently

relevant, a registered company charge has priority over a subsequent registered charge.22 On this basis, SP2 has priority over SP1. The result would be the same if the PPSA applied. The difference is that the PPSA provides for notice filing, and under a notice filing system SP1 could have avoided postponement to SP2 by registering a financing statement on Date 1: this would have guaranteed SP1’s priority position and prevented SP2 from beating SP1 out. By contrast, the Corporations Act requires document filing, and under a document filing system SP1 could not register until Date 3. Therefore, to protect its position, SP1 would have to make the loan conditional on obtaining first priority and then delay releasing the funds until after it had registered the agreement and completed a search to make sure no one else had registered first. Presumably with cases like this in mind and in common with the PPSAs elsewhere, s 161 of the Australian Act allows for advance registrations. However, s 151 imposes some important restrictions which potentially undercut the utility of s 161.23

Blanket registrations 6.18 Under a document filing system, the secured party must complete a separate registration for each security agreement. On the other hand, under a notice filing system, it becomes possible for a single registration to perfect multiple security interests in the same type of collateral. Example 3. Grantor is a car dealer. On Date 1, SP1 starts negotiations with Grantor for a security interest in Grantor’s new car inventory and registers a financing statement. The financing statement describes the collateral as required by the Act and Regulations, that is, it states that the collateral is commercial property and also states that it is motor vehicles.24 On Date 2, the parties complete their negotiations and execute the security agreement. The security agreement describes the collateral as Grantor’s new car inventory.

[page 169] The Date 1 registration perfects SP1’s security interest because the collateral description in the financing statement — commercial property, motor vehicles — clearly covers the new car inventory. Now assume that, on Date 4, SP1 and Grantor enter into a second security agreement, this time for Grantor’s used car inventory. The Date 1 registration perfects this security interest, too, again because the collateral description in the financing statement covers the used car inventory. PPSA subs 21(4) confirms that blanket registrations are permissible.

6.19 To see the implications of the blanket registration rule assume that, in Example 2, on Date 3, SP2 negotiates with Grantor for a security agreement in Grantor’s used car inventory. SP2 completes a register search, discovers SP1’s registration and sees that it covers commercial property motor vehicles. SP2 makes follow-up inquiries and discovers that SP1’s security agreement only covers new cars. Is SP2 safe to proceed with its transaction? The answer is ‘no’: if SP2 goes ahead, it will end up being subordinate to SP1’s Date 4 security interest. The reason is that priority turns on the date of registration, not the dates of the respective security agreements, and SP1 registered first. To be on the safe side, SP2 should negotiate a subordination agreement with SP1.25 The other option would be to have SP1 narrow the collateral description in its financing statement so that it only covers new cars.26

Computerisation 6.20 The PPSA register is an electronic one. Computerised registration has a number of advantages over paper-based systems. One is that it saves on administrative costs. If the register is a paper-based one, the Registrar must employ staff to transcribe information from the financing statement onto the register and also to transcribe information from the register onto search certificates. On the other hand, if the register is computerised, system users have direct access to the registry data base and this eliminates the transcription function. 6.21 Another advantage of computerisation is that it avoids the risk of transcription errors. As indicated above, paper-based systems involve a transcription function and this creates the risk that the person doing the transcribing might make a mistake. For example, assume the grantor’s name is Smith, but the registry employee types ‘Smyth’ instead. A mistake like this may make the security interest unsearchable.27 Then the question becomes who should bear the risk: the searcher or the secured party? If the legislature wants to put the risk on the searcher, it will need to include in the statute a provision saying that the secured party’s registration is effective from the time it lodges its financing statement at the registry office. On the other hand, if [page 170]

the legislature wants to put the risk on the secured party, it will need to include in the statute a provision saying that the registration is not effective until the financing statement details are correctly entered on the register. Either way, there may be pressure for a statutory compensation fund to cover losses to register users resulting from system failures. A computerised register avoids transcription errors, again because it eliminates the transcription function.28 Furthermore, because registration in a computerised system is instantaneous, there is no need for statutory provisions, of the kind described above, to establish the status of a registration between the date the secured party lodges the financing statement and the date the details are entered on the register. And last but not least, the avoidance of transcription errors substantially reduces the need for a compensation fund because transcription errors were previously a major potential category of system failure.

Registration Renewals 6.22 The pre-PPSA registration statutes typically required the secured party to renew its registration every year or two. Failure to renew led to lapse of the registration and this, in turn, allowed the registry office to throw out the paperwork. The renewal requirement was essentially a storage control device; in other words, it was a way of keeping the amount of paper within manageable limits. A notice filing system significantly reduces the storage problem and computerised registration reduces it even further. For these reasons, the PPSAs do not require periodical registration renewals. In Australia, the rule is that, for commercial property, a secured party can choose an indefinite registration period or a specified registration period up to 25 years and the registration continues until the period expires or the secured party terminates it.29

SEARCHING THE REGISTER Grantor’s Name (Grantor Details) Searches and Serial Number Searches 6.23 There are two basic types of registration system: in the first, the statute requires registration against the grantor’s name, and in the second it requires registration against the collateral’s serial number (for example, if the collateral is a motor vehicle, the statute will require registration against the Vehicle Identification Number, or VIN). Correspondingly, in the first type of system, searchers look for security interests against the grantor’s name, while in the second type of system they

look for security interests against the collateral serial number. The register of company charges is an example of a grantor’s name system, while the REV statutes are an example of a serial number system. The Canadian PPSAs combine both systems so that, at least for some kinds of collateral, security interests are registered against both the grantor’s name [page 171] and also against the collateral serial number. The Australian PPSA follows suit, except that it provides for registration against the ‘grantor’s details’ which in some cases means the grantor’s name and in other cases the grantor’s ACN or the equivalent.30 The combination of the two systems gives the searcher a choice between searching against the grantor’s details, searching against the serial number, or doing both. 6.24 What are the relative advantages of the two systems? In a grantor’s name system, a search should reveal every personal property security interest the debtor (or grantor) has given, or may have given, assuming they are all registered. In other words, a grantor’s name search gives the searcher an indication of the extent to which the grantor has encumbered its assets. This may be useful information if, for example, the searcher is a prospective lender who plans to take a security interest in all the grantor’s present and after-acquired personal property or the searcher is a judgment creditor looking for unencumbered assets to levy execution against. On the other hand, what a grantor’s name search will not reveal is a security interest created by a prior owner as shown in the following example. Example 4. Mary has a little lamb. She gives Bo-Peep a security interest. Bo-Peep registers a financing statement against Mary’s name. Later, Mary sells the lamb to Teacher. Later still, Searcher negotiates to buy the lamb from Teacher. Searcher does a register search in the debtor’s name index to check for outstanding security interests. Searcher’s only contact is with Teacher and he has no knowledge of either Mary or Bo-Peep so, naturally enough, he conducts the search against Teacher’s name.

Searcher’s search will not reveal Bo-Peep’s security interest because Bo-Peep’s security interest is registered against Mary’s name, not Teacher’s. This is commonly referred to as the ‘A-B-C-D problem’. In Example 4, Bo-Peep is A, Mary is B, Teacher is C and Searcher is D. The potential for A-B-C-D problems is the main weakness of debtor name registration systems. Serial number registration systems address the A-B-C-D problem as shown in the following example.

Example 5. Mary has a little Lamborghini. She gives Bo-Peep a security interest. Bo-Peep registers a financing statement against the VIN. Later, Mary sells the Lamborghini to Teacher. Later still, Searcher negotiates to buy the Lamborghini from Teacher. Searcher conducts a search in the serial number index to check for outstanding security interests.

This time, Searcher’s search should reveal Bo-Peep’s security interest despite the intermediate dealing in the collateral between Mary and Teacher. In summary, serial number registration systems are designed to provide a complete history of security interests in a specific asset. On the other hand, what a serial number system cannot provide is information about security interests in other assets and the extent to which the grantor has encumbered [page 172] its enterprise at large. This may not matter to Searcher in our example because they are only interested in the Lamborghini. But assume instead that Searcher is a prospective lender and is planning to take a security interest in all Teacher’s assets. Now Searcher will be interested in more than just the car and a serial number search will not give them the additional information they need. This is one weakness of serial number registration systems as against grantor’s name registration. Another weakness is that serial number registration is only feasible for collateral that has a unique, systematically recorded serial number and not all collateral types have this feature. Cars do, and so, for example, do trucks, motor cycles, boats and aircraft. But lambs and other livestock do not. Nor do jewellery and works of art, crops or accounts. In all these cases, grantor’s name registration is the only option. 6.25 Turning to the Australian system, the starting point is Item 4 in the table appended to PPSA subs 153(1). This provides, more or less, that if the collateral is serial-numbered collateral, the financing statement either may or must set out the serial number. It is left to the Regulations to specify what qualifies as serialnumbered collateral. The governing provision is in Sch 1 of the Regulations, cl 2.2, which lists the following classes of collateral: aircraft and aircraft engines; certain kinds of intellectual property and intellectual property licences; motor vehicles; and watercraft.31 Motor vehicles are the most common type of collateral on this list and for motor vehicles the prescribed serial number is the VIN.32 Clause 2.2 of the Regulations, Sch 1, effectively determines the scope of the serial number index. PPSA s 171 provides for various kinds of search, including search against the grantor’s details and serial

[page 173] number search. Obviously, a serial number search will only be feasible if the collateral is serial-numbered collateral. For non-serial-numbered collateral, a search against the grantor’s details will be the only option. 6.26 Section 170 provides that a person may apply to search the register and may request a written search result and the Registrar must grant the application if: the search is authorised under ss 171 and 172 (see 6.40 below); the application is in the approved form; and the searcher pays the required fee.33 Subsection 174(1) provides that a written search result in the appropriate form is admissible as evidence and is, in the absence of proof to the contrary, proof of the matters stated in it.34

Grantor’s Details Searches — Individual Grantor 6.27 If the collateral is non-serial numbered consumer property (for example, a computer) or if it is commercial property, the financing statement must set out the grantor’s details as prescribed by the Regulations.35 If the grantor is an individual, the details are their surname, given names and date of birth.36 The grantor may go by different names. For example, the grantor’s name on her birth certificate might be Gladys Mary O’Grady, but she calls herself Mary O’Grady. Or the grantor might go by a nickname; for example, Jack instead of John. Or if the grantor is married, she may use her maiden name for work purposes and her married name at home. In cases like this, which name should the secured party include in the financing statement? The question matters because, if the secured party writes one name in the financing statement and the searcher looks under another name, the search will not reveal the security interest. In other words, for the register to work, there must be a common set of rules for the secured party and the searcher to go by. 6.28 The Regulations address the issue by enacting, in cascading form, a set of grantor name rules to assist secured parties and searchers.37 At the top of the list is a transitional provision, which applies if the grantor’s details are disclosed on a transitional register for migrated security interests; it requires disclosure of the grantor’s surname, given names and date of birth, as recorded on the transitional register.38 The transitional rule will cease to matter once the [page 174]

transition to the PPSA regime is complete and, in any event, it only applies if the grantor’s details are recorded on a transitional register. The second item on the list applies if the secured party is a financial institution and the grantor is an existing customer, as where the grantor obtains a loan from their regular bank or where the grantor obtains a loan from a financial institution they have borrowed from previously; it requires disclosure of the grantor’s surname, given names and date of birth as revealed to the secured party pursuant to the customer identification requirements of the Anti-Money Laundering and Counter-Terrorist Financing Act 2007 (Cth) (AML-CTF Act). If this provision does not apply, the financing statement must disclose the grantor’s surname and given names as recorded on their driver’s licence. If the grantor does not have a driver’s licence, the next item on the list comes into play and it specifies the grantor’s surname, given names and date of birth as recorded on their proof of identity or proof of age card. If the grantor does not have either of these documents, the next specified port of call is the grantor’s Australian passport. Next in line comes the grantor’s name and date of birth as specified on a current Australian visa or, failing that, on a current non-Australian passport. The last resort point of reference is the grantor’s birth certificate. 6.29 Once the transitional period is over, the AML-CTF Act customer identification procedures will become the first point of reference for determining the grantor’s details. The rule benefits financial institutions because, if the grantor is already a customer, it saves them the trouble of having to go through a second customer identification process. On the other hand, the rule potentially prejudices searchers because a searcher may not know of the secured party’s existence or identity and so they may have no reliable means of discovering the grantor’s details as they appear in the secured party’s AML-CTF Act customer identification records. In other words, the rule puts the searcher in a catch-22 position: the searcher may be relying on the search to reveal the very information they need to carry out the search in the first place. The AML-CTF Act does not specify hard and fast customer identification rules, instead leaving it to individual financial institutions to establish their own customer identification procedures. Some financial institutions may use the customer’s driver’s licence as the main method of identification, while others may rely on some other document, such as the customer’s passport or birth certificate. If a searcher does not have the information to conduct a search against the grantor’s AML-CTF Act customer identification details, the logical fallback is to conduct a search against the grantor’s details as indicated by the next item on the prescribed list, namely, their driver’s licence. But assume that, as it turns, out the AML-CTF Act rule does apply; the secured party’s customer identification records

disclose the grantor’s details as they appear in their birth certificate; and the secured party puts these details in the financing statement. If the grantor’s name as it appears on their driver’s licence is different from the name in their birth certificate, a search against the grantor’s driver’s licence details will not reveal the secured party’s registration. A searcher can reduce this risk by conducting [page 175] searches against the grantor’s details as revealed by other prescribed sources as well, for example their passport and birth certificate, but it costs time and money to obtain this additional information, not to mention the additional fees for multiple searches. In summary, the problem with relying on the AML-CTF Act as a source of data for PPSA registration and search purposes is that the information is not equally available to registrants and searchers. The sources ranking below the AMLCTF Act rule on the prescribed list are not subject to this objection. To address these concerns, the Statutory Review has recommended deletion of the AML-CTF Act rule.39 6.30 Sources of information ranking below the AML-CTF Act rule on the prescribed list become relevant if the AML-CTF Act rule does not apply. Moving to these other items, at first glance, it might seem strange that the grantor’s birth certificate is the lowest ranked point of reference on the prescribed list. It is tempting to think that the birth certificate should be top of the list because it is the most obvious official record of a person’s name. Furthermore, the grantor’s name as recorded on their birth certificate is unlikely to change, whereas the grantor may change the name on their driver’s licence and other documents. This thinking has prevailed in Canada where model rules developed by the Canadian Conference on Personal Property Security Law (CCPPSL) state that, if the debtor is Canadianborn, the name for secured parties and searchers to go by is the name as stated in the debtor’s birth certificate.40 The main shortcoming of the birth certificate test is that people typically do not carry around their birth certificates when they go shopping. Example 6. Grantor purchases a high-end wide-screen television from Dealer. With Dealer acting as its intermediary, SP contracts with Grantor for a loan to finance the purchase coupled with a security interest in the television to secure repayment. Grantor is keen to take immediate delivery of the television so he can watch the AFL finals which start the following day. The catch is that SP will not permit delivery until either Dealer or SP has registered a financing statement.

If Grantor’s correct name for registration purposes is the name as it appears on his birth certificate, SP may insist on production of the birth certificate prior to registration. If so, the transaction will be delayed while Grantor applies for a copy of his birth certificate and waits for it to arrive. On the other hand, the risk of lost sales may tempt SP not to insist on sighting customers’ birth certificates. That may make Dealer’s customers happy, but now SP runs the risk of entering an incorrect name on the financing statement and this will [page 176] invalidate the registration. In summary, the birth certificate rule puts SP in a dilemma: to insist on sighting birth certificates and risk losing business for both itself and Dealer, or to turn a blind eye and risk an unperfected security interest.41 The driver’s licence rule ameliorates this problem for a substantial subset of cases. People normally do carry their driver’s licences with them, assuming they hold a licence in the first place. So, in Example 6, bearing in mind that PPSA register users have direct access to the system, the Australian driver’s licence rule facilitates onthe-spot registration which, in turn, removes at least one of the reasons for delay in completing transactions.42 Article 9 of the United States Uniform Commercial Code was recently amended to incorporate a driver’s licence rule, and Australia borrowed the idea from there.43 As indicated above, the disadvantage of the driver’s licence rule relative to the birth certificate alternative is that the grantor may change the name on their driver’s licence and a search under the new name will not show up a security interest registered under the old name. PPSA s 166 caters for cases like this by providing, in effect, that the registration remains valid for the shorter of: (1) five years; and (2) five business days after the secured party learns about the change: see further, 6.72 below. The provision compromises the integrity of the register because it means that the security interest is effectively unsearchable for up to five years. With this problem in mind, the government advises searchers to check the licence date of issue and, if it is relatively recent, to insist on seeing the previous licence.44 But not all searchers will be aware of [page 177]

this advice and, in any event, the need to ask for the grantor’s previous driver’s licence undercuts the advantage of the driver’s licence test relative to the birth certificate test. 6.31 Assume that the grantor’s name on their driver’s licence is Gladys Mary O’Grady, but the secured party mistakenly writes the name as Glenys Mary O’Grady in the financing statement. Later, a searcher conducts a search under the name Gladys Mary O’Grady. Will the search return the entry? In the abstract, the answer to this question depends on how the registration system is designed. There are two basic design options: exact match and close similar match. In an exact match system, as the name implies, a search will not return a registration if there is any discrepancy at all between the grantor’s name as it appears in the financing statement and the name the searcher looks under. In a close similar match system, a search will return entries against the name the searcher looked under and also against names which closely correspond. So, in an exact match system, a search against the name Gladys Mary O’Grady would not return a registration against the name Glenys Mary O’Grady. On the other hand, in a close similar match system, the search might be successful, though the actual outcome will depend on how much tolerance the designers have built into the system. In a close similar match system, a search certificate will typically display a list of registrations and the searcher will have to sift through them to locate the one they are looking for. So, for example, in the Gladys O’Grady case, the search certificate might list all the O’Gradys who appear on the register with the same first and middle initials. The ball will then be in the searcher’s court to narrow the field, using date of birth or some other distinguishing variable as a tool.45 6.32 In all the Canadian provinces except Ontario, the registers are close similar match. Ontario employs an exact match system. New Zealand and Australia, following the Ontario lead, have both opted for exact match systems. Exact match systems and close similar match systems both have strengths and weaknesses. The main advantage of a close similar match system is the allowances it makes for human error. The main disadvantage is a potentially more cluttered search certificate, as the Mary O’Grady case illustrates. The main disadvantage of an exact match system is the lack of tolerance for even minor mistakes, but the advantage is a crisper search outcome. The thinking behind Ontario’s choice of an exact match system is that Ontario has a larger population than any of the other provinces. This means that a close similar match system would be likely to show up more entries, particularly for common names, and so search certificates would be proportionately

more cluttered. In other words, the costs of a close similar match system would be [page 178] higher in Ontario than they are in the other provinces.46 This consideration is even stronger in the Australian context, given that the Australian PPSA register is a national one and the entire country’s population is within its ambit. In summary, the choice is between making the registration process harder by imposing a high accuracy requirement on the secured party and making the registration process easier by allowing the secured party some margin for error. Correspondingly, a more exacting registration process makes it easier to search the register, while relaxing the registration requirements increases search costs. The Australian approach is presumably based on the view that the benefits to searchers of an exact match system outweigh the costs to registrants.47

Grantor’s Detail Searches — Corporate Grantor 6.33 If the grantor is a body corporate, the financing statement must include the grantor’s details as prescribed by the Regulations: Sch 1 cl 1.3. This provision requires the secured party to enter on the financing statement not, in most cases, the company’s name, but rather its number. Again, there is a cascading set of rules for establishing the relevant number but, for the majority of cases, it will be the company’s ACN.48 These rules have knock-on implications for searches; the consequence is that if the grantor is a body corporate, a searcher must conduct their search by number, not name. This is another unique feature of the Australian registration system. In the other PPSA jurisdictions, the statute provides for registration and search against the debtor’s (grantor’s) name.49 The rule is that for registration and search purposes, the grantor’s name is the name stated in its documents of incorporation. This can be a trap for the unwary, particularly if the grantor carries on business under another name. For example, assume the grantor is a numbered company and its name as stated in its documents of incorporation is 276542 Ontario Limited. [page 179]

The grantor carries on business using the business name Acme Products. The correct name for registration and search purposes is 276542 Ontario Limited, not Acme Products. If the secured party registers under Acme Products, a search against the grantor’s correct name will not reveal the registration. Correspondingly, a search against the name Acme Products will not reveal the security interest if the secured party has correctly named the grantor in the financing statement. The Australian approach avoids these traps, but it puts a premium on register users knowing the correct number to enter for registration and search purposes. A particular issue in this connection is that many businesses are conducted by a company acting as trustee for a trading trust. If the grantor is a trustee of a trading trust, the financing statement must include the grantor’s details as prescribed by the Regulations: Sch 1 cl 1.5. This provision requires the secured party to enter on the financing statement not the trustee company’s ACN, but rather the ABN (Australian Business Number) that has been allocated to the trust business: see 6.34 below. The difficulty is that a searcher may not know whether the grantor company is a trustee or not, and so it may need to make inquiries before conducting a search; clearly, if the registration is against the trust’s ABN, a search against the grantor’s ACN will not retrieve the registration.

Grantor’s Details Searches — Other 6.34 If the grantor is a partner in a partnership which has been allocated an ABN,50 the ABN must be entered in the grantor’s details field of the financing statement; for any other partnership, the secured party must enter the individual partner’s details in accordance with the rules discussed in 6.27–6.32 above.51 If the secured party is a trustee of a trust which carries on an enterprise that has been allocated an ABN, the ABN must be entered as the grantor’s details on the financing statement; for any other trust, if the trustee is a body corporate, the secured party must enter the trustee’s details in accordance with the rules discussed in 6.33 above, while if the trustee is an individual, the secured party must enter the trustee’s details in accordance with the rules discussed in 6.27–6.32.52 If the secured party is a body politic [page 180] which carries on an enterprise for which it has been allocated an ABN, the ABN

must be entered on the financing statement, and in any other case the grantor’s details consist of the body politic’s name, in accordance with its constitution.53 The implications of these requirements for searchers can be inferred from the discussion in 6.27–6.33 above.54

Serial Number Searches — Consumer Property 6.35 Item 4 in the table appended to PPSA subs 153(1) provides that the financing statement must indicate whether the collateral is commercial property or consumer property. If the collateral is serial-numbered collateral and it is consumer property, then the financing statement must set out the serial number,55 but not the grantor’s details. So, for example, if the collateral is a car the grantor uses for domestic purposes, the financing statement will include the VIN, but it will not include the grantor’s name or other details. It follows that the searcher only has one option, namely, to search against the serial number. The REV statutes were subject to the same limitation and so the approach is not entirely novel.56 On the other hand, in the other PPSA jurisdictions, the financing statement must always include the debtor’s (grantor’s) name even if it also has to include a serial number and this enables a searcher to conduct either type of search, or both. The Australian approach was motivated primarily by privacy concerns. The objective is to keep an individual grantor’s personal details off the register unless absolutely necessary.57 The main disadvantage of the Australian approach is that it prejudices searchers who do not know the serial number and have no easy way of discovering it: for example, a prospective execution creditor wanting to know whether the grantor’s motor vehicle is encumbered.58 The Australian law-makers apparently thought that privacy considerations were more important.59 Privacy does not loom as large in the other PPSA jurisdictions.60 [page 181]

Serial Number Searches — Commercial Property 6.36 Leaving aside small aircraft, aircraft engines and airframes, if the collateral is serial-numbered collateral and it is commercial property, then the financing statement may set out the serial number,61 and it must include the grantor’s details.62 So, for example, if the collateral is a delivery van the grantor uses in their

business, the financing statement may include the VIN and it must include the grantor’s details. This suggests that the searcher can choose between a serial number search, a grantor’s details search or both. However, a serial number search may not be reliable: for example, if the search returns a nil entry the searcher has no way of knowing whether this is because there is no registered security interest or because the secured party opted not to include the VIN. PPSA s 44 partly compensates for this shortcoming by providing that a buyer or lessee takes the collateral free of a security interest if the collateral is serial-numbered collateral and the financing statement either does not disclose or misstates the serial number. In summary, if the financing statement does disclose the serial number a search will reveal the security interest, while if it does not disclose the serial number the transferee will obtain clear title. So either way the transferee is protected. On the other hand, s 44 only protects buyers and lessees. Other parties, such as prospective lenders or execution creditors, to be on the safe side, should conduct a grantor’s details search as well as a serial number search.63 6.37 Why does the statute make the serial number optional for most commercial property? The reason is that commercial property will be either inventory or equipment. It is common for a secured party to take a security interest not just in the grantor’s current inventory, but all the grantor’s present and after-acquired inventory. Likewise, it is common to take a security interest in not just, say, the debtor’s presently owned delivery trucks, but all the debtor’s present and afteracquired fleet. In cases like this, on the date when the secured party completes the financing statement, it will have no way of knowing the serial numbers of the yet to be acquired property. It follows that, as a practical matter, it would be impossible for the secured party to comply with a requirement to include the serial numbers. PPSA s 44 attempts to improve the reliability of serial number searches by creating an incentive for the secured party to include the serial number in cases where this is possible. As explained above, s 44 provides, in effect, that the secured party may lose [page 182] to a subsequent purchaser if it does not include the serial number.64 On the other hand, failure to include the serial number does not affect the validity of the registration or the perfected status of the security interest. It follows that a security interest may still have priority over competing security interests and it may still be

effective in the grantor’s bankruptcy or other insolvency proceedings, even though the financing statement does not include the serial number. 6.38 In summary, the registration requirements for security interests in serialnumbered collateral vary depending on whether the collateral is consumer property or commercial property. If the collateral is consumer property, the financing statement must include the serial number and it must not include the grantor’s details. But if the collateral is commercial property, the financing statement must include the grantor’s details while, subject to s 44, the serial number is optional. Furthermore: (1) the financing statement must indicate whether the collateral is consumer property or commercial property;65 and (2) if the collateral is consumer property, the registration period must not exceed seven years: see 6.50 below. The problem is that the secured party may not know whether the collateral is consumer property or commercial property. Section 10 defines ‘consumer property’ to mean personal property held by an individual, other than personal property held for the purpose of carrying on a business to any degree; ‘commercial property’ means personal property other than consumer property: see 2.51–2.53 of this text. The only way for the secured party to determine the collateral type is to ask the grantor how they use, or plan to use, the collateral. But the grantor may answer wrongly and there are no effective precautions the secured party can take against this risk. If the secured party completes the registration on the incorrect basis that the collateral is consumer property, the registration will be ineffective because the financing statement will not include the grantor’s details: see PPSA ss 164 and 165, discussed in 6.54–6.65 of this text. On the other hand, if the secured party completes the registration on the incorrect basis that the collateral is commercial property, the consequences might not be so dire. The secured party will be in contravention of the statute for disclosing the grantor’s details, but it is unlikely that this mistake would make the registration ineffective under ss 164 and 165. Likewise, an incorrect indication in the financing statement that the collateral is commercial property would probably not make the registration ineffective. The message seems to be that if the secured party is in doubt, it should assume that the collateral is commercial property. The Australian PPSA is different in this respect from the Canadian and New Zealand PPSAs. In these other jurisdictions, the registration requirements are the same for consumer and commercial transactions, except that if the [page 183]

collateral is consumer goods, the financing statement must disclose the serial number. This means that in doubtful cases it is safer for the secured party to assume that the collateral is consumer goods.66 6.39 The commercial property–consumer property distinction creates a parallel set of problems for searchers. If the collateral is a motor vehicle, for example, the searcher may have no reliable way of knowing whether it is being used, to any degree, for business purposes. Therefore, to be on the safe side, the search should be conducted against the grantor details (in case the vehicle is commercial property and the financing statement does not disclose the serial number) and also against the serial number (in case the vehicle is consumer property and the financing statement does not disclose the grantor details).67 There are further complications for both registrants and searchers in cases where the grantor’s use changes between the date of the registration and the date of the search: see 6.73–6.74 below. For these reasons, the Statutory Review has recommended getting rid of the consumer property–commercial property distinction in favour of a distinction between individual debtors and non-individual debtors. On this basis, the special rules which currently apply to the registration of security interests in consumer property would instead apply to security interests given by an individual.68 So, for example, if the grantor is an individual and the registration is made against the collateral’s serial number, the financing statement may not include the grantor’s name and, correspondingly, a searcher’s only option will be a serial number search. Presumably, the Regulations would also be amended to provide that if the collateral is serial-numbered goods and the grantor is an individual, the financing statement must include the serial number and may not include the grantor’s details; while if the grantor is not an individual, the financing statement may include the serial number and must include the grantor’s details. In summary, substituting a brightline distinction between individual and non-individual grantors for the indeterminate consumer property–commercial property distinction is a substantial improvement which addresses a major cause of uncertainty in the current law and it should significantly reduce the costs to register users. [page 184]

Restrictions on Access to the Register 6.40 For privacy reasons, PPSA s 172 limits the classes of person who may search

the register and the purposes they may search for.69 An unauthorised search is subject to a civil penalty and may also give rise to a damages claim under s 271. For good measure, the statute goes on to provide, in s 173, that an unauthorised search or the use of information obtained from an unauthorised search amounts to a contravention of the Privacy Act 1988 (Cth). Sections 172 and 173 are modelled on ss 173 and 174 of the New Zealand PPSA, but there is one important difference. The New Zealand provisions affect all searches, whereas the Australian provisions only apply where the search is by reference to the details of a grantor who is an individual.70 They do not affect serial number searches or grantor detail searches where the grantor is a company or other business entity. On the assumption that most searches will fall into one or other of these categories, the impact of the Australian provisions on register use should be minimal.71

Follow-up Inquiries 6.41 In a notice filing system, a security interest is registered, not by lodging a copy of the security agreement, but by filing a financing statement which is no more than a bare-bones summary of the transaction amounting at best to a warning that the secured party might have a security interest in one or more broadly defined classes of collateral: see 6.12–6.13 above. If a searcher wants fuller details, including a copy of the security agreement, they must apply to the secured party named in the financing statement. The governing PPSA provisions are discussed in 5.54–5.58 of this text.

REGISTERING A FINANCING STATEMENT The Mechanics of Registration The registration process 6.42 PPSA Pt 5.3 governs the registration process. Section 150 provides that, to register a financing statement, the secured party must apply to the Registrar in the approved form and pay the prescribed fee.72 A registration becomes effective from the moment it becomes available for search on the register.73 Section 151 is relevant to advance registrations. As discussed earlier, [page 185]

in 6.17, s 161 allows a secured party to register a financing statement even if it does not yet have a security interest. This is an important feature of the PPSA system because it allows a secured party to stake out its priority position before committing itself to the loan.74 6.43 Section 151 diminishes the attractiveness of advance registration. It provides that a person may not apply to register a financing statement unless they believe on reasonable grounds that a security agreement will follow. Failure to comply is subject to a civil penalty. The section goes on to say that the secured party must discharge an advance registration within five days if there are no reasonable grounds for believing that a security agreement will follow. The onus of establishing reasonable grounds is on the secured party. In theory, the secured party may maintain an advance registration indefinitely, but in practice the secured party will be at risk unless it completes the security agreement within five days of the registration. The reason is that the provision fails to specify what constitutes reasonable grounds and, on top of this, it puts the burden of proof on the secured party. 6.44 Assume, for example, that at the time of registration, the secured party believes there is a 40 per cent chance that its negotiations with the grantor will be successful: does the secured party have reasonable grounds for believing that a security agreement will result? And would the answer be different if the figure was 30 per cent or 10 per cent? Likewise, if the secured party believes at the outset that there is a 40 per cent chance of the negotiations succeeding but, as the negotiations progress it becomes less optimistic, at what point does it cease to have reasonable grounds for anticipating a successful outcome and when does the five-day discharge period start to run? The only sure-fire way of avoiding this uncertainty is to discharge the advance registration unless the security agreement is completed within five days.75 Section 151 also creates difficulties in a case where a party (A) is not certain that it holds a security interest and wants to register a financing statement to be on the safe side. For example, if A’s transaction with the counterparty (B) involves a flawed asset arrangement, it may not be readily apparent whether the arrangement gives rise to a security interest: see 3.14 of this text. Similarly, A and B may enter [page 186]

into a consignment agreement, but A may be unsure whether the transaction is in substance a security agreement and, if not, whether it falls within the definition of a commercial consignment: see 3.31–3.32 of this text. Section 151 may discourage registration in cases like this because it requires A to have reasonable grounds for believing that, in effect, it holds a security interest. 6.45 There is no provision like s 151 in any of the other PPSAs. One aim of s 151 is to deter over-reaching collateral descriptions in the financing statement. But the provision is aimed at register abuses more generally, including vexatious or nuisance registrations aimed at causing harm or inconvenience to the grantor. The problem is that the drafters have given too little consideration to the effect of the provision on the advance registration facility.76 There are other provisions in the statute which offer protection against register abuses, in particular the amendment demand provisions in Pt 5.6, and no proper explanation has been given for why these provisions are insufficient to counter register abuses. In any event, even if further measures are required, there are alternatives to the approach taken in s 151. For example, consideration might be given to requiring the grantor’s consent to the registration. Article 9 takes this approach, while at the same time providing that the grantor impliedly consents to the registration by signing the security agreement.77 This means that the secured party must take the extra step of obtaining the grantor’s consent only in cases where it registers in advance of the security agreement. It is true that a grantor’s consent requirement would add to the costs of advance registration, but these costs must be weighed against the costs of PPSA s 151, and it is hard to believe they would come out higher. Despite these arguments, the Statutory Review has recommended retaining s 151 and not adopting the Art 9 approach.78 But the Review did acknowledge the uncertain application of s 151 in its current form and recommended a change of wording to make the provision clearer.79 Unfortunately, though, the Review immediately goes on to recommend a further change that would add a new level of uncertainty to the provision. In an effort to tackle the problem of overly broad or over-reaching collateral descriptions, the Review recommends adding to subs 151(1) a requirement that the secured party must include a further description of the collateral in the free text field, ‘using the information that is reasonably available to the [secured party] at the time the registration is made’.80 Failure to comply would not make the registration [page 187]

ineffective, but it would be a breach of s 151, exposing the secured party to a civil penalty. The uncertainty lies in the words ‘reasonably available’. The choice of words is aimed at keeping the requirement flexible so that, for example, less detail would be required if the registration is made ‘in advance of the collateral being identified [than] in a registration that was made at a later point in time’.81 Again with the aim of keeping the requirement flexible, the Review recommends that ‘the section not specify the level of detail that the further description needs to satisfy’.82 In any given case, there may be room for argument as to whether information is ‘reasonably available’ to the secured party at the time of registration and for further argument as to whether a collateral description is sufficiently specific, having regard to the reasonably available information. As a result, the proposed reform would expose secured parties to the unavoidable risk of a civil penalty, which is likely to be reflected in the cost and availability of credit.

Financing statement content 6.46 Section 153 governs the contents of the financing statement. The table appended to subs 153(1) lists the following items: (1) (2) (3) (4) (5) (6)

the secured party’s details;83 the grantor’s details;84 an address for the giving of notices;85 a collateral description (see further 6.47–6.49 below); details of the registration end time (see further 6.50 below); an indication of whether the security interest is, or will be, subordinated to any other security interest (see further 6.51 below); (7) an indication of whether the security interest is a purchase money security interest (see further below 6.52); and (8) prescribed additional details.86 [page 188]

The collateral description 6.47 The financing statement must identify the collateral as either commercial

property or consumer property:87 see 6.38 above. Additionally, if the collateral is serial-numbered consumer property, the collateral description must include the serial number, while if it is serial-numbered commercial property the serial number is optional.88 Finally, the collateral description must identify the collateral by reference to one of the classes prescribed by the Regulations: agriculture; aircraft; all present and after-acquired property; all present and after-acquired property except;89 financial property;90 intangible property;91 motor vehicles; other goods; and watercraft.92 The following are some examples: (1) The grantor is a consumer and the collateral is a car — the required collateral description is consumer property; serial number; motor vehicle. (2) The grantor is a wheat farmer and the collateral is the coming year’s crop — the required collateral description is commercial property; agriculture. (3) The grantor is a retailer and the collateral is the grantor’s accounts — the required collateral description is commercial property; intangible property. [page 189] (4) The grantor is a manufacturer and the security interest is a general one — the required collateral description is commercial property; all present and after-acquired personal property.93 The pro forma electronic registration application lists the various collateral classes and the secured party completes the collateral description by clicking on the desired option. The statute provides that the collateral must belong to a ‘single class’.94 It follows that if a security agreement provides for a security interest over multiple collateral classes, the secured party must register multiple financing statements. For example, if the collateral comprises the grantor’s planes, boats and buses, the secured party must register three separate financing statements describing the collateral as commercial property, aircraft; commercial property, watercraft; and commercial property, motor vehicles respectively. If the collateral comprises the grantor’s farm equipment, the secured party may have to register one financing statement for equipment that falls within the definition of motor vehicle,95 describing the collateral as commercial property, motor vehicles, and another for non-motor vehicle equipment, describing the collateral as commercial property, other goods. By the same token if the collateral comprises several motor vehicles,

one or more of which is exclusively for the grantor’s private use, the secured party will have to register two financing statements, one describing the collateral as commercial property, motor vehicles, and the other describing the collateral as consumer property, motor vehicles. This is a unique feature of the Australian registration system. In all the other PPSA jurisdictions, registration of security interests in multiple collateral types can be accomplished with a single financing statement. The Australian approach increases the costs and complexity of the registration process and it may lead to inadvertent registration errors, particularly in borderline cases; for example, where the secured party is not sure whether the collateral is a motor vehicle within the meaning of the statutory definition or whether the collateral is commercial or consumer property.96 The best advice in the case of uncertainty is to register the additional financing statement: the additional registration fees may be a downside to over-registration, but under-registration may result in the security interest being unperfected. Of course this advice will not help unless it occurs to the secured party in the first place that there may be a need to register more than once. The Statutory Review has recommended amending the Act so that a single registration may cover multiple collateral classes. It has also recommended reducing the number of collateral classes to the following: [page 190] serial-numbered property; other goods; accounts; other intangible property; all present and after-acquired property; and all present and after-acquired property, except.97 These changes should substantially simplify the registration process, in particular by reducing the need for multiple registrations, and consequently they should result in lower costs for register users. 6.48 Some secured parties have tried to avoid the multiple registration problem by registering a financing statement which describes the collateral as ‘all present and after-acquired personal property except collateral not covered by the security agreement’ (or words to that effect). However, it is open to question whether this formulation meets the statutory collateral description requirements. PPSA s 10 defines ‘description’ to mean, in the case of a class of personal property, ‘a description that identifies the class’ while the Regulations define ‘all present and after-acquired personal property, except’ to mean ‘all present and after-acquired property, except for an item or class of personal property stated in the financing

statement’.98 The implication seems to be that the words following ‘except’ must refer either to a specific item of collateral or a prescribed class of collateral (agriculture, aircraft, financial property, intangible property, motor vehicles, other goods or watercraft). In policy terms, the purpose is to ensure that a searcher can discover the scope of the security interest from the financing statement itself without having to consult the security agreement.99 It is clear that if the secured party omits the collateral description altogether, the financing statement will be invalid and it makes no difference that a searcher could have discovered the collateral by making a s 275 follow-up inquiry.100 By extension, a description of the collateral which is meaningless without reference to the security agreement will also invalidate the financing statement.101 The need for convoluted collateral descriptions should abate if the law is changed, as the Statutory Review has recommended, so that a single registration may cover multiple collateral classes. 6.49 The registration facility includes a free text field in which the secured party may enter additional details about the collateral. The free text field is not provided for in either the Act or the Regulations. Nevertheless, [page 191] information included in the free text field may affect the scope and validity of the registration. For example, if the collateral is the grantor’s motor vehicle inventory and the collateral description reads ‘commercial property — motor vehicles’, a statement in the free text field indicating that the collateral is new cars will have the effect of limiting the registration to the grantor’s new car inventory. By the same token, additional details in the free text field may correct what would otherwise be a seriously misleading error in the financing statement. For example, assume the collateral is earth-moving equipment. The secured party describes the collateral as ‘commercial property — motor vehicle’, but the equipment is not a motor vehicle as defined in the Regulations. By itself, this is probably a seriously misleading error because it may lead searchers to the wrong conclusion: see 6.54–6.65 of this text. But a statement in the free text field indicating clearly that the collateral is the earthmoving equipment may correct the error and save the registration.102 The Statutory Review has recommended amending the Act to provide expressly that a statement in the free text field has the effects described above.103 As discussed in 6.45 above, the Review also recommends that the secured party should be required to include a

further description of the collateral in the free text field, using information that is reasonably available to it at the time of registration. Failure to comply would be a breach of s 151, but it would not affect the validity of the registration. Nevertheless, the proposed reform would effectively make completion of the free text field mandatory.

Other noteworthy financing statement matters 6.50 If the collateral is consumer property or serial-numbered property, the maximum registration period is seven years. In all other cases, the secured party has the option of not stating an end time in the financing statement or specifying any period up to 25 years.104 Subsection 153(2) provides that if the secured party enters an incorrect end time — for example eight years where the collateral is consumer property — the default time (in other words, seven years) applies instead. 6.51 The secured party may indicate on the financing statement whether the security interest is, or will be, subordinated to any other security interest.105 In common with the PPSAs elsewhere, this item is optional. The reason is that ‘the subordination only affects the priority position of the parties bound [page 192] by it’ and so it is immaterial to the searcher’s interests.106 One reason the parties might want to record the subordination is to substitute the senior creditor for the junior creditor as the party to whom registration inquiries should be addressed. However, the design of the Australian registration system only allows the secured party to signify, by clicking on the appropriate box, that the registration is subordinate to another registration and there is no provision for including the senior creditor’s name and contact details. Subordination agreements are discussed further in Chapter 7. 6.52 The statute gives special priority status to purchase money security interests: see Chapter 8 of this text. To qualify, however, the secured party must, among other things, indicate in its financing statement that the security interest is a purchase money security interest.107 Item 8 in the table appended to PPSA subs 153(1) reflects this requirement.108 Failure to make the Item 8 disclosure will result

in the secured party not obtaining the benefit of the special priority rule. Conversely, an Item 8 disclosure made by a secured party whose security interest is not a purchase money security interest will invalidate the registration.109

Verification statements 6.53 Sections 155–158 deal with verification statements. A verification statement is a notice issued by the Registrar setting out details of a registration or a registration amendment.110 Section 156 provides that the Registrar must give the secured party a verification statement following a registration or a registration amendment. The purpose is to allow the secured party to check the accuracy of its registration and avoid registration errors. Section 157 provides that the secured party must give the person registered as the grantor in the financing statement notice of the verification statement in the approved form.111 The purpose is to alert the grantor to the registration and to allow them to check its accuracy. If the registration is inaccurate (for example, if the collateral description is broader than the parties agreed on), the grantor can exercise their rights under Pt 5.6. Section 157 appears to overlook the fact that if the collateral is serial-numbered consumer property, the financing statement [page 193] will not identify the grantor.112 If the collateral is commercial property, the grantor may waive their right to receive a verification statement.

Registration Errors 6.54 Registration is one of several methods the statute recognises for perfecting a security interest.113 In contrast to the approach taken in some earlier registration statutes,114 the PPSA does not automatically invalidate a security interest if the secured party fails to register. However, failure to register is likely to result in the security interest being unperfected, unless the secured party has perfected by some other method, such as by taking possession of the collateral.115 The same consequence may follow if the secured party registers its security interest but makes a mistake in the financing statement that invalidates the registration. The governing provisions are ss 164 and 165. Subsection 164(1) provides that a registration error

invalidates the financing statement if it is: (a) a seriously misleading defect;116 or (b) a defect mentioned in s 165. Paragraph 165(a) applies to serial number errors in cases where inclusion of the serial number in the financing statement is mandatory and it refers to defects which make the registration undiscoverable by a serial number search. Paragraph 165(b) applies to errors in the grantor’s details where inclusion of the serial number in the financing statement is not mandatory and it refers to defects which make the registration undiscoverable by a search against the grantor’s details. Paragraph 165(c) applies if the financing statement incorrectly indicates that the security interest is a purchase money security interest.117 Paragraph 165(d) applies in circumstances prescribed by the Regulations.118 6.55 Paragraphs 164(1)(a) and (b) overlap in their application to serial number errors and errors in the grantor’s details. The reason is that, in the PPSA context, a seriously misleading error is an error that would be likely to seriously mislead a reasonable person and this may be the result if the error prevents a properly conducted search from disclosing the registration.119 [page 194] It follows that a serial number error to which paras 164(1)(b) and 165(a) apply, or an error in the grantor’s details to which paras 164(1)(b) and 165(b) apply, is necessarily also an error that is seriously misleading. 6.56 Example 7. SP takes a security interest in Grantor’s wide-screen television set which Grantor holds for personal use. The collateral is non-serial numbered consumer property, and so the financing statement must set out Grantor’s name and there will be no serial number. Grantor’s name as shown on her driver’s licence is Gladys Mary O’Grady, but she goes by the name Mary O’Grady and this is the name SP writes in the financing statement.

According to the statute and Regulations, assuming that neither the transitional rule nor the AML-CTF Act rule applies, the correct name for registration and search purposes is the name as it appears on Grantor’s driver’s licence.120 It follows that SP has entered the incorrect name on the financing statement. The mistake will make the registration undiscoverable by any searcher who looks under the correct name. On this basis, SP’s registration is invalid both because: (1) there is a seriously misleading defect within the meaning of para 164(1)(a); and (2) para 164(b), read in conjunction with para 165(b), applies.

6.57 Example 8. SP takes a security interest in Grantor’s wide-screen television set which Grantor holds for personal use. The collateral is non-serial-numbered consumer property and so the financing statement must set out Grantor’s name and there will be no serial number. Grantor’s name as shown on her driver’s licence is Gladys Mary O’Grady. SP makes a keyboarding slip while completing the financing statement and types Gladys as ‘Gledys’. In all other respects, the financing statement is accurate.

Does SP’s typographical mistake affect the validity of the registration? It might be tempting to think not, because s 164 is concerned only with seriously misleading errors and typing an ‘e’ for an ‘a’ may seem trivial. However, the question has to be addressed in context and the key point in Example 8 is that the Australian PPS register system is an exact match one: see 6.31–6.32 above. In an exact match registration and search system, the secured party’s misspelling of Gladys makes its registration unsearchable. Therefore, as in Example 7, paras 164(1)(a) and (b), read in conjunction with para 165(b), apply. 6.58 The Ontario Court of Appeal’s decision in Fairbanx Corp v RBC121 confirms this analysis. In that case, the debtor company entered into a factoring agreement assigning its accounts to Fairbanx. The debtor’s name, as indicated in its documents of incorporation, was ‘Friction Tecnology Consultants Inc’, ‘Tecnology’ being spelled without an ‘h’. But the debtor carried on business using an incorrect spelling of its name, in other words, [page 195] with the ‘h’ in ‘Technology’. It spelled its name this way on its letterhead and invoices and it also used the incorrect spelling in its security agreement with Fairbanx. Fairbanx registered a financing statement, but it used the incorrect spelling of the debtor’s name (‘Technology’ instead of ‘Tecnology’). Some time later, the debtor approached the Royal Bank for a loan secured on the debtor’s present and after-acquired personal property including its accounts. The bank conducted a PPSA search using the debtor’s incorrect name and it found Fairbanx’s registration. The bank agreed to the loan some months afterwards and at this point it conducted another register search, this time using the correct spelling of the debtor’s name, and the search did not return Fairbanx’s entry. The bank went ahead and registered its own financing statement, using the correct spelling of the debtor’s name. The bank and Fairbanx ended up in dispute over various accounts the debtor had factored to Fairbanx. The bank argued that Fairbanx’s security interest was

unperfected because of the spelling error in its financing statement and, because the bank itself was perfected, it had priority.122 The court ruled in the bank’s favour.123 6.59 The Fairbanx case is a strong one because the bank conducted two register searches before entering into the security agreement with Fairbanx: the first time round, it spelled ‘Technology’ with the ‘h’ in its search application and the search returned Fairbanx’s entry. The second time around, it spelled ‘Tecnology’ without the ‘h’, and the search did not return the entry. In other words, the case offers a practical demonstration of how, in an exact match registration and search system, even an apparently minor spelling mistake can make a registration undiscoverable. Another interesting feature of the Fairbanx case is that no one was actually misled by Fairbanx’s mistake. Specifically, the bank was not misled because its first search returned Fairbanx’s entry. The court held that the bank’s knowledge was irrelevant: the test is an objective one and so it makes no difference that no one was actually misled. Returning to the Australian scene, subs 164(2) makes this point explicitly: ‘in order to establish that a defect is seriously misleading, it is not necessary to prove that any person was actually misled by it’. The outcome of the Fairbanx case seems harsh on Fairbanx and unduly generous to the bank, but there are several policy justifications. One is that a strict error rule increases the incentive for [page 196] a secured party to make sure its financing statement is accurate and this, in turn, increases the reliability of the register. Another is that introducing a knowledge qualification would increase litigation costs, first, because the courts would have to inquire into the competing party’s state of knowledge and this would mean longer and more expensive trials, and second because it would make case outcomes less predictable. 6.60 The objective character of the s 164 test has important implications for bankruptcy trustees and liquidators. Assume Grantor goes into liquidation. SP claims to have a security interest in all Grantor’s inventory. If this claim is proved, the liquidator may have to hand over the inventory to SP and this will reduce the pool of assets available for distribution among Grantor’s unsecured creditors. On the other hand, an unperfected security interest is by and large ineffective against the grantor’s liquidator, with the result that the secured party is reduced to the status of an unsecured creditor in the insolvency proceedings.124 As indicated above,

a security interest may be unperfected if there is a mistake in the financing statement, and so the liquidator will want to go through SP’s financing statement with a fine-tooth comb checking for potentially invalidating mistakes. This weapon would not be available to the liquidator if the s 164 test was a subjective one, because then the liquidator would have to prove that they themselves were misled by the mistake or, alternatively, find someone else who was, and it is unlikely that they would be able to satisfy either of these requirements. 6.61 Example 9. SP takes a security interest in Grantor’s delivery truck. Grantor is a company and the truck is commercial property. SP misstates Grantor’s ACN in the financing statement, but correctly states the truck’s serial number.

If a searcher conducted a search against the correct grantor’s details, they would not discover SP’s security interest, given the error in the financing statement and the exact match nature of the Australian registration and search system. On the other hand, a serial number search would retrieve the registration. The question is whether, in the circumstances, a searcher should be expected to conduct both types of search. The answer is provided by para 165(b), which makes it clear that if the collateral is not required to be described by serial number, an error in the grantor’s details, such as the one in Example 9, will invalidate the registration. By implication, it makes no difference that a searcher could discover the registration by conducting a serial number search. The rationale is that, since serial number disclosure is optional for commercial property, a serial number search may not turn up a result anyway. In other words, a nil return on a serial number search is ambiguous: it may mean either that there is no registered security interest, or that there is a registered security interest and the secured party opted not to include the serial number in the registration. In these circumstances, it would [page 197] be unreasonable to expect a searcher to conduct a serial number search in addition to searching against the grantor’s details.125 6.62 Example 10. SP takes a security interest in Grantor’s motor vehicle. Grantor holds the car for personal use and so the collateral is serial-numbered consumer property. SP must include the serial number in the financing statement, but not Grantor’s name. SP misstates the serial number.

Paragraph 164(1)(a) applies because SP’s mistake will make its registration undiscoverable and so it is a seriously misleading defect. Given that SP’s registration is undiscoverable, para 164(1)(b), read in conjunction with para 165(a), will also apply. 6.63 Example 11. SP takes a security interest in all Grantor’s present and after-acquired personal property. Due to a clerical misunderstanding, SP’s financing statement describes the collateral as ‘all present and after-acquired personal property except motor vehicles’.

Example 11 is a little different from the previous cases because here SP’s mistake does not make the registration undiscoverable. Therefore, the defect is not a seriously misleading one in the primary sense. However, it is still seriously misleading in the sense that it gives the wrong impression about the scope of SP’s security interest and so it may lead third parties into a false sense of security, so to speak. The result is that, subject to subs 164(3), the registration is ineffective. Subsection 164(3) provides as follows: ‘a registration that describes particular collateral is not ineffective only because the registration is ineffective with respect to other collateral described in the registration’. Applying this provision to Example 11, SP’s statement that its security interest does not cover SP’s vehicles is misleading, but the balance of the collateral description is not misleading. Therefore, SP’s error invalidates the financing statement, but only so far as the vehicles are concerned. Suppose that SP indicates in the free text field of the financing statement that the collateral includes motor vehicles. This may correct the error in the primary collateral description: see 6.49 above. The test of a seriously misleading error is whether the error would be likely to mislead a reasonable searcher. A reasonable searcher would read the financing statement as a whole and [page 198] the information in the free text field would prompt them to make further inquiries as to whether SP’s security interest extends to motor vehicles.126 6.64 Example 12. SP takes a security interest in Grantor’s present and after-acquired accounts. It registers a financing statement which describes the collateral as ‘all present and after-acquired personal property’.

PPSA subs 164(3) is again the governing provision. The result is that SP’s overly broad collateral description does not invalidate the financing statement. The

financing statement perfects SP’s security interest in the accounts but, bearing in mind that the financing statement is not a contractual document, it does not give SP a claim to any other property: see Simpson and Walton v New Zealand Associated Refrigerated Food Distributors Limited.127 A risk SP runs in a case like Example 12 is that Grantor may make a s 178 amendment demand to narrow the collateral description, and SP will be put to the trouble and expense of complying.128 A related concern is that an overly broad collateral description may increase the number of s 275 follow-up inquiries from searchers and SP will have to bear the additional cost of responding to these. Last, but not least, the secured party may be liable to a civil penalty under s 151 for registering a financing statement that describes collateral (all present and after-acquired personal property) without a reasonable belief that it has a security interest in the collateral as described: see 6.42–6.45 above. As discussed earlier, the Australian registration system requires a separate financing statement for each class of collateral: see 6.47 above. To avoid the need for multiple registrations, a secured party with a security interest in more than one collateral class may be tempted to describe the collateral as ‘all present and after-acquired personal property’. However, PPSA s 151, along with the other considerations discussed above, puts paid to this approach. A possible alternative strategy would be for the secured party to describe the collateral as ‘all present and after-acquired personal property except collateral not covered by the security agreement’ (or words to that effect). This formulation would at least avoid the application of s 151, if not the other consequences identified above. However, the formulation probably does not satisfy the statutory collateral description requirements and it may constitute a seriously misleading defect in the registration on the ground that the statement is meaningless without reference back to the security agreement: see 6.48 above. The Statutory Review has recommended amending the Act so that a single registration may cover multiple collateral classes: see 6.47 of this text. If this measure is adopted, it should reduce the need to rely on over-broad and convoluted collateral descriptions. 6.65 Example 13. SP takes a security interest in all Grantor’s present and after-acquired personal property and registers a financing statement. The financing

[page 199] statement discloses SP’s ABN instead of its ACN. The financing statement is correct in all other

respects, including the grantor’s details.

These were the facts in Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd.129 The financing statement should have disclosed SP’s ACN, not its ABN: see 6.46 above. But the court held that SP’s error was not a seriously misleading one because the secured party’s details are not a search point and so the error would not have prevented a searcher from discovering the registration. Paragraph 165(d), read in conjunction with s 164, provides that a registration is ineffective if the financing statement contains a defect ‘in relation to the data related to the registration that are prescribed by the Regulations’. This provision is ambiguous. It might mean ‘prescribed by the Regulations to be included in the financing statement’. Or it might mean ‘prescribed by the Regulations to be a defect for the purposes of s 165’. On the first reading, the error in Example 13 would invalidate the registration because the Regulations require entry of the secured party’s ACN in the financing statement. But on the second reading, the error would not invalidate the registration because there are no Regulations prescribing defects for the purposes of s 165. This point was not raised in the Medica Radiology case, but the courts are likely to hold that the second interpretation is the correct one. Otherwise, any error would invalidate a registration, whether it was seriously misleading or not, and that outcome would make para 164(1)(a) redundant. Furthermore, on this reading, ss 164 and 165 would substantially increase the burden on the secured party without additionally benefiting searchers.

REGISTRATION AMENDMENTS 6.66 PPSA subs 150(2) provides that a person may apply to the Registrar to register a financing change statement to amend a registered financing statement. The statute imposes no restrictions on the kinds of change that can be made, but the registration system creates significant obstacles. As a matter of practice, registration attributes that cannot be amended include the following: • • • • • •

grantor identifier; grantor date of birth; grantor name; any serial number in a serial number field; the PMSI disclosure; the inventory disclosure;

•

the control disclosure;

• •

collateral type; collateral class.130 [page 200]

Registration attributes that can be amended include: • • • • • •

the registration end date; addition or removal of grantors; the free text description; the subordination disclosure; the giving of notice indicator (secured party details); the proceeds indicator and description.131

6.67 PPSA s 178 provides that the grantor or another interested party may serve an amendment demand requiring the secured party to narrow an overly broad collateral description. According to s 178, the secured party may amend the collateral description by registering a financing change statement. But the system is not designed to allow the amendment of collateral descriptions. So, for example, if the collateral description is ‘all present and after-acquired personal property’ and the secured party wants to substitute ‘commercial property; intangible property’ to reflect the fact that its security interest is limited to the grantor’s accounts, it must register a new financing statement. Likewise, if the secured party discovers an error in the grantor’s details and wants to correct it, it cannot make the change by registering a financing change statement and it must create a new registration. PPSA s 34 provides in part that where the grantor transfers its interest in the collateral, and the security interest is perfected by registration, the secured party must amend its registration within the prescribed time limits to record the fact that the transferee is now the grantor: see 5.47–5.53 of this text. However, the grantor identifier is one of the registration attributes that cannot be amended. Therefore, to comply with s 34, the secured party must register a new financing statement. 6.68 In cases where a financing change statement can be used to amend a registration, the change is effective from the date the financing change statement is registered, but the date of the original registration remains the secured party’s

priority time for the purposes of the s 55 priority rules. Example 14. On Date 1, SP registers a financing statement that specifies a registration period of five years. At the end of Year 4, it decides to extend the registration period to seven years.

SP can extend its registration by registering a financing change statement before the original registration period expires. SP must act before this time because otherwise there will be no registration to amend. SP’s only option in these circumstances is to register a new financing statement with a registration period of two years. One disadvantage of this option is that SP’s priority time for the purpose of the s 55 priority rules will be pushed back to the date of its new registration, whereas if SP had registered a financing change statement while the original registration was still current, it would have retained the [page 201] original registration date (Date 1) as its priority time: see further, Chapter 7 of this text. Additionally, SP’s security interest will be unperfected from the date its original registration ends to the date it registers the new financing statement, and it may be at risk if a third party acquires an interest in the collateral during this period. 6.69 In most cases if a secured party wants to amend its registration, it must register a new financing statement and it does not have the option of registering a financing change statement instead. This feature of the Australian registration system may affect priorities. In the other PPSA jurisdictions, if a secured party registers a financing statement on Date 1 and registers another financing statement on Date 2, before the expiry of the Date 1 registration, the result is that when the first registration expires, the secured party’s priority time shifts from Date 1 to Date 2. This means the secured party may be at risk if a competing security interest is created and perfected in the period between Date 1 and Date 2. According to the default priority rules in PPSA s 55, priority between competing security interests perfected by registration turns on their respective priority times and, if the secured party’s priority time is Date 2, it will be subordinate to another secured party with an earlier priority time.132 The conceptual basis for this outcome is that there are two separate, though overlapping, registrations. During the overlap period, the security interest is perfected by both registrations, but, once the Date 1 registration expires, the security interest ceases to be perfected by the Date 1 registration and

remains perfected by the Date 2 registration alone. The policy justification is that after the Date 1 registration expires, it ceases to be searchable and so a searcher may have no way of discovering the original registration date. Making Date 2 the secured party’s priority time addresses this problem.133 6.70 The position in Australia may be different. PPSA s 56(1) provides that ‘a security interest is continuously perfected after a particular time if the security interest is, after that time, perfected under this Act at all times’. A note following s 56 states that a security interest could be perfected in two or more different ways as follows: (1) by possession and by a registration; and (2) by two different registrations. The implication seems to be that, in the case discussed in 6.69 above, the secured party’s security interest is continuously perfected from Date 1 and therefore its priority time is Date 1 even after the Date 1 registration expires. But there is a counter-argument. PPSA s 163(1) provides, in effect, that a registration ceases to be effective when it expires and, if the registration is no longer effective, it is hard to see how it can determine priorities. This line of reasoning would ensure that Australia remained in step with the other PPSAs and it would be consistent with the policy considerations indicated above.134 On the other hand, it would have potentially serious [page 202] consequences for registration amendments, given the limited availability of the financing change statement facility in Australia.135 6.71 The Statutory Review has recommended amending ‘the functionality of the Register’ to allow for removal of a collateral class or the replacement of a collateral class with a narrower one.136 This recommendation makes obvious sense, but it is arguably too narrow: it should also be possible to add one or more new collateral classes or replace a collateral description with a broader one. Apart from this recommendation, the Statutory Review does not address the limited uses of the financing change statement in the Australian context and the apparent mismatch between what the statute allows and what the registry system is designed to accommodate.

CHANGES IN GRANTOR’S DETAILS AND OTHER

PARTICULARS 6.72 Consider the following example. Example 15. SP takes a security interest in Grantor’s computer and registers a financing statement correctly recording Grantor’s married name, which is the name on her driver’s licence. Twelve months later, and while SP’s registration is still current, Grantor renews her driver’s licence, but reverts to her maiden name.

SP must register a new financing statement to substitute the new grantor details because otherwise SP’s registration will be unsearchable by anyone relying on Grantor’s new driver’s licence. The governing provision is s 166, which preserves the effectiveness of SP’s registration for five years from the date of Grantor’s name change or five days after SP finds out about the change or should have known about it.137 The Explanatory Memorandum explains the thinking behind PPSA s 166 as follows:138 Finance providers should not be subject to unduly onerous requirements to update the PPS Register, but could be expected to undertake periodic reviews of their customer loans. Where such reviews reveal a change of circumstances, registrations made by the secured party should be amended to include updated information … [Section 166] is not intended to give secured parties the

[page 203] opportunity to correct defects of their own creation, but to provide a grace period for secured parties to correct registrations where events beyond their control have led to a previously effective registration becoming defective.

6.73 The registration requirements vary depending on whether the collateral is commercial property or consumer property: see 6.36–6.38 above. Example 16. On Date 1, SP makes a loan to Grantor to finance the purchase of a car which Grantor plans to use exclusively for non-commercial purposes. SP takes a security interest in the car and registers a financing statement on the basis that the car is consumer property. Grantor runs a business to which an ABN has been allocated. On Date 2, while the security agreement and SP’s registration are still current, Grantor starts using the car for occasional business trips.

On Date 1, the car is consumer property and so SP must comply with the registration requirements for consumer property. But on Date 2 the car ceases to be consumer property and, given the different registration requirements for commercial property, SP’s financing statement no longer complies with the statute. Does this mean that SP’s registration is now invalid? This is another case where s 166 applies: the effect of the provision in this context is that, despite the emergence

of the registration defect on Date 2, SP’s registration remains valid for five years, unless SP discovers the new facts, in which case it has five days to amend its registration to comply with the requirements for commercial property. 6.74 Section 166 has implications for searchers in cases where the collateral is a motor vehicle or other serial-numbered goods that may be used for either personal or business purposes. Suppose that, in Example 16, Searcher conducts a register search on Date 3. Assuming that the car is commercial property, Searcher conducts their search against the grantor’s details. The search will not disclose the registration; the security interest is registered on the basis that the collateral is consumer property and so the financing statement will not include the grantor’s details. But the registration is valid, provided the s 166 grace period has not expired. A parallel issue arises in the reverse case where the collateral is commercial property at the time of SP’s registration, but is consumer property at the time of the search. In this case, a search against the collateral serial number will not disclose the registration if SP has elected not to include the serial number in its financing statement.139 The lesson for searchers is that if the collateral is a motor vehicle or other serial-numbered property, which may be used for either personal or business purposes, the search should be made against the grantor’s details as well as against the collateral serial number even if, at the date of the search, the collateral is consumer goods. Likewise, the search should be conducted against the collateral serial number, as well as against the grantor details even [page 204] if, at the date of the search, the collateral is commercial property. All this presupposes that the searcher knows whether or not the grantor is using the collateral for business purposes to any degree. But the searcher may not have this information. In that case, again, to be on the safe side, the search should be made against both the grantor details and the collateral serial number. The Statutory Review has recommended amendments aimed at addressing these and related difficulties: see 6.39 above.

AMENDMENT DEMANDS 6.75 PPSA Pt 5.6 deals with amendment demands. Section 178 allows an interested party to serve an amendment demand on the secured party requiring the

registration to be discharged if the secured obligation has been satisfied or if there is no actual security interest. An amendment demand may also be served requiring the secured party to narrow a collateral description that covers more than the actual collateral. Section 178 provides that the secured party may comply with an amendment demand by registering a financing change statement. However, as indicated above, the system does not allow for the amendment of a collateral description using a financing change statement and, instead, the secured party must create a new registration. But read literally, s 178 requires the amendment to be made using a financing change statement and, if a financing statement is used instead, it might be argued that the amendment is invalid. A court’s response would presumably be that s 178 is not an exhaustive statement of how amendments can be made, and so it does not preclude using a new financing statement. Nevertheless, the mismatch between what s 178 provides for and what the registration system allows is hardly defensible. 6.76 The secured party has five business days to comply with an amendment demand: s 179. At the end of that time, the demander may apply to the Registrar for an amendment notice inviting the secured party to lodge a written response to the amendment demand with the Registrar, generally within five business days: s 180.140 The Registrar may make the requested amendment themselves if the secured party does not respond to the notice within five business days, or if its response is unsatisfactory: s 181. Either the demander or the secured party may apply to a court for an order in relation to an amendment demand. The court may make an order requiring the Registrar to amend the registration or, alternatively, (1) restraining the Registrar from amending the registration, (2) restraining the demander from making further demands or (3) restraining the Registrar from serving further amendment notices on the secured party. The court may also make any other order it thinks fit: s 182. As an alternative to making a court application under s 182, an [page 205] application may be made to the Administrative Appeals Tribunal under s 191 for a review of the Registrar’s decision. The onus of proof in court proceedings under s 182 is on the party asserting the relevant facts: PPSA s 296. PPSA s 296 applies only to proceedings ‘under this Act’ (the PPSA). In Davidson v Registrar of Personal

Property Securities,141 it was held that an application for review of a decision by the Registrar not to register a registration amendment was a proceeding under the Administrative Appeals Tribunal Act 1975 (Cth), not the PPSA, and therefore PPSA s 296 did not apply. Instead, in reviewing the Registrar’s decision, the tribunal is required to ask itself the same question as the one confronting the Registrar, namely, whether there were reasonable grounds for suspicion that the amendment was not authorised under s 178 (see subs 181(1)). ‘Suspicion on reasonable grounds is a less rigorous standard than satisfaction on the balance of probabilities.’142 In summary, the result appears to be that if the Registrar’s decision is challenged in court under PPSA s 182, the party bringing the action has the onus of establishing the relevant facts and the governing standard of proof is the balance of probabilities. But if the Registrar’s decision is challenged before the Administrative Appeals Tribunal, a lower standard of proof applies so that in marginal cases, the outcome may vary depending on the forum chosen. In Davidson itself, a security agreement was signed by a party purportedly on behalf of a partnership as grantor. The Tribunal held that the party did not have authority to bind the partnership and therefore there was no valid security interest. The Tribunal applied the ‘suspicion on reasonable grounds’ standard; it may well have come to the same conclusion if it had instead required proof by the applicant on the balance of probabilities. However, in other cases the facts may not be so clearcut.143 6.77 Section 167 avoids the need for an amendment demand in certain circumstances. The provision is aimed predominantly at consumer transactions and it says, in effect, that the secured party must discharge the registration no more than five business days after the secured obligation has been satisfied. More specifically, s 167 applies if the collateral is: (1) used predominantly for personal, domestic or household purposes; or (2) serial-numbered property.144 The provision is engaged where ‘the registration becomes unperfected at a particular [page 206] time’, but this appears to be a drafting slip. The reference should be to discharge of the secured obligation, not to the perfection status of the security interest.145 6.78 In Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd,146 it was held that the court has the discretion, as part of its general equitable jurisdiction, to grant an

injunction restraining a registration if the interest claimed by the prospective registrant is not a security interest within the meaning of the Act. The court treated the case as being analogous to an application for an injunction to restrain the lodging of a caveat where necessary to protect the rights of another party. Presumably on the same basis, the court might award an injunction to restrain a registration if the prospective registrant does not have a security interest and there is no reasonable prospect of it acquiring one. These powers are additional to the powers invested in the court by PPSA Pt 5.6. 6.79 PPSA Pt 5.7 deals with the Registrar’s power to amend registrations on their own initiative. Section 184 provides for the removal of data, including an entire registration if, among other things, the registration was frivolous or vexatious, the data is offensive or retention of the data is contrary to the public interest. Section 185 provides for the removal of stale registrations (registrations that have been ineffective for seven years or more). Section 186 provides that the Registrar may restore data to the register (including an entire registration) ‘if it appears to the Registrar that the data was incorrectly removed from the register under this Act’. In SFS Projects Australia Pty Ltd v Registrar of Personal Property Securities,147 the secured party assigned its security interest and sought to amend its registration to reflect the transfer. However, due to a clerical mix-up, the secured party discharged the registration instead. The court held that PPSA s 186 authorised the Registrar to restore the registration. However, this is a misreading of the provision. It is clear from the context that the provision only applies where the data was incorrectly removed by the Registrar themselves and not in any other circumstances. The court’s ruling, if correct, would give the Registrar substantial powers to save secured parties from the consequences of their own mistakes. This, in turn, would be an invitation to carelessness and, perhaps more importantly, it would detract from the reliability of the register. The Statutory Review has recommended amending s 186 to make it clear that the provision only applies to data removed by the Registrar.148

1. 2.

3.

4.

Personal Property Securities Regulations 2010 (Cth) (PPS Regulations). Australian Attorney-General’s Department, Review of the Law on Personal Property Securities: Discussion Paper 1 — Registration and Search Issues (November 2006), available at , para 419 (‘PPS Discussion Paper 1’). For a list of these statutes, see Commonwealth of Australia Standing Committee of Attorneys-General, Options Paper: Review of the Law on Personal Property Securities (April 2006), available at (‘SCAG Options Paper’), Attachment D. For a comprehensive account of the state and territory bills of sale legislation current to 1993, see Edward I Sykes and Sally Walker, The Law of Securities, 5th ed, Law Book Company, Sydney, 1993, chs 12 and

5.

6.

7. 8. 9. 10. 11. 12. 13. 14. 15.

16. 17. 18. 19.

20. 21. 22.

23. 24. 25. 26. 27. 28. 29. 30. 31.

13. But see Bills of Sale and Other Instruments Act 1955 (Qld) s 6D (now repealed), extending the application of the Act to hire-purchase agreements: see 1.24 of this text. The Bills of Sale Act 1898 (NSW) was replaced by the Registration of Interests in Goods Act 2005 (NSW). The bills of sale provisions in Instruments Act 1958 (Vic) Pt VI were repealed by the Chattel Securities Act 1981 (Vic). But see Bills of Sale and Other Instruments Act 1955 (Qld), which also applied to assignments of book debts. Instruments Act 1958 (Vic) Pt IX also provided for the registration of the assignment of book debts, but it was repealed in 1997. REV is an acronym for ‘registered encumbrances on vehicles’. For citations to the state and territory REV statutes, see above note 2, at Attachment D. For details, see above note 2, at Attachment C. See 3.24–3.29 of this text. For details, see above note 2, at Attachment D. For details, see above note 3, at paras 33–42. See John V Swinson, ‘Security Interests in Intellectual Property in Australia’ in Howard P Knopf (ed), Security Interests in Intellectual Property, Thomson Canada, Toronto, 2002, p 377. See Australian Central Credit Union v Commonwealth Bank of Australia (1990) 54 SASR 135, reversed (1991) ASC 56-037. See, for example, Douglas Financial Consultants Pty Ltd v Price [1991] 1 Qd R 243, on which Example 1 is based. The best Canada has been able to achieve is uniform choice of law rules. This at least ensures consistent choice of law outcomes regardless of the province in which an action is brought. For a detailed account of the differences between the Ontario PPSA and the other provincial PPSAs, see Ronald C C Cuming, Catherine Walsh and Roderick J Wood, The Law of Personal Property Securities, 2nd ed, Irwin Law, Toronto, 2012. But not if the collateral is serial-numbered consumer property: see 6.35 below. The serial number is mandatory in some cases and optional in others: see 6.35–6.37 below. See further, 6.46–6.52 below. Grant Gilmore reports that in the United States, pre-Art 9 registration statutes commonly included a provision authorising the filing officer to remove from the files old filings which had not been properly renewed: Security Interests in Personal Property, Little, Brown & Co, Boston, 1965, para 21.1. See 6.13 above. PPSA subss 55(4) and (5): see Chapter 7 of this text. There is an exception if the subsequent registered charge was created first and the holder of the charge proves that the holder of the prior registered charge had notice of the subsequent registered charge at the time the prior registered charge was created. However, these are not the facts of our example. See 6.42–6.45 below. See 6.47–6.49 below. See 7.29–7.33 of this text. See 6.66–6.71 below. See 6.57–6.59 below. Of course, there is still the risk that the secured party itself might make a mistake, but that was a risk under earlier systems too. PPSA subs 153(1) Table, Item 5. For consumer property the maximum registration period is seven years. Australian Company Number. See further, 6.33 below. PPS Regulations reg 1.7 defines ‘motor vehicle’ broadly to include not just cars, motor cycles and trucks, but also, for example, tractors and other types of mobile farm equipment (subject to speed and engine power), trailers and caravans, but not, for example, trams or trains. For definitions of the other items, see PPS Regulations reg 1.6. The Statutory Review has recommended changing the definition to say that an object is a motor vehicle only if it has a VIN: Bruce Whittaker, Review of the Personal Property Securities

32.

33.

34. 35. 36. 37. 38. 39. 40.

41.

42.

43.

44.

Act 2009: Final Report (Commonwealth of Australia, 2015), para 6.6.3 (‘Statutory Review: Final Report’). PPS Regulations Sch 1 cl 2.2(3)(c). If the motor vehicle does not have a VIN, the prescribed serial number is the chassis number and, if it does not have a chassis number either, the prescribed serial number is the manufacturer’s number: PPS Regulations Sch 1 cl 2.2(3)(c). For aircraft engines, airframes and helicopters, the prescribed serial number is the manufacturer’s number and the manufacturer’s name, and the manufacturer’s generic model designator must also be disclosed: PPS Regulations Sch 1 cl 2.2(3) (a); for small aircraft, the prescribed details are the nationality and registration marks assigned to it under the Chicago Convention on International Civil Aviation: PPS Regulations Sch 1 cl 2.2(3)(b). For watercraft, the prescribed serial number is the official number; if the craft does not have an official number, the hull identification number and for an outboard motor it is the manufacturer’s number: PPS Regulations Sch 1 cl 2.2(3)(d); for designs, patents, plant breeders’ rights and trade marks, the primary prescribed numbers are, respectively, the design number, the patent number, the plant breeder’s right number and the trade mark number issued by IP Australia: PPS Regulations Sch 1 cl 2.2(3)(e)–(h). See Personal Property Securities (Approved Form) Instrument 2011 (Cth) s 8: an interactive form provided at the internet address is an approved form of search application; and an electronic communication in a format required by the Registrar is an approved form of search application. See Personal Property Securities (Approved Form) Instrument 2011 (Cth) s 9: a search certificate generated by the Register is an approved form of search result. PPSA subs 153(1) Table, Item 2(b) and (c). PPS Regulations Sch 1 cl 1.2. PPS Regulations Sch 1 cl 1.2. Compare the model rules developed by the Canadian Conference on Personal Property Security Law on which the form of the Australian provision is based. The provisions governing transition from pre-PPSA law to the PPSA regime are in PPSA Ch 9. Statutory Review: Final Report, para 6.7.1. The CCPPSL model rules have been adopted in the Atlantic provinces, Alberta, Manitoba, the Northwest Territories and Nunavut: see above note 15, at pp 341–4. In Ontario, there is case law establishing that the debtor’s birth certificate is the first port of call for establishing their name: Re Haasen (1992) 92 DLR (4th) 204 (ON Gen Div); CIBC v Melnitzer (1994) 6 PPSAC 5 (ON Gen Div). There is a corresponding problem on the search side of the equation. Assume Grantor is negotiating to sell his wide-screen television to Buyer. If Buyer is sensible, she will search the register for any undisclosed security interests. Given that the television is non-serial numbered consumer property, Buyer will have to conduct a search against Grantor’s name and, to be sure of searching against the correct name, Buyer should insist on sighting Grantor’s birth certificate. Doing this will delay the transaction and Buyer may miss out on the purchase altogether. But not doing it confronts Buyer with the risk of not getting clear title. There may be other reasons; for example, SP may want to check Grantor’s credit record before committing to the loan. But in many cases this can be done quickly — and more quickly, in any event, than it takes to apply for a birth certificate. United States Uniform Commercial Code — Secured Transactions s 9-503. Section 9-503 incorporates two versions of the driver’s licence rule, Alternative A and Alternative B, which enacting states can choose between. Under Alternative A, the requirement is mandatory: in other words, the secured party must include in the financing statement the debtor’s name as it appears on their driver’s licence. Under Alternative B, the driver’s licence rule is a safe harbour: in other words, use of the debtor’s name as it appears on their driver’s licence guarantees the secured party protection, but the secured party is not obliged to rely on the driver’s licence. In Australia, the driver’s licence rule is mandatory. For criticism of the Art 9 driver’s license rule and, in particular, Alternative A, see Harry C Sigman, ‘Improvements(?) to the UCC Article 9 Filing System’ (2010/2011) 46 Gonzaga Law Review 457. Australian Government, Personal Property Securities Register — Searching the PPSR — Searching by Individual Grantors, available at .

45.

46. 47.

48.

49.

50. 51.

52.

53. 54.

55. 56. 57. 58. 59. 60. 61. 62. 63.

64.

For a detailed account of how the Saskatchewan close similar match system works, see Ronald C C Cuming, ‘Modernization of Personal Property Security Registries: Some Old Problems Solved and Some New Ones Created’ (1983–1984) 48 Saskatchewan Law Review 189 at 198–204 and 209–11. Canadian Bar Association — Ontario, Submission to the Minister of Consumer and Commercial Relations Concerning the Personal Property Security Act, Canadian Bar Association, Toronto, 1998, pp 21–2. The Statutory Review has recommended retaining the exact match system; to deal with foreign names written in characters not accepted by the register, it recommends that the registering party be permitted to use any reasonable transliteration of the name: Statutory Review: Final Report, para 6.7.7. Australian Company Number: see PPS Regulations reg 1.6. If the grantor does not have an ACN, the relevant number is its ARBN (Australian Registered Body Number): see PPS Regulations reg 1.6. If the grantor does not have any of the specified numbers, then, and only then, is the financing statement to disclose its name as provided for in its constitution. (The Statutory Review has recommended changing this last part to read ‘its name under the law in which it is incorporated’: Statutory Review: Final Report, para 6.7.3.) If the grantor is the responsible entity of a registered scheme, the required grantor’s details are the registered scheme’s ARSN (Australian Registered Scheme Number): see PPS Regulations reg 1.6. The New Zealand PPSA provides for a dual system, requiring registration against both a debtor company’s name and its incorporation number, and allowing for search against either or both indicators: see New Zealand PPSA s 172. ABN means Australian Business Number: see PPSA s 10. PPS Regulations Sch 1 cl 1.4. There are special rules for transitional registrations and also for cases where: (1) an individual partner grants a security interest over the partner’s net interest in a partnership; and (2) the grantor is a body corporate in a partnership that does not have an ABN. The Statutory Review has recommended amending the rules for partnerships to provide that the registration should be against the following grantor details: (1) the partnership’s ABN, if it has one; (2) otherwise, the partnership’s registered name in its place of establishment; (3) otherwise, the name of the partnership and the name of at least one of the partners; (4) otherwise, the names of all the partners: Statutory Review: Final Report, para 6.7.5.2. PPS Regulations Sch 1 cl 1.5. There are special rules for transitional registrations. The Statutory Review has recommended that registration should be against the relevant details for the trustee, rather than the ABN or other identifying details for the trust: Statutory Review: Final Report, para 6.7.4.1. PPS Regulations Sch 1 cl 1.6. The Statutory Review has recommended an amendment to make it clear that a registration against multiple grantors is effective only to perfect a security interest that is given by them jointly: Statutory Review: Final Report, para 6.7.6. PPS Regulations Sch 1 cl 2.2(1)(a). Parliament of the Commonwealth of Australia, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009 (‘Replacement Explanatory Memorandum’), para 5.89. See above note 56, at para 5.37. See above note 15, at p 274. On the other hand, while the PPSA Explanatory Memorandum mentions privacy considerations in support of the Australian approach, it does not address the competing policy considerations. See further, 6.16 above. PPS Regulations Sch 1 cl 2.2(1)(c). For small aircraft and so on, when described in the financing statement as commercial property, the serial number is mandatory. PPSA subs 153(1) Table, Item 2(c). The story is different if the collateral is small aircraft or aircraft parts. In this case, because the serial number is mandatory, the searcher can rely on the results of a serial number search and so they genuinely do have two options. The Statutory Review has recommended that the serial number should be optional for aircraft: Statutory Review: Final Report, para 6.6.5. See also s 45 (taking motor vehicle free of security interest). Sections 44 and 45 are discussed further in

65. 66.

67. 68. 69. 70. 71. 72.

73. 74.

75.

76. 77. 78. 79.

80. 81. 82. 83.

84.

Chapter 10 of this text. PPSA s 53 Table, Item 4(a). But in all provinces except Ontario the significance of this point is minimised because, if the collateral is equipment and the financing statement does not include the serial number, the security interest will be subordinate to a competing perfected security interest and it will be ineffective against a subsequent purchaser of the collateral: see, for example, Saskatchewan PPSA s 35(4). In Ontario, if the collateral is equipment and the financing statement does not include the serial number, the security interest will be ineffective against a subsequent purchaser, but its priority status vis-à-vis competing security interests remains unaffected: Ontario PPSA s 28(5). The Saskatchewan provision gives the secured party a strong incentive to include the serial number. The Ontario provision serves the same purpose, but the incentive is weaker. This problem is substantially mitigated in Canada by the provisions discussed in above note 66. Statutory Review: Final Report, para 6.2.1. The restrictions are listed in the table set out in PPSA subs 172(2). PPSA subs 172(1). But see PPSA s 176B, which provides that searchers and other register users may be required to comply with conditions relating to, among other things, the use of registered data. See Personal Property Securities (Approved Form) Instrument 2011 (Cth) s 5: an interactive form provided at the internet address is an approved form of application for registration; and an electronic communication in a format approved by the Registrar is an approved form of application for registration. PPSA s 160. See above note 56, at para 5.65: ‘[a]dvance registration would inform secured parties of the order of registration (and potentially their order of priority) while still negotiating the transaction. This would improve certainty in commercial negotiations as parties could ascertain their rights to priority over other security interests in personal property’. The examples following subs 151(1) take no account of this limitation. Example 1. A person applies to register a financing statement that describes collateral as ‘all present and after-acquired property’ of the grantor described in the statement. It is sufficient to comply with this subsection if the applicant believes on reasonable grounds that the secured party described in the statement will take a security interest in a particular class of items of personal property held (or later acquired) by the grantor …’ Example 2. A person applies to register a financing statement that describes collateral as ‘fruit’. It is sufficient to comply with this subsection if the applicant believes on reasonable grounds that the secured party described in the statement will take a security interest in apples …’ The Replacement Explanatory Memorandum does not identify the reason for the provision. Article 9 s 9-509. Statutory Review: Final Report, para 6.10.4.2. Specifically, the recommendation is that subs 151(1) should be amended to provide as follows: ‘a person may register a financing statement if the person believes on reasonable grounds that the person described in the statement as the secured party is or may be, or may become, a secured party in relation to the collateral’ (Statutory Review: Final Report, para 6.10.4.3). Statutory Review: Final Report, para 6.10.4.4. Statutory Review: Final Report, para 6.10.4.4. Statutory Review: Final Report, para 6.10.4.4. The details are prescribed by the regulations and the requirements are the same as for grantor’s details (for example, surname and given names if the secured party is an individual; ARSN, ACN or ARBN if the secured party is a body corporate): see 6.27–6.34 above. The details are prescribed by the regulations: PPS Regulations Sch 1 Pt 1. For discussion, see 6.27–6.34 above.

85. 86.

87. 88.

89.

90.

91.

92.

93.

94. 95. 96. 97. 98. 99. 100. 101.

102. 103. 104.

PPSA subs 153(1) Table, Item 3. PPSA subs 153(1) Table, Item 8; PPS Regulations Sch 1 Pt 4. The prescribed additional details are: (1) if the collateral is commercial property, an indication of whether it includes inventory; (2) if the collateral is commercial property, an indication of whether it may be subject to control; and (3) details relating to transitional and migrated security interests (see Chapter 15 of this text). Items (1) and (2) are for the purposes of Pt 9.5 of the Act: see Chapter 13 of this text. The Statutory Review has recommended deleting Items (1) and (2): Statutory Review: Final Report, paras 6.2.2 and 6.2.3. PPSA subs 153(1) Table, Item 4(a). The Statutory Review has recommended deleting this requirement: see 6.39 of this text. PPSA subs 153(1) Table, Item 4(b): see Part 3(e) and (f) above. The Statutory Review has recommended changing the relevant variable from the consumer property– commercial property distinction to a distinction between individual and non-individual debtors: see 6.39 of this text. ‘ “All present and after-acquired property, except” means all present and after-acquired property, except for an item or class of personal property stated in the financing statement for the interest’: PPS Regulations reg 1.6. For example, ‘all present and after-acquired personal property except motor vehicles’. For the purposes of the collateral description requirements, an intermediated security is to be treated as financial property: PPS Regulations Sch 1 cl 2.1. In practice, the register breaks down ‘financial property’ into the following further sub-categories: chattel paper; currency; document of title; intermediated security; investment instrument; negotiable instrument. In practice, the register breaks down ‘intangible property’ into the following further sub-categories: account; general intangible; intellectual property (circuit layout, copyright, design, patent, plant breeder’s right, trade mark). PPSA subs 153(1) Table, Item 4(d); PPS Regulations Sch 1 cl 2.3. PPSA subs 105(2) deals with the case of goods with embedded intellectual property rights and it provides in effect that if a financing statement is registered to perfect a security interest in the goods, it is not necessary to separately identify the intellectual property rights in the collateral description: see 4.39 of this text. The financing statement must also include a description, in the form required by the regulations, of collateral types the secured party claims as proceeds from any dealing in the collateral: PPSA subs 153(1), Table, Item 4(d), PPS Regulations Sch 1 Item 2.4: these requirements are discussed in 11.39–11.45. PPSA s 153(1) Table, Item 4(c). See PPS Regulations reg 1.7. There are no reasons given for the Australian approach in the Explanatory Memorandum: see above note 56, paras 5.40–5.41, where the requirement is described, but not justified. Statutory Review: Final Report, para 6.3. PPS Regulations reg 1.6. See Re Noriega (2003) 42 CBR (4th) 274 (ABQB). See PPSA ss 164 and 165, discussed in 6.54–6.65 below; see above note 15, at p 368. Re Noriega (2003) 42 CBR (4th) 274. Compare with Simpson and Walton v New Zealand Associated Refrigerated Food Distributors Limited [2006] NZCA 349, holding that an overly broad collateral description does not invalidate the financing statement. However, the case is distinguishable because the collateral description in issue there was ‘all present and after-acquired personal property’, which was one of the prescribed methods of description. Furthermore, a statement that the collateral comprises all present and after-acquired personal property is not meaningless without reference to the security agreement, though a searcher may want to check the security agreement to verify its accuracy: see further, 6.64 below. See Adelaide Capital Corp v Integrated Transportation Finance Inc (1994) 16 OR (3d) 414 (Ont Sup Ct Justice, Gen Div). Statutory Review: Final Report, para 6.4. PPSA subs 153(1) Table, Item 5. The Statutory Review has recommended changing the relevant variable from the consumer property–commercial property distinction to a distinction between individual and

105. 106.

107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117.

118. 119.

120. 121. 122.

123.

124. 125.

non-individual debtors: see 6.39 of this text. It has also recommended deleting the seven-year time limit for serial-numbered property: Statutory Review: Final Report, para 6.6.2. PPSA subs 153(1) Table, Item 6. The Statutory Review has recommended deleting this item: Statutory Review: Final Report, para 6.2.4. See above note 15, at p 356. See also Gibbston Downs Wines Ltd v Perpetual Trust Limited [2013] NZCA 506 at [31], stressing the optional nature of this item. In that case, the disclosure gave an expiry date for the subordination agreement (as required by the New Zealand Regulations), but the date was earlier than the expiry date the parties had agreed on. The court held that the misstatement did not affect the parties’ agreement and that, since disclosure of the subordination agreement was optional, the misstatement also did not affect the validity of the registration. See PPSA s 62, discussed in Chapter 8 of this text. The Statutory Review has recommended deleting this provision and also the requirement to which it relates in PPSA s 62: Statutory Review: Final Report, paras 6.2.5 and 7.7.8.11. PPSA paras 164(1)(b) and 165(c). The verification statement must be in an approved form. The approved forms are provided for in Personal Property Securities (Approved Form) Instrument 2011 (Cth) s 6. See Personal Property Securities (Approved Form) Instrument 2011 (Cth) s 7. See 6.35 above. The Statutory Review has recommended an amendment to correct this oversight: Statutory Review: Final Report, para 6.11.10. See Chapter 5 of this text. For example, the bills of sale legislation in some states: see Edward I Sykes and Sally Walker, The Law of Securities, 5th ed, Law Book Company, Sydney, 1993, pp 631–7. The consequences of failure to perfect a security interest are discussed in 5.59–5.60 of this text. ‘Defect’ includes an irregularity, omission or error in the registration: PPSA s 10. The Statutory Review has recommended deletion of the purchase money security interest (PMSI) box from the Register: see 6.52 of this text. If this change is made, para 165(c) will be redundant. The Statutory Review recommends that if the change is not made, para 165(c) should be repealed anyway because it is ‘draconian and unnecessary’: Statutory Review: Final Report, para 6.10.3.2. There is no relevant regulation. See Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd [2013] NSWSC 1741 at [6]. See also Re Lambert (1994) 20 OR (3rd) 108 (ONCA); Stevenson v GMAC Leaseco Ltd (2003) 227 DLR (4th) 154 (NBCA); and Fairbanx Corporation v RBC (2010) 319 DLR (4th) 618 (ONCA). See 6.28 above. (2010) 319 DLR (4th) 618. Ontario PPSA s 46(4) provides that a financing statement is not invalidated by an error or omission unless a reasonable person is likely to be materially misled; compare Australian PPSA s 164. The bank’s argument was that Fairbanx’s misspelling of the debtor’s name would be likely to have materially misled a reasonable person. Ontario PPSA s 20(1)(a)(i) provides that an unperfected security interest is subordinate to a perfected security interest in the same collateral. Compare Australian PPSA subs 55(3): see 5.59 of this text. In Australia, if the grantor is a company, registration and search is by reference to the grantor’s company number, not its name: see 6.33 above. It follows that a fact situation like the one in Fairbanx could not arise in Australia. But the case is still important for what it has to say about the significance of apparently minor errors in an exact match registration and search system. PPSA s 267: see 5.59–5.60 of this text. See Stevenson v GMAC Leaseco Ltd (2003) 227 DLR (4th) 154 (NBCA) at [81], addressing a similar issue in the context of the New Brunswick PPSA. Compare Re Lambert (1994) 20 OR (3d) 108 (ONCA), holding that a reasonable searcher would conduct both types of search and that therefore a debtor’s name error does not invalidate a registration if the financing statement correctly states the serial number. However, Re Lambert is distinguishable because there the collateral was consumer goods and so the serial

126. 127. 128. 129. 130.

131. 132. 133. 134. 135.

136. 137.

138. 139. 140. 141. 142. 143.

144.

145. 146. 147. 148.

number was mandatory. In Australia, if the collateral is serial-numbered consumer goods, the financing statement will not include the grantor’s details: see 6.35 above. Therefore, Re Lambert has no relevance for Australia. Adelaide Capital Corp v Integrated Transportation Finance Inc (1994) 16 OR (3d) 414 (Ont Sup Ct Justice, Gen Div). [2006] NZCA 349. See above note 127, at [32]. [2013] NSWSC 1741. Australian Government, Personal Properties Securities Register, Registrations — Managing Existing Registrations — Amend a Registration — What Can Be Amended, available at . See above note 130. Mike Gedye, ‘The Development of New Zealand’s Secured Transactions Jurisprudence’ (2011) 34 University of New South Wales Law Journal 696 at 705–6. See above note 132. See above note 132, at pp 707–8. Where a new registration is created to amend an earlier registration, the Australian system allows the secured party to enter the registration number of the earlier registration to warn searchers of the earlier registration: see above note 130. The purpose of this facility, apparently, is to address the problems identified in the text. But the requirement is not mandatory. Furthermore, it has no legal significance. For example, if the date of the original registration was Date 1, the registration turns out to be invalid and the secured party registers a new financing statement on Date 2, the fact that the Date 2 financing statement refers to the Date 1 registration does not affect the secured party’s priority time, which remains Date 2. Statutory Review: Final Report, para 6.10.5.4. This is equivalent to temporary perfection. But s 166 does not describe it as such. One consequence is that the transferee protection rule in PPSA s 52 does not apply in a case where SP’s security interest is perfected by virtue of s 166: see 10.68 of this text. See above note 56, at paras 5.75 and 5.76. If Searcher is a prospective buyer or lessee, they may be protected by s 44: see 6.36–6.37 and 10.11–10.13 of this text. The Registrar may issue an amendment notice on their own initiative if they suspect on reasonable grounds that the amendment demanded is authorised under s 178: subs 180(2). [2015] AATA 549. [2015] AATA 549 at para 60. The Statutory Review reports that the current amendment demand process is placing significant strain on the Registrar’s resources and it recommends moving to a new system based on the New Zealand and Canadian model. Under this approach, the person who gives an amendment demand may themselves take steps to have the registration amended unless the secured party is able to produce a court order disallowing the amendment within 15 working days: Statutory Review: Final Report, para 6.10.5.8. Query why the provision applies where the collateral is serial-numbered property used for business purposes. The Statutory Review has recommended an amendment to address this issue: Statutory Review: Final Report, para 6.10.4.6. Compare, for example, Saskatchewan PPSA s 50(2) and New Zealand PPSA s 161. The Statutory Review has recommended an amendment to address this issue: Statutory Review: Final Report, para 6.10.4.6. [2014] VSC 217. [2014] FCA 846. Statutory Review: Final Report, para 6.11.14.3.

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CHAPTER 7 The Default Priority Rules INTRODUCTION 7.1 This chapter deals with the provisions in Personal Property Securities Act 2009 (Cth) (PPSA) Pt 2.6 governing priority between security interests. The main provision is s 55, which incorporates a set of rules for disputes involving two or more competing security interests in the same collateral. Section 57 incorporates an additional set of priority rules for cases where one or more of the competing security interests is perfected by control. Section 58 governs priority for future advances. Section 59 addresses the problem of circular priorities. Section 61 provides for the voluntary subordination of security interests. Section 67 governs priorities between competing security interests given by different grantors. 7.2 Section 55 is headed ‘default priority rules’. ‘Default’, in this context, means residual as opposed to primary. The heading’s meaning is explained in subs 55(1): s 55 applies in a particular case only if the statute provides no other way of determining priority. Other provisions of the statute enact special priority rules for particular cases and the effect of subs 55(1) is that these special rules apply to the exclusion of the default, or residual, rules in s 55. Examples include the special priority rules in ss 62–64 for purchase money security interests (see Chapter 8); the special priority rules in ss 69–72 for security interests in debt payments; negotiable instruments, chattel paper and negotiable documents of title (see Chapter 10); and the special priority rules in ss 85 and 86 for security interests in crops and livestock (see Chapter 8). 7.3 The s 55 priority rules are default rules in the further sense that, in common with all the PPSA priority rules, they apply only if the parties do not specify a different priority order. In other words, the parties are free to contract around the statutory priority rules and s 61 makes this clear by expressly permitting subordination agreements. ‘Default’, in this sense, means optional as opposed to mandatory.

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THE SECTION 55 PRIORITY RULES Competing Perfected Security Interests Introduction 7.4 PPSA subs 55(4) provides that priority between two or more currently perfected security interests in the same collateral is to be determined by the order in which the priority time for each security interest occurs. Subsection 55(5) defines priority time to mean the earliest of the following times: (a) the registration time for the collateral; (b) the time the secured party, or another person on behalf of the secured party, first perfects the security interest by taking possession or control of the collateral; (c) the time the security interest is temporarily perfected, or otherwise perfected, by force of this Act.

Competing security interests perfected by registration 7.5 In a case involving, say, two security interests in the same collateral which are both at all relevant times perfected by registration, the effect of subss 55(4) and (5) is that priority turns on the order of registration. Example 1. On Date 1, SP1 takes a security interest in all Grantor’s present and after-acquired personal property and registers a financing statement. The agreement is in writing but, due to an oversight, Grantor does not sign it. On Date 2, Grantor transfers its present and after-acquired accounts to SP2 who registers a financing statement on the same day. On Date 3, SP1 discovers the oversight in the security agreement and Grantor supplies the missing signature. Grantor defaults against SP1 and SP2 and they both claim Grantor’s accounts.

PPSA s 21 makes compliance with the s 20 writing requirements a condition of perfection: see 5.1–5.3. This means that SP1’s security interest was not perfected until Date 3, when Grantor supplied the missing signature. SP2’s security interest was presumably perfected on Date 2. However, according to subss 55(4) and (5), priority turns on the order of registration, not the order of perfection, and so SP1 has priority over SP2.1 7.6 As discussed in 6.17 of this text, the first to register priority rule, in

combination with the PPSA’s system of registration by notice filing, enables a secured party to reserve its priority position before the security agreement is in place. Example 2. On Date 1, SP1 and Grantor start negotiations for a secured lending agreement and SP1 registers a financing statement. The parties complete their negotiations and execute the agreement on Date 3. In the meantime, on Date 2 Grantor signs a security agreement with SP2 covering the same collateral and SP2 registers on Date 2.

[page 209] SP1’s security interest was not perfected until Date 3, when the parties finalised their security agreement. SP2’s security interest was perfected on Date 2. However, applying subss 55(4) and (5), SP1 has priority because it was the first to register its security interest. SP2 could have avoided this result by negotiating a subordination agreement with SP1 or, alternatively, by using PPSA s 151 or 178 to have SP1 discharge its registration: see 6.42–6.45 and 6.75–6.78. 7.7 The first to register rule also facilitates blanket registrations and allows the secured party to reserve its priority position for multiple security agreements involving the same collateral type. Example 3 in Chapter 6, reproduced below, illustrates the point. Example 3. Grantor is a car dealer. On Date 1, SP1 starts negotiations with Grantor for a security interest in Grantor’s new car inventory and registers a financing statement. The financing statement describes the collateral as required by the Act and regulations, that is, it states that the collateral is commercial property and also states that it is motor vehicles. On Date 2, the parties complete their negotiations and execute the security agreement. The security agreement describes the collateral as Grantor’s new car inventory. On Date 3, Grantor gives SP2 a security interest in its used car inventory and SP2 registers a financing statement on the same day. On Date 4, SP1 and Grantor enter into a second security agreement, this time for Grantor’s used car inventory. Grantor defaults against SP1 and SP2 and they both claim the used car inventory.

PPSA subs 21(4) provides that a single registration may perfect one or more security interests. SP1’s Date 1 registration perfects its security interests under both its Date 1 and Date 3 security agreements because the collateral description — commercial property; motor vehicles — covers both the new and used cars. To protect itself, SP2 should have negotiated a subordination agreement with SP1 or, alternatively, arranged for SP1 to amend its registration by narrowing the collateral description.2

Security interest perfected by registration versus security interest otherwise perfected 7.8 If SP1 has a security interest perfected by registration and SP2 has a competing security interest in the same collateral perfected by possession, priority depends on whether SP1 registered its security interest before SP2 perfected its security interest by taking possession of the collateral, or vice versa. Example 4. SP1 and Grantor are in loan negotiations. On Date 1, Grantor agrees to give SP1 a possessory security interest in her cattle and she leaves the cattle in SP1’s possession pending the successful completion of the loan negotiations. On Date 2, Grantor gives a security interest in the cattle to SP2 who registers a financing statement on the same day. On Date 3, SP1 and Grantor conclude their loan agreement.3

[page 210] SP1 took possession of the collateral on Date 1, but its security interest only became perfected on Date 3, when it concluded its security agreement with Grantor. Which of these dates is the relevant one depends on the meaning of the phrase in subs 55(5) ‘perfects the security interest by taking possession … of the collateral’. The most likely interpretation is that perfection in this context refers to the perfection step (taking possession), not the state of perfection (compliance with all the subs 21(1) perfection requirements).4 On this basis, in Example 4, SP1’s priority time is Date 1 and so it has priority over SP2. The corresponding provision in the New Zealand PPSA (s 66) refers to the secured party ‘taking possession of the collateral’, without any reference to perfection, and this wording leaves no doubt that in a case like Example 4, SP1 would have priority. It is reasonable to suppose that the Australian drafters were attempting to achieve the same result.5 The Statutory Review has recommended drafting changes to PPSA s 55(5), the effect of which would be to make the date of actual perfection the priority point in cases like Example 4. This change would put Australia out of step with most of the other PPSAs (except Ontario), and the Review provides no justification for it.6 It is hard to see why the date of actual perfection should be the priority time for a security interest perfected otherwise than by registration, when the priority time for a security interest perfected by registration is the date of registration, regardless of the date of attachment. 7.9 If SP1’s security interest is temporarily perfected to start with, and SP2 has a

competing security interest perfected by registration or possession, priority depends on the time SP1’s temporary perfection commenced relative to the time SP2 registered its security interest or took possession of the collateral, as the case may be. Example 5. Grantor is a clothing manufacturer. On Date 1, Grantor gives SP1 a security interest in 200 men’s suits stored in its Melbourne warehouse. On Date 2, Grantor delivers the suits to Carrier for shipment to Grantor’s Sydney premises and Carrier issues a bill of lading. At Grantor’s request, Carrier forwards the bill of lading to SP1 and SP1 receives it on Date 4. In the meantime, on Date 3, Grantor gives SP2 a security interest in the suits and SP2 registers a financing statement on the same day. Date 4 marks the end of five business days from Date 2. Grantor defaults and SP1 and SP2 both claim the suits.

Applying PPSA subs 22(2), SP1’s security interest is temporarily perfected for the five business days from Date 2 to Date 4, and thereafter it is perfected by possession: see 5.13 of this text. Applying subss 55(4) and (5), SP1’s [page 211] priority time is Date 2, the date Carrier issued the bill of lading; SP2’s priority time is Date 3 and so SP1 has priority over SP2. 7.10 In Example 5, temporary perfection is SP1’s initial method of perfection. More often, though, temporary perfection serves as a bridge between other methods of perfection serving to ensure that the security interest remains continuously perfected. Example 6. Grantor is a clothing manufacturer. On Date 1, Grantor gives SP1 a security interest in 200 men’s suits stored in its Melbourne warehouse. On Date 2, Grantor delivers the suits to Carrier for shipment to Grantor’s Sydney premises and Carrier issues a bill of lading. SP1 takes possession of the bill of lading on the same day. On Date 4, Grantor negotiates the sale of the suits to a Sydney retailer and SP1 returns the bill of lading to Grantor so that Grantor can take delivery of the suits from Carrier. On Date 5, SP1 registers a financing statement. Date 5 marks the end of five business days after Date 4. In the meantime, on Date 3 Grantor gives SP2 a security interest in the suits and SP2 registers a financing statement on the same day. Grantor defaults and SP1 and SP2 both claim the suits.

SP1’s security interest is initially perfected by possession on Date 2 when it takes possession of the bill of lading. Applying PPSA s 35, it is temporarily perfected from Date 4 to Date 5, and it is perfected by registration thereafter. Since there is no break in perfection, SP1’s security interest is continuously perfected from Date 2, notwithstanding the changes in the method of perfection, and so its priority time is Date 2: see 5.14 and 5.41–5.42 of this text. SP2’s priority time is Date 3 and so SP1 has priority over SP2.

Reperfected Security Interests 7.11 PPSA subs 55(6) provides that a time is a priority time for a security interest only if the security interest remains continuously perfected. Section 56 provides that a security interest is continuously perfected if it remains perfected at all times even if there are changes in the method of perfection. Example 6, above, is a case in point. Example 7, below, is a variation on the facts of Example 6. Example 7. Grantor is a clothing manufacturer. On Date 1, Grantor gives SP1 a security interest in 200 men’s suits stored in its Melbourne warehouse. On Date 2, Grantor delivers the suits to Carrier for shipment to Grantor’s Sydney premises and Carrier issues a bill of lading. SP1 takes possession of the bill of lading on the same day. On Date 4, Grantor negotiates the sale of the suits to a Sydney retailer and SP1 returns the bill of lading to Grantor so that Grantor can take delivery of the suits from Carrier. Date 5 marks the end of five business days after Date 4. On Date 7, SP1 registers a financing statement.

The difference between Examples 6 and 7 is that in Example 7 SP1 does not register a financing statement until after the expiration of the s 35 grace period. Consequently, SP1’s security interest is unperfected between Date 5 and Date 7. Assume SP2 takes a security interest in the suits and registers a financing statement on Date 6. Applying subs 55(6), SP1’s priority time is [page 212] Date 7 and, since SP2’s priority time is Date 6, SP2 has priority over SP1. Now assume that SP2 acquires its security interest and registers on Date 3. At this point, SP1’s security interest is perfected by possession of the bill of lading. Nevertheless, applying subs 55(6), SP1’s priority time is still Date 7; SP1 cannot claim that its priority time is Date 2 because its security interest did not remain continuously perfected after Date 2. A similar rule applies in the other PPSA jurisdictions.7 7.12 Example 8. Grantor is a clothing manufacturer. On Date 1 Grantor gives SP1 a security interest in 200 men’s suits stored in its Melbourne warehouse and SP1 registers a financing statement on the same day. On Date 2, Grantor gives SP2 a competing security interest in the same suits and registers a financing statement. On Date 3, SP1’s registration is accidentally discharged due to a clerical error. On Date 5, SP1 discovers the mistake and renews its registration. Grantor defaults and SP1 and SP2 both claim the suits.

Applying PPSA subs 55(6), the result is the same as in Example 7: because SP1’s security interest was not continuously perfected after Date 1, its priority time is Date 5, not Date 1. Therefore, SP2 has priority over SP1 even though SP1’s

security interest was perfected by registration at the time of SP2’s transaction with Grantor. The Canadian PPSAs make a concession to SP1 in cases like Example 8. Saskatchewan PPSA s 35(7) applies where a registration lapses due to non-renewal or is discharged without authorisation or in error, and it preserves the secured party’s priority provided it renews its registration within 30 days.8 Such concessions can create circular priorities problems and this may be why the Australian lawmakers decided not to toe the Canadian line.9

Perfected Security Interest versus Unperfected Security Interest 7.13 Subsection 55(3) provides that a perfected security interest has priority over an unperfected security interest in the same collateral. Subsection 55(3) is discussed in 5.59–5.60 of this text. [page 213]

Competing Unperfected Security Interests 7.14 Subsection 55(2) provides that priority between unperfected security interests in the same collateral is to be determined by the order of attachment of the security interests. Example 9. On Date 1, SP1 takes a security interest in all Grantor’s present and after-acquired personal property and registers a financing statement on the same day. On Date 2, SP2 takes a security interest in Grantor’s racehorse and registers a financing statement on the same day. Grantor later defaults and SP1 and SP2 both claim the racehorse. Their dispute ends up in litigation and the court finds that both parties misstated Grantor’s details in their financing statements, and so their registrations are invalid.10

Since both registrations are invalid, Example 9 involves a competition between two unperfected security interests and so priority depends on the order of attachment. On the facts, it seems that SP1’s security interest attached on Date 1 and so SP1 has priority. 7.15 Example 10. On Date 1, SP1 takes a security interest in all Grantor’s present and after-acquired personal property and registers a financing statement on the same day. On Date 2, SP2 takes a security interest in all Grantor’s present and after-acquired accounts and registers a financing statement on the same day. On Date 3, Grantor sells goods to Customer on 90-day terms. Grantor later defaults and SP1 and SP2 both claim Customer’s account. Their dispute ends up in litigation and the court finds that both parties misstated Grantor’s details in their financing statements and so their registrations are invalid.

As in Example 9, Example 10 involves a competition between two unperfected security interests, and PPSA subs 55(2) suggests that priority depends on the order of attachment. But in Example 10 the security interests attached simultaneously on Date 3, which was when Grantor acquired rights in the collateral: see 4.14–4.22. The PPSA does not have a rule for cases like this and so the courts will be forced back to common law principles and, at common law, priority turns on the respective dates of the security agreements.11 7.16 In most cases involving a competition between unperfected security interests, at least one of the secured parties will realise sooner or later that its security interest is unperfected and it will register a financing statement or otherwise perfect its security interest. If one of the secured parties perfects but the other does not, the dispute will be governed by PPSA subs 55(3), while [page 214] if both secured parties perfect, the priority rules in subss 55(4) and (5) will apply.12 At what point does it become too late for a secured party to perfect its security interest? In Sperry v Canadian Imperial Bank of Commerce,13 SP1 and SP2 held competing unperfected security interests in the debtor’s (grantor’s) farm equipment. The debtor defaulted and SP1 appointed a receiver. Eleven days later, SP2 registered a financing statement. SP2 argued that its perfected security interest had priority over SP1’s unperfected security interest. The court rejected the argument, holding that the priority issue should be resolved by reference to the time at which the security interests came into conflict. This occurred when SP1 enforced its security interest by appointing the receiver. The Sperry case has been followed in a number of other Canadian decisions and also in New Zealand.14 Applying the Sperry ruling to the facts of Examples 9 and 10, the relevant date is the date on which either SP1 or SP2 claims the collateral, depending on which of them acts first.

The Irrelevance of Notice 7.17 Pre-PPSA, Corporations Act 2001 (Cth) Ch 2K provided for the registration of company charges and enacted rules to determine priorities between competing registrable charges. The main priority rules were in s 280, which

provided that a registered charge (A) had priority over a subsequently registered charge or an unregistered charge (B), but not if charge B was created first and the B chargee proved that the A chargee had notice of the B charge at the time the A charge was created. By contrast, notice is not a factor in the PPSA s 55 priority rules. Example 11. On Date 1, SP1 makes a loan to Grantor and takes a security interest in Grantor’s fleet of trucks, but does not register a financing statement or otherwise perfect its security interest. On Date 2, having previously learned from Grantor about SP1’s security interest, SP2 takes a competing security interest in the same collateral and registers a financing statement. On Date 3, SP1 registers a financing statement. Grantor defaults and SP1 and SP2 both claim the trucks.15

[page 215] The governing provision is PPSA subs 55(4): SP2 was the first to register and so it has priority over SP1 even though SP2 knew about SP1’s security interest at the time of its transaction with Grantor. If SP1 had not registered a financing statement on Date 3, the governing provision would have been PPSA subs 55(3) (a perfected security interest has priority over an unperfected security interest in the same collateral) and, again, SP2 would have had priority even though it knew about SP1’s security interest at the relevant time.16 7.18 In the Robert Simpson case, on which Example 11 is loosely based, SP1 argued that the purpose of the registration requirement is to protect competing claimants against hidden security interests. Since SP2 knew about SP1’s security interest anyway, it was not prejudiced by SP1’s failure to register and it would be unfair to penalise SP1 by subordinating its security interest to SP2. The court rejected the argument on the simple ground that the statutory priority rule made no reference to the parties’ knowledge and there was no basis for reading in a knowledge limitation. Fairbanx Corporation v RBC,17 discussed in 6.58–6.59 of this text, raises a similar issue in the registration error context, and the court’s response in Fairbanx is consistent with the Robert Simpson case. In Fairbanx, Fairbanx and the bank held competing security interests in the debtor’s (grantor’s) accounts. They had both registered financing statements, but Fairbanx’s financing statement misstated the debtor’s name and so the registration was apparently invalid under Ontario PPSA s 46(6) (the misleading error provision).18 Fairbanx argued that the error did not prejudice the bank because the bank knew about Fairbanx’s security interest anyway, and therefore the court should excuse the error. The court

rejected the argument, holding that s 46(4) requires an objective assessment: the question was whether the error would be likely to mislead a reasonable person, not whether it actually misled a competing secured party or anyone else. In other words, a competing secured party’s knowledge is irrelevant in the context of the misleading error provision, just as it is irrelevant in the context of the PPSA default priority rules.19 7.19 The main policy justification for the PPSA s 55 approach is that inquiries into knowledge are expensive and time-consuming.20 On the other hand, a brightline priority rule, which turns solely on the order of registration or the order of perfection, as the case may be, saves litigation costs by keeping the inquiry simple and it facilitates settlements by increasing the predictability of litigation outcomes.21 A secondary consideration is that [page 216] introducing a knowledge factor into priority disputes creates the potential for circular priority problems. Example 12. Pre-PPSA, SP1, SP2 and SP3 each acquire registrable charges, in that order, over Grantor’s fleet of trucks. SP1 fails to register its charge, while SP2 and SP3 both register their charges. SP2 acquired its charge with actual knowledge of SP1’s unregistered charge, but SP3 knew nothing about it. Grantor defaults against all three lenders and they each claim the trucks.

Applying Corporations Act s 280, SP1 has priority over SP2 because SP2’s interest arose later in time and SP2 had actual knowledge of SP1’s charge. SP2 has priority over SP3, because SP2 was the first to register. And SP3 has priority over SP1 because SP1 failed to register and SP3 had no knowledge of SP1’s charge.22 The PPSA s 55 approach avoids this type of issue. 7.20 Returning to Example 11, it might be argued that SP2 is guilty of bad faith or unconscionable conduct. However, this presupposes that SP2 is under an obligation to disclose to SP1 the fact that SP1 has neglected to register a financing statement and it is hard to see what the justification for such a duty might be. In particular, it cannot be said that, by failing to make disclosure, SP2 takes SP1 by surprise because SP1 — like SP2 itself and, for that matter, all register users — must be taken to know the law, including the consequences of failure to register. In any event, imposing a duty of disclosure on SP2 would probably not encourage SP2 to reveal the information to SP1; it is more likely to drive SP2 away. In that event,

SP1 may end up losing priority anyway: if Grantor contracts with SP3 instead and SP3 lacks knowledge of SP1’s security interest, SP3 will have priority over SP1.23 In this connection it is worth noting that, with the exception of Ontario, all the Canadian PPSAs require parties to act in good faith and the provision goes on to say that a person does not act in bad faith simply because they act with knowledge of the interest of some other person.24 There is no corresponding provision in the Australian PPSA, but on general principles the courts should arrive at the same conclusion.25

THE SECTION 57 PRIORITY RULES 7.21 PPSA s 57 enacts special priority rules for a competition between security interests, one or more of which is perfected by control. Section 57 takes precedence over the other provisions of Pt 2.6, including s 55.26 Subsection 57(1) provides that a security interest perfected by control has priority over a competing security interest that is perfected by another [page 217] means.27 So, for example, if SP1 has a security interest in all Grantor’s present and after-acquired personal property perfected by registration, and SP2 later acquires a competing security interest in Grantor’s shares perfected by control, SP2 has priority even though SP1 registered its security interest before SP2 acquired control. In its application to a security interest held by an authorised deposit-taking institution (ADI) in an ADI account, s 57 represents a generous concession in favour of the banking industry: see 5.23–5.24. The Explanatory Memorandum sheds no light on the underlying reasons, but the official explanation for the Art 9 version of the rule is that it ‘enables banks to extend credit to their depositors without the need to examine either the public record or their own records to determine whether another party might have a security interest in the deposit account’.28 The rationale for s 57 in its other applications is to preserve the negotiable, or quasi-negotiable, status of intermediated securities, investment instruments and the like. By giving special priority status to security interests in these kinds of collateral, the statute treats them as being in some respects equivalent to negotiable instruments.29 The objective is to facilitate dealings in the collateral by giving purchasers, including secured parties, an at least partial assurance of

obtaining first priority which avoids the need for PPS register searches in advance of the transaction.30 7.22 PPSA subs 57(2) provides that priority between two or more security interests perfected by control is to be determined by the order in which the security interests were perfected by control. Example 13. SP1 takes a security interest in Grantor’s shares and acquires control on Date 1 by taking possession of the share certificates. On Date 2, SP2 takes a competing security interest in the same collateral and acquires control by entering into a control agreement.

Applying subs 57(2), SP1 has priority because it was the first to acquire control of the collateral. Section 57(2) is ambiguous: the reference to ‘perfection by control’ could be read as meaning the date of actual perfection or, alternatively, the date the secured party obtains control, regardless of the date the security interest becomes perfected. The Statutory Review assumes that the first interpretation is the correct one, and on this basis recommends an additional provision stating that, where the security interests attach simultaneously, priority turns on which secured party obtained control first.31 But the second interpretation is arguably the better one: see 7.8 above, and on this basis there is no need for the proposed change. A better reform would [page 218] be to make it clear that the references in s 57 to perfection by control are to obtaining control, not actual perfection.

FUTURE ADVANCES Introduction 7.23 Consider the following example. Example 14. On Date 1, SP1 opens a line of credit in Grantor’s favour secured by a security interest in Grantor’s inventory. On the same date, SP1 registers a financing statement and Grantor draws down $60. On Date 2, SP2 and Grantor enter into a security agreement, giving SP2 a security interest in the same inventory. SP2 registers a financing statement and makes Grantor a loan of $30. On Date 3, Grantor draws an additional $50 on its line of credit with SP1. On Date 4, Grantor defaults against SP1 and SP2 and, on that date, the value of Grantor’s inventory is $100. SP1 claims the inventory for its Date 1 and Date 3 advances. SP2 argues that its claim to the inventory in relation to SP2’s Date 2 advance has priority over SP1’s claim to the inventory in relation to SP1’s Date 3 advance.

The Law 7.24 Pre-PPSA, if the grantor was a company, Corporations Act 2001 (Cth) s 282 applied in cases like Example 14. Section 282 gave SP1 priority over SP2 for its Date 3 advance if there was provision in SP1’s agreement with Grantor for further advances and one or more of the following conditions was satisfied: (1) SP1 had no actual knowledge on Date 3 of SP2’s security interest (charge); (2) SP1 and Grantor had agreed on a specified maximum amount for further advances which was noted on the register; or (3) SP1’s agreement with Grantor obliged it to make the Date 3 advance. If the grantor was not a company, the equitable doctrine of tacking applied, except in states which had abolished the doctrine. The rule in equity was that SP1 had priority over SP2 for the Date 3 advance, but not if SP1 had notice of SP2’s Date 2 loan;32 the rule applied whether or not SP1 was under a commitment to make the Date 3 advance.33 Three states — Queensland, Tasmania and Victoria — had replaced the equitable doctrine with a statutory rule which gave SP1 priority where: (1) an arrangement to that effect was made between SP1 and SP2; (2) SP1 had no actual notice on Date 3 of SP2’s security interest; or (3) SP1’s agreement with Grantor obliged it to make the Date 3 advance.34 In some states, the registered encumbrances on vehicles (REV) legislation enacted a different rule again for cases involving a motor vehicle.35 [page 219] 7.25 The PPSA provisions bring some order to this chaos. PPSA subs 18(4) provides that a security agreement may provide for future advances and s 10 makes it clear that a payment is a future advance whether or not SP1 was under an obligation to make it: see 4.9. Section 58 provides that a security interest has the same priority in respect of all advances, including future advances, secured by the security agreement. Applying these provisions to Example 14, Grantor’s agreement with SP1 is for a line of credit and so it will necessarily provide for the making of future advances. The facts do not indicate whether the agreement gives SP1 the right at any point to decline further credit, but this variable is irrelevant because a payment qualifies as a future advance whether or not the agreement obliges SP1 to make it. On this basis, s 58 applies and SP1 has priority over SP2 for its Date 3 advance, without regard to the state of SP1’s knowledge.

Policy Considerations 7.26 PPSA s 58 gives SP1 a competitive advantage over SP2 and it forces SP2 to negotiate a subordination agreement with SP1 if SP2 wants to be sure of priority for its Date 2 loan. Functionally, the provision puts SP2 in more or less the same position as if secured creditor claims were ranked on a last-in-time, rather than a first-in-time, basis. The policy justification for giving SP1 priority, despite these consequences, is that it saves transactions costs by allowing SP1 to make subsequent advances ‘without each time having, as a condition of protection, to check for filings later than his’.36 From Grantor’s point of view, while it is true that the statute increases the cost of subsequent borrowings from junior creditors, ‘it also reduces the expenses of transactions involving the repeated extension of credit from a single senior lender’.37 Particularly in the case of revolving credit arrangements, as in Example 14, it is probably safe to assume that the benefits to the grantor exceed the costs. 7.27 There is another consideration, illustrated by Example 15. Example 15. On Date 1, SP1 agrees to lend Grantor $110, with $60 to be paid immediately and $50 on Date 3. Grantor gives SP1 a security interest in its inventory to secure repayment and SP1 registers a financing statement. On Date 2, SP2 and Grantor enter into a security agreement, giving SP2 a security interest in the same inventory. SP2 registers a financing statement and makes Grantor a loan of $30. On Date 3, SP1 makes the agreed $50 payment. On Date 4, Grantor defaults against SP1 and SP2 and, on that date, the value of Grantor’s inventory is $100. SP1 claims the inventory for its Date 1 and Date 3 advances. SP2 argues that its claim to the inventory in relation to SP2’s Date 2 advance has priority over SP1’s claim to the inventory in relation to SP1’s Date 3 advance.

[page 220] In this case, the contract between SP1 and Grantor is in substance a single contract for the loan of $110 payable in two instalments. If SP1 had paid Grantor the full $110 at the outset, SP1 would clearly have had priority over SP2 for the whole amount. In principle, it should make no difference that SP1 paid Grantor in instalments.38 7.28 This analysis holds only if SP1 is under a commitment to make the Date 3 payment. If SP1 has a discretion, then the transaction between SP1 and Grantor is the same in substance as if SP1 had made two separate loans to Grantor. Assume that this is in fact what happens: on Date 1, SP1 agrees to lend Grantor $60. Grantor gives SP1 a security interest in its inventory to secure repayment and SP1

registers a financing statement. On Date 3, SP1 agrees to lend Grantor a further $50 and takes a security interest in Grantor’s inventory. On these facts, SP1’s Date 3 payment is not a future advance under the Date 1 security agreement; it is a present advance made under the entirely separate Date 3 security agreement. Therefore, PPSA s 58 does not apply. By virtue of PPSA subs 21(4), however, SP1’s Date 1 registration perfects both its Date 1 and Date 3 security interests: see Example 3 above. Since priority between SP1 and SP2 turns on the order of registration, SP1 still has priority over SP2 for the Date 3 advance: PPSA subss 55(4) and (5). In principle, the outcome should be the same in the analogous case where SP1 and Grantor’s Date 1 security agreement contemplates future advances, but without any commitment on SP1’s part. To treat the two cases differently would be to elevate form over substance.

SUBORDINATION AGREEMENTS 7.29 PPSA subs 61(1) provides that a secured party (SP1) may, in a security agreement or otherwise, subordinate its security interest to any other interest in the collateral (SP2). As indicated in 7.3 above, this provision makes it clear that the PPSA priority rules are default rules, in the sense that the parties are free to contract for a different priority ordering. The subordination agreement is the mechanism for achieving this result. PPSA subs 61(1) contemplates that the subordination agreement may be part of the security agreement between SP1 and Grantor or, alternatively, it may take the form of a separate agreement between SP1 and SP2. In the first case, SP1 agrees with Grantor to subordinate its security interest to SP2. SP2 is not a party to the contract, but para 61(2)(b) avoids privity of contract issues by providing that the subordination provision may be enforced by a third party for whose benefit the provision was intended. 7.30 PPSA s 61 relates to the subordination of security interests, not debt subordination. Debt subordination is discussed in 3.41–3.43 of this text. Debt subordination is different from security interest subordination: in a debt [page 221] subordination, the subordinating creditor agrees that payment of its claim should be postponed until payment of the benefiting creditor’s claim, whereas in a security interest subordination, the subordinating creditor (SP1) agrees that its security

interest should be ranked behind the benefiting creditor’s (SP2’s) security interest. In other words, a security interest subordination subordinates the ranking of SP1’s security interest, not the payment of its debt. The implication is that if the collateral is insufficient to satisfy SP2’s claim, SP1 and SP2 may both enforce their claims against the grantor and, if the grantor becomes bankrupt, they may both prove their claims and will share pro rata in the bankruptcy distribution.39 7.31 There are three possible forms a security interest subordination might take.40 The first possibility is that the agreement may create only a personal obligation on SP1’s part not to claim the collateral ahead of SP2. If SP1 breaches the obligation, SP2 may sue for damages, but SP2 has no proprietary remedy against SP1. The second possibility is that subordination amounts to a partial waiver. SP1 agrees that, if there are no other parties involved, it will not enforce its security interest ahead of SP2. On the other hand, if a third party claims the collateral, SP1 may enforce its security interest, but it must account to SP2 for the enforcement proceeds, up to the value of SP2’s claim. Again, if SP1 breaches its obligations, SP2 may sue for damages, but it does not have a proprietary remedy against SP1. The third possibility is that the agreement constitutes either an outright or security transfer to SP2 of SP1’s secured claim, in which case SP2 acquires a proprietary interest in the claim; either way, the PPSA applies and SP2 must register a financing statement but, subject to this, SP2’s claim is enforceable in SP1’s bankruptcy or other insolvency proceedings: see 3.41–3.43. 7.32 PPSA para 61(2)(a) provides that a subordination agreement is effective according to its terms. Consequently, it is for the parties to decide which of the above outcomes they want and the court must construe the subordination agreement to determine the parties’ intentions. PPSA subs 12(6) creates a presumption that a subordination agreement does not create a security interest and the result is that the parties must use clear language if they intend otherwise. Unless it creates a security interest, a subordination agreement does not have to be registered. However, the statute gives SP1 the option of indicating in its financing statement whether the security interest is, or is to be, subordinated to another security interest: see 6.51 of this text.41 [page 222] 7.33 In Gibbston Downs Wines Limited v Perpetual Trust Limited,42 SP1 initially

had priority over SP2, but the parties entered into a subordination agreement. SP1 subsequently assigned its security interest to SP3, and SP2 assigned its security interest to SP4. The question was whether the subordination agreement was binding as between SP3 and SP4. The court held that it was because, by implication, SP1’s assignment to SP3 included SP1’s obligations under the subordination agreement while, also by implication, SP2’s assignment to SP4 included the benefit of the subordination agreement. The court also relied on the New Zealand equivalent of the Australian PPSA s 60 (New Zealand PPSA s 69). The effect of the provision was that SP3 inherited SP1’s priority status, while SP4 inherited SP2’s priority status. Since, as a result of the subordination agreement, SP2 had priority over SP1, it followed that SP4 had priority over SP3.

CIRCULAR PRIORITIES 7.34 Example 16. Grantor gives competing security interests to three secured creditors, SP1, SP2 and SP3, with priority in that order. SP1 and SP3 enter into an agreement under which SP1 agrees to subordinate its security interest to SP3. Grantor defaults owing SP1 $200,000, SP2 $100,000 and SP3 $150,000. The value of the collateral is $225,000.

In the absence of the subordination agreement, SP1 would be entitled to $200,000 out of the collateral sale proceeds; SP2 would receive $25,000; and SP3 would get nothing. The subordination agreement changes the distribution, but the nature of the change depends on the terms of the agreement. There are two main possibilities. The first is that the parties intended SP1 to receive nothing until SP3 has been paid in full. This is known as a ‘contractual subordination’, or a ‘full subordination’: see Re CIF Furniture Limited.43 The effect of a full subordination is to place SP1 at the back of the queue, behind SP2 and SP3 in that order. The resulting distribution is as follows: $100,000 to SP2; $125,000 to SP3; and nothing to SP1. This gives SP2 a windfall: it was not a party to the subordination agreement, but it ends up being the main beneficiary. In Re CIF Furniture Limited, the Ontario Court of Appeal held that clear wording would be needed to justify the conclusion that the parties intended a full subordination or, in other words, that SP1 intended to subordinate its security interest not just to SP3 but to SP2 as well. The court concluded that, in the case before it, the documents did not support this construction. The court also looked at the commercial background to the transaction and the parties’ likely motivations. The facts, briefly stated, were as follows. SP1, apart from being a major creditor, also held a substantial shareholding in the grantor company. The money SP2 loaned the grantor had all been spent and

SP3 was providing the grantor with new finance to help it [page 223] keep afloat. From SP1’s point of view, it made sense to subordinate its security interest to SP3 because, with luck, SP3’s funds would help the grantor’s financial recovery and protect at least some of SP1’s investment and so SP1 had a direct interest in encouraging SP3 to make the loan. On the other hand, SP2’s loan deal with the grantor was a matter of history: SP2 had already made the loan, the money was gone and there was no commercial advantage to SP1 in giving SP2 priority. In summary, the wording of the subordination agreement, coupled with the background commercial circumstances, pointed strongly to the conclusion that SP1 did not intend a full subordination. 7.35 The other possibility, and the one the court in the CIF Furniture case in the end accepted, is that SP1 intended only a partial subordination. In a partial subordination, SP1 gives SP3 first claim on the collateral to the value of SP3’s claim and SP1 is entitled to any surplus up to the value of SP1’s claim. Any remaining surplus is applied in satisfaction of SP2’s claim. On this basis, the distribution in Example 16 would be as follows: $150,000 to SP3; $50,000 to SP1; and $25,000 to SP2.44 One noteworthy feature of this outcome is that SP1’s and SP3’s subordination agreement does not affect SP2’s entitlement: SP2 recovers the same amount as it would have without the agreement. In other words, in a partial subordination, SP1 and SP3 in effect contract around SP2.45 7.36 PPSA s 59 provides as follows: A security interest (the first security interest) has priority over another security interest (the last security interest) if, by the operation of this Act (including this section): (a) the first security interest has priority over security interests of a particular kind (the intermediate security interests ); and (b) the intermediate security interests have priority over the last security interest.

This provision, which is unique to the Australian PPSA, seems to have been drafted with a case like Example 16 in mind. Leaving aside the subordination agreement, SP1 holds the first security interest (in the sense that it has first priority), SP2 holds the intermediate security interest (in the sense that it has second priority) and SP3 holds the last security interest (in the sense that it has third priority). On one reading, s 59 means that SP1 retains priority over SP3 notwithstanding the

subordination agreement. In other words, the provision appears to preclude subordination agreements in a case involving one or more intermediate security interests. As a matter of policy, this would [page 224] be an undesirable outcome because, as the CIF Furniture case demonstrates, there may be good commercial reasons for subordinations even if there is an intermediate party involved. 7.37 Section 59 is apparently aimed at avoiding potentially unresolvable circular priority problems (where SP3 has priority over SP1, SP1 has priority over SP2 and SP2 has priority over SP3). As the above discussion indicates, however, subordination agreements do not raise this concern. In the case of a partial subordination, the apparent circular priorities issue disappears once it is recognised that SP1’s security interest is subordinated only to the value of SP3’s claim while, in the case of a full subordination, there is not even the hint of a circular priorities problem because SP1 is subordinated to both SP2 and SP3. In summary, at least in its application to cases like Example 16, s 59 is both unnecessary and commercially disruptive. The solution is to treat the priority rule in s 59 as a default rule, like all the other PPSA priority rules. This leaves the parties free to contract around s 59 by indicating their preference for a different priority order. On this basis, if the parties enter into a full subordination agreement, the priority order should be SP2, SP3 and SP1, while, if their agreement is for a partial subordination, the priority order should be SP3 (to the value of its claim), SP1 and SP2.46

THE DOUBLE GRANTOR RULES 7.38 The main PPSA priority rules are drafted on the assumption that the competing security interests were given by a common grantor. However, there may be cases where more than one grantor is involved. Example 17. On Date 2, Grantor 1 gives SP1 a security interest in its printing press and SP1 registers a financing statement. Previously, on Date 1, Grantor 2 had given SP2 a security interest in all Grantor 2’s present and after-acquired personal property and SP2 registered a financing statement on the same day. On Date 3, Grantor 1 sells the printing press to Grantor 2. The sale is outside the ordinary course of Grantor 1’s business.47 On Date 4, SP1 learns about Grantor 1’s sale of the printing press. It immediately registers a new financing statement incorporating Grantor 2’s details and claims the printing press from Grantor 2. SP2 disputes SP1’s claim.

SP1’s security interest ceases to be perfected by registration on Date 2 when Grantor 1 sells the printing press. However, it is temporarily perfected from Date 2 until Date 4 when it is again perfected by registration: PPSA s 34.48 If the default priority rules in PPSA s 55 applied, SP2 would have priority over SP1. SP1 is continuously perfected from Date 2, and so this is its priority [page 225] time for the purposes of subs 55(4). However, SP2’s priority time is Date 1: see 7.5–7.6 above. PPSA s 67 enacts a special priority rule which displaces this outcome. It provides that SP1 has priority provided that its security interest was perfected immediately before the transfer and was continuously perfected thereafter.49 There is a corresponding provision in Art 9 and, with the exception of Ontario, all the other PPSAs.50 The policy explanation is that SP1 has the stronger claim because it complied with the statute by amending its registration within the required time and, given the chronology, there is little it could have done to protect itself other than by constantly monitoring the collateral in Grantor 1’s hands. In particular, any inquiries SP1 might have made before acquiring its security interest would not have revealed SP2’s competing claim. In comparison, SP2 is not quite so helpless. In particular, if SP2 made an advance to Grantor 2 after Date 3 and in reliance on the printing press as collateral, it could have investigated the source of the printing press before going ahead and, if it had done so, it would have discovered SP1’s security interest.51 7.39 Example 18. On Date 1, SP1 takes a security interest in Grantor 1’s printing press and registers a financing statement. On Date 2, Grantor 1 sells the printing press to Grantor 2. The sale is not in the ordinary course of Grantor 1’s business. On Date 3, Grantor 2 gives SP2 a security interest in the printing press and SP2 registers a financing statement. On Date 4, SP1 learns about Grantor 1’s sale of the printing press. It immediately registers a new financing statement incorporating Grantor 2’s details and claims the printing press from Grantor 2. SP2 disputes SP1’s claim.

PPSA para 66(1)(c) provides that s 67 applies whether SP2 acquires its security interest before or after the sale of the collateral to Grantor 2.52 In Example 18, SP2 acquired its security interest after the sale, but s 67 still applies and so SP1 has priority. On the facts of Example 18, the s 55 default

[page 226] rules would have produced the same result: since SP1 is continuously perfected from Date 1, its priority time is Date 1 and so it has priority over SP2. 7.40 Example 19. On Date 1, SP1 takes a security interest in Grantor 1’s printing press and registers a financing statement. On Date 2, Grantor 1 sells the printing press to Grantor 2. The sale is not in the ordinary course of Grantor 1’s business. On Date 3, Grantor 2 gives SP2 a security interest in the printing press and SP2 registers a financing statement. On Date 4, SP1 learns about Grantor 1’s sale of the printing press, but it does not reperfect its security interest until Date 5, more than five business days after Date 4.

SP1’s security interest is unperfected from five business days after Date 4 until Date 5: s 34.53 This means that SP1 does not have priority under s 67 because its security interest was not continuously perfected following the sale on Date 2. The result would be the same if the s 55 default priority rules applied: since SP1’s security interest was unperfected from five business days after Date 4 until Date 5, its priority time is Date 5, not Date 1, and so SP2 has priority. However, s 68 is relevant in this connection. Section 68 applies if: (1) the collateral is not serialnumbered collateral; (2) SP1’s security interest was perfected by registration immediately before the sale on Date 2; and (3) SP1’s security interest becomes unperfected and is later reperfected and is continuously perfected thereafter. Subsection 68(1) provides that, in these circumstances, SP1 may obtain priority by serving a notice on SP2. The notice must be in the approved form and it must state that SP1 expects to perfect a security interest in the transferred collateral, describe the transferred collateral and set out the effect of subss 68(1) and (2). 7.41 Subsection 68(2) enacts an exception in SP2’s favour, catering for the case where SP2 makes an advance to Grantor 2 before SP1 reperfects its security interest or serves a subs 68(1) notice. Subsection 68(2) applies if: (1) SP2’s security interest is perfected immediately before SP1’s security interest becomes reperfected; and (2) Grantor 2 acquired the collateral without actual or constructive knowledge that the sale constituted a breach of Grantor 1’s security agreement with SP1.54 Example 20. On Date 1, SP1 takes a security interest in Grantor 1’s printing press and registers a financing statement. On Date 2, Grantor 1 sells the printing press to Grantor 2. The sale is not in the ordinary course of Grantor 1’s business and Grantor 2 has no knowledge of SP1’s security interest. On Date 3, Grantor 2 gives SP2 a security interest in the printing press and SP2 registers a financing statement. On Date 4, SP1 learns about Grantor 1’s sale of the printing press. On Date 6, it serves a subs 68(1) notice on SP2 and on Date 7, it reperfects its security interest. Date 7 is more than five

business days after Date 4. In the meantime, on Date 5, SP2 makes an advance of $100 to Grantor 2.

[page 227] Applying subs 68(2), SP2 has priority over SP1 for the Date 5 advance. On the other hand, SP1 continues to have priority under subs 68(1) with respect to any advances SP2 makes after Date 6. 7.42 Sections 67 and 68 do not apply unless SP1’s security interest was perfected immediately before the transfer and, in the case of s 68, perfection must be by registration. Example 21. On Date 2, Grantor 1 gives SP1 a security interest in its printing press, but SP1 does not register a financing statement or take any other steps to perfect its security interest. Previously, on Date 1, Grantor 2 had given SP2 a security interest in all Grantor 2’s present and after-acquired personal property and SP2 registered a financing statement on the same day. On Date 3, Grantor 1 sells the printing press to Grantor 2. The sale is outside the ordinary course of Grantor 1’s business. On Date 4, SP1 learns about Grantor 1’s sale of the printing press. It immediately registers a financing statement and claims the printing press from Grantor 2. SP2 disputes SP1’s claim.

SP1’s security interest was unperfected before the sale on Date 3, and so ss 67 and 68 do not apply. The s 55 default priority rules apply instead: SP1’s priority time is Date 4, SP2’s priority time is Date 1 and so SP2 has priority.55 The award of priority to SP2 is premised on the belief that SP1’s failure to perfect its security interest could have misled SP2.56 7.43 Sections 67 and 68 also only apply on the assumption that SP1’s security interest is not extinguished by Grantor 1’s sale of the collateral to Grantor 2. Example 22. Grantor 1 is a jeweller. On Date 1, SP1 takes a security interest in Grantor 1’s inventory. The security agreement limits Grantor 1’s freedom to sell the inventory and, in violation of these limits, on Date 2 Grantor 1 sells a necklace to Grantor 2. The sale is in the ordinary course of Grantor 1’s business and Grantor 2 has no knowledge of the irregularity. On Date 3, Grantor 2 gives SP2 a security interest in the necklace and SP2 registers a financing statement.

In this case, PPSA s 46 applies. The result is that Grantor 2 takes the necklace free of SP1’s security interest: see Chapter 10. In other words, SP1 loses its security interest and so it has no claim on the necklace against Grantor 2 or any third party, including SP2, who has acquired an interest in the necklace from Grantor 2.57 7.44 Example 23. On Date 2, Grantor 1 gives SP1 a security interest in its present and after-acquired accounts and SP1 registers a financing statement. Previously, on Date 1, Grantor 2 had given SP2 a

security interest in all Grantor 2’s present

[page 228] and after-acquired personal property and SP2 registered a financing statement on the same day. On Date 3, Grantor 1 transfers some accounts to Grantor 2 and Grantor 2 registers a financing statement.58 The transfer is outside the ordinary course of Grantor 1’s business. On Date 4, SP1 learns about the transfer. It immediately amends its registration substituting Grantor 2’s details and claims the accounts from Grantor 2. SP2 disputes SP1’s claim.

PPSA s 34 applies if collateral is ‘transferred’. Likewise, PPSA ss 67 and 68 apply if collateral is ‘transferred by a grantor to a transferee’. In Example 23, the transaction between Grantor 1 and Grantor 2 is in form a transfer of the accounts. But it is also a deemed security interest for PPSA purposes: see 3.24–3.29 of this text. It has been argued that, for this reason, ss 34 and 67–68 do not apply in cases like Example 23: for the purposes of the statute, Grantor 1 is deemed simply to have given Grantor 2 a security interest, not to have transferred ownership.59 However, the policy considerations in Example 23 are the same as in Example 17 and there is no good reason for treating the two cases differently. The discrepancy can be avoided by reading the reference to ‘transfer’ in ss 34 and 67 as extending to a transaction that, but for the deeming provision in PPSA subs 12(3), would be a transfer. 7.45 Example 24. On Date 1, SP1 takes a security interest in all Grantor 1’s present and after-acquired accounts and registers a financing statement. On Date 2, Grantor 1 transfers the accounts outright to Grantor 2. The sale is not in the ordinary course of Grantor 1’s business. On Date 3, Grantor 2 transfers the accounts, again outright, to SP2 and SP2 registers a financing statement. On Date 4, SP1 learns about the Date 2 transfer. It immediately amends its registration substituting Grantor 2’s details and claims the accounts from Grantor 2. SP2 disputes SP1’s claim.

It has been argued that ss 67–68 do not apply in a case like Example 24 because the transaction between Grantor 2 and SP2 is an outright transfer and para 68(2)(d) refers to the transferee-granted interest securing ‘the performance of an advance made, or an obligation incurred’.60 However, as indicated above, subs 68(2) is directed specifically at the case where the holder of the transferee-granted interest makes further advances and this scenario will only arise if it holds an in-substance security interest. On this basis, the limitation in para 68(2)(d) makes sense so far as the application of subs 68(2) is concerned, but there is no good reason for reading the limitation as if it applied to s 67 and subs 68(1) as well. In any event, if ss 67

and 68 do not apply, the default priority rules in s 55 will apply instead and, either way, SP1 has priority over SP2: see 7.39 above. [page 229] 7.46 Returning to Example 17, assume now that Grantor 1 leases the press to Grantor 2, rather than selling it. Is this a transfer for the purposes of ss 34 and 67? The analysis may vary depending on whether the lease is an in-substance security agreement, a PPS lease or a lease that is neither an in-substance security agreement or a PPS lease. If it is an in-substance security agreement, the implication is that, for the purposes of the statute, Grantor 1 is treated as having transferred ownership to Grantor 2 and taken a security interest in the press to secure payment of the price. On this basis, clearly there is a transfer and ss 34 and 67 apply in the manner described above. The analysis is the same if the lease is a PPS lease because, for the purposes of the statute, subs 12(3) presumptively equates a PPS lease with an insubstance security agreement. If the lease is neither an in-substance security agreement nor a PPS lease, there is still a transfer in the sense that the transaction transfers possession to Grantor 2, but ss 34 and 67 are not engaged. The reason is that, if Grantor 2 has only a possessory right, SP2’s security interest is correspondingly bounded: SP2’s security interest attaches to the press, but only to the extent of Grantor 2’s rights (see 4.15 of this text). A possessory right is good against all the world except the true owner and, since SP1’s security interest derives from the owner (Grantor 1), while SP2’s security interest derives from a party with only possessory rights (Grantor 2), SP1 has priority over SP2. In common with the other PPSA priority rules, ss 34 and 67 presuppose that the competing security interests are co-extensive, but in the scenario under consideration, this is not the case.

1. 2. 3. 4. 5. 6.

See The Healy Holmberg Trading Partnership v Grant [2012] NZLR 61 (CA). See 6.66–6.71 above on changes to registrations. Example 4 is adapted from Ronald C C Cuming, Catherine Walsh and Roderick J Wood, Security Interests in Personal Property, 2nd ed, Irwin Law, Toronto, 2012, p 420. On the ambiguity of the word ‘perfection’ in the PPSA context, see para 5.1. With the exception of Ontario, the Canadian PPSAs are all the same as the New Zealand PPSA in this respect. For discussion, see above note 3, at p 420. Bruce Whittaker, Review of the Personal Property Securities Act 2009: Final Report (Commonwealth of Australia, 2015), para 7.7.3 (‘Statutory Review: Final Report’).

7.

8.

9.

10. 11.

12. 13. 14.

15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

31. 32.

See New Zealand PPSA s 66(b), providing for ‘priority between perfected security interests in the same collateral (where perfection has been continuous)’ (emphasis added); and, for example, Saskatchewan PPSA s 35. The same rule applies in the other Canadian provinces. In Ontario, the concession is not subject to the 30-day registration renewal proviso and it applies in a wider range of circumstances than the Saskatchewan version: Ontario PPSA s 30(6). For discussion, see above note 3, at pp 474–9. For example, assume that SP3 takes a security interest in the suits and registers a financing statement on Date 4. Applying Saskatchewan PPSA s 35: (1) SP1 has priority over SP2 (providing SP1 renewed its registration within 30 days); (2) SP2 has priority over SP3 (because it was the first to register); and (3) SP3 has priority over SP1 (because SP1’s security interest was unperfected on Date 4 when SP3 appeared on the scene). See 6.54–6.65 of this text. See Louise Gullifer (ed), Goode on Legal Problems of Credit and Security, 5th ed, Sweet & Maxwell, London, 2013, at para 2.13; above note 3, at 421–2. The corresponding passages in the previous editions of both works were cited with approval in Royal Bank of Canada v Radius Credit Union Ltd [2010] 3 SCR 38 at [20]. The Statutory Review has recommended enacting an express priority rule to this effect: Statutory Review: Final Report, para 7.7.2. Assuming neither security interest is a purchase money security interest: see Chapter 8 of this text. (1985) 17 DLR (4th) 236 (ONCA). See, for example, John Deere Credit Inc v Standard Oilfield Services Inc (2000) 16 CBR (4th) 227 (ABQB); Gibbston Downs Wines Limited and RFD Finance No 2 Limited v Perpetual Trust Limited [2012] NZHC 1022. For a different view, see above note 3, at pp 473–4, arguing that the point of no return is not reached until one of the parties has realised on the collateral and is ready to distribute the proceeds. However, the trend of the authorities is against this view. The Statutory Review has recommended amending the PPSA to confirm that the priority position between competing security interests is determined at the time they come into conflict: Statutory Review: Final Report, para 7.7.1. Neither security interest is a purchase money security interest. For discussion of the special priority rules governing purchase money security interests, see Chapter 8 of this text. See, for example, The Robert Simpson Company Limited v Shadlock and Duggan (1981) 31 OR (2d) 612 (ONSC). (2010) 319 DLR (4th) 618 (ONCA). Compare Australian PPSA ss 164 and 165. See also Stevenson v GMAC Leaseco (2003) 227 DLR (4th) 154 (NBCA) at [20]–[26]. See Shallcross v Community State Banks Trust Co 434 A 2d 671 (NJ Sup Ct 1981). See Douglas G Baird and Thomas H Jackson, ‘Information, Uncertainty and the Transfer of Property’ (1984) 13 Journal of Legal Studies 299 at 312–6. See above note 21, at pp 312–6. See above note 21, at pp 312–6. See, for example, Saskatchewan PPSA s 65(3) and (4). PPSA s 111 requires parties to act honestly and in a commercially reasonable manner, but the provision only applies to Ch 4 of the statute (Enforcement of security interests). PPSA subs 57(3). See 5.22–5.37 for discussion of the various methods of acquiring control. Uniform Commercial Code — Secured Transactions, Official Comment on s 9-327. See 5.15 of this text, on security interests in negotiable instruments. The Statutory Review has suggested that the government should consider limiting the super-priority rule in PPSA s 57 to intermediated securities, investment instruments and ADI accounts: Statutory Review: Final Report, para 7.7.4.1. Statutory Review: Final Report, para 7.7.4.2. Hopkinson v Rolt (1861) 9 HLC 514; 11 ER 829.

33. 34. 35. 36. 37. 38. 39.

40. 41.

42. 43. 44. 45.

46. 47. 48. 49.

50.

51.

52.

53. 54. 55. 56. 57.

West v Williams [1899] 1 Ch 132 (CA). Property Law Act 1974 (Qld) s 82; Conveyancing and Law of Property Act 1884 (Tas) s 38; Property Law Act 1958 (Vic) s 94. For example, Chattel Securities Act 1987 (Vic) s 10 and Chattel Securities Act 1987 (WA) s 10, both foreshadowing the PPSA rule. Thomas H Jackson and Anthony T Kronman, ‘Secured Financing and Priorities Among Creditors’ (1979) 88 Yale Law Journal 1143 at 1180, quoting from the official comment to former Art 9 s 9-312. See above note 36. Alan Schwartz, ‘A Theory of Loan Priorities’ (1989) 18 Journal of Legal Studies 209 at 252. Roderick J Wood, ‘Subordination Agreements, Bankruptcy and the PPSA’ (2010) 49 Canadian Business Law Journal 65 at 69. In recognition of this point, the Statutory Review has recommended changing the references in s 61 from ‘subordination’ agreement to ‘priority’ agreement: Statutory Review: Final Report, para 7.7.7. See above note 39, at pp 89–90. PPSA subs 153(1) Table, Item 6. See Gibbston Downs Wines Limited v Perpetual Trust Limited [2013] NZCA 506 at [31], dealing with the corresponding provision in the New Zealand PPSA and stressing its optional aspect. [2013] NZCA 506. 2011 ONCA 34. See Royal Bank of Canada v General Motors Acceptance Corporation of Canada Ltd (2006) 274 DLR (4th) 372 (NFCA); Re CIF Furniture Limited 2011 ONCA 34. The court’s approach in the CIF case is consistent with case law in other, non-PPSA jurisdictions: see, for example, Re Portbase Clothing Ltd [1993] Ch 388; Amalgamated Roofing Ltd v Chris Larsen Ltd [1990] 1 NZLR 185; Re Armstrong [1895] 1 IR 87. See generally, Bruce Whittaker, ‘Circular Priority Conundrums — Cutting the Gordian Knot’ (2014) 42 Australian Business Law Review 62. The Statutory Review recommends repealing s 59: Statutory Review: Final Report, para 7.7.6. Therefore, Grantor 2 takes the printing press subject to SP1’s perfected security interest; neither PPSA s 32 nor s 46 apply to give Grantor 2 clear title. Contrast Example 22 below. See 5.47–5.53 of this text. Sections 67 and 68 do not apply if either security interest is perfected by control: para 66(1)(d). Note 1 to subs 66(1) makes it clear that if either or both security interests are perfected by control, the priority rules in s 57 apply. United States Uniform Commercial Code — Secured Transactions s 9-325; Saskatchewan PPSA s 35(8); New Zealand PPSA s 88. See generally, Anthony Duggan, ‘Security Interests in Transferred Collateral: A Note on Lisec America Inc v Barber Suffolk Limited’ (2014) 55 Canadian Business Law Journal 296. United States Uniform Commercial Code — Secured Transactions, Official Comment on s 9-325. SP1’s security interest may secure further advances. In that case, SP1 may want to conduct a register search before each advance to check for intervening security interests. But SP1 has no reason to search against someone other than Grantor 1: United States Uniform Commercial Code — Secured Transactions, Official Comment on s 9-325. Compare with Saskatchewan PPSA s 35(8) which only applies if SP2 acquires its security interest before the sale. In other cases, the default priority rule applies. Article 9 s 9-135 is not limited in this way, nor is New Zealand PPSA s 88. See 5.47-5.53 of this text. On the meaning of actual and constructive knowledge, see 10.17–10.18 of this text. See Note 2 following PPSA subs 66(1) which makes it clear that if ss 67 and 68 do not apply, s 55 applies instead. United States Uniform Commercial Code — Secured Transactions, Official Comment on s 9-325. See New Zealand PPSA s 88(2), which makes this point explicitly. See also, for example, Saskatchewan PPSA s 35(9).

58. 59. 60.

On the basis that, applying PPSA subs 12(3), Grantor 2 is deemed to hold a security interest in the accounts: see 3.24–3.29 of this text. John H Stumbles, ‘The Impact of the Personal Property Securities Act on Assignments of Accounts’ (2013) 37 Melbourne University Law Review 415 at 458–61. Above note 59, at p 459.

[page 231]

CHAPTER 8 Purchase Money Security Interests INTRODUCTION 8.1 Personal Property Securities Act 2009 (Cth) (PPSA) ss 62–64 enact special priority rules for disputes involving purchase money security interests. Broadly speaking, a purchase money security interest (PMSI) is a security interest given to facilitate the grantor’s purchase of the collateral to which the security interest relates. The simplest example is the retention of title arrangement, where the secured party sells goods to the grantor on conditional sale terms: see Example 1 below. A variation on the same theme is where the secured party makes a loan to the grantor to finance the purchase of an item and takes a security interest in the purchased item to secure repayment of the loan: see Example 2 below. Example 1. On Date 1, Grantor gives SP1 a security interest in all its present and after-acquired personal property and registers a financing statement. On Date 2, SP2 sells and delivers a printing press to Grantor, for use in Grantor’s publishing business. The sale is on reservation of title terms. On Date 3, Grantor defaults against SP1 and SP2 and they both claim the press.

SP1’s and SP2’s claims are both subject to the PPSA; the PPSA applies to SP1’s claim because it is in both form and substance a security interest, and it applies to SP2’s claim because it is in substance a security interest regardless of its form.1 For the purposes of the statute, SP2 is deemed to have transferred ownership of the press to Grantor on Date 2 but to have taken or retained a security interest to secure payment of the sale price. On this basis, Grantor has rights in the press and so it is subject to SP1’s security interest.2 In summary, SP1 and SP2 both have claims to the press and the PPSA priority rules apply to determine the dispute.3 8.2 SP2’s security interest in the printing press is a PMSI because it secures Grantor’s obligation to pay for the press: see further, 8.7 below. It follows that [page 232]

the special priority rules for PMSIs apply. PPSA s 62 gives priority to a PMSI over a competing non-PMSI security interest subject to two conditions: (1) the PMSIholder must register a financing statement; and (2) the financing statement must disclose that the security interest is a PMSI. If the disputed collateral is inventory, the financing statement must be registered before the inventory is delivered, but otherwise the financing statement may be registered any time up to 15 business days after delivery: see further, 8.35–8.40 below. in Example 1, the printing press is not inventory,4 and so the more liberal registration requirement applies. The upshot is that SP2 has priority over SP1 provided that it registers a financing statement within 15 business days after Date 2.5 8.3 Example 2. On Date 1, Grantor gives SP1 a security interest in all its present and after-acquired personal property and registers a financing statement. On Date 2, Seller sells and delivers a printing press to Grantor, for use in Grantor’s publishing business. SP2 makes Grantor a loan to finance the purchase and takes a security interest in the printing press to secure repayment. On Date 3, Grantor defaults against SP1 and SP2 and they both claim the press.

SP2’s security interest in the printing press is a PMSI because it enabled Grantor to purchase the press: see further, 8.8–8.10 below. Therefore, the analysis is the same as in Example 1: the special priority rules in PPSA s 62 apply and, provided SP2 registers a financing statement within 15 business days after Date 2, it will have priority over SP1, even though SP1 was the first to register.6

POLICY CONSIDERATIONS 8.4 In a competition between security interests in the same collateral, pre-PPSA law normally took a first-in-time approach and the PPSA by and large continues this tradition: see Chapter 7. The justification for some version of the first-in-time rule is obvious: under any other approach, a secured party would have no way of knowing at the time of transacting whether its security interest would end up being worth anything and this uncertainty would undermine the practice of secured lending. Why, then, does the PPSA abandon the first-in-time rule when it comes to PMSIs? There are two main policy justifications, represented by the so-called new money theory and the situational monopoly theory. [page 233]

8.5 A PMSI-holder (SP2) adds new money to the grantor’s enterprise in the sense that it allows the grantor to acquire new assets, typically inventory or equipment, for use in the business. There are two versions of the new money theory: a dynamic version and a static version.7 According to the dynamic version, SP2 deserves priority because the new assets increase the grantor’s profitability: new equipment improves the efficiency of the enterprise and new inventory allows for additional sales. Increased profitability reduces the risk of the grantor’s defaulting on its payment obligations and, in this sense, SP2’s new money potentially makes the competing secured lender (SP1) better off. According to the static version of the new money theory, SP2 deserves priority because even if its new money does not make SP1 any better off, at least SP1 is no worse off. The reason is that each new dollar of debt the grantor incurs to SP2 is exactly offset by a new dollar of asset value so that SP2’s security interest does not diminish the grantor’s asset base. In other words, giving SP2 priority for the collateral in question puts SP1 in no worse a position than if the grantor had not contracted with SP2 in the first place. For these reasons, SP1 will at best favour, and at worst be indifferent to, ceding priority to SP2, and so a statutory rule in SP2’s favour simply reflects the outcome the parties would have bargained for anyway. The advantage of a statutory rule is that it avoids the need for express contractual provisions to deal with the matter. 8.6 The situational monopoly theory runs as follows.8 Aside from the PMSI provisions, the PPSA strongly favours the first-in-time creditor and this gives SP1 a potential monopoly over the grantor’s present and future borrowing requirements. For one thing, the statute allows SP1 to take a security interest in all the grantor’s present and after-acquired personal property and to obtain priority for it by registering ahead of anyone else.9 If SP1 takes advantage of this facility, there will be no collateral left for other creditors to take a first-ranking security interest. In summary, the statute enables SP1 to lock up all the grantor’s collateral. For another thing, the statute allows SP1 to make future advances and it gives SP1 the same priority for future advances as for the original loan.10 If SP1 has taken a security interest in all the grantor’s present and after-acquired personal property and is the first to register, a provision for future advances in SP1’s loan contract locks up all the grantor’s borrowing requirements. Example 3 illustrates the concern. Example 3. SP1 takes a security interest in all Grantor’s present and after-acquired personal property and registers a financing statement on Date 1. SP1 and Grantor’s agreement provides for the making of future advances. On Date 2, SP1 lends Grantor $100. On Day 3, Grantor negotiates with SP2

[page 234] for a secured loan of $50. SP2 conducts a register search and discovers SP1’s security interest. Having done this, SP2 realises that it cannot obtain a first-ranking security interest in any of Grantor’s collateral for the $50 loan.

What are SP2’s options in these circumstances? One possibility might be to negotiate a subordination agreement with SP1 but, failing this, SP2 will have to be content with a second-ranking security interest behind SP1. However, a secondranking security interest may not offer the same level of protection, and so SP2 will likely raise its interest charges to compensate for the added risk. The problem is that, by raising its interest charges, SP2 makes itself less competitive with SP1 and so, other things being equal, Grantor will borrow the $50 from SP1 instead, because SP1’s terms are better. In summary, according to the situational monopoly theory, the purpose of the PMSI super-priority rules is to counteract SP1’s monopoly advantage and to facilitate borrowing from other sources.

THE MEANING OF ‘PURCHASE MONEY SECURITY INTEREST’ Seller PMSIs and Lender PMSIs 8.7 PPSA subs 14(1) defines ‘purchase money security interest’, in part, as follows: A purchase money security interest means any of the following: (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. Paragraph (a) is aimed at the case where a seller takes a security interest in goods it sells to the buyer to secure payment of the purchase price: see Example 1, above. In the case of a retention of title agreement, formally speaking the seller does not ‘take a security interest’; it reserves title. However, s 14 must be read in conjunction with s 12 which, for the purposes of the statute, in effect assimilates title reservation arrangements with security interests in the strict sense: see 3.4–3.7. It follows that the seller’s interest under a retention of title agreement is a PMSI within the

meaning of para 14(1)(a). 8.8 The transaction para 14(1)(a) refers to is a two-party one, involving a seller and a buyer. Paragraph (b) deals with the equivalent three-party transaction, where a lender lends money to a buyer to finance a purchase from the seller and the lender takes a security interest in the goods purchased to secure repayment of the loan: see Example 2 above. A PMSI falling under para (a) of the definition is commonly referred to as a ‘seller’s PMSI’, while a PMSI that falls under para (b) is known as a ‘lender’s PMSI’.11 One element of the para (b) definition is that the loan must be for the purpose of enabling [page 235] the grantor (buyer) to acquire rights in the collateral (goods). This makes the chronology important: if the contract of sale precedes the loan agreement, the lender’s security interest typically will not be a PMSI. The reason is that property passes to the buyer under the contract of sale, and if the buyer already owns the goods at the time the seller agrees to make the loan, the loan cannot be ‘for the purpose of enabling the [buyer] to acquire rights in the collateral’. 8.9 For example, in North Platte State Bank v Production Credit Association of North Platte,12 the buyer bought a herd of cattle from the seller on unsecured credit terms and subsequently took a loan from the lender to pay the seller, giving the lender a security interest in the cattle to secure repayment. The court held that the lender did not have a PMSI. By contrast, in Agricultural Credit Corp of Saskatchewan v Pettyjohn13 — which also involved the purchase of a herd of cattle — the buyer arranged a bank loan, secured against the cattle, to finance the purchase and, when there was a delay in the loan funds coming though, obtained interim finance to pay the seller. Upon receipt of the loan funds, the buyer used them to repay the interim financier. The court held that the bank had a PMSI; in contrast to North Platte, the buyer had applied for the bank loan before making the purchase and, on this basis, the interim finance arrangement and the bank loan were in substance two stages in one overall transaction: (1) the interim financier loaned the buyer money to enable the buyer to acquire the collateral; and (2) the bank loaned the buyer the money to repay the interim financier. Therefore, indirectly, the bank’s loan enabled the buyer to acquire the collateral. This reasoning was approved by the Privy Council in Federal Republic of Brazil v Durant

International Corporation.14 8.10 The other main element of the para (b) definition is that the buyer (grantor) must apply the value received to acquire ownership. Example 4. SP1 has a security interest, perfected by registration on Date 1, in all Grantor’s present and after-acquired personal property. SP2 lends Grantor money to purchase a herd of cattle from Seller and takes a security interest in the cattle to secure repayment. SP2 registers a financing statement on Date 2. As events turn out, Grantor draws on an alternative source of funds to pay for the cattle and uses SP2’s money for another purpose.

SP2 has a security interest in the cattle, but it is not a PMSI because Grantor did not apply the value SP2 provided to buy the cattle. The result is that, in a priority dispute between SP1 and SP2, SP2 does not have the benefit of the PMSI [page 236] super-priority rule and the default priority rules in PPSA s 55 apply instead.15 SP2 could have avoided this outcome by paying the loan proceeds directly to Seller.

Exceptions 8.11 PPSA subs 14(2) lists a number of exceptions to the definition in subs (1), including ‘an interest acquired under a transaction of sale and lease back to the seller’. Example 5. Grantor runs a publishing business and its assets include a number of printing presses. Grantor sells one of the presses to SP who, in turn, leases the press back to Grantor for a three-year term.

SP’s lease gives it a security interest in the press for the purposes of the statute, but the security interest is not a PMSI because it falls under the subs 14(2) exception. The exception is most easily explained in terms of the new money theory: Grantor’s deal with SP does not bring new money into Grantor’s enterprise. It is true that Grantor now has some extra cash, but this value is offset by Grantor’s loss of title to the press. In substance, the case is the same as if Grantor had simply borrowed money from SP, using the press or some other existing asset, to secure repayment. Assume that, in Example 5, instead of leasing the press back to Grantor, SP resells it to Grantor on retention of title terms. The subs 14(2) exception does not apply because it is limited to sale and leaseback arrangements. However, in Canada the courts have held that, by implication, a sale and repurchase agreement

does not create a PMSI.16 8.12 A sale and leaseback transaction may be part of a larger arrangement, the purpose of which is to enable the grantor to acquire the collateral, as where the grantor buys the goods from a seller in anticipation of a sale and leaseback arrangement with the secured party. In cases like this, a court might be prepared to hold that SP’s security interest is in substance a PMSI and that the sale and leaseback exception does not apply; the court’s reasoning in the Pettyjohn case is relevant in this connection: see 8.9 above. In any event, the Statutory Review has recommended a carve-out from the sale and leaseback exception which would at least partially address the issue. The proposed carve-out would apply where the secured party pays the purchase price directly to the seller.17 The thinking is that, in these circumstances there can be no doubt that the sale and leaseback is part of a larger transaction, the purpose of which is to enable the grantor to acquire the collateral. [page 237] 8.13 A grantor may attempt to avoid the sale and leaseback limitation by relying on PPSA s 46. Section 46 provides that a party who buys collateral from the grantor in the ordinary course of the grantor’s business takes free of a security interest given by the selling grantor unless the buyer knew that the sale was in breach of the security agreement: see further, Chapter 10 of this text. Assume that, in Example 5, SP* held a prior perfected security interest in all Grantor’s present and afteracquired personal property. If s 46 applied, Grantor’s sale to SP would extinguish SP*’s security interest in the printing press, leaving the way open for SP to stake a first-ranking claim for itself.18 However, s 46 only applies if the sale is in the ordinary course of the grantor’s business, and typically a sale of equipment, which is part of a sale and leaseback transaction, will not satisfy this requirement.19 8.14 Subsection 14(2) also carves out from the definition of ‘purchase money security interest’ transactions where the original collateral is chattel paper, an investment instrument, an intermediated security, a monetary obligation or a negotiable instrument. The reason for this provision is that the statute enacts special priority rules for these types of collateral and the aim is to avoid conflict with the PMSI priority rules: see Chapter 10 of this text. The upshot is that the definition of ‘purchase money security interest’ is confined to cases where the collateral is goods,

a document of title to goods or intangible property other than accounts (the most important example being intellectual property rights): see Chapter 2 of this text. Finally, subs 14(2) provides that a purchase money security interest does not include a security interest in collateral that the grantor intends to use predominantly for personal, domestic or household purposes; the exception does not apply if the collateral is serial-numbered goods, such as a motor vehicle: subs 14(2A). This last exception is unique to Australia: there is no corresponding provision in any of the other PPSAs. According to the Explanatory Memorandum, the purpose of the exception is ‘to promote [the] availability of finance to small business, by ensuring that general PPSA security interests are not eroded by later [PMSIs] granted to acquire personal use assets’.20 However, the significance of the exception is substantially reduced by the subs 14(2A) carve-out, the purpose of which is, presumably, to facilitate the financing of motor vehicle purchases and the like.21 [page 238]

Mixed PMSIs and Non-PMSIs 8.15 Subsections 14(3) and (4) deal with mixed PMSIs and non-PMSIs, and they are relevant to the inclusion of all liability and cross-collateralisation clauses in PMSI agreements. The provisions are borrowed from Art 9 of the United States Uniform Commercial Code.22 There are no corresponding provisions in any of the Canadian PPSAs, but the courts have read into the statute rules to similar effect.23 8.16 Subsection 14(3) provides, in effect, that a security interest does not lose its PMSI status simply because the purchase-money collateral also secures a nonpurchase money obligation. Example 6. SP supplies Grantor with motor vehicle spare parts for resale in Grantor’s dealership business. There is a provision in the contract saying that SP reserves title in the goods until Grantor has paid for them in full and, further, until Grantor has discharged all its obligations to SP under all other contracts.

Pre-PPSA, a provision like this would have been valid as a matter of sales law. The sale of goods legislation allows a seller to reserve title and it does not restrict the seller’s freedom to stipulate the conditions on which title will pass. The leading case was Armour v Thyssen Edelstahlwerke AG.24 Assume that, in Example 6, Grantor had previously given Bank a floating charge. Grantor pays SP for the spare parts under the contract in question, but defaults on another obligation owing to SP. The

implication of the Armour case is that, if Bank and SP both claimed the spare parts, SP would have priority. 8.17 The PPSA is less generous to SP in this respect. Applying subs 14(3): (1) SP has a security interest in the goods supplied which secures Grantor’s obligations under the contract in question and all other contracts as well; (2) SP’s security interest is a PMSI in so far as it secures Grantor’s obligation to pay for the goods supplied; and (3) SP holds a non-PMSI security interest in the goods supplied to secure Grantor’s other obligations. Assume that, in Example 6, Bank holds a priorregistered security interest in all Grantor’s present and after-acquired personal property. As a consequence of subs 14(3), while SP would have priority over Bank for the spare parts to enforce Grantor’s obligation to pay for them, it does not have the same priority when it is relying on the security interest to enforce other obligations. 8.18 PPSA subs 14(4) provides, in effect, that a security interest does not lose its PMSI status simply because collateral other than purchase-money collateral also secures the purchase money obligation. Example 7. SP supplies Grantor with motor vehicle spare parts for resale in Grantor’s dealership business. There is a provision in the contract saying that SP reserves title in the goods until Grantor has paid for them in full and, to

[page 239] further secure payment, Grantor gives SP a security interest in all its other present and after-acquired inventory.

As a matter of pre-PPSA law, on the same reasoning as in Example 6, SP’s retention of title claim would have prevailed over a pre-existing floating charge but, by the same token, its security interest in Grantor’s other inventory quite possibly would not.25 The PPSA gets to a roughly comparable result. Applying subs 14(4): (1) SP has a security interest in the goods supplied, and all Grantor’s other present and after-acquired inventory as well, to secure payment for the goods supplied; (2) SP’s security interest in the goods supplied is a PMSI; and (3) SP’s security interest in the remaining collateral is not a PMSI. Given that SP’s security interest in the remaining collateral is not a PMSI, the residual first-to-register priority rule applies, and so SP’s security interest is subordinate to a prior-registered security interest in the same collateral.

8.19 Example 8. SP sells Grantor a printing press for use in Grantor’s publishing business. The sale is on reservation of title terms and the contract price is $25,000. Later, SP sells Grantor a second printing press, again on reservation of title terms, for a price of $50,000. Both contracts contain a provision saying that the security interest secures payment for not only the goods sold under the contract in question, but also goods SP may sell to Grantor under any other contract.

Again applying subs 14(4): (1) SP has a PMSI in the first printing press to secure payment of the $25,000 purchase money obligation owing under the first contract; (2) SP has a PMSI in the second printing press to secure payment of the $50,000 purchase money obligation owing under the second contract; (3) SP has a nonPMSI in the first printing press to secure payment of the $50,000 owing under the second contract; and (4) SP has a non-PMSI in the second printing press to secure payment of the $25,000 owing under the first contract. 8.20 To see the significance of this analysis, assume that, in Example 8, before either purchase, Grantor gave Bank a security interest in all Grantor’s present and after-acquired personal property and Bank registered a financing statement. Some time after the second contract with SP, Grantor defaults and the two printing presses are sold for $20,000 and $40,000 respectively. There is $15,000 owing to SP for the first printing press and $45,000 owing for the second printing press.26 Bank and SP each claim the sale proceeds. SP has PMSIs in both printing presses but, as a consequence of PPSA subs 14(4), it does not have priority over Bank for the entire $60,000 sale proceeds. SP has a PMSI in the first printing press only for the $15,000 that is owing under the first contract, and it has a PMSI in the second printing press only [page 240] for the $45,000 that is owing under the second contract. Taking first the $20,000 proceeds from the sale of the first printing press, on the assumption that SP has complied with the registration requirements in PPSA s 62, it has priority over Bank for $15,000 by virtue of its PMSI; Bank is entitled to the remaining $5000 by virtue of its earlier registration. Turning to the $40,000 proceeds from the sale of the second printing press, this amount is less than the purchase money obligation owing under the second contract ($45,000) and so, by virtue of its PMSI, SP has priority for the full amount.

Allocation of Payments 8.21 Example 9. Grantor gives Bank a security interest in all its present and after-acquired personal property and Bank registers a financing statement. Later SP sells Grantor a consignment of yellow motor vehicle spare parts for resale in Grantor’s business. The sale is on reservation of title terms and the price is $25,000. Later still, SP sells Grantor a second consignment of spare parts, this time green ones, again on reservation of title terms for a price of $50,000. Both contracts contain a provision saying that the security interest secures payment for not only the goods sold under the contract in question, but also goods SP may sell to Grantor under any other contract. Eventually Grantor defaults, having made payments to SP totalling $25,000. There is no indication of how Grantor and SP intended these payments to be allocated between the two contracts. There are yellow and green spare parts supplied by SP still in Grantor’s stock which Bank and SP both claim.

Applying PPSA subs 14(4): (1) SP has a PMSI in the yellow spare parts to secure payment of the purchase money obligation owing under the first contract; (2) SP has a PMSI in the green spare parts to secure payment of the purchase money obligation owing under the second contract; (3) SP has a non-PMSI in the yellow spare parts to secure payment of the purchase money obligation owing under the second contract; and (4) SP has a non-PMSI in the green spare parts to secure payment of the purchase money obligation owing under the first contract. 8.22 The challenge in Example 9, though, is to identify the amounts of the respective outstanding purchase money obligations to determine Bank’s and SP’s entitlements. In the absence of any agreement between SP and Grantor governing allocation of payments or of any relevant statutory provision, a court might address the problem by applying the rule in Clayton’s case, otherwise known as the first-in, first-out rule.27 On this basis, SP’s $25,000 payments would all be allocated to the first contract so as to discharge the purchase money obligation in respect of the yellow spare parts. Since SP’s security interest in the yellow spare parts no longer secures a purchase money obligation, it cannot be a PMSI. Therefore, as between Bank and SP, the [page 241] ordinary priority rule applies and, since Bank registered first, it has priority over SP with respect to the yellow spare parts. But SP retains a PMSI in the green spare parts for the $50,000 purchase money obligation owing under the second contract and, assuming SP has complied with the PPSA s 62 registration requirements, it will

have priority over Bank for the green spare parts. On the other hand, instead of applying the rule in Clayton’s case, a court might decide to apportion SP’s $25,000 payments between the two contracts pro rata according to the obligations secured. On this basis, one-third of SP’s $25,000 payments would be allocated to the first contract, and two-thirds to the second contract. If the court adopted this approach, SP would retain a PMSI in the yellow spare parts for the balance of the purchase money obligation outstanding under the first contract, and it would retain a PMSI in the green spare parts for the balance of the purchase money outstanding under the second contract. In other words, SP would have partial priority over Bank in respect of both the yellow and green spare parts. 8.23 PPSA subs 14(6) resolves the uncertainty by enacting a statutory rule for allocation of payments in cases where the parties have not themselves agreed on a method of allocation. The provision reads as follows:28 In any transaction, if the extent to which a security interest is a purchase money security interest depends on the application of a payment to a particular obligation, the payment must be applied: (a) in accordance with any method of application to which the parties agree; or (b) if the parties do not agree on a method — in accordance with any intention of the debtor manifested at or before the time of the payment; or (c) if neither paragraph (a) nor (b) applies — in the following order: (i) to obligations that are not secured, in the order in which those obligations were incurred; (ii) to obligations that are secured, but not by purchase money security interests, in the order in which those obligations were incurred; (iii) to obligations that are secured by purchase money security interests, in the order in which those obligations were incurred.

Applying this provision to the facts of Example 9, on the assumption that neither para (a) or (b) applies, the governing rule is in subpara (c)(ii): SP holds a non-PMSI in the yellow spare parts to secure payment of the obligation [page 242] arising under the second contract and it has a non-PMSI in the green spare parts to secure payment of the obligation arising under the first contract; the obligation under the first contract was incurred before the obligation under the second contract; and so SP’s $25,000 payment is allocated to the first contract. Given that this extinguishes the purchase money obligation with respect to the yellow spare parts, it follows that SP no longer enjoys PMSI status with respect to the yellow

spare parts. 8.24 The effect of para 14(6)(c) is to maximise the reach of a PMSI by keeping the purchase money obligation intact until the debtor has paid off all its other obligations to the secured party. However, the provision may be overridden by a contrary intention on the grantor’s part, manifested at or before the time of payment. The implication is that it may be unsafe for the secured party to rely on para (c) and, to avoid the risk, it should incorporate an express allocation of payments provision in the contract. 8.25 Assume that, in Example 9, the spare parts SP supplies under both contracts are all yellow ones. The above analysis presupposes that it is possible to differentiate between the yellow spare parts supplied under the first contract and the yellow spare parts supplied under the second contract but, unless Grantor has kept the two consignments separate or marked them in some way, they may be indistinguishable. In these circumstances, a court may deny SP PMSI status altogether on the ground that SP has not satisfied the burden of proof.29 In the United States, Art 9 s 9-103(b)(2) provides that a security interest is a PMSI ‘if the security interest is in inventory that is or was purchase-money collateral, also to the extent that the security interest secures a purchase-money obligation incurred with respect to other inventory in which the secured party holds or held a purchasemoney security interest’. Applying this provision to our fact situation, both SP’s security interests are PMSIs to the extent of the purchase money obligations under both contracts. This makes it unnecessary to determine whether any given spare part belongs to the first consignment or the second one. However, although the PMSI definition in PPSA s 14 is modelled in some respects on the Art 9 definition, Australia has not adopted this part of the provision. The Statutory Review has recommended that Australia should take this step.30

Refinancings and Consolidations 8.26 PPSA subs 14(5) provides that a security interest does not lose its PMSI status only because the purchase money obligation is renewed, refinanced, consolidated or restructured (whether or not by the same secured party).31 [page 243]

Example 10. SP sells Grantor a printing press, on reservation of title terms, for use in Grantor’s publishing business. Later SP sells Grantor a spare part for the press. The sale is on credit terms, but SP does not reserve title. Later still, the parties consolidate the two transactions.

8.27 Subsection 14(5) makes it clear that SP does not lose its PMSI status with respect to the printing press as a result of the consolidation. The allocation rules in subs 14(6) will apply to determine the apportionment of post-consolidation repayments between the two parts of the consolidated obligation. The same provisions apply to the consolidation of a PMSI agreement with a non-PMSI agreement and to the consolidation of two or more PMSI agreements. 8.28 The analysis becomes more complicated where a third party refinances the original PMSI transaction. Example 11. Grantor gives Bank a security interest in all its present and after-acquired personal property and Bank registers a financing statement. Later SP sells Grantor a printing press for use in Grantor’s publishing business. The sale is on reservation of title terms and the contract price is $25,000. SP registers a financing statement within the time limit prescribed by PPSA s 62. Later still Grantor negotiates a loan from Financier for the purpose of paying out its contract with SP. Financier takes a security interest in the printing press to secure repayment of the loan. Grantor ends up in financial difficulty and Financier and Bank both claim the printing press.

The outcome of the dispute between Bank and Financier depends on whether Financier’s security interest qualifies as a PMSI. The starting point is para 14(1)(b), which provides that the loan must be for the purpose of enabling Grantor to acquire rights in the press. Grantor already owns the press at the time of Financier’s arrival on the scene and so it is hard to see how Financier’s loan can be for the purpose stated in para 14(1)(b). It is true that the refinancing results in the discharge of SP’s security interest in the press, but this does not enlarge Grantor’s rights because, in the end, SP’s security interest is simply replaced by Financier’s security interest; Grantor’s rights in the press are the same as they were before the refinancing, the only difference being the identity of the secured party.32 8.29 In Example 11, Financier took a new security interest in the press, presumably on the understanding that SP’s security interest was extinguished when SP was paid out. An alternative way of proceeding might have been for SP to assign its security interest in the press to Financier as security for Financier’s loan to Grantor. If the parties had structured their transaction this way, PPSA [page 244]

s 60 would have applied. Section 60 provides that if a security interest is transferred, the transferred interest has the same priority immediately after the transfer as it had immediately before the transfer. Applying this provision to the facts of the case, immediately before the transfer SP had priority over Bank by virtue of its PMSI status; following the transfer Financier succeeds to SP’s priority position and so Financier has priority over Bank. 8.30 The PPSA at large takes a substance-over-form approach to the regulation of security interests and it would be a triumph of form over substance if the priorities between Financier and Bank were to depend on how the parties happened to have structured their transaction. PPSA subs 14(5) is relevant in this connection. It provides in part that a security interest does not lose its PMSI status only because the purchase money obligation is refinanced ‘whether or not by the same secured party’ (emphasis added). The wording could be clearer, but the implication seems to be that, on the facts of Example 11, Financier inherits SP’s PMSI status.33 However, that is not the end of the story because, to obtain priority over Bank, in addition to proving that its security interest is a PMSI, Financier must also comply with the s 62 registration requirements. If the collateral is goods other than inventory, s 62 requires the PMSI-holder to register a financing statement within 15 business days after the grantor obtains possession of the collateral. 8.31 In Example 11, it is at first glance hard to see how Financier can satisfy this requirement given that considerably more than 15 days is likely to have elapsed between the date Grantor took delivery of the press from SP and the date of the refinancing agreement. Some Canadian courts have addressed this problem by holding that the debtor (grantor) notionally takes possession of the collateral, vis-àvis the refinancing lender, when the new funds are applied to pay out the old obligation. On this basis, the 15 days starts to run, not from the date the grantor originally obtained possession of the collateral, but from the date of the refinancing.34 Australian courts will need to take the same approach in order to make sense of subs 14(5): there is no point in giving the PMSI refinancier PMSI status if the time limits in s 62 are read as [page 245] denying it super-priority.35 Assuming the courts do take this approach then, in Example 11, Financier will obtain priority over Bank provided it registers a

financing statement, in compliance with s 62, no later than 15 business days after the date of the refinancing. 8.32 An alternative approach might be for Financier to rely on the equitable doctrine of subrogation. Subrogation involves the substitution of one party (B) for another (A) so that B takes over A’s rights in respect of a claim. At general law, the doctrine of subrogation applies in a case where a third party, at the grantor’s request, pays off a first-ranking security interest on the understanding that it will inherit the original secured party’s priority position. All the PPSAs, and Art 9, include a provision which preserves the operation of the general law in so far as it is capable of applying consistently with the statute;36 and there are Canadian and United States authorities suggesting that the doctrine of subrogation may apply in a case like Example 11.37 Under the doctrine of subrogation, Financier would step into SP’s shoes with respect to its rights against Bank. In other words, Financier succeeds to SP’s priority position. However, subrogation is a derivative right; in other words, Financier’s rights are coextensive with the rights SP previously enjoyed. The implication is that if SP has complied with the s 62 registration requirements so as to qualify for super-priority, then Financier has super-priority too — even if Financier has not itself complied with s 62. On the other hand, if SP has not complied with the s 62 registration requirements and so is disqualified from super-priority, Financier is disqualified too. The result would be the same if Financier had taken an assignment of SP’s PMSI and PPSA s 60 applied. Under s 60, the assignee automatically succeeds to the assignor’s priority position. This means that if SP has complied with the s 62 registration requirements, there is no need for Financier to register its own financing statement. On the other hand, it also means that if SP has not complied with the s 62 registration requirements, Financier will not have the benefit of the super-priority rule. In other words, s 60 mimics the doctrine of subrogation in its application to the case under discussion. To see the implications of the different approaches, assume that, in Example 11, SP registers more than 15 business days after Grantor takes delivery of the press, while Financier registers within 15 business days after the date of the refinancing. On these facts, SP does not get the benefit of the super-priority rule in s 62. However, if subs 14(5) applies, Financier may do so (subject to how the courts interpret the s 62 registration requirements). By contrast if Financier relies instead on the doctrine of subrogation, or if [page 246]

PPSA s 60 applies, Financier cannot achieve a better priority position than SP had.38

PPS Leases 8.33 Paragraph 14(1)(c) extends the definition of ‘purchase money security interest’ to the interest of a lessor or bailor of goods under a PPS lease. Example 12. Grantor is in the road construction business. On Date 1, SP1 takes a security interest in all Grantor’s present and after-acquired personal property and registers a financing statement. On Date 2, SP2 supplies Grantor with a steamroller under a two-year operating lease. On Date 3, Grantor defaults against SP1 and SP2 and they both claim the steamroller.

The contract between SP2 and Grantor is a PPS lease and so the statute applies on the footing that SP2 holds a deemed security interest: see PPSA subs 12(3), discussed in 3.33–3.36. Consequently, if SP2 fails to register a financing statement, SP1 will have priority under subs 55(2) (a perfected security interest has priority over an unperfected security interest in the same collateral): see Chapter 7. But even if SP2 registers a financing statement on Date 2, its security interest would still be subordinate to SP1 if the default priority rules in s 55 applied because SP1’s priority time is Date 1: subss 55(4) and (5). From a policy perspective, giving SP1 priority would be an undesirable outcome. It would increase SP2’s risk of doing business and so it would be more costly for Grantor to rent equipment. This would not be in the interests of any of the parties, including SP1 itself; it is in SP1’s interests to facilitate Grantor’s rental agreement with SP2 so that Grantor can run its business profitably, repay SP1 and remain a good customer for the future. 8.34 The statute avoids the problem, and ensures the right commercial outcome, by treating SP2’s security interest as a PMSI. The consequence is that, in a case like Example 12, the special priority rules in s 62 apply; provided SP2 complies with the s 62 registration requirements, discussed in 8.35–8.39 below, it will have priority over SP1. For similar reasons, PPSA para 14(1)(d) also includes the interest of a consignor under a commercial consignment in the definition of ‘purchase money security interest’.39 Like a PPS lease, a commercial consignment is subject to the statute whether or not it in substance secures payment or performance of an obligation.40 The effect of para 14(1)(d) is to give the consignor the benefit of the special s 62 priority rules. Paragraph (c) only applies to PPS leases. A lease which is not a PPS lease, but which in substance secures payment or performance of an obligation, is covered by para (a), on the basis that the transaction is in substance a sale coupled with a security interest in the seller’s favour to secure payment.

Likewise, para (a) [page 247] applies to a consignment which is not a commercial consignment, but which in substance secures payment or performance of an obligation.41

REQUIREMENTS FOR SUPER-PRIORITY 8.35 PPSA s 62 sets out the requirements a PMSI-holder must satisfy to qualify for super-priority: the PMSI-holder must perfect its security interest by registration and the financing statement must disclose that the security interest is a PMSI.42 If the collateral is inventory, the PMSI-holder must register before the grantor obtains possession, but in any other case — for example, if the collateral is equipment — the PMSI-holder has up to 15 business days after delivery to register a financing statement.43 The reason for the 15-day grace period in the case of non-inventory collateral is a logistical one. Returning to Example 1 above, Grantor may be anxious to take delivery of the printing press quickly, and SP2 may be concerned that if it does not make immediate delivery it will lose the sale. The grace period avoids the need for SP2 to postpone delivery until after it has registered a financing statement. If the collateral is inventory, the statute does not provide a grace period. The reason is that the inventory supplier’s arrangement with the buyer is likely to be an ongoing one and, in that case, SP can register a single financing statement at the outset of the relationship. The upfront registration perfects all later security interests in the same collateral type and avoids the need to register again: PPSA subs 21(4).44 On this basis, SP does not need a grace period.45 [page 248] 8.36 Whether the collateral is inventory or collateral other than inventory, the PMSI-holder’s financing statement must disclose that the security interest is a PMSI. The Canadian PPSAs and Art 9 take a different approach. In Canada and the United States, if the collateral is inventory, the PMSI-holder must, in addition to satisfying the timely registration requirement, also serve a notice on every other secured party who has registered a financing statement claiming a security interest

in the debtor’s (grantor’s) inventory.46 For instance, in Example 9 above, SP would have to serve the notice on Bank before it delivered the first consignment of spare parts. The notice must be in writing and it must indicate that SP expects to acquire a PMSI in Grantor’s inventory. It must also include a description by item or kind of the inventory in question: Clark Equipment of Canada Ltd v Bank of Montreal.47 8.37 The notice serves as a warning to Bank about SP’s PMSI. The idea is to alert Bank to the risk that its security interest in Grantor’s inventory may be subordinated to SP’s claim. This information may be important, particularly if Bank is making advances to Grantor on a regular basis, for example, under a line of credit. In cases like this, Bank needs to know, before each new advance, whether Grantor holds sufficient collateral to support the additional obligation. The notice alerts Bank to the fact that, even though Grantor has new inventory in stock, Bank may not have priority for it. It is true that Bank could find out this information for itself by conducting a register search, but it would have to conduct a register search before every new advance and this may be impractical. In summary, the notice requirement saves Bank from having to search the register before every new advance.48 8.38 The Australian approach — requiring the PMSI-holder to disclose in its financing statement that it holds a PMSI — is less useful to Bank. In order to find the disclosure, Bank will have to conduct a register search. Once Bank has conducted the search, it will be on notice of SP’s PMSI, but that is not the end of the story. When it comes time for the next new advance, Bank will need to worry not only about SP’s PMSI, but also the possibility that Grantor may have obtained new inventory from an alternative source which is also claiming PMSI status. To guard against this possibility, Bank should conduct another register search. In summary, PPSA s 62 does not obviate the need for Bank to conduct a register search before each new advance. 8.39 In New Zealand, the position is different again. Like Australia, New Zealand has jettisoned the notice requirement but, unlike Australia, it has not attempted to put anything in its place.49 The justification for [page 249] the New Zealand approach was that ‘the PMSI super-priority rule merely reflects

the rights that title-holders (such as suppliers retaining title under a “Romalpa clause”) would otherwise have had under the previous law, and that general financiers tended, in any case, to discount the value of inventory under their all assets security’.50 The first part of this statement is clearly incorrect because the PPSA changes the rights of Romalpa sellers in various respects: see 8.7–8.32 above. The second part of the statement is a matter of empirical observation but, even if it is true, it overlooks the possibility that general financiers discount the value of inventory collateral because of the difficulties the notice requirement was designed to address. Returning to Australia, there is no discussion of the issue at all in the PPSA Explanatory Memorandum.51 The Statutory Review has recommended deleting the requirement that, to qualify for super-priority status, the secured party must indicate in the financing statement that its security interest is a PMSI. It also rejects the North American approach of requiring an inventory PMSI-holder to give advance notice of its PMSI to prior registered secured parties.52 The end result would be to assimilate the Australian approach with the New Zealand one. 8.40 The s 62 priority rules only apply if the competing security interests are given by the same grantor. The reason is that the policy justifications for the PMSI super-priority rules (discussed in 8.4–8.6 above) do not apply if there are multiple grantors.53 Example 13. SP1 holds a security interest in all Grantor 1’s present and after-acquired personal property. SP1 registered a financing statement on Date 1. On Date 2, Grantor 1 sells a printing press to Grantor 2. SP2 finances the purchase and takes a security interest in the press to secure repayment. SP2 registers a financing statement on the same day. Grantor 1 defaults and SP1 and SP2 both claim the press.

The s 62 priority rules do not apply and the s 67 double grantor priority rules apply instead: see 7.38–7.46 of this text. As a result, SP1 (the holder of the transferor-granted interest) has priority over SP2 (the holder of the transfereegranted interest). [page 250]

COMPETING PMSIs 8.41 Example 14. On Date 1, SP1 takes a security interest in all Grantor’s present and after-acquired personal property and registers a financing statement. On Date 2, SP2 negotiates the sale to Grantor of

a printing press for use in Grantor’s publishing business. Grantor agrees to make a 20 per cent down payment on the purchase price and to pay SP2 the balance by instalments under a retention of title agreement. Grantor borrows the amount of the down payment from SP3 and gives SP3 a security interest in the press. SP3 registers a financing statement on Date 3. SP2 registers its financing statement on Date 4. Grantor defaults and SP1, SP2 and SP3 all claim the machine.

SP2 and SP3 both have PMSIs in the printing press, which is non-inventory collateral. Applying subs 62(3), SP2 and SP3 both have priority over SP1. As between SP2 and SP3, the governing provision is s 63 which provides that, in a competition between a seller PMSI and a lender PMSI, the seller PMSI has priority provided the seller PMSI-holder has complied with the s 62 registration requirements. This means that, in Example 14, SP2 has priority over SP3. One suggested justification for this rule is that SP3 (the lender) ought to suspect that Grantor may be financing the 80 per cent balance of the purchase price from another source and it can protect itself by making inquiries. By contrast, SP2 (the seller) typically will have no reason to suspect that there is another financier involved; for all SP2 knows, Grantor may be paying the deposit out of its own funds.54 In common with s 62, s 63 only applies if the competing security interests are given by the same grantor. 8.42 Example 15. On Date 1, SP1 takes a security interest in all Grantor’s present and after-acquired personal property and registers a financing statement. On Date 2, Dealer negotiates the sale to Grantor of a printing press for use in Grantor’s publishing business. Grantor borrows 60 per cent of the purchase price from SP2 and gives SP2 a security interest in the press. Grantor borrows the remaining 40 per cent of the purchase price from SP3 and gives SP3 a security interest in the press. SP3 registers a financing statement on Date 3. SP2 registers its financing statement on Date 4. Grantor defaults and SP1, SP2 and SP3 all claim the machine.

SP2 and SP3 have PMSIs, so they both have priority over SP1. As between SP2 and SP3, s 63 does not apply because neither SP2 nor SP3 is a seller. In the absence of a specific rule to cover the case, the default priority rules in s 55 apply. SP2 and SP3 both have security interests perfected by registration and so SP3, being the first to register, has priority. [page 251]

PMSI IN ACCOUNTS AS PROCEEDS 8.43

Example 16. SP (accounts) takes a security interest in Grantor’s present and after-acquired accounts55 and registers a financing statement which identifies the collateral as all Grantor’s present and afteracquired accounts (‘intangible property’56). Later SP (inventory) supplies Grantor with motor vehicle spare parts for sale in Grantor’s business. The sale is on reservation of title terms and SP (inventory) registers a financing statement before delivering the goods. The financing statement identifies the collateral as ‘commercial property; other goods’, states that the security interest extends to all present and after-acquired personal property as proceeds and indicates that SP (inventory)’s security interest is a PMSI. Grantor sells the spare parts to various customers on 90-day terms. Subsequently, Grantor runs into financial difficulties. The customer accounts in question are all still outstanding. SP (accounts) claims the accounts as original collateral. SP (inventory) claims the accounts as proceeds of the inventory it supplied to Grantor.

If PPSA s 62 applied, SP (inventory) would have priority. The super-priority rule in s 62 applies not only to the goods originally supplied, but also to sale proceeds, provided the security interest is perfected; the customer accounts are proceeds of the inventory SP (inventory) supplied and SP (inventory)’s financing statement perfects its security interest in both the original collateral and the accounts as proceeds.57 However, s 64 enacts a special priority rule for disputes of this nature.58 It provides that, in general, the priority between SP (accounts) and SP (inventory) is to be determined on a first-in-time basis which, in most cases, will translate to a first-to-register rule. This is consistent with the approach taken in Art 9 and most of the Canadian provincial PPSAs.59 8.44 But s 64 goes on to provide a way for SP (accounts) to claim priority over SP (inventory), even if SP (inventory) was the first to register. To qualify for [page 252] this super-priority status, SP (accounts) must serve a notice on SP (inventory) in an approved form. The notice must be given to SP (inventory) at least 15 business days before the date SP (accounts) registers its financing statement or the date SP (accounts)’s security interest attached to the account, whichever is earliest.60 According to the Explanatory Memorandum, the purpose of the notice is to give ‘the inventory financier time to protect its security interest by altering the terms of trade for future inventory finance that would become subordinate to [the accounts financier’s interest]’.61 Subsection 64(3) offers the subordinated inventory financier (SP inventory) a consolation prize of sorts. It gives SP (inventory) a deemed PMSI in the loan funds Grantor received from SP (accounts) and it waives any new registration requirement. The upshot is to qualify SP (inventory) for super-priority status under s 62 with respect to the funds in question. SP (inventory)’s capacity to

enforce this claim will of course depend on the funds being traceable in Grantor’s hands and this may not be the case if, for example, Grantor has used the money to pay wages or taxes or to pay down its overdraft. 8.45 In common with Art 9, all PPSA jurisdictions concede that the PMSI super-priority rule is inappropriate in a case like Example 16, at least without some modification. Cuming explains the reason as follows:62 [E]very accounts financer who has registered a financing statement and has loaned money to a debtor … [would face] the risk of loss of his security to subsequent inventory financers claiming purchase money security interests in the debtor’s accounts. There are no measures an account financer can take to protect himself. The result is that accounts financers must make sure that any advances they make are fully secured by existing accounts which cannot be traced as the proceeds of sale of a debtor’s inventory.

[page 253] On the other hand, a first-to-register rule is justifiable because:63 If a secured party is approached by a potential customer seeking inventory financing, he will conduct a search of the registry to determine whether or not any priority claims to the potential customer’s account have been registered. If the search reveals a prior claim, the inventory financer must decide whether or not he would be adequately secured without having as collateral the accounts that are the proceeds of his inventory. The decision that the accounts are necessary may, but need not, lead to the conclusion that the potential customer must be turned away. The accounts financer may be prepared to execute a subordination agreement giving the inventory financer priority to the accounts which are proceeds of his inventory. In any event, if priority is given to the accounts financer, the inventory financer is in a position to take measures to avoid loss to anyone simply by refusing to deal with the person seeking further credit.

However, while these considerations justify a first-to-register rule in preference to a super-priority rule favouring the PMSI-holder, they do not justify taking the further step of giving super-priority to the accounts financier instead. There is no explanation in the Explanatory Memorandum for the Australian approach.64 In any event, there is a loophole in s 64 that may assist the PMSI-holder. The section only applies if the PMSI-holder is claiming accounts ‘as proceeds of inventory’. Suppose that, in Example 16, SP (inventory) is the first to register. Suppose also that SP (inventory) takes a security interest not only in the spare parts it supplies to Grantor, but also in Grantor’s present and after-acquired accounts.65 This enables SP (inventory) to claim the accounts as original collateral, not proceeds, and so s 64 does not apply. The PMSI super-priority rule in subs 62(2) does not apply either because it is limited to the case where the PMSI-holder’s claim is to inventory or its proceeds. In the absence of any other relevant provision, the priority rule in subs

55(4) applies and, since in the scenario under consideration SP (inventory) registered before SP (accounts), SP (inventory) has priority.66 [page 254]

SUBORDINATION AGREEMENTS 8.46 PPSA s 61 permits subordination agreements in the form of a contract between the subordinating and subordinated secured parties themselves, or in the form of a subordination provision contained in the security agreement between the subordinating secured party and the grantor: see 7.29–7.33. There is a line of Canadian cases suggesting that a negative pledge clause in a general security agreement may, in some circumstances, be construed as an agreement by the secured party to subordinate its security interest to competing claims. The issue arises in cases where the provision in question, having stipulated that the debtor (grantor) will keep the collateral free from all other encumbrances, goes on to make an exception for permitted transactions, typically PMSIs. 8.47 In Euroclean Canada Inc v Forest Glade Investments Ltd,67 SP1 and the grantor entered into a security agreement covering all the grantor’s present and after-acquired personal property. The agreement contained the following provision: The Corporation [Grantor] shall not, without the consent in writing of the Holder [SP1], create any mortgage, hypothec, charge, lien or other encumbrance upon the mortgaged property or any part thereof, ranking or purporting to rank in priority to or pari passu with the charge created by this debenture, except that the Corporation may give mortgages or liens in connection with the acquisition of property after the date hereof or may acquire property subject to any mortgage, lien or other encumbrance thereon existing at the time of such acquisition and any such mortgage, lien or other encumbrance shall rank in priority to the charge hereby created. (emphasis added)

SP1 registered a financing statement, and some time later SP2 supplied the grantor with goods pursuant to a conditional sale agreement. SP2 failed to register a financing statement. Grantor defaulted and a priority dispute arose between SP1 and SP2 over the goods SP2 had supplied to Grantor. SP2 held a PMSI and so, if it had registered in time, it would have had priority over SP1 by virtue of the PMSI super-priority rule. Correspondingly, its failure to register in time meant that it lost the benefit of the super-priority rule. However, the court interpreted the provision quoted above as an agreement by SP1 to subordinate its security interest to any PMSI the grantor might give to a third party. The result was that SP2 had priority

over SP1 even though SP2 had not complied with the statutory requirements for super-priority. In other words, the express provision in the security agreement displaced the statutory rule. [page 255] 8.48 In Chiips Inc v Skyview Hotels Ltd,68 the facts were similar to those in the Euroclean case. The negative pledge clause was in similar terms, except that it did not expressly state that a PMSi would have priority over SP1. However, the court held that the statement was implicit and it gave SP2 priority on that basis. On the other hand, in Sperry v Canadian Imperial Bank of Commerce,69 the relevant provision read as follows: [T]he undersigned [Grantor] represents and warrants that, except for the security interest created hereby and except for purchase money obligations, the undersigned [Grantor] is, or with respect to collateral acquired after the date hereof will be, the owner of collateral free from any mortgage, lien, charge, security interest or encumbrance.

This is different from the provisions in Euroclean and Chiips because it does not explicitly give the grantor permission to create PMSIs. The court held that the provision was no more than a warranty of title and it did not amount to a subordination agreement. Kubota Canada Ltd v Case Credit Ltd70 is a more recent decision to the same effect. 8.49 The distinction between a subordination agreement and a warranty of title is a subtle one and it depends on the precise wording of the provision in dispute. However, the parties can avoid disputes by drafting the provision carefully so as to make their intentions clear. For example, a provision along the following lines signifies a mere warranty of title and not a subordination agreement: ‘the grantor shall keep the collateral free from all liens, security interests and encumbrances other than permitted encumbrances’.71 On the other hand, a provision along the following lines is at risk of being construed as a subordination agreement: ‘the grantor shall keep the collateral free from all liens, security interests and encumbrances ranking in priority to or pari passu with the security interest other than permitted encumbrances’ (emphasis added).72

SECURITY INTERESTS IN CROPS AND LIVESTOCK

8.50 PPSA s 85 enacts a special priority rule for security interests in crops which is similar to the PMSI super-priority rules. It provides that a perfected security interest in crops or their proceeds (the ‘priority interest’) has priority over any competing security interest if the priority interest is granted for value to enable the crops to be produced and either: (1) the security agreement is made while the crops are growing; or (2) the crops are planted within six months after the date of the security agreement. Section 86 enacts a similar [page 256] provision dealing with security interests in livestock. It provides that a perfected security interest in livestock or its proceeds (the ‘priority interest’) has priority over any competing non-PMSi if the priority interest is granted for value to enable the livestock to be fed or developed and either: (1) the grantor holds the livestock at the date of the security agreement; or (2) the grantor acquires the livestock within six months after the date of the security agreement.73

1. 2. 3. 4. 5.

6. 7. 8. 9. 10. 11. 12. 13. 14.

PPSA s 12: see 3.4–3.7 of this text. PPSA s 19: see 4.14–4.22 of this text. Subject to the proviso that SP2’s security agreement must be evidenced by writing: PPSA s 20. See 4.27–4.36 of this text. PPSA s 10, ‘inventory’: see 2.54–2.56 of this text. Compare pre-PPSA law, where SP2’s security interest would have had priority over SP1’s floating charge on the ground that SP1’s floating charge only covers Grantor’s property and the printing press belongs to SP2, not Grantor: see Louise Gullifer (ed), Goode on Legal Problems of Credit and Security, 5th ed, Sweet & Maxwell, London, 2013, para 5-63. For an account of the pre-PPSA approach to cases like Example 2, see above note 5, at paras 5-62–5-64. For a fuller account and criticism of the new money theory, see Alan Schwartz, ‘A Theory of Loan Priorities’ (1989) 18 Journal of Legal Studies 209. See Thomas H Jackson and Anthony T Kronman, ‘Secured Financing and Priorities Among Creditors’ (1979) 88 Yale Law Journal 1143. PPSA ss 55 and 160. PPSA subs 18(4) and s 58. See, for example, Ronald C C Cuming, Catherine Walsh and Roderick J Wood, Personal Property Security Law, 2nd ed, Irwin Law, Toronto, 2012, p 441. 200 NW 2d 1 (S Ct Neb, 1972). (1991) 79 DLR (4th) 22 (SKCA). [2015] UKPC 35 at [37] (on appeal from Jersey) (DIC case). The main concern in the DIC case was with the doctrine of tracing and the board’s remarks on this aspect of the Pettyjohn case were not directly relevant to its decision. But the remarks are important because they confirm the logic of the Pettyjohn

15.

16. 17. 18. 19. 20. 21.

22. 23. 24. 25.

26. 27. 28.

29.

30. 31. 32.

33.

approach and establish the significance of the case both within and outside the PPSA context. To comply with PPSA s 62, SP2’s financing statement is likely to have indicated that the security interest is a PMSI: see 8.35–8.39 below. This misstatement is a registration defect within the meaning of PPSA s 165 and it invalidates the financing statement: see 6.52 of this text. Therefore, SP2’s security interest is unperfected and so PPSA s 55(3) applies to give SP1’s perfected security interest priority over SP2’s unperfected security interest. See, for example, Wheatland Industries (1900) Ltd v Baschuk (1994) 8 PPSAC (2nd) 247 (Sask QB). Bruce Whittaker, Review of the Personal Property Securities Act 2009: Final Report (Commonwealth of Australia, 2015), para 7.7.8.2 (‘Statutory Review: Final Report’). The lease is presumably either an in-substance security agreement or a PPS lease, so SP can obtain first priority by registering a financing statement before another competing secured party appears on the scene. See Michael J Gedye, ‘Financing Transactions Structured as Sales of Goods’ (2013) 25 New Zealand Universities Law Review 1122, discussing New Zealand case law on point. Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property Securities (Consequential Amendments) Bill 2009, para 8.26. See National Credit Code s 45, which prohibits mortgages of future property if the debtor is a consumer, but makes an exception for ‘a mortgage of property that is to be acquired wholly or partly with the credit provided under the credit contract secured by the mortgage’ (that is, PMSIs). The Statutory Review recommends repealing subss 14(2)(c) and (2A): Statutory Review: Final Report, para 7.7.8.4. Section 9-103(f)(1) and (2). See, for example, Clark Equipment of Canada Ltd v Bank of Montreal [1984] 4 WWR 519 (Man CA). [1991] 2 AC 339 (HL Scot). The additional security interest would be a registrable charge and its priority relative to a prior registered floating charge would depend on the terms of the floating charge agreement as notified on the register: see Corporations Act 2001 (Cth) s 279. This example and the analysis which follows is adapted from Cuming, Walsh and Wood, see above note 11, pp 453–4. Devaynes v Noble; Clayton’s Case (1816) 1 Mer 572; 35 ER 781 (Rolls Ct). Compare Uniform Commercial Code — Secured Transactions s 9-103(e). There is no corresponding provision in any of the Canadian provincial PPSAs, though some of the statutes do contain the following provision: A purchase money security interest in an item of collateral does not extend or continue in the proceeds of the item after the obligation to pay the purchase price of the item or to repay the value given for the purpose of enabling the debtor to acquire rights in it has been discharged. See, for example, Saskatchewan PPSA s 34(10). The purpose of the provision is to reverse the decision in Chrysler Credit Canada Ltd v Royal Bank of Canada [1986] 6 WWT 338 (SKCA): see above note 11, at pp 454–6. Compare Uniform Commercial Code — Secured Transactions s 9-103(g), which provides that a secured party claiming a PMSI has the burden of establishing the extent to which the security interest is a PMSI. There is some Canadian case law to the same effect: see, for example, Re Gerrard (2000) 20 CBR (4th) 90 (NSSC). Statutory Review: Final Report, para 7.7.8.5. Compare Uniform Commercial Code — Secured Transactions s 9-103(f)(3). But see Battlefords Credit Union Ltd v Ilnicki (1991) 82 DLR (4th) 69 (SKCA) and Unisource Canada Inc v Laurentian Bank of Canada (2000) 47 OR (3d) 616 (ONCA), critically analysed in Anthony Duggan, ‘Hard Cases, Equity and the PPSA’ (2000) 34 Canadian Business Law Journal 129. See also New Zealand Bloodstock Leasing Ltd v Jenkins [2007] NZHC 336 at [58], questioning the correctness of Ilnicki and Unisource on the grounds stated in the text. The Statutory Review has recommended amending subs 14(5) to clarify that it does have this meaning: Statutory Review: Final Report, para 7.7.8.7.

34.

35.

36. 37. 38. 39. 40. 41. 42.

43.

44. 45.

46.

47. 48. 49. 50.

See, for example, Farm Credit Corporation v Gannon [1993] 6 WWT 736 (SKQB); Unisource Canada Inc v Laurentian Bank of Canada (2000) 47 OR (3d) 616 (ONCA). Compare MacPhee Chrevolet Buick GMC Cadillac Ltd v SWS Fuels Ltd 2011 NSCA 35 (NSCA), rejecting this approach and stating (at para 41): [t]he Legislature has not conditioned the PMSI’s super-priority on the date the debtor “first possesses collateral as a debtor to each new creditor, despite that the debtor earlier had obtained his possession of this collateral as a debtor with another creditor”. Whether the [PMSI superpriority rule] should embody that language is a policy choice for the Legislature. There is no equivalent in the Nova Scotia PPSA to Australian PPSA subs 14(5), and this lessens the relevance of the case for Australia. In any event, the decision has been criticised even in Canada: see above note 11, at p 451. Section 293 provides that the court may extend the 15-day period in para 62(3)(b) if ‘it is just and equitable to do so’: see 8.35 below. In the case under consideration, Financier might make an application to the court under this provision. But if the courts are prepared to read para 62(3)(b) as suggested in the text, a s 293 application will be unnecessary. On the other hand, if the courts are not prepared to read para 62(3)(b) as suggested in the text, it is hard to see how a s 293 order could be justified. In Australia, see PPSA s 254. See above note 11, at pp 489–90, for a discussion of the cases. See above note 11, at pp 461–2. The other PPSAs take a similar approach. See New Zealand PPSA s 16(1), ‘purchase money security interest’ and, for example, Saskatchewan PPSA s 2(1)(jj). PPSA subs 12(3): see 3.31–3.32 of this text. The Statutory Review has recommended clarification of this point: Statutory Review: Final Report, para 7.7.8.1. In other words, if a secured party holds a PMSI, but fails to make the PMSI disclosure in the financing statement, it loses its super-priority status: PPSA subs 153(1) Table, Item 7; Personal Property Securities Regulations 2010 (Cth) reg 5.5 Sch 1 cl 3.1. In the reverse case where the secured party does not have a PMSI, but falsely claims in the financing statement that it does, the consequence is to invalidate the registration so that the security interest is unperfected: PPSA ss 164 and 165. A court may extend the 15-day grace period in para 62(3)(b) if ‘it is just and equitable to do so’: para 293(1)(a). If the courts apply s 293 liberally, the effect may be to defeat the purpose of having a time limit in the first place. There is no provision in any of the other PPSAs for extending this time limit. The Statutory Review has recommended amending s 62 to make it clear that the time starts to run only from the date that the grantor takes possession in its capacity as grantor. This means, for example, that if the grantor takes possession of the collateral for a trial period on Date 1 and enters into a PMSI security agreement on Date 2, having decided to go ahead with the purchase, the time starts to run from Date 2, not Date 1: Statutory Review: Final Report, para 7.7.8.8. See 6.18–6.19 of this text. The Statutory Review argues that there is no good reason for distinguishing between inventory and noninventory collateral in this respect, and recommends that in all cases the rule should be that the secured party must register within 15 days after the grantor takes possession of the collateral: Statutory Review: Final Report, para 7.7.8.10. See, for example, Saskatchewan PPSA s 34(3); Uniform Commercial Code — Secured Transactions s 9324(b). In some Canadian provinces, the notice must also be sent to any prior registered secured party claiming a security interest in the debtor’s accounts; for example, Ontario PPSA s 33(1). [1984] 4 WWR 519 (MBCA). See above note 11, at pp 437–8. New Zealand PPSA s 74. Craig Wappett, Laurie Mayne and Anthony Duggan, Review of the Law on Personal Property Securities: An International Comparison, Commonwealth of Australia, Attorney-General’s Department, July, 2006, para 3.2.3.

51. 52. 53.

54.

55.

56. 57. 58.

59. 60.

61. 62. 63. 64.

65.

Commonwealth of Australia, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009 (‘Replacement Explanatory Memorandum’). Statutory Review: Final Report, para 7.7.8.11. See Leon H Lysaght and George R Stewart, ‘Priority between Competing Secured Creditors: Exploring the Borderland between Personal Property Security Rules and the Common Law’ (1995) 74 Canadian Bar Review 50 at 60; Anthony Duggan, ‘Security Interests in Transferred Collateral: A Note on Lisec America Inc v Barber Suffolk Limited’ (2014) 55 Canadian Business Law Journal 296 at 306–7. Jacob S Ziegel and David L Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed, Butterworths, Toronto and Vancouver, 2000, at p 291. Ziegel and Denomme go on to say, though, that ‘admittedly, the equities are not always that clear cut and the rule … only does rough justice’. For an alternative explanation of the rule, see Revised Art 9 s 9-324, Official Comment, para 13. Or, alternatively, takes an outright assignment. The analysis is the same either way, because the assignee under an outright assignment is deemed to hold a security interest for the purposes of the statute: PPSA para 12(3)(a). The statutorily required collateral description for accounts is: ‘commercial property; intangible property’: see PPSA subs 153(1) Table, Item 4; PPS Regulations reg 5.5 Sch 1 cl 2.3. PPSA s 31 defines ‘proceeds’ to mean, in part, identifiable or traceable personal property that is derived directly or indirectly from a dealing with the collateral: see further, Chapter 11. PPSA s 64 applies in any case where a non-PMSI is granted for new value in an account. PPSA s 10 defines ‘new value’ to mean ‘value other than value provided to reduce or discharge an earlier debt or liability owed to the person providing the value’. In Example 16, SP (accounts) is a dedicated accounts financier. However, s 64 would also apply where, for example, SP is a bank which has a security interest in all the grantor’s present and after-acquired personal property including accounts. Uniform Commercial Code — Secured Transactions s 9-324(b). See also, for example, Saskatchewan PPSA s 34(6). New Zealand has also taken this approach: New Zealand PPSA s 75A. Assume that, in Example 16, the security agreement between SP (accounts) and Grantor is concluded on Date 1. Grantor has 25 customer accounts outstanding on Date 1. Thirty new accounts are generated on Date 3. SP (accounts) registers on Date 2. With respect to the 25 Date 1 accounts, the 15-day period runs from Date 1: Date 1 is the date of attachment and it precedes the registration date (Date 2). With respect to the 30 Date 3 accounts, the 15-day period runs from Date 2: Date 2 is the registration date and it precedes the date of attachment which is Date 3. The Statutory Review has recommended simplifying the notice requirement by providing that the 15 days starts to run from the date the account financier’s security interest attaches to the disputed account: Statutory Review: Final Report, para 7.7.9.7. On this basis, in the above example, for the Date 1 accounts, the time still starts running on Date 1, but for the Date 3 accounts the time does not start running until Date 3. The Review also recommends that the notice should have to state only: (1) that the accounts financier may be acquiring a security interest in accounts as proceeds of inventory in which the PMSI-holder may also have a security interest; and (2) the effect of s 64 (para 7.7.9.9). See above note 51, at para 2.147. Ronald C C Cuming, ‘Second Generation Personal Property Security Legislation in Canada’ (1981–82) 46 Saskatchewan Law Review 5 at 39. See above note 62, at pp 38–9. The Statutory Review has recommended that s 64 should be retained, having been advised that the provision reflects ‘the importance of the receivables finance industry to Australian businesses’: Statutory Review: Final Report, para 7.7.9.1. This implies that receivables financing is more important than inventory financing, but the Review makes no attempt to substantiate the claim. Note the difference between a claim to accounts as original collateral and a claim to accounts as proceeds. For a claim to accounts as original collateral, the collateral description in the security agreement must refer to accounts. For a claim to accounts as proceeds, there is no need for the security agreement to say anything because the statute creates an automatic right to proceeds: see Chapter 11. In either case, failure

66.

67. 68. 69. 70. 71. 72. 73.

to describe the accounts in the financing statement may mean that the security interest is unperfected as to the accounts, but describing the accounts in the financing statement is neither a necessary nor a sufficient condition for the creation of a security interest in the accounts as original collateral. The Statutory Review has recommended an amendment that would close off this loophole: Statutory Review: Final Report, para 7.7.9.3. It has also recommended limiting s 64 to cases where the accounts financier has registered a financing statement specifically describing the collateral as ‘accounts’. On this basis, if the collateral description was, for example, ‘all present and after-acquired personal property’, the accounts financier would not qualify for protection under s 64: Statutory Review: Final Report, para 7.7.9.6. (1985) 16 DLR (4th) 289 (ONCA). (1994) 116 DLR (4th) 385 (ABCA). (1985) 17 DLR (4th) 236 (ONCA). (2005) 253 DLR (4th) 171 (ABCA). Roderick J Wood, ‘Subordination Agreements, Bankruptcy and the PPSA’ (2010) 49 Canadian Business Law Journal 65 at 88. See above note 71, at p 88. Pre-PPSA, state and territory legislation made special provision for security interests in crops and livestock. For details, see Edward I Sykes and Sally Walker, The Law of Securities, 5th ed, Law Book Company, Sydney, 1993, ch 14. The PPSA supersedes this legislation. The Statutory Review reports some dissatisfaction with ss 85 and 86 and recommends that the government give stakeholders an opportunity to make further inputs: Statutory Review: Final Report, para 7.7.11.

[page 257]

CHAPTER 9 Accessions, Commingled Goods and Crops INTRODUCTION 9.1 This chapter deals with the priority of security interests in component parts, raw materials and other manufacturing inputs. It also deals with the priority of a crop security interest relative to the claim of a person who holds an interest in the land on which the crop is growing. Paragraphs 9.2–9.16 below discuss the accessions provisions in the Personal Property Securities Act 2009 (Cth) (PPSA) Pt 3.3 (ss 88–97), which enacts priority rules for the case where components (for example, tyres) are fitted to host goods (for example, a truck) and a party holding a security interest in the component and a party holding an interest in the host goods both claim the component.1 Paragraphs 9.17–9.32 discuss the processed and commingled goods provisions in PPSA Pt 3.4 (ss 98–103), which enacts priority rules for the case where raw materials or other manufacturing inputs are combined to produce an end product (for example, where woodchips and resin are used to produce chipboard) and: (1) a party holding a security interest in an input and a party holding an interest in the end product both claim the end product; or (2) a party holding a security interest in one input (for example, woodchips) and a party holding a security interest in another input (for example, resin) both claim the end product (the chipboard).2 Paragraphs 9.33–9.34 discuss PPSA s 84 (in Pt 3.2), which enacts priority rules for the case where a secured party holding a security interest in a growing crop and a person with an interest in the land on which the crop is growing both claim the crop.

ACCESSIONS Introduction 9.2

Example 1. SP1 has a security interest in Grantor’s truck, perfected by registration. SP2 supplies Grantor with new tyres on conditional sale terms

[page 258] and Grantor fits the tyres to the truck. Grantor defaults against SP1 and SP2. SP1 claims the truck with the new tyres and SP2 claims the tyres.

At common law, the outcome of this type of dispute was governed by the doctrine of accession. The doctrine of accession is analogous to the law governing fixtures: the fixtures doctrine applies where A’s goods become attached to B’s land and A and B, or a third party holding an interest in B’s land, both claim the fixture. The accessions doctrine applies where, as in Example 1, A’s component becomes attached to B’s host goods and A and B, or a third party holding an interest in the host goods, both claim the component. 9.3 The accessions doctrine provided an all-or-nothing solution to cases like Example 1. If the court found that the component had become an accession, the result was that title in the component passed to the owner of the host goods and the original component owner’s claim was extinguished. The courts relied on various competing tests to determine when accession occurs. One approach was to ask whether the component could be removed without destroying or seriously damaging the host goods. Another was to ask whether the component had ceased to exist as a separate chattel. A third approach was to ask whether removal of the component would destroy the utility of the host goods. A fourth approach was to look at the intentions of the parties and the purpose of the attachment. Clearly, the outcome in Example 1 might vary, depending on which of these tests the court applied. The tests are discussed in Industrial Acceptance Corporation v Firestone Tire & Rubber Company of Canada Limited3 on which Example 1 is based. In that case, the Supreme Court of Canada opted for a version of the fourth approach, holding that if the accessions doctrine applied, SP1 would get a windfall in the form of an unbargained increase in the value of its collateral and this could not have been the parties’ intention. 9.4 The PPSA changes the law in three main ways. First, it enacts a straightforward definition of ‘accession’ to replace the smorgasbord of common law tests; second, it contains a set of carefully thought-out priority rules for resolving cases like Example 1; and third, in cases where SP2 prevails over SP1, it gives SP2 a

statutory right to remove the accession from the host goods.

The Meaning of ‘Accession’ 9.5 PPSA s 10 defines ‘accession’ to mean goods that are installed in or affixed to other goods.4 Goods that are installed on or affixed to land (fixtures) are [page 259] not within the definition,5 nor, by extension, are goods that are installed in or affixed to a fixture.6 Notwithstanding these limitations, the PPSA definition is considerably broader than the meaning of accession at common law under any of the competing tests described above. For example, the definition clearly covers tyres fixed to a truck, as in Example 1. The broader statutory definition is possible because, under the PPSA and in contrast to the common law, SP2 does not necessarily lose its collateral when it becomes an accession. At common law, if a court decides that the accessions doctrine applies, that is the end of the matter. By contrast under the PPSA, a decision that the disputed collateral is an accession within the meaning of s 10 is only the first step. The next step is to identify the relevant priority rule and apply it to the facts. Consistently with this scheme, PPSA s 88 provides that a security interest in goods that become an accession continues in the accession. 9.6 The PPSA accession provisions are premised on the assumption that the accession can be removed from the host goods without excessive damage to either: see further, 9.14–9.16 below. Therefore, by implication, goods that become irreversibly affixed to other goods (for example, paint applied to a car), are not accessions, but processed or commingled goods. The meaning of ‘processed and commingled goods’ is discussed further in 9.17 below.7 At the other end of the scale, where the connection between items is slight and temporary, as in the case of a DVD player connected by cable to a television, neither item is ‘affixed to or installed in’ the other and so it is not an accession.8 Given the lack of connection between the items in cases like this, it follows that a party with a claim to the television set will not, on that account alone, have a claim to the DVD player, and vice versa. In other words, the potential for competing claims between a party holding an interest in the television set and a party holding an interest in the DVD

player does not arise.

The Priority Rules 9.7 PPSA s 89 provides that, except as otherwise provided in the statute, a security interest in goods that is attached at the time when the goods become [page 260] an accession has priority over a claim to the goods as an accession made by a person with an interest in the whole. The provision does not depend on perfection of either security interest. 9.8 Applying this provision to the facts of Example 1, SP2’s security interest probably attaches to the tyres either on the date of its conditional sale agreement with Grantor or, at the latest, upon delivery of the tyres.9 Either way, SP2’s security interest attaches to the tyres before the tyres become affixed to the truck. Therefore, SP2 has first claim to the tyres over SP1. The purpose of s 89 is to give effect to the parties’ reasonable expectations; the new tyres add to the value of SP1’s collateral (the truck) and SP1 would get a windfall if it could claim the tyres without paying for them. 9.9 PPSA s 89 applies where SP2’s security interest attaches before the disputed goods become an accession. Section 91 applies where the sequence is the other way round. Paragraph 91(a) provides that a security interest in goods that attaches after the goods become an accession is subordinate to the interest of a person who has an interest in the host goods at the time when the disputed goods become an accession and who has not consented to the security interest in the accession, has not disclaimed an interest in the accession and has not agreed to removal of the accession. The provision does not depend on the perfection of either security interest. Example 2. SP1 has a security interest in Grantor’s truck, perfected by registration. SP2 takes a security interest in the tyres on the truck. Grantor defaults against SP1 and SP2. SP1 claims the truck with the tyres and SP2 claims the tyres.

Applying para 91(a) to the facts of Example 2, the tyres were already on the truck at the time SP2’s security interest attached and so, in the absence of any indication that SP1 waived its claim to the tyres in any of the ways listed in s 91,

SP1 has priority over SP2. Again, the purpose of the priority rule in s 91 is to give effect to the parties’ reasonable expectations; because the tyres are already on the truck at the time of SP1’s security agreement with Grantor, SP1 is likely to assume that they are part of its collateral and that Grantor is not free to dispose of them, and it will have negotiated with Grantor on that basis. On the other hand, SP2, for its part, should realise that Grantor may have given someone else a security interest in the truck and that any such security interest would extend to the tyres. 9.10 PPSA s 90 applies where the security interest in the disputed goods attaches before the goods become an accession and it enacts some qualifications to the general priority rule in s 89. Paragraph 90(a) provides that a person [page 261] who acquires for value an interest in the whole after the disputed goods have become an accession, but before the security interest in the accession is perfected, has priority over the security interest in the accession.10 Example 3. SP supplies Grantor with new tyres on conditional sale terms and Grantor fits the tyres to its truck. Grantor later sells the truck to Buyer. Grantor defaults on payment to SP and SP claims the tyres from Buyer.

Applying para 90(a), the success of SP’s claim will depend on whether it registered a financing statement before Grantor sold the truck to Buyer. The purpose of para 90(a) is to give Buyer a means of discovering SP’s security interest in the tyres before it buys the truck. However, there is no knowledge limitation in para 90(a) and so, if SP fails to perfect its security interest, Buyer may claim the tyres even if, as it happens, it knew about SP’s security interest. Paragraph 90(a) is not limited to buyers. It applies in any case where a person ‘acquires for value an interest in the whole’. Assume that, in Example 3, instead of selling the truck to Buyer, Grantor gives SP(Truck) a security interest in the truck. SP(Truck) acquires for value an interest in the truck and so, applying para 90(a), SP(Truck) has priority over SP unless SP perfected its security interest in the tyres before SP(Truck) acquired its security interest. 9.11 Paragraph 90(c) provides that a person with a perfected security interest in the whole who makes an advance under the security agreement relating to the security interest after the goods become an accession, but before the security interest in the accession is perfected, has priority over the security interest in the accession,

but only to the extent of the advance. Example 4. On Date 1, SP1 takes a security interest in Grantor’s truck, registers a financing statement and makes an advance to Grantor of $60. On Date 2, SP2 supplies Grantor with new tyres on conditional sale terms and Grantor fits the tyres to the truck. On Date 3, SP1 makes a second advance of $90 to Grantor under the terms of its original security agreement. On Date 4, Grantor defaults against SP1 and SP2 and they both claim the tyres. The outstanding balance owing to SP2 for the tyres is $30. On Date 4, the tyres are worth $100.

SP2 has priority, vis-à-vis the tyres, over SP1’s security interest in respect of SP1’s Date 1 advance: PPSA s 89. But applying para 90(c), SP1 will have priority over SP2 for its Date 3 advance unless SP2 registered a financing statement before Date 3. Assuming SP1 has priority over SP2 for its Date 3 advance, SP1 will be entitled to payment of its $90 Date 3 advance out of the $100 collateral, leaving $10 collateral value for SP2. On the other hand, [page 262] if SP2 perfects its security interest on or before Date 3, so that SP1 does not have priority for its Date 3 advance, SP2 will have first claim on the tyres for the $30, leaving $70 collateral value for SP1. The purpose of para 90(c) is to give SP1 a means of discovering SP2’s security interest in the tyres before making the Date 3 advance. However, there is no knowledge limitation in para 90(c). In this respect it is similar to para (a), and the implications are the same in both contexts. 9.12 Paragraph 90(d) provides that a person with a perfected security interest in the whole who acquires the right to retain the whole in satisfaction of the obligation secured after the goods became an accession, but before the security interest in the accession is perfected, has priority over the security interest in the accession. Paragraph 90(d) is relevant to the case where the party with a security interest in the whole exercises its statutory right of foreclosure under PPSA Pt 4.3 Div 4: see Chapter 12 of this text. Example 5. SP1 holds a security interest in Grantor’s truck, perfected by registration. SP2 supplies Grantor with new tyres on conditional sale terms and Grantor fits the tyres to the truck. Grantor defaults and SP1 forecloses against the truck.

Applying PPSA para 90(d), SP1 takes the truck free of SP2’s security interest in the tyres unless SP2 registered a financing statement before SP1’s foreclosure. Foreclosure means that the secured party takes the collateral in full satisfaction of the obligation secured. By contrast, a secured party who elects instead to exercise its

power of sale retains the right to sue the grantor for any shortfall between the realised collateral value and the amount owing. The secured party’s estimate of the collateral value will clearly be relevant in deciding between the sale and foreclosure options, and the purpose of para 90(d) is to give SP1 the means of discovering SP2’s security interest in the tyres before making its decision. 9.13 PPSA para 91(b) applies where the security interest in the accession attaches after the goods become an accession and it qualifies the general rule in para 91(a). Paragraph 91(b) provides that a security interest in goods that attaches after the goods become an accession is subordinate to the interest of a person who acquires an interest in the whole after the goods become an accession, but before the security interest in the accession is perfected. Example 6. SP takes a security interest in the tyres on Grantor’s truck. Grantor later sells the truck (with the tyres) to Buyer. Grantor defaults against SP and SP claims the tyres.

Applying para 91(b), Buyer takes the tyres free of SP’s security interest unless SP registered a financing statement before the sale. The purpose of the provision is to give Buyer a means of discovering SP’s security interest in the tyres before completing the purchase. Like para 90(a), para 91(b) is not limited to buyers; it applies in any case where a person ‘acquires an interest in the whole’. The implications are the same in both contexts. [page 263]

Removal of Accession 9.14 The PPSA accessions priority rules are premised on the assumption that if the accession-secured party prevails over the host goods-secured party, it will have the right to remove the accession from the host goods.11 Section 92 provides that a secured party who is entitled to remove an accession must do so in a manner that causes no greater damage to the host goods, or that puts the person in possession of the host goods to no greater inconvenience, than is ‘necessarily incidental’ to the removal. Section 93 provides that any person, other than the grantor, who has an interest in the host goods may claim reimbursement for any damage caused by the removal, other than a reduction in the value of the host goods resulting from the absence of the accession or the need to replace it. Section 94 provides that a person entitled to reimbursement under s 93 may refuse permission to remove the

accession until the secured party provides adequate security for the reimbursement. 9.15 A secured party proposing to exercise its right of removal must give notice to both the grantor and any secured party with a higher ranking security interest in the accession: subs 95(1). As a general rule, the notice must be given at least 10 business days before the proposed removal, unless the parties have agreed on a shorter notice period:12 subs 95(2). The notice must contain the secured party’s name, a description of the accession and the host goods, a statement of the obligation owed to the secured party and the value of the accession if it were removed from the host goods, and a statement of intention to remove the accession unless the secured obligation is discharged, or the value of the accession is paid, before the end of the notice period: subs 95(3).13 The party entitled to notice may waive the notice requirement by written notice to the secured party: subs 95(5). The notice requirement does not apply if: (1) the secured party believes, on reasonable grounds, that the accession will decline substantially in value if it is not disposed of quickly (‘immediately after default’); or (2) the cost of keeping the accession for the duration of the notice period is disproportionately large in relation to the value of the accession:14 subs 95(6). A person is not entitled to a notice of proposed removal only because they have an interest in another accession to [page 264] the same goods: subs 95(7). PPSA s 144 provides for additional circumstances in which an enforcement notice is not required: see Chapter 12. 9.16 Section 96 provides that a person, other than the grantor, who has an interest in the host goods, may keep the accession by paying to the accessionsecured party either the amount of the secured obligation or the value of the accession.15 Section 97 gives the court power, on application by a person entitled to receive a notice of proposed removal, to postpone the removal or to determine the amount payable to the secured party under s 96.

PROCESSED OR COMMINGLED GOODS Introduction 9.17 PPSA Pt 3.4 (ss 98–103) governs security interests in commingled or processed goods. The provisions apply where the secured party’s collateral

‘subsequently becomes part of a product or mass [having been] so manufactured processed, assembled or commingled that [its] identity is lost in the product or mass’: PPSA subs 99(1).16 This formulation covers two types of case: (1) where goods are used in a manufacturing process to form a new end product, as where woodchips and resin are combined to make chipboard, or eggs and flour are mixed to make pancakes (‘processing’); and (2) where goods are mixed with similar goods from another source, as where Farmer A’s wheat is mixed with Farmer B’s wheat in a storage facility (‘commingling’). At common law, the position in Case (1) was that the inputs became lost in the end product and so a party holding a security interest in an input lost its claim in the manufacturing process.17 The position in Case (2) was normally that the owners of the inputs were entitled to proportionate shares of the mixture.18 This meant that if A’s goods became commingled with B’s and SP held a security interest in A’s goods, SP’s security interest was enforceable against A’s proportionate share of the mixture. 9.18 The PPSA Part 3.4 provisions apply where one or more of the competing claims is a security interest and they displace the common law rules by: (1) providing that a security interest in an input continues in the end product or mixture; and (2) enacting priority rules for the determination of competing claims to the end product or mixture. Processed and commingled goods are distinguishable from accessions. The PPSA Pt 3.4 provisions apply [page 265] where the input becomes lost in the end product or mixture, whereas the accessions provisions apply where the disputed goods are retrievable or, in other words, where it is ‘commercially practical to restore the goods to their original state’: PPSA subs 99(2). Processed and commingled goods are also distinguishable from collateral proceeds. Proceeds are the product of dealings with the collateral; for example, money the grantor receives from a sale: see PPSA s 31, discussed in 11.8–11.30 of this text. Dealing, in this context, implies an exchange so that, while in a loose sense it might be said that goods are dealt with when they are commingled or processed, the element of exchange is missing and so it cannot be said that the end product or mixture is proceeds of the inputs.19 9.19 The PPSA Pt 3.4 provisions are particularly relevant in the context of socalled Romalpa agreements,20 or retention of title arrangements. There is a

substantial body of pre-PPSA case law addressing the situation where a Romalpa supplier sells raw materials to its customer, the customer uses the goods in a manufacturing process and the supplier claims an interest in the end product. At common law, the seller’s title to the inputs is extinguished in the manufacturing process and the end product typically belongs to the manufacturer-buyer. Parties commonly tried to displace this outcome by including in the retention of title agreement a provision, commonly known as an ‘aggregation clause’,21 stipulating that ownership of the end product is to vest in the supplier. Such a provision would ‘almost invariably be treated as creating a mortgage or charge’ over the end product, and so it would be subject to the registration of charges provisions in the Corporations Act 2001 (Cth).22 A leading English case is Borden (UK) Ltd v Scottish Timber Products Ltd.23 There the seller supplied resin to the buyer on reservation of title terms and the resin was combined with other raw materials to manufacture chipboard. There was no aggregation clause in the parties’ contract, but the seller argued that it was entitled to trace its interest in the resin into the end product. The court rejected the seller’s claim on the ground that its title to the resin disappeared once it had been used up in the manufacturing process, and that if the seller wanted to acquire rights in the end product this could only be done by an express contractual stipulation. 9.20 In a later case, Re Peachdart Ltd,24 the agreement did contain an aggregation clause but the court, relying on Borden, held that since the seller’s title to the inputs was lost in the manufacturing process, its interest in the end product could only be by way of grant and so it was a registrable charge. [page 266] In Clough Mill Ltd v Martin,25 Robert Goff LJ suggested that it might be possible to draft an aggregation clause which avoids this outcome by providing that title to the end product ipso facto vests in the Romalpa seller at the point of manufacture. However, even if this is possible, it is unlikely to reflect the parties’ real intentions; the provision would give the Romalpa supplier a windfall because it would take the benefit of the buyer’s labour together with other materials that might have belonged to the buyer. The windfall effect becomes even more acute where the end product includes materials sourced from two or more suppliers all with competing claims.26 The PPSA commingled goods provisions avoid these difficulties, in part by

providing that a security interest in commingled goods continues in the end product. In other words, the security interest attaches automatically to the end product and there is no need for any aggregation clause in the security agreement: see further, 9.21–9.23 below.

Continuation and Perfection of Security Interest 9.21 PPSA subs 99(1) provides that a security interest in processed or commingled goods continues in the end product or mass. PPSA s 100 provides that, for the purpose of s 55 (the default priority rules), perfection of a security interest in goods that subsequently become part of a product or mass is to be treated as perfection of the security interest in the product or mass. Example 7. Grantor is a chipboard manufacturer. On Date 1, Grantor gives SP1 a non-purchase money security interest in Grantor’s resin supplies and SP1 registers a financing statement. On Date 2, Grantor uses the resin to make chipboard. On Date 3, Grantor gives a security interest in the chipboard to SP2, who registers a financing statement. On Date 4, Grantor defaults against SP1 and SP2 and they both claim the chipboard.

Applying PPSA subs 99(1), SP1’s security interest in the resin continues in the chipboard, regardless of whether SP1’s contract with Grantor contains an aggregation clause. Applying s 100, SP1’s security interest in the chipboard is automatically perfected and so there is no need for SP1 to register a financing statement or financing change statement to cover the chipboard. Applying subss 55(4) and (5), since SP1 registered on Date 1 and SP2 registered on Date 2, SP1 has priority. The lesson to be drawn from Example 7 is that a secured party negotiating for a security interest in the end product should search for prior security interests not just in the end product itself, but also in the manufacturing inputs.27 [page 267] 9.22 Example 8. Grantor is a chipboard manufacturer. On Date 1, SP supplies Grantor with resin on conditional sale terms and registers a financing statement. Grantor uses the resin to make chipboard. On Date 2, Grantor goes into liquidation. SP and Grantor’s liquidator both claim the chipboard.

SP holds a security interest in the resin as original collateral. Applying subs 99(1), SP’s security interest continues in the chipboard. PPSA s 267 provides, in substance, that an unperfected security interest is ineffective against the grantor’s

liquidator. Therefore the success of SP’s claim depends on whether its security interest in the chipboard is perfected. The automatic perfection rule in s 100 does not apply because it is relevant only for the purposes of the default priority rules in s 55. The collateral description in SP’s financing statement, if completed in accordance with the statutory requirements, should read: ‘commercial property; other goods’.28 This description is wide enough to cover the chipboard as well as the resin and so SP holds a perfected security interest in the chipboard, enforceable against Grantor’s liquidator.29 9.23 There is a potential windfall effect in this outcome because the value of the end product may exceed the value of SP’s inputs and so, if SP was undercollateralised to start with, it may end up better off as a result of the processing or commingling. PPSA s 101 attempts to address the windfall problem. It limits the supplier’s claim to the value of its inputs at the time they became part of the end product. However, the provision only applies in the case of a competition between two or more security interests continuing in the product or mass, and so it would not apply in a case like Example 8. On the other hand, the underlying principle is the same in both cases and the courts might be prepared to imply the limitation across the board.30

Priority between Competing Claims to End Product Competing input security interests 9.24 PPSA subs 102(1) provides that a perfected security interest continuing in a product or mass has priority over an unperfected security interest continuing in the same product or mass. [page 268] Example 9. Grantor is a chipboard manufacturer. On Date 1, SP1 supplies Grantor with resin on conditional sale terms but fails to register a financing statement. On Date 2, SP2 supplies Grantor with wood chips on conditional sale terms and registers a financing statement. On Date 3, Grantor uses SP1’s resin and SP2’s wood chips to make chipboard. On Date 4, Grantor defaults against SP1 and SP2 and they both claim the chipboard.

SP1’s and SP2’s security interests in the respective inputs continue in the chipboard: subs 99(1). Applying subs 102(1), SP2’s perfected security interest has priority over SP1’s unperfected security interest.

9.25 Subsection 102(2) provides that if more than one security interest continues in the same product or mass, each perfected security interest is entitled to share in the product or mass according to the ratio that the obligation secured by the perfected security interest bears to the sum of the obligations secured by all perfected security interests in the same product or mass. Example 10. Grantor is a chipboard manufacturer. On Date 1, SP1 supplies Grantor with resin on conditional sale terms and registers a financing statement. On Date 2, SP2 supplies Grantor with wood chips on conditional sale terms and registers a financing statement. On Date 3, Grantor uses SP1’s resin and SP2’s wood chips to make chipboard. On Date 4, Grantor defaults against SP1 and SP2 and they both claim the chipboard. The amount owing to SP1 is $75 and the amount owing to SP2 is $25. The value of the chipboard is $60.

Applying subs 102(2), SP1 and SP2 share the $60 chipboard value in the proportions 75:25 so that they will receive $45 and $15 respectively. Assume that the value of the chipboard is $120. If the subs 102(2) formula is applied, SP1 and SP2 would recover $90 and $30 respectively. However, this outcome is wrong in principle because the amounts exceed the debts owing to both parties. Section 101 addresses the problem by limiting SP1’s and SP2’s security interests in the chipboard to the value of their respective inputs on the chipboard manufacture date. 9.26 Subsection 102(4) provides that, for the purposes of the section, the obligation secured by a security interest does not exceed the value of the goods on the day they became part of the product or mass. Assume that, in Example 10, the value of the resin on Date 3 is $75, but the amount of the secured obligation on Date 4 is $100. The higher amount might reflect accrued interest and other charges, or it may be that SP1’s security interest in the resin secures not just Grantor’s obligation to pay for the resin, but other obligations as well. In any event, as a result of subs 102(4), the relevant figure for calculating SP1’s entitlement under subs 102(2) is $75, not $100.31 [page 269] The purpose of subs 102(4) is to prevent SP1 from obtaining a windfall through the application of subs 102(2). But for the events on Date 3, SP1 would have been under-collateralised by $25 on Date 4 (the value of the resin is $75, but Grantor owes $100). Assume the value of the chipboard is $120. In the absence of the subs 102(4) limitation, SP1 would receive $96 and SP2 $24; in other words, SP1 would

improve its position as a result of the resin being used to make the chipboard. 9.27 PPSA subs 102(3) applies in a case where more than one unperfected security interest continues in the same product or mass, and it enacts a sharing rule similar to the one in subs 102(2).

Competing input security interest and end product security interest 9.28 Example 11. Grantor is a chipboard manufacturer. On Date 1, Grantor gives SP1 a non-purchase money security interest in Grantor’s resin supplies and SP1 registers a financing statement. On Date 2, Grantor uses the resin to make chipboard. On Date 3, Grantor gives a security interest in the chipboard to SP2, who registers a financing statement. On Date 4, Grantor defaults against SP1 and SP2 and they both claim the chipboard.

Example 11 repeats Example 7 above. As indicated in the context of Example 7, SP1’s security interest in the resin continues in the chipboard and is automatically perfected under s 100; the default priority rules in subss 55(4) and (5) apply and so SP1 has priority over SP2. 9.29 Example 12. Grantor is a chipboard manufacturer. SP1 holds a security interest in all Grantor’s end products, perfected by registration. SP2 supplies Grantor with resin on conditional sale terms and registers a financing statement. Grantor uses the resin to make chipboard. Grantor defaults against SP1 and SP2 and they both claim the chipboard.

The governing provision is PPSA para 103(b), which provides that a perfected purchase money security interest (PMSI) in goods that continues in a product or mass has priority over a non-PMSI in the product or mass given by the same grantor.32 Applying this provision to the facts of Example 12, SP2 has priority over SP1 provided that SP2’s security interest is perfected. The reference in s 103 is to ‘a perfected purchase money security interest in goods that continues in a product or mass’ and this seems to mean that the provision applies so long as SP2 perfected its security interest in the resin. In other words, perfection of SP2’s continuing security interest in the chipboard is not a requirement. The point is potentially significant because the automatic perfection rule in s 100 is only for the purposes of s 55. [page 270]

9.30 Example 13. Grantor is a chipboard manufacturer. SP1 holds a security interest in all Grantor’s present and after-acquired raw materials, perfected by registration. SP2 supplies Grantor with resin on conditional sale terms and registers a financing statement. Grantor uses the resin to make chipboard. Grantor defaults against SP1 and SP2 and they both claim the chipboard.

The governing provision is para 103(a), which provides that a perfected PMSI in goods that continues in the product or mass has priority over a non-PMSI in the same goods. 9.31 PPSA ss 101 and 102(4) prevent a secured party from obtaining a windfall from the application of s 102. As discussed in 9.23 and 9.26 above, s 101 limits the input secured party’s security interest to the value of the input on the date of manufacture, while subs 102(4) limits the obligation secured by the security interest to the value of the input on the date of manufacture. Windfalls may also occur in cases like Examples 11, 12 and 13 and, in the absence of express statutory provisions to cover cases like this, the courts might be prepared to imply limitations on the secured party’s recovery corresponding to ss 101 and 102(4).33 The Statutory Review has recommended amendments to fill these gaps.34

Deconstructing Part 3.4 9.32 As indicated in 9.17 above, PPSA Pt 3.4 applies in two fact situations, processing and commingling, and the common law treated the two cases differently. By contrast, the PPSA enacts a common set of rules for both cases. The Statutory Review points out that the PPSA provisions appear to have been drafted mainly with processed goods in mind and they may lead to unfair outcomes when applied to goods that are commingled.35 The Review recommends splitting Pt 3.4 into two, with the current provisions continuing to govern processed goods and a new set of provisions being enacted for commingled goods. The new commingled goods provisions would reflect the following principles: •

•

A party with an interest in goods that are commingled into a larger bulk shares in that larger bulk, in the proportion that its goods represent of all contributions to the bulk. To the extent that more than one party has an interest in goods that become part of a larger bulk, their rights as against each other continue to be resolved as if the goods were still separate, but on the basis that the

[page 271]

•

aggregate of their claims may not exceed the relevant proportion of the bulk. If a secured party wants to enforce its security interest in a share of the bulk, it must separate the relevant share from the bulk, and then enforce against that separate share.36

CROP SECURITY INTERESTS 9.33 Pre-PPSA, state and territory legislation created a special statutory security interest for growing crops.37 According to Sykes and Walker, the crop lien statutes were ‘about as bad an example of legislative drafting as it is possible to conceive. In fact, the various drafters seem almost to have taken a fiendish delight in obscure phraseology and in disquieting changes in language from jurisdiction to jurisdiction’.38 The PPSA supersedes the state and territory laws, replacing them with a single and simplified set of rules that apply Australia-wide. Example 14. Grantor is a wheat farmer. SP1 holds a mortgage over Grantor’s farm. SP2 makes a loan to Grantor to finance the production of next year’s crop and takes a security interest in the crop to secure repayment. Grantor defaults against SP1 and SP2. SP1 claims the farm together with the growing crop and SP2 claims the crop.

A growing crop is goods for the purposes of the PPSA and so the PPSA applies to SP2’s security interest: see 2.5 of this text. PPSA subs 84A(1) makes it clear that a security interest may attach to crops while they are growing: see 4.22 of this text. Therefore, SP2 has an enforceable claim to Grantor’s crop. At common law, the interest of a mortgagee of land extends automatically to growing crops, and so SP1 also has an enforceable claim to Grantor’s crop.39 Again, at common law, a mortgagee’s real property claim to a growing crop has priority over a subsequent security interest in the crop where the mortgagor defaults before the crop has been harvested.40 PPSA subs 84(1) codifies the common law priority rule. It provides that a security interest in crops does not prejudicially affect the rights of a lessor or mortgagee of land on which the crops are growing if those rights existed at the time the security interest was created and the lessor or mortgagee has not consented in writing to the creation of the security interest. The justification is that since SP1’s real property mortgage preceded SP2’s crop mortgage, SP1 had no way of knowing about SP2’s crop mortgage at the time of its transaction with Grantor and no easy way of discovering it subsequently. On the other hand, SP2 could have discovered SP1’s mortgage by conducting a search in the land

[page 272] titles register before taking a security interest in Grantor’s crop. Armed with this information, SP2 would then have been in a position either to negotiate a subordination agreement with SP1 or, alternatively, to adjust the price of its crop loan to cover the increased risk. The lesson for crop lenders is that they should conduct a land title search before making a loan on the security of a growing crop. 9.34 Example 15. Grantor is a wheat farmer. SP1 makes a loan to Grantor to finance the production of next year’s crop, takes a security interest in the crop to secure repayment and registers a financing statement. Subsequently, Grantor borrows money from SP2 to make improvements to her farm and grants SP2 a mortgage over the farm to secure repayment. Grantor defaults against SP1 and SP2. SP1 claims the crop and SP2 claims the farm, including the crop.

PPSA subs 84(2) provides that a perfected security interest in crops is not prejudicially affected by a subsequent sale, lease or mortgage of the land on which the crops are growing. Applying this provision to the facts of Example 15, SP1 has priority over SP2. The justification is that SP1 had no means of knowing about SP2’s interest in the land at the time it made the crop loan. On the other hand, SP2 could have discovered SP1’s security interest by conducting a PPS register search before entering into its mortgage agreement with Grantor. The lesson for prospective farm mortgagees and buyers is that, before going ahead with the transaction, they should conduct a PPS register search to check for outstanding crop security interests.41

1. 2. 3. 4.

5.

6.

Compare New Zealand PPSA ss 78–81 and, for example, Saskatchewan PPSA s 38. Compare New Zealand PPSA ss 82–86 and, for example, Saskatchewan PPSA s 39. [1971] SCR 357. Except if both the accession and the host goods are serial-numbered goods, for example aircraft and aircraft parts: PPSA s 10, ‘serial number’; Personal Property Securities Regulations 2010 (Cth) (PPS Regulations) reg 5.5 Sch 1 cl 2.2. There is no other priority rule in the PPSA for cases like this, and so it follows that the common law rules discussed in 9.2 and 9.3 above apply. There is no corresponding exception in the other PPSAs. The Canadian PPSAs, and Art 9, enact special priority rules for disputes between the holder of a security interest in a fixture and a party claiming an interest in the land on which the fixture is located. There are no corresponding provisions in the Australian PPSA: see 2.9 of this text. Contrast, for example, Saskatchewan PPSA para s 2(1)(u) (‘goods’ defined to include fixtures). The Explanatory Memorandum’s example of a replacement mirror attached to a large telescope at the grantor’s observatory appears to overlook this limitation: Parliament of the Commonwealth of Australia, Senate, Personal Property Securities Bill 2009: Replacement Explanatory Memorandum, para 17.

7.

8. 9.

10.

11.

12. 13. 14. 15.

16.

17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

28. 29. 30.

The Statutory Review has recommended amending the definition of ‘accession’ to make this point explicit: Bruce Whittaker, Review of the Personal Property Securities Act 2009: Final Report (Commonwealth of Australia, 2015), para 7.9.1 (‘Statutory Review: Final Report’). See Ronald C C Cuming, Catherine Walsh and Roderick J Wood, Personal Property Security Law, 2nd ed, Irwin Law, Toronto, 2012, p 602. For, attachment, SP2 must give value and Grantor must have rights in the collateral: PPSA subs 19(2). Grantor acquires rights in the tyres when the conditional sale agreement is made or, at any rate, upon delivery, while the value requirement is satisfied by SP2’s promise to give credit, incorporated in the conditional sale agreement: for discussion of the attachment rules, see 4.11–4.23 of this text. Paragraph 90(b) provides that an assignee for value of a person with an interest in the whole at the time when the disputed goods become an accession, but before the security interest in the accession is perfected, has priority over the security interest in the accession. It is hard to see what para (b) adds to para (a). The Statutory Review recommends deleting para (b): Statutory Review: Final Report, para 7.9.3. The statute does not expressly provide for a right of removal. Section 92 refers to a secured party being entitled to remove an accession under s 123, but s 123 provides for seizure of collateral generally and it does not say anything specifically about removal of accessions. There is a note to s 123 saying that: ‘for seizure of accessions, see ss 95–97’, but these provisions presuppose the secured party’s right of removal. The Statutory Review has recommended that there should be express provision for removal: Statutory Review: Final Report, para 8.3.3. Specifically, the party entitled to notice has given a written notice to the accession-secured party specifying a smaller number of days: para 95(2)(b). The notice may be in an approved form: subs 95(4). For the approved form, see Personal Property Securities (Approved Form) Instrument 2011 (Cth). The latter exception only applies if the security interest in the accession secures the costs of retention. PPSA s 96 deals only with the rights of a person other than the grantor. But, on general principles, the grantor may also keep the accession by paying out the secured party either before or after the secured party takes possession of the accession. See PPSA s 142, which deals with redemption of collateral following repossession. PPSA subs 99(2) elaborates by providing that the identity of goods that are manufactured, processed, assembled or commingled is lost in a product or mass if it is not commercially practical to restore the goods to their original state. See, for example, Louise Gullifer (ed), Goode on Legal Problems of Credit and Security, 5th ed, Sweet & Maxwell, London, 2013, para 1-35; see above note 8, at p 605. See above note 8, at pp 605–6. See above note 8, at pp 606–7. Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676. Gerard McCormack, Secured Credit Under English and American Law, Cambridge University Press, Cambridge (UK), 2004, p 199. See above note 21, at p 199. [1981] Ch 25. [1984] Ch 131. [1985] 1 WLR 111. See above note 17, at para 1-35; see above note 21, at pp 200–20. See above note 8, at p 607. The Statutory Review has recommended amending s 100 so that it applies for the purpose of all the priority rules (including the PMSI priority rules in s 62), but not the taking free rules in Pt 2.5: Statutory Review: Final Report, para 7.10.1. PPSA s 153(1) Table, Item 4(a); Personal Property Securities Regulations 2010 (Cth) reg 5.5 Sch 1 cl 2.3. The perfection rules for proceeds in s 33 do not apply because the chipboard is not proceeds: see 9.18 above. See above note 8, at pp 610–11. Section 101 limits the secured party’s ‘priority’. The limitation should be

31.

32. 33. 34. 35.

36. 37. 38. 39. 40. 41.

on the amount the secured party may recover from enforcing its security interest. Otherwise, if there is any collateral value left over after the secured party has enforced its priority claim and the competing secured party has enforced its security interest, the first secured party may come back and enforce its security interest against the surplus, up to the amount of the secured obligation. This would make an under-secured secured party better off than if its collateral had not been processed or commingled in the first place. The Statutory Review has recommended an amendment to address this problem: Statutory Review: Final Report, para 7.10.3.1. In the converse case, where the value of the resin on Date 3 is $100 and the amount of the secured obligation is $75, the relevant figure for the purpose of subs 102(2) is $75, the amount of the obligation: see above note 8, at pp 608–9. ‘Purchase money security interest’ is defined in PPSA s 14: see 8.7–8.32 of this text. See above note 8, at pp 610–11. Statutory Review: Final Report, para 7.10.3.2. Statutory Review: Final Report, para 7.10.1.1, referring to Andrew Boxall and Diccon Loxton, ‘Commodity Transactions and Part 3.4 of the Personal Property Securities Act 2009: An Anomolous Outcome’ (2013) 27 Commercial Law Quarterly 3. Statutory Review: Final Report, para 7.10.1.3. For details, see Edward I Sykes and Sally Walker, The Law of Securities, 5th ed, Law Book Company, Sydney, 1993, pp 714–28. See above note 37, at p 699. See above note 37, at pp 714–16. See above note 37, at pp 714–16. PPSA s 85 enacts a priority rule for competing security interests in crops or their proceeds: see 8.50 of this text. By implication, s 85 is subordinate to s 84, and so it does not apply where the competition is between a crop lender and the mortgagee of the farm on which the crop is growing.

[page 273]

CHAPTER 10 Transfers of Collateral INTRODUCTION 10.1 Chapters 7–9 are concerned with the Personal Property Securities Act 2009 (Cth) (PPSA) provisions governing priority disputes between competing security interests in the same collateral (‘SP–SP disputes’). By contrast, the main focus of this chapter is on the case where the grantor sells or leases the collateral to a third party (‘the transferee’) without the secured party’s authority and the secured party later attempts to recover the collateral from the transferee (‘SP–transferee disputes’). SP–SP disputes and SP–transferee disputes both involve competing claims by innocent parties, but there is at least one important difference. In the case of an SP–SP dispute, the winner ends up with first claim on the collateral for satisfaction of the grantor’s obligation, while the loser is relegated to second bite at the cherry; in other words, the losing party may still enforce its security interest, but only if there is collateral value left over after the winning party’s claim has been satisfied. By contrast, in the case of an SP–transferee dispute, if the transferee defeats the secured party, the secured party loses its security interest in the transferred collateral, and the transferee acquires clear title;1 on the other hand, if the secured party’s claim prevails, the result is that the transferee holds the collateral subject to the security interest and must pay out the secured party to obtain clear title.2 [page 274] If the transferee prevails, the secured party will have a damages claim against the grantor for breach of the security agreement and in tort for conversion; correspondingly, if the secured party prevails, the transferee will have a damages claim against the grantor for breach of the grantor’s contractual obligation to transfer clear title. But the availability of a damages claim will be cold comfort if the

grantor is insolvent, and so the loser in the battle over the collateral may be left with no effective means of redress. 10.2 SP–transferee disputes arise where the grantor and transferee contract for the transfer of clear title to the transferee. This is to be distinguished from the case where the grantor and transferee contract for transfer to the transferee of title to the collateral subject to the secured party’s security interest. In the first case, the transferee may or may not know about the security interest. In the second case, the transferee is necessarily aware of the security interest and, in effect, agrees to take over performance of the secured obligation. In the first case, the question is whether the transferee takes the collateral free of, or subject to, the security interest. In the second case, given the understanding on which the transaction between the grantor and the transferee is based, this question does not arise. The main issue in the second case is whether, if the security interest is perfected by registration, the secured party should be required to amend its registration to reflect the substitution of the transferee as the new grantor. The governing provision is s 34, discussed in 5.47–5.53 of this text. 10.3 The main provisions governing SP–transferee disputes are in PPSA ss 32, 43 and 79. Section 79 provides that the grantor may transfer collateral despite any provision in the security agreement to the contrary, but that the transfer does not prejudice the secured party’s rights under the security agreement, including the right to treat a prohibited transfer as an act of default. In other words, an unauthorised transfer of collateral may give the secured party rights against the grantor, but the transfer is still effective as between the grantor and the transferee. It does not follow from s 79 that the transferee takes the collateral free of the security interest. Whether or not that is the case depends on PPSA ss 32 and 43 and the other provisions discussed in this chapter. Section 43 provides that a buyer or lessee of personal property for value takes the personal property free of any unperfected security interest. Subsection 32(1) provides, in part, that if collateral gives rise to proceeds, the security interest continues in the collateral unless the secured party expressly or impliedly authorised the disposal giving rise to the proceeds. Read together, these provisions enact three general rules, as follows: (1) A buyer or lessee of the collateral acquires title free of the security interest if the security interest is unperfected. (2) If the secured party expressly or impliedly authorised the transfer, the transferee acquires clear title to the collateral even if the security interest is

perfected. [page 275] (3) If the security interest is perfected and the secured party did not expressly or impliedly authorise the transfer, the transferee takes the collateral subject to the security interest. Rule (1) derives from s 43. Rule (2) derives from subs 32(1); it typically applies where the grantor is a dealer and the collateral is inventory. A dealer must remain free to sell its inventory in the ordinary course of business because otherwise it could not continue to trade. For this reason, an inventory security agreement may expressly allow the grantor to dispose of the collateral in the ordinary course of business while, in the absence of an express provision, the courts are likely to imply a term to the same effect.3 Rule (3) derives by implication from ss 32 and 43. PPSA ss 44–52 carve out some exceptions to Rule (3). If one of these provisions applies, the transferee takes the collateral free of the security interest even though: (1) the security interest is perfected; and (2) the secured party did not expressly or impliedly authorise the transfer. 10.4 PPSA s 43 is discussed further in 10.5–10.10 below. PPSA ss 44–52 are dealt with in 10.11–10.70. Paragraphs 10.72–10.87 deal with PPSA ss 69–72, which govern the priority of creditors and purchasers of negotiable instruments, chattel paper and negotiable documents of title. Paragraphs 10.88–10.107 cover PPSA ss 37, 38 and 76 which govern the secured party’s rights in a case where: (1) the grantor sells or leases the collateral; (2) the transferee takes the collateral free of the security interest; and (3) the collateral is subsequently returned following rescission of the sale or lease and in related circumstances.

UNPERFECTED SECURITY INTERESTS 10.5 PPSA subs 43(1) provides that a buyer or lessee of personal property for value takes the personal property free of an unperfected security interest.4 The provision does not apply if the buyer or lessee was a party to the security agreement: subs 43(2). The purpose of s 43 is to protect third parties who, given the secured party’s failure to perfect, may have no means of discovering the security interest: see 5.59–5.60 of this text.

Example 1. SP holds an unperfected security interest in Grantor’s truck. Grantor sells the truck to T for $10,000.

Assuming T was not a party to the security agreement with SP, they take the truck free of the security interest. But the security interest is not [page 276] extinguished altogether;5 by virtue of PPSA subs 32(1), the security interest switches from the truck to the $10,000 sale proceeds giving SP a proprietary claim to these funds provided they remain traceable in Grantor’s hands: see further, Chapter 11.6 In Example 1, T obtains clear title to the truck even if they were aware of the security interest, because there is no knowledge limitation in s 43.7 At first glance this feature of the provision may seem anomalous, because if T knows about SP’s security interest, they do not need the protection s 43 is designed to offer. However, there is no knowledge limitation in s 55 (default priority rules) either and the justification is the same in both contexts. A knowledge limitation would increase litigation costs and it would inhibit settlements by making case outcomes less predictable. Furthermore, the absence of a knowledge limitation increases the incentive for SP to perfect its security interest, thereby reducing the risk of disputes in the first place: see 7.17–7.20 of this text.8 10.6 Changing the facts of Example 1, assume that, instead of selling the truck, Grantor gives T a security interest and the security agreement is in the form of a mortgage. Subsection 43(1) does not apply unless T is a buyer or lessee, and, in the case under consideration, T is neither.9 It is true that, in form, a mortgage is a type of transfer, but in the PPSA context it is substance, not form, that counts and it would be drawing a long bow to argue that T qualifies as a buyer. In any event, para 42(b) makes it clear that s 43 and the immediately following provisions do not apply to the acquisition of an interest in personal property if the interest taken is itself a security interest. This exception relates to the distinction between SP–SP disputes and SP–transferee disputes, noted in 10.1–10.2 above: if subs 43(1) applied, the result would be that SP loses its security interest in the transferred collateral altogether. But this outcome is inappropriate, given that SP and T both hold security interests. The appropriate outcome is postponement of SP’s unperfected security interest to T’s competing claim. Section 55 governs priorities in the absence of any other applicable provision: see 7.4–7.20. Applying Section 55

to the case under consideration, T will have priority over SP provided T takes steps to perfect its security interest before SP. [page 277] 10.7 Changing the facts of Example 1 again, assume now that Grantor leases the truck to T. PPSA subs 43(1) provides that a buyer or lessee of personal property ‘takes free of’ an unperfected security interest’. As indicated above, in the case of a buyer, this means that the secured party loses its security interest in the transferred collateral and the buyer acquires clear title. In the case of a lease, the outcome depends on whether the transaction between Grantor and T is an in-substance security agreement, a PPS lease or a lease that is neither an in-substance security agreement nor a PPS lease. If the transaction is an in-substance security agreement, for the purposes of the statute Grantor must be treated as having sold the truck outright to T and taken a security interest in the truck to secure the payments. It follows that T is a ‘buyer’ for the purposes of subs 43(1) and the provision applies on that footing. The analysis is the same if the transaction between Grantor and T is a PPS lease because, for the purposes of the statute, subs 12(3) equates a PPS lease with an in-substance security agreement. But if the transaction is neither an insubstance security agreement nor a PPS lease, Grantor is not deemed to have sold the truck nor T to have bought it. Instead T acquires only a right of possession for the duration of the term, with Grantor holding the reversionary interest. The effect of subs 43(1) in this case is that SP may not interfere with T’s right of possession during the currency of the lease, but the security interest continues in Grantor’s reversionary interest and SP may reclaim the truck from Grantor at the end of the lease10 10.8 Example 2. SP holds an unperfected security interest in Grantor’s accounts. Grantor later transfers the accounts to T for $10,000.

In this case, T is a buyer but PPSA subs 43(1) does not apply. The reason is that the transaction between Grantor and T creates a deemed security interest in T’s favour: PPSA para 12(3)(a) (see 3.24–3.30 of this text); and s 43 does not apply to the acquisition of an interest in personal property if the interest taken is itself a security interest: para 42(b). Section 55 applies instead and the result is that T will have priority over SP provided T takes steps to perfect its security interest before SP.

However, given that the transaction between Grantor and T is actually an outright sale and only a deemed security agreement, ‘priority’ in this context must mean that SP loses its security interest in the accounts altogether and T acquires clear title. In this respect, the statute blurs the distinction between SP–SP disputes and SP– transferee disputes. [page 278] 10.9 Example 3. SP holds an unperfected security interest in Grantor’s truck. On Date 1, Grantor sells the truck to T1 for $10,000. On Date 2, SP registers a financing statement. On Date 3, T1 sells the truck to T2 for $12,000.

SP’s security interest was unperfected on the date of the sale to T1. Therefore, subs 43(1) applies and T1 takes the truck free of SP’s security interest. SP’s registration on Date 2 does not affect this outcome.11 T2 also acquires clear title because SP no longer has a security interest in the truck. SP’s registration on Date 2 does not affect this outcome, given that SP has lost its security interest in the truck. Example 4. SP holds a security interest in Grantor’s truck perfected by registration. On Date 1, Grantor sells the truck to T1 for $10,000. On Date 2, SP accidentally discharges its registration. On Date 3, T1 sells the truck to T2 for $12,000.

Example 4 is the obverse of Example 3. In Example 4, SP’s security interest was perfected on the date of the sale to T1. Therefore, T1 cannot rely on subs 43(1) and, subject to the other statutory cut-off rules discussed in 10.11–10.70 below, T1 takes the truck encumbered by SP’s security interest. Grantor’s sale to T1 triggers the application of s 34. The result is that SP’s security interest ceases to be perfected by registration on Date 1 and becomes temporarily perfected instead. On this basis, SP’s security interest remains perfected despite the discharge of its registration on Date 2. However, T2 is protected by s 52, which provides, in general terms, that a buyer of goods takes title clear of a temporarily perfected security interest.12 10.10 Example 5. SP holds an unperfected security interest in Grantor’s truck. On Date 1, Grantor sells the truck to T1, taking T1’s computer in part payment with the balance of the price payable in cash. On Date 2, which is more than five business days later, Grantor sells the computer to T2.

SP’s security interest in the truck extends to the computer as proceeds: subs 32(1). PPSA para 42(a) provides that s 43 and following provisions apply to a

security interest in original collateral and proceeds. SP’s security interest in the truck is unperfected and so, applying subs 43(1), T1 takes the truck free of SP’s security interest. SP’s security interest in the computer is also unperfected and so, again applying subs 43(1), T2 takes the computer free of SP’s security interest.13 [page 279]

PERFECTED SECURITY INTERESTS Serial-numbered Collateral 10.11 PPSA subs 44(1) provides, in effect, that a buyer or lessee of serialnumbered collateral takes free of a security interest perfected by registration unless the financing statement correctly discloses the serial number.14 The provision does not apply if (1) the buyer or lessee is a dealer (‘holds the personal property as inventory’) or (2) the buyer or lessee was a party to the security agreement: subs 44(2). In common with s 43 and other provisions in PPSA, Pt 2.5 s 44 applies whether the collateral is original collateral or proceeds, but it does not apply if the interest the transferee acquires is itself a security interest: PPSA s 42. Example 6. SP holds a security interest in Grantor’s truck perfected by registration. SP’s financing statement does not disclose the truck’s vehicle identification number. Grantor sells the truck to T.

The truck is commercial property and so SP is not required to include the serial number in its financing statement: see 6.36–6.37. It follows that SP’s omission of the serial number does not affect the validity of the financing statement. On the other hand, the serial number omission inhibits register searches: it forecloses the possibility of successfully searching for SP’s security interest by serial number and leaves a search against the grantor’s details as the only reliable option.15 The purpose of PPSA s 44 is to give the secured party an incentive to include the serial number in its financing statement if the information is available to it at the time of registration.16 The provision reduces, but does not eliminate, the risk of relying on a search by serial number where the collateral is commercial property. 10.12 According to the regulations, serial-numbered consumer property must be described by serial number, whereas for serial-numbered commercial property the serial number is optional.17 Subsection 44(1) applies where the collateral is personal property which, according to the regulations ‘may, or must, be described by serial number [in the financing statement]’. This wording suggests that the provision

applies whether the collateral is commercial or consumer property. However, if the collateral is consumer property and the secured party omits or misstates the serial number, the result will be to invalidate the financing statement: PPSA ss 164 and 165, discussed in 6.54–6.65 of this text. If the financing statement is invalid, the security [page 280] interest will be unperfected. Therefore, s 43 applies and there is no need for the buyer or lessee to rely on s 44. In Example 6, subs 44(1) applies and T takes the truck free of SP’s security interest. This outcome follows even if T knew about SP’s security interest when they purchased the truck because s 44, like s 43, is not subject to any knowledge limitation. Nor does it matter whether T was actually misled by SP’s failure to include the serial number in the financing statement. So, for example, T does not have to prove that they conducted a serial number search which failed to disclose SP’s security interest and that T went ahead with the purchase on that basis. 10.13 Subsection 44(1) does not apply if the buyer or lessee is a dealer.18 However, if the dealer resells the collateral, the new buyer will have the benefit of the provision and may obtain clear title on that basis. Alternatively, if the collateral is a motor vehicle and the dealer is licensed, the buyer may obtain clear title under subs 45(3): see further, 10.19–10.20 below. The Explanatory Memorandum provides no justification for the dealer exclusion in s 44. The thinking may have been that dealers can look after themselves and do not need the protection s 44 provides. In particular, dealers may appreciate better than other transferees that searching by serial number for a security interest in serial-numbered commercial property is unreliable and that a serial number search needs to be supplemented by a search against the grantor’s details. But a grantor’s details search may not be reliable in an A-B-C-D scenario: see 6.23–6.25. The effect of the dealer exclusion in s 44 is to leave the dealer-transferee exposed to this risk. On the other hand, it reduces the risk of loss to the secured party in cases where the secured party lacks the necessary information to include in the original financing statement and cannot readily acquire it to include in a later financing change statement. In summary, the dealer exclusion may reflect the law-makers’ judgment that the benefits to the secured party exceed the costs to the dealer-transferee.19

Special Rules for Motor Vehicles The day-and-a-half rule 10.14 Example 7. On February 1, SP takes a security interest in Grantor’s car but does not register a financing statement. On February 2, T negotiates to buy the car from Grantor but, before concluding the purchase, conducts a PPS register search against the vehicle’s serial number. Since SP has not registered a financing statement, T’s search does not disclose SP’s security interest. On February 3, SP registers a financing statement which correctly discloses the vehicle’s serial number. On February 4, T buys the car.

[page 281] As a general rule, if a security interest is perfected and the secured party did not expressly or impliedly authorise the grantor to sell the collateral, the buyer takes the collateral subject to the security interest: see 10.1–10.2 above. PPSA subs 45(1) creates an exception which is relevant to Example 7. It provides, in part, that a buyer or lessee of a motor vehicle20 for new value21 takes the motor vehicle free of a security interest22 if ‘there is a time during the period between the start of the previous day and the time of the sale or lease by reference to which a search of the register [by serial number] would not disclose a registration’. ‘Previous day’ refers to the day before the sale or lease. In Example 7, the date of the sale is February 4 and the previous day is February 3. There is a time during this period when a search would not disclose SP’s security interest. Therefore, applying subs 45(1), T takes the car free of SP’s security interest. 10.15 There is no counterpart to subs 45(1) in any of the other PPSAs. The provision is based on Chattel Securities Act 1987 (Vic) s 7(1A) and Registration of Interests in Goods Act 1986 (NSW) s 8(3)(b), the so-called ‘day-and-a-half rule’.23 The purpose of the day-and-a-half rule is to avoid the need for T to search the register a second time immediately before buying the car on February 4. In other words, the rule means that T can safely rely on their February 2 search provided they complete the purchase within the time the provision allows. The pre-PPSA versions of the day-and-a-half rule only applied if, as in Example 7, T actually does conduct a register search. PPSA subs 45(1) is not limited in this way: the provision applies in any case where ‘there is a time during the period between the start of the previous day and the time of the sale or lease by reference to which a search of the register [by serial number] would not disclose a registration’. It follows that, in

Example 7, even if T had not conducted a register search on February 2, they would still have the benefit of the provision.24 10.16 Subsection 45(1) applies if the seller or lessor is the grantor or, if the grantor ‘has lost the right to possess the motor vehicle or is estopped from asserting an interest in [it], another person who is in possession of the motor [page 282] vehicle’. So, for example, the provision may apply if Grantor sells the vehicle to T1 and T1 resells it to T2: T1 is in possession in circumstances where Grantor has lost the right of possession or is estopped from asserting an interest in the vehicle. On the other hand, the provision would not apply if, for example, T1 stole the vehicle from Grantor and resold it to T2.25 Subsection 45(1) may apply even if the grantor is a dealer. But, in practice, a person who buys from a dealer will rarely, if ever, need to rely on the provision. The reason is that, as a general rule, a customer who buys goods in the ordinary course of a dealer’s business takes free of any security interest in the dealer’s inventory: see 10.3 above and also PPSA subs 45(3), which is discussed in 10.19–10.20 below. In common with ss 43 and 44, subs 45(1) does not apply if T is a dealer.26 If the dealer, T, resells the vehicle, the new buyer, notionally at any rate, may rely on the provision, but in practice, for the reasons which have just been discussed, they will rarely, if ever, need to do so. 10.17 Subsection 45(1) does not apply if the secured party was in possession of the vehicle immediately before the sale or lease: para 45(2)(a). The reason is that the secured party’s possession should alert the prospective transferee to the existence of the security interest and so they do not need the protection of subs 45(1). In the same connection, subs 45(1) does not apply if the buyer or lessee buys or leases the motor vehicle with actual or constructive knowledge of the security interest. Subsection 45(1) is different from ss 43 and 44 in this respect because these provisions are not subject to any knowledge limitation. PPSA ss 295–300 are relevant to the determination of knowledge. Section 296 provides that the onus of proof lies on the party asserting that a person acquires personal property without actual or constructive knowledge of a relevant fact. In the context of subs 45(2), the onus will typically be on the buyer or lessee to prove that they did not have actual or constructive knowledge of the security interest at the time of their transaction with the grantor. The statute does not define ‘actual knowledge’, but s 297 provides that

a person (T) has constructive knowledge of a circumstance if: (1) T fails to make ‘the inquiries that would ordinarily have been made by an honest and prudent person in [T’s] situation’ or ‘the inquiries that would have been made by an honest and prudent person with [T’s] actual knowledge in [T’s] situation’; and (2) those inquiries would have given T actual knowledge of the circumstance.27 [page 283] In the absence of a statutory definition, the common law meaning of ‘actual knowledge’ applies. In Baden Delvaux & Lecuit v Société Général pour Favoriser le Développement du Commerce,28 a case involving accessory liability for breach of trust, Peter Gibson J identified29 five categories of knowledge, as follows: (1) actual knowledge (in other words, knowing something for a fact); (2) wilfully shutting one’s eyes to the obvious; (3) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; (4) knowledge of circumstances which would indicate the facts to an honest and reasonable person; and (5) knowledge of circumstances which would put an honest and reasonable person on inquiry. Categories (4) and (5) are both forms of constructive knowledge. Categories (2) and (3) may be either forms of actual knowledge or forms of constructive knowledge. The question matters in contexts where the liability of the party in question turns on their actual knowledge, or notice, of the relevant facts.30 The distinction between Categories (2) and (3) (deliberately refraining from inquiry) and Categories (4) and (5) (negligently failing to inquire) is a subtle one and it may be difficult to apply in practice. But, in the context of PPSA s 45, nothing turns on the distinction because, even if Categories (2) and (3) do not qualify as forms of actual knowledge, they are clearly constructive knowledge within the meaning of s 297, and either actual or constructive knowledge will disqualify a transferee under subs 45(2) and related provisions.31 10.18 PPSA s 298 deals with the question of knowledge in the context of transactions where the parties are related to one another: where the transferor and

transferee are members of the same household, where they are associated entities within the meaning of the Corporations Act 2001 (Cth) and where the transferor is a director or officer of the transferee or vice versa. Section 298 enacts a series of presumptions, rebuttable by proof to the contrary beyond reasonable doubt, including a presumption that the transferee had actual or constructive knowledge of a security interest in the personal property. [page 284] Section 300 provides that a person does not have notice, or actual or constructive knowledge, about the existence or contents of a registration merely because data in the registration is available for search. In other words, failure to search the register does not itself amount to constructive knowledge within the meaning of s 297.32

Purchase from dealer 10.19 PPSA subs 45(3) provides, in effect, that a person who buys or leases a motor vehicle33 from a licensed dealer34 for new value takes free of any security interest. The provision does not apply if: (1) the secured party is in possession of the vehicle at the time of the sale or lease; (2) the vehicle is bought at a sale held by or on behalf of an execution creditor; (3) the buyer or lessee is a dealer;35 or (4) the buyer or lessee has actual or constructive knowledge that the sale or lease breaches the security agreement. Example 8. SP holds a security interest in Grantor’s motor vehicle, perfected by registration. Grantor sells the vehicle to Dealer without SP’s consent. Later Dealer sells the vehicle to T who has no knowledge of SP’s security agreement with Grantor.

SP did not authorise either Grantor’s sale to Dealer or Dealer’s sale to T, and so T does not obtain clear title under subs 32(1). Nor can T rely on s 46 (the transfer in ordinary course provision) because, even if Dealer’s sale to T was in the ordinary course of business, s 46 only applies if the security interest is given by the seller and, in Example 8, it was Dealer, not Grantor, who sold T the vehicle: see further, 10.23 below. However, subs 45(3) applies, provided T gave new value and T is not a dealer. Subsection 45(3) does not apply if the transferee has actual or constructive knowledge that the transfer constitutes a breach of the security agreement. In Example 8, T is not aware of SP’s security agreement and so, a fortiori, they cannot

know, or be expected to know, that there has been a breach of the agreement. There is no corresponding provision in the other PPSAs but there was a similar provision in s 7(2) of the Chattel Securities Act 1987 (Vic) and this appears to have been the source of PPSA subs 45(3). In cases like Example 8, PPSA ss 34 and 52 also apply and so subs 45(3) may be unnecessary in this context: see 10.68–10.70 below. [page 285] 10.20 Example 9. Grantor is a motor vehicle dealer. SP has perfected a security interest in all the vehicles in Grantor’s showroom, by registering each vehicle against its serial number. The security agreement obliges Grantor to sell the vehicles for an amount determined in accordance with a formula agreed to by Grantor and SP, with a minimum price of $X for any vehicle. Grantor sells a vehicle to T for an amount significantly less than $X. Like many car buyers, T is aware that motor vehicles held by dealers as inventory are commonly subject to a security interest, but they are not specifically aware of SP’s security interest and they do not know about the restriction in the security agreement on Grantor’s authority to sell.

Example 9 is a modified version of the example given in the Explanatory Memorandum to illustrate the application of subs 45(3).36 Subsection 45(3) applies on these facts, provided T gave new value and T is not a dealer. It is true that T may have either actual or constructive knowledge of SP’s security interest but they do not have knowledge, in either sense, that the sale to them was in breach of the security agreement. The discussion in the Explanatory Memorandum suggests that the main purpose of subs 45(3) is to address cases like Example 9, but in practice T will rarely need to rely on subs 45(3) in cases like this. The reason is that if the sale is in the ordinary course of Dealer’s business, T will obtain clear title under s 46 (see 10.21–10.47 below). In other words, there is a substantial overlap between subs 45(3) and s 46. In Example 9, the fact that Dealer’s sale to T was in breach of the security agreement does not necessarily make the sale to T outside the ordinary course of Dealer’s business: see 10.29 below. Assume, however, that there are additional irregularities and so the sale is not in the ordinary course of business. On these facts, T cannot rely on s 46, but subs 45(3) may still apply because it is not limited to sales in the ordinary course of business. On the other hand, the irregularities surrounding the sale may put T on notice that the sale is in breach of the security agreement and, in that case, the provision will not apply.

Sale or Lease in the Ordinary Course of Business

Introduction 10.21 Subsection 46(1) provides that a buyer or lessee of personal property takes free of a security interest given by the seller or lessor37 if the sale or lease was in the ordinary course of the seller’s or lessor’s business of selling or leasing personal property of that kind.38 The provision does not apply if: (1) the collateral is serialnumbered personal property and the buyer or lessee [page 286] is a dealer (para 46(2)(a));39 (2) the buyer or lessee has actual knowledge that the sale or lease constitutes a breach of the security agreement (para 46(2)(b)); or (3) the interest the buyer or lessee acquires is itself a security interest (para 42(b), discussed in 10.6 above). There is a comparable provision in all the other PPSAs.40 Example 10. Grantor is a furniture retailer. SP holds a security interest in Grantor’s inventory perfected by registration. The security agreement authorises Grantor to sell inventory in the ordinary course of business. The agreement goes on to provide that SP may withdraw authority by serving notice on Grantor. SP serves a notice on Grantor. Grantor later, and while the notice is still in force, sells an armchair to T, a retail customer.

SP holds a perfected security interest in the armchair and it did not expressly or impliedly authorise the sale to T. Therefore, if General Rule (3) discussed in 10.3 above applied, T would hold the armchair subject to SP’s security interest. But subs 46(1) creates an exception which applies in cases like this and the result is that T obtains clear title unless they had actual knowledge that the sale was in breach of the security agreement. As Example 10 illustrates, the main purpose of subs 46(1) is to protect retail buyers from unpublicised restrictions on the retailer’s freedom to sell its inventory. The provision avoids the need for a buyer or lessee to conduct a register search and make other inquiries prior to purchase. Part of the justification is that many customers will lack the sophistication to realise that these types of precautions might be necessary. A further consideration is that such precautions would be time-consuming and costly and requiring customers to take them would have a significantly chilling effect on retail sales.41

Personal property 10.22 The corresponding provision in the other PPSAs only applies to

transactions involving goods, but subs 46(1) extends to personal property at large. This raises the possibility that a transfer of accounts or chattel paper might be subject to the provision. However, there are other provisions in the statute governing competing claims to accounts and chattel paper, and if subs 46(1) applied as well, it would overlap and possibly also contradict these other rules.42 On the other hand, subs 46(1) only applies if the transfer is in the ordinary course of the transferor’s business of dealing in personal property of that kind, and this limitation may disqualify a transfer of accounts or chattel [page 287] paper; in other words, a court may conclude that if, for example, a furniture retailer assigned its accounts to T, the transaction was not in the ordinary course of the retailer’s business of selling furniture: see further, 10.24–10.33 below.

Security interest given by seller or lessor 10.23 Subsection 46(1) only applies if the security interest is given by the seller or lessor. Example 11. SP holds a security interest in Grantor’s motor vehicle, perfected by registration. Grantor sells the vehicle to Dealer without SP’s consent. Later Dealer sells the vehicle to T who has no knowledge of SP’s security agreement with Grantor.

Example 11 repeats Example 8 above. The application of subs 46(1) to these facts involves a two-stage inquiry. The first question is whether the provision applies to give Dealer clear title. If it does, T will also obtain clear title because SP no longer has a claim to the vehicle. This is sometimes referred to as the ‘shelter principle’: the clear title acquired by Dealer shelters T from all claims by SP.43 The second question is whether, if Dealer does not obtain clear title, subs 46(1) applies to give T clear title. The answer to the first question is ‘no’ because: (1) the provision only applies if the sale is in the ordinary course of the seller’s business and Grantor’s sale to Dealer does not qualify on this score; and (2) in any event, the provision does not apply if the disputed collateral is serial-numbered personal property and the buyer is a dealer. This conclusion makes it necessary to address the second question and, again, the answer is ‘no’. The reason is that SP’s security interest was given by Grantor, whereas it was Dealer who sold the vehicle to T. The

upshot is that subs 46(1) does not protect T. But T may still obtain clear title under subs 45(3) or, alternatively, under s 34 read in conjunction with s 52: see 10.68–10.70 below.

Ordinary course of business 10.24 Subsection 46(1) applies only if the sale or lease is ‘in the ordinary course of the seller’s or lessor’s business of selling or leasing personal property of that kind’.44 In the context of the Canadian PPSAs, a sale ‘in the ordinary course of business’ has been defined as ‘a sale to the public at large of the type normally made by the vendor in a particular business, where the basic business dealings between buyer and seller are carried out under normal terms and consistent with general commercial practice’.45 On this basis, a sale between [page 288] private parties is not a sale in the ordinary course of business,46 nor is a sale by a dealer in unusual circumstances.47 Examples of unusual circumstances might include a sale off-premises or outside the dealer’s normal business hours; a sale at substantially below market value; and a sale comprising an unusually large quantity of the dealer’s stock.48 10.25 These propositions all presuppose that the sale takes place in a retail context. However, a sale may be in the ordinary course of business even if the seller is not a retailer. The Explanatory Memorandum offers the following example: GrantA is primarily in the business of raising and selling livestock. GrantA and BuyA regularly exchange livestock for feed. The exchange of the livestock for feed would be in the ordinary course of business despite it being secondary to GrantA’s primary business of dealing in livestock.49

In Camco Inc v Olson Realty,50 a leading Canadian case, a property developer, Muxlow, sold condominium units to various buyers. The units came equipped with kitchen and laundry appliances. Muxlow had purchased the appliances from Camco on conditional sale terms and the agreement included an undertaking by Muxlow that it would not resell the appliances except ‘with the building in which it is a chattel’ and only after paying Camco in full. Camco perfected its security interest in the appliances by registering a financing statement. Muxlow sold the appliances to the unit buyers in breach of its undertaking in the conditional sale agreement and

Camco took steps to recover the appliances from the buyers. The buyers claimed that the PPSA buyer in ordinary course provision applied with the result that they had clear title to the appliances. 10.26 The main issue in the case was whether the sale of the appliances was in the ordinary course of Muxlow’s business. Camco argued that the court should take account of the manner in which appliances are sold; that appliances are typically sold in retail outlets; and that since Muxlow was [page 289] a property developer, not a retailer of appliances, the sales were not in the ordinary course of its business. The court rejected the argument, holding that: (1) the section’s focus is on the business of the particular seller and not the trade or industry as a whole; (2) Muxlow was selling the appliances on a systematic basis; and (3) the fact it was engaged in selling the appliances as an incident to its primary business as a property developer did not prevent the section from applying. The decision is consistent with the policy behind the provision which, as noted in 10.20 above, is to protect buyers against hidden restrictions on the seller’s authority to sell the disputed collateral. To all outward appearances, Muxlow was free to sell the appliances and there was nothing to alert the buyers to the restriction on Muxlow’s authority in the conditional sale agreement. It is true that if the buyers had conducted a PPS register search, they would have discovered Camco’s security interest, and this revelation may in turn have led them to the terms of the security agreement. But there was nothing to alert the buyers to the need for a register search. The buyers were entitled to assume that, even if the appliances were subject to a security interest, Muxlow was free to sell them and that it was in a position to pass clear title. On this basis, a register search would have been pointless. 10.27 Australian PPSA subs 46(1) refers to a sale or lease ‘in the ordinary course of the seller’s or lessor’s business of selling or leasing personal property of that kind’. The italicised words do not appear in the other PPSAs. Do they affect the relevance of Camco in the Australian context? In Camco, Muxlow was a property developer, but the evidence established that it sold appliances, along with home units, on a systematic basis. Therefore, it was in the business of selling appliances which was secondary to its primary business as a real estate developer. PPSA subs 46(1) does not stipulate that the sale must be in the course of the seller’s primary business and

so the Camco case applies. To summarise, according to the decision in Camco, a sale may be in the ordinary course of the seller’s business, even if the transaction is secondary to the seller’s main line of activity, provided that the seller engages in such transactions on a systematic basis. The case suggests that the issue involves a two-step process: the first is to determine the business of the seller; and the second is to inquire whether the sale was made in the ordinary course of that business.51 10.28 How might the courts address a case where the disputed transaction is the seller’s first foray into the field? The Ontario Superior Court’s decision in Agricultural Commodity Corp v Schaus Feedlots Inc 52 is relevant in this connection. There the court made two main points: first, that the frequency and number of sales is not determinative and, second, that the question whether a sale is in the ordinary course of business must be addressed from [page 290] the buyer’s perspective. In other words, the key consideration is whether there were any obvious irregularities that should have put the buyer on alert. If there is a previous pattern of similar sales, as a general rule the buyer will be justified in concluding that their transaction is in the ordinary course of the seller’s business. But even where the seller has not previously made sales of the kind, the sale may still be in the ordinary course of business if the indications are that the transaction is not an isolated one and that the seller is embarking on a course of dealing. 10.29 In a similar vein, it was held in Ford Motor Credit Co of Canada Limited v Central Motors of Brampton Limited53 that whether a sale is in the ordinary course of business must be objectively ascertained given the circumstances that would have been known to the purchaser, and it does not matter that there are other circumstances not known to the purchaser that would take the transaction outside the ordinary course of the seller’s business. In Gibson v Stockco Limited,54 a New Zealand decision, the court rejected this approach on the basis that ‘it would add an unwarranted gloss to [the buyer in ordinary course provision] which would direct attention away from the objective factual inquiry and consequently have the potential for undermining the purpose of the provision’.55 But the purpose of the provision is to protect the ordinary course buyer and this objective may be frustrated if the court disregards the transaction’s outward appearance. The fact that the sale to the buyer is in breach of the security agreement does not itself take the

transaction outside the ordinary course of the seller’s business. If it did, subs 46(1) would never apply. This further supports the proposition that the ordinary course of business question should be judged from the buyer’s perspective. A sale in breach of the security agreement is irregular and, therefore, from the seller’s perspective, outside the ordinary course of business. But the irregularity does not affect the buyer unless they have knowledge of it.56 In summary, irregularities of which the buyer is unaware should not take the transaction outside the ordinary course of business.57 10.30 According to the Explanatory Memorandum, ‘a person would not take free in the ordinary course of a seller’s business if the sale is made at a time of financial stress and the sale would not have been made but for the seller’s [page 291] financial stress’.58 A sale made in these circumstances will often be manifestly irregular; for example, the transaction may be on fire sale terms, or it may take place outside ordinary business hours or off-premises. On the other hand, if there are no manifest irregularities — in other words, if there is nothing to alert the buyer to the fact that the transaction is an unusual one from the seller’s perspective — a court may conclude that it is in the ordinary course of business. In the absence of other relevant circumstances, the fact that the seller is in financial difficulties does not justify the conclusion that the sale is outside the ordinary course of business, even if the buyer is aware of the seller’s situation.59 As a matter of bankruptcy policy, the law should facilitate a seller’s attempts to trade out of financial difficulty. Denying buyers the protection of PPSA subs 46(1) simply because the seller is in financial distress may have a chilling effect on the seller’s business and frustrate its recovery efforts. 10.31 Example 12. Grantor runs a printing business. SP has a security interest in all Grantor’s present and after-acquired personal property, perfected by registration. Grantor owns a number of superseded printing presses. It sells one of the presses to T without SP’s authority.

As indicated above, PPSA subs 46(1) typically applies where the seller is a retailer selling inventory in the ordinary course of business. But the provision is not expressly limited to retailers or to cases where the disputed collateral is inventory in the seller’s hands. In Example 12, the printing press is non-inventory commercial

property, but this fact alone does not prevent the section from applying. On the other hand, if the sale to T is a one-off transaction, a court is likely to conclude that subs 46(1) does not apply because there is no pattern of dealing on Grantor’s part. The transaction is, in effect, a private sale between Grantor and T: see Stockco Limited v Gibson and Stiassny.60 Assume, though, that Grantor has a practice of selling off its superseded equipment and does so on a fairly regular basis. In that case, a court might conclude that the sale to T is in the ordinary course of business even though the transaction is incidental to Grantor’s main business activity.61 The Explanatory Memorandum provides the following illustration: [page 292] Grant A is primarily in the business of leasing, repairing and rebuilding cranes. GrantA’s practice is to sell a crane if it becomes obsolete, deteriorated beyond its useful life, or difficult to lease. GrantA sells one of its cranes to BuyA. The sale is the only sale that occurs that year. While the sale of the crane to BuyA would be in the ordinary course of GrantA’s business, the sale would not be in the ordinary course of GrantA’s business of dealing with property of that kind (emphasis added).

This illustration is based on the facts of Alberta Pacific Leasing Inc v Petro Equipment Sales,62 where the court held that the sale was in the ordinary course of the seller’s business, and said that if the seller considers a sale to be in its greater economic interest it is appropriate to treat the sale as being in the ordinary course of its business. The Explanatory Memorandum’s illustration suggests that PPSA subs 46(1) has a narrower scope and that it does not apply to the sale of superseded capital equipment. But in the illustration, the facts state that the sale is the only sale that occurs that year. Therefore the conclusion that subs 46(1) does not apply might be justified on the basis that the type of sale in question does not occur with sufficient frequency to establish a course of dealing on GrantA’s part. On the other hand, the facts also state that ‘GrantA’s practice’ is to sell a crane if it becomes surplus to requirements. There may come a point at which GrantA sells cranes with such regularity that a court would be justified in concluding that it is in the business of selling cranes. In that case, subs 46(1) would apply, even though GrantA’s business of selling cranes is secondary to its leasing and repair business. 10.32 In Stockco Limited v Gibson v Stiassny,63 the New Zealand Court of Appeal held that, in an Example 12-type case, courts should not conclude too readily that the sale is in the ordinary course of the grantor’s business. The reason is that asset sales or a sudden change in business strategy may be indications that the

company is in financial difficulty and is desperately trying to raise cash. But this is the very situation in which the secured party most needs protection. The court said:64 [W]hile the purpose of [the buyer in ordinary course provision] is to provide protection for buyers in the ordinary course of business of the seller, the necessary corollary is that a secured party is protected against a purported sale of goods subject to a security interest in circumstances other than in the ordinary course of the seller’s business … [S]ecured parties rely heavily on the protection against sales other than in the ordinary course of business when a debtor teeters on the brink of insolvency and the temptation to divest assets to raise cash looms large … [T]oo broad an interpretation of ‘ordinary course of business of the seller’ would mean that, just when the secured party’s reliance on the covenant preventing sales outside the ordinary course of business is strongest, the restriction on the debtor’s ability to dispose of its assets would

[page 293] disappear … What all of this tells us is that [the buyer in ordinary course provision] must be interpreted in a way which meets the commercial objective of facilitating commerce without undermining the equally important commercial objective of ensuring that those who provide credit on the security of the debtor’s goods are not unfairly deprived of the benefit of that security.

In other words, the buyer in ordinary course provision should not ‘be interpreted in a way that allows a debtor to make a sudden change of business strategy and thereby broaden the freedom provided by [the section] (and narrow the protection provided to the secured party by [the section])’.65 10.33 A sale to a related company is not necessarily outside the ordinary course of business. In Warehouse Sales Pty Ltd (in liq) & Lewis and Templeton v LG Electronics Australia Pty Ltd,66 the grantor was a whitegoods dealer which acquired its inventory from various suppliers on conditional sale (retention of title) terms. It sold goods direct to the public, but it also commonly sold goods to a related company which, in turn, sold to the public. The court held that the sales to the related company were in the ordinary course of the grantor’s business and that therefore the related company acquired the goods free of the inventory suppliers’ security interests. Applying the shelter principle, it followed that the related company’s customers also obtained clear title. The main factor in the court’s decision was that the grantor regularly carried on business in this way and it was ‘no less a part of [its] ordinary business than the retail sales to customers despite being a small part of the business’.67 All the inventory suppliers, with one exception (Panasonic), expressly or impliedly authorised the sales to the related company and this enabled the court to find for the customers on the further ground that,

applying subs 32(1), the suppliers’ security interests did not continue in the collateral. The Panasonic supply agreement expressly prohibited sales to a third party for further resale. The court held that Panasonic’s security interest was not affected by subs 32(1), and that subs 46(1) did not apply because the related company knew the sale was in breach of the security agreement. The court did not discuss where this left the customers who had bought Panasonic goods from the related company, but they themselves could not have relied on subs 46(1) because the security interest was not ‘given by the seller’; the security interest was given by the grantor, but the customers’ seller was the related company: see Example 11 above. However, they may have been able to rely on ss 34 and 52: see 10.68–10.70 below.

Sale to buyer 10.34 Example 13. Grantor is a furniture retailer. SP holds a perfected security interest in Grantor’s inventory. T orders a sofa from Grantor and pays a

[page 294] 20 per cent deposit. Grantor agrees to deliver the sofa to T in two weeks time. In the meantime, Grantor defaults on its obligations to SP and SP appoints a receiver. At the date of the receiver’s appointment, there is a sofa in Grantor’s warehouse ready for delivery to T. The receiver and T both claim the sofa.

Example 13 is a simplified version of the facts in Royal Bank of Canada v 216200 Alberta Ltd.68 The main issue in the Royal Bank case was whether T could rely on the PPSA buyer in ordinary course provision to defeat the receiver’s claim. The court held that the provision does not apply in a case like Example 13. The provision applies if personal property is ‘sold’ by a ‘seller’ to a ‘buyer’ and these terms must be read in light of the meaning given to them by the sale of goods legislation (SGA).69 The SGA defines a contract of sale to mean a contract whereby the seller transfers or agrees to transfer the property in the goods to the buyer for a money consideration called the ‘price’ and it goes on to subdivide contracts of sale into ‘sales’ and ‘agreements to sell’.70 A contract is a sale where the property in the goods passes from seller to buyer; but where the transfer of property is to take place at some future time, the contract is an agreement to sell. An agreement to sell

becomes a sale when property in the goods is transferred.71 In summary, a transaction qualifies as a ‘sale’ in the legal sense only when property in the goods passes to the buyer; in the period between the date of the contract and the date when property passes, the contract is merely an agreement to sell. 10.35 It follows that whether a contract is a sale or an agreement to sell depends on whether property has passed. Property passes at the time the parties intend,72 and the SGA enacts a set of rules for determining the parties’ intentions.73 The application of the rules depends on whether the disputed goods are ‘specific goods’ or ‘unascertained goods’. ‘Specific goods’ are goods identified and agreed upon at the time the contract is made.74 ‘Unascertained goods’ means goods that are not initially earmarked to the contract but that become identified at some later date. Goods sold over the counter, for example where the buyer purchases a sofa off the showroom floor, are typically specific goods; the sofa is specific goods because the parties are agreed from the outset on the particular sofa that is to form the subject matter of the contract. On the other hand, goods purchased on order, for example where the buyer orders a sofa which the seller agrees to supply at some later date, are typically unascertained goods because, at the date of the contract, there is no [page 295] particular sofa earmarked to the buyer’s order. If the contract is for the sale of specific goods, the SGA provides that, as a general rule, property passes to the buyer as soon as the contract is made, while if the contract is for the sale of unascertained goods, as a general rule property passes when the goods are appropriated to the contract.75 10.36 Appropriation typically occurs when the seller delivers the goods to the buyer or, alternatively, when the seller notifies the buyer that the goods are available for collection.76 The significance of these events is that they mark the point where the seller loses its right of substitution, in other words, the right to deliver sofa A rather than sofa B to the buyer in fulfilment of the contract. Returning to Example 13, it appears that Grantor has not notified T that the disputed sofa is available for collection. Therefore the sofa is still not appropriated to the contract and property in the sofa has not passed to T. It follows that the contract between Grantor and T remains merely an agreement to sell and, applying the reasoning in the Royal Bank case, since there is no sale, the buyer in ordinary course provision does not apply.77

10.37 The Royal Bank case analysis was adopted and applied by the Supreme Court of Victoria in the Warehouse Sales case (see 10.33 above). In the Warehouse Sales case, the grantor (Warehouse Sales) was a dealer in whitegoods. It acquired its inventory from various suppliers on retention of title terms and its customers fell into three main categories: (1) customers who had agreed to pay cash on delivery; (2) customers who had paid wholly or partly in advance; and (3) lay-by customers. Warehouse Sales went into liquidation and a question arose as to whether the inventory suppliers had any claim over goods Warehouse Sales was holding for customers pending delivery. With regard to the Category (1) customers, the court held that the contracts were for the sale of specific goods; applying the relevant SGA provisions, property in the goods passed to the customer on the date of the contract; the transaction was a ‘sale’ in the SGA sense; and therefore PPSA subs 46(1) applied to give the customer clear title. The court reached the same conclusion with respect to the Category (2) customers, including the customers who had made only part payments. The reason was that Warehouse Sales had not reserved title in the goods pending payment in full, and so property passed when the contract was made. With regard to the Category (3) customers (the lay-by transactions), [page 296] property had not passed, the transaction with Warehouse Sales was merely an agreement to sell and therefore PPSA subs 46(1) did not apply. 10.38 In common with the other PPSAs, Australian PPSA subs 32(1) provides in part that if collateral gives rise to proceeds, the security interest continues in the collateral unless the secured party expressly or impliedly authorised the dealing (see further, 11.31–11.38 below). The court in the Warehouse Sales case went on to hold that the Category (1) and Category (2) customers were also entitled to succeed under this provision on the ground that the suppliers had expressly or impliedly authorised the sales and so their security interests were extinguished. At first glance, it might seem that the Category (3) customers should have succeeded on the same ground: the lay-by transactions gave rise to proceeds, namely the customer’s obligation to pay for the goods (which is an ‘account’ in PPSA parlance), the secured party expressly or impliedly authorised the transaction which gave rise to the proceeds and therefore, applying subs 32(1), the security interest did not continue in the goods. But the court was probably right in not finding for the

Category (3) customers on this ground. ‘Proceeds’ is defined in para 31(1)(a) to mean, in part, personal property that is derived directly or indirectly from a dealing in the collateral. Paragraphs (b)–(e) go on to list cases where personal property is proceeds even though it does not derive from a dealing, including an insurance payment for loss of or damage to the collateral, royalties earned under an intellectual property licence (where the collateral is, or includes, the intellectual property) and earnings on an investment (where the collateral is, or includes, the investment property). By implication, subject to paras (b)–(e), personal property is proceeds only if it is exchanged for the original collateral.78 In the case of a lay-by sale, the customer does not obtain either possession of or title to the goods until payment of the last instalment, and so arguably there is no exchange until that point.79 10.39 Re Renovation Boys Pty Ltd80 is a similar case: inventory had been supplied to a retailer (the grantor) on conditional sale terms and the supplier had registered a financing statement; customers had paid in full for goods; the retailer had allocated goods to each customer on its computer system; and there were sufficient items in stock to fill all orders entered on the system. The court held that the goods had been appropriated to the contracts and that therefore property had passed. Since the goods had been ‘sold’, the customers were entitled to rely on PPSA subs 46(1). Assuming, contrary to the court’s [page 297] conclusion, that property in the goods had not passed so that the customers could not rely on subs 46(1), might subs 32(1) have applied instead? The better view is that subs 32(1) would not apply because, as indicated above, the provision is predicated on an exchange, and this requirement is not satisfied until the customer acquires an interest in the goods. 10.40 A win against the secured party under the PPSA may end up being cold comfort to a customer if the retailer goes into liquidation before the customer takes delivery of the goods. In that event, the liquidator may claim the goods for the estate. The liquidator’s claim will prevail unless property in the goods passed to the customer before the commencement of the liquidation, and this issue depends on application of the relevant SGA provisions. More specifically, if the goods have not been appropriated to the customer’s contract, they are property of the estate and the

customer is left with only a provable claim for recovery of their payment. Incidentally, the liquidator has a choice in this type of case: they may elect either to complete the sale and collect the balance of the purchase price for the estate or, alternatively, refuse to perform the contract and keep the goods. If the liquidator elects to perform the contract, the customer will end up suffering no loss. The problem is that the higher the customer’s prepayment, the more attractive it becomes for the liquidator not to complete the contract; that way, the estate gets to keep both the payment and the goods and, as indicated above, the customer has only a provable claim in the liquidation proceedings for the recovery of their money. 10.41 The customer may also end up losing out if there are insufficient items in the retailer’s stock to fill all outstanding orders. Assume that at the date of the receiver’s appointment in Example 13 there are three sofas in Grantor’s warehouse which are identical to the one T has ordered, and three other customers in the same position as T. Which three customers do the sofas belong to? Again, the answer lies in the sale of goods legislation. In the absence of appropriation, the sofas remain Grantor’s property and none of the customers has a claim. The receiver may elect to complete the contracts but, given the insufficient stock, one of the customers will miss out. The point is that, from a consumer protection perspective, it does no good for the PPSA to extinguish SP’s security interest if T has no title to the sofa in the first place. This was presumably the thinking behind the court’s decision in the Royal Bank case. 10.42 Example 14. Grantor is a boatbuilder. SP holds a perfected security interest in all Grantor’s present and after-acquired personal property. Grantor builds a boat and supplies it to T on conditional sale (retention of title) terms. Grantor subsequently defaults on its obligations to SP and SP claims the boat from T.

Example 14 is similar to Spittlehouse v Northshore Marine Inc.81 The issue in the case was whether T could rely on the buyer in ordinary course provision [page 298] to defeat SP’s claim. SP argued that: (1) the contract between Grantor and T was a conditional sale (retention of title) agreement; (2) a conditional sale remains an agreement to sell until the buyer has paid the price in full; and (3) according to the

Royal Bank case, the buyer in ordinary course provision only applies to sales. The court rejected SP’s argument, holding, contrary to the Royal Bank case, that the provision applies to sales in a non-technical sense and that, in common parlance, the transaction between Grantor and T was a sale. The actual outcome of the Spittlehouse case seems right. We can test this by changing the nature of T’s financing arrangements in Example 14. Assume that, instead of acquiring the boat on conditional sale terms, T borrows the purchase price from Bank and gives Bank a security interest in the boat to secure repayment. On these facts, the contract between Grantor and T is a sale in the SGA sense and so the buyer in ordinary course provision applies. Given the PPSA’s substance over form philosophy, why should the outcome vary depending on how T chooses to finance the purchase? The court’s reasoning in Spittlehouse appears to put the decision in conflict with the Royal Bank case, but the cases can be reconciled by reference to the PPSA’s substance over form philosophy. The PPSA treats a conditional sale agreement on the same basis as if it were an outright sale of the goods coupled with a loan to finance the purchase and a security interest in the goods to secure repayment of the loan. In Example 14, the buyer in ordinary course provision applies on the footing that the transaction between Grantor and T is in substance a sale.82 The same analysis should apply if the transaction between Grantor and T is a lease which is in substance a security agreement or a PPS lease.

Exceptions 10.43 Subsection 46(1) does not apply if the disputed collateral is serialnumbered personal property, typically a motor vehicle, and the buyer or lessee is a dealer: para 46(2)(a). There is no corresponding limitation in the other PPSAs. The main consequence is that the buyer in ordinary course provision does not apply in cases where the grantor is a wholesaler of serial-numbered goods. In most other cases where the grantor sells goods to a dealer, the transaction will not be in the ordinary course of the grantor’s business and so subs 46(1) will not apply anyway: see Example 11 above. 10.44 Subsection 46(1) is also inapplicable if the buyer or lessee has actual knowledge that the transaction is in breach of the security agreement: para 46(2)(b). This is different from the knowledge limitations in subss 45(2) and (4), which refer to both actual and constructive knowledge. As indicated in 10.17 above, actual knowledge means knowing something for a fact (Baden category (1)). Whether, in

the PPSA context, it also includes Baden category (2) (wilfully shutting one’s eyes to the obvious) and (3) (wilfully and recklessly failing to make such inquiries as an honest and reasonable person [page 299] would make) is less clear. The definition of constructive knowledge in PPSA s 297 appears to cover not only cases where the buyer negligently fails to make inquiries (Baden categories (4) and (5)), but also cases where they deliberately refrain from inquiry (Baden categories (2) and (3)). It could be argued that if Baden categories (2) and (3) are instances of constructive knowledge for the purposes of the PPSA, by implication they do not amount to actual knowledge. However, this argument presupposes that, in the PPSA context, actual knowledge and constructive knowledge are mutually exclusive and there is nothing in the statute to compel this conclusion. From a policy perspective, it is hard to see the justification for allowing a wilful or reckless buyer to claim the protection of s 46 and, on this basis, a court might conclude that actual knowledge extends to knowledge in the Baden category (2) and (3) senses. 10.45 If this conclusion is right, the courts will still face the challenge of deciding whether the buyer’s state of mind in a particular case amounts to recklessness (Baden categories (2) and (3)), or simply negligence (Baden categories (4) and (5)). The distinction matters in the PPSA s 46 context because in cases of negligence the buyer has only constructive knowledge which will not disqualify them from relying on the provision.83 In drawing the distinction, the courts may gain some assistance from the Baden line of cases involving accessory liability for breach of trust.84 However, cases decided in other contexts may also be relevant. For example, in Jones v Gordon,85 a bills of exchange case, Lord Blackburn drew the distinction as follows:86 If the facts and circumstances are such that the jury, or whoever has to try the question, come to the conclusion that [the party] was not honestly blundering and careless, but that he must have had a suspicion that there was something wrong, and that he refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind — I suspect there is something wrong, and if I ask questions and make further inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover — I think that is dishonesty.

10.46 The knowledge limitation in subs 45(2) refers to the buyer’s or lessee’s knowledge of the security interest. By contrast, the knowledge limitation in subs

46(2) refers to knowledge that the sale or lease is in breach of the security [page 300] agreement. The different wording reflects the different fact situations which subss 45(1) and 46(1) are aimed at: compare Example 7 above (subs 45(1)) and Example 10 (subs 46(1)). The knowledge limitation in subs 45(4), which relates to subs 45(3), also refers to the buyer’s or lessee’s knowledge that the sale or lease is in breach of the security agreement. Examples 8 and 9 illustrate the applications of subs 45(3). The subs 45(4) wording is appropriate for an Example 9-type case, but in an Example 8-type case the reference should be to knowledge of the security interest.87 10.47 A grantor in financial difficulty might be tempted to take advantage of s 46. For example, the grantor might sell collateral to a related party and then argue that s 46 applies to extinguish the security interest. But tactics like this will usually fail on the ground either that, in the absence of plausible counter-indications, a sale to a related party is not a transaction in the ordinary course of business or, alternatively, that under PPSA s 299, T, being a related party, is likely to be fixed with Grantor’s knowledge that the sale is in breach of the security agreement.88 If the secured party wants additional protection, it might include a provision in the security agreement prohibiting related party sales; again T is likely to be fixed with Grantor’s knowledge of this provision and will therefore know that the sale is in breach of the security agreement.89 Another strategy might be for Grantor to sell an asset to a buyer (who may or may not be a related party) and then sell or lease back the asset. The definition of ‘purchase money security interest’ in PPSA s 10 specifically excludes sale and leaseback transactions, and so the buyer/lessor cannot claim priority over any prior perfected security interest by relying on the purchase money security interest (PMSI) super-priority rules. But it might argue instead that s 46 applies with the result that the sale extinguishes the prior security interest. Again, this strategy is unlikely to succeed. For one thing, a court may hold that a sale which is part of a sale and leaseback arrangement is not a transaction in the ordinary course of the grantor’s business and so s 46 does not apply. Alternatively, looking at the transaction as a whole, the court might conclude that it is not in substance a sale at all but, rather, a security agreement. On this basis, s 46 does not apply and the dispute will be determined instead by the default priority rules in

PPSA s 55.90 [page 301]

Low-value Transactions 10.48 PPSA subs 47(1) provides that a buyer or lessee (T) of personal property, for new value,91 that T intends to use predominantly for personal, domestic or household purposes,92 takes free93 of any security interest if the market value of the consideration provided by T94 does not exceed $5000. The provision does not apply if: (1) the disputed collateral is serial-numbered personal property, such as a motor vehicle; (2) T has actual or constructive knowledge that the transaction constitutes a breach of the security agreement; or (3) to T’s knowledge, the market value of the disputed collateral exceeds $5000 (subs 47(2)). Example 15. SP holds a security interest in Grantor’s jewellery collection, perfected by registration. T buys a ring from Grantor at a garage sale for $1200. The market value of the ring is $1500. The sale takes place without SP’s knowledge. T does not know about SP’s security interest.

SP’s security interest is perfected and SP did not authorise the sale to T and so T does not obtain clear title under PPSA subs 32(1). Nor does subs 46(1) (the buyer in ordinary course provision) apply because the sale to T was not in the ordinary course of Grantor’s business. But subs 47(1) applies and so T takes the ring free of SP’s security interest. As Example 15 illustrates, one purpose of subs 47(1) is to avoid the need for the buyer or lessee of a low-value consumer item to conduct a register search before completing the transaction. There is a similar provision in all the other PPSAs except Ontario,95 and it is commonly referred to as the ‘garage sale rule’ because of its application to cases like Example 15.96 10.49 However, the ‘garage sale rule’ is misleading, because it implies that the provision is limited to cases like Example 15, whereas it may also apply in a case where the seller is a dealer. [page 302] Example 16. SP holds a security interest in Grantor’s jewellery collection, perfected by registration. Grantor sells a ring to Dealer without SP’s consent. Later, Dealer resells the ring to T for $2000. The market value of the ring is $1500. T does not know about SP’s security interest.

For the same reason as in Example 15, T does not obtain clear title under subs 32(1). Nor can T rely on subs 46(1) (the buyer in ordinary course provision) because the provision only applies if the security interest is given by the seller and, in Example 16, it was Dealer, not Grantor, who sold T the ring. However, subs 47(1) applies and the result is that T takes the ring free of SP’s security interest. In a case like Example 16, T is unlikely to search the register before buying the ring, because they will assume that Dealer is reputable and that the goods they have on sale are not subject to outstanding third-party claims. In any event, a register search would probably not disclose SP’s security interest because the person who is selling the ring (Dealer) is not the person who created the security interest (Grantor). As Example 16 illustrates, a second function of subs 47(1) is to provide a partial solution to A-B-C-D problems of this kind.97 PPSA ss 34 and 52 may also apply in a case like Example 16: see 10.68–10.70 below. 10.50 The low-value transaction provision in Saskatchewan PPSA s 30(3) applies if the price T pays is $1000 or less or, in the case of a lease, if the market value of the goods is $1000 or less. The corresponding provision in New Zealand PPSA s 54 applies if the value of the goods was $2000 or less at the time the security interest attached. Australian PPSA s 47 combines elements of both approaches. On the one hand, subs 47(1) provides that the rule applies if ‘the market value … of the total new value given for the personal property’, in other words, the consideration provided by T, is $5000 or less. On the other hand, subs 47(2) provides that the rule does not apply if, to T’s knowledge, the ‘market value of the personal property’ is more than $5000. Assume that, in Example 15, the ring’s market value is $5500 and T knows this. On these facts, subs 47(1) does not apply and T takes the ring subject to SP’s security interest, even though the price T paid was well below the $5000 threshold stipulated in subs 47(1).98 The justification is presumably that, if the sale is for substantially below market value, T should realise that there may be something wrong and make further inquiries. However, the provision makes no allowance for cases where there is only a minor discrepancy between the two figures; for example, where the market value of the ring is $5100 and T pays $4900.99 Furthermore, in the garage sale context (Example 15), even a substantial discrepancy between the two figures is not necessarily sinister. As often happens in garage sales, the explanation may simply be that the seller [page 303]

is unaware of the item’s real value.100 Perhaps the Australian law-makers took the view that since, in cases like this, the buyer gets a windfall, their position is in some way unmeritorious and that therefore the statute should prefer the secured party.101 In any event, the Explanatory Memorandum provides no clues to the thinking behind this aspect of the provision.102 10.51 Subsection 47(1) does not apply if the disputed collateral is serialnumbered personal property. Assume that, in Example 15, the item in dispute is a car instead of a ring, all other facts remaining the same. On these facts, subject to PPSA subs 44(1) (incorrect or missing serial number), T will take the car subject to SP’s security interest. Now assume the same change to the facts of Example 16. On these facts, subs 47(1) does not apply but, assuming Dealer is licensed, subs 45(3) (purchase from dealer) applies and so T will take the car free of SP’s security interest. PPSA ss 34 and 52 may also apply: see 10.68–10.70 below. 10.52 Subsection 47(1) is subject to the knowledge limitation in para 47(2)(b), which refers to the buyer’s or lessee’s actual or constructive knowledge that the transaction is a breach of the security agreement. The meaning of ‘actual or constructive knowledge’ is discussed in 10.17 and 10.44–10.46 above. The reference is to the buyer’s or lessee’s knowledge that the transaction is in breach of the security agreement. Given the typical applications of subs 47(1), as illustrated by Examples 15 and 16 above, the reference should probably be to knowledge ‘of the security interest’. The discussion in the Explanatory Memorandum proceeds on the basis that this is what para 47(2)(b) means.103

Interface with Other Laws 10.53 There is some overlap between the PPSA cut-off rules discussed above, and the rules in the sale of goods legislation and the Factors Acts governing transfer of title by non-owners.104

The buyer in possession rule 10.54 Example 17. SP supplies Grantor with a car pursuant to a conditional sale agreement and registers a financing statement. Later, Grantor sells the car to T without SP’s authority. T does not conduct a register search and is unaware of SP’s security interest.

[page 304] T holds the car subject to SP’s security interest. SP’s security interest is perfected and SP did not authorise Grantor’s sale to T and, so applying PPSA subs 32(1), SP’s security interest continues in the car. None of the cut-off rules in PPSA Pt 2.5 applies to displace this outcome. Section 31 of the Goods Act 1958 (Vic), the socalled buyer in possession provision, provides as follows: Where a person having bought or agreed to buy goods obtains with the consent of the seller possession of the goods or the documents of title to the goods, the delivery or transfer by that person or by a mercantile agent acting for him of the goods or documents of title under any sale pledge or other disposition thereof to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods shall have the same effect as if the person making the delivery or transfer were a mercantile agent entrusted as such with the possession of the goods or documents of title.

Applying this provision to the facts of Example 17, T takes the car free of SP’s claim.105 In other words, on the facts of Example 17, the buyer in possession provision conflicts with the PPSA. In other PPSA jurisdictions, the scope of the buyer in possession provision has been narrowed to avoid conflict with the PPSA.106 In Australia, the anti-overlap provision is in PPSA subs 254(1), read in conjunction with s 109 of the Australian Constitution.107 PPSA subs 254(1) provides, in part, that the PPSA is not intended to exclude or limit the operation of a state or territory law to the extent that the law is capable of operating concurrently with the PPSA. In other words, state and territory laws continue to apply unless they are directly inconsistent with the PPSA which, of course, is a Commonwealth statute. In a case like Example 17, the buyer in possession provision is directly inconsistent with the PPSA and therefore, applying Australian Constitution s 109, the provision is invalid to the extent of the inconsistency. The Statutory Review leaves open the question whether the PPSA taking free rules should be an exhaustive code, recommending simply that the government, in consultation with the states and territories, should consider the matter further.108 The discussion in the Review does not address the constitutional point raised above. Nor does it address the policy implications. As a policy matter, it makes no sense to have the PPSA provisions operating in conjunction with potentially inconsistent state and territory laws. The types of dispute under consideration involve [page 305]

a competition between innocent parties and so, inevitably, they give rise to difficult policy choices. But the law must make a choice one way or the other and it would be a recipe for incoherence at the policy level to have conflicting rules applying simultaneously to the same fact situation. If the PPSA taking free rules are not an exhaustive code but, rather, apply in conjunction with the general law, on the same basis the PPSA priority rules should not be regarded as an exhaustive code either. But the Statutory Review does not suggest that the general law priority rules should continue to apply in conjunction with the PPSA rules and, so far as we are aware, no one else in Australia has made this suggestion either. The idea is, of course, nonsensical because it would substantially undermine the reasons for enacting the PPSA in the first place and it would make the register next to worthless.

The seller in possession rule 10.55 Section 30 of the Goods Act 1958 (Vic), the so-called seller in possession provision, provides as follows: Where a person having sold goods continues or is in possession of the goods or of the documents of title to the goods the delivery or transfer by that person or by a mercantile agent acting for him of the goods or documents of title under any sale pledge or other disposition thereof to any person receiving the same in good faith and without notice of the previous sale shall have the same effect as if the person making the delivery or transfer was expressly authorised by the owner of the goods to make the same.

Example 18 illustrates the interaction between this provision and the PPSA. Example 18. Seller sells a motor vehicle to Buyer 1, but Buyer 1 leaves the vehicle with Seller for some repair work. Shortly afterwards, Seller gives SP a security interest in the vehicle and delivers the vehicle to SP. SP is unaware of Buyer’s claim to the vehicle.

PPSA subs 19(1) provides that a security interest is unenforceable against third parties unless it has attached to the collateral, while subs 19(2) provides that, for a security interest to attach, the grantor must have rights in the collateral. In Example 18, Seller, the grantor, no longer owns the vehicle, but they are rightfully in possession of it. A right of possession is probably sufficient for attachment purposes: see 4.14–4.22 of this text. Therefore, SP has a claim to the vehicle which is in competition with Buyer’s claim. There is no provision in the PPSA for resolving disputes of this nature, and so the court will have to look outside the statute. The solution lies in the seller in possession provision which, applied to the facts of Example 18, leads to the conclusion that SP’s security interest prevails over Buyer’s claim to the vehicle.109 As Example 18 illustrates, the seller in possession provision is

[page 306] capable of operating concurrently with the PPSA and so, returning to PPSA subs 254(1), the PPSA does not exclude it.110

Mercantile agents 10.56 Example 19. Importer is in the business of importing carpets from the Middle East. Dealer is a carpet retailer. Importer delivers a shipment of carpets to Dealer for sale on Importer’s behalf. The terms are that title to the carpets remains with Importer, Dealer acts as Importer’s agent when selling the carpets and Dealer must account to Importer for the proceeds of sale. The terms also incorporate a schedule of prices and provide that Dealer must not sell an item below the listed price without first obtaining Importer’s consent. Dealer sells a carpet to T in breach of this provision.

Importer’s agreement with Dealer is a commercial consignment within the meaning of PPSA s 10 and therefore it is subject to the statute by virtue of PPSA para 12(3)(b), whether or not the transaction in substance secures payment or performance of an obligation: see 3.31–3.32 of this text. Assuming Importer has registered a financing statement, its dispute with T will be governed by PPSA subs 46(1), the buyer in ordinary course provision, and T will obtain clear title provided they were unaware that the sale was in breach of Grantor’s agreement with Importer: see 10.21–10.47 above. On the other hand, if Importer fails to register a financing statement, the governing provision will be PPSA subs 43(1) and T will obtain clear title without reference to their state of knowledge: see 10.5–10.10 above. 10.57 Goods Act 1958 (Vic) subs 67(1) provides as follows: Where a mercantile agent is entrusted as such with the possession of any goods or the documents of title to any goods any sale pledge or other disposition of the goods made by him in the ordinary course of business of a mercantile agent shall subject to the provisions of this Part be as valid as if he was expressly authorised by the owner of the goods to make the same: Provided that the person taking under such disposition acts in good faith and has not at the time of the disposition notice that the person making the disposition has not authority to make the same.111

[page 307] Applying this provision to the facts of Example 19, T takes the carpet free of

Importer’s claim provided they were unaware of the restriction on Dealer’s authority to sell. This result follows regardless of whether Importer has registered a PPSA financing statement. In other words, depending on the particular facts of the case, the mercantile agents provision may be in conflict with the PPSA.112 In some PPSA jurisdictions, the scope of the mercantile agents provision has been narrowed to avoid conflicts of this kind.113 In Australia, PPSA subs 254(1) applies to resolve the conflict. The upshot is that the mercantile agents provision will be invalid to the extent of any direct inconsistency with the PPSA: see 10.54 above.

Currency 10.58 PPSA s 48 provides that a holder of currency (typically, cash114) takes free of a security interest if they acquire the cash with no actual or constructive knowledge of the security interest.115 The provision applies whether or not the security interest is perfected,116 but it does not apply if the holder’s claim to the cash is itself a security interest: para 42(b). In cases where s 48 applies, a cash recipient does not have to worry about possible competing claims by a secured party. According to the Explanatory Memorandum, the ‘rule recognises the importance of the negotiability of currency in ordinary commerce’.117 There is a comparable provision in most of the other PPSAs, including the Saskatchewan and New Zealand PPSAs.118 But Australian PPSA s 48 is narrower than the Saskatchewan and New Zealand version. PPSA s 48 applies regardless of whether the holder gave value or received the cash as a gift but, in either case, it only applies if the holder received the cash without active or constructive knowledge of the security interest. Under the Saskatchewan and New Zealand version, the holder’s knowledge is irrelevant if they gave value for the cash. The Australian approach may give rise to discrepancies in cases where the holder receives the cash from the grantor in [page 308] payment of a debt.119 The effect of s 48 in this case is that the holder takes the cash subject to any security interest of which they have actual or constructive knowledge.120 On the other hand, if the grantor pays the debt by cheque, electronic funds transfer or transfer order (or the like), the payee takes free unless they had actual knowledge that the payment was made in breach of the security agreement:

PPSA s 69, discussed in 10.72–10.73 below. Under the Saskatchewan and New Zealand versions, the payee-creditor’s state of knowledge is irrelevant, regardless of the payment method. 10.59 Example 20. SP holds a security interest in all Grantor’s present and after-acquired personal property perfected by registration. Grantor buys office supplies from T and pays cash.

PPSA subs 32(1) provides, in part, that if collateral gives rise to proceeds, the security interest continues in the collateral unless the secured party expressly or impliedly authorised the dealing that gave rise to the proceeds. In Example 20, the cash is part of SP’s collateral and Grantor’s transaction with T gave rise to proceeds (the office supplies). Therefore, applying subs 32(1), T takes the cash free of SP’s security interest if SP expressly or impliedly authorised the transaction and even if T knew about SP’s security interest. On the other hand, if SP did not authorise the transaction, T may still obtain clear title to the cash under s 48 unless they had actual or constructive knowledge of SP’s security interest.121 10.60 Example 21. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor makes a sale to T, in the ordinary course of business and T pays cash. Grantor uses T’s payment to pay its wages bill.

Applying subs 32(1), T takes the inventory free of SP’s security interest, but SP’s security interest continues in the cash as proceeds of the sale to T. Turning to PPSA s 48, Grantor does not take the cash free of SP’s security interest because Grantor obviously has knowledge of the security interest. However, assuming SP expressly or impliedly authorised Grantor to pay the wages bill out of the inventory sale proceeds, the employees will take the cash free of SP’s security interest without regard to their state of knowledge: subs 32(1). In the absence of any such authorisation, the employees may still take free under s 48, but not if they had actual or constructive knowledge of the security interest.

Investment Instruments and Intermediated Securities 10.61 PPSA ss 49–51 deal with SP–Transferee disputes involving investment instruments and intermediated securities. Section 49 applies to transactions [page 309]

on the stock exchange. It provides that a person who buys an investment instrument or an intermediated security in the ordinary course of trading on a prescribed financial market takes free of any security interest. The provision applies regardless of the buyer’s state of knowledge. According to the Explanatory Memorandum, the purpose of the provision is to preserve the integrity of stock markets.122 10.62 Section 50 applies to disputes involving investment instruments. Subsection 50(1) provides that a purchaser of an investment instrument, other than a secured party, takes the instrument free of any security interest if the purchaser gave value123 for the instrument and takes possession or control.124 The rule does not apply if the purchaser takes the investment instrument with actual or constructive knowledge that the taking constitutes a breach of the security agreement: subs 50(2).125 Subsection 50(3) defines ‘purchaser’ to mean ‘a person who takes the instrument by sale, lease, discount, assignment, negotiation, mortgage, pledge, lien, issue, reissue or any other consensual transaction that creates an interest in personal property’. There are comparable provisions in the Canadian PPSAs and Securities Transfer Acts.126 10.63 The definition of ‘purchaser’ suggests that subs 50(1) applies in favour of not just buyers, but also a person who acquires a security interest. This impression is strengthened by para 42(b), which provides that, with the exception of ss 50 and 51, the provisions of PPSA Pt 2.5 do not apply to the acquisition of an interest in personal property if the interest taken is itself a security interest. But the rule as stated in subs 50(1) itself is expressed not to [page 310] apply if the purchaser is a secured party. Furthermore, the section heading reads ‘Taking investment instrument free of security interest’ and this fortifies the conclusion that the rule is limited to SP–Transferee disputes and does not apply to SP–SP disputes.127 Since subs 50(1) does not apply to SP–SP disputes, the priority rules in ss 55–57 apply: see 7.4–7.22 of this text. 10.64 Example 22. SP1 holds a security interest in Grantor’s shares perfected by registration. Grantor gives SP2 a security interest in the same shares and SP2 perfects its security interest by control.128 SP2 conducts a register search before transacting with Grantor and discovers SP1’s registration.

PPSA subs 57(1) provides that a security interest perfected by control has priority over a security interest perfected by any other means: see 7.21–7.22. Applying this provision to Example 22, SP2 has priority over SP1. But if PPSA subs 50(1) applied, SP1 would have priority because SP2 has actual knowledge of SP1’s security interest and therefore, probably, constructive knowledge that its security interest is in breach of Grantor’s security agreement with SP1. However, subs 50(1) does not apply where the purchaser is a secured party and so the conflict is avoided.129 10.65 PPSA s 51 applies to disputes involving intermediated securities. Subsection 51(1) provides that a person (the transferee) who takes an interest in an intermediated security takes the interest free of any security interest if the transferee gives value (unless the interest acquired is itself a security interest) and the credit of the interest in the financial product in relation to which the intermediated security arises is made in accordance with a consensual transaction. The rule does not apply if the transferee has actual or constructive knowledge that crediting the interest in the financial product is a breach of the security agreement: subs 50(2).130 [page 311] 10.66 PPSA s 51 is drafted with investments in the indirect holding system in mind. As discussed in 2.23–2.27, an investor in the indirect holding system does not actually buy the shares or other financial product. Instead, they purchase a position in their broker’s holding of the financial product in question and the broker credits the investor’s payment to a securities account maintained by the broker in the investor’s name. This explains the terminology in s 51: ‘transferee’ rather than ‘purchaser’, ‘takes an interest in’ rather than ‘purchases’ and ‘crediting of an interest in the financial product’ rather than ‘takes [the financial product]’. However, the drafting of s 51 overlooks the point that ‘intermediated security’ includes not only the product of an investment in the indirect holding system, but also a security traded on the CHESS system: see 2.19–2.21 and 2.23–2.27 of this text. Securities on the CHESS system are directly held securities and s 51, as drafted, makes no sense in its application to them.131 10.67 It is unclear whether subs 51(1) applies in favour of a transferee who is a secured party. On the one hand, para 42(b) suggests that it does. On the other hand, para 51(1)(a) indicates otherwise (‘the transferee gives value for the interest

(unless the interest acquired is itself a security interest)’) (emphasis added). It is true that the italicised words could be read as qualifying just the value requirement in para (a), as opposed to subs 51(1) in its entirety, and the layout of the provision supports this construction. But, as a policy matter, it makes no sense to exempt a secured party-transferee from the requirement to give value. Furthermore, as discussed above, s 50 does not apply in favour of secured parties and, again as a policy matter, it is hard to understand why s 51 would not be subject to the same exclusion. The section heading (Taking intermediated security free of security interest) is also relevant; in common with the correspondingly worded heading for s 50, it suggests that the legislature’s concern was with SP–transferee disputes only and not SP–SP disputes as well. In any event, it will be apparent from the foregoing that, as other writers have remarked, ‘giving the provision a sensible operation takes some work’.132

Temporarily Perfected Security Interests 10.68 At various points, the PPSA gives the secured party a grace period to perfect an as yet unperfected security interest or to reperfect a security interest which, for some reason, has become unperfected, and the security interest is deemed to be temporarily perfected during this period: see 5.38–5.40. [page 312] The temporary perfection provisions compromise the statute’s publication objective and they potentially prejudice third parties who have no easy means of discovering a temporarily perfected security interest. PPSA s 52 was enacted with these considerations in mind.133 Subsection 52(1) provides that a buyer or lessee, for new value,134 of the proceeds of personal property,135 or of goods or a negotiable document of title, takes free of any security interest that is temporarily perfected immediately before the sale or lease. The provision does not apply if the buyer or lessee has actual knowledge that the sale or lease is a breach of the security agreement: subs 52(2).136 The protection s 52 offers is not comprehensive. For one thing, it is limited to buyers and lessees. For another thing, the provision only applies where the collateral falls within one of the types listed in subs 52(1).137 PPSA s 166 (Defects in registration — temporary effectiveness) applies to supervening registration defects: see 6.72–6.74 of this text. The provision gives the

secured party a grace period to remedy the defect and provides that, during the grace period, the registration is not ‘ineffective’. In substance, this is the same as temporary perfection of the security interest to which the registration relates, but the statute does not describe it as such. It seems to follow that if personal property is subject to a security interest that remains perfected under s 166, a buyer or lessee cannot claim the protection of s 52. Section 166 does not apply where the defect results from a change of grantor: subpara 166 (i)(a)(ii). In such cases, s 34 applies instead. The result is that the security interest is temporarily perfected during the s 34 grace period and s 52 applies to protect a buyer or lessee who transacts with the new grantor during this period. 10.69 Section 52 only applies where the security interest is temporarily perfected immediately before the sale or lease. Example 23. Grantor is a furniture retailer. SP holds a security interest in Grantor’s inventory perfected by registration. The security agreement authorises Grantor to sell inventory in the ordinary course of business. The agreement goes on to provide that SP may withdraw authority by serving notice on Grantor. SP serves notice. Grantor later, and while the notice is still in force, sells an armchair to T, a retail customer.

[page 313] As a result of PPSA s 34, SP’s security interest ceases to be perfected by registration when Grantor ‘transfers’ the armchair to T and it becomes temporarily perfected instead for the duration of the s 34 grace period: see 5.47–5.53 of this text. However, s 52 does not apply because SP’s security interest was not temporarily perfected immediately before the sale or lease: it was perfected by registration up to that point and became temporarily perfected thereafter. Instead, PPSA subs 46(1) applies and T takes the armchair free of SP’s security interest: see 10.21 above. The point is that the words ‘immediately before’ are critical to the application of s 52 and its relationship with the other cut-off provisions in Pt 2.5. If instead the reference was to a security interest temporarily perfected at the time of the sale or lease, s 52 in combination with s 34 would make the other cut-off provisions largely unnecessary. In any case involving collateral of the relevant types (proceeds, goods and documents of title), the buyer or lessee could avoid the other cut-off rules and rely on s 52 instead. So, for example, if the sale or lease was arguably not in the course of the grantor’s business for the purposes of subs 46(1), the buyer or lessee could avoid the limitation by pleading ss 34 and 52 instead. But,

to restate, the actual wording of s 52 forecloses this possibility. 10.70 Example 24. SP holds a security interest in Grantor’s printing press perfected by registration. Grantor sells the press to Dealer outside the ordinary course of business and without SP’s consent. Later Dealer sells the press to T who has no knowledge of SP’s security interest with Grantor.

As discussed in 10.24 above, Dealer does not obtain clear title under subs 46(1) because the sale was not in the ordinary course of Grantor’s business, and T cannot rely on subs 46(1) either because the security interest was not ‘given by the seller’ (Dealer). However, T can rely on ss 34 and 52. Applying s 34, SP’s security interest ceases to be perfected by registration when Grantor ‘transfers’ the printing press to Dealer and it becomes temporarily perfected instead. SP’s security interest is therefore temporarily perfected ‘immediately before’ Dealer’s sale to T and so s 52 applies. The result is that T takes the printing press free of SP’s security interest. In a case like Example 24, T is unlikely to discover SP’s security interest in advance of transacting with Dealer. The press is non-serial numbered goods and so, if T searches the register, a search against the grantor’s details will be their only option. But a grantor’s details search will not disclose the security interest if, as is likely, T relies on Dealer’s details to carry out the search, rather than Grantor’s details. This is a manifestation of the A-B-C-D problem discussed in 6.23–6.24 of this text. Sections 34 and 52 in combination respond to the A-B-C-D problem in a manner that is unique to the Australian PPSA. None of the other PPSAs have taken this step.138 [page 314]

Subrogation 10.71 PPSA subs 53(2) provides that if a transferee acquires personal property free of a security interest under any of the Pt 2.5 provisions (ss 43–52), the secured party’s rights are subrogated to the rights of the transferor and the transferor’s predecessors in title, including the right to receive any part of the purchase price that has not yet been paid.139 Subsection 53(3) provides that a payment made by the transferee before receiving notice of a secured party’s right under subs 53(2) discharges the transferee’s obligation to the extent of the payment. Example 25. SP holds a perfected security interest in Grantor’s truck perfected by registration. SP’s financing statement does not disclose the truck’s vehicle identification number. Grantor sells the truck

to T on the understanding that T will pay half the price on delivery of the truck and the balance in six months time. On Date 1, T takes delivery of the truck and pays the first instalment. On Date 2, while T’s second instalment is still outstanding, SP finds out about the sale and gives T notice that the second payment is payable to SP.

Applying PPSA s 44, T takes the truck free of SP’s security interest: see Example 6 above. Applying s 53, SP is subrogated to Grantor’s right to payment of the second instalment. But SP has no rights in relation to the first instalment, which T paid before receiving notice of SP’s claim. PPSA para 32(1)(b) is also relevant to Example 25. It provides that, where collateral gives rise to proceeds, the security interest attaches to the proceeds. Applying this provision to the facts of Example 25, SP’s security interest gives it: (1) a claim against Grantor for the first instalment, provided the funds remain traceable; and (2) a claim against T for the second instalment, on the ground that T’s payment obligation (‘account’) is proceeds.140 The Statutory Review has recommended repealing s 53, mainly on the ground that it adds nothing to the secured party’s rights under para 32(1)(b).141

CREDITOR PAYMENTS, NEGOTIABLE INSTRUMENTS, CHATTEL PAPER AND NEGOTIABLE DOCUMENTS OF TITLE Creditor Payments 10.72 Example 26. SP holds a security interest in all Grantor’s present and after-acquired personal property perfected by registration. Grantor buys office supplies from T and pays by electronic funds transfer from its bank account.

The bank account is part of SP’s collateral and so are the funds Grantor transferred from it to pay T. Does T take the payment subject to SP’s security interest? If SP has expressly or impliedly authorised Grantor’s purchase, PPSA subs 32(1) applies and T takes the payment free of SP’s security interest. [page 315] Otherwise, PPSA subs 69(1) may be relevant. It provides that, in a case like Example 26, T has priority over SP’s security interest unless T had actual knowledge that the payment was made in breach of Grantor’s security agreement with SP.

10.73 PPSA subs 69(1) applies where the payment is by: (1) electronic funds transfer (as in Example 26); (2) a debit, transfer order, authorisation or similar written payment mechanism executed by the grantor-debtor when the payment was made (for example, payment by credit card); or (3) negotiable instrument (for example, a cheque). However, it does not apply to pre-authorised debits or transfers,142 nor does it apply to payments in cash. If Grantor pays in cash, PPSA s 48 applies instead. Sections 48 and 69 are subject to differently worded knowledge limitations: under s 48, T is disqualified if they have actual or constructive knowledge of SP’s security interest, whereas under s 69, T is only disqualified if they have actual knowledge that the payment was made in breach of Grantor’s security agreement with SP. In this connection, the statute discriminates between different payment methods and it is hard to see the justification: see 10.58–10.60 above.143 10.74 In Stiassny v Commissioner of Inland Revenue,144 dealing with the corresponding provision in New Zealand PPSA s 95, the point was made145 that the section replicates ‘the earlier entitlement of a debtor to pay its creditors where there exists an uncrystallised floating charge over the assets of the debtor’, but that ‘issues as to whether the security [interest] had crystallised and whether the payment was made in the ordinary course of business are not relevant to the operation of s 95’.146 In Stiassny, the disputed payment was made by a receiver acting on the debtor’s behalf. The receiver mistakenly thought that it was personally liable for the payment and it was argued that, even if the payee–creditor had priority for the payment under s 95, the secured party could still bring a personal action for recovery of the payment on the ground that it was made by mistake. The court rejected the [page 316] argument, in part on the basis that s 95 cannot ‘be circumvented by the simple mechanism of the secured creditor asserting that the payment was made by mistake about whether the payee was entitled to priority’.147 In other words, the priorities established by s 95 ‘cannot be disturbed on the basis that the payer was mistaken about the very priorities the section dictates’.148

Negotiable Instruments

10.75 PPSA s 70 applies where a person, by a consensual transaction, acquires a negotiable instrument or an interest in a negotiable instrument. It provides that the acquirer’s interest has priority over any perfected security interest if they: (1) gave value; (2) took possession or control of the instrument;149 and (3) lacked knowledge in the relevant sense. The knowledge limitation varies, depending on whether the acquirer acquired their interest in the ordinary course of business. If so, the application of the provision depends on whether they had actual or constructive knowledge that the acquisition is a breach of the security agreement. In other cases, a higher standard applies: the acquirer must acquire their interest without actual or constructive knowledge of the security interest.150 The lower standard appears to have been drafted for the protection of banks, who routinely acquire cheques and other negotiable instruments as part of their business.151 This suggestion is borne out by the Explanatory Memorandum, which gives the following example: Finance A perfects its security interest in Dealer A’s cars by registering a financing statement. Dealer A sells a car to a person who pays for the car with a cheque. Dealer A deposits the cheque with Bank A. Bank A is unaware of Finance A’s security interest in the cheque (as proceeds of the car). Bank A’s interest in the cheque takes priority over Finance A’s security interest in the cheque.152

This example presupposes that Bank A acquires an interest in the cheque. However, that would only be the case if Bank A is a discounting bank, rather than a collecting bank. A collecting bank does not acquire property in the cheque, but a discounting bank does. A collecting bank acts on its customer’s behalf in collecting payment from the paying bank, and property in the [page 317] cheque remains with the customer throughout the clearance process. A bank becomes a discounting bank if it allows its customer to draw against the funds represented by the cheque before final clearance and, in that case, the bank receives payment from the paying bank on its own account. A bank likewise becomes a discounting bank if it reduces its customer’s overdraft by the amount of the cheque before sending the cheque for clearance. In both cases, the bank in effect purchases the cheque in consideration for an advance made to the customer. PPSA s 70 applies in this scenario because the bank acquires an interest in the cheque in exchange for value, but it has no application in cases where the bank acts as a collecting bank.153

10.76 Section 70 applies to any ‘consensual transaction’ by which a person acquires an interest in a negotiable instrument. This formulation covers not only acquisitions by way of outright transfer, but security interests as well. In other words, the provision applies to both SP–Transferee disputes and SP–SP disputes involving a negotiable instrument and, in the case of an SP–SP dispute, it takes precedence over the PPSA default priority rules. The rule in s 70 closely tracks the holder in due course rule and the provision is part of a scheme to avoid conflict between the PPSA and the general law relating to negotiable instruments. In this respect, PPSA s 256 supplements s 70 by providing that if there is any inconsistency between the PPSA and the Bills of Exchange Act 1909 (Cth), the Cheques Act 1986 (Cth) or the Payment and Netting Systems Act 1998 (Cth), the non-PPSA Act applies to the extent of the inconsistency.

Chattel Paper154 10.77 ‘Chattel paper’ was a new category of personal property invented by the drafters of Art 9 in the 1950s to accommodate a method for financing retail purchases which had become commonplace in North America. As explained in 2.12–2.14 of this text, the method involved a two-stage transaction: (1) the dealer sells the goods to the customer, typically on conditional sale terms; and (2) the dealer assigns the conditional sale agreement to a third-party financial institution for a price equivalent to the stream of payments under the conditional sale agreement less a discount.155 Conditional sale agreements and functionally equivalent transactions156 have both a proprietary aspect (the seller’s reserved title or security interest) and a personal aspect (the customer’s payment obligation), and the statutory definition of ‘chattel paper’ reflects both aspects. [page 318] 10.78 In common with accounts, chattel paper may be assigned on either a notification or a non-notification basis: see 3.27 of this text. At the time of Art 9’s drafting, the notification, or ‘direct collection’, method was widely used for automobile financing, while the non-notification, or ‘indirect collection’, method was more commonly used in connection with sales of household appliances and furniture.157 The direct collection method required the dealer to deliver the chattel paper to the financial institution, which would, in turn, notify the customer of the

assignment and take over the payment collection function.158 Under the indirect collection method, the chattel paper would be left in the dealer’s hands and the dealer would continue collecting payments from the customer who was not notified of the assignment.159 These financing methods involved the outright transfer of the chattel paper to the financial institution; in other words, the financial institution obtained title to the chattel paper and not merely a security interest in it. However, as discussed in 3.24–3.28 of this text, the transferee’s interest under an outright transfer of chattel paper is deemed, for the purposes of the statute, to be a security interest.160 10.79 Article 9 makes special provision for disputes between a purchaser of chattel paper and the holder of a security interest. These special rules are designed to accommodate the direct collection method of chattel paper financing and they only apply where the purchaser is a commercial chattel paper financier who takes possession of the chattel paper in the ordinary course of its business. Outside these circumstances, the default priority rules apply to disputes involving chattel paper.161 As originally drafted, the first part of the Art 9 chattel paper provision (‘Rule 1’) provided that a purchaser of chattel paper who gives new value and takes possession of it in the ordinary course of its business and without knowledge that the chattel paper is subject to a security interest has priority over a perfected security interest.162 The second part of the provision (‘Rule 2’) provided that a purchaser of chattel paper who gives new value and takes possession of it in the ordinary course of its business has priority over a security interest which is claimed merely as proceeds of inventory, even though it knows that the chattel paper is subject to a security interest. In recognition of industry practice, these provisions expressly acknowledge that, by taking possession of the chattel paper, the direct [page 319] collection chattel paper financier perfects its security interest and they give the chattel paper financier priority over an earlier perfected security interest in the same collateral, subject to the limitations indicated above. The policy is to facilitate chattel paper financing for retail sales. If the chattel paper financier could not be sure of obtaining priority in the cases the provisions address, it might be less willing to buy the chattel paper in the first place.163 The effect of these rules is to give chattel paper negotiable, or at least quasi-negotiable, status and to approximate the

chattel paper purchaser to the holder in due course of a negotiable instrument.164 10.80 The Art 9 provisions were subsequently imported into the Canadian and New Zealand PPSAs and they are also the basis of Australian PPSA s 71.165 Chattel paper financing for retail sales is less widespread in Australia than it is in North America, and so the policy considerations underlying the Art 9 provisions may be less pressing.166 But they are still important because they help explain what PPSA s 71 means. In common with its predecessors, PPSA s 71 applies to both outright transfers (where the transferee acquires title to the chattel paper) and also to security transfers (where the transferee takes a security interest in the chattel paper to secure performance of an obligation). In other words, the provision is relevant to both SP– transferee disputes involving chattel paper and also SP–SP disputes. The provision applies if: (1) a person, for new value,167 acquires an interest consisting of chattel paper or an interest in chattel paper; (2) by means of a consensual transaction; and (3) in the ordinary course of the acquirer’s business of acquiring interests of that kind (subs 71(1)). Subsection 71(2) enacts two priority rules. The first rule provides that the acquirer’s interest in the chattel paper has priority over any perfected security interest if the acquirer took possession of the chattel [page 320] paper without actual or constructive knowledge of the security interest.168 The second rule provides that the acquirer’s interest has priority over any security interest that has attached to the collateral as proceeds of inventory.169 In contrast to the other PPSAs, and Art 9, the Australian version of the second rule applies whether or not the acquirer takes possession of the chattel paper; in other words the acquirer obtains priority even if it has not perfected its security interest.170 10.81 Example 27. Grantor is a car dealer. On Date 1, Grantor sells a car to Customer on conditional sale terms and transfers the chattel paper to Financier 1 who does not take possession of the chattel paper, but registers a financing statement. On Date 2, Grantor transfers the chattel paper again, this time to Financier 2, a commercial purchaser of chattel paper, who gives new value and takes possession of the chattel paper without knowledge of Financier 1’s claim.

Example 27 illustrates one application of subs 71(1), Rule 1. Financier 1 and Financier 2 both hold deemed security interests in the chattel paper and they are subject to the PPSA on that basis. Financier 2 acquired the chattel paper for new

value, by means of a consensual transaction with Dealer. The transaction is in the ordinary course of Financier 2’s business. Financier 2 took possession of the chattel paper. The result is that Financier 2 prevails over Financier 1, provided Financier 2 had no actual or constructive knowledge of Financier 1’s deemed security interest. Financier 1’s registration is not sufficient to put Financier 2 on notice of Financier 1’s security interest: PPSA s 300. Financier 1 could have protected itself by marking the chattel paper so that third parties, including Financier 2, were aware of Financier 1’s claim.171 Subsection 71(2) says that Financier 2 ‘has priority over’ Financier 1. However, in Example 27, Financier 1 and Financier 2 are both outright transferees and, while the PPSA treats them as holding security interests, this is only in a presumptive sense. Therefore, the provision must be read as meaning that Financier 2 takes the chattel paper free of Financier 1’s competing claim. The position would be different if Financier 1 and Financier 2 had each loaned money to Grantor and taken actual security interests in the chattel paper to secure repayment. PPSA subs 71(2) would still apply (Financier 2 acquires an interest in the chattel paper by a consensual transaction), but in this case the provision gives Financier 2 priority over Financier 1 in the strict [page 321] sense: Financier 2 has first claim on the chattel paper for repayment of the amount Grantor owes and Financier 1 has a claim to any value left over. 10.82 Now assume that, in Example 27, Financier 2 does not take possession of the chattel paper but instead registers a financing statement on Date 2. On these facts, subs 71(1), Rule 1 does not apply and the dispute will be governed instead by the default priority rules in PPSA s 55. On this basis, Financier 1 beats Financier 2 because Financier 1 perfected its (deemed) security interest by registration on Date 1, whereas Financier 2’s (deemed) security interest was not perfected until Date 2: see 7.4–7.20. The analysis would be the same if, in Example 27, Financier 2 did take possession of the chattel paper, but the transfer was not in the ordinary course of Financier 2’s business. 10.83 Example 28. Grantor is a car dealer. SP holds a security interest in all Grantor’s present and afteracquired personal property, perfected by registration. Grantor sells a car to Customer on conditional sale terms and subsequently transfers and delivers the chattel paper to Financier, a commercial purchaser of

chattel paper. Grantor defaults on its obligations to SP. SP and Financier both claim the chattel paper.

Example 28 illustrates another application of subs 71(2), Rule 1. Financier acquired the chattel paper, presumably for new value, by means of a consensual transaction with Dealer. The transaction is in the ordinary course of Financier’s business. Financier took possession of the chattel paper. The result is that Financier’s interest prevails over SP’s security interest provided Financier had no actual or constructive knowledge of the security interest. However, the proviso is significant because, while Financier may not have actual knowledge of SP’s security interest, it should realise that there may be a general lender in the picture and this may be enough to fix Financier with constructive knowledge of SP’s security interest. The implication is that, in a case like Example 28, Financier will frequently lose if Rule 1 applies. Financier may argue that subs 71(2), Rule 2 applies instead and this possibility is discussed further in 10.85 below. 10.84 Example 29. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor sells a car to Customer, in the ordinary course of business, on conditional sale terms and subsequently transfers the chattel paper to Financier, a commercial chattel paper financier. Grantor defaults on its obligations to SP. SP claims the chattel paper as proceeds of inventory. Financier also claims the chattel paper, relying on its agreement with Grantor.

Example 29 illustrates the application of subs 71(2), Rule 2. Financier acquired the chattel paper, presumably for new value, by means of a consensual transaction with Dealer and the transaction is in the ordinary course of Financier’s business. The result is that Financier’s claim prevails over SP’s security interest and, in this case, it makes no difference whether [page 322] Financier took possession of the chattel paper or whether Financier had actual or constructive knowledge of SP’s security interest. In this context, the chattel paper is even more freely negotiable than a negotiable instrument where the status of a holder in due course turns on both delivery of the instrument and ignorance of the competing claim: see 10.75–10.76 above. The policy is to further facilitate chattel paper financing by giving the dedicated chattel paper financier priority over the dedicated inventory financier. Subsection 71(2), Rule 2 is based on the Art 9 drafters’ assumption that the commercial benefits of facilitating chattel paper financing in this way exceed the costs to inventory financiers. But the rule means

that an inventory financier wanting to protect its proceeds security interest in chattel paper must monitor inventory sales and ensure that the grantor physically hands over all resulting chattel paper.172 Under the Australian version of the rule, the inventory financier is even more vulnerable because para 71(2)(b) gives the chattel paper transferee priority whether or not it takes possession of the chattel paper. This means that the inventory financier is unprotected even if it does take possession of the chattel paper itself. 10.85 There is a division of opinion over whether, in a case like Example 28, Rule 1 or Rule 2 applies. The issue turns on what the section means when, in the context of Rule 2, it refers to a ‘security interest that has attached to proceeds of inventory’ (or, as the Art 9 version puts it, ‘a security interest which is claimed merely as proceeds of inventory’). According to one school of thought, SP’s security interest in Example 28 is an ‘all assets’ one, and so it attaches to the chattel paper as original collateral, not proceeds. Therefore, Rule 1 applies and, to succeed, Financier must show that it took possession of the chattel paper and that it had no knowledge of SP’s security interest in the relevant sense.173 According to the other school of thought, Rule 2 applies: ‘if, in fact, the chattel paper is proceeds of inventory, [Rule 2 applies] even though the chattel paper may be viewed as original collateral under the wording of the security agreement and the understanding of the parties’.174 On this reading, Rule 2 applies in both Examples 28 and 29, while Rule 1 is limited to cases like Example 27. If the first school of thought is correct, [page 323] an inventory financier can avoid the application of the less favourable Rule 2 by ensuring that the collateral clause in its security agreement includes not only inventory, but also chattel paper as original collateral. Furthermore, on this reading, s 71 turns out to give only limited protection to the chattel paper financier against the general lender with an all assets security interest. The main argument against this approach is that ‘it would result in easy circumvention of the policy that the priority provisions of [PPSA s 71] embody’.175

Negotiable Documents of Title 10.86 PPSA s 72 governs competing claims to a negotiable document of title.176

At common law, the bill of lading is the only true document of title, though documents of title may also be created by statute.177 It follows that PPSA s 72 is mainly, if not exclusively, relevant to security interests in a bill of lading. The provision parallels the rule for negotiable instruments in s 70: see 10.75–10.76 above. It provides that the holder of a negotiable document of title has priority over a perfected security interest if the holder: (1) gave value; and (2) lacked knowledge in the relevant sense. The knowledge limitation varies, depending on whether the acquirer acquired its interest in the ordinary course of business. If so, the application of the provision depends on whether it had actual or constructive knowledge that the acquisition was a breach of the security agreement. In other cases, a higher standard applies: the acquirer must acquire its interest without actual or constructive knowledge of the security interest. In contrast to the negotiable instruments rule in s 70, delivery to the acquirer is not a requirement under s 72. There is a similar provision in the other PPSAs.178 10.87 Section 72 only applies to a negotiable document of title and, while the PPSA defines ‘document of title’, there is no definition of ‘negotiable document of title’. The expression could be read as meaning a document of title which at general law has true negotiable status in the sense identified above. But this reading would produce absurd results because, apart from s 72, a bill of lading does not have true negotiable status and so s 72 could never apply. A more plausible construction is that ‘negotiable document of title’ means simply a document of title that is transferable at general law. This restriction makes sense in the PPSA context, because if a document is not transferable, it is hard to see how the holder could give a security interest in it. [page 324]

RETURNED AND REPOSSESSED GOODS Introduction 10.88 PPSA ss 37–38 and 76 apply where a buyer or lessee takes goods free of a security interest under one or other of the cut-off provisions in PPSA Pt 2.5 and the goods are subsequently returned; for example, because they are defective, or repossessed because the buyer or lessee defaults on their payments.179 Example 30. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by

registration. Grantor sells a car to Customer in the ordinary course of business. The car turns out to be defective. Customer returns it and the contract of sale is rescinded.

Customer takes the car free of SP’s security interest under PPSA subs 32(1) because SP expressly or impliedly authorised the sale or, alternatively, under subs 46(1) because the sale was in the ordinary course of Grantor’s business and Customer was unaware that SP had not authorised the sale. PPSA s 37 provides for reattachment of SP’s security interest when Customer returns the car. Customer may have given a security interest in the car to another secured party (SP*) before rescinding the sale. Section 76 governs the priorities between SP and SP*: see 10.100–10.107 below. 10.89 Example 31. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor sells a car to Customer in the ordinary course of business on conditional sale (retention of title) terms. Customer defaults on their repayments to Grantor and Grantor repossesses the car.

This is a second case where subs 37(1) applies. SP’s security interest is extinguished when Grantor sells the car to Customer, but it reattaches when Grantor repossesses the car. Example 32. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor sells a car to Customer on conditional sale terms and transfers the resulting chattel paper to Financier. The car turns out to be defective. Customer returns the car to Grantor and rescinds the contract of sale.

This is a tripartite variation of Example 30. As in Example 30, subs 37(1) applies and SP’s security interest reattaches to the car when Customer returns it to Grantor (the dealer). Customer’s rescission of the contract of sale effectively cancels the chattel paper, leaving Financier with nothing. Subsection 38(1) counteracts this effect by giving Financier a deemed security interest in the returned car. Section 76 governs the priorities between SP and Financier. Customer may have given a security interest in the car to another [page 325] secured party (SP*) before rescinding the contract of sale. Again, s 76 applies to determine the priorities between SP, SP* and Financier. Example 33. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor sells a car to Customer on conditional sale terms and transfers the resulting chattel

paper to Financier. Customer defaults on their repayment obligations and Financier seizes the car.

This is a tripartite version of Example 31. As in Example 31, subs 37(1) applies and SP’s security interest reattaches when Financier repossesses the car. Subsection 38(1) gives Financier a deemed security interest in the car. As in the previous examples, s 76 applies to determine the priorities between SP and Financier. 10.90 Parallel issues arise where Grantor sells the car to Customer on deferred payment terms without taking security so that the sale generates an account, and subsequently transfers the account to Financier. Rescission of the sale cancels Customer’s payment obligation (the account), so Financier is left holding nothing. Section 38 also addresses this case. A hybrid scenario is also possible, where the sale is financed partly on an unsecured basis and partly on retention of title terms, with Grantor subsequently transferring the account to Financier (Accounts) and the chattel paper to Financier (Chattel Paper). Section 38 applies in this case to give both Financier (Accounts) and Financier (Chattel Paper) a security interest in the returned goods.

Returned Goods — Reattachment of Security Interest 10.91 PPSA subs 37(1) provides that if a grantor or debtor sells or leases goods that are subject to a security interest, and the buyer or lessee takes the goods free of the security interest due to the operation of the PPSA, the security interest reattaches to the goods if the goods are returned in any of the following circumstances: (1) in the case of a sale, the contract of sale is rescinded; (2) in the case of a lease, the lease expires or is rescinded; or (3) the grantor or debtor repossesses the goods. Case (3) may arise where the grantor supplies the goods on conditional sale or hire-purchase terms or on lease and the customer defaults against the grantor. Subsection 37(2) provides that the reattached security interest remains continuously perfected provided that: (1) it was perfected by registration at the time of ‘the acquisition’ (in other words, the sale or lease); and (2) the registration was effective when the goods were returned (‘the repossession time’). In a Case (3) scenario, the grantor may transfer the chattel paper and then subs 37(1) will apply if the chattel paper transferee repossesses the goods.180 [page 326]

10.92 For the purposes of the statute, a lease which is either an in-substance security agreement or a PPS lease is the equivalent of a sale to the lessee on deferred payment terms with the lessor taking a security interest in the goods to secure the payments: see 10.7 above. Subsection 37(1) applies to leases of this kind in the same way it applies to sales: see Examples 30 and 31 above. By contrast, in the case of a lease which is neither an in-substance security agreement nor a PPS lease, the transaction does not extinguish the secured party’s security interest altogether; the security interest remains attached to the grantor–lessor’s reversionary interest, but the secured party cannot interfere with the lessee’s possession and use of the goods during the currency of the lease: see 10.7 above. The effect of subs 37(1) in cases like this is to remove the restriction on the secured party’s right to take possession of the goods. 10.93 Section 37 is drafted with chattel paper financing specifically in mind, and it does not take account of alternative models for financing retail sales which are common in Australia (‘Model 1’ and ‘Model 2’).181 Under Model 1, which is standard for hire-purchase and leasing arrangements, when the dealer and customer finish their negotiations, the dealer sells the goods to the financier in return for an immediate payment representing the cash price less, in most cases, the deposit taken by the dealer from the customer. The financier then enters into a hire-purchase or lease agreement with the customer.182 Example 34. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor supplies a car to Customer on hire-purchase terms using the Model 1 method: in other words, Grantor sells the car to Financier who, in turn, enters into a hire-purchase agreement with Customer. The car turns out to be defective and Customer returns it to Grantor (the dealer).

Grantor’s sale to Financier extinguishes SP’s security interest in the car, assuming, as is likely, that SP expressly or impliedly authorised the sale: PPSA subs 32(1).183 PPSA subs 37(1) is triggered if ‘the goods come into the possession of the grantor or debtor’ when, ‘in the case of a sale — the contract of sale is rescinded’. The provision is drafted on the assumption that Grantor contracts directly with Customer. But, in Example 34, Customer’s contract is with Financier and it is not a contract of sale. Therefore, the return of the goods does not itself trigger subs 37(1). On the other hand, following [page 327]

Customer’s rescission of the hire-purchase agreement, Financier is likely, in turn, to rescind its contract with Grantor and this will trigger subs 37(1). 10.94 Example 35. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor sells a car to Financier, in the ordinary course of business, to facilitate a hirepurchase agreement between Financier and Customer. Customer defaults on their repayment obligations and Financier repossesses the car.

Subsection 37(1) is triggered if ‘the goods come into the possession … of a transferee of chattel paper’ when ‘the transferee seizes the goods in the exercise of a right in enforcing the security agreement’. Financier is not a transferee of chattel paper and so its repossession does not trigger subs 37(1) and SP does not acquire a deemed security interest in the car. SP might attempt to protect itself by including in its security agreement with Grantor a provision specifying that its security interest extends to any returned or repossessed goods. However, the priority rules in s 76 apply only to a security interest arising under subs 37(1); they do not apply to a security interest in goods that is provided for in the security agreement itself. This means that in Example 35 if Customer gives SP* a security interest in the car before the repossession date, the court must look outside the statute for a rule to determine the priorities between SP and SP*. 10.95 Under Model 2, the customer buys the goods from the dealer, financing the purchase with a loan provided by a dealer-associated financier which takes a security interest in the goods to secure repayment.184 Example 36. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor sells a car to Customer in the ordinary course of business. Financier makes Customer a loan to finance the purchase and takes a security interest in the car to secure repayment. The car turns out to be defective. Customer returns the car to Grantor and rescinds the contract of sale.

When Grantor sells the car to Customer, SP’s security interest is extinguished under PPSA subs 32(1) or, alternatively, subs 46(1). However, subs 37(1) is triggered when Customer rescinds the contract of sale and SP’s security interest reattaches to the car at that point. National Credit Code s 135 applies in a case like Example 36, and it provides that when Customer rescinds the contract of sale they may also terminate the loan contract and the security agreement.185 It also provides that, if the loan contract is terminated, Financier may recover from Grantor (subject to any agreement between them) the amount of any loss Financier may have suffered from the termination. The agreement between Financier and Grantor may give Financier a security interest in the returned car to secure Grantor’s obligation

to compensate [page 328] Financier. Any such security interest would conflict with SP’s subs 37(1) security interest. Section 76 enacts a priority rule for disputes involving a subs 37(1) security interest and a subs 38(1) security interest: see 10.100 below. However, in a case like Example 36, while SP’s security interest arises under subs 37(1), Financier’s security interest does not arise under subs 38(1) and so s 76 does not apply. If Customer’s loan contract and security agreement with Financier are not terminated, either because National Credit Code s 135 does not apply or Customer elects not to terminate the loan contract and security agreement, Financier’s security interest will continue in the car and it will conflict with SP’s subs 37(1) security interest. In this case, subs 76(3) will apply to determine the priorities: see 10.105 below. 10.96 Example 37. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor sells a car to Customer in the ordinary course of business. Financier makes Customer a loan to finance the purchase and takes a security interest in the car to secure repayment. Customer defaults on the repayments and Financier repossesses the car.

Subsection 37(1) is not triggered when Financier repossesses the car because Financier is not a chattel paper transferee. In this respect, Example 37 is comparable to Example 35. Again, SP may attempt to protect itself by including in its agreement with Dealer a provision specifying that its security interest extends to any returned or repossessed goods, but the priority rules in s 76 will not apply.186

Returned Collateral — Accounts and Chattel Paper 10.97 Example 38. Grantor, a car dealer, sells a car to Customer in the ordinary course of business on hirepurchase terms and transfers the chattel paper to Financier. The car turns out to be defective, Customer returns it to Grantor and the hire-purchase agreement is rescinded.

As noted in 10.89 above, rescission of the hire-purchase agreement in effect cancels the chattel paper, leaving Financier with nothing. PPSA s 38 compensates Financier by giving it a deemed security interest in the car instead. Subsection 38(1) provides that if a sale or lease of goods creates an account or chattel paper and the account or chattel paper is transferred, the transferee is taken to have a security

interest in the returned goods if: (1) in the case of a sale, the contract of sale is rescinded; (2) in the case of a lease, the lease expires or is rescinded; or (3) the grantor or debtor repossesses the goods. The provision also applies where, chattel paper having been transferred, the chattel paper transferee repossesses the goods. [page 329] 10.98 Subsection 38(2) provides that the deemed security interest attaches to the goods at the repossession time, in other words, when they are returned. Subsection 38(3) states that, provided the transferee’s security interest was perfected by possession or registration at the repossession time, its deemed security interest in the goods is temporarily perfected for five business days following the repossession time. The deemed goods security interest becomes unperfected at the end of that period unless the transferee registers a financing statement identifying the goods as collateral or takes possession of the goods: subs 38(4). As noted earlier, a chattel paper transferee will typically perfect its security interest by taking possession of the chattel paper: see 10.79 above. However, the returned goods are a different class of collateral, and so the chattel paper transferee cannot rely on its possession of the chattel paper to perfect its deemed security interest in the returned goods. Likewise, though perhaps more obviously, an accounts transferee cannot rely on registration of its security interest in the accounts to perfect its subs 38(1) deemed security interest. 10.99 Section 38 provides specifically for chattel paper, but it does not address alternative models for financing consumer sales, in particular Model 1 and Model 2 discussed above. Assume that, in Example 38, the parties use the Model 1 method: Grantor sells the car to Financier and Financier, in turn, supplies the car to Customer on hire-purchase terms. In this case, there is no sale or lease of goods creating chattel paper and so subs 38(1) does not apply. Following rescission of the hire-purchase agreement, Customer’s possessory interest terminates and Financier becomes entitled to the car. Typically Financier will have an arrangement requiring Grantor to take the car back and reimburse Financier. The arrangement may include a provision giving Financier a security interest in the car to secure Grantor’s repayment obligation. However, the priority rules in PPSA s 76 do not apply where Financier’s security interest derives from the security agreement itself rather than s 38. More or less the same analysis applies if the parties use the Model 2 method:

Grantor sells the car to Customer who finances the purchase with a loan from Financier secured against the car. Again, there is no chattel paper and so subs 38(1) does not apply. Following rescission of the sale, the tied loan and security agreement will also be discharged and Customer will return the car to Grantor.187 Typically, Financier will have an arrangement requiring Grantor to compensate Financier for any resulting losses and the arrangement may include a provision giving Financier a security interest in the returned car to secure Grantor’s obligation; however, the priority rules in PPSA s 76 would not apply.188 [page 330]

Priority of Security Interests in Returned Goods 10.100 Example 39. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor sells a car to Customer in the ordinary course of business on unsecured credit terms and later assigns the account to Financier. The car turns out to be defective, Customer returns it to Grantor and the contract of sale is rescinded.

SP’s security interest reattaches when Customer returns the car and the security interest is continuously perfected: PPSA s 37. Financier has a deemed security interest in the car which attaches when Customer returns the car: s 38. Subsection 76(1) resolves the resulting priority dispute between SP and Financier. It provides that a perfected security interest in goods that has reattached under subs 37(1) has priority over a subs 38(1) security interest held by an account transferee. Applying subs 76(1) to Example 39, SP has priority over Financier. 10.101 Example 40. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor sells a car to Customer in the ordinary course of business on hire-purchase terms and later assigns the chattel paper to Financier. The car turns out to be defective, Customer returns it to Grantor and the hire-purchase agreement is rescinded.

Again, ss 37 and 38 give rise to a priority dispute between SP and Financier. Subparagraph 76(2)(b)(i) provides that a subs 38(1)189 security interest held by a chattel paper transferee has priority over a perfected security interest in goods that has reattached under subs 37(1). Applying subs 76(2) to Example 40, Financier has priority over SP. Assume that SP’s security agreement includes a provision saying that the security interest extends to any returned or repossessed inventory as original

collateral. In that case, SP’s claim to the returned car does not depend on PPSA subs 37(1). Saskatchewan PPSA s 29(6) anticipates this possibility by providing that the chattel paper transferee has priority over not only a reattached security interest, but also ‘a security interest in goods as after-acquired property that attaches on the return, seizure or repossession of the goods’. Australian PPSA subpara 76(2)(b)(ii) partially reproduces this wording; it provides that the chattel paper transferee has priority over a perfected security interest in goods that attaches following repossession.190 The Australian provision applies only to disputes involving [page 331] repossessed goods, not to disputes involving returned goods, and it is hard to see the justification for treating the two cases differently.191 10.102 There is another noteworthy difference between the Australian and Saskatchewan provisions. Saskatchewan PPSA s 29(6) gives the chattel paper transferee priority over the inventory financier (SP in Example 40), only if the chattel paper transferee would have had priority under s 31(7). Saskatchewan PPSA s 31(7) corresponds with Australian PPSA s 71 (see 10.77–10.85 above). Applying the Saskatchewan version to the facts of Example 40, the outcome will depend on whether, but for the rescission of the hire-purchase agreement, SP’s security interest would have extended to the chattel paper as original collateral. If so, then reading Saskatchewan PPSA ss 29(6) and 31(7) together, Financier does not have priority over SP unless it took possession of the chattel paper without knowledge of SP’s security interest. In summary, the Saskatchewan PPSA aligns the ss 29(6) and 31(7) priority rules to ensure that Financier’s priority status vis-à-vis SP is not improved simply because the goods are returned or repossessed. By contrast, Australian PPSA subs 76(2) is not limited by reference to s 71 and anomalies may result. 10.103 Example 41. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor sells a car to Customer in the ordinary course of business on unsecured credit terms for half the purchase price and on hire-purchase terms for the other half. Grantor transfers to Financier 1 the account represented by the unsecured credit terms and it transfer to Financier 2 the chattel paper represented by the hire-purchase agreement. Customer defaults on their hire-purchase payments and Financier 2 repossesses the car.

Example 41 involves a three-way dispute over the repossessed car between SP,

Financier 1 and Financier 2. SP has priority over Financier 1: subs 76(1) (see Example 39 above); Financier 2 has priority over SP: para 79(2)(b) (see Example 40 above); and Financier 2 has priority over Financier 1: para 76(2)(a). Paragraph 76(2)(a) provides that a chattel paper transferee’s subs 38(1) security interest has priority over an account transferee’s subs 38(1) security interest in the same returned goods. Applying these provisions to the facts of Example 41, the priority ranking is as follows: (1) Financier 2 (the chattel paper transferee); (2) SP (the inventory financier); and (3) Financier 1 (the accounts transferee). 10.104 As discussed in 10.98 above, subss 38(3) and (4) provide for perfection of a subs 38(1) deemed security interest in returned goods. Subsection 76(2) gives a chattel paper transferee’s subs 38(1) security interest priority over both an account transferee’s subs 38(1) security interest and the inventory financier’s subs 37(1) security interest (see Example 41). Subsection 76(2) does [page 332] not expressly say that, to qualify for priority, the chattel paper transferee must have perfected its security interest in the returned goods, but the requirement is implicit.192 10.105 Subsection 76(3) provides that a security interest (‘the priority interest’) in goods that is granted by a person who acquires an interest in the property has priority over a s 37 security interest in returned or repossessed goods and a s 38 deemed security interest if: (1) the priority interest attaches while the goods are in the possession of the person who granted the priority interest; and (2) the priority interest is perfected when the goods are returned or repossessed.193 Example 42. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor sells a car to Customer in the ordinary course of business. Later, Customer borrows money from Financier which takes a security interest in the car to secure repayment and registers a financing statement. The car turns out to be defective and Customer returns it to Grantor. Financier’s security interest is still perfected at this point.

Because Grantor’s transaction with Customer is in the ordinary course of business, Customer takes the car free of SP’s security interest under PPSA subs 32(1) or, alternatively, subs 46(1), but SP’s security interest reattaches under subs 37(1) when Grantor repossesses the car. This gives rise to a priority contest between SP and Financier and subs 76(3) applies: Financier’s security interest attached while

the car was in Customer’s possession and it was perfected when Customer returned the car to Grantor; therefore Financier has priority over SP. 10.106 Example 43. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor negotiates a sale with Customer and agrees to arrange hire-purchase finance through Financier. Grantor sells the car to Financier who, in turn, enters into a hire-purchase agreement with Customer. The car turns out to be defective. Customer rescinds the hire-purchase agreement and returns the car to Grantor.

In substance, the arrangement between Grantor, Financier and Customer is a sale to Customer with credit provided by Financier secured against the car. Because the transaction is in the ordinary course of Grantor’s business, [page 333] Customer takes the car free of SP’s security interest under PPSA subs 32(1) or, alternatively, subs 46(1). However, SP’s security interest may reattach under subs 37(1) assuming, as is likely, that following Customer’s rescission of the hirepurchase agreement, Financier rescinds its contract with Grantor. Subsection 76(3) may then apply to resolve SP’s and Financier’s competing claims to the collateral. For subs 76(3) to apply, Customer must be in possession of the car when Financier’s security interest attaches194 and Financier’s security interest must be perfected when Customer returns the car. 10.107 Example 44. Grantor is a car dealer. SP holds a security interest in Grantor’s inventory, perfected by registration. Grantor negotiates a sale with Customer and agrees to arrange finance through Financier, an associated lender. Grantor sells the car to Customer. Customer uses loan funds provided by Financier to pay the purchase price and Financier takes a security interest in the car to secure repayment. The car turns out to be defective. Customer rescinds the contract of sale and returns the car to Grantor.

As in Example 43, SP’s security interest reattaches when Customer returns the car and subs 76(3) applies to resolve the resulting priority dispute between SP and Financier. The outcome is that Financier has priority, provided: (1) Customer was in possession of the car at the time Financier’s security interest attached;195 and (2) Financier’s security interest was perfected when Customer returned the car.

1.

Some writers describe this result by saying that the security interest is ‘extinguished’: see, for example,

2. 3. 4.

5. 6.

7.

8. 9.

10.

11. 12.

13. 14. 15. 16.

17. 18. 19.

Craig Wappett, Steve Edwards and Bruce Whittaker, Personal Property Securities in Australia (LexisNexis looseleaf), para 2.11650. But this terminology is misleading because, while it is true that the secured party loses its security interest in the transferred collateral and therefore has no claim against the transferee, it may still have a security interest in the proceeds enforceable against the grantor: PPSA subs 32(1), discussed in Chapter 11 of this text. The PPSA itself refers to the transferee ‘taking [the collateral] free of’ the security interest, as opposed to saying that the security interest is ‘extinguished’. The foregoing consideration explains why. The Explanatory Memorandum provides an additional reason, namely, that the collateral may comprise more than one item and the transferee is acquiring only one item: Parliament of the Commonwealth of Australia, Senate, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009, para 2.72. See Denise McGill, ‘Transfer of Title by Non-Owner: The Personal Property Securities Act 2009 (Cth) Exceptions to the Nemo Dat Rule’ (2011) 39 Australian Business Law Review 209 at 224. See Flintoft v Royal Bank of Canada [1964] SCR 631. ‘Value’ means consideration that is sufficient to support a simple contract and includes an antecedent debt or liability: PPSA s 10. Sections 43–52 vary between referring to ‘value’ and ‘new value’. The Statutory Review has recommended amendments to ensure more consistency in the terminology: Bruce Whittaker, Statutory Review: Final Report (Commonwealth of Australia, 2015), para 7.6.1 (‘Statutory Review: Final Report’). See above note 1. But since Grantor’s security interest in the truck as original collateral is unperfected, its security interest in the $10,000 sale proceeds is also unperfected: PPSA s 33. If Grantor is insolvent, SP’s unperfected security interest will be ineffective against the insolvency administrator: PPSA s 267. Compare New Zealand PPSA s 52, which also has no knowledge limitation. By contrast, the corresponding provision in all the Canadian PPSAs is subject to a knowledge limitation: see, for example, Saskatchewan PPSA s 20(3). Compare PPSA ss 45(1), 45(3), 46(1), 47(1), 48, 50, 51 and 52, where a knowledge limitation does apply. Neither expression is defined and so the common law meanings apply. On this basis, a buyer is a person who acquires ownership of personal property pursuant to a contract of sale, while a lessee is a person who acquires an interest in personal property pursuant to a lease. Re Perimeter Transportation Ltd 2010 BCCA 509; Anthony Duggan, ‘Security Interests in Goods Held for Lease: The Double Perfection Requirement’ (2011) 51 Canadian Business Law Journal 85. See also PPSA s 37, which provides expressly for ‘reattachment’ of the security interest upon expiry of a lease: s 37 is discussed in 10.88–10.107 below. Ronald CC Cuming, Catherine Walsh and Roderick J Wood, Personal Property Securities Law, 2nd ed. Irwin, Toronto, 2012, p 379. See 5.47–5.53 of this text for a fuller account of s 34. Section 52 is discussed in 10.68–10.70 below. Section 34 applies where the security interest is perfected at the date of the transfer. Therefore, the provision does not apply to Example 3 or Example 5 in 10.10. PPSA s 33 governs perfection of security interests in proceeds: see 11.39–11.45 of this text. On what it means for a lessee to ‘take free’ of a security interest, see 10.7 above. See 6.23–6.24 of this text, discussing the relative advantages of serial number searches and grantor’s detail searches. The information may not be available if, for example, the security interest is in the grantor’s present and after-acquired trucks; at the time of registration, the secured party will have no way of knowing the serial numbers of trucks the grantor is yet to acquire. See 6.35–6.37 of this text. Parliament of the Commonwealth of Australia, Senate, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009, para 2.80. The Statutory Review has recommended deleting the dealer exclusion: Statutory Review: Final Report, para

20.

21.

22. 23. 24. 25. 26.

27.

28. 29. 30. 31.

32. 33. 34.

35. 36. 37. 38.

7.6.4.2. The actual wording is ‘a motor vehicle of a kind prescribed by the regulations’. Personal Property Securities Regulations 2010 (Cth) (PPS Regulations) reg 2.1 provides that, for the purposes of PPSA s 45, a motor vehicle described in reg 1.7 is prescribed. Regulation 1.7 defines ‘motor vehicle’ broadly to include not just cars, motor cycles and trucks, but also, for example, tractors and other types of mobile farm equipment (subject to speed and engine power), trailers and caravans but not, for example, trams or trains. ‘New value’ means value other than value provided to reduce an earlier debt or liability owed to the person providing the value: PPSA s 10. Contrast s 43, which requires only that the buyer or lessee give ‘value’. ‘Value’ is defined to include an antecedent debt or liability: s 10. As in the case of ss 43 and 44, the meaning of ‘takes free’ may vary depending on whether the transfer is a sale or lease: see 10.7 above. See above note 18, at para 2.84. See above note 18, at para 2.84. See Anthony Duggan, Simon Begg and Elizabeth Lanyon, Regulated Credit: The Credit and Security Aspects, Law Book Company, Sydney, 1989, para 7.3.28. That is, if the buyer or lessee holds the motor vehicle as inventory: para 45(2)(c). The Statutory Review recommends removing this limitation. It also recommends: (1) limiting subs 45(1) to cases where the buyer or lessee is an individual; and (2) simplifying the drafting of the provision: Statutory Review: Final Report, para 7.6.5. Compare, for example, Property Law Act 1958 (Vic) s 199 (1)(a): A person shall not be prejudicially affected by notice of any instrument, fact or thing unless … it is within his own knowledge, or would have come to his knowledge if such inquiries or inspections had been made as ought reasonably to have been made by him. For discussion, see above note 25, at para 7.3.27. [1993] 1 WLR 509. See above note 28, at 575–6. See above note 25, at para 7.3.27. Compare with, for example, Chattel Securities Act 1987 (Vic) s 3(5) which defined ‘notice’ for the purposes of the statute as either actual notice (Baden category (1)) or deliberately refraining from inquiry (Baden categories (2) and (3)). This approach left the courts with the task of applying the difficult distinction identified in the text: see above note 25, at para 7.3.27. The Statutory Review has recommended amending the Act by: (1) replacing the references to actual knowledge or actual or constructive knowledge with a reference to ‘knowledge’; and (2) providing that a person has knowledge of something for the purposes of the Act when information comes to their attention under circumstances in which a reasonable person would take cognisance of it: Statutory Review: Final Report, para 7.6.2. Section 298 governs the attribution of actual or constructive knowledge to a body corporate and other entities. The actual wording is ‘a motor vehicle of a kind prescribed by the regulations’. PPS Regulations reg 2.1 provides that, for the purposes of PPSA s 45, a motor vehicle described in reg 1.7 is prescribed. The actual wording is ‘a seller or lessor [who] is in a class of persons prescribed by the regulations for the purposes of this subsection’. PPS Regulations reg 2.2 provides that a licensed motor vehicle dealer is a prescribed person for the purposes of PPSA subs 45(3). As to what it means for a lessee to ‘take free’ of a security interest, see 10.7 above. The Statutory Review has recommended removing this limitation: Statutory Review: Final Report, para 7.6.6. See above note 18, at para 2.89. ‘Or that arises under s 32 (proceeds–attachment).’ This part of subs 46(1) appears to duplicate subpara 42(a)(ii). Example 5 above illustrates the application of subpara 42(a)(ii). As in the case of the provisions previously discussed, the meaning of ‘takes free’ may vary depending on

39. 40. 41. 42.

43.

44. 45. 46. 47. 48.

49. 50. 51.

52. 53. 54. 55. 56.

57. 58.

whether the transaction is a sale or lease: see 10.7 above. The Statutory Review has recommended removing this limitation: Statutory Review: Final Report, para 7.6.7.1. See, for example, New Zealand PPSA s 53 and Saskatchewan PPSA s 30(2). See Tubbs v Ruby 2005 Ltd [2010] NZCA 353 at [36]. See also Stockco Limited v Gibson and Stiassny [2012] NZCA 330 at [77]–[78]. PPSA s 55 applies to disputes between a person holding a security interest in accounts and a transferee of the accounts: see Example 2 above. PPSA s 71 enacts special rules for disputes between a person holding a security interest in chattel paper and a purchaser of the chattel paper: see 10.77–10.85 below. See above note 11, at p 437. See Warehouse Sales Pty Ltd (in liq) & Lewis and Templeton v LG Electronics Australia Pty Ltd [2014] VSC 644 at [55], [113], applying the shelter principle in the context of Australian PPSA subs 46(1). See Mike Gedye, ‘A Hoary Chestnut Resurrected: The Meaning of “Ordinary Course of Business” in Secured Transactions Law’ (2013) 37 Melbourne University Law Review 1. See above note 11, at p 391. See above note 11, at p 391. See above note 11, at pp 391–2. See Fairline Boats Ltd v Leger (1980) 1 PPSAC 218 (ONSC) at 222–3 per Linden J. See also, Stockco Limited v Gibson and Stiassny [2012] NZCA 330 at [77]–[78]. Gedye, above note 44 at pp 25–6, lists the following additional factors: • Advertising — if the seller advertises that it sells such goods, a sale is more likely to be in ordinary course. • The nature and significance of the transaction — it ought to be a transaction that a manager might reasonably be expected to carry out on their own initiative without reference to their superiors. • The transaction ought not to resemble a liquidation of assets. • The reason for the transaction — it ought not to have occurred as a response to financial difficulties or in suspicious circumstances. See above, note 42, citing Alberta Pacific [1996] 1 WWR 552; 369413 Alberta Ltd v Pocklington [2001] 4 WWR 423 (Alta CA). See above note 18, at para 2.92. (1979) Ltd (1986) 50 Sask R 161. See ORIX New Zealand Limited v Milne [2007] NZHC 507 at [66]; Gibson v Stockco Limited [2010] NZHC 2398 at [142]. In Stockco Limited v Gibson and Stiassny [2012] NZCA 330, the Court of Appeal endorsed this two-step approach, subject to adding the word ‘ordinary’ before ‘business’ in the first step: at [50]–[51]. [2001] OJ No 2908. (1982) 38 OR (2d) 516 (ONCJ) at 521–7; See also 369413 Alberta Limited v Pocklington [2001] 4 WWR 423 at [22] (ABQB). [2010] NZHC 2398. See above note 54, at [143]. The case was appealed sub nom Stockco Limited v Gibson and Stiassny [2012] NZCA 330, but the Court of Appeal did not address this issue. In Gibson, the court’s response to this point was to argue that the section’s express reference to the buyer’s knowledge that the sale was in breach of the security agreement supports the view that ‘no other knowledge requirement, one way or the other, should be implied’: see [143]. But this is a literal reading which, for the reasons stated in the text, arguably discounts the purpose of the provision. For a similar view, see above note 44, at pp 31–5. See above note 18, at para 2.92. For Canadian case law in support of the proposition, see MacDonald v Canadian Acceptance Corp Limited [1955] 5 DLR 344 (ONCA); Northwest Equipment Inc v Daewoo Heavy Industries America Corp [2002] 6 WWR 444 (ABCA); Re 547592 Alberta Limited (Receivership)

59.

60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77.

78. 79.

80. 81. 82. 83.

84. 85. 86. 87.

(1995) 10 PPSAC (2d) 62 (ABQB). Contrast Tubbs v Ruby 2005 Limited [2010] NZCA 353, where the court may have gone too far in holding that sales by a debtor to a related company were in the ordinary course of the debtor’s business even though they were for the purpose of assisting the debtor’s cash flow: see Michael J Gedye, ‘Financing Transactions Structured as Sales of Goods’ (2013) 35 New Zealand Universities Law Review 1076. [2012] NZCA 330 at [67]. See above note 11, at pp 292–4. (1995) 10 PPSAC (2d) 69 (ABQB). [2012] NZCA 330. See above note 63, at [48], [49], citing 369413 Alberta Ltd v Pocklington [2001] 4 WWR 423 (ABCA). See above note 63, at [69]. [2014] VSC 644. See above note 66, at [102]. (1987) 51 Sask R 147 (SKCA). The following is a summary only. For a fuller account, see the standard sale of goods texts: for example, Kenneth Sutton, Sales and Consumer Law, 4th ed, LBC Information Services, Sydney, 1995, ch 14. See also, Michael G Bridge (ed), Benjamin’s Sale of Goods, 9th ed, Sweet & Maxwell, London, 2014, Part Two. See, for example, Goods Act 1958 (Vic) s 6. See, for example, Goods Act 1958 (Vic) s 22. See, for example, Goods Act 1958 (Vic) s 23. See, for example, Goods Act 1958 (Vic) s 3(1). See, for example, Goods Act 1958 (Vic) s 23. But see Re Renovation Boys Pty Ltd [2014] NSWSC 340, discussed in 10.39 below. See also ORIX New Zealand Limited v Milne [2007] NZHC 507. A secondary question in the Royal Bank case was whether, in a case like Example 13, assuming T cannot claim the sofa, they have a claim against the receiver for recovery of their deposit. The obstacle to such a claim is that SP’s security interest extends to the disputed funds as proceeds of inventory and, to defeat SP’s security interest, T would have to establish a proprietary claim. This, in turn, would depend on showing that: (1) the funds remained traceable in Grantor’s hands; and (2) Grantor held the funds on trust for T. In the Royal Bank case, the court held that, even if the funds remained traceable, there was no trust and so the claim failed. Cuming, Walsh and Wood, above note 11 at pp 565–6. The opening words of subs 32(1) refer to collateral giving rise to proceeds ‘(whether by being dealt with or otherwise)’. The words in parentheses could be read as meaning that the provision applies even in the absence of an exchange. But the better view is that the purpose was simply to make it clear that the provision applies not only where collateral gives rise to proceeds within the meaning of para 32(1)(a), but also where it gives rise to proceeds within the meaning of paras 31(1)(b)–(e). [2014] NSWSC 340. [1994] 18 OR (3d) 60 (ONCA). See Jacob Ziegel, ‘Comment’ (1995) 24 Canadian Business Law Journal 457. The Statutory Review has recommended amending the Act by: (1) replacing the references to actual knowledge or actual or constructive knowledge with a reference to ‘knowledge’; and (2) providing that a person has knowledge of something for the purposes of the Act when information comes to their attention under circumstances in which a reasonable person would take cognisance of it: Statutory Review: Final Report, para 7.6.2. These reforms would avoid the difficult distinctions that currently arise. Apart from the Baden case itself, see also, for example, Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (JC); Twinsectra Ltd v Yardley [2002] 2 AC 164 (HL). [1877] 2 App Cas 616. See above note 85, at 619. The Statutory Review has recommended amendments aimed at achieving more consistent use of

88. 89. 90. 91. 92.

93. 94.

95. 96. 97. 98. 99. 100. 101. 102. 103. 104.

105. 106. 107.

108. 109.

110.

terminology in this connection: Statutory Review: Final Report, para 7.6.2. See above note 44, at p 31. Compare Warehouse Sales Pty Ltd (in liq) & Lewis and Templeton v LG Electronics Australia Pty Ltd [2014] VSC 644, discussed in 10.33 above. See above note 44, at p 31. See, for example, Warehouse Sales Pty Ltd (in liq) & Lewis and Templeton v LG Electronics Australia Pty Ltd [2014] VSC 644, discussed in 10.33 above. See above note 59, discussing New Zealand cases where strategies of this kind were in issue. ‘New value’ means value other than value provided to reduce an earlier debt or liability owed to the person providing the value: PPSA s 10. This is not the same as consumer property. ‘Consumer property’ means personal property held by an individual other than personal property held in the course, or furtherance, to any degree of carrying on an enterprise to which an ABN has been allocated: PPSA s 10. See 2.51–2.53 of this text. As in the case of the provisions previously discussed, the meaning of ‘takes free’ may vary depending on whether the transaction is a sale or lease: see 10.7 above. The actual wording is ‘the market value … of the total new value given for the personal property’. In the case of a lease, the market value of the consideration is to be ‘worked out at the time each part of the total new value is given’. In other words, the total market value of the consideration is the sum of the rentals. Compare New Zealand PPSA s 54 and, for example, Saskatchewan PPSA s 30(3) and (4). See above note 11, at p 397. The Explanatory Memorandum provides three illustrations of how subs 47(1) applies and all three cases involve garage sales: see above note 18, at para 2.95. See above note 11, at p 397. See above note 18, at para 2.95. Conversely, the provision may apply in a case where, for example, T pays $5 for goods worth $4900. See Anthony Duggan, Michael Bryan and Frances Hanks, Contractual Non-Disclosure, Longman Professional, Melbourne, 1994. See above note 100 for discussion of the relevant policy considerations. The Statutory Review has recommended minor amendments to address some of these concerns: Statutory Review: Final Report, para 7.6.8. See above note 18, at para 2.95. For ease of reference, the following discussion focuses on Victorian law and, in particular, the Goods Act 1958 (Vic). However, the relevant provisions are the same in all states and territories and are discussed in detail in the standard sale of goods texts: see, for example, above note 69, chs 15–17. See also above note 2, at 213–17. Lee v Butler [1893] 2 QB 318. See also PPSA s 300: a person does not have notice of a security interest simply because the security interest is registered. See, for example, Sale of Goods Act 1908 (NZ) s 27(2A) and New Zealand PPSA s 53(2); Sale of Goods Act RRS 1978 c.S-1 s 26(4) (Saskatchewan). Australian Constitution s 109 provides that when ‘the law of a State is inconsistent with the law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid’. Statutory Review: Final Report, para 7.6.18. See also above note 1, at para 4.1.4900 and above note 2, at pp 225–6, arguing that the buyer in possession provision may apply in a case like Example 17. The seller in possession provision provides that the disponee (SP, in Example 18) must ‘receive the goods’. On the facts of Example 18 itself, this requirement is clearly satisfied because SP took possession of the vehicle. But constructive delivery is sufficient: Gamer’s Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236. Therefore, the outcome in Example 18 may be the same even if SP does not take physical possession. Some PPSA jurisdictions allow a buyer who has left the seller in possession to register their interest in the PPS register and the seller in possession provision is expressed not to apply if the buyer’s interest is registered: see, for example, Sale of Goods Act RRS 1978 c.S-1 s 26(1.1) (Saskatchewan). However, this step has not been taken in Australia.

111. ‘Mercantile agent’ means ‘a mercantile agent having in the customary course of their business as such agent authority either to sell goods or to consign goods for the purpose of sale or to buy goods or to raise money on the security of goods or of documents of title’: s 65. 112. Goods Act 1958 (Vic) s 67(2) applies where the mercantile agent continues in possession of the disputed goods after the principal has revoked the agent’s authority. Depending on the particular facts, this provision, too, may be in conflict with the PPSA. 113. See, for example, Factors Act RRS 1978, c.F-1 (Saskatchewan); compare with Mercantile Law Act 1908 (NZ) s 3(1A), which provides that the mercantile agents rule does not apply to a PPSA security interest, but only if the security interest is perfected. See also New Zealand PPSA s 53(2). 114. ‘Currency’ is defined in PPSA s 10: see 2.15 of this text. 115. The meaning of ‘actual or constructive knowledge’ is discussed in 10.17 and 10.44–10.46 above. 116. See PPSA para 42(a). PPSA s 43 (Taking personal property free of an unperfected security interest) is unlikely to apply if the collateral is currency because a cash recipient is not a buyer or lessee of the cash. 117. See above note 18, para 2.97. 118. Saskatchewan PPSA s 31(1) and New Zealand PPSA s 94. 119. See above note 1, at paras 2.12100 and 4.10.2650. 120. Subject to PPSA subs 32(1), discussed in the context of Example 20 below. 121. PPSA s 46 (the buyer in ordinary course provision) does not apply because T does not buy or lease the cash. 122. See above note 18, at para 2.98. 123. ‘Value’ means any consideration sufficient to support a simple contract and includes an antecedent debt or liability: PPSA s 10. 124. Section 50 applies to both certificated and uncertificated investment instruments. An uncertificated investment instrument is incapable of possession and so, to obtain the benefit of the provision, the buyer must take control. See PPSA s 24 (Possession), discussed in 5.10, and PPSA s 27 (Control of investment instruments), discussed in 5.28–5.33 of this text. 125. The meaning of ‘actual or constructive knowledge’ is discussed in 10.17 and 10.44–10.46 above. 126. See, for example, Saskatchewan PPSA s 31.1, which provides, in part, that the interest of a protected purchaser, within the meaning of the Securities Transfer Act 2007 c.S-42.3, takes priority over an earlier security interest even if it is perfected. ‘Protected purchaser’ means a purchaser of a certificated or uncertificated security, or of an interest in a security, who: (i) gives value; (ii) does not have notice of any adverse claim to the security; and (iii) obtains control of the security: Securities Transfer Act s 1(1). ‘Purchase’ means a taking by sale, discount, negotiation, mortgage, hypothec, pledge, security interest, issue or reissue, gift or any other voluntary transaction that creates an interest in property. ‘Adverse claim’ means a claim that a claimant has a property interest in the security and it is a violation of the claimant’s rights for another person to hold, transfer or deal with the security. There are similar provisions in all the Canadian provincial Securities Transfer Acts and PPSAs. 127. The Statutory Review points out that s 50 is mainly relevant to off-market transactions and queries the appropriateness of giving an off-market purchaser this kind of protection. But the Review goes on to say that if s 50 is retained it should be amended to clarify that it does not operate in favour of another secured party: Statutory Review: Final Report, para 7.6.9. 128. PPSA s 27 governs control of investment instruments: see 5.28–5.33 of this text. 129. In Example 22, the other requirements for the application of subs 50(1) are satisfied: (1) SP2 gives value; and (2) SP2 has control of the investment instrument. The protected purchaser provisions in the Canadian PPSAs and Securities Transfer Acts do not exclude a secured party: see above note 126. But Example 22-type conflicts are for the most part avoided because the relevant PPSA priority rules take precedence over the protected purchaser rules: see John Cameron, ‘Secured Transactions under Ontario’s Securities Transfer Act, 2006’ (2007) 22 Banking and Finance Law Review 309 at 332–3. 130. Compare, for example, Saskatchewan Securities Transfer Act s 96: ‘a legal proceeding based on an adverse claim to a financial asset, however framed, may not be brought against a person who acquires a security

entitlement … for value and without notice of the adverse claim’. 131. The Statutory Review has recommended re-classifying CHESS securities as investment instruments: Statutory Review: Final Report, para 5.3.4.5. If adopted, this recommendation would address the problem identified in the text. 132. See above note 1, at para 4.10.3050. The Statutory Review has recommended that the government undertake further consultations on s 51, as part of a broader inquiry into issues relating to intermediated securities and investment instruments: Statutory Review: Final Report, para 7.6.10. 133. See above note 18, at para 2.103. 134. ‘New value’ means value other than value provided to reduce or discharge an earlier debt or liability: PPSA s 10. 135. See PPSA subs 33(2), which provides for temporary perfection of a security interest in proceeds, discussed in 11.44–11.45. 136. If the sale or lease is a consumer transaction (‘the personal property is bought or leased with the intention of using it predominantly for personal, domestic or household purposes’), the time for assessing the buyer’s or lessee’s state of knowledge is when they first give new value; in other cases, the relevant time is the date of the agreement: subs 52(2). 137. The Statutory Review has recommended removing this limitation: Statutory Review: Final Report, para 7.6.11.1. 138. The Statutory Review has recommended that the government give further consideration to this feature of the Australian PPSA: Statutory Review: Final Report, para 7.6.11. 139. Compare, for example, Chattel Securities Act 1987 (Vic) s 7(7). 140. See Chapter 11 of this text for a fuller treatment of proceeds claims. 141. Statutory Review: Final Report, para 7.6.16. 142. See above note 11, at p 408. PPSA subs 69(1) refers to a security interest in: (1) the funds paid; (2) an intangible that was the source of the payment; and (3) a negotiable instrument used to effect the payment. A bank account from which the funds were paid is an example of an intangible that was the source of the payment: see the example appended to subs 69(1). The reference caters for the case where SP holds a security interest in the bank account and claims the payment as proceeds. 143. The Statutory Review has recommended amending s 69 to align it more closely with s 48: Statutory Review: Final Report, para 7.6.12. 144. [2012] NZCA 93. 145. See above note 144, at [59]. 146. See above note 144, at [69]. New Zealand PPSA s 95 is different in some respects from Australian PPSA s 69. In particular: (1) it is limited to ‘debtor-initiated payments’; (2) it is expressed to apply even if the creditor has knowledge of the security interest at the time of the payment; and (3) it does not address the case where the creditor has actual knowledge that the payment is in breach of the security agreement. See also Saskatchewan PPSA s 31(2). However, despite these differences, the statements quoted in the text are relevant in the Australian context. 147. See above note 144, at [77]. 148. See above note 144, at [77]. 149. The reference to ‘control’ caters for cases involving uncertificated negotiable instruments: see 5.34–5.37 of this text. 150. There is a similar provision in all the PPSAs. See, for example, Saskatchewan PPSA s 31(4) and New Zealand PPSA s 96. In the Saskatchewan version, there is only one knowledge limitation: the acquirer must take without knowledge that the instrument is subject to a security interest. In the New Zealand version, the knowledge limitation is a two-tiered one but, in contrast to Australian PPSA s 70, the lower standard applies to transactions in the ordinary course of the transferor’s business. 151. See above note 1, at para 4.10.2700. 152. See above note 18, at para 2.161. 153. See Flexi-Coil Ltd v Kindersley District Credit Union Ltd (1993) 107 DLR (4th) 129 (SKCA).

154. See Anthony Duggan, ‘Chattel Paper’ (2013) Australian Business Law Review 171. 155. These days it is increasingly common for the dealer to assign the chattel paper to a special purpose vehicle for securitisation purposes. 156. For example, hire-purchase agreements, leases and loans secured against the collateral being purchased: see 2.12 of this text. 157. This still appears to be the case: see Permanent Editorial Board for the Uniform Commercial Code, Commentary Number 8: Section 9-330 (December 10, 1991, as amended to apply to Revised Article 9). 158. See also Grant Gilmore, Security Interests in Personal Property, vol 1, Little Brown & Co, Boston, 1965, s 25.5. 159. See above note 158. 160. United States Uniform Commercial Code — Secured Transactions s 9-109(a)(3); Australian PPSA para 12(3)(a). 161. See United States Uniform Commercial Code-Secured Transactions, Official Comment 3 on s 9-330 (Revised Article 9). 162. Uniform Commercial Code — Secured Transactions s 9-308. 163. See above note 158. See also, above note 157. 164. Grant Gilmore described chattel paper under Art 9 as ‘quasi-negotiable — that is, collateral which is in the no-man’s-land between strictly negotiable paper and the pure intangible’: see above note 158. However, as will be explained below, the analogy between the purchaser of chattel paper and the holder in due course of a negotiable instrument is an inexact one: where Rule 1 applies, the chattel paper purchaser’s position is weaker than that of a holder in due course, but where Rule 2 applies it is stronger. 165. See, for example, Saskatchewan PPSA s 31(7); New Zealand PPSA s 98. The Revised Article 9 provision is in United States Uniform Code — Secured Transactions s 9-330 and it is different in some respects from the original version. Most significantly, Rule 2 is now subject to the limitation that the chattel paper must not indicate that it has been assigned to an identified assignee other than the purchaser. 166. The Statutory Review has recommended repeal of the chattel paper provisions on the ground that chattel paper financing is not common in Australia, and so there is no policy justification for the special priority rule in s 71: Statutory Review: Final Report, para 4.3.3; see also above note 154. 167. ‘New value’ means value other than value provided to discharge an earlier debt or liability: PPSA s 10, ‘new value’, ‘value’. 168. The meaning of ‘actual or constructive knowledge’ is discussed in 10.17 and 10.44–10.46 above. PPSA subs 24(5) defines ‘possession’ in relation to electronic chattel paper: see 5.16–5.18 of this text. 169. PPSA subs 71(3) provides that these rules take precedence over the PMSI priority rules in ss 62 and 64: see 8.35–8.40. However, the provisions appear not to be in conflict. 170. The Revised Article 9 version of the second rule is subject to a further limitation, namely the chattel paper does not indicate that it has been assigned: Uniform Commercial Code — Secured Transactions s 9330(a)(2). 171. See above note 158. 172. See above note 128, at s 27.3; see above note 11, at p 412. 173. This is the position of the Permanent Editorial Board for the Uniform Commercial Code. See Commentary No 8: … the Board believes that [in an Example 28-type case] [SP] has more than a mere proceeds interest in the chattel paper on hand whether or not at any specific time there is sufficient inventory on hand to secure the amount of the loan outstanding at that time. The structure of the deal is such that the chattel paper is part of the primary collateral for the debt. That interest extends to any chattel paper subsequently generated by a sale of inventory whether or not at any particular time the existing inventory is adequate security for the debt actually outstanding. The Comment goes on to indicate that the United States case law supports this position. 174. See above note 11, at pp 412–3. 175. See above note 11, at p 413.

176. See PPSA s 10, ‘document of title’, discussed in 2.17–2.18 of this text. 177. Jacob S Ziegel and David L Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed, Butterworths Toronto, 2000, p 14. 178. See, for example, New Zealand PPSA s 99 and Saskatchewan PPSA s 31(5). 179. PPSA ss 37–38 and 76 are based on Saskatchewan PPSA s 29 and corresponding provisions in the other Canadian provinces. 180. PPSA para 37(1)(c) reads: ‘the transferee seizes the goods in the exercise of a right in enforcing the security agreement’. The reference is to the transferee of chattel paper mentioned in the opening words of the subsection. Compare Saskatchewan PPSA s 29(1)(a) which reads: ‘the goods are returned to, or seized or repossessed by the debtor or by a transferee of chattel paper’. 181. See above note 154, at pp 222–5 and 226–8. The Statutory Review has recommended removal from the PPSA of all references to ‘chattel paper’: Statutory Review: Final Report, para 4.3.3. Section 37 and related provisions will need to be redrafted if this recommendation is adopted. But, for the reasons explained in the text, the provisions need redrafting anyway, even if the chattel paper concept is retained. 182. See Anthony Duggan and Elizabeth Lanyon, Consumer Credit Law, Butterworths, Sydney, 1999, para 1.3.9. 183. PPSA subs 46(1) (the buyer in ordinary course provision) may also apply on the basis that the transaction between Grantor, Customer and Financier is in substance a sale to Customer with credit provided by Financier secured against the car. 184. See above note 182, at para 1.3.11. 185. National Consumer Credit Protection Act 2009 (Cth) Sch 1 (National Credit Code) s 135. 186. The Statutory Review has recommended redrafting s 37 to address these concerns: Statutory Review: Final Report, para 7.6.17. 187. National Credit Code s 135. 188. The Statutory Review has recommended redrafting s 38 to address these concerns: Statutory Review: Final Report, para 7.6.17. 189. Subsection 76(2) refers throughout to subs 38(2), but the reference should be to subs (1). 190. The actual wording is ‘when the goods come into the possession of the grantor or transferee in the circumstances mentioned in para 37(1)(d)’. But para 37(1)(d) refers to repossession by the grantor or debtor and makes no mention of repossession by the transferee. 191. The Statutory Review has recommended an amendment which would fill this gap: Statutory Review: Final Report, para 7.7.10.3. 192. See above note 11, at p 588. In the absence of this limitation, circular priority problems may arise. For example, if the grantor became bankrupt, the chattel paper financier would have priority over the inventory financier, but would be subordinate to the trustee in bankruptcy. The inventory financier would have priority over the trustee in bankruptcy, but would be subordinate to the chattel paper financier: see above note 11, at p 589. 193. Compare Saskatchewan PPSA s 29(7), which is clearer. It provides that a security interest in goods given by a buyer or lessee that attaches while the goods are in the possession of the buyer or lessee, or the debtor, and that is perfected when the goods are returned, seized or repossessed, has priority over a security interest in the goods arising pursuant to this section. 194. In the case of an Example 43-type transaction, it may be a close call which comes first: delivery of the car to Customer or attachment of Financier’s security interest. Compare Saskatchewan PPSA s 29(7), which applies if the goods are in the possession of the buyer (or lessee) or the debtor (grantor). The Statutory Review has recommended an amendment to address this issue: Statutory Review: Final Report, para 7.7.10. 195. The observations in note 194 are also relevant here.

[page 335]

Chapter 11 Proceeds INTRODUCTION 11.1 This chapter deals with the secured party’s rights in a case where the grantor sells or otherwise disposes of the collateral and where the collateral otherwise generates proceeds. Example 1. SP has a security interest in Grantor’s truck perfected by registration. Grantor sells the truck to Buyer for $50,000 and Buyer pays by cheque.

If the sale to Buyer is without SP’s consent, SP has two basic options. The first is to locate and identify the truck and reclaim it from Buyer. This process is commonly known as ‘following’. The second option is to trace the truck into the cheque and claim the cheque from Grantor on the ground that it represents proceeds of the original collateral.1 If the sale to Buyer is with SP’s consent, the option of following the collateral will not be open to SP and it will be limited to a proceeds claim against Grantor. This will typically be the case if the collateral is inventory and the sale to Buyer is in the ordinary course of Grantor’s business. Even if the sale is without SP’s consent, SP may still be denied the following option if one or other of the transferee protection rules in the Personal Property Securities Act 2009 (Cth) (PPSA) Pt 2.5 applies: see Chapter 10. PPSA subs 32(1) imports the concepts of following collateral and tracing proceeds. It provides that, if collateral gives rise to proceeds, the security interest continues in the collateral, unless the secured party expressly or impliedly authorised the dealing, and it extends to the proceeds. 11.2 Pre-PPSA, the law relating to proceeds claims, particularly in the context of retention of title agreements, was complex and uncertain. The PPSA substantially simplifies the law by enacting clear rules for the establishment of proceeds claims. The scheme of this chapter is as follows. Paragraphs 11.3–11.7 provide an overview of the pre-PPSA law relating to proceeds claims in the context of retention of title agreements. Paragraphs 11.8–11.30 address the definition of ‘proceeds’ in PPSA s 31. Paragraphs 11.31–11.35 discuss the rules in PPSA s 32 governing the

attachment of a security interest to proceeds. Paragraphs 11.36–11.51 examine the rules in PPSA s 33 relating [page 336] to the perfection of a security interest in proceeds and the priority rules governing competing proceeds claims.

THE PRE-PPSA POSITION 11.3 There is a substantial body of pre-PPSA case law on proceeds claims, mostly in the context of retention of title agreements. Where inventory was sold on retention of title terms, it was common to find in the agreement a provision authorising the buyer to resell the goods in the ordinary course of business but giving the seller a claim to the resale proceeds. Generally speaking, the courts were disinclined to uphold proceeds clauses; in the words of one commentator, ‘it is almost as if the courts [were] drawing a line in the sand and saying to the supplier, “You can have your simple and current-account reservation of title clauses, but thus far and no further”’.2 11.4 The main obstacle to proceeds clauses were the provisions in the Corporations Act 2001 (Cth) Ch 2K, requiring registration of a charge on book debts, among other things. If the proceeds took the form of accounts receivable and a court construed the proceeds clause as creating a charge in the original seller’s favour, the clause would be void against the buyer’s liquidator or administrator unless it was registered. Likewise, without registration, the seller’s claim to the accounts would be subordinate to a registered charge on the same collateral while, even if registered, it would typically be subordinate to prior registered charges.3 To avoid these outcomes, the seller had to convince the court that there was a fiduciary relationship between itself and the buyer and that the buyer resold the goods on the seller’s behalf. This, in turn, provided a basis for concluding that the proceeds belonged in equity to the seller and that the function of the proceeds clause was not to create a new entitlement in the seller’s favour but simply to affirm the seller’s equitable interest.4 11.5 But this line of argument is essentially counter-factual and, for the most part, the courts refused to subscribe to it. If the buyer really did resell the goods on

the original seller’s account, rather than on its own behalf, the logical conclusion is that the original seller would be entitled to the whole of the resale price, including the profit margin. This is unlikely to reflect the parties’ actual intentions and it would deliver a windfall to the original seller.5 Concerns about the windfall effect underpin much of the case law going against the seller. One way of addressing these concerns was for the agreement to limit the proceeds claim to the amount owing on the original sale. But a [page 337] provision like this undermines the argument that the buyer resold the goods on the original seller’s account, and it strengthens the view that the parties intended to create a charge. Furthermore, the original seller’s claim to the proceeds would come to an end once the buyer paid the purchase price, and this consideration reinforces the inference that the buyer resold the goods on its own account subject to a charge on the resale proceeds to secure payment of the original purchase price.6 11.6 For these reasons, at least in England, ‘there is very little chance of a reservation-of-title [proceeds] clause receiving judicial approval’.7 On the other hand, in Associated Alloys Pty Ltd v ACN 001 452 106,8 the High Court of Australia upheld a proceeds clause which required the buyer to hold the resale proceeds on trust for the original seller, declining to characterise the provision as giving rise to a registrable charge. The majority saw the key question as being whether the parties intended to create a trust, and it treated their explicit use of trusts language as proof that they did. ‘There is nothing to suggest’, the court said,9 ‘that the parties in their written instrument did not mean what they say, or did not say what they meant’. Therefore, there was no reason for not taking the parties at their word or for giving the bargain a meaning that diverged from the way the parties themselves had expressed it.10 The court recognised the commercial significance of its decision, saying that ‘for third parties, such as financial institutions seeking to assess the credit-worthiness of the buyer, the non-registration of the proceeds subclause may cause potential difficulties’.11 However, it suggested that these difficulties ‘were capable of remedy by legislation’.12 The court said:13 To treat the Proceeds Subclause as an agreement which falls foul of the [Corporations] Law is to rewrite the statute. It is not for the courts to destroy or impair property rights, such as those arising under trusts, by supplementing the list of those rights which the legislature has selected for such treatment.

Kirby J, dissenting, cautioned against the ‘exclusive concentration on the terms of an instrument purporting to create a trust, to the neglect of an examination of the purpose and effect of the instrument when considered for its substance not merely its form’.14 He concluded that the proceeds subclause did create a registrable charge and that any other construction ‘would permit the easy defeat of the clear purpose of the [Corporations] Law’.15 [page 338] 11.7 The PPSA enacts the reforms foreshadowed in the Associated Alloys case and it avoids the formalism inherent in that decision and earlier case law. PPSA subs 32(1) creates a statutory right to proceeds, and so it is no longer necessary for parties to include an express proceeds provision in their agreement or to establish a fiduciary relationship as the basis for a proceeds claim: see further, 11.31–11.33 below. This means that the need for formal characterisation of a seller’s proceeds claim, which was the main preoccupation of the pre-PPSA case law, no longer arises. The only question is whether the seller has a security interest in the original collateral and s 12 specifically states that, for the purposes of the statute, a conditional sale agreement is a security interest: see Chapter 3 of this text. PPSA s 62 makes it clear that a purchase money security interest holder’s super-priority extends to the proceeds of any dealing in the original collateral: see Chapter 8 of this text. In contrast to prior law, this means that in most cases a seller’s proceeds claim will have priority over competing security interests: see further, 11.47–11.48 below.

THE MEANING OF PROCEEDS Introduction 11.8 PPSA subs 31(1) defines ‘proceeds’ to mean, in part, ‘identifiable or traceable personal property … that is derived directly or indirectly from a dealing with the collateral (or proceeds of the collateral)’. The definition also includes: the right to an insurance payment as indemnity or compensation for loss of, or damage to, the collateral or its proceeds; a payment made in total or partial discharge or redemption of chattel paper, intangible property, an investment instrument, an intermediated security or a negotiable instrument; if the collateral is intellectual

property, payments earned under any licence agreement; and if the collateral is an investment instrument or intermediated security, rights arising out of the collateral, property collected on the collateral, and property distributed on account of the collateral (for example, dividends, bonus shares and the like).16

Second and Subsequent Generation Proceeds 11.9 The definition makes it clear that proceeds include not just first-generation proceeds, but also second and subsequent generation proceeds. Example 2. SP holds a security interest in Grantor’s inventory. Grantor sells an item of inventory to Customer, in the ordinary course of business, on 90-day terms. At the end of the 90 days, Customer pays Grantor by cheque. Grantor cashes the cheque and uses the money to buy office supplies.

Grantor’s sale to Customer gives rise to a money obligation owing by Customer to Grantor (an ‘account’, in PPSA terminology).17 The account [page 339] is first-generation proceeds of the original collateral. Customer’s payment discharges the account, but now SP has a claim to the cheque (‘negotiable instrument’, in PPSA terms18) as first-generation proceeds of the account and second-generation proceeds of the original collateral. The cashing of the cheque terminates SP’s interest in the cheque, but SP acquires an interest in the cash as proceeds of the cheque and likewise, when Grantor spends the cash on the office supplies, SP acquires an interest in the office supplies as proceeds of the cash.

The Dealing Requirement 11.10 Paragraph 31(1)(a) provides that an asset is proceeds if it derives directly or indirectly from a dealing with the original collateral. Example 2, above, provides an illustration of proceeds collateral that derives from dealing. A simple counterexample is the case of money a grantor earns from using their truck to transport goods. ‘Dealing’ implies some form of exchange and the grantor’s profits are not proceeds because they do not derive from a dealing with the truck in this sense.19 There are some limited exceptions to the dealing requirement in paras 31(1)(b)–(e). For example, an insurance payout is proceeds even though the payment is not referable to any dealing with the collateral. Similarly, payments the grantor earns

from licensing its intellectual property are proceeds, as are dividends and the like earned on shares and other investment property. 11.11 In the same connection, subss 31(4) and (5) extend the definition of ‘proceeds’ to the harvested produce of crops and livestock products such as meat or wool, even though neither case involves a dealing with the original collateral in the relevant sense. PPSA s 12 defines ‘livestock’ as including unborn young and also the products of livestock before they become proceeds (for example, the wool on a sheep’s back before the sheep is shorn): see 2.7 of this text. The upshot is that a secured party may take a security interest in wool on the sheep’s back without also taking a security interest in the sheep itself. In that case, the wool is original collateral, not proceeds of the sheep. On the other hand, PPSA subs 31(5) makes it clear that if the secured party takes a security interest in the sheep without reference to the wool as a separate item, after shearing the wool is proceeds. Likewise, if a secured party takes a security interest in livestock, the security interest extends to any unborn young as original collateral unless the security agreement specifies otherwise. Correspondingly, a secured party may take a security interest in the unborn young of livestock, as original collateral, without also taking a security interest in the mother. PPSA subs 31(6) avoids any doubt on this score by providing, in part, that livestock are not proceeds merely because they are the unborn young or offspring of livestock that are collateral. [page 340] 11.12 One implication of the dealing requirement is that if the grantor uses the original collateral in a manufacturing process, the end product is not proceeds. Broadly speaking, manufacture may constitute a dealing with the manufacturing inputs, but it is not a dealing in the sense of exchange. On this basis, there is no overlap between s 32, which governs proceeds claims, and PPSA Pt 3.4, which enacts special rules governing claims to commingled goods: see Chapter 9 of this text.

The Grantor’s Interest Limitation 11.13 PPSA subs 31(3) provides that for personal property to qualify as proceeds, the grantor must have an interest in it.20 There is a corresponding

provision in the New Zealand PPSA and also all the Canadian PPSAs, except Ontario.21 Example 3. SP has a security interest in Grantor’s truck, perfected by registration. Grantor sells the truck to Buyer 1, a dealer. SP does not consent to the sale and none of the transferee protection rules in PPSA Pt 2.5 applies. Therefore, Buyer 1 takes the truck subject to SP’s security interest and SP has the right to follow the truck into Buyer 1’s hands. Buyer 1 later sells the truck to Buyer 2, taking Buyer 2’s car as a trade-in.22

Applying PPSA subs 31(3), SP’s security interest does not extend to the trade-in vehicle. It is true that the trade-in vehicle derives from a dealing with the original collateral, but it is not ‘proceeds’ because Grantor never acquired an interest in it. There are two reasons for the limitation in subs 31(3). The first is to prevent the geometric multiplication of proceeds claims which could otherwise occur if the original collateral is sold numerous times over. The second and related reason is to limit third-party exposure to the risk of undiscoverable security interests.23 In Canada and New Zealand, the position in this second connection is as follows. Assume that, in Example 3, Buyer 1 sells the trade-in vehicle to Buyer 3 in the ordinary course of business. Buyer 3 will typically have no reason to suspect that the vehicle may be subject to a security interest. Buyer 3 is unlikely to conduct a register search; they will assume that, because the trade-in vehicle is part of Buyer 1’s inventory, [page 341] Buyer 1 is free to make the sale and in a position to give them clear title.24 In any event, a register search would typically leave Buyer 3 none the wiser. The reason is that, if they search at all, they will search against the serial number of the trade-in vehicle and perhaps also Buyer 1’s grantor details. However, SP’s security interest will be registered against the serial number of the truck and Grantor’s grantor details, and so neither search will return the entry. This is a version of the A-B-C-D problem identified in 6.24 of this text. Serial-number registration resolves the A-BC-D problem for a substantial subset of cases, but the case in point is not one of them. The statute’s solution is to limit the potential damage by narrowing the definition of ‘proceeds’. 11.14 In Australia, the position is complicated by the interaction between PPSA ss 34 and 52 and the s 31 definition of ‘proceeds’. PPSA s 34 applies in Example 3. The result is that SP’s security interest ceases to be perfected by registration when

Grantor sells the truck to Buyer 1 and it becomes temporarily perfected instead: see 5.47–5.53 of this text. Section 52 provides, in part, that a buyer or lessee of ‘goods’ or ‘the proceeds of personal property’ takes the goods or the proceeds free of any temporarily perfected security interest. In Example 3, the trade-in vehicle is not ‘proceeds’ because Grantor does not acquire an interest in the vehicle. The trade-in vehicle is ‘goods’, but s 52 does not apply on this basis either because, given the grantor’s interest limitation in subs 31(3), SP’s security interest does not extend to the trade-in vehicle. In the end, Buyer 3 obtains clear title not under s 52, but because of the grantor’s interest limitation. In any event, s 52 only protects buyers and lessees. The provision would not apply if, for example, instead of selling the trade-in vehicle to Buyer 3, Buyer 1 gave SP* a security interest in the vehicle. In that case, but for the grantor’s interest limitation, SP would have priority over SP* under PPSA s 67. 11.15 The Canadian PPSAs define ‘debtor’ (‘grantor’) to mean, in part, ‘a person who owes payment or performance of an obligation secured’ and, for the purposes of certain provisions (not including the definition of ‘proceeds’), ‘the transferee of a debtor’s interest in the collateral’.25 Australian PPSA s 10 defines ‘grantor’ to mean ‘a person who has the interest in the personal property to which a security interest is attached’ and also a transferee of the original grantor. In Example 3, Buyer 2 is indirectly a transferee from Grantor and it could be argued that they, too, are a grantor for the purposes of s 31. However, this reading would make nonsense of the grantor’s interest limitation in subs 31(3), and it can hardly have been what the Australian drafters intended when they adopted the grantor’s interest limitation from the [page 342] Canadian PPSAs. It follows that the references to the grantor in subs 31(3) must be read as meaning the original grantor.26

Identifiable or Traceable Personal Property Introduction 11.16 To qualify as proceeds, the disputed asset must be ‘identifiable or traceable personal property’. There has been some confusion over the meaning of this

expression in the Canadian PPSAs, but the now generally accepted view is that ‘ “identifiable” refers to the ability to point to the particular property obtained by the debtor as a result of the dealing with the collateral (or proceeds), while “traceable” refers to the situation where the collateral is [mixed] with other property so that its identity is lost’.27 In Example 2, the account, the cheque, the cash and the office supplies are all identifiable personal property in the relevant sense. Assume that, instead of cashing the cheque and spending the proceeds, Grantor deposited the cheque in its bank account. If there were no other funds in the account, the money in the bank (or ‘ADI account’, to use the PPSA terminology28) would also qualify as identifiable personal property. But if the proceeds of the cheque become mixed with other funds in the bank account, they lose their identifiability and SP’s claim to them depends instead on whether they are ‘traceable’.

The concept of tracing 11.17 Example 4. SP has a security interest in Grantor’s cows. Grantor sells the cows to Buyer for $1000 cash without SP’s authority. Grantor spends the money on a week of riotous living. Grantor’s only remaining asset is a speedboat. The cows become ill and Buyer has them put down.

Can SP claim the speedboat as proceeds of its original collateral? The answer depends on whether the speedboat is identifiable or traceable personal property that is derived directly or indirectly from a dealing with the cows: PPSA subs 31(1). It is clear that the speedboat does not satisfy this requirement and so it is not proceeds of the cows. SP may acquire a claim to the speedboat by obtaining a judgment against Grantor and levying execution against the speedboat to enforce the judgment debt. But leaving this possibility aside, the speedboat has nothing to do with the security agreement between SP and Grantor; SP did not bargain for a security interest in the speedboat and allowing SP to claim the speedboat would result in an expropriation of Grantor’s property and a windfall to SP. This analysis is consistent with the common law [page 343] and equitable principles of tracing, which depend on a connection between the original collateral and the asset SP is claiming as proceeds.

11.18 In Agricultural Credit Corp of Saskatchewan v Pettyjohn,29 a leading Canadian case on tracing in the PPSA context, the court described tracing as follows:30 Tracing at common law and equity is a proprietary remedy. It involves following an item of property either as it is transformed into other items of property, or as it passes into other hands, so that the rights of a person in the original property may extend to the new property. In establishing that one piece of property may be traced into another, it is necessary to establish a close and substantial connection between the two pieces of property, so that it is appropriate to allow the rights in the original property to flow through to the new property.

Assume that, in Example 4, instead of frittering the money away, Grantor deposits it in their bank account. There are no other funds in the account. This is a simple example going the other way: the bank deposit is identifiable personal property derived from Grantor’s dealing with the cows and so it is proceeds of the cows.

Tracing into an overdrawn account 11.19 Assume that, as in the case just discussed, Grantor pays the $1000 into their bank account, but now the account is overdrawn when Grantor makes the deposit. This was more or less what happened in Flexi-Coil Ltd v Kindersley District Credit Union Ltd.31 There SP had a security interest in Grantor’s present and afteracquired inventory. Some of Grantor’s retail customers paid by cheque and Grantor deposited the cheques into its account with the credit union. The account was overdrawn and one of the questions the court had to decide was whether SP’s security interest extended to the deposits as proceeds of the cheques. As the court explains, the answer depends on the nature of the banker–customer relationship. If the customer’s account is in credit, the relationship is debtor–creditor. The customer is the creditor and the bank is the debtor. Each deposit increases the amount of the bank’s debt and each withdrawal reduces it. As discussed in 2.34–2.35 of this text, a bank account with a credit balance is personal property belonging to the customer, and in PPSA terminology it is an ‘ADI account’. On the other hand, if the account is overdrawn, the relationship between the customer and the bank is still debtor–creditor, but now the customer is the debtor and the bank is the creditor. Each deposit reduces the amount of the customer’s debt and each withdrawal increases it. The bank account is still personal property, but the property belongs to the bank, not the customer. When the customer

[page 344] makes a deposit, this reduces their obligation to the bank, but it does not give the customer any new property interest into which the deposit can be traced.32

Backwards tracing 11.20 Example 5. SP has a security interest in Grantor’s cows. On Date 1, Grantor sells the cows to Buyer for $1000 cash without SP’s authority. On Date 2, Grantor opens a bank account and deposits the $1000. There are no further deposits. On Date 3, Grantor purchases a speedboat from Seller for $1000 but does not immediately pay for it. On Date 4, Grantor withdraws the $1000 and uses the money to pay the debt he owes Seller.

On a strict application of tracing law, SP has no claim to the speedboat as proceeds of the cows. Grantor dissipates the value represented by the cows when he uses the money to pay the debt he owes Seller and so SP cannot claim that the value represented by the cows continues in the speedboat. In other words, as in Example 4, there is no ‘close and substantial connection’ between the cows and the speedboat.33 On the other hand, it is clear that if Grantor had paid Seller for the speedboat immediately, withdrawing the $1000 from his bank to make the payment, SP would have had a claim to the speedboat as proceeds: the $1000 bank deposit is proceeds of the cows and the speedboat is proceeds of the withdrawal. It might be argued that the period of credit Seller gives Grantor in Example 5 should make no difference and that SP should have a claim to the speedboat in both cases. This is the intuition behind the principle of so-called ‘backwards tracing’: ‘when money is used to pay a debt, it is traceable into what was acquired in exchange for the incurring of the debt’.34 Backwards tracing is controversial and, at least until recently, the case law was unsettled. But in Federal Republic of Brazil v Durant International Corporation,35 the Privy Council, after reviewing the authorities, held that backwards tracing may be permissible if, as in the Pettyjohn case, the deposit and the withdrawal are in substance both parts of the one overall transaction: … if the court is satisfied that the various steps are part of a coordinated scheme, it should not matter that, either as a deliberate part of the choreography or possibly because of the incidents of the banking system, a debt appears in the

[page 345]

bank account of an intermediary before a reciprocal entry … [T]he availability of equitable remedies ought to depend on the substance of the transaction in question and not upon the strict order in which the associated events occur.36

This passage suggests that, in a case like Example 5, backwards tracing may be permissible if there is proof that Grantor sold the cows to finance the purchase of the speedboat. 11.21 In the DIC case, the Privy Council held that it makes no difference to the application of the backwards tracing principle whether the account was in credit or overdraft at the relevant time.37 But there may be difficulties applying the concept to overdrafts. In the Pettyjohn case, the secured party held a security interest in the grantors’ herd of cattle (the ‘old herd’). The grantors purchased a new herd of cattle, using money withdrawn from their overdraft account to pay the seller. Subsequently, the grantors sold their old herd and paid the sale proceeds into their overdraft account. One question the court had to address was whether the new herd could be treated as proceeds of the old herd. The court conceded that the backwards tracing principle, or ‘tracing by subrogation’, as the court called it, ‘could be appropriately applied in such a situation’.38 But it went on to point out that, in order to apply the principle, the payment of funds into the account from the cattle sales would have to be matched with the debts which had been created by the new herd purchases. The grantors had made payments into the account from various sources, including, but not limited to, sales of cattle from the old herd, and they had made withdrawals for various purposes, including, but not limited to, the purchase of the new herd. Therefore, in order to apply the backwards tracing principle, the court would have had to ‘connect the payments in with the appropriate payments out, using an appropriate principle of tracing (such as the rule in Clayton’s case39)’.40 The difficulties were compounded by the fact that the grantors refused to concede that all the sale proceeds identified in the pleadings were attributable to sales of the old herd cattle and also by the fact that the bank account was not the only source of funds for the purchase of the new herd. 11.22 In the end, the court sidestepped these difficulties by articulating the following new principle: ‘where a set of chattels is replaced by another of like function in the affairs of the debtor, it shall be open to the court to find that the proceeds from the first were used to acquire the second, whatever the formalities of the transactions in question’.41 The court argued that the general law tracing rules elevated form over substance and that this approach was inappropriate in the PPSA context. It conceded that its approach ‘extended the equitable concept of tracing for

the purpose of the PPSA’, but claimed that [page 346] this was ‘an appropriate extension, in keeping with both the spirit of the PPSA and the equitable tracing remedy’.42 In substance, the series of transactions the grantors entered into amounted to a substitution of the new herd for the old one. If the grantors had simply swapped the herds, there would clearly have been a close and substantial connection between the new herd and the old one and, in the PPSA context, the actual form of the transaction should make no difference to the outcome.43 11.23 The Pettyjohn approach has some intuitive appeal in the PPSA context, given the substance over form philosophy that pervades the statute. On the other hand, it violates one of the basic principles of the law of tracing, which is the need to establish transactional links between each substitute asset in the chain between the original asset and the asset claimed as proceeds. As discussed above, the principle of backwards tracing has been criticised on this score and the argument applies with even greater force to the Pettyjohn approach. In policy terms, the concern is that the more generously the courts apply the tracing rules in favour of a secured party, the greater the potential prejudice to the grantor’s unsecured creditors.44 In the Pettyjohn case, the court conceded that ‘the tracing remedy must balance the claim of the security holder whose security has been improperly disposed of with the claims of the unsecured creditors who are interested in any residue remaining after secured interests are paid’.45 It also noted that the wider the tracing net is cast, the more difficult it may be for an unsecured creditor, at the outset of its transaction with the grantor, to anticipate the extent of the grantor’s unencumbered assets.46 But it concluded by saying that ‘where there is a close and substantial connection between the original security and its proceeds, the balance of fairness swings in favour of the prior secured creditor’.47 The trouble with this rationalisation is that it glosses over the point that the Pettyjohn approach substantially weakens the close and substantial connection requirement, and therefore it shifts the pendulum further in favour of the secured party, relative to conventional tracing principles. It is hard to see any reason in principle why a secured party should have any larger tracing rights than, say, a trust beneficiary. In both cases, the concern is to strike a balance between the claimant’s interest and the rights of the defendant’s unsecured

creditors and so outcomes in one context should match outcomes in the other. A related concern is the indeterminacy of the Pettyjohn functional equivalence test. This concern did not arise in the case itself because it was clear that the new herd was functionally equivalent to the old herd. But depending on the level of abstraction, any two objects may be functionally equivalent. In the Pettyjohn case, if the debtors had exchanged the cattle for horses, would the court still have allowed the tracing claim? [page 347] What if the exchange was for a new item of farm equipment? These kinds of questions invite litigation and threaten the stability of property rights.

Tracing into a mixed fund 11.24 Example 6. SP has a security interest in Grantor’s inventory perfected by registration. On Date 1, Grantor sells inventory to various customers and the receipts total $1000. On Date 2, Grantor deposits the money in its bank account. There is already $500 of Grantor’s own money in the account. On Date 4, Grantor goes into liquidation. There are no further movements in the account between Date 2 and Date 4.

The $1000 represents proceeds of SP’s original collateral. The funds become mixed with Grantor’s own money when Grantor deposits them in the bank account, but the general law of tracing permits a claimant to trace its entitlement into a mixed fund.48 Therefore, the $1000 in Grantor’s bank account is ‘traceable personal property’ as referred to in the PPSA s 31 definition of ‘proceeds’ and, applying subs 32(1), SP’s security interest attaches to the bank account to the extent of SP’s entitlement.49 Given that the security interest is perfected,50 SP may assert it against Grantor’s liquidator and so SP will be entitled to payment of $1000 from the account ahead of Grantor’s unsecured creditors. 11.25 Example 7. SP has a security interest in Grantor’s inventory perfected by registration. On Date 1, Grantor sells inventory to various customers and the receipts total $1000. On Date 2, Grantor opens a bank account and deposits the money. On Date 3, Grantor deposits $500 of its own funds. On Date 4, Grantor withdraws $400 leaving $1100 in the account. On Date 5, Grantor goes into liquidation. There are no further movements in the account between Date 4 and Date 5.

How much of the closing balance can SP claim as traceable proceeds of its original collateral? The answer depends on how Grantor’s Date 4 withdrawal is accounted for. One possible approach would be to apply the rule in Clayton’s case.51 On this basis, the Date 4 withdrawal would be debited against the Date 2 deposit, with the result that SP’s claim against the closing balance is limited to $600. However, by analogy to the rule in Re Hallett’s Estate; Knatchbull v Hallett,52 the courts are more likely to apply a presumption of rightful withdrawal and to treat Grantor as having intended to make the Date 4 withdrawal against its own funds.53 On this basis, Grantor’s Date 4 withdrawal will be debited against its own $500 in the account, leaving SP’s [page 348] contribution intact. Accordingly, SP’s security interest will attach to $1000 of the account’s closing balance. 11.26 Example 8. SP has a security interest in Grantor’s inventory perfected by registration. On Date 1, Grantor sells inventory to various customers and the receipts total $1000. On Date 2, Grantor opens a bank account and deposits the money. On Date 3, Grantor deposits $500, representing proceeds of collateral belonging to another secured party (SP*). On Date 4, Grantor withdraws $400 leaving $1100 in the account. On Date 5, Grantor goes into liquidation. There are no further movements in the account between Date 4 and Date 5.

What are SP’s and SP*’s respective rights to the $1100 still in the account? The presumption of rightful withdrawal has no application in this scenario because it presupposes that Grantor is one of the contributors to the account. If the rule in Clayton’s case applied, the $400 withdrawal would be debited against SP’s money so that SP and SP* share the $1100 closing account balance in the proportions 600:500. But this is an arbitrary outcome because it depends entirely on the timing of the deposits. If the deposit of SP*’s $500 had preceded the deposit of SP’s $1000, then under the rule in Clayton’s case SP and SP* would share the $1100 account balance in the proportions 1000:100; in other words, in the one case, SP bears the whole loss and in the other case SP* bears the whole loss. To avoid arbitrary outcomes, the courts are likely to adopt a pro rata sharing rule in place of the rule in Clayton’s case. On this basis, SP and SP* would share the $1100 closing balance in the proportions 2:1.54 11.27

Example 9. SP has a security interest in Grantor’s inventory perfected by registration. On Date 1, Grantor sells inventory to various customers and the receipts total $1000. On Date 2, Grantor deposits the money in its bank account. There is already $500 of Grantor’s own money in the account. On Date 3, Grantor withdraws $400. On Date 4, Grantor withdraws another $200, leaving $900 in the account. On Date 5, Grantor deposits $800 of its own money taking the account balance up to $1700. On Date 6, Grantor goes into liquidation. There are no further movements in the account between Date 5 and Date 6.

Example 9 concerns the application of the ‘lowest intermediate balance rule’, which states that ‘a claimant to a mixed fund cannot assert a proprietary interest in that fund in excess of the smallest balance in the fund during the interval between the original contribution and the time when a claim with respect to that contribution is being made against the fund’.55 Applying [page 349] this rule to Example 9, SP’s claim is limited to $900, which was the lowest intermediate balance between Date 2, when Grantor deposited the inventory sale proceeds, and Date 6. 11.28 The lowest intermediate balance rule derives from James Roscoe (Bolton) Ltd v Winder.56 In the LSUC case, Blair JA described the rationale for the rule as follows:57 … [the] concept is grounded, ultimately, on the premise that tracing rights are predicated upon the model of property rights. The [lowest intermediate balance rule] seeks to recognise that, at some point in time, because of earlier misappropriations, an earlier beneficiary’s money has unquestionably left the fund and therefore cannot physically still be in the fund. Accordingly, it cannot be ‘traced’ to any subsequent versions of the fund that have been swollen by the contributions of others, beyond the lowest intermediate balance in the fund.58

Assume that Grantor had not made the $800 deposit on Date 5, but instead had left the cash in a drawer at home. Just as in Example 4, above, SP has no claim to the speedboat so, in the case under consideration, SP would have no claim to the $800 cash in the drawer and there is no reason why SP should suddenly acquire a claim to the money just because Grantor deposits it in the bank account.59 11.29 Changing the facts of Example 9 slightly, assume now that the $800 Date 6 deposit is not Grantor’s money, but the proceeds of collateral belonging to SP*. In principle, the analysis should be the same as for Example 9. If Grantor had not deposited the $800 into the account, SP would have had no claim to it and it is hard to see how SP could acquire a claim simply by virtue of the deposit. SP*’s

claim should be subject to the same limitation. For example, assume that, following the deposit of SP*’s $800, Grantor withdraws $1500, reducing the account balance to $200 and then deposits $2000 of its own money so that the closing balance is $2200. Applying the lowest intermediate balance rule, SP and SP*’s claims are limited to $200 to be shared pro rata between them and the remaining $2000 goes to Grantor’s liquidator.60 11.30 Example 10. SP holds a security interest in Grantor’s cows, perfected by registration. On Date 1, Grantor sells the cows to Buyer for $1000 without SP’s consent. On Date 2, Grantor deposits the $1000 in his bank account. There is already $500 of Grantor’s own money in the account. On Date 3, Grantor withdraws $400, leaving $1100 in the account and uses the money to buy a painting. On Date 4, Grantor withdraws the remaining $1100 and spends it on a weekend holiday. On Date 5, Grantor goes into bankruptcy.

[page 350] Example 10 is different from the previous cases. Here Grantor is guilty of wrongdoing because they had no right to sell the cows without SP’s authority. The general law tracing principles are more generous to the plaintiff where the defendant is guilty of wrongdoing. If the defendant is innocent, the plaintiff may trace their claim into the remaining bank balance, but they have no claim to the funds the defendant withdraws or, by extension, to any asset the defendant acquires with the funds. By contrast, where the defendant is guilty of wrongdoing, the plaintiff has both options and can choose whichever is the most advantageous to them. Applying this principle to Example 10, the painting is traceable proceeds of the cows and so SP’s security interest attaches to the painting.61

ATTACHMENT OF SECURITY INTEREST TO PROCEEDS Introduction 11.31 PPSA subs 32(1) provides that if collateral gives rise to proceeds, the security interest (a) continues in the collateral unless the secured party expressly or impliedly authorised the disposal that gave rise to the proceeds; and (b) attaches to the proceeds unless the security agreement provides otherwise. Paragraph 32(1)(a) deals with the secured party’s right to follow the original collateral into the hands of

a third-party transferee. Paragraph (b) deals with the secured party’s right to trace the collateral proceeds in the grantor’s hands. Example 11. SP holds a security interest in Grantor’s inventory. On Date 1, Grantor sells an item of inventory to Customer, in the ordinary course of business, for $1000 payable on 90-day terms. On Date 2, Customer pays Grantor by cheque which Grantor deposits in its bank account. There is already $500 of Grantor’s own money in the account. On Date 3, Grantor goes into liquidation. There are no further movements in the account between Date 2 and Date 3.

Applying para 32(1)(a), SP’s security interest does not continue in the inventory Grantor sold to Customer because the sale was in the ordinary course of business and SP will have expressly or impliedly authorised the dealing.62 This must be the case because, if Grantor cannot continue to make sales, its business will grind to a halt and that would be in neither party’s interests: see 1.33 of this text. On the other hand, applying para 32(1)(b), SP’s security interest attaches to Grantor’s Date 2 deposit as proceeds of the sale on the basis that the funds remain traceable even though they have become [page 351] mixed with Grantor’s own funds in the bank account: see 11.24–11.30 above. SP’s security interest in the deposit is perfected pursuant to PPSA para 33(1)(c): see 11.43 below. The result is that SP has a claim for the $1000 in the bank account which will have priority over the unsecured creditors in Grantor’s liquidation. 11.32 Paragraph 32(1)(b) gives the secured party an automatic proceeds claim and it avoids the need for an express proceeds clause in the security agreement. PPSA subs 20(6) reinforces this point by making it clear that, while the security agreement must contain a description of the original collateral, it does not also have to describe the proceeds. The parties may exclude or limit the secured party’s right to claim proceeds. Credit Suisse Canada v 1133 Yonge Street Holdings,63 discussed in 4.47–4.55 of this text, is a case in point. There the secured party held a security interest in the debtor’s existing and future accounts. The security agreement provided that, until notified to the contrary in writing, the debtor ‘shall be entitled to’ the accounts. The court interpreted this provision as permitting the debtor to collect the accounts and spend the proceeds until notified to the contrary. In effect, the secured party had contracted out of its proceeds claim pending notice to the debtor.64 Paragraph 32(1)(b) also makes it unnecessary for the secured party to establish a fiduciary relationship with the grantor in order to make a proceeds claim.

Subsection 31(2) confirms this point by providing that proceeds are traceable whether or not there is a fiduciary relationship between the secured party and the grantor or anyone else. 11.33 Assume that, in Example 11, SP’s security interest is in all Grantor’s present and after-acquired personal property, while all other facts remain the same. Here para 32(1)(b) does not apply. SP’s security interest extends to the money in Grantor’s bank account as original collateral, not proceeds. In other words, SP has a claim on the account balance as security for the amount of Grantor’s outstanding obligations under the security agreement without having to prove that the money in the bank, or any part of it, is traceable to other assets Grantor may have disposed of.

The Secured Party’s Cumulative Entitlements 11.34 Example 12. SP holds a security interest in Grantor’s cows, perfected by registration. The security interest secures a $5000 payment obligation owing by Grantor. On Date 1, Grantor sells the cows to Buyer without SP’s consent. The market value of the cows is $2700, but Grantor and Buyer agree on a price of $1000. On Date 2, Grantor deposits the $1000 in their bank account. There is already $500 of Grantor’s own money in the account. On Date 3, SP learns about the sale and takes steps to enforce its security interest. There are no movements in Grantor’s account between Date 2 and Date 3.

[page 352] Under pre-PPSA law, in the absence of any applicable exception to the rule nemo dat quod non habet, SP could have recovered the cows from Buyer. Alternatively, SP could have adopted the Date 2 sale and treated its security interest as attaching to the $1000 sale proceeds. But it could not have claimed both the cows and the sale proceeds because the remedies are inconsistent. SP’s claim to the proceeds rested on its implied adoption of the Date 2 sale and SP ‘cannot have [its] cake and eat it’.65 By contrast, SP’s statutory rights under PPSA subs 32(1) are cumulative. The purpose is to protect SP from deterioration in the value of its collateral that occurs after, and perhaps as a consequence of, the dealing.66 However, subs 32(2) limits SP’s cumulative entitlement to the market value of the collateral immediately before the collateral gave rise to the proceeds. Applying this provision to the facts of Example 12, SP may enforce its security interest against both the cows and the bank deposit, but for no more than $2700, which was the value of the cows on Date 2. The purpose of this limitation is to avoid a windfall to SP as a result of the Date 2

sale: if there were no restrictions on SP’s cumulative claims, its collateral value would be $3700 (representing the $2700 value of the cows and the $1000 bank deposit), whereas if Grantor had not sold the cows in the first place, SP’s collateral value would have been $2700, or perhaps less if the value of the cows had depreciated since Date 2. There is no reason in principle why SP should profit as a result of Grantor’s actions.67 PPSA subs 32(3) provides that the subs 32(2) limitation does not apply if, at the time of the transfer, the transferee has actual or constructive knowledge that the transfer was in breach of the security agreement. Having regard to the policy underlying subs 32(2), this provision makes no sense. The point of subs 32(2) is to avoid a windfall to SP, and the transferee’s state of knowledge has nothing to do with this concern. Most of the other PPSAs include a provision along the lines of Australian PPSA subs 32(2), but not subs (3).68 11.35 PPSA subs 32(4) provides that subs (2) does not affect any right the secured party may have to recover the amount secured without enforcing its security interest. Example 13. SP holds a security interest in Grantor’s cows, perfected by registration. The security interest secures a $5000 payment obligation owing by Grantor. On Date 1, Grantor sells the cows to Buyer without SP’s consent. The value of the cows is $2700, but Grantor and Buyer agree on a price of $1000. On Date 2, Grantor pays the $1000 to SP in reduction of its

[page 353] indebtedness. On Date 3, SP learns about the sale and takes steps to enforce its security interest.

If the limitation in subs 32(2) applied, SP could enforce its security interest in the cows but only up to an amount of $1700, representing the difference between the $2700 value of the cows on Date 1 and the $1000 sale proceeds which Grantor paid SP on Date 2. But subs 32(2) only applies if the secured party ‘enforces’ its security interest against both collateral and proceeds and, in Example 13, while it is true that SP received the $1000 sale proceeds, Grantor paid the money voluntarily and not in response to any enforcement action on SP’s part. Therefore, SP can claim the full $2700 value of the cows. PPSA subs 32(4) puts the correctness of this conclusion beyond doubt. The rationale for the provision is to facilitate SP’s risk assessment. During the life of Grantor’s loan, SP may need to make decisions from time to time about how the account should be handled. To make informed decisions, SP must be able to ascertain the value of its collateral at any given point and, in a case like Example 13, SP has no ready means of discovering that Grantor’s

$1000 payment on Date 2 was collateral proceeds.

Proprietary and Personal Claims 11.36 Where collateral gives rise to proceeds, PPSA s 32 gives the secured party a proprietary claim for recovery of the original collateral and also its proceeds. But the secured party may choose instead to bring a personal claim against a third party who has dealt with the collateral or its proceeds. The availability of a personal claim may be important if the collateral is lost or destroyed, or has depreciated in value.69 Example 14. SP holds a security interest in Grantor’s cows, perfected by registration. The security interest secures a $5,000 payment obligation owing by Grantor. On Date 1, Grantor sells the cows to Buyer without SP’s consent. The value of the cows is $2700, but Grantor and Buyer agree on a price of $1000, which Grantor spends on a week of riotous living. On Date 2, the cows become ill and Buyer has them put down. On Date 3, Grantor goes into bankruptcy.

In this case, SP cannot assert its PPSA s 32 tracing rights against Grantor because Grantor has squandered the proceeds and is now bankrupt. Nor can SP reclaim the cows from Buyer. But SP still has the option of suing Buyer in tort for conversion. The action lies because Buyer has interfered with SP’s collateral in a manner that is inconsistent with SP’s rights.70 11.37 Example 15. SP1 holds a security interest in Grantor’s present and after-acquired accounts to secure a line of credit in Grantor’s favour. At all relevant times, the amount outstanding on the line of credit is $5000. SP1’s security interest is perfected by registration on Date 1. On Date 2, without SP1’s

[page 354] knowledge or consent, Grantor transfers a block of accounts to SP2 who registers a financing statement. The total face value of the accounts is $1000 and SP2 pays Grantor $900, which Grantor uses to pay its wages bill. On Date 3, SP2 collects the full $1000 owing on the transferred accounts and banks the money. The funds remain traceable in SP2’s bank account. On Date 4, SP1 learns of the transfer to SP2 and it claims the $1000 in SP2’s bank account as proceeds of its original collateral.

SP1 and SP2 hold competing security interests in the transferred accounts and their proceeds.71 SP1 has priority over SP2 because it was the first to register: PPSA subss 55(4) and (5). However, SP1 cannot claim the $1000 in SP2’s bank account as proceeds. The funds are not proceeds because Grantor does not have an interest in them: PPSA subs 31(3), discussed in 11.13–11.15 above.72 On the other hand, as Example 14 indicates, the secured party has not only a proprietary claim to the

collateral, but also a personal right of action against a party who wrongly interferes with its property interest.73 The stumbling block in Example 15 is that, traditionally, the tort of conversion has been confined to tangible property and the action does not lie in respect of accounts and other intangibles.74 However, critics argue that the limitation reflects outmoded notions of property and that it creates artificial distinctions between property types.75 If these views prevailed, SP1’s rights in Example 15 would be similar to SP’s rights in Example 14. Given SP1’s priority position, SP2 acted wrongfully and contrary to SP1’s proprietary rights when it collected the accounts and kept the payments for itself; SP1 would have an action in conversion against SP2 for the loss it has suffered as a result of SP2’s treating the accounts and their proceeds as if it had a higher ranking claim to them. 11.38 Assume that, in Example 15, Grantor uses the $900 it receives from SP2 to purchase new factory equipment, rather than in payment of its wages bill. If the above analysis is correct, SP1 should be able to claim the factory equipment as proceeds of its original collateral and also maintain its personal action against SP2. The limitation in PPSA subs 32(2) does not apply because SP1’s action against SP2 is a personal claim and it does not involve enforcement of its security interest.76 [page 355]

PERFECTION AND PRIORITIES Introduction 11.39 PPSA s 33 sets out rules for the perfection of a security interest in proceeds. As a general rule, the collateral description in the financing statement must include a description of the proceeds, otherwise a searcher may not realise that the secured party’s claim extends beyond the original collateral to the proceeds in question. Paragraphs 33(1)(a)–(c) provide for three automatic methods of perfection, while subs 33(2) enacts a non-automatic method.77 Paragraph 33(1)(a) provides that if the original financing statement describes the proceeds in question, the financing statement as it stands perfects the security interest in the proceeds and the secured party does not need to do anything further. Item 4 in the Table appended to PPSA subs 153(1) provides that any description of proceeds must comply with the Regulations. The Regulations prescribe three ways of describing proceeds: (1) as all present and after-acquired personal property; (2) by item; or (3)

by class.78 The register has been designed to make Item (1) the default option. If the secured party wants to claim proceeds, it must indicate its intention during the registration process by clicking the ‘proceeds’ option. At that point, the system will automatically populate the ‘description of proceeds’ field with ‘all present and afteracquired property’. The secured party is free to replace this text with something else, but in most cases it will probably not do so. 11.40 This measure benefits the secured party by substantially simplifying the process of perfecting a security interest in proceeds. On the other hand, it diminishes the information given to searchers and it raises the question whether there is any point in having a perfection requirement for proceeds claims at all. Specifically, a register search will not reveal to the searcher whether any particular asset is, or may be, subject to a proceeds claim by a prior-ranking secured party. Consequently, in any subsequent dealings with the grantor, the searcher must factor in the risk that its entitlement to the asset in question may be subject to an undiscoverable proceeds claim. In terms of outcomes, the Australian approach resembles the Ontario PPSA, which provides that a security interest in proceeds is automatically perfected if the security interest in the original collateral was perfected by registration when the proceeds were generated.79 This feature of the Australian registration system makes the balance of PPSA s 33 largely redundant.80 The Statutory Review has recommended repealing s 33 and providing instead that a security interest [page 356] over collateral perfected by registration is automatically perfected with regard to any proceeds.81 This proposal, if adopted, would formalise the arrangement already in place and it would assimilate the Australian approach with Ontario. The Ontario approach is open to the criticism that it unduly favours registering parties over searchers or, in other words, that it compromises the integrity of the register. The proposed new Australian provision is subject to the same criticism. For the sake of completeness, a short account of s 33 follows.

Other Methods of Perfection 11.41

Example 16. Grantor is a dealer in appliances. SP supplies refrigerators to Grantor on conditional sale terms and registers a financing statement which describes the collateral as ‘commercial property – other goods’, and the proceeds as ‘intangible property — accounts’. Grantor sells a refrigerator to Customer on 12 months interest-free credit terms.

In Example 16, SP has discarded the default option of describing the proceeds as ‘all present and after-acquired property’ in favour of a description by class, namely ‘intangible property — accounts’. Customer’s account fits the description and so SP holds a perfected security interest in Customer’s account without the need for any further action on its part. 11.42 Paragraph 33(1)(b) provides that if the proceeds are property of the same kind as the original collateral, and the financing statement correctly describes the collateral, the secured party’s original registration perfects its security interest in the proceeds. Example 17. Grantor is a dealer in office equipment. SP takes a security interest in Grantor’s inventory and registers a financing statement which describes the collateral as ‘commercial property — other goods’. The financing statement makes no reference to proceeds. Grantor sells a photocopier to Customer and takes Customer’s old photocopier as a trade-in.

SP’s security interest extends to Customer’s trade-in as proceeds of the original collateral. The trade-in matches the collateral description in SP’s financing statement, ‘commercial property — other goods’, and so SP needs to do nothing further to perfect its security interest in the trade-in. 11.43 Paragraph 33(1)(c) provides that if the proceeds consist of currency, cheques, a deposit to an ADI account or an insurance payment, SP is automatically perfected, without reference to the wording of its collateral description. The policy justification for this rule is that a party who acquires an interest in these types of assets ought to realise that they may be proceeds of original collateral described in the financing statement.82 Assume that, in Example 17, SP’s security interest is in all Grantor’s present and after-acquired personal property and the financing statement describes the collateral [page 357] accordingly. In this case, the trade-in is part of SP’s original collateral. Therefore, its security interest is perfected under PPSA s 21, and s 33 does not apply. 11.44 If none of the subs 33(1) rules apply, SP may rely instead on the

temporary perfection rule in subs 33(2). This provides that if a security interest is perfected in original collateral but not proceeds, the security interest is temporarily perfected in the proceeds for a period of five business days from the date the security interest attaches to the proceeds. The purpose is to give the secured party time to amend its registration by adding a collateral description to cover the proceeds in question. Example 18. Grantor is a dealer in appliances. On Date 1, SP takes a security interest in Grantor’s inventory and registers a financing statement which describes the collateral as ‘commercial property — other goods’. The financing statement makes no reference to proceeds. On Date 2, Grantor sells a refrigerator to Customer on 12 months interest-free credit terms.

SP’s security interest extends to Customer’s account as proceeds of the refrigerator. None of the automatic perfection rules in subs 33(1) applies here. However, SP’s security interest in the account is temporarily perfected for five business days from Date 2. Assume SP amends its collateral description on Date 3, which is within the five-day grace period. SP’s security interest in the account is continuously perfected from Date 2; it is temporarily perfected from Date 2 to Date 3; and it is perfected by registration thereafter: PPSA s 56, discussed in 7.11–7.12. Assume Grantor goes into liquidation on Date 4. SP holds a perfected security interest in the account which it may assert against Grantor’s liquidator.83 11.45 Assume now that, on Date 3, Grantor transfers Customer’s account to SP*. SP amends its collateral description on Date 4, within the subs 33(2) grace period. SP’s security interest in the account is temporarily perfected from Date 2 until Date 4, when it becomes perfected by registration. Given that the security interest is temporarily perfected on Date 3, when Grantor transfers the account to SP*, the question arises as to whether SP* can claim the protection of s 52: see 10.68 of this text. The answer lies in para 42(b), which provides that s 52, along with the other provisions of Pt 2.5, do not apply to the acquisition of an interest that is itself a security interest: see 10.6 above. It is true that the transaction between Grantor and SP* is an outright transfer, but according to para 12(3)(a), the interest of an account transferee is a security interest for the purposes of the Act: see 3.24–3.30 of this text. The result is that s 52 does not [page 358] apply to determine the priorities between SP and SP* and the default priority rules

in PPSA s 55 apply instead: see further, 11.46 below.

Priorities 11.46 PPSA subs 32(5) provides that the time of registration, possession or perfection of a security interest in original collateral is also the time of registration, possession or perfection of the proceeds.84 Assume that, in Example 18, SP amends its collateral description on Date 3, which is within the five-day grace period. On Date 4, Grantor gives SP* a security interest in Customer’s account and SP* registers a financing statement. Assuming SP’s security interest is not a purchase money security interest (PMSI), the priority dispute between SP and SP* will be governed by PPSA subss 55(4) and (5). Applying subs 32(5), SP’s priority time in relation to Customer’s account is Date 1, the date of its original registration. SP*’s priority time is Date 4 and so SP has priority over SP*.85 Changing the facts slightly, assume now that Grantor gives SP* a security interest in Customer’s account on Date 3, less than five business days after Date 2, and SP amends its collateral description on Date 4, more than five business days after Date 2. In this case, SP is perfected by registration from Date 1 to Date 2, temporarily perfected for five business days from Date 2, unperfected from the end of that period until Date 4 and perfected by registration thereafter. PPSA subs 55(6) provides that a time is a priority time for a security interest only if the security interest remains continuously perfected: see 7.11–7.12. Therefore, given the break in SP’s perfection, its priority time is Date 4 and SP* has priority, even though SP’s security interest was temporarily perfected in relation to the account on Date 3, when SP* appeared on the scene. 11.47 The PMSI priority rules in PPSA s 62 extend to proceeds. Example 19. SP1 holds a security interest in all Grantor’s present and after-acquired personal property perfected by registration on Date 1. On Date 2, SP2 sells and delivers a printing press to Grantor. The sale is on reservation of title terms. SP2 registers a financing statement on Date 2. The financing statement describes the collateral as commercial property — other goods, and it discloses that SP2’s security interest is a PMSI. On Date 3, Grantor transfers the printing press to Transferee in exchange for a photocopying machine.

SP1 has a claim to the photocopying machine as original collateral. SP2’s security interest in the printing press extends to the photocopying machine as proceeds: see 11.8–11.9 above. SP2’s security interest in the photocopying machine is perfected by virtue of para 33(1)(b): see Example 17 above. SP2 has complied with the subs 62(3) registration requirements and so it has priority over SP1 with

respect to the photocopying machine. [page 359] 11.48 PPSA s 64 enacts a special priority rule for competing claims between a non-PMSI in an account as original collateral and a PMSI in an account as proceeds. This provision is discussed in 8.43–8.45 of this text. 11.49 PPSA subs 57(1) provides that a security interest perfected by control has priority over a competing security interest that is perfected by some other means: see 7.21–7.22 of this text. PPSA subs 57(2A) purportedly extends the super-priority for security interests perfected by control to proceeds claims.86 According to the Explanatory Memorandum, the effect of the provision is that ‘a security interest in the proceeds of original collateral that was perfected by control when the collateral gave rise to the proceeds [has] priority over any other security interest in the proceeds except a security interest in the proceeds as original collateral perfected by control’.87 Example 20. On Date 1, SP1 takes a security interest in Grantor’s shares and registers a financing statement. On Date 2, SP2 takes a competing security interest in the same collateral and acquires control by entering into a control agreement. On Date 3, Grantor sells the shares and pays the sale proceeds into his bank account. There are no other funds in the account and no further movements in the account. Grantor defaults against SP1 and SP2 and they both claim the bank deposit.

According to the Explanatory Memorandum’s account of subs 57(2A), SP2 has priority because its security interest was perfected by control. However, the provision as drafted appears to produce the opposite result. It provides, in effect, that SP1 has priority over SP2 if: (1) SP2 was perfected by control when the collateral gave rise to the proceeds; and (2) SP1 was not perfected by control. This is clearly a drafting slip and the courts may be prepared to correct it. 11.50 On either reading, subs 57(2A) only applies where the competition is between a security interest perfected by control and a security interest perfected by some other method. If both security interests are perfected by control, the s 55 default priority rules, read in conjunction with subs 32(5), apply. Subsection 57(2A) is also inapplicable where the competition is between a secured party claiming the collateral as proceeds and another secured party claiming the collateral as original collateral. Example 21. SP supplies Grantor with inventory on conditional sale terms and registers a financing

statement which perfects Grantor’s security interest in both the inventory and its proceeds. Grantor holds a deposit account with Bank. Bank makes a loan to Grantor and takes a security interest in the deposit account to secure repayment. Grantor sells inventory and deposits the sale proceeds in the deposit account. There are no other funds in the account and

[page 360] no subsequent movements in the account. Grantor defaults against SP and Bank and they both claim the funds in the deposit account.

SP claims the bank deposit as proceeds of the inventory, Bank claims the deposit as original collateral and so the priority rule in subs 57(2A) does not apply. The governing rule is in s 75, which provides that a perfected security interest held by an ADI in an ADI account with the ADI has priority over any other perfected security interest in the ADI account. On this basis, in Example 21, Bank has priority over SP. The same result follows under Art 9 s 9-327(3). As the Official Comment explains, SP can reduce the risk by requiring Grantor to deposit the inventory sale proceeds into a segregated account. But if Grantor breaches the agreement and pays the proceeds into the disputed account, SP will lose to Bank.88 11.51 Example 22. SP supplies Grantor with inventory on conditional sale terms and registers a financing statement which perfects Grantor’s security interest in both the inventory and its proceeds. Grantor holds a deposit account with Bank. Bank makes a loan to Grantor and takes a security interest in the deposit account to secure repayment. Grantor sells inventory and deposits the sale proceeds in the deposit account. There are no other funds in the account. Grantor later makes a withdrawal from the account and uses the money to purchase new inventory. Grantor defaults against SP and Bank and they both claim the new inventory.

Under Art 9, Bank’s priority extends to the withdrawal as proceeds of the deposit, but not to the new inventory purchased with the withdrawal.89 There is no corresponding limitation in the Australian PPSA. In Example 22, PPSA subs 57(2A) is the governing provision and the result appears to be that Bank has priority over SP with respect to the new inventory. It follows that the risk to inventory suppliers flowing from the super-priority rule in favour of banks is greater than in the United States.90

1. 2.

See Lionel D Smith, The Law of Tracing, Clarendon Press, Oxford, 1997, ch 1. Gerard McCormack, Secured Credit Under English and American Law, Cambridge University Press, Cambridge, 2004, p 182.

3.

4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

21. 22. 23. 24.

25. 26.

27. 28. 29. 30. 31. 32.

33.

Corporations Act 2001 (Cth) ss 280–281. The Corporations Act also required registration of a charge on a negotiable instrument (para 262(1)(j)) and so, if the resale proceeds took the form of cheques, the same issues would arise. Louise Gullifer (ed), Goode on Legal Problems of Credit and Security, 5th ed, Sweet & Maxwell, London, 2013, para 1-34. See above note 2, at p 185. See above note 2, at p 185. See above note 2, at p 185. (2000) 202 CLR 588. See above note 8, at [35]. See above note 8, at [40]. See above note 8, at [47]. See above note 8, at [47]. See above note 8, at [51]. See above note 8, at [92]. See above note 8, at [95]. Compare New Zealand PPSA s 16(1), ‘proceeds’ and, for example, Saskatchewan PPSA s 2(1)(hh). PPSA s 10, ‘account’: see 2.29–2.33 of this text. PPSA s 10, ‘negotiable instrument’: see 2.22 of this text. Ronald C C Cuming, Catherine Walsh and Roderick J Wood, Personal Property Security Law, 2nd ed, Irwin Law, Toronto, 2012, p 565. Or, alternatively, the power to transfer rights in the proceeds to the secured party: subpara 31(3)(a)(ii). Query the need for subpara 31(3)(a)(ii), having regard to the rationale for the grantor’s interest limitation discussed in the text. Subsection 31(3) also provides that personal property is proceeds only if the grantor’s interest in the proceeds does not arise because of the operation of para 140(2)(f). As the note to subs 31(3) explains, para 140(2)(f) provides for the distribution of an amount or proceeds to the grantor upon the enforcement of a security interest: see Chapter 12 of this text. New Zealand PPSA s 16(1), ‘proceeds’; and see, for example, Saskatchewan PPSA s 2(1)(hh). Example 3 is adapted from Cuming, Walsh and Wood, see above note 19, at p 563. See above note 19, at pp 563–4. The buyer in ordinary course provision in PPSA s 46 does not apply because, although the sale to Buyer 2 is in the ordinary course of Buyer 1’s business, SP’s security interest was not ‘given by the seller’ (Buyer 1): see 10.23–10.27. For example, Saskatchewan PPSA s 2(1)(m). The Statutory Review has recommended amending s 31 to clarify this point: Bruce Whittaker, Review of the Personal Property Securities Act 2009 (Commonwealth of Australia, 2015), para 7.4.1.1 (‘Statutory Review: Final Report’). See above note 19, at p 567. PPSA s 10, ‘ADI account’: see 2.34–2.36 of this text. (1991) 79 DLR (4th) 22 (SKCA). See above note 29, at 39. See further, above note 1, at ch 1. (1993) 107 DLR (4th) 129 (SKCA). Outside the PPSA context, see, for example, Bishopsgate Investment Management Ltd v Homan [1995] Ch 211; Re Goldcorp [1995] 1 AC 74 (PC). In the Flexi-Coil case, SP claimed in the alternative that it was entitled to follow the cheques into the credit union’s hands and, further, that it was entitled to the money the credit union collected when the cheques were processed. The court rejected both claims on the ground that the credit union had purchased them for value and so it obtained clear title: Saskatchewan PPSA s 31 (compare Australian PPSA s 70: see Chapter 10). For a fuller account of the case, see Anthony Duggan, ‘The PPSA and the Common Law’ (2005) 11 New Zealand Business Law Quarterly 122 at 129–31. See Matthew Conaglen, ‘Difficulties with Tracing Backwards’ (2011) 127 Law Quarterly Review 432 at

34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.

56. 57. 58. 59. 60. 61.

62. 63. 64. 65. 66. 67. 68.

446–50. See above note 1, at p 146. [2015] UKPC 35 (DIC case). See above note 35, at [38]. See above note 35, at [39]. See above note 29, at 41. Devaynes v Noble; Clayton’s Case (1816) 1 Mer 572; 35 ER 781. See above note 29, at 41–2 See above note 29, at 39. See above note 29, at 42. See above note 29, at 42. See above note 33, at pp 450–4. See above note 29, at 44. See above note 29, at 44–5. See above note 29, at 45. See above note 1, at pp 162–74 and 208–12. See also BMP Global Distribution Inc v Bank of Nova Scotia [2009] 1 SCR 504 at [75]–[89] and cases there cited. See above note 19, at pp 568–9. See 11.39–11.45, on the perfection of a security interest in proceeds. Devaynes v Noble; Clayton’s Case (1816) 1 Mer 572; 35 ER 781. (1880) 13 ChD 696 (CA). See above note 1, at pp 209–10. See above note 1, at pp 203–4, citing Ontario (Securities Commission) v Greymac Credit Corporation (1986) 55 OR (2d) 673, 30 DLR (4th) 1 (ONCA), affirmed [1988] 2 SCR 172. Law Society of Upper Canada v Toronto-Dominion Bank (1998) 169 DLR (4th) 353 (ONCA) (LSUC case) at [14] per Blair JA. See also the DIC case, above note 35, at [17]–[20]. See generally above note 1, at pp 203–5. [1915] 1 Ch 62. See above note 55, at [17]. For a similar statement, see the DIC case, above note 35, at [17]. Lionel Smith, ‘Tracing in Bank Accounts: The Lowest Intermediate Balance Rule on Trial’ (2000) 33 Canadian Business Law Journal 75 at 79–81. See above note 1, at p 204. See above note 1, at pp 194–9, 209–11. For a contrary view, see Ronald C C Cuming, ‘Protecting Interests in Proceeds: Equity and the Canadian Personal Property Security Acts’ in Donovan Waters (ed), Equity, Fiduciaries and Trusts, Carswell, Toronto, 1993, ch 18, arguing that wrongdoing by the grantor should not make any difference. Compare above note 19, at pp 573–6, arguing that whatever approach is taken, it should be the same for both the conventional and the PPSA tracing rules. Unless the sale breaches a restriction imposed by the security agreement on Grantor’s right to make sales in the ordinary course of business; however, the facts of Example 9 do not indicate that this is the case. (1998) 41 OR (3d) 632 (ONCA). See above note 19, at p 558. See above note 4, at para 1–66. See above note 19, at pp 560–2. See above note 19, at p 461. See, for example, Saskatchewan PPSA s 28(1); New Zealand PPSA s 45(2). There is no corresponding provision in the Ontario PPSA, but in Bank of Nova Scotia v IPS Invoice Payment System Corporations (2010) 101 OR (3d) 352 (ONSC), the court read in the relevant limitation. The Statutory Review has recommended a number of drafting improvements to s 32, including the deletion of subs 32(3): Statutory Review: Final Report, paras 7.4.3 and 7.4.4.

69. 70. 71. 72.

73. 74. 75.

76. 77. 78. 79. 80.

81. 82. 83.

84. 85. 86. 87. 88. 89.

90.

See above note 19, at pp 684–5. See above note 19, at pp 685–6. SP2 holds a deemed security interest in the transferred accounts and their proceeds by virtue of PPSA para 12(3)(a): see 3.24–3.30 of this text. This point was overlooked in Bank of Nova Scotia v IPS Invoice Payment System Corporations (2010) 101 OR (3d) 352, on which Example 15 is loosely based: see Roderick J Wood, ‘Accounts, Proceeds and Conversion: Bank of Nova Scotia v IPS Invoice Payment System Corporations’ (2011) 26 Banking and Finance Law Review 359 at 365–7. The following analysis draws on Wood’s critique of the IPS Invoice case: see above note 72, at pp 367–9. OBG v Allan [2008] 1 AC 1 (HL). See, for example, Sarah Green and John Randall, The Tort of Conversion, Hart Publishing, Oxford, 2009, at pp 128–39; above note 72 at pp 369–70; Martin Davies, ‘Conversion of Intangible Goods: Some Modern Approaches’ (2014) 88 Australian Law Journal 235. See above note 72, at pp 369–70. Compare New Zealand PPSA ss 46 and 47 and, for example, Saskatchewan PPSA s 28(2) and (3). Personal Property Securities Regulations 2010 (Cth) reg 5.5 Sch 1 cl 2.4. Ontario PPSA s 25(2). But a secured party cannot rely on the default proceeds collateral description if the proceeds consist of serial-numbered goods (for example, a motor vehicle trade-in) because, in such cases, the proceeds collateral description should include the serial number: see 6.35–6.37 of this text. Statutory Review: Final Report, para 7.4.6.1. See above note 19, at p 581. Subject to Corporations Act 2001 (Cth), s 588FL: see Chapter 13 of this text. Again subject to Corporations Act s 588FL, SP may still be protected if it amends its financing statement after the five-day period but before the commencement of the liquidation proceedings. In that case, SP will have been temporarily perfected during the five days, unperfected from the end of the five days to the date of its financing change statement and perfected again thereafter. Compare New Zealand PPSA s 68 and, for example, Saskatchewan PPSA s 35(3). If SP’s security interest is a PMSI, PPSA s 64 applies; SP will have priority over SP* unless SP* complied with the s 64 conditions for super-priority: see 8.43–8.45. See Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property Securities (Corporations and Other Amendments) Bill 2010, para 9.80. See above note 86, at para 9.80. Uniform Commercial Code — Secured Transactions, Official Comment on s 9–327. Section 9–322(c): priority extends to second and subsequent generation proceeds only if all the intervening proceeds are cash proceeds, proceeds of the same type as the original collateral or an account relating to the collateral. The Statutory Review argues that subs 57(2A) is unduly generous to the secured party perfected by control and recommends repealing the provision: Statutory Review: Final Report, para 7.7.4.3.

[page 361]

Chapter 12 Enforcement of Security Interests INTRODUCTION 12.1 Personal Property Securities Act 2009 (Cth) (PPSA) Ch 4 governs the secured party’s rights and remedies against the grantor following default in performance of the secured obligation.1 As indicated in Chapter 1 of this text, all creditors, whether secured or unsecured, have a personal right of action against a defaulting debtor for recovery of the amount owing. But a secured creditor also has a proprietary remedy which allows it to take the collateral in full or partial satisfaction of the secured obligation. 12.2 Pre-PPSA, a secured party’s enforcement rights could be different, depending on the form of the security agreement.2 For example, in the case of a chattel mortgage or a charge, the secured party’s main remedy was to seize and sell the collateral, helping itself to payment out of the sale proceeds. If the realised value of the collateral was less than the amount owing, the secured party could fall back on its personal remedy and sue the borrower to recover the deficiency. Conversely, if the realised value was more than the amount owing, the secured party was required to account to the borrower for the surplus.3 12.3 By contrast, in the case of a conditional sale or hire-purchase agreement, apart from statute, the secured party’s (supplier’s) remedies were governed by the [page 362] law of contract, not the law of mortgages. In summary, the supplier’s primary remedy was to terminate the agreement and recover the goods. Termination of the agreement would also bring to an end the customer’s obligation to pay the

instalments. But the customer was still liable to the supplier for arrears of instalments and also for loss of bargain damages. The current value of the goods was a relevant factor in the calculation of the supplier’s damages. In the (presumably rare) case where the goods had appreciated, the damages might be lower, but the supplier would not have to account to the customer for the surplus. The hirepurchase statutes, which applied to both conditional sale and hire-purchase agreements, modified these common law rules and limited the amount the supplier was entitled to recover. In simple terms, the legislation assimilated the supplier’s remedies for breach of a hire-purchase or conditional sale agreement with the remedies for mortgage default.4 The hire-purchase statutes were partly superseded by the consumer credit laws enacted during the 1980s, which continued and expanded on the theme of a unitary remedy structure for all security agreements regardless of form.5 The original credit laws were replaced by the Uniform Consumer Credit Code in 1996 and this, in turn, has now been replaced by the National Credit Code.6 But the substance over form approach to the regulation of security interests remains the same. The PPSA takes the logical next step. In common with the consumer credit laws, the enforcement provisions in PPSA Ch 4 apply without regard to forms of transaction, the difference being that the PPSA provisions are not limited to consumer transactions. 12.4 In addition to its power of sale, the pre-PPSA mortgagee also had a right of foreclosure which allowed it to apply to the court for an order extinguishing the borrower’s equity of redemption. The effect of a foreclosure order was to give the mortgagee clear title to the collateral, enabling it either to keep the property for itself or to sell it without having to account to the borrower for any surplus. The informal quid pro quo was that, while a foreclosure order extinguished the borrower’s equity of redemption, it also extinguished the debt; in other words, the mortgagee took the property in full satisfaction of the debt and the borrower was relieved of personal liability for any deficiency. The pre-PPSA foreclosure remedy was limited to mortgages. A chargee had no right of foreclosure for the simple reason that, in the case of a charge, there was no equity of redemption; instead, the borrower owned the collateral outright subject to the chargee’s security interest. Without the equity there was nothing to foreclose and so the chargee’s only remedy was the power of sale. Likewise in the case of a hire-purchase or conditional sale agreement, the customer had no equity of redemption but only a right of possession and a contingent right of ownership, both of which terminated when the supplier took the goods back; consequently, there was no occasion for foreclosure. PPSA Ch 4 enacts

[page 363] a statutory foreclosure procedure which is available to the secured party in all cases, without reference to forms of transaction: see further, 12.61–12.65 below. 12.5 Pre-PPSA, in the case of a mortgage or charge, the borrower had a right in equity to redeem the collateral, following repossession, by paying out the lender. At common law, there was no corresponding right of redemption in the conditional sale or hire-purchase contexts. However, the hire-purchase legislation enacted a statutory right of redemption in the hirer’s favour7 and this initiative was carried through into the consumer credit laws. The PPSA takes the reform one step further by enacting a statutory right of redemption for commercial and consumer transactions alike. 12.6 In summary, PPSA Ch 4 enacts a common remedies scheme for all secured transactions, regardless of form. The basic approach, which derives from the Canadian PPSAs and Art 9, is to take the remedies scheme for mortgages and apply it across the board to all forms of transaction. One difference between the Australian and North American approaches is that in the United States and Canada the remedies provisions are for the most part mandatory. In Australia, the parties may exclude many of the PPSA Ch 4 provisions, but there are some core provisions which the parties may not exclude: see further, 12.15–12.16 below.

SCOPE OF PPSA CHAPTER 4 Deemed Security Interests 12.7 PPSA subs 12(3) provides, in effect, that the statute applies to the following transactions whether or not the transaction in substance secures payment or performance of an obligation: (1) the transfer of an account or chattel paper; (2) a commercial consignment; and (3) a PPS lease. This provision, along with the thinking behind it, is discussed in 3.24–3.35 of this text. PPSA subs 109(1) qualifies subs 12(3). It provides that the Ch 4 enforcement provisions do not apply to the transfer of an account or chattel paper, a commercial consignment or a PPS lease if the transaction does not secure payment or performance of an obligation. The upshot is that while the bulk of the statute applies to these transactions whether or not they are in substance secured transactions, the Ch 4 enforcement provisions

apply only if they are in substance secured transactions. The reason is that the Ch 4 provisions presuppose an underlying debt obligation. For example, as outlined in 12.1–12.6 above, Ch 4 allows the secured party to sell the collateral and use the sale proceeds to pay down the secured obligation. Likewise, Ch 4 provides that, following repossession, the grantor may redeem the collateral by paying the secured party out. These provisions, and others like them, make sense only in cases involving a debt or like obligation to which the disputed [page 364] property is dedicated. An outright transfer of accounts or chattel paper does not have this characteristic. Nor does a true consignment or lease. Given that PPSA Ch 4 does not apply in these cases, the parties’ rights and obligations remain subject to the common law. To determine whether, in the case of a transfer, consignment or lease, PPSA Ch 4 applies, the court must be able to tell whether or not the transaction in substance creates a security interest. In borderline cases, the characterisation may be difficult. In practice, the issue is most likely to arise in relation to lease agreements. In this context, the courts may look for guidance to the Australian Accounting Standards Board’s Accounting Standard, Leases (AASB 117).8 12.8 The AASB 117 requirements vary depending on whether the transaction in question is a finance lease or an operating lease. This classification corresponds with the distinction the PPSA draws between a lease which in substance secures payment or performance of an obligation (a security lease) and a lease which in substance does not secure payment or performance of an obligation (a true lease). ‘Finance lease’ is defined to mean ‘a lease that transfers substantially all the risks and rewards incidental to ownership of an asset’, while an ‘operating lease’ is a lease other than a finance lease.9 According to AASB 117: Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised; (c) the lease term is for the major part of the economic life of the asset even if title is not transferred;

(d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and (e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications.10

[page 365] Other relevant factors include the following: (a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee; (b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example, in the form of a rent rebate equalling most of the sales proceeds at the end of the lease); and (c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.11

However, the foregoing factors and indicators are not always conclusive. AASB 117 s 12 states: If it is clear from other features of the lease that the lease does not transfer substantially all risks and rewards incidental to ownership, the lease is classified as an operating lease. For example, this may be the case if ownership of the asset transfers at the end of the lease for a variable payment equal to its then fair value, or if there are contingent rents, as a result of which the lessee does not have substantially all such risks and rewards.12

12.9 The key distinguishing characteristic of a true consignment is that the relationship between the consignor and consignee is principal and agent. The consignee (agent) is under no obligation to purchase the goods; instead their function is to sell the goods on behalf of the consignor (principal). When the consignee negotiates a sale, property in the goods passes directly from the consignor to the customer.13 Conversely, if the consignee is under an obligation to purchase the goods or to account for a predetermined amount whether or not they sell the goods, the transaction is a security consignment.14 12.10 Security transfers of accounts or chattel paper and non-security transfers perform a similar commercial function: they both enable the transferor to use their outstanding accounts or chattel paper to raise immediate cash (see 3.24 of this text). The difference is that, in the case of a non-security, or outright transfer, the transferee acquires title and the money the transferor receives in return is not repayable. By contrast, in the case of a security transfer, the transferee acquires only a security interest and the money the transferor receives is a loan and repayable as such. In the case of a security transfer, the transferor bears the risk of non-payment

by the account or chattel paper debtor. The reason is that if the transferee is unable to collect from the account debtor, it may still exercise its personal rights against the transferor [page 366] under the loan agreement. By contrast, in the case of an outright transfer, the allocation of risk depends on the terms of the arrangement. If the transfer is negotiated on a non-recourse basis, the transferee bears the risk of the account or chattel paper debtor’s non-payment, but if the transfer is on a recourse basis (in other words, the transferor guarantees payment), the risk shifts to the transferor. The allocation of risk may be a relevant factor in determining whether a transaction is an outright or a security transfer, but it is not decisive because the inclusion of a recourse provision is not fundamental to the characterisation issue. In this respect, an outright transfer of accounts or chattel paper on a with-recourse basis is analogous to a sale of goods where the seller guarantees the product’s quality: in both cases, the guarantee shifts the risk of ‘defects’ to the seller, but it does not affect the characterisation of the transaction.

Goods Located Outside Australia 12.11 PPSA subs 109(2) provides that Ch 4 does not apply to a security interest in goods that are located outside Australia. This provision raises conflict of laws issues and its implications are discussed in 14.51.15

Investment Instruments and Intermediated Securities 12.12 PPSA subs 109(3) provides that Ch 4, apart from ss 110, 111, 113 and 114, does not apply to a security interest in an investment instrument perfected by possession or control, or to a security interest in an intermediated security perfected by control.16 Section 110 provides that the statute does not derogate from the parties’ rights under the security agreement; s 111 provides that the parties must act honestly and in a commercially reasonable manner; s 113 provides that recovering judgment or issuing execution does not extinguish a security interest; and s 140 provides for the distribution of proceeds received by the secured party. According to the Explanatory Memorandum, the purpose of subs 109(3) is ‘to allow a secured

party to trade in the market without having to comply with the procedures and time limits [in Ch 4].’17

Consumer Transactions 12.13 PPSA subs 109(5) provides that certain Ch 4 provisions do not apply if the grantor uses the collateral predominantly for personal, domestic [page 367] or household purposes.18 The provisions in question are ss 117 and 118 (relationship with land laws), s 120 (enforcement of security interest in liquid assets), s 126 (apparent possession of collateral), paras 128(2)(b) and (c) (disposal of collateral by lease or licence), s 129 (disposal of repossessed collateral by purchase) and s 134 (retention of collateral). The subs 109(5) exception applies even if the collateral secures a business debt.19 12.14 National Credit Code Part 5 regulates the enforcement of consumer goods mortgages. For the purposes of the Code, ‘mortgage’ includes ‘any interest in, or power over, property securing obligations of a debtor or guarantor’ and also ‘a credit provider’s title to land or goods subject to a sale by instalments’.20 The Code deems a hire-purchase agreement to be a sale by instalments secured by a mortgage over the goods supplied, and this statutory deemed mortgage is also a mortgage for the purposes of the legislation.21 The Code applies to a mortgage if the mortgagor is a natural person and the mortgage secures obligations under a contract for the provision of credit to a debtor, who is a natural person, wholly or predominantly for personal, domestic or household purposes.22 In summary, the Code applies to a mortgage that secures a consumer credit contract and regardless of whether the mortgagor uses the collateral for personal or business purposes. On the other hand, the Code does not apply if the credit is for business purposes, even if the mortgagor uses the collateral predominantly for personal, domestic or household purposes. PPSA subs 119(1) provides that Ch 4, except ss 117 and 118 (obligations secured by security interest in personal property and land), applies to a security interest in collateral to which the National Credit Code applies. Example 1. Grantor borrows money from SP to buy a car and gives SP a security interest in the car to secure the loan. Grantor is a natural person and buys the car predominantly for personal use. Grantor defaults and SP plans to repossess the car.

The National Credit Code applies and SP’s repossession rights are subject to the provisions governing the enforcement of mortgages in Pt 5. By virtue of PPSA subss 109(5) and 119(1), PPSA Ch 4 also applies, with the exception of s 126 (apparent possession of collateral), paras 128(2)(b) and (c) (disposal of collateral by lease or licence), s 129 (disposal by purchase) and s 134 (retention of collateral). There is some overlap between National Credit Code Pt 5 and PPSA Ch 4 and, to avoid possible inconsistencies, PPSA subs 119(2) provides for the making of regulations to say that specified Ch 4 provisions [page 368] are deemed to have been complied with if the corresponding National Credit Code provision has been complied with. The regulations specify the following provisions:23 PPSA s 130 (notice of disposal of collateral) and National Credit Code s 102 (procedures to be followed by credit provider after taking possession of goods); PPSA s 128 (secured party may dispose of collateral) and s 131 (duty of secured party to obtain market value) and National Credit Code s 104 (sale of goods by credit provider); PPSA s 132 (secured party to give statement of account) and National Credit Code subs 104(3) (credit provider to give mortgagor written notice); and PPSA s 140 (distribution of proceeds received by secured party) and National Credit Code s 105 (matters for which account can be debited after mortgagee sale of goods). The details and implications of this measure are dealt with at appropriate points in the discussion below. There may be other points of overlap between the two statutes, apart from those identified in the regulations.24 In any such case, PPSA s 258 applies with the result that, to the extent of any direct inconsistency, the National Credit Code prevails.

Contracting Out 12.15 PPSA s 110 provides that the statute does not derogate in any way from the rights and remedies provided for in the security agreement. In other words, the security agreement may give the secured party additional remedies to those provided for in PPSA Ch 4.25 Subsection 115(1) provides, in effect, that in cases where the collateral is not used predominantly for personal, domestic or household purposes, the parties may contract out of specified Ch 4 provisions.26 Example 2. Grantor is a truck driver. He borrows money from SP to renovate his house. SP takes a

security interest in Grantor’s truck.

Since the collateral is not used predominantly for personal, domestic or household purposes, PPSA subs 115(1) applies and the parties may contract out of the specified Ch 4 provisions. However, the loan is for Grantor’s personal use and so the security interest is subject to the provisions in Pt 5 of the National Credit Code governing the enforcement of consumer mortgages. These provisions cannot be excluded. [page 369] Example 3. Grantor is an accountant. He borrows money from SP to renovate his office. SP takes a security interest in Grantor’s car which Grantor uses predominantly for personal purposes.

Example 3 is the obverse of Example 2. Since the collateral is used predominantly for personal, domestic or household purposes, PPSA subs 115(1) does not apply and the parties may not contract out of Ch 4. On the other hand, because the loan is for business purposes, the National Credit Code does not apply. Assume that, in Example 3, Grantor uses the car predominantly for work-related purposes. In this case, PPSA subs 115(1) applies so that the parties may contract out of Ch 4 and the National Credit Code does not apply. 12.16 The provisions specified in PPSA subs 115(1) account for most of Ch 4. Importantly, though, ss 111, 131 and 140 are not on the list. Section 111 requires the secured party to act honestly and in a commercially reasonable manner: see 12.23–12.25 below. Section 131 imposes on a secured party disposing of collateral a duty to get the best price reasonably obtainable: see 12.48–12.49 below. Section 140 governs the distribution of collateral sale proceeds and it provides that the grantor is entitled to any surplus: see 12.55–12.57 below. In summary, the parties cannot contract out of the grantor’s right to a surplus or the secured party’s obligation to protect the grantor’s surplus. Article 9 and the Canadian PPSAs are more stringent in this regard. Article 9 enacts an extensive list of non-waivable provisions,27 while the Canadian PPSAs provide that, subject to limited exceptions, no enforcement provision, to the extent that it gives rights to the debtor or imposes obligations on the secured party, can be waived or varied.28 Grant Gilmore explains the underlying policy as follows: Since the beginnings of mortgage law, it has never been questioned that the mortgagor’s equity is entitled to absolute protection and cannot be frittered away. No agreement, we have long been told, will

be allowed to ‘clog the equity of redemption’. And not even the most drastic of pledge agreements has ever purported to free the pledgee from his inescapable duties of accounting to the pledgor for the value of the pledged property and of remitting any surplus. Article 9, therefore, merely reflects history when it provides that the debtor’s rights and the secured party’s correlative duties following default ‘may not be waived or varied’.29

The Australian approach is grounded in freedom of contract considerations.30 The thinking was, presumably, that most of the provisions on the PPSA subs 115(1) list relate to consumer protection matters which are sufficiently addressed by the National Credit Code. The Statutory Review favours retention of the current approach. It recommends that the Ch 4 [page 370] provisions should not be mandatory in all cases but, significantly, it goes on to say that ‘there should be an irreducible core of requirements that a secured party must comply with’; for example, the provisions governing the grantor’s right to any surplus following sale of the collateral should be mandatory for all transactions, including title retention arrangements.31 The Review suggests that there ‘there may be other aspects of Chapter 4 [apart from the surplus requirement] which should be mandatory as well’.32 These would presumably include provisions bearing on the secured party’s duty to protect the grantor’s surplus, such as the provisions governing sale of the collateral. The ‘irreducible core of requirements’ is important for the protection of debtors, as Gilmore suggests, but it is also part and parcel of the PPSA’s mission to create a generic security interest.33 It is impossible to define a mortgage or charge, for example, without reference to the rights the transaction creates. The same is true of the PPSA security interest. Without an ‘irreducible core of requirements’ in Ch 4, it would be impossible to determine, at least in marginal cases, whether a transaction gave rise to a security interest or not.34

Receivers 12.17 PPSA s 116 provides that Ch 4 does not apply if there is a receiver or receiver and manager in control of the collateral except if the grantor is an individual. Part 5.2 of the Corporations Act 2001 (Cth) contains detailed provisions governing company receivers and the purpose of PPSA s 116 is to avoid overlap.35 The New Zealand PPSA is the same in this respect,36 but the Canadian PPSAs take the opposite approach by making it clear that references in the

enforcement provisions to a secured party include a receiver.37 As a result, a receiver has the same rights and duties under the Canadian PPSAs as a secured party when enforcing a security interest. The legislation also includes provisions governing receivers’ powers and duties and court supervision of receivers.38 The Canadian approach is preferable; the trouble with the Australian approach is that it makes the law governing enforcement of security interests subject to arbitrary variables. Example 4. SP holds a security interest in Grantor’s factory equipment. Grantor is a company. Grantor defaults and SP seizes the collateral.

PPSA Ch 4 governs SP’s rights and obligations in enforcing its security interest. But assume that SP appoints a receiver to enforce its security interest. [page 371] Now, PPSA Ch 4 does not apply and Corporations Act Pt 5.2 applies instead. On the other hand, if SP appoints a receiver but Grantor is an individual, not a company, the Corporations Act provisions do not apply and PPSA Ch 4 applies instead. The Corporations Act provisions are discussed further in 12.77–12.83 below.39 12.18 PPSA s 116 relates only to the application of the enforcement provisions in Ch 4. The appointment of a receiver or receiver and manager does not affect the application of other parts of the statute. For example, the provisions governing attachment, perfection and priorities continue to apply and they may affect the validity of the receiver’s appointment or actions the receiver takes to enforce the security interest.

Security Interests in Personal Property and Land 12.19 PPSA ss 117 and 118 apply where the collateral comprises both personal property and land. Apart from these provisions, to enforce its security interest the secured party would have to proceed separately under the PPSA in relation to the personal property and the relevant state or territory land laws in relation to the land. ‘To reduce costs and to ensure the expeditious resolution of enforcement, [ss 117 and 118] allow [the secured party] to apply the land law to the personal property as if it were land.’40 The concession is not available to the secured party unless: (1) its security interest has the highest priority ranking; or (2) all higher ranking secured

parties have agreed in writing with the secured party’s decision to proceed under ss 117 and 118. It is also not available if the personal property collateral is used predominantly for personal, domestic or household purposes: subs 109(5). 12.20 A secured party with a security interest in both land and personal property is not obliged to proceed under ss 117 and 118. The provisions give a secured party the choice between: (1) enforcing its security interest in the personal property in accordance with PPSA Ch 4 and proceeding separately under the land laws with respect to its security interest in the land; and [page 372] (2) enforcing its security interest in the personal property ‘in the same way as the interest in the land may be enforced under the land law’. In making the choice, the secured party must act reasonably, taking into account the following matters: (1) the respective values of the personal property and the land; (2) the nature of any connection between the personal property and the land; (3) the respective locations of the personal property and the land; and (4) any other matters relevant to the efficient enforcement of the security interest. 12.21 Before taking advantage of the concession ss 117 and 118 offer, the secured party must give a notice to the grantor, any other secured party holding a perfected security interest in the personal property, and any other person who has notified the secured party that it claims an interest in the personal property. The notice must be in the approved form and it must describe the personal property and set out the effect of the statutory concession. Subject to this requirement and the other restrictions mentioned in 12.20 above, the secured party may enforce its security interest in the same way as the interest in the land may be enforced under the land law. For this purpose, law in the same terms as the land law applies under the PPSA for the purpose of enforcing the security interest. By the same token, PPSA Ch 4 does not apply, with the exception of s 140 which relates to the distribution of the collateral sale proceeds. 12.22 The secured party’s (A’s) decision to proceed under ss 117 and 118 does not prejudice the rights of any other secured party (B) with a security interest in the personal property. In particular, B has standing in proceedings taken by A to enforce A’s security interest and B may apply to the court for the conduct of a

judicially supervised sale.

GENERAL RULES Commercially Reasonable Manner 12.23 PPSA subs 111(1) provides that all rights, duties and obligations arising under Ch 4 must be exercised honestly and in a commercially reasonable manner. Subsection 111(2) provides that a person does not act dishonestly simply because they act with actual knowledge of another party’s interests. Section 111 applies to rights, duties and obligations arising under Ch 4, but not to those arising under the security agreement or any other law.41 This limitation may be significant, given that, as a general rule, parties are free to contract out of Ch 4 and negotiate their own remedies: see 12.15–12.16.42 On the other hand, PPSA s 254 makes it clear that the statute is not intended to exclude or limit the application of other laws and a party [page 373] who acts dishonestly or unreasonably in enforcing its security interest may be subject to general law doctrines relating to fraud, unconscionable conduct and the like. PPSA s 111 overlaps with s 131, which provides that a secured party who disposes of collateral must obtain either market value or the best price reasonably obtainable: see further, 12.48–12.49 of this text. 12.24 The corresponding provision in the Saskatchewan PPSA (s 65(3)) requires the secured party to act ‘in good faith and in a commercially reasonable manner’, while the corresponding provision in the New Zealand PPSA (s 25(1)) requires the secured party to act ‘in good faith and in accordance with reasonable standards of commercial practice’. These various formulations go to matters of style rather than substance and there is no indication that, in adopting one form of words in preference to another, the drafter was trying to achieve a different result. Australian PPSA subs 111(1) uses the expressions ‘honestly’ and ‘in a commercial reasonable manner’. The courts will probably read the reference to honesty in a subjective sense.43 On the other hand, courts in Canada and the United States have read the phrase ‘in a commercially reasonable manner’ as establishing an objective standard which requires assessment of the secured party’s conduct in a particular case against

industry practice and norms of commercial behaviour.44 12.25 PPSA subs 111(2) provides that a person does not act dishonestly merely because the person acts with actual knowledge of the interest of some other person. This provision supports the view, stated above, that the reference to honesty in subs 111(1) is to honesty in a subjective sense. There is a corresponding provision in the other PPSAs but whereas Australian PPSA subs 111(2) is relevant only to Pt 4 of the statute, the overseas versions of the provision apply to the statute at large. Outside Australia, the provision is important in cases where a secured party (SP2) enters into a security agreement and registers a financing statement in the knowledge that another secured party (SP1) holds a competing unperfected security interest: see 7.17 of this text. The provision makes it clear that SP2 does not act in bad faith (or dishonestly) simply because it takes advantage of SP1’s failure to perfect its security interest and obtains priority by perfecting its own security interest. Given that Australian PPSA subs 111(2) only applies to Pt 4 of the statute, it is not relevant to cases like this: see 7.20. [page 374]

Limitation on Secured Party’s Rights 12.26 Subsection 112(1) provides that, in exercising its Ch 4 rights and remedies, a secured party may deal with the collateral only to the same extent as the grantor would be entitled to deal with the collateral. The provision applies where the grantor has only a limited interest in the collateral. As discussed in 4.14–4.22 of this text, a security interest cannot attach unless the grantor has rights in the collateral, but even limited rights are sufficient for attachment. On the other hand, the secured party can acquire no greater rights than the grantor’s: nemo dat quod non habet. Example 5. Trustee holds an art collection on trust for Grantor for life. Grantor, who is in possession of the collection, gives SP a security interest. Grantor defaults and SP seizes the collection and sells it to Buyer.

Grantor has rights in the collateral and, assuming the other requirements in PPSA s 19 are satisfied, SP’s security interest attaches to the collection. However, SP’s security interest is bounded by reference to Grantor’s own limited rights. Applying PPSA subs 112(1), in enforcing its security interest SP may not transact

for the sale to Buyer of any interest larger than Grantor’s. Section 133 provides that, in a case like Example 5, Buyer takes the collateral free of both SP’s and Grantor’s interests but the provision makes no reference to other competing interests, such as Trustee’s. The result is that Buyer acquires Grantor’s equitable interest in the art collection, but no more. Assuming that the contract between SP and Buyer was for the transfer of full ownership, SP is in breach of the duty imposed by s 112. Buyer will have a statutory claim against SP for damages under PPSA s 271 and also an action for breach of SP’s contractual obligation to transfer clear title.45 Re Maiden Civil (P&E) Pty Ltd; Richard Albarran and Bruce Alexander Pleash 46 confirms this interpretation. 12.27 At first glance, subs 112(1) appears to create difficulties in its application to title retention arrangements (conditional sales, hire-purchase agreements and finance leases) because in these cases, as a matter of form, title to the goods remains with the supplier and the grantor has only a limited interest in the collateral. On the other hand, here as elsewhere (for example, subs 46(1): see 10.42 of this text), the reader must keep in mind the PPSA’s [page 375] substance over form philosophy: the statute proceeds on the basis that, in the case of a conditional sale agreement and other types of title retention arrangement, the transaction is in substance an outright sale of goods coupled with a loan to finance the purchase and a security interest in the goods to secure repayment of the loan. From this perspective, the grantor owns the collateral and subs 112(1) does not limit SP’s Ch 4 rights. 12.28 Example 6. SP1 holds a perfected security interest in all Grantor’s present and after-acquired personal property. SP2 holds an unperfected security interest in Grantor’s printing press. Grantor defaults against SP1. SP1 seizes the printing press and sells it to Buyer.

According to PPSA subs 112(1), SP1 may deal with the printing press only to the same extent as Grantor would have been entitled to do so. Grantor could not have sold the printing press to Buyer without SP2’s consent. Does it follow that SP1 needed to obtain SP2’s consent before selling the press? The answer is no. SP2’s unperfected security interest is subordinate to SP1’s perfected security interest: subs 55(3). PPSA s 133 provides that Buyer takes the collateral free of Grantor’s interest,

SP1’s security interest and also any lower ranking security interest (SP2’s). In other words, on the facts of Example 6, Buyer obtains clear title and has no dispute with SP1. SP2, for its part, cannot claim that SP1 was in breach of subs 112(1) for selling the printing press without SP2’s consent because this would be inconsistent with SP1’s priority over SP2. In other words, in a case like Example 6, subs 112(1) must be read subject to the statutory priority rules. 12.29 Subsection 112(3) provides that, without limiting subs (1), a secured party may only seize, purchase or dispose of a licence subject to the terms and conditions of the licence and any applicable Commonwealth, state or territory law. This provision confirms the proposition stated in Saulnier v Royal Bank of Canada 47 that the rights of a secured party with a security interest in a licence are subject to the terms and conditions on which the grantor holds the licence. ‘The [grantor] can transfer no greater rights than he possesses’. In enforcing the security interest, the secured party ‘simply steps into the [grantor’s] shoes and takes the licence warts and all’:48 see 2.47 of this text. PPSA subs 128(6) repeats the point.49

Non-merger 12.30 PPSA s 113 provides that the fact a secured party has recovered judgment, or issued execution, against a grantor in relation to collateral does [page 376] not extinguish the security interest.50 In other words, a security interest does not merge simply because the claim has been reduced to judgment. It follows that the secured party may enforce its security interest against the collateral and simultaneously exercise its remedies as a judgment creditor against the grantor’s other assets up to the value of the judgment debt.51

Cumulative Rights and Remedies 12.31 PPSA s 114 provides that the secured party’s Ch 4 rights and remedies are cumulative. There is a corresponding provision in Art 9 and the Canadian PPSAs.52 In the North American context, the main function of the provision is to make it clear that the secured party is not required to elect between enforcing its security

interest and exercising its personal remedies against the debtor. So, for example, the secured party may realise on the collateral and, in addition, sue the debtor for any deficiency.53 In contrast to its North American counterparts, Australian PPSA Ch 4 does not expressly provide for the secured party’s right to bring a deficiency action. But s 110 provides that the PPSA does not derogate from the secured party’s rights under the security agreement. In short, the secured party’s right to sue for the deficiency depends on the express or implied terms of the security agreement, not the provisions of Ch 4: see further 12.57 below. In any event, it is clear by implication that, subject to any other law to the contrary, the secured party may both enforce its security interest under PPSA Ch 4 and exercise whatever rights it may have under the security agreement to sue the grantor for any deficiency. National Credit Code s 91 is relevant in this connection. It provides that a credit provider may not, without the consent of the court, take possession of mortgaged goods if the amount currently owing under the credit contract is less than 25 per cent of the amount of credit provided or $10,000, whichever is the lesser.54

Default 12.32 Most of the provisions in PPSA Ch 4 presuppose a default by the grantor (or debtor).55 The Canadian and New Zealand PPSAs define ‘default’ to mean: (1) the failure to pay or otherwise perform the obligation secured when due; or (2) the occurrence of an event that, under the security agreement, [page 377] gives the secured party a right to enforce the security interest.56 There is no corresponding provision in the Australian PPSA, but the courts will probably settle on a definition along the same lines.

Notice Requirements 12.33 PPSA Ch 4 imposes various notice requirements on the secured party. For example: a secured party must notify the grantor and other interested parties before exercising its rights under ss 117 and 118 (see 12.19–12.22 above); a secured party must serve a notice on interested parties before disposing of collateral pursuant to s 128 (see 12.43–12.44 below); and a secured party must, on request, give the

grantor and any other interested party a statement of account following sale of the collateral (see 12.51–12.52 below). Section 144 excuses the secured party from providing a notice if: (1) it cannot locate the person it is supposed to notify; (2) the person to be notified waives their right to the notice; or (3) the court rules that a notice is not required.57

NOTICE BEFORE ENFORCEMENT 12.34 There is no requirement in PPSA Ch 4 for the secured party to serve a notice on the grantor before taking action to enforce its security interest. However, other laws may apply. For example, and most importantly, National Credit Code s 88 provides that a credit provider must give the debtor and any guarantor a default notice containing specified information and allowing the debtor a period of at least 30 days to remedy the default. Section 89 provides that, if the debtor or guarantor remedies the default within the 30-day period, the credit contract or mortgage is reinstated and any acceleration clause cannot operate.58

SEIZURE OF COLLATERAL Introduction 12.35 PPSA subs 123(1) provides that the secured party may seize the collateral, by any method permitted by law, if the debtor is in default under the security agreement. The reference is to the debtor’s default, not the grantor’s. The purpose is to cater for cases where the security interest is given by a third party. In such cases, it is the debtor’s default that triggers the secured party’s right to enforce its security interest, but the right is exercisable against the grantor. In the more typical twoparty case, the debtor and the grantor are the same person and, in this connection, references in Ch 4 to the debtor are necessarily [page 378] also references to the grantor. Subsection 123(2) enacts a special procedure for intangible collateral, which cannot be physically seized. It provides that a secured party may seize intangible collateral by giving a notice to the grantor stating that the notice constitutes seizure.59 Subsection 123(3) allows the parties to agree on an alternative method of seizing intangible property. Section 124 applies in cases where

the security interest is perfected by possession or control and the secured party is already in possession of the collateral. It provides that, in such cases, the secured party may seize the collateral by serving a notice of seizure on the grantor.60 Section 125 provides that a secured party who seizes collateral under s 123 must either dispose of it in accordance with Ch 4 Div 3 or take action to retain the collateral under Div 4.

Methods Permitted by Law 12.36 According to subs 123(1), the secured party may seize the collateral ‘by any method permitted by law’.61 At general law, the main limitations are to be found in the laws governing breach of the peace and trespass. The secured party or its agent may not use unlawful force to seize the collateral. For example, if the grantor is present and resists the seizure, the secured party may not resort to violence. The appropriate response is to back down and obtain a court order for seizure of the collateral.62 Otherwise, the secured party or its agent may face criminal charges.63 Various civil consequences may also follow. For example, the grantor may challenge the validity of the seizure on the ground that it was not carried out in compliance with subs 123(1); and the grantor may bring a damages claim for assault or, alternatively, a statutory claim for damages under PPSA s 271.64 The laws of trespass prohibit the secured party or its agent from entering the grantor’s property without the grantor’s consent. The security agreement may give the secured party a licence to enter the grantor’s property and this may signify consent. On the other hand, if, for example, the grantor is present and refuses entry, the secured party [page 379] or its agent runs the risk of liability in trespass, despite the licence provision, if it proceeds with the seizure.65 Again, the appropriate course of action in a case like this is to back down and apply to the court for an order authorising entry. 12.37 If the National Credit Code applies, there are additional restrictions. National Credit Code s 99 provides that a credit provider or its agent may not enter residential premises for the purpose of repossessing mortgaged goods without a court order unless the occupier of the premises has, after being informed in writing

of what s 99 says, consented in writing to the entry.66 Failure to comply is a criminal offence and the other consequences specified above may also follow: in particular the grantor may challenge the validity of the seizure on the ground that it was not in compliance with the National Credit Code and hence also not in compliance with PPSA subs 123(1); and the grantor may have a statutory damages claim under the National Credit Code or the PPSA or, alternatively, a claim for damages at common law. Other National Credit Code provisions may also be relevant. For example, s 91 prohibits repossession, without the court’s consent, if the amount currently owing is less than 25 per cent of the original loan or $10,000, whichever is the lesser. Sections 94–96 provide that a debtor who receives a default notice may apply to the credit provider for a negotiated postponement of enforcement proceedings.67 If the credit provider refuses to negotiate or if the negotiations are unsuccessful, the debtor may apply to the court for an order postponing enforcement of the mortgage. Seizure of the collateral while any proceedings under these provisions were still pending would put the secured party in non-compliance with PPSA subs 123(1).

Apparent Possession 12.38 PPSA s 126 provides that if the collateral cannot be readily removed from the grantor’s premises or if adequate storage facilities are not available for the collateral, the secured party may seize the collateral by taking ‘apparent possession’. In such cases, the secured party may dispose of the collateral on the grantor’s premises, but it must avoid unnecessary cost or inconvenience to the grantor.68 The statute does not define ‘apparent possession’, but the Explanatory Memorandum refers to apparent possession as ‘[providing] notice of the transfer of the collateral from the grantor to the secured party’.69 On this basis a secured party might obtain apparent possession by, for example, marking the collateral or posting a notice on the collateral or in its vicinity.70 [page 380] Section 126 does not apply if the collateral is used predominantly for personal, domestic or household purposes: subs 109(5).

Higher and Lower Ranking Secured Parties 12.39 Example 7. SP1 and SP2 both hold security interests in Grantor’s printing press, with SP1 having priority over SP2. Grantor defaults and SP2 plans to enforce its security interest by seizing the printing press.

Can SP2 proceed, given that its security interest is subordinate to SP1? The governing provision is PPSA s 127 which provides, in effect, that if SP2 seizes the collateral, SP1 may take over the enforcement proceedings. Specifically, SP1 may give SP2 a written notice requiring SP2 to hand over the seized collateral.71 This is subject to the qualification that SP1 would have been entitled to seize the collateral in its own right. So, for example, SP1 cannot invoke the s 127 procedure unless the debtor is in default against SP1. SP2 must comply with SP1’s notice within five business days or such longer period as is reasonable in the circumstances. SP1 must reimburse SP2 its reasonable enforcement expenses out of the collateral sale proceeds, provided the expenses are sufficiently documented.72 12.40 PPSA s 133 provides that, on a sale of repossessed collateral, the buyer takes the property free of various interests, including ‘all security interests in the collateral that have a lower priority than the security interest of the enforcing secured party’. In other words, a sale following repossession does not extinguish a higher ranking security interest and the buyer takes the collateral subject to any such interest. Other things being equal, prospective buyers will factor this risk into their calculations of the purchase price and so a sale conducted by a lower ranking secured party is likely to bring in less than a sale conducted by the highest ranking secured party. On the face of it, therefore, it would seem to be in all parties’ interests for the sale to be conducted by the highest ranking secured party and, in cases like Example 7, for SP1 to take over from SP2. As it happens, SP2 may have an even greater interest than SP1 in SP1’s taking over because, given SP2’s subordinate position, a reduced sale price may limit, or even eliminate, its prospects of recovery. However, PPSA s 140 muddies the waters by providing that a higher ranking secured party is entitled to be paid out of the collateral sale proceeds ahead of the enforcing secured party. This reduces the risk to prospective purchasers and, as a result, [page 381]

they should be willing to pay a higher price. Therefore, at least on this account, SP1 and SP2 may be indifferent as to which of them conducts the sale. On the other hand, the distribution rules in s 140 may discourage SP2, in a case like Example 7, from taking action in the first place. SP2 may conclude that, since its claim on the collateral sale proceeds is subordinate to SP1, the costs of initiating enforcement proceedings would exceed the expected benefits. The uneasy relationship between PPSA ss 133 and 140 is discussed further in 12.55–12.56 below.73

DISPOSAL OF COLLATERAL Timing of Disposal 12.41 PPSA s 125 provides that a secured party who seizes collateral under s 123 must either dispose of it in accordance with Div 3 or take action to retain it in accordance with Div 4.74 The secured party is allowed a reasonable time, before taking either of these actions, to secure, store and value the collateral and to determine how to deal with it. Further delay is permitted if the security agreement provides for it or if the delay is reasonable in the circumstances. Delaying the sale may be commercially unreasonable if, for example, the collateral is depreciating or the market is falling. On the other hand, in some cases it may make commercial sense to delay the sale; for example, in the expectation that market conditions will improve. Under the pre-PPSA law governing mortgagee sales, the mortgagee could choose a time for the sale which suited their own interests and without regard to the interests of other parties.75 By contrast, s 125 subjects the secured party’s decision to a reasonableness standard. On the other hand, s 125 allows the parties to replace the reasonableness standard with their own contractual rules and the parties may choose to replicate pre-PPSA law by including in the security agreement a provision giving the secured party complete discretion as to the timing of sales. 12.42 In summary, s 125 changes the default rule: pre-PPSA, the default rule put the timing of a sale at the secured party’s discretion unless the security agreement provided otherwise; post-PPSA, the default rule makes the timing of the sale subject to a reasonableness standard unless the security agreement says otherwise. PPSA s 111 requires the secured party to act honestly and in a commercially reasonably manner: see 12.23–12.25 above. However, the [page 382]

provision only applies to rights, duties and obligations arising under Ch 4. It follows that if the secured party delays a collateral sale in accordance with a provision in the security agreement, the grantor cannot challenge the secured party’s actions under s 111. In cases where the s 125 reasonableness standard applies, the courts will presumably weigh the secured party’s interest in delaying the sale against the grantor’s interest in a quicker sale. Section 125 does not provide for the reverse case where the secured party opts to sell quickly when it would have been in the grantor’s interests to delay the sale. The security agreement itself may cover the case and, if so, the contractual provision will apply. Otherwise, PPSA s 111 will apply and the grantor, or another interested party, may challenge the timing of the sale on that basis. In deciding whether the secured party acted in a commercially reasonable manner with regard to the timing of a sale, the courts will presumably weigh the secured party’s interest in selling the collateral quickly against the grantor’s interest in delaying the sale.

Notice before Disposal 12.43 Section 130 provides that, as a general rule, a secured party who proposes to dispose of collateral on default by the debtor must give a notice to the grantor and any other secured party with higher priority. The notice must contain: (1) the secured party’s name; (2) a description of the collateral; (3) a statement that the secured party proposes to dispose of the collateral unless the secured obligation is performed by a specified date;76 (4) a statement that the notice is given for the purposes of the PPSA; and (5) if the secured party proposes to purchase the collateral itself, details of the notice recipient’s statutory right to object and an address to which a notice of objection may be sent.77 As a general rule, the date specified in the notice must be at least 10 business days after the notice is served.78 The notice may be in an approved form.79 A notice is not required if: (1) the secured party reasonably suspects the debtor or grantor of fraud; (2) the collateral is perishable or subject to rapid depreciation; (3) the costs of preserving the collateral are prohibitive; (4) the collateral is foreign currency; or (5) the collateral is to be disposed of in accordance with the operating rules of a clearing and settlement facility. A notice is also not required in the circumstances s 144 specifies: see 12.33 above. 12.44 The s 130 notice requirement serves several purposes. First, PPSA ss 142 and 143 give the grantor a right to redeem seized collateral or to

[page 383] reinstate the security agreement at any time before disposal, and the s 130 notice of disposal alerts them to these rights and the date by which they must be exercised.80 Second, PPSA s 137 provides that the grantor may object if the secured party proposes to purchase the collateral itself, and the s 130 notice alerts the grantor to the secured party’s intentions and to their right of objection. Third, s 127 gives a competing secured party with a higher ranking security interest the right to take over the collateral sale process, and the s 130 notice requirement alerts it to the fact that the notice-giving secured party has seized the collateral and is planning to sell it: see 12.39–12.40 above. Fourth, the notice enables the recipient to monitor the sale to make sure that it is conducted in a commercially reasonable manner and that the secured party obtains the best price. The s 142 right of redemption may be exercised by the grantor or any other person with a security interest in the collateral, while the s 143 right of reinstatement may be exercised by ‘any person’ (which would include another secured party). However, the enforcing secured party is not required to serve a s 130 notice on lower ranking secured parties.81 In cases where the security interest is provided by a third party, the grantor has an interest in learning about the sale because they may want to redeem the collateral. The debtor also has an interest because the conduct of the sale may affect the size of the deficiency for which the debtor is personally liable.82 However, the secured party is required to serve a s 130 notice on the grantor, but not the debtor. 12.45 National Credit Code s 102 provides that a credit provider who has taken possession of goods under a goods mortgage must, no later than 14 days afterwards, give the mortgagor a written notice containing the following matters: (1) the estimated value of the goods; (2) details of accrued enforcement expenses; and (3) a statement of the mortgagor’s rights and obligations under the Code. The credit provider must not dispose of the goods until at least 21 days after the date of the notice unless the court orders otherwise. Personal Property Securities Regulations 2010 (Cth) (PPS Regulations) reg 4.1 provides that, in a case where the PPSA and the National Credit Code both apply, PPSA s 130 is taken to have been complied with if the secured party complies with National Credit Code s 102. On paper, this concession may seem significant because: (1) there are differences in the contents of the two notices; and (2) the National Credit Code provision does not require service of the notice on other secured parties. In practice, though, these differences may not matter much. The additional information required

[page 384] in the PPSA s 130 notice is likely to be immaterial in consumer transactions,83 while in the majority of consumer transactions there will be no higher ranking secured party involved.

Methods of Disposal 12.46 PPSA s 128 governs the disposal of collateral following seizure. It provides that the secured party may dispose of the collateral by private or public sale (including auction or closed tender), by lease if permitted by the security agreement or, if the collateral is intellectual property, by licence.84 The secured party may dispose of all or part of the collateral. So, for example, the secured party does not have to dispose of all the collateral at once, but may dispose of it in parts. Alternatively, the secured party may dispose of part of the collateral and retain the rest under Div 4. If the collateral is a licence, the secured party’s power of disposal must be exercised subject to the terms and conditions of the licence and any applicable Commonwealth, state or territory law.85 12.47 Section 129 permits the secured party to purchase the collateral itself, but only at a public sale and by paying at least the market value of the collateral.86 Furthermore, the secured party may only proceed if it discloses its intention in the s 130 notice and there is no notice of objection. Section 137 governs the objection process. It provides that a recipient of the s 130 notice, in other words, either the grantor or a higher ranking secured party, may give the secured party a notice of objection before the end of the day specified in the notice and, in that case, the secured party cannot proceed under s 129 but must revert to its s 128 power of sale. Section 138 provides that, if the secured party receives a notice of objection from a party other than the grantor, it may request the objector to provide proof of its interest and, if the objector fails to comply within 10 business days, the notice of objection is taken not to have been given. Section 137 does not say that the notice of objection must set out the grounds of objection and there is no provision for the secured party to challenge an objection, for example on the grounds that it is frivolous or [page 385]

vexatious.87 The s 129 restrictions do not apply if the secured party sells the collateral to a related party. However, the secured party may be in breach of its obligations under ss 111 (duty to act in a commercially reasonable manner) and 131 (duty to maximise the sale price) if the related party pays less than market value. 12.48 Section 131 provides that a secured party who disposes of collateral under s 128 owes a duty to the grantor and any party holding a competing security interest to ‘exercise all reasonable care’ to obtain at least market value for the collateral or, if the collateral does not have a market value, to obtain ‘the best price that is reasonably obtainable at the time of the disposal, having regard to the circumstances existing at that time’. In cases where the security interest is provided by a third party, the debtor, as well as the grantor, has an interest in the disposal price because the debtor is personally liable to the secured party for any deficiency between the realised value of the collateral and the amount owing. The secured party’s s 131 duty does not extend to the debtor. However, s 131 overlaps with s 111 (rights and duties to be exercised honestly and in a commercially reasonable manner) and the debtor may have rights under s 111 if the secured party fails to exercise reasonable care in conducting the sale.88 12.49 The secured party’s duty under s 131 is to exercise reasonable care. Failure to maximise the purchase price is not itself proof of carelessness.89 For example, the outcome of the sale may be due to economic or other factors beyond the secured party’s control. On the other hand, a low price acts as a red alert and it will cause the court to look especially closely at the circumstances surrounding the transaction and the secured party’s conduct.90 If the secured party elects to purchase the collateral itself, it must comply with the specific requirements in s 129, and s 131 does not apply. Alternatively, if the secured party elects to proceed under s 128, it will be subject to the general duty of care set out in s 131 which substitutes for precise directions as to how the sale should be conducted. PPSA s 131 is substantially the same as Corporations Act s 420A (controller’s duty of care in exercising a power of sale) and cases decided under that provision will be relevant to the interpretation of PPSA s 131. Pre-PPSA cases dealing with the mortgagee’s power of sale may also be relevant, but some care may be needed here because the older case law suggests that the mortgagee’s duty was simply to act in good faith, whereas s 131 [page 386]

imposes a duty of care which is more onerous.91 According to the Explanatory Memorandum: [Section 131] requires that the collateral be marketed in a manner appropriate for sale of collateral of that type and compliance in each case would depend on the particular circumstances. The secured party … would be expected to, where appropriate, obtain proper valuations, advertise appropriately, maintain the collateral in good condition pending sale and choose an appropriate venue for the sale.92

If the secured party breaches s 131, the grantor and other interested parties may have a statutory claim for damages under PPSA s 271 for an amount equivalent to the shortfall in the purchase price.93 12.50 National Credit Code s 103 provides that the mortgagor may nominate a person who is prepared to buy the collateral for a price at least equal to the estimated value specified in the s 102 post-repossession notice and the credit provider must, in effect, give any nominated buyer the first right of refusal.94 Section 104 provides that, subject to s 103, the credit provider must ‘as soon as reasonably practicable (or at such time as the credit provider and mortgagor agree)’ sell the collateral ‘for the best price reasonably obtainable’. The credit provider must credit the mortgagor with a payment equivalent to the sale proceeds less any amounts the credit provider is entitled to deduct. Section 106 creates a statutory right to compensation in favour of the mortgagor and other mortgagees in cases where the credit provider breaches its duty to sell the collateral in a timely fashion or to sell for the best price reasonably obtainable. In cases where the PPSA and National Credit Code both apply, the National Credit Code provisions prevail to the extent of any inconsistency: see 12.13–12.14 above. For example, if the National Credit Code applies, the secured party must comply with the introduced buyer provision in s 103, even though there is no corresponding requirement in the PPSA. PPS Regulations reg 4.1 addresses the other side of the coin. It provides that, in a case where the PPSA and the National Credit Code both apply, PPSA ss 128 and 131 are taken to have been complied with if the secured party complies with National Credit Code s 104.

Statement of Account Following Disposal 12.51 PPSA s 132 provides that where a secured party disposes of collateral, it must, upon request, give the grantor and any other person with a security interest in the collateral a written statement of account. The secured party must comply with the request within 20 business days or such further period

[page 387] as is reasonable in the circumstances. The statement of account must disclose the following information: (1) in the case of a disposal by lease or licence, the total of actual and expected receipts from the date the secured party seized the collateral to the end of the lease or licence period;95 (2) in any other case, the total receipts from the date the secured party seized the collateral to the date of disposal; (3) the costs of the disposal; (4) any amounts paid to other secured parties; and (5) the balance owing by the secured party to the grantor, or by the debtor to the secured party, as the case may be.96 If the secured party does not dispose of the collateral within six months, it must, upon request, give the grantor or any other person with a security interest in the collateral a written statement of account for each period of six months after seizing the collateral until disposing of it. The secured party must comply with the request within 20 business days or such other period as is reasonable in the circumstances. The statement of account must: (1) state that the secured party has not disposed of the collateral; (2) show the total amount received in relation to the collateral from the date the secured party seized it to the date of the statement of account; and (3) show the total expenses relating to the retention of the collateral.97 A s 132 notice is not required if s 144 applies: see 12.33 above. 12.52 PPSA s 140 governs the distribution of the collateral sale proceeds: see 12.55–12.57 below. A s 132 statement of account enables the grantor and other secured parties to verify the correctness of the distribution. Section 140 provides that if there is any surplus remaining after the enforcing secured party has paid out prior claims on the distribution list, it must be paid to the grantor. Section 132 reflects this requirement by providing that the statement of account must disclose the balance owing by the secured party to the grantor. In most cases, there will be no surplus, and instead the collateral proceeds will fall short of the amount owing: ‘the surplus to be returned to the [grantor] after sale is the glittering mirage; the deficiency judgment is the grim reality’.98 Section 132 reflects this proposition by providing that the statement of account must disclose ‘the balance owing … by the debtor to the secured party’: see para 132(3)(e). However, in cases where the security interest is given by a third party, the grantor is entitled to a s 132 notice, but not the debtor. The Australian PPSA does not expressly confer on the secured party the right to bring a deficiency action: see 12.31 above. But the security agreement will typically provide for deficiency actions either expressly or by implication and PPSA s 132 appears to be drafted on this assumption.

[page 388] 12.53 National Credit Code subs 104(3) provides that a credit provider who sells mortgaged goods must give the mortgagor a written notice stating the gross amount realised on the sale, the net proceeds of the sale, the amount required to pay out the credit contract, any further recovery action the credit provider proposes to take against the debtor and any other information required by the regulations. This requirement must be complied with as a matter of course, and not simply at the mortgagor’s request. PPS Regulations reg 4.1 provides that in a case where the PPSA and the National Credit Code both apply, PPSA s 132 is taken to have been complied with if the credit provider complies with National Credit Code subs 104(3).

Purchaser’s Title 12.54 PPSA s 133 provides that when the secured party disposes of collateral, the purchaser acquires title free of: (1) the grantor’s interest; (2) the enforcing secured party’s security interest; and (3) all lower ranking security interests.99 The provision applies whether or not the secured party has complied with the requirements of Ch 4. Section 133 does not extinguish other competing interests; for example, the claim of a person with a better title to the collateral than the grantor’s. The purchaser will take the collateral subject to competing claims of this nature, but will have an action against the secured party for breach of the implied obligation to transfer clear title. Nor does s 133 extinguish the claim of a secured party holding a higher ranking security interest than the enforcing secured party’s. Again, therefore, the purchaser will take the collateral subject to any such competing claim. However, PPSA s 140, which governs the distribution of collateral disposal proceeds, provides for payment to the holder of a higher ranking security interest ahead of the enforcing secured party’s own claim. Payment of the higher ranking secured party discharges its security interest and so the purchaser acquires the collateral free of the higher ranking secured party’s claim after all: see 12.39–12.40 above.100

Distribution of Collateral Disposal Proceeds 12.55 PPSA s 140 governs the distribution of collateral disposal proceeds. Unlike most of the other provisions in Ch 4, s 140 cannot be excluded or varied by

agreement: see 12.15–12.16 above. However, the provision is subject to other Commonwealth, state and territory laws requiring the payment of collateral sale proceeds to unsecured creditors in priority to the claims listed in s 140. An example is Corporations Act s 561, which gives priority to unpaid wages and related claims over the claim of a secured party holding a security interest in the grantor’s circulating assets.101 Subsection 140(2) provides that the funds must be applied in the following order: (1) obligations to persons holding interests, other than security interests, in the collateral that have a [page 389] higher priority than the enforcing secured party’s security interest (for example, the holder of a repairer’s lien); (2) the enforcing secured party’s reasonable enforcement expenses to the extent that they are secured by the security interest; (3) obligations to persons holding higher ranking security interests; (4) obligations to the enforcing secured party; (5) obligations to persons holding lower ranking security interests; and (6) the grantor. A purchaser of collateral acquires title under s 133 free of the enforcing secured party’s security interest and also of any lower ranking security interest. However, subs 140(4) makes it clear that s 133 does not affect these parties’ entitlements under subs 140(2). Subsection 140(5) provides that a payment to a secured party under subs 140(2) discharges the security interest to the extent of the amount paid. Subsection 140(7) provides that the enforcing secured party is under no liability with respect to the distribution of proceeds provided that it applied the proceeds honestly and in a commercially reasonable manner. 12.56 As indicated above, the purchaser acquires title to the collateral under s 133 free of any lower ranking security interest: see 12.54. Section 140 compensates the lower ranking secured party by providing that it is entitled to payment out of the collateral disposal proceeds. By contrast, the purchaser takes subject to any higher ranking security interest. In recognition of this point, the Canadian PPSAs do not provide for payment of a higher ranking secured party out of the collateral disposal proceeds.102 The expectation is that the higher ranking secured party will enforce its claim against the purchaser and, in that case, a payment out of the sale proceeds would result in double recovery.103 The Australian PPSA does provide for the payment of a higher ranking secured party out of the collateral disposal proceeds while at the same time providing that the collateral purchaser acquires title subject

to the higher ranking security interest. Subsection 140(5) avoids the prospect of double recovery by making it clear that payment to the higher ranking secured party out of the collateral disposal proceeds discharges the security interest. However, this provision effectively means that, contrary to what s 133 says, the purchaser takes the collateral free of the higher ranking security interest. It is true that, under subs 140(5), the higher ranking security interest is discharged only to the extent of the amount paid. It is theoretically possible that the collateral sale proceeds may be insufficient to satisfy the higher ranking secured party’s claim in full, in which case it may enforce its security interest against the purchaser for the balance. However, the issue only arises in cases where the enforcement proceedings are taken by a lower ranking secured party and if there is insufficient collateral value to satisfy the higher ranking secured party’s claim, the lower ranking secured party is unlikely to take the enforcement proceedings in the first place. [page 390] 12.57 Section 140 provides that any surplus remaining at the end of the distribution process is payable to the grantor. This requirement derives ultimately from pre-PPSA mortgage law and it reflects the underlying purpose of a security interest. In contrast to the Canadian PPSAs, however, s 140 does not address the reverse case where, following the distribution, there is a shortfall between the amount paid to the enforcing secured party and the amount of the secured obligation.104 According to the Explanatory Memorandum, ‘where a secured party does not receive funds from the distribution [of the collateral sale proceeds] or there is a shortfall in the amount received, they would be able to take legal action against the debtor personally for the outstanding obligation’.105 However, there is no basis for this statement in the statute itself and so the secured party’s entitlement must depend on the terms of the security agreement. A court might be prepared to imply a term permitting deficiency actions but, to be on the safe side, the security agreement should probably include an express provision.106 12.58 National Credit Code s 105 provides that a credit provider who sells mortgaged goods under s 104 is entitled to deduct from the proceeds of sale only the following amounts: (1) the amount currently secured by the mortgage; (2) the amount required to discharge any prior mortgage; (3) the amounts payable in successive discharge of any subsequent mortgages; and (4) the credit provider’s

reasonable enforcement expenses. Section 105 must be read with s 104, which provides in part that, following the sale, the credit provider must credit the mortgagor with a payment equivalent to the proceeds of sale less any amounts the credit provider is entitled to deduct. The upshot is that any surplus remaining at the end of the distribution process is payable to the debtor.107 PPS Regulations reg 4.1 provides that where a transaction is subject to both the PPSA and the National Credit Code, the secured party is taken to have complied with PPSA s 140 if it complies with National Credit Code s 105.

Redemption and Reinstatement 12.59 PPSA s 142 provides that, at any time before a secured party disposes of collateral under s 128, the grantor or another secured party may redeem the collateral by paying out the obligation owing to the enforcing secured party together with enforcement expenses.108 Redemption discharges the enforcing secured party’s security interest. The grantor’s right of redemption under s 142 has priority over any other party’s right of redemption. Subsection 142(2) [page 391] provides that a person may not redeem collateral if they agree in writing after the default not to do so. However, this provision is subject to s 115, which provides that the parties cannot contract around s 142 if the collateral is used predominantly for personal, domestic or household purposes. Section 115 also suggests that, if the collateral is not predominantly for personal, domestic or household purposes, the parties may contract around s 142 in the security agreement itself and they are not required to wait until after the grantor defaults. National Credit Code subs 102(4) also provides for a right of redemption. If the National Credit Code applies, this provision applies in conjunction with PPSA s 142. The parties cannot contract around the National Credit Code right of redemption. The s 142 right of redemption is not to be confused with the grantor’s ‘equity of redemption’, in other words the right to have the security interest discharged following performance of the secured obligation and the right to any surplus following enforcement of the security interest. While the parties may contract around s 142, they cannot exclude or fetter the grantor’s more basic rights: see 12.16 above.

12.60 PPSA s 143 provides that, at any time before a secured party disposes of or retains collateral, a person may reinstate the security agreement by paying amounts in arrears (disregarding the effect of any acceleration clause in the security agreement) together with the enforcing secured party’s enforcement expenses and remedying other defaults.109 ‘Any person’, including the grantor and another secured party, may exercise the right of reinstatement, but the right may be exercised only once during the life of the security agreement. Reinstatement is different from redemption. To reinstate the security agreement, the grantor or other party must pay all arrears and cure any other defaults. In return, the grantor gets the collateral back; any acceleration that may have been triggered by the default is negated; and the security agreement continues as before with the secured party keeping its security interest in the collateral to secure payment.110 Unless the collateral is used predominantly for personal, domestic or household purposes, the parties may contract around s 143. However, National Credit Code s 89 also provides for a right of reinstatement and, if the National Credit Code applies, this provision operates in conjunction with PPSA s 143. The National Credit Code right of reinstatement cannot be excluded.

RETAINING COLLATERAL Introduction 12.61 PPSA Ch 4 Div 4 gives the secured party the option of retaining the collateral in satisfaction of the secured obligation, as an alternative to disposing [page 392] of the collateral under Division 3.111 This is the statutory equivalent of the prePPSA mortgagee’s equitable right of foreclosure. The statutory version is different from the equitable remedy in two main respects. First, the equitable remedy was only available where the security agreement took the form of a mortgage,112 whereas the statutory provisions apply to all security agreements regardless of form. Second, the equitable remedy required the secured party to obtain a court order extinguishing the debtor’s equity of redemption, whereas the statutory remedy is an extra-judicial one. The effect of the remedy is that the enforcing secured party is entitled to keep the collateral free of the grantor’s interest and also lower ranking

security interests, but that the debt or other obligation secured by the enforcing secured party’s security interest is extinguished. In other words, if the secured party elects to retain the collateral, it loses its right to sue the grantor for any shortfall between the value of the collateral and the amount of the debt. 12.62 Foreclosure may be an attractive option for the secured party if the value of the collateral exceeds the amount of the debt because the remedy enables the secured party to keep the surplus for itself. The statute provides, however, that the grantor and other interested parties may object to a proposed foreclosure and the most likely ground of objection is that the collateral value exceeds the amount of the debt. In practice, therefore, foreclosure will be unlikely in these circumstances. Will foreclosure ever be a viable remedy? A possible scenario is the case where the enforcing secured party knows that there will be a deficiency if it disposes of the collateral under Div 3 and also that its prospects of recovering the deficiency from the grantor are slight. If the secured party exercises its power of sale, it will have to comply with the requirements of Div 3 (unless the security agreement waives or modifies these provisions). On the other hand, if the secured party proceeds instead under Div 4, it can keep the collateral or sell whenever it likes and on its own terms. The remedy is not available if the collateral is used predominantly for personal, domestic or household purposes: subs 109(5).

Notice Requirements 12.63 PPSA s 134 provides that the secured party may retain the collateral following seizure, but only if it serves a notice under s 135 and receives no notice of objection under s 137. Section 135 provides that the secured party must give notice to: (1) the grantor; (2) any other secured party holding a security interest in the collateral that is perfected by registration (unless the enforcing secured party’s security interest is a purchase money security interest); and (3) if the enforcing secured party’s security interest is a purchase money security interest, any other secured party holding a security interest in [page 393] the collateral that is perfected by registration and over whom the enforcing secured party has priority under s 62 or 63.113 The notice must be given at least 10 business

days before the enforcing secured party takes its first steps to retain the collateral or any shorter period the enforcing secured party and the notice recipient may have agreed to in writing. The notice must be given in the approved form114 and contain: (1) the enforcing secured party’s name; (2) a description of the collateral; (3) a statement that the secured party proposes to retain the collateral unless the secured obligation is performed on or before a specified day (being at least 10 business days after the notice is given); (4) details of the obligation to be performed; (5) details of the notice recipient’s right of objection; (6) the address to which a notice of objection may be sent; and (7) any other matters prescribed by the regulations. A s 135 notice is not required if s 144 applies: see 12.33 above.

The Consequences of the Remedy 12.64 Section 136 provides that if the secured party complies with the s 135 notice requirements and receives no objection, the secured party may take steps to have title to the collateral pass to the secured party.115 The secured party’s title to the collateral, once acquired, is free of the grantor’s interest and also any lower ranking security interest.116 According to s 135, the enforcing secured party is required to serve a notice on another secured party only if its security interest is perfected by registration. A notice is not required if the other security interest is unperfected or perfected by a method other than registration. A secured party in this situation is subject to the operation of s 136 whether or not it receives a s 135 notice.117 While the enforcing secured party takes the collateral free of lower ranking security interests under s 136, its title remains subject to any higher ranking security interest. The holder of a higher ranking security interest remains free to exercise its rights under [page 394] s 127: see 12.39–12.40 above. Alternatively, the enforcing secured party may agree to pay out the higher ranking secured party. Section 136 also provides that when the enforcing secured party acquires title to the collateral, the obligation secured by its security interest is extinguished. If the enforcing secured party fails to comply with the s 135 notice requirements, it does not get the benefit of s 136. If it subsequently sells the collateral, however, the purchaser acquires title clear of the interests referred to above, provided they had no actual knowledge that the s 135

requirements had not been complied with.118

Objections and Related Matters 12.65 Sections 137 and 138 deal with the s 135 notice recipient’s right of objection. Section 137 provides that, if the secured party receives a notice of objection, it may not proceed with the proposed foreclosure but must revert to its Div 3 power of sale. Section 138 provides that, if the objector is not the grantor, the enforcing secured party may require proof of its interest and that the objector must comply within 10 business days. Section 137 does not say that the notice must set out the grounds of objection and there is no provision for the secured party to challenge an objection, for example on the grounds that it is frivolous or vexatious.119 Section 142 allows the grantor and other interested parties to redeem the collateral ‘at any time before the secured party disposes of the collateral under s 128’. The provision does not say that the grantor may redeem at any time before the secured party exercises its s 134 rights, but this is probably an oversight and the courts should be prepared to correct it. In any event, the converse proposition is clearly true, namely that the right of redemption is lost once title in the collateral passes to the secured party. This follows from subs 136(2) which provides that the secured party acquires title free of the grantor’s interest. Section 143 allows the grantor and other interested parties to reinstate the security agreement at any time before the secured party disposes of the collateral or ‘retains the collateral’. In the latter case, the right of reinstatement is presumably lost when the secured party acquires title to the collateral pursuant to s 136. [page 395]

COLLECTION RIGHTS Introduction 12.66 Example 8. SP takes a security interest in all Grantor’s present and after-acquired accounts to secure an operating line of credit. Some time later Grantor defaults. At the time of the default there are 100 customers who owe Grantor money for goods and services supplied.

SP may proceed under PPSA s 123: see 12.35 above. This involves ‘seizing’ the outstanding accounts by serving a notice of seizure on Grantor. The next step

would be to dispose of the accounts under s 128 and help itself to payment out of the disposal proceeds in accordance with s 140. Section 120 provides an alternative remedy. It allows SP to enforce its security interest by giving notice to the account debtors and directing them to pay SP. Section 120 also allows SP to recover from Grantor the proceeds of accounts on which Grantor has already collected. In many cases, the s 120 alternative will be quicker and cheaper than proceeding under s 128, not least because there are fewer formalities involved.

Notice Requirements 12.67 Section 120 applies where the collateral is accounts, chattel paper or a negotiable instrument.120 The notice to the account debtor (in the case of an account or chattel paper) or the drawee (in the case of a negotiable instrument) must be in writing in the approved form and it must direct the notice recipient to pay to the secured party the amount owing to the grantor within five business days from receipt of the notice or from the date the amount becomes due and payable (whichever is later): subs 120(3).121 The secured party must distribute any amounts it receives in accordance with s 140 and pay any surplus to the grantor.122 If the secured party takes [page 396] action under s 120, it must notify the grantor in writing within five business days afterwards, or any shorter period the parties may have agreed to in writing.123 12.68 PPSA subss 121(1)–(3) parallel s 127: see 12.39 above. They provide, in effect, that if the secured party plans to proceed under s 120 it must give a written notice to any higher ranking secured party stating that the enforcing secured party proposes to take action under s 120. The higher ranking secured party may preempt the enforcing secured party by indicating that it proposes to take action under s 120 itself and, in that case, the enforcing secured party may not proceed under the section.

Notification and Non-notification Transactions 12.69 Parties may negotiate a transfer of accounts or chattel paper on either a

notification or a non-notification basis. If the transfer is on a notification basis, the account debtors will be informed of the transaction and directed to pay the transferee. If the transfer is on a non-notification basis, the account debtors will not be informed and the transferor will continue collecting the accounts until told by the transferee to stop. The notification method is more commonly used in connection with outright transfers, whereas security transfers are typically transacted on a non-notification basis.124 On the other hand, the transaction of a security transfer on a notification basis is not out of the question. In that event, the secured party would typically take over the collections from the outset and hold the proceeds in a separate account of some kind. If the grantor defaults, the secured party will want to help itself to payment out of either or both future collections and the collections already in hand. PPSA s 120 is drafted with the non-notification type of transaction primarily in mind, but it is capable of applying also to notification arrangements. Subsection 120(2) provides that the secured party may seize any proceeds of collateral to which it is entitled. In the case of a notification arrangement, where the secured party is already in possession of the collection proceeds, seizure would be effected by notifying the grantor that the secured party plans to keep the proceeds in full or partial satisfaction of the secured obligation. PPSA subs 80(7) governs the rights of an account debtor who receives a notice under s 120: see 12.74 below.

The Account Debtor’s Rights Introduction 12.70 PPSA s 80 governs the rights of an account debtor following the transfer of accounts or chattel paper. Section 80 is in Ch 2 of the statute, not [page 397] Ch 4, and so it applies to both security and non-security transfers. References in the provision to a transferee include a secured party and a receiver.125

Account debtor’s defences 12.71

Example 9. Grantor is a furniture retailer. SP takes a security interest in Grantor’s present and afteracquired accounts. Grantor sells Customer a dining table for $2500 on 12 months interest-free credit terms. Grantor defaults on its obligations to SP and, at the time of Grantor’s default, Customer’s account is still outstanding. The table is defective and Customer has been quoted $500 or more to have it repaired. SP serves a PPSA s 120 notice on Customer requiring them to pay the outstanding account to SP.

Can Customer set off their $500 or more damages claim against the $2500 they owe SP? The governing provision is PPSA para 80(1)(a), which provides that the rights of the transferee of an account or chattel paper (including a secured party or a receiver) are subject to the terms of the contract between the account debtor (Customer) and the transferor (Grantor) and any equity, defence, remedy or claim arising in relation to the contract (including a defence by way of set-off). The provision does not apply if the account debtor makes an enforceable agreement not to assert defences to claims arising out of the contract. If Grantor had not transferred Customer’s account to SP, Customer would have had an equitable right of set-off against Grantor.126 The effect of PPSA para 80(1)(a) is to preserve Customer’s set-off rights following Grantor’s transfer of the account to SP.127 12.72 Example 10. Grantor is a furniture retailer. SP takes a security interest in Grantor’s present and afteracquired accounts. Grantor sells Customer a dining table for $2500 on 12 months interest-free credit terms. Grantor defaults on its obligations to SP and, at the time of Grantor’s default, Customer’s account is still outstanding. Customer is a plumber and does some work for Grantor for which they charge $500. Grantor has not paid Customer’s bill. SP serves a PPSA s 120 notice on Customer requiring them to pay the outstanding account to SP.

Equitable set-off is only available if both debts derive from the same contract or closely connected contracts (as in Example 10): see 3.52. But this is not a requirement for legal set-off. Legal set-off allows the account debtor to set off [page 398] claims that arise out of unconnected transactions, provided that both claims are for liquidated amounts and the debts are mutual.128 In Example 10, if Grantor had not transferred Customer’s account to SP, Customer would have had a legal right of setoff against Grantor.129 PPSA para 80(1)(b) preserves Customer’s rights following the transfer. It provides, in effect, that Customer may set off the $500 Grantor owes them against the $2500 Customer owes Grantor, provided Grantor’s $500 debt accrued before Customer was notified of the transaction between Grantor and

SP.130 Again, the provision is subject to any provision to the contrary in Customer’s contract with Grantor. It follows that Customer has a right of set-off against SP provided they did the plumbing work before SP served the s 120 notice.131

Contract modifications and substitutions 12.73 PPSA subs 80(3) deals with contract modification following the transfer of an account. It provides that, unless the account debtor has otherwise agreed, a modification of, or substitution for, the contract between the account debtor and the transferor is effective against the transferee (including a secured party or a receiver). The rule is subject to the following qualifications: (1) the account debtor and transferor must act honestly in making the modification or substitution; (2) the manner in which the modification or substitution is made must be commercially reasonable; and (3) the modification or substitution must not have a materially adverse effect on the transferee’s rights or the transferor’s obligations to the transferee. Subsection 80(4) provides that subs (3) applies to the extent that the account debtor’s obligation has not been fully earned by performance on the transferor’s side, and even if the account debtor has notice of the transfer. Subsection 80(5) provides that if a contract is modified or substituted in accordance with subs (3), the transferee inherits the transferor’s rights as modified or substituted. Subsection 80(6) provides that nothing in the preceding subsections affects the validity of a term in a transfer agreement prohibiting modifications or substitutions. In other words, while a modification or substitution is effective despite any provision to the contrary in the contract between the transferor and transferee, the transferee may have a damages claim against the transferor for any loss it suffers due to breach of the prohibition.132 The significance of subs 80(6) is diluted by the [page 399] fact that subs 80(3) does not permit a modification or substitution in the first place if it would adversely affect the transferee’s rights. The combined effect of the two provisions seems to be that a modification or substitution is valid, despite any provision to the contrary in the transfer agreement, and even if it adversely affects the transferee’s rights, provided the transferee can be adequately compensated in

damages for the breach.

Payment by account debtor after transfer 12.74 PPSA subs 80(7) is relevant to the non-notification transfer of an account or chattel paper and it protects the account debtor against the risk of double payment. It provides that the account debtor may continue making payments to the transferor until notified that the account (or chattel paper) has been transferred and that payment is to be made to the transferee. After receiving notification, the account debtor may require the transferee to provide proof of the transfer. The transferee must comply within five business days, otherwise the account debtor may continue making payments to the transferor. Subsection 80(8) makes it clear that a payment by the account debtor to the transferee pro tanto discharges their obligation.133

Restrictions on assignment 12.75 PPSA s 81 applies where the contract between the transferor and the account debtor contains a provision prohibiting or restricting transfer. It provides, in effect, that: (1) the term is binding on the transferor, but only to the extent of making the transferor liable in damages for breach of contract; and (2) the term is unenforceable against third parties.134 The provision reverses the common law rule upholding anti-assignment provisions. As a result of PPSA s 81, an anti-assignment clause is valid, but only to the extent of giving the account debtor an action in damages against the transferor for breach of contract. The clause does not affect the validity of the transfer: see 2.33 of this text.135

CROPS AND LIVESTOCK 12.76 PPSA ss 138B and 138C enact special rules for the enforcement of a security interest in crops and livestock. Section 138B applies where the collateral is a crop. It provides, in effect, that, for the purpose of exercising its s 123 power of seizure, the secured party may enter the land on which the [page 400]

crop is growing and harvest the crop. After harvesting, the secured party may dispose of or retain the crop subject to the provisions of Ch 4 discussed above. Section 138C applies where the collateral is livestock. It provides, in effect, that, for the purpose of exercising its s 123 power of seizure, the secured party may enter the land on which the livestock is located and take possession of the livestock or, alternatively: (1) slaughter the livestock; (2) if the livestock is fish, catch the fish; or (3) extract products from the livestock (for example, by shearing sheep to extract wool). The secured party may dispose of or retain the livestock or its products subject to the provisions of Ch 4.

CORPORATIONS ACT 2001 (CTH) PART 5.2 12.77 Corporations Act 2001 (Cth) Pt 5.2 governs receivers and other controllers of a corporation’s property. ‘Controller’ means: (1) a receiver, or receiver and manager; and (2) anyone else who, whether or not as agent for the corporation, is in possession or has control of the corporation’s property for the purpose of enforcing a security interest.136 The terms ‘receiver’ and ‘receiver and manager’ are not defined as such but, broadly speaking, a receiver is a person appointed either by court order or pursuant to the terms of a security agreement to take control of a corporation’s property for the purpose of enforcing a security interest. A receiver and manager is a receiver who, in addition to his primary function as a receiver, also has power under the terms of their appointment to carry on the corporation’s business during the course of the receivership. References in Pt 5.2 to a ‘receiver’ include a receiver and manager.137 Some of the provisions in Pt 5.2 apply to controllers at large, while others are limited to receivers. The following is an outline of the main provisions in Pt 5.2 relevant to the enforcement of security interests.138 12.78 The security agreement or court order will typically give the receiver extensive powers. Corporations Act s 420 also confers a set of powers on receivers which are designed to supplement the powers expressly conferred by the security agreement or court order. The s 420 powers are subject to the terms of the receiver’s appointment. Section 420 provides that the receiver has power to do ‘all things necessary or convenient to be done’ to attain the objectives for which they were appointed. It goes on to provide specifically that the receiver may, among other things: enter into possession and take control of the corporation’s property in accordance with the terms of their appointment; and lease, let on hire or dispose of the corporation’s property.

12.79 Section 420A applies not just to receivers, but to controllers at large. Subsection 420A(1) provides that, in exercising a power of sale in respect of a corporation’s property, a controller must take all reasonable care to sell [page 401] the property for: (1) if when sold, the property has a market value, not less than that market value; or (2) otherwise, the best price that is reasonably obtainable having regard to the circumstances existing when the property is sold.139 The provision imposes a higher standard than the general law. At general law, the rule was that, in exercising a power of sale, a receiver must ‘act in good faith, which involves an obligation to deal fairly with the interests of the [debtor], which in turn involves an obligation to refrain from acting in wilful or reckless disregard of those interests’.140 The receiver traditionally was not answerable for ‘ “mere negligence in carrying out the sale”. Any departure from reasonable standards must be so serious as to be properly characterised as unconscionable in order to render the [receiver] accountable’.141 12.80 ‘Market value’ is not defined in the Act, but it has been held to mean ‘the estimated amount for which an asset should be exchanged on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion’.142 The second limb of the provision deals with cases where the property does not have a market value, or where the market value is difficult or impossible to ascertain by reference to comparable sales or market experience.143 The statute does not enact remedies for breach of the duty, but a party who suffers loss may use the provision as a basis for claiming an appropriate remedy at common law.144 For example, they may bring an action for account145 or plead equitable setoff.146 It may also be possible to claim damages under Corporations Act s 430, which gives the court a broad jurisdiction to inquire into a controller’s conduct and ‘to take such action as it thinks fit’.147 [page 402] 12.81 Section 420A does not require the controller to obtain the maximum

price.148 The controller’s obligation is simply to take ‘reasonable care’ in conducting the sale and to sell for the best price ‘reasonably obtainable’. Whether a private sale or an auction is appropriate will depend on the nature of the property and other circumstances. In Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd,149 the court held that the sale process was seriously flawed because the mortgagee undermined the auction by keeping a knowingly interested purchaser away. Where necessary, the controller must take and consider professional and independent advice, particularly if the property is of an unusual kind.150 In Skinner v Jeogla,151 the receiver was found to be in breach of duty when he sold some cattle at a local auction, even though he had received advice from a specialist stock agent that the cattle were rare breeding stock and should have been sold on the international market. By contrast, in Florgale Uniforms Pty Ltd v NAB,152 the company specialised in customised industrial and nursing uniforms. The receiver arranged for the stock to be sold at auction. The company’s directors argued that the receiver should have approached established customers to negotiate a private sale, but the court found that the receiver had taken reasonable care in the circumstances. 12.82 Corporations Act s 420B applies where a receiver and manager or other managing controller wants to sell property that is subject to a higher ranking security interest. It provides that, on application by the controller, the court may authorise a sale even though the property is subject to a higher ranking security interest. However, the court must be satisfied that: (1) apart from the higher ranking security interest, the controller would have power to sell the property; (2) the controller has taken all reasonable steps to obtain the higher ranking secured party’s consent to the sale; (3) the sale is in the interests of the corporation and its creditors; and (4) the sale would not unreasonably prejudice the higher ranking secured party’s interests. If the subject property is to be sold along with other property, the court may take into account how much less the other property would be likely to sell for if it was sold separately, and how much more the subject property would be likely to sell for if it was sold separately. An order under s 420B may be made subject to conditions, including a condition that some or all of the net sale proceeds be paid to the higher ranking secured party. 12.83 Corporations Act s 433 applies where a receiver is appointed on behalf of debenture-holders who hold a circulating security interest and the corporation is not in liquidation. It provides that the receiver must pay

[page 403] certain claims in priority to the debenture-holders’ claims. The statute does not indicate how the receiver is to distribute the balance of the funds, but the receiver is subject to duties at common law in this regard.153 The common law position is broadly consistent with the order of distribution in PPSA s 140. PPSA s 140 itself does not apply; subs 140(1) indicates that the section applies to amounts received by or on behalf of a secured party as a result of enforcing a security interest, but it is clear from s 116 that Ch 4, including s 140, does not apply in a receivership.

1.

2. 3. 4. 5. 6. 7. 8. 9.

10. 11. 12.

13. 14. 15.

16.

As explained in Chapter 1, in most cases the person who gives the security interest (the grantor) and the person subject to the secured obligation (the debtor) will be one and the same. But if the security interest is given by a third party, the grantor and the debtor will be two separate entities. In both the two-party and three-party cases, the security interest is enforceable against the grantor. The difference is that, in the two-party case, the secured party’s rights are triggered by the grantor’s own default, whereas in the threeparty case the triggering event is the debtor’s default, not the grantor’s. For ease of exposition, the discussion in this chapter for the most part assumes a two-party scenario. See Edward I Sykes and Sally Walker, The Law of Securities, 5th ed, Law Book Company Limited, Sydney, 1993, ch 13. See Jacob S Ziegel and David L Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed, Butterworths, Toronto, 2000, p 480. See, for example, Hire-Purchase Act 1959 (Vic). See, for example, Credit Act 1984 (Vic). National Consumer Credit Protection Act 2009 (Cth) Sch 1. See, for example, Hire-Purchase Act 1959 (Vic) s 16. Australian Accounting Standards Board, Compiled AASB Standard — Leases (AASB 117) (Commonwealth of Australia, 2009). AASB 117 s 4. Risks incidental to ownership include the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions. Rewards include the expectation of profitable operation over the asset’s economic life and of gain from appreciation in value or realisation of a residual value: AASB 117 s 7. AASB 117 s 10. AASB 117 s 11. See also: Ronald C C Cuming, Catherine Walsh and Roderick J Wood, Personal Property Security Law, 2nd ed, Irwin Law, Toronto, 2012, pp 125–33, identifying a similar list of factors relevant in the Canadian context; the United States Uniform Commercial Code s 1-201(37) listing factors relevant to whether a transaction creates a true lease or a security interest for the purposes of the Code. See above note 12, at p 133. See above note 12. See also Access Cash International Inc v Elliott Lake and North Shore Corporation for Business Development (2000) 1 PPSAC (3d) 209 (ONSC). The Statutory Review has recommended deleting subs 109(2): Bruce Whittaker, Review of the Personal Property Securities Act 2009 (Commonwealth of Australia, 2015), para 8.1.4 (‘Statutory Review: Final Report’). The Statutory Review has recommended further consideration of this provision, suggesting that it should

17. 18. 19. 20. 21. 22. 23. 24. 25. 26.

27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39.

40.

41. 42.

43.

44.

be limited to market-traded investments: Statutory Review: Final Report, para 8.1.5. Parliament of the Commonwealth of Australia, Senate, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009 (24 June 2009), para 4.5. Contrast the definition of ‘consumer property’ in PPSA s 10: see 2.51–2.53 of this text. The Statutory Review has recommended repealing subs 109(5): Statutory Review: Final Report, para 8.1.6. National Credit Code subs 204(1), ‘mortgage’. National Credit Code subss 9(3), 204(1), ‘mortgage’. National Credit Code ss 4, 5 and 7. Personal Property Securities Regulations 2010 (Cth) reg 4.1. See above note 17, at para 4.32 which lists the points of interaction between the PPSA and the National Credit Code and details how the two statutes operate when there are concurrent and conflicting duties. Or the security agreement may give the grantor rights additional to those provided for in PPSA Ch 4. The Statutory Review has recommended amending subs 115(1) to make it clear that the test is the grantor’s intended use for the collateral at the date of the security agreement: Statutory Review: Final Report, para 8.1.9.1. Uniform Commercial Code — Secured Transactions s 9–602. See, for example, Saskatchewan PPSA s 56(3). Grant Gilmore, Security Interests in Personal Property, Vol II, Little Brown & Co, Boston, 1965, pp 1228– 9. See above note 17, at para 4.1. Statutory Review: Final Report, para 8.1.1. Paragraph 8.1.1. Statutory Review: Final Report, para 8.1.1.2. Contractual deposits and repo agreements are both cases in point: see 3.18–3.20 of this text. See above note 17, at para 4.18. Personal Property Securities Act 1999 (NZ) s 106. See, for example, Saskatchewan PPSA s 56(1). Saskatchewan PPSA s 64. PPSA subs 116(2) provides that Ch 4 (except s 131) does apply if a controller other than a receiver or receiver and manager is in control of the collateral. A controller is any person who (whether or not as agent for the corporation) is in possession or control of the collateral for the purposes of enforcing a security interest: PPSA subs 116(4); Corporations Act 2001 (Cth) s 9. However, in a case to which subs 116(2) applies, the parties may contract out of the application of Pt 4.3 (seizure and disposal or retention of collateral). Section 131 governs the duty of a secured party disposing of collateral to obtain market value. It is excepted from subs 116(2) because there is a similar provision in Corporations Act s 420A and the purpose is to avoid overlap. The Statutory Review has recommended that the government give further consideration to whether company receiverships should continue to remain outside PPSA Pt 4: Statutory Review: Final Report, para 8.1.10.2. Replacement Explanatory Memorandum, at para 4.20. There are comparable provisions in Art 9 and the Canadian PPSAs: see Uniform Commercial Code — Secured Transactions s 9–604 and, for example Saskatchewan PPSA s 55(4)–(6). Contrast Saskatchewan PPSA s 65(3) and New Zealand PPSA s 25(1) in this respect. See Re Maiden Civil (P&E) Pty Ltd; Richard Albarran and Bruce Alexander Pleash [2013] NSWSC 852 at [80], distinguishing between rights and remedies under PPSA Ch 4 and rights and remedies under the security agreement. Compare cases relating to directors’ duties under the Corporations Act; for example, Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 13 ACLR 261; Commercial Bank of Australia v Friedrich (1991) 5 ASCR 115. See, for example, Greyvest Leasing v Merkur (1994) 8 PPSAC (2d) 203; GC Parking Ltd v New West Ventures Ltd (2004) BCSC 706 at [77]; Northwest Equipment Inc v Daewoo Heavy Industries America Corp

45.

46. 47. 48. 49. 50. 51. 52. 53. 54. 55.

56. 57.

58. 59.

60. 61.

62. 63. 64. 65. 66. 67.

(2002) 3 PPSAC (3d) 101; Mallicoat v Volunteer Finance (1966) 3 UCC 1035 (Tennessee CA); HSBC Bank Canada v Kupritz (2011) BCSC 788 at [36]. Paragraph 112(2)(a) provides that subs (1) does not apply if the secured party had title to the collateral immediately before commencing enforcement proceedings. For instance, assume that, in Example 5, SP acquires title to the art collection from Trustee. On these facts, SP has legal title to the collateral together with a security interest in Grantor’s equitable title and para 112(1)(a) makes it clear that there are no relevant restrictions on SP’s rights to deal with the collateral. Paragraph 112(2)(b) provides that subs (1) does not apply to the extent that it would otherwise prevent the secured party from dealing with the collateral by way of transfer because a transfer by the grantor would be prohibited under a security agreement. For example, if SP1 and SP2 have competing security interests in the collateral, SP1 may seize and sell the collateral despite a provision in the grantor’s security agreement with SP2 prohibiting the grantor from selling the collateral. [2013] NSWSC 852 at [78], [79]. [2008] 3 SCR 166. See above note 47, at [50]. The Statutory Review has recommended deleting subs 112(3), on the ground that it adds nothing to subs 112(1) (or, it might be added, subs 128(6)): Statutory Review: Final Report, para 8.1.8. Compare, for example, Saskatchewan PPSA s 55(7). See above note 12, at p 615. See Uniform Commercial Code — Secured Transactions s 9–601(c) and, for example, Saskatchewan PPSA s 55(3). See above note 3, at p 490. For discussion, see Anthony Duggan and Elizabeth Lanyon, Consumer Credit Law, Butterworths Sydney, 1999, para 10.4.29. Most of the references in Ch 4 are to ‘default by the debtor’. This formulation overlooks cases where the grantor and debtor are different persons, either or both of whom might be in default. The Statutory Review has recommended amendments to address this problem: Statutory Review: Final Report, para 8.1.2. Saskatchewan PPSA s 21(1), New Zealand PPSA s 16(1). The Statutory Review has recommended expanding s 144 to provide that a secured party is only required to give a notice to another secured party if the other secured party is perfected by registration or possession. The concern is that in other cases the enforcing secured party may not be aware of the competing security interest: Statutory Review: Final Report, para 8.4.3.2. For discussion, see above note 54, at paras 10.4.10–10.4.19. If the collateral is a licence, the notice must also be given to the licensor or the licensor’s successor. As currently drafted, subs 123(2) does not apply to financial property or intermediated securities. The Statutory Review has recommended removing these restrictions: Statutory Review: Final Report, para 8.3.1. If the collateral is a licence, the notice must also be served on the licensor or the licensor’s successor. The Statutory Review has recommended deleting this requirement: Statutory Review: Final Report, para 8.3.2. PPSA s 123 is on the s 115 list of provisions the parties may contract out of: see 12.15–12.16 above. However, s 115 cannot be read as meaning that the parties may agree to an illegal method of seizure. All the provision means in this context is that the parties may contract out of liability under the PPSA itself for non-compliance with s 123. See above note 54, at para 10.4.28; Colin Turner, ‘Repossession under the Australian ‘Uniform’ Hire– Purchase Legislation’ (1973) 7 Sydney Law Review 1. As in the Canadian case of R v Doucette [1960] OR 407 (ONCA). PPSA s 271 provides for a damages claim against a person who fails to discharge any duty or obligation imposed by the statute. See above note 54, at para 10.4.28. For discussion, see above note 54, at paras 10.4.30–10.4.31. See above note 54, at paras 10.4.23–10.4.26.

68. 69. 70.

71.

72.

73. 74.

75.

76.

77. 78. 79. 80. 81.

82. 83.

84.

85. 86. 87.

88. 89.

Compare New Zealand PPSA s 111 and, for example, Saskatchewan PPSA s 58(2). See above note 17, at ch 4, para 47. The corresponding provision in Saskatchewan PPSA s 58(2) provides that the secured party may seize the collateral without removing it from the debtor’s premises ‘in any manner by which a sheriff acting pursuant to a writ of execution may seize without removal’. SP2 must notify SP1 under s 130 of its intention to sell the collateral: see 12.43–12.44 below. The Statutory Review has recommended amending s 127 to make it clear that SP1’s right to take over the enforcement proceedings is subject to any agreement to the contrary between SP1 and SP2: Statutory Review: Final Report, para 8.3.5.1. The payment must be made within 20 business days after the sale of the collateral or the date SP2 gives SP1 evidence of the expenses, whichever is the later. The note to subs 127(2) misrepresents the effect of the section and should be disregarded. The Statutory Review elected not to recommend any changes in this connection: Statutory Review: Final Report, para 8.4.5. Section 125 implies that the secured party must seize the collateral before disposing of it. There may be circumstances where the secured party would prefer to sell the collateral without seizing it. The Statutory Review has recommended an amendment to address this point: Statutory Review: Final Report, para 8.4.1.1. See, for example: Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349; and see generally the cases discussed in Artistic Builders Pty Ltd v Elliott & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16 at [101]– [105]. The Statutory Review has recommended amending this part of the provision to make it clear that the notice does not have to state the actual amount owing and that it may simply disclose the manner of calculation: Statutory Review: Final Report, para 8.4.3.3. PPSA s 129 governs the secured party’s right to purchase the collateral itself; ss 137 and 138 deal with objections: see 12.47 below. A shorter period is permissible if the notice recipient agrees in writing. See Personal Property Securities (Approved Forms) Instrument 2011 (Cth). PPSA ss 142 and 143 are discussed in 12.59–12.60 below. Contrast, for example, Saskatchewan PPSA s 59(6). According to the Explanatory Memorandum, the reason for the Australian approach is to limit ‘the cost burden on enforcing secured parties’. The Explanatory Memorandum goes on to point out that a lower ranking secured party might negotiate additional notice provisions in their favour: see above note 17, at para 4.36. See above note 12, at p 622. The PPSA s 130 notice must disclose certain information if the secured party proposes to purchase the collateral itself. But National Credit Code s 104, which provides for sale by the credit provider, makes no reference to purchase by the credit provider itself and appears to preclude it. For the purposes of the statute, if collateral is disposed of by lease or licence, the disposal occurs at the time the lease or licence is entered into: subs 128(3). The power to dispose of collateral by lease or licence must be exercised in accordance with the terms and conditions of the security agreement: subs 128(4). The option is not available if the collateral is used predominantly for personal, domestic or household purposes: subs 109(5). See subs 120(6). This provision duplicates PPSA subs 112(3): see 12.29 above. Compare, for example, Saskatchewan PPSA s 59(13). Section 129 does not apply if the collateral is used predominantly for personal, domestic or household purposes: subs 109(5). The Statutory Review has recommended dispensing with the objection process on the ground that the grantor and other interested parties are sufficiently protected by the requirements for a public sale and payment of at least market value: Statutory Review: Final Report, para 8.4.2.2. See above note 17, at para 4.71. See above note 17, at para 4.69.

90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.

107. 108. 109. 110.

111. 112. 113.

114. 115.

116.

117. 118.

See above note 12, at p 648. For discussion of the earlier case law, see above note 2, at pp 113–21. Cases decided under the hirepurchase laws and consumer credit laws may also be relevant: see above note 54, at [10.4.36]. See above note 17, at para 4.70. See above note 17, at para 4.72. For discussion of this provision, see above note 54, at para 10.4.35. The Statutory Review has recommended deleting the requirement to disclose expected receipts: Statutory Review: Final Report, para 8.4.4.2. The Statutory Review has recommended a clarification to the effect that a statement of account is required only when the secured party has disposed of all the collateral: Statutory Review: Final Report, para 8.4.4.1. Compare, for example, Saskatchewan PPSA s 60(3). See above note 29, at p 1188. Compare, for example, Saskatchewan PPSA s 59(14). See above note 17, at paras 4.77–4.78. Example following PPSA subs 140(1A). See, for example, Saskatchewan PPSA s 60(2). See above note 12, at pp 675–6. Contrast, for example, Saskatchewan PPSA s 60(5). See above note 17, at para 4.89. At common law, in the case of a mortgage or charge, the secured party’s right to sue for any deficiency derived by implication from the nature of the transaction. But there was no such implied term in the case of a conditional sale agreement: see above note 12, at pp 665–6. The Statutory Review has recommended closing this gap in the statute: Statutory Review: Final Report, para 8.6.5. See above note 54, at paras 10.4.43–10.4.45. Compare, for example, Saskatchewan PPSA s 62(1)(a). Compare, for example, Saskatchewan PPSA s 62(1)(b). The Statutory Review has recommended that only the grantor should be permitted to reinstate the security agreement and also that the right should terminate if the secured party has committed itself to disposing of the collateral, even if the disposal has not yet taken place: Statutory Review: Final Report, para 8.6.3. Compare, for example, Saskatchewan PPSA s 61. See 12.4 above. The Statutory Review has recommended simplifying these requirements by providing instead that the notice must be given to the grantor and any other secured party whose security interest is perfected by registration or possession: Statutory Review: Final Report, para 8.5.1. See Personal Property Securities (Approved Forms) Instrument 2011 (Cth). The Explanatory Memorandum states that ‘a secured party would need to ensure that legal title to the property passes to them as this would not occur by operation of law’: see above note 17, at para 4.85. In this connection, see also PPSA s 141. The Statutory Review has recommended amending the provision to accommodate the fact that title to the collateral may already be with the secured party: Statutory Review: Final Report, para 8.5.3. However, the obligation owing to the lower ranking secured party is not extinguished: para 136(5)(b). In other words, the lower ranking secured party loses its security interest in the collateral but still has its personal remedies against the grantor. The Statutory Review has recommended extending the notice requirement to a secured party whose security interest is perfected by possession: Statutory Review: Final Report, para 8.5.1. PPSA subs 136(3). Subsection (4) makes it clear that this provision applies with respect to a lower ranking security interest even if it is perfected by registration. This provision avoids the need for a person who purchases collateral from the enforcing secured party to search the PPS register in advance of the transaction.

119. Contrast, for example, Saskatchewan PPSA s 61(2), which limits objections to persons ‘whose interest in the collateral would be adversely affected by the secured party’s proposal’ and s 61(6) which provides that the secured party may apply to the court for an order that the objection is ineffective. See also New Zealand PPSA s 121, which corresponds with Saskatchewan PPSA s 61(2). There is no New Zealand equivalent to s 61(6). The Statutory Review has recommended amendments to address this issue: Statutory Review: Final Report, para 8.5.4. 120. Note that an ADI account is not an ‘account’ within the meaning of the statute, while a loan obligation may or may not qualify as an account: see 2.34–2.35 of this text. The Statutory Review has recommended broadening the provision so that it applies to all payment obligations: Statutory Review: Final Report, para 8.2.2. 121. The Statutory Review has recommended changes to subs 80(7) which, if implemented, would make subs 120(3) unnecessary: see Statutory Review: Final Report, para 8.2.4; and see 12.74 below. 122. Subsection 120(4) provides that the secured party must apply any amount received under s 120 towards the secured obligation, while subs 120(5) provides that if any amount is received in the form of currency, it must be distributed in accordance with s 140. But it makes no sense for s 140 to apply if the obligor pays in cash but not if, for example, they pay by cheque. Besides, subss 120(4) and (5) appear to contradict subs 140(1), which clearly indicates that s 140 applies in any case where the secured party receives an amount under s 120. The Statutory Review has recommended replacing subss 120(4) and (5) with a provision saying simply that all amounts recovered under s 120 must be applied in accordance with s 140: Statutory Review: Final Report, para 8.2.5. 123. Subsections 121(4) and (5). 124. PPSA Ch 4 does not apply to an outright, or non-security, transfer of accounts: see 12.7 above. 125. The provision is limited to accounts as defined in PPSA s 10. This means, for example, that it does not apply to ADI accounts, while its application to loan obligations at large is uncertain: see 2.29–2.33 of this text. 126. Customer would not have had a legal right of set-off because, for legal set-off, both debts must be for liquidated amounts. This is not a requirement for equitable set-off: see 3.52 of this text. 127. In this respect, the provision simply restates the common law position relating to the enforceability of setoff rights against assignees and other interested third parties: see Derham on the Law of Set-Off, 4th ed, Oxford University Press, Oxford, 2010, ch 17; see paras 17.11–17.12. 128. In other words, both claims must be against the same party in the same right: see 3.52 of this text. 129. But possibly not in New South Wales and Queensland, where the Statutes of Set-Off have been repealed: see above note 127, at para 17.16. 130. The corresponding provision in Saskatchewan PPSA s 41(2)(b) states that the rights of an assignee are subject to ‘any other defence or claim of the account debtor against the assignor that accrues before the account debtor acquires knowledge of the assignment’. Australian PPSA para 80(1)(b) is more convoluted, but it comes to the same thing. 131. For discussion of the pre-PPSA position regarding disputes of this nature, see above note 127, ch 17. 132. Compare, for example, Saskatchewan PPSA s 41(3)–(6). 133. Compare, for example, Saskatchewan PPSA s 41(7)–(8). The Statutory Review has recommended amending subs 80(7), among other things, to give the account debtor a further five days after receipt of the notice to make the payment: Statutory Review: Final Report, para 8.2.3. 134. Compare, for example, Saskatchewan PPSA s 41(9). See also Australian PPSA s 79 (transfer of collateral despite prohibition in security agreement). 135. The Statutory Review has recommended some amendments to s 81, among other things, to make it clear that transfer includes the giving of a security interest: Statutory Review: Final Report, para 7.11.3. 136. Corporations Act 2001 (Cth) s 9. 137. Corporations Act 2001 (Cth) s 416. 138. For a fuller account, see R P Austin and I M Ramsay, Ford’s Principles of Corporations Law, 15th ed, LexisNexis Butterworths, Sydney, 2012, ch 26.

139. A receiver is an officer of the corporation: Corporations Act 2001 (Cth) s 9 and, as such, they are subject to the duties imposed on directors and other officers by ss 180–185. Subsection 420A(2) provides that subs (1) does not limit the application of these other provisions. 140. Artistic Builders Pty Ltd v Elliott & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16 at [87], quoting Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1994) 8 BPR 15,581 at 15,582–3 per McLelland CJ in Eq. 141. Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1994) 8 BPR 15,581 at 15,582–3 per McLelland CJ in Eq, quoting Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 6 CLR 676 at 700 per Isaacs J; Artistic Builders Pty Ltd v Elliott & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16 at [87] per Campbell J. 142. Fortson Pty Ltd v Commonwealth Bank of Australia (2008) 100 SASR 162 at 171. 143. Skinner v Jeogla (2001) 37 ACSR 106; Investec Bank (Australia) Ltd v Glodale Pty Ltd (2009) 71 ASCR 615. 144. GE Capital Australia v Davis (2002) 180 FLR 250; Florgale Uniforms Pty Ltd v NAB (2004) 11 VR 54. 145. Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646. 146. Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570. 147. Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16. 148. Fortson Pty Ltd v Commonwealth Bank of Australia (2008) 100 SASR 162. 149. [2002] NSWSC 16; see also Greyvest Leasing Inc v Merkur (1994) 8 PPSAC (2d) 203 at [45]. 150. Florgale Uniforms Pty Ltd v NAB (2004) 51 ACSR 699; Skinner v Jeogla (2001) 37 ACSR 106; Investec Bank (Australia) Ltd v Glodale Pty Ltd (2009) 71 ACSR 615. 151. (2009) 71 ASCR 71. 152. (2004) 51 ACSR 699. 153. See, for example, Expo International Pty Ltd v Chant [1979] 2 NSWLR 820; Pendlebury v The Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676.

[page 405]

CHAPTER 13 Insolvency Law and the PPSA INTRODUCTION 13.1 Insolvency law is largely statute-based. The Bankruptcy Act 1966 (Cth) governs personal insolvency. Corporations Act 2001 (Cth) Ch 5 contains the corporate insolvency procedures.1 This chapter is about how the Personal Property Securities Act 2009 (Cth) (PPSA) interacts with the law relating to personal2 and corporate insolvency.3 The PPSA does not exclude or limit insolvency law (or the general law), unless there is an inconsistency, in which case the PPSA prevails.4 In one sense, everything in this book impacts on insolvency practice, because the primary purpose of security is to enable creditors to have recourse to the secured collateral on default, rather than merely a personal claim against a debtor, and this becomes most crucial when the debtor is insolvent: see 1.8–1.9 of this text. Therefore, students and practitioners in insolvency will have to understand the impact of the PPSA on security interests, and parties taking PPSA security interests will have to ensure they are properly perfected so as to obtain the best protection when most needed, that is, on insolvency. However, this chapter is confined to the impact of the PPSA on those aspects of insolvency law amended, or directly affected, by the PPSA. Paragraphs 13.2–13.19 below discuss PPSA ss 267–269 and Corporations Act s 588FL, which deal with the status of an unperfected security interest in insolvency proceedings. Paragraphs 13.20–13.32 cover consequential changes to the Corporations Act which substitute PPSA terminology for references to pre-PPSA forms of security interest (‘floating [page 406] charge’, ‘charge’, ‘pledge’, ‘lien’ and so on). Paragraphs 13.33–13.35 deal with PPSA-related personal insolvency issues.

INSOLVENCY AND THE EFFECT OF NONPERFECTION Introduction 13.2 PPSA s 267 provides that failure to perfect a security interest by the time certain insolvency procedures are commenced will render the security interest, to all intents and purposes, ineffective. There is a corresponding provision in Art 9 of the United States Uniform Commercial Code and the Canadian PPSAs, but not the New Zealand PPSA.5 The policy justification for PPSA s 267 is discussed in 5.59–5.60 of this text.6 The details of the provision are discussed in 13.3–13.11 below. Corporations Act s 588FL imposes an additional requirement. It provides, in effect, that if a security interest is given by a company and perfection is by registration, the security interest is ineffective in the grantor’s insolvency proceedings unless it is registered no later than 20 business days after the date of the security agreement or six months prior to the commencement of the insolvency proceedings: see 13.12–13.19 below.

The PPSA Provisions Scope of the provisions 13.3 PPSA s 267 is relevant in proceedings where: (1) a winding-up order is made, or a resolution is passed, to wind up a company or body corporate (that is, liquidation); (2) an administrator is appointed under Corporations Act Pt 5.3A (voluntary administration); (3) a company or body corporate executes a deed of company arrangement under Corporations Act Pt 5.3A; (4) a sequestration order is made against a person under the Bankruptcy Act 1966; or (5) a voluntary filing for bankruptcy is made by an individual debtor under the Bankruptcy Act. In the following discussion, the commencement of the above procedures is referred to as ‘the insolvency event’. Section 267 does not extend to the alternatives to bankruptcy (debt agreements and personal insolvency agreements) provided for in the Bankruptcy Act 1966.7 [page 407] Nor does it apply to receiverships, although, in practice, many receiverships may be

triggered by, or lead to, a voluntary administration or liquidation. The Statutory Review has recommended deleting Item (3), deeds of company arrangements, on the ground that it is both superfluous and potentially misleading; by virtue of Corporations Act s 513C Item (3) proceedings are taken to have commenced at either the time an administrator is appointed or the commencement of a windingup and both these events are already provided for in s 267.8

Vesting of unperfected security interests on insolvency 13.4 PPSA subs 267(2) provides that an unperfected security interest ‘vests in the grantor’ immediately before the insolvency event occurs. At first sight, this provision appears odd in a number of respects. First, it provides for ‘vesting’ in the grantor. By contrast, the Canadian PPSAs state simply that the security interest is ‘ineffective’ against the trustee in bankruptcy while, in the same vein, Corporations Act s 266 (now repealed) provided that an unregistered company charge was ‘void’ against the company’s liquidator. Second, PPSA subs 267(2) provides that the security interest, not the collateral, vests in the grantor. On the other hand, the effect of the provision appears to be that, upon vesting of the security interest in the grantor, the grantor obtains unencumbered title to the collateral and this benefit flows through to the grantor’s insolvency administrator. In other words, the result is the same as if the provision had simply said that the security interest is ‘ineffective’ or ‘void’.9 PPSA subs 12(3) provides that the PPSA applies to a PPS lease, the transfer of an account or chattel paper and a commercial consignment even if the transaction does not in substance secure payment or performance of an obligation: see 3.24–3.39 of this text. Section 268 provides that s 267 does not apply to the transfer of an account or chattel paper or a commercial consignment that does not secure payment or performance of an obligation: see 13.7 below. However, s 267 does apply to PPS leases whether or not the lease secures payment or performance of an obligation. PPSA subs 267(2) applies to a lease agreement in the same way it applies to other transactions. For the purposes of the relevant parts of the statute, the lessor’s title is treated as a security interest; consequently, if the lessor is unperfected at the time of an insolvency event, its title (the deemed security interest) vests in the grantor pursuant to subs 267(2).10 However, PPSA s 269 offers a measure of comfort by giving the lessor a claim for damages, provable in the lessee’s insolvency proceedings, equivalent to the market value of the leased goods: see 13.11 below.

[page 408]

Attachment of after-acquired property after insolvency event 13.5 Example 1. On Date 1, SP takes a security interest in all Grantor’s present and after-acquired inventory but does not register a financing statement. On Date 2, Grantor goes into liquidation. On Date 3, Grantor acquires new inventory.

It could be argued that subs 267(2) does not apply in this case because the provision presupposes that SP holds a security interest at the time of the insolvency event (Date 2), whereas in Example 1, SP’s security interest does not attach to the new inventory until Date 3, when Grantor acquires rights in the collateral. Section 267A was enacted to head off this argument. It provides, in effect, that subs 267(2) applies even though SP’s security interest had not attached to the new inventory at the time of the insolvency event (Date 2). 13.6 Assume that, in Example 1, SP registered a financing statement on Date 1 and the registration was still in place on Date 2. It could be argued that subs 267(2) applies in this case because although SP registered a financing statement on Date 1, the registration itself does not perfect SP’s security interest. PPSA subs 21(1) makes it clear that attachment is a condition of perfection: see 5.1 of this text. In the case under consideration, SP’s security interest does not attach to the new inventory until Date 3 and so the security interest was unperfected at the time of the insolvency event. Section 267A indirectly addresses this issue. The provision implies that if there is a registration prior to the insolvency event which would perfect a security interest once it attaches to collateral, the fact that the security interest attaches to collateral after the insolvency event does not attract the operation of subs 267(2).

Third-party purchaser from secured party or receiver 13.7 Example 2. On Date 1, SP takes a security interest in Grantor’s printing press, but does not register a financing statement. On Date 2, Grantor defaults against SP and SP appoints a receiver. On Date 3, Grantor goes into liquidation. On Date 4, the receiver sells the printing press to Buyer. On Date 5, Grantor’s liquidator, relying on PPSA subs 267(2), claims the press from Buyer.

The governing provision is PPSA subs 267(3), which provides that subs 267(2)

does not affect Buyer’s title provided that Buyer: (1) gave new value for the press; and (2) had no actual or constructive knowledge of the liquidation proceedings.11 PPSA s 297 defines ‘constructive knowledge’. This provision, and the meaning of ‘actual knowledge’, is discussed in 10.19 of this text. Subsection 267(3) is limited to cases where the grantor is in liquidation, under administration or subject to a deed of company arrangement and it does not apply if the grantor is an individual subject to bankruptcy proceedings. [page 409] The omission appears to have been inadvertent and the Statutory Review has recommended correcting it.12 In any event, it is unlikely that the provision will have much application in practice. In a case like Example 2, the receiver will typically know that SP’s security interest is unperfected and therefore will not attempt to sell the collateral in the first place. Furthermore, in most cases Buyer will have at least constructive knowledge of the liquidation proceedings.

Security interests not covered by s 267 13.8 PPSA subs 268(1) provides that subs 267(2) and s 267A do not apply to the following transactions: (1) a transfer of an account or chattel paper that does not secure payment or performance of an obligation: see 3.24–3.30 of this text; and (2) a commercial consignment that does not secure payment or performance of an obligation: see 3.31–3.32 of this text. The Explanatory Memorandum did not specifically address these exclusions, but the government likely wanted to avoid imposing excessively onerous registration requirements on accounts and chattel paper transferees and commercial consignors.13 But given that these parties are deemed to hold security interests, there is a strong incentive for them to register a financing statement in any event, for priority purposes, so the impact of the exception is diluted. As matters presently stand, PPS leases are not among the exclusions from s 267 listed in s 268. It is unclear why the government did not feel the need to extend the same protection to PPS lessors as it did to accounts and chattel paper transferees and commercial consignors. The thinking may have been that lessors were sufficiently protected by PPSA s 269, but the Explanatory Memorandum sheds no light on the matter. In any event, the Statutory Review has

recommended that PPS leases should be added to the list of exclusions in s 268.14 13.9 PPSA para 268(1)(aa) provides that subs 267(1) and s 267A do not apply to a security interest for which perfection, and the effect of perfection or nonperfection, is governed by the law of a foreign jurisdiction. It is hard to see the point of this provision because if the law of a foreign jurisdiction applies, PPSA subs 267(1) and s 267A will be inapplicable in any event. The Statutory Review has recommended deleting the provision.15 Conflict of laws issues are discussed further in Chapter 14. [page 410] 13.10 PPSA para 268(1)(b), read in conjunction with subs 268(2), provides that subs 267(1) and s 267A do not apply to certain turnover subordination arrangements. The application of the statute to turnover subordinations is discussed in 3.41–3.43 of this text. For the exception to apply, the transaction must have the features listed in subs 268(2). Specifically, the subordination agreement must provide that: (1) the junior creditor holds any payment received in respect of its claim on trust for the senior creditor; and (2) the junior creditor grants the senior creditor a security interest in the payment to secure the junior creditor’s obligation to turn over the payment to the senior creditor. The Explanatory Memorandum explains the thinking behind para 268(1)(b) and subs 268(2) as follows:16 Turnover trusts are a feature of a large number of commercial documents and are commonly included in guarantees provided in commercial financing. It would therefore be onerous to require financiers to register turnover trusts. The [statute strikes] a balance by allowing unregistered turnover trusts to survive the grantor’s insolvency but would make the senior creditor’s unregistered interest under the trust subordinate to the interest of another registered security interest.

However, the exception only applies if the agreement has both the trust feature and the security interest feature. It has been suggested that the exception is of little practical use because most subordination agreements do not contain the security interest feature.17 The Statutory Review has recommended removing both limitations on the application of para 268(1)(b).18

Compensation for lessors and consignors 13.11 PPSA s 269 applies where the security interest of a consignor under a

commercial consignment vests in the grantor under s 267 or 267A. As currently drafted, it also applies where the security interest of a lessor under a PPS lease vests in the grantor under s 267 or 267A. The provision gives the consignor and the lessor a claim for compensation.19 PPSA subs 268(1) provides that ss 267 and 267A do not apply to a commercial consignment that does not secure payment or performance of an obligation. It follows that s 269 applies only to a commercial consignment that is in substance a security agreement. Section 269 applies to a PPS lease whether or not it in substance secures payment or performance of an obligation. As a matter of policy, it is hard to see why transactions which are in substance security agreements should fall within s 269; the effect is to discriminate between commercial consignments and PPS leases which in substance secure payment or performance of an [page 411] obligation and other forms of in-substance security agreement. As indicated above, the Statutory Review has recommended exempting PPS leases which are not in substance security agreements from the application of s 267. If this recommendation is adopted, there may be a case for repealing s 269 on the basis that if a consignment or lease is in substance a security agreement, there is no justification for treating it differently from other forms of security agreement. Subsection 269(2) provides that the consignor or lessor is deemed to have suffered damage immediately before the security interest vests in the grantor and may recover from the grantor the lesser of: (1) any amount provided for in the agreement; and (2) the market value of the goods and any other loss resulting from the termination of the lease or consignment. As the note to s 269 states, the lessor or consignor may prove its claim in the grantor’s bankruptcy or winding-up proceedings. The effect of the provision is twofold: (1) it allows the lessor or consignor to claim compensation for loss of the goods due to the operation of ss 267 and 267A; and (2) it allows the lessor to claim compensation for the loss it has suffered due to termination of the agreement. In the latter connection, the significance of the provision lies in the fact that, even though the effect of s 267 is to terminate the agreement, the grantor may not be in breach of the agreement and so, apart from s 269, the lessor or consignor may not have a claim.20

The Corporations Act Provisions Introduction 13.12 PPSA s 267 provides, in essence, that if a security interest is unperfected at the time of the insolvency event, it is ineffective against the grantor’s insolvency administrator. If the grantor is a corporation, Corporations Act s 588FL applies in conjunction with PPSA s 267. Corporations Act s 588FL provides, broadly speaking, that a security interest may be ineffective against the grantor’s insolvency administrator even if it is perfected by registration at the time of the insolvency event21 unless the registration was effected: (1) at least six months before the commencement of the insolvency proceedings; or (2) within 20 business days of the security agreement coming into force.22 [page 412] The provision derives from Corporations Act s 263 (now repealed), which required notice of a charge, and a copy of the instrument, to be lodged within 45 days after the creation of the charge or more than six months before the insolvency event. An application can be made to the court under s 588FM for extension of time for registration: see further 13.16–13.19 below. It has been said that the purpose of s 588FL is ‘to prevent security interests being granted fraudulently by corporations with knowledge of imminent insolvency’.23 However, other provisions in Corporations Act Pt 5.7B (for example, s 588FJ in respect of circulating security interests) enable security interests granted in a period leading up to insolvency to be challenged as voidable in certain circumstances. The Statutory Review has recommended repealing s 588FL on various grounds. First, the provision unnecessarily duplicates PPSA s 267. Second, it only applies to corporate grantors, contrary to the unifying principle of the PPSA. Third, it only applies where the security interest is perfected by registration, as opposed to possession or control and so it unjustifiably discriminates between methods of perfection.24 Fourth, it provides little additional incentive for secured parties to register, given that they need to do so for priority reasons anyway. Lastly, the time limit imposed by the provision creates difficulties in certain cases.25

Operation of s 588FL

13.13 The following examples of how Corporations Act s 588FL applies are adapted from the Explanatory Memorandum.26 Example 3. Grantor Pty Ltd agrees to grant SP a security interest in all present and after-acquired property. SP registers its security interest 15 business days after the agreement is entered into. Grantor Pty Ltd passes a resolution for winding up 30 business days after the agreement is entered into.

In this case, SP would retain its security interest, because it registered within the required 20-business-day period, even though an insolvency event occurred within six months of the agreement. Example 4. Grantor Pty Ltd agrees to grant SP a security interest in all present and after-acquired property. SP registers a financing statement 25 business

[page 413] days after the agreement was entered into. Grantor Pty Ltd enters voluntary administration 30 business days after the agreement.

In this case, the security interest vests in Grantor Pty Ltd, since SP did not register within the 20-business-day period following the coming into force of the security agreement, or more than six months prior to the voluntary administration.27 Example 5. Grantor Pty Ltd agrees to grant SP a security interest in all its present and after-acquired property. SP registers 25 business days after the agreement. Grantor Pty Ltd goes into liquidation eight months after the agreement.

In this case, SP would retain its security interest even though it registered more than 20 business days after the date of the security agreement because the registration date was more than six months before the commencement of the liquidation proceedings. Example 6. Grantor Pty Ltd agrees to grant SP a security interest in all present and after-acquired property. SP registers a financing statement 15 business days after the agreement was entered into. Grantor Pty Ltd passes a resolution to wind up the company five months after the date of the agreement.

In this case, SP retains its security interest and the security interest does not vest in the grantor since SP registered within 20 business days of the agreement. It does not matter that this was less than six months prior to the time of the insolvency event. Example 7. Grantor Pty Ltd agrees to grant SP a security interest in all its present and after-acquired property. SP registers 25 business days after the agreement was entered into. Ten months later, Grantor

Pty Ltd is wound up by court order.

In this case, SP retains its security interest because, although SP registered more than 20 business days after the agreement, the registration date was more than six months prior to the time of the insolvency event. 13.14 Corporations Act subs 588FL(5) corresponds with PPSA subs 267(3) (property acquired for new value without knowledge): see 13.7 above. Corporations Act s 588FN corresponds with PPSA s 268 (security interests to which vesting rules do not apply): see 13.8 above.28 Corporations Act s 588FO corresponds with PPSA s 269 (certain lessors, bailors and consignors entitled to damages): see 13.11 above.

Registration after insolvency event 13.15 Corporations Act subpara 588FL(2)(b)(ii) provides, in effect, that if a security interest is registered after the time of the insolvency event, it vests [page 414] in the grantor even though the registration is effected within 20 business days after the date of the security agreement. This provision ensures consistency with the PPSA s 267 rule that a security interest vests in the grantor if it is unperfected at the time of the insolvency event. Example 8. On 20 February 2012, Grantor Pty Ltd agrees to grant a security interest to SP in all present and after-acquired property. On 1 March 2012, Grantor Pty Ltd passes a resolution to wind up the company. On 3 March 2012, SP registers a financing statement.

In this case, SP’s security interest vests in Grantor Pty Ltd (in liquidation) on 3 March 2012 by virtue of both PPSA s 267 and Corporations Act subpara 588FL(2) (b)(ii).

Court’s discretion to fix a later registration time 13.16 Pre-PPSA, the court had a discretion under Corporations Act subs 266(4) (now repealed), to extend the time for registration of a charge and, post-PPSA, Corporations Act subpara 588FL(2)(b)(iv) and s 588FM preserve this discretion by allowing the court ‘to fix a later time’ for the registration. The wording is in similar terms to Corporations Act subs 266(4) and the grounds for exercising the discretion

are that: (1) the failure to register earlier was accidental or due to inadvertence or some other sufficient cause; (2) the failure was not of such a nature as to prejudice the position of creditors or shareholders; or (3) on other grounds, it is just and equitable to grant relief. In exercising their discretion under s 588FM, the courts have drawn on the extensive case law under subs 266(4).29 Most s 588FM orders are made on ground (1) or (3). Consistently with the pre-PPSA case law, the courts have been generous in their application of ground (1) (‘inadvertence’).30 In particular, it has been suggested that the courts are likely to take a lenient view of errors made during the first few years of operation of the PPSA.31 In Appleyard Capital,32 a leading case, the lender, a Swedish corporation, loaned money to an Australian company (Appleyard) and took a security interest in all Appleyard’s present and after-acquired property to secure repayment. Nearly 12 months later, Appleyard got into financial difficulty and the secured party sought legal advice in Australia. At that point it discovered that the security interest had not been registered, so it registered and then applied for an extension of time under s 588FM. The secured party’s principal, Mr Andersson, had not previously conducted business in Australia, had transacted without the benefit of Australian legal advice and was unaware of any legislative requirement for registration in Australia. Moreover, the court accepted his evidence that [page 415] Appleyard’s director had represented to Mr Andersson that he had attended to the registration. On this basis, the court found that the failure to register was accidental or due to inadvertence or some other sufficient cause for the purposes of s 588FM. 13.17 Once the court has found that one of the three grounds for making a s 588FM order has been established, it must then decide, as a matter of discretion, whether to make an order in the secured party’s favour. In the Appleyard case, the court held that, in the exercise of its discretion, it must balance the secured creditor’s interest against the interests of the grantor’s unsecured creditors.33 The secured creditor’s interest is to avoid the risk that the grantor may become insolvent, in which case its security interest will be invalid unless the court makes a s 588FM order. The unsecured creditors’ interests are bound up with the prejudice they may suffer if the s 588FM order is made. In this connection, the court stressed that the relevant consideration is the prejudice the unsecured creditors may suffer due to the

delay in registration, not the prejudice they may suffer from making the order. It follows that there is no prejudice in the relevant sense just because the unsecured creditors may recover less in the grantor’s insolvency if the s 588FM order is made than they would have if the order had not been made and the security interest was invalid against the grantor’s insolvency administrator. Unsecured creditors may suffer prejudice as a result of the delay in registration if, for example, they extended credit to the grantor in ignorance of the security interest. The longer the delay in registration, the greater the likelihood that this type of prejudice may have occurred. In the Appleyard case itself, it was very likely that the grantor would go into liquidation or administration within the next six months. Therefore, the risk to the applicant secured party was substantial if the court did not make the s 588FM order. On the other hand, the prejudice to the unsecured creditors may not have been substantial because there were two other secured parties, both of which had registered their security interests during the period while the applicant’s security interest remained unregistered, and so the unsecured creditors were unlikely to have traded with the grantor during this period on the faith that the collateral was unencumbered.34 Nevertheless, to guard against the contrary possibility, the court granted the s 588FM application conditional on a future liquidator or administrator having leave to apply for discharge or modification of the [page 416] order.35 In Appleyard, the grantor was close to insolvency.36 The outcome of a case may be different if there is clear evidence that the grantor is shown to be financially secure and likely to remain so in the foreseeable future. In that case, the unsecured creditors are unlikely to be prejudiced by a s 588FM order and the court will grant the application.37 At the other extreme, if the grantor is already in liquidation or administration at the date of the s 588FM application, the court may still make an order, provided that: (1) the security interest was registered before the critical event and at a time when there was no evidence of the grantor’s insolvency; and (2) the unsecured creditors would not be prejudiced by the order.38 13.18 In a case like Example 8, pre-PPSA the court might have made an order under Corporations Act subs 266(4) permitting registration of the security interest after the date of the insolvency event. It is doubtful whether this could be done under Corporations Act s 588FM because such an order would be inconsistent with

PPSA s 267. PPSA s 254 provides for the continued operation of other Commonwealth laws, but only where they are capable of operating concurrently with the PPSA. While PPSA s 267 and Corporations Act ss 588FL–588FM were clearly intended to operate concurrently, they are incapable of doing so in a case like Example 8. PPSA s 255 provides for the making of regulations to resolve inconsistencies between the PPSA and other laws, but in the absence of any such measure, it seems clear that the PPSA must prevail and the court may not make an order under Corporations Act s 588FM if the secured party registers after the time of the insolvency event. 13.19 Corporations Act s 588FL may result in a security interest registered prior to the insolvency event but outside the time periods prescribed by Corporations Act s 588FL losing out to a later, duly registered, security interest. Example 9. Grantor Pty Ltd agrees to grant SP1 a security interest in all present and after-acquired property on 2 July 2012. SP1 registers a financing statement on 6 August, 25 business days after the agreement was entered into.

[page 417] Grantor Pty Ltd agrees to grant SP2 a security interest in all present and after-acquired property on 16 July. SP2 registers a financing statement on 17 July. Grantor Pty Ltd is wound up by court order on 27 August.

SP1’s security interest vests in Grantor Pty Ltd, since SP1 did not register within the 20-business-day period following the coming into force of the security agreement or more than six months before the insolvency event. However, SP2’s security interest does not vest in Grantor because SP2 registered less than 20 business days after the date of its security agreement. The result is that SP1 is relegated to the status of an unsecured creditor in Grantor’s liquidation, while SP2, which was previously subordinate to SP1, acquires a first-ranking claim over all Grantor’s personal property.

CONSEQUENTIAL AMENDMENTS TO CORPORATIONS ACT Introduction 13.20 The Corporations Act 2001 (Cth) has been amended to remove references to old forms of secured transaction (‘charge’, ‘mortgage’, ‘lien’ ‘pledge’, ‘floating

charge’ and ‘fixed charge’) and to replace them with terms which reflect the PPSA’s functional approach (‘security interest’ and ‘PPSA security interest’).39 These are mostly just drafting changes and they are not intended to affect the pre-PPSA rights of parties under the Corporations Act.40 On the contrary, some of the changes were made for the express purpose of preserving pre-PPSA entitlements and to ensure that the PPSA did not change the operation of the insolvency laws. These include: (1) the replacement of the references in the Corporations Act to a floating charge with references to a ‘circulating security interest’ (see 13.22–13.23 below); the introduction of a new concept, ‘PPSA retention of title property’ (see 13.28 below); and the substitution of a new term, ‘possessory security interest’ to cover pledges and liens (see 13.32 below). 13.21 This program of consequential amendments is unique to Australia. No other PPSA jurisdiction has attempted systematically to bring its insolvency and other laws into line with the PPSA. For example, in New Zealand it was decided not to amend the language of ‘charge’ and similar ‘old’ terminology in the Companies Act 1993 when the PPSA was enacted, but to leave it to the courts to interpret the Companies Act in the light of the PPSA.41 Likewise, in Canada there has been no attempt to harmonise the PPSAs with the insolvency [page 418] statutes. So, for example, the definition of ‘security interest’ in the federal insolvency statutes is still based on pre-PPSA concepts and fails to reflect the PPSA substance-over-form approach to the treatment of secured transactions. This has led to significant uncertainty in the application of the insolvency laws to security interests.42 In Canada, the main obstacle to harmonisation is that the PPSAs are provincial statutes, whereas the insolvency laws are federal and to date there has been insufficient political will at the federal level to update the insolvency laws in response to developments at the provincial level. In Australia, by contrast, the enactment of the PPSA at the federal level facilitated harmonisation with the (federal) insolvency laws because primary responsibility for both the PPSA and the insolvency laws rests with the same government.

Circulating Security Interests

13.22 The PPSA abolishes the floating charge concept, replacing it with the concept of a fixed security interest which attaches to each new asset the grantor acquires: see 4.45–4.55 of this text. In response to this reform, references in the Corporations Act to the floating charge have been removed and replaced with a new term, ‘circulating security interest’.43 ‘Circulating security interest’ is defined by reference to the term ‘circulating asset’ which, in turn, is defined in PPSA ss 340– 341A. The Statutory Review has recommended relocating these provisions to the Corporations Act, since they are relevant only in that context.44 The Corporations Act provisions to which these changes relate are as follows:45 • •

• • •

para 124(1)(f), dealing with a company’s capacity to grant circulating security interests ss 433 and 561, giving certain employee claims priority over property covered by a floating charge, where the grantor is in receivership or liquidation s 422B allowing a voluntary administrator to deal with a company’s assets which were subject to a floating charge, despite its crystallisation s 433E giving priority to the administrator’s lien and indemnity in a voluntary administration s 459C regarding presumption of insolvency if a receiver is appointed [page 419]

•

s 588FJ, which avoids floating charges given by insolvent companies within six months before the relation-back day, except to the extent they secure new advances and certain other obligations.

Pre-PPSA, the application of these provisions involved a sometimes difficult inquiry into whether the charge in question was a fixed or floating charge.46 In this connection, the courts’ main focus was on the degree of control the chargee had over the collateral and whether the chargor was free, both under the terms of the agreement and in practice, to use the collateral in the ordinary course of its business. The distinction did not turn on the type of asset as such, but some types of asset, for example inventory, were more consistent with categorisation as a floating charge, given that typically a debtor needs to be able to deal with its inventory in the ordinary course of business. Control is also a central feature in the definition of

‘circulating security interest’, and ‘control’ has a special meaning in this context: see 13.25 below. It follows that just as pre-PPSA, a secured party could avoid the application of the above-listed statutory provisions by establishing that it controlled the collateral in the common law sense so, post-PPSA, the provisions can be avoided by establishing that a secured party controls the collateral in the parallel statutory sense.47 13.23 The Statutory Review has rightly described these provisions as ‘very detailed and technical, and at times difficult to apply’.48 It recommends replacing them with a new set of provisions focusing simply on collateral type. Specifically, it proposes that a ‘circulating security interest’ should be limited to a security interest in inventory and its proceeds (other than inventory subject to a purchase money security interest (PMSI)).49 The report does not recommend that the definition of ‘circulating security interest’ should extend to security interests in accounts.50 However, the statutory priority currently does extend to some accounts and authorised deposit-taking institutions (ADI) accounts.51 The Statutory Review’s proposed reforms are similar to the approach taken in the New Zealand PPSA, but the New Zealand solution [page 420] gives statutory insolvency priority creditors priority over both inventory (other than where held under a PMSI) and accounts receivable.52 Accounts are of increasing importance as a collateral class in modern business and finance and in any event, it is suggested that in order to preserve the status quo as a matter of insolvency policy, the Statutory Review should have recommended the inclusion of accounts in the definition of ‘circulating security interest’. The Statutory Review made a number of recommendations for improving the existing provisions in ss 340–341A, in case its broader reform proposal is not adopted. These recommendations are discussed at the appropriate points in 13.25 below. 13.24 Corporations Act s 51C defines ‘circulating security interest’ to mean, in part, a PPSA security interest which has attached to a ‘circulating asset’ within the meaning of the PPSA where the grantor has title to the asset.53 PPSA s 340 defines ‘circulating asset’. According to the Explanatory Memorandum, the definition confirms:54 … the existing case law on floating charges, which provides that in determining whether a floating

charge exists over personal property, consideration must be given to both the express terms of the agreement between the parties as well as to the actual level of control exerted by the secured party. The provision takes into account current case law on the nature of floating charges so that, in determining whether a charge is a floating charge, consideration would be given to the intention of the parties as demonstrated by both their contract and their practice.

PPSA s 340 defines ‘circulating asset’ to include the following types of property, which it lists under the heading, ‘current assets’;55 (1) accounts both as original collateral and as proceeds of inventory; (2) ADI accounts; (3) currency; (4) inventory; and (5) negotiable instruments. Property other than current assets may qualify as circulating assets if the secured party has given the grantor express or implied authority to transfer the property in the ordinary course of business free of the security interest.56 However, an asset is not a circulating asset if: (1) the secured party has registered a financing [page 421] statement which discloses that it has control of the asset, and it does in fact have control of the asset;57 or (2) the collateral is goods and the security interest is perfected by possession. The reason for these exceptions is, of course, that if the secured party has possession or control then, by definition, the asset cannot be a circulating asset. 13.25 PPSA subs 341(1A) enacts a special definition of ‘control’ for the purpose of s 340. The expression includes control within the meaning of PPSA Pt 2.3: see 5.22–5.37 of this text.58 But it also includes control ‘within the ordinary meaning’ of the word and, in relation to inventory, accounts and ADI accounts, ‘control’ is further defined in subss 341(1) and (2)–(4) and s 341A respectively. Subsection 341(1) enacts a special control rule for inventory.59 It provides that a secured party has control of inventory if: (1) the secured party and the grantor have agreed in writing that the grantor will specifically appropriate the inventory to the security interest and will not remove any specifically appropriated inventory without the secured party’s consent; and (2) it is the grantor’s usual practice to comply with the agreement.60 Subsections 341(2)–(4) enact a special control rule for accounts. Subsection 341(3) provides that the secured party has control of an account if: (1) the secured party and the grantor have agreed in writing that the

[page 422] account payment must be deposited into a specified ADI account; (2) the usual practice is for such amounts to be so deposited; (3) the secured party controls the ADI account; and (4) depositing the money in the ADI account does not result in a party becoming liable to pay the grantor or a related body corporate.61 Subsection 340(4) applies to the outright transfer of accounts and it provides that the secured party-transferee has control if payment by the account debtor to the secured party would discharge the account debtor’s obligation under PPSA subs 80(8): see 12.71 of this text. Section 341A enacts a special control rule for ADI accounts. It provides that, for the purposes of s 340, a secured party has control of an ADI account if: (1) the secured party is the ADI; (2) the secured party is able to direct the disposition of the funds from the account without the grantor’s further consent; or (3) the secured party becomes the ADI’s customer with respect to the account.62 The provision goes on to make it clear that the secured party has control even if the grantor retains the right to direct disposition of the funds from the account.63 13.26 A security interest is not a circulating security interest within the meaning of Corporations Act s 51C unless it has attached to the collateral and the grantor has title to the collateral. The purpose of this restriction is to limit the definition to security interests in the nature of a charge and to make it clear that, for example, a title retention arrangement is not a circulating security interest.64 This aspect of the provision marks a reversion to pre-PPSA formalism.65 So far as the PPSA is concerned, a title retention arrangement [page 423] in substance involves a sale of the collateral to the grantor coupled with a security interest in the secured party’s favour to secure payment of the price. But to make sense of Corporations Act s 51C, it is necessary to ignore this logic and to focus instead on the form of the transaction. What the provision means, in effect, is that if in form title to the collateral is in the secured party, the transaction is outside the definition. Incidentally, on this basis a mortgage would also fall outside the definition because, in form, a mortgage involves the transfer of title to the secured party: see 1.16 of this text.

13.27 PPSA s 339 enacts special rules dealing with references to charges, fixed charges and floating charges in Commonwealth statutes, and in security agreements entered into after Registration Commencement Time (30 January 2012).66 Subsection 339(1) provides that the section applies in relation to a reference to a charge, a fixed charge or a floating charge in a Commonwealth statute or in a security agreement, but only if: (1) the charge has attached to collateral; (2) title to the collateral is in the grantor; and (3) the charge is a security interest to which the PPSA applies.67 Subsection 339(3) provides that a reference to a charge is to be taken to be a reference to a security interest that has attached to: (1) a circulating asset; or (2) personal property that is not a circulating asset. Subsection 339(4) provides that a reference to a fixed charge is taken to be a reference to a security interest that has attached to personal property that is not a circulating asset. Subsection 339(5) provides that a reference to a floating charge is taken to be a reference to a security interest that has attached to a circulating asset. The meaning of ‘circulating asset’ is discussed in 13.24 above. These provisions envisage that, for some time after the enactment of the PPSA, parties may continue to use old forms of contract employing pre-PPSA terminology and the purpose is to make sense of these references in the PPSA context. According to the notes in PPSA s 338, ‘[the s 339 special rules] are expected to have less relevance over time, as the scheme provided for by this Act provides an alternative to reliance on those techniques for security interest transactions’. On the other hand, it has been suggested, with some justification, that s 339 may encourage survival of the old terminology, prolong confusion and increase the risk of error.68 The Statutory Review has recommended deleting the provision.69 [page 424]

PPSA Retention of Title Property 13.28 Corporations Act Ch 5 refers frequently to the ‘property of the company’. For example, ss 433 and 561 require payment of priority creditors ahead of a secured party holding a circulating security interest in cases where the property of the company is insufficient to pay the priority creditors in full.70 Assume the grantor holds inventory on retention of title terms. Is the inventory ‘property of the company’ for the purposes of ss 433 and 561? Pre-PPSA, the answer was clearly not, because title to the inventory remained in the supplier. However, the PPSA treats

title retention arrangements on the same footing as the traditional forms of security and this approach necessarily involves a presumption that the supplier transfers title to the grantor and simply retains a security interest to secure payment of the price. If, on this basis, the inventory was treated as property of the company, there would be a marked change in priorities: the inventory would become available for distribution to the priority creditors and the inventory supplier ‘would lose its property’.71 This outcome, in turn, would violate the government’s policy of ensuring that the PPSA is ‘insolvency-neutral’. To address the problem, in the context of ss 433 and 561 and other provisions, the Corporations Act has been amended by the introduction of a new concept referred to as ‘PPSA retention of title property’.72 According to Corporations Act s 51F, property of a corporation is ‘PPSA retention of title property’ if: (1) it is personal property; (2) it is used or occupied by or is in the possession of the corporation; (3) the corporation does not have title to the property; (4) a PPSA security interest is attached the property; and (5) the corporation is the grantor of the PPSA security interest. The following examples appear at the end of the provision: a retention of title agreement (conditional sale agreement) or a hire-purchase agreement; a lease or consignment agreement that secures payment or performance of an obligation; a commercial consignment whether or not the agreement secures payment or performance of an obligation; and a PPS lease whether or not the agreement in substance secures payment or performance of an obligation. Section 51F provides that a reference in the statute to the property of a corporation does not include PPSA retention of title property unless provided otherwise expressly or by necessary implication. 13.29 Corporations Act Pt 5.2 governs receivers and other controllers of a corporation’s property: see 12.77–12.83 of this text. Section 9 defines ‘controller’, in relation to property of a corporation, to mean: (1) a receiver, or [page 425] receiver and manager of that property; and (2) anyone else who is in possession or has control of that property for the purpose of enforcing a security interest. Applying s 51F, the references in this provision to ‘property of a corporation’ do not include PPSA retention of title property. Consequently, it seems that Corporations Act Pt 5.2 does not apply to a controller of PPSA retention of title property, for example, a receiver appointed by a retention of title supplier to enforce its security

interest. However, if this is the case, PPSA Ch 4 will apply instead. PPSA subs 116(1) provides that Ch 4 does not apply in receiverships and subs 116(4) provides that, for the purposes of the section, ‘controller’, ‘receiver’ and ‘receiver and manager’ have the same meanings as in the Corporations Act. If a controller of PPSA retention of title property is not a controller within the meaning of the Corporations Act, it follows that PPSA s 116 is not engaged. This would be an unsatisfactory outcome and it is hard to believe that it was intended. 13.30 A security interest which is unperfected at the time of an insolvency event vests in the grantor: PPSA s 267 and Corporations Act s 588FL: see 13.3–13.19 above. Some of the provisions in Corporations Act Pt 5 are expressed to apply to PPSA retention of title property only where the security interest vests in the grantor pursuant to one or other of these provisions. For example, ss 465 and 513A provide that, for the purposes of the winding-up provisions, property of a company includes PPSA retention of title property if the security interest is vested in the company because of the operation of PPSA s 267 or 267A or Corporations Act s 588FL. The following provisions are affected: s 471B (where a company is being wound up, a person cannot proceed against the company’s property); subss 473(10) and 504(2) (in determining the remuneration for a liquidator, the court must take into account the value and nature of the property the liquidator was required to deal with); s 474 (when a company is being wound up, the liquidator must take custody of the property to which the company is entitled); s 53 and subs 475(8) (the liquidator can commission a report on the company’s affairs and the property of the company); s 477 (the powers of the liquidator include selling or disposing of property and doing all things necessary for the winding up of the company and distributing its property); s 478 (after the court orders a company to be wound up, the liquidator must collect the company’s property); and subs 485(3) (where the property is insufficient to satisfy all creditors, the court may make an order on the priority of payment of costs and expenses from the property).73 13.31 In contrast to the general rule for the Corporations Act in s 51F (see 13.28 above), Corporations Act s 435B provides that, for the purposes of Pt 5.3A (voluntary administration and deeds of arrangement), property of a company includes PPSA retention of title property. Section 436C [page 426]

provides that a person who is entitled to enforce a security interest in the whole, or substantially the whole, of a company’s property, may appoint an administrator, subject to the qualification that if the security interest is a PPSA security interest, it must be perfected. Reading the two provisions together, a secured party which holds a security interest in PPSA retention of title property may appoint an administrator, but only if the PPSA retention of title property accounts for the whole or substantially the whole of the company’s property. In practice, this condition is unlikely to be met very often. On the other hand, if the company holds substantial PPSA retention of title property, this may prevent another secured party wanting to appoint an administrator from satisfying the ‘whole or substantially whole’ requirement in s 436C.74 This was a concern expressed by stakeholders in the leadup to the legislation.75 The issue was subsequently addressed, but only in relation to transitional security interests.76

Possessory Security Interests 13.32 Pre-PPSA, various provisions in Corporations Act Ch 5 referred to ‘pledges’ and ‘liens’, treating them separately from charges. An example was s 441JA (now replaced by s 441EA), which applied when a company was under administration and provided for the sale of property subject to a lien or pledge.77 Post-PPSA, references in the Corporations Act to liens and pledges have been replaced by references to a ‘possessory security interest’. Section 51D defines ‘possessory security interest’ to mean: (1) a PPSA security interest that is perfected by possession or control; and (2) a lien or pledge. The first part of the definition covers possessory security interests to which the PPSA applies, while the second part of the definition covers security interests to which the PPSA does not apply, for example because the collateral is not personal property or because the security interest arises by operation of law. The first part of the definition extends to a security interest perfected by control and so it goes beyond possessory security interests in the traditional sense. The justification is that, in many cases, the PPSA uses control as a surrogate for possession, particularly where the collateral is intangible property. Security interests in the following types of collateral may be perfected by control: an ADI account; an intermediated security; an investment instrument; an uncertificated negotiable instrument; and a right evidenced by a letter of credit: see 5.22–5.37 of this text.

[page 427]

PERSONAL INSOLVENCY 13.33 The Bankruptcy Act 1966 governs bankruptcy; it also establishes alternative procedures (debt agreements (Pt IX) and personal insolvency agreements (Pt X)), which allow debtors to propose agreements with their creditors.78 If the grantor becomes bankrupt, PPSA s 267 applies and an unperfected security interest vests in the grantor. Section 267 does not apply to debt agreements or personal insolvency agreements but, for the reasons discussed below, this omission may make little difference in practice: see 13.35. 13.34 The definition of ‘secured creditor’ in Bankruptcy Act 1966 s 5 has been amended so that it now refers to: (1) a perfected PPSA security interest; and (2) a mortgage, charge or lien. This amendment has various consequences. The voting provisions in the Bankruptcy Act state that unsecured creditors may vote on proposals by debtors, or vote at meetings of creditors, and that secured creditors may only vote if they value their security and vote for any unsecured shortfall owing, or if they surrender their security and vote for the whole debt.79 A party holding an unperfected PPSA security interest is not a ‘secured creditor’ within the meaning of the new definition and the voting rules apply on the basis that it is an unsecured creditor. Furthermore, the unperfected secured party may present a creditor’s petition on the basis of the unsecured debt,80 and it may prove in the bankruptcy for the full amount of its debt, as do other unsecured creditors.81 On the other hand, the unperfected secured party will be bound by the moratoria which apply to unsecured creditors on bankruptcy.82 If the debt is treated as unsecured, the bankrupt’s discharge from bankruptcy will also discharge the debt, whereas a creditor with a perfected PPSA security interest will still have the right to enforce its security interest.83 This distinction between the treatment of perfected as opposed to unperfected security interests is consistent with the vesting of unperfected security interests in the grantor on bankruptcy. 13.35 The amended definition of ‘secured creditor’ has similar implications for debt agreements and personal insolvency agreements. Bankruptcy Act s 185C, which governs the requirements for a debt agreement proposal, refers specifically to the rights of secured creditors. The holder of an unperfected PPSA security interest is not a secured creditor within the meaning of the statute and it follows that they are an unsecured creditor for the purposes of the Pt IX debt agreements regime.

Bankruptcy Act s 188A, which governs the requirements for a Pt X personal insolvency agreement makes no reference to secured creditors, but s 207 does. The effect is to import the s 5 definition [page 428] of ‘secured creditor’ into the Pt X regime.84 The implications in relation to voting, realisation of security and so on, are the same as for debt agreements. A special resolution of 75 per cent (in value) of unsecured debt and a majority (in number) of those present and voting is required to pass a debt agreement proposal. Given that the holder of an unperfected PPSA security interest is an unsecured creditor within the meaning of the statute, it will be entitled to vote on the proposal, and if its debt is for a substantial amount its vote may affect the outcome. Correspondingly, if the proposal is approved, it will bind the holder of an unperfected PPSA security interest just as it binds other unsecured creditors.85

1.

2.

3.

4. 5. 6.

7. 8.

9.

Receivership is governed by a mixture of contract law, equity and statute: see Michael Murray and Jason Harris, Keay’s Insolvency: Personal and Corporate Law and Practice, 8th ed, Thomson Reuters, Sydney, 2014, pp 538–9. That is, bankruptcy, debt agreements and personal insolvency agreements: Bankruptcy Act 1966 (Cth), Pts IX–XI. See Christopher Symes and John Duns, Australian Insolvency Law, 3rd ed, LexisNexis Butterworths, Sydney, 2015, chs 2–6. For an overview of Australian insolvency law, see above note 2. PPSA s 10 states that ‘insolvency’ (and related terms such as ‘insolvent’) has the like meaning as para 51(xvii) of the Australian Constitution, but this merely refers to ‘bankruptcy and insolvency’. However, the PPSA rarely uses the terms ‘insolvency’ or ‘insolvent’, an exception being s 324, discussed in Chapter 15. PPSA s 254. Uniform Commercial Code — Secured Transactions s 9-371(a)(2); Saskatchewan PPSA s 20(2). For discussion of the contrary New Zealand approach, see Michael Gedye, Ronald C C Cuming and Roderick Wood, Personal Property Securities in New Zealand, Thomson Brookers, Wellington, 2002, Intro, p 5; David McLauchlan, ‘Unperfected Security Interests Under the PPSA’ (1999) New Zealand Law Journal 55; Donald Dugdale, ‘The Proposed PPSA’ (1998) New Zealand Law Journal 383; David Brown, ‘The New Zealand Personal Property Securities Act’ in John de Lacy (ed), The Reform of UK Personal Property Security Law, Routledge Cavendish, Abingdon, United Kingdom, 2010, 328 at pp 338– 340. See also Bruce Whittaker, Statutory Review of the Personal Property Securities Act 2009: Final Report (Commonwealth of Australia, 2015), para 8.7.2 (‘Statutory Review: Final Report’). See 13.33 of this text. Statutory Review: Final Report, para 8.7.7. Paragraph 267(1)(b) refers to Corporations Act 2001 (Cth) s 513A–513C for ascertainment of the relevant ‘critical time’ at which the insolvency event is taken to have commenced. See Re Maiden Civil (P&E) Pty Ltd; Richard Albarran and Bruce Alexander Pleash [2013] NSWSC 852 at

10. 11. 12. 13.

14.

15. 16. 17. 18. 19. 20. 21.

22.

23.

24.

25.

26. 27. 28. 29. 30. 31.

[71]–[72]. The Statutory Review has recommended retaining the expression ‘vests in the grantor’: Statutory Review: Final Report, para 8.7.3. See Re Giffen [1998] 1 SCR 1. Compare Corporations Act 2001 (Cth) s 266(6) (now repealed). Statutory Review: Final Report, para 8.7.8. But see Commonwealth of Australia Senate, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009 (Cth), para 8.9, discussing the justification for excluding one category of PPS lease, a lease or bailment of serial-numbered property for between 90 days and one year (para 13(1)(e) PPSA). This category of PPS lease has now been removed, and with it, the exclusion in subs 268(1): see Personal Property Securities Amendment (Deregulatory Measures) Act 2015 (Cth). Statutory Review: Final Report, para 8.7.4. The recommendation refers to PPS leases in general, but the discussion in the Report indicates that the intention was only to exclude PPS leases which do not in substance secure payment or performance of an obligation. The definition of PPS lease is discussed in 3.30 of this text. Statutory Review: Final Report, para 8.7.9. Commonwealth of Australia Senate, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009 (Cth), para 8.8. John Stumbles, ‘Personal Property Security Law in Australia and Canada: A Comparison’ (2011) 41 Canadian Business Law Journal 425 at 439. Statutory Review: Final Report, para 8.7.6.3. Compare, for example, Saskatchewan PPSA s 21. In the case of bankruptcy, ipso facto clauses, providing for automatic termination of an agreement on the grantor’s insolvency, are prohibited: Bankruptcy Act 1966 ss 301, 302. The insolvency events, and the critical times for their respective commencement, are identical to those in subs 267(1); see Corporations Act 2001 (Cth) s 588FL. See also Statutory Review: Final Report, para 9.2.2.2.3, recommending removal of reference to ‘deeds of company arrangement’ from s 588FL, consistent with the recommendation regarding subs 267(1) discussed in 13.3 above. Section 588FL only applies to security interests perfected by registration. The provision does not apply to a security interest that is perfected by possession or control, or that is temporarily perfected, prior to the insolvency event. The reason is historical. The provision in part replicates Corporations Act s 263 (now repealed), which related to the registration of company charges. Pozzebon (Trustee) v Australian Gaming & Entertainment Ltd [2014] FCA 1034 at [48], per Collier J; and Carrafa, Goutzos & Lofthouse (as liquidators of Relux Commercial Pty Ltd) (in liq) v Doka Formwork Pty Ltd [2014] VSC 570 at [50], per Sifris J, both citing Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property Securities (Corporations and other Amendments) Bill 2010, para 6.2. See Pozzebon (Trustee) v Australian Gaming & Entertainment Ltd [2014] FCA 1034. The Statutory Review recommends that if s 588FL is retained, it should not be confined to perfection by registration: Statutory Review: Final Report, para 9.2.2.2.3. For example: (1) where the grantor does not acquire the collateral immediately; and (2) in the case of a lease which becomes a PPS lease because it is allowed to continue for a period of more than one year: see Statutory Review: Final Report, para 9.2.2. See note 23 above, at para 6.5. See Carrafa, Goutzos & Lofthouse (as liquidators of Relux Commercial Pty Ltd) (in liq) v Doka Formwork Pty Ltd [2014] VSC 570. See Statutory Review: Final Report, para 9.2.2.2, apparently overlooking s 588FN. See Re Barclays Bank plc [2012] NSWSC 1095; Re Cardinia Nominees Pty Ltd [2013] NSWSC 32; Re Enviro Pallets (NSW) Pty Ltd [2013] QSC 220; Re Appleyard Capital Pty Ltd [2014] NSWSC 782. Appleyard, above note 29, at [11]. Re Barclays Bank plc [2012] NSWSC 1095 at [11].

32. 33.

34. 35.

36. 37.

38.

39.

40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

51.

52.

Re Appleyard Capital Pty Ltd [2014] NSWSC 782. The court noted that prior secured creditors are not affected by the making of an extension order and so the position of prior registered secured parties did not have to be considered, at [15]. In cases both before and since s 588FM, courts have made so-called ‘Joplin orders’ (Re Joplin Brewery Co Ltd [1902] 1 Ch 79). For an example of such an order under s 588FM, see Re Enviro Pallets (NSW) Pty Ltd [2013] QSC 220, to the effect that an extension order is without prejudice to the rights of secured parties acquired prior to the registration in question. Appleyard, above note 29, at [33]. This is a so-called ‘Guardian’ condition’: see Re Guardian Securities Ltd [1984] 1 NSWLR 95. In Appleyard, the s 588FM application was made ex parte and the court cautioned against this practice, saying the grantor company should be joined in the proceedings to represent the interests of its creditors and contributories: Appleyard, above note 29, at [34]. Appleyard, above note 29, at [32]. Appleyard, above note 29 at [25], citing Hewlett Packard Australia Pty Ltd v GE Capital Finance Pty Ltd [2003] FCAFC 256; Investa Properties Pty Limited v Westpac Property Funds Management Limited [2001] NSWSC 1089. Clear evidence of solvency was the basis for exercising the discretion under s 588FM in Re Barclays Bank plc [2012] NSWSC 1095, though the case was not cited in Appleyard. Compare Re Black Opal IP Pty Ltd [2013] NSWSC 1225 at [10]. See Re Enviro Pallets (NSW) Pty Ltd [2013] QSC 220, where the administrators and liquidators had advised unsecured creditors of the s 588FM application and given them an opportunity to be heard, but none sought to do so. See Corporations Act 2001 (Cth) s 51: ‘PPSA security interest’ means a security interest within the meaning of the Personal Property Securities Act 2009 (Cth). ‘Security interest’ is defined in Corporations Act s 51A to mean: (1) a PPSA security interest; and (2) a charge, lien or pledge. The statute continues to use the expressions, ‘charge’, ‘lien’ and ‘pledge’ in relation to interests not subject to the PPSA, for example, security interests in land and security interests arising by operation of law. See note 23, above, at p 1. See, for example, Dunphy v Sleepyhead Manufacturing Co Ltd [2007] NZCA 241 at [36]–[37]. Roderick Wood, ‘The Structure of Secured Priorities in Insolvency Law’ (2011) 27 Banking and Finance Law Review 25. Corporations Act 2001 s 51C, referring to ‘circulating asset’ as defined in PPSA s 340: see 13.24 below. Statutory Review: Final Report, para 9.2.1.2. See Diccon Loxton, ‘All Assets Securities’, in Craig Wappett, Steve Edwards and Bruce Whittaker, Personal Property Securities in Australia (LexisNexis looseleaf), para 4.6.800. National Westminster Bank v Spectrum Plus [2005] 2 AC 680 (HL). The statutory definition of ‘control’ attempts to mimic the pre-PPSA case law: see further 13.25 below. Statutory Review: Final Report, para 9.2.1.1.1. On the basis that, historically, insolvency law was concerned to protect employees’ wages from the floating charge over inventory: see note 48 above. Though it does note that it would be possible to include accounts and ADI accounts ‘if it was determined as a policy matter that the statutory priority should be available in relation to those assets as well’: Statutory Review: Final Report, para 9.2.1.1.3. The Corporations Act amendments made consequent upon the passing of the PPSA were expressly intended to reflect, not change, existing policy and priorities: see Commonwealth of Australia, House of Representatives, Explanatory Memorandum on the Personal Property (Corporations and other amendments) Bill 2011, Outline, p 1. The current elaborate provisions relating to control of accounts and ADI accounts indicate that accounts may be circulating assets: see further 13.25 below. Companies Act 1993 (NZ) s 313; Sch 7 cl 2. The New Zealand PPSA does not have a separate class of ‘ADI account’, and its definition of ‘account receivable’ (s 16), incorporated into the insolvency priority provision of its Companies Act, is wider than the Australian definition of ‘account’; see Strategic Finance

53.

54. 55. 56.

57.

58.

59. 60.

61.

62.

63.

Ltd (in rec and in liq) v Bridgman [2013] NZCA 357. The definition also refers to a floating charge. The purpose is to cover transitional security interests to the extent that the term continues to be used, and also a floating charge over property that is excluded from the PPSA. See above note 16, at para 9.67. PPSA s 340(5). But personal property is not a circulating asset merely because the secured party has given express authority to transfer specific personal property free of the security interest: PPSA subs 340(4). Transfers of accounts and chattel paper are also excluded: subs 340(4A). In other parts of the statute, the expression ‘control’ refers to a method of perfection which is an alternative to other methods of perfection, including perfection by registration. A secured party which takes control of the collateral does not have to register a financing statement in order to perfect its security interest. But in the present context, ‘control’ has a different meaning and, to establish control in the relevant sense, the secured party does have to register a financing statement which discloses that it has control: see PPSA subs 340(2) and Personal Property Security Regulations 2010 (Cth) reg 4.1 Item 2. The Statutory Review has recommended that the financing statement data field relating to control should be removed; Statutory Review: Final Report, para 6.2.3. It further recommends that assuming (1) its proposed broader changes to ss 340–341A are not adopted; and (2) the ‘control’ field on the financing statement is retained, it should not be necessary for an ADI with control over an ADI account within s 341A, to have to disclose control on the financing statement: Statutory Review: Final Report, para 9.2.1.4.3. PPSA Pts 2.1 and 2.3 deal with control as a method of perfection. But in the context of PPSA s 340, the concept of control is used for the different purpose of distinguishing circulating assets from noncirculating assets. The definition of ‘control’ in the s 340 context is different from the definition of ‘control’ as a method of perfection, and the different meanings reflect the different functions the concept performs in the two contexts. In this context, ‘inventory has its ordinary meaning’ and ‘the definition of inventory in [PPSA] s 10 does not apply’: PPSA subs 341(1B). The Statutory Review suggested that the term ‘specifically appropriate’ was both unclear and unnecessary. It recommended that assuming its broader proposals for restructuring ss 340–341A are not adopted, the operation of subs 341(1) should depend simply on: (1) the existence of an agreement in writing that the grantor will not remove any inventory without the express consent of the secured party and (2) it being the grantor’s usual practice to comply with the agreement: Statutory Review: Final Report, para 9.2.1.7. The Statutory Review noted that the ‘usual practice’ requirement could produce uncertain outcomes, particularly in one-off cases where there is no usual practice. The report was also critical of the requirement that depositing the money in the ADI account must not result in a party becoming liable to pay the grantor. It recommended that if its broader proposals for restructuring ss 340–341A are not adopted, the control rule for accounts should be simply that (1) the secured party and the grantor have agreed in writing that the account payment must be deposited into a specified ADI account and (2) the secured party controls the ADI account, unless it is shown that the grantor’s usual practice is not to deposit the proceeds into the ADI account and that the secured party expressly consented to that practice: Statutory Review: Final Report, paras 9.2.1.5.3 and 9.1.6.3. If the secured party is not the ADI, there is a further requirement that depositing the money in the ADI account does not result in any person becoming liable to pay the debtor or a related body corporate of the debtor: para 341A(1)(b). As mentioned above in the discussion on control of an account, the Statutory Review has recommended that this requirement be deleted: Statutory Review: Final Report, para 9.2.1.6.3. The Statutory Review argued that a secured party who satisfies these requirements should not be at risk of the ADI account nevertheless being treated as a ‘circulating asset’ due to the failure to disclose control on a financing statement, as required by subs 340(2). It recommended that, if its proposal for removing the ‘control’ data field from the financing statement is not adopted, the control disclosure requirement in subs

64. 65. 66.

67. 68. 69.

70. 71. 72.

73. 74. 75.

76. 77. 78. 79. 80. 81. 82. 83. 84. 85.

340(2) should not apply to a security interest held in an ADI account by the ADI itself: Statutory Review: Final Report, para 9.2.1.4.1. See above note 16, at para 9.59. As noted in critical terms in submissions to the Statutory Review: Statutory Review: Final Report, para 9.2.1.1.1. In other words, the provision does not apply to transitional security interests: see PPSA s 318. PPSA s 339 overlaps with Corporations Act s 51C, but it is broader; Corporations Act s 51C is relevant only to the Corporations Act, whereas PPSA s 339 is relevant to all Commonwealth statutes and also to the security agreement The provision also does not apply to transfers of accounts or chattel paper: subs 339(2). See above note 17, at p 433. Pointing out that the provision has no meaningful role to perform: PPSA s 12 is sufficient to ensure that agreements using pre-PPSA terminology are subject to the statute and all Commonwealth statutes have now been amended to substitute PPSA terminology: Statutory Review: Final Report para 9.3.2. For other examples of provisions referring to ‘property of the company’, see above note 23, Sch 1 paras 5.7–5.23. See above note 23, at para 5.14. In New Zealand, the government elected not to deal with the ‘property of the company’ issue by statutory amendment and has instead left it to the courts to decide whether references in the Companies Act 1993 (NZ) to property of a company include property supplied to the company on retention of title terms. In this connection, see Dunphy v Sleepyhead Manufacturing Co Ltd [2007] NZCA 241. See above note 23, at paras 5.15–5.23. See above note 23, at para 5.9. Commonwealth of Australia, Senate Standing Committee on Legal and Constitutional Affairs, Report on the Personal Property Securities (Corporations and Other Amendments) Bill 2010 (Canberra, May 2010), paras 3.15–3.19. See Corporations Act s 1501A, inserted by Personal Property Securities (Corporations and Other Amendments) Act 2011 (Cth) s 3, Sch 1 Item 13. For other examples, see above note 23, at [4.9]. See above note 2, ch 5. Bankruptcy Act 1966 ss 64ZA(5), 90. Bankruptcy Act 1966 s 44. Bankruptcy Act 1966 ss 90–92, 94. Bankruptcy Act 1966 ss 54L, 58. Bankruptcy Act 1966 subs 153(3). Section 207 deals with surrender of security where a secured party has voted on the personal insolvency agreement. Bankruptcy Act 1966 s 204.

[page 429]

CHAPTER 14 Conflict of Laws INTRODUCTION 14.1 This chapter deals with conflict of laws issues which may arise in the context of the Personal Property Securities Act 2009 (Cth) (PPSA). Example 1. Grantor is a company incorporated in Jurisdiction A. Grantor carries on business in Jurisdiction A and Jurisdiction B. Grantor and SP enter into a security agreement in Jurisdiction A under which Grantor gives SP a security interest in factory equipment located in Jurisdiction B. Grantor subsequently sells and delivers the equipment to T in Jurisdiction B without SP’s authority. T is unaware of SP’s security interest. When SP learns about the sale, it claims the equipment from T.

The first issue in a case like this is to determine whether the dispute between SP and T is governed by the laws of Jurisdiction A or those of Jurisdiction B. The answer to the question may affect the outcome of the case if the rule in Jurisdiction A for dealing with disputes of this nature is different from the rule in Jurisdiction B. In Canada and the United States, conflict of laws issues may arise at the provincial or state level. Assume that, in Example 1, Jurisdiction A is Saskatchewan and Jurisdiction B is Ontario. If Saskatchewan law applies, the outcome of the case will depend on whether SP perfected its security interest, in accordance with the Saskatchewan PPSA, by registering a financing statement in the Saskatchewan Personal Property Securities Register. On the other hand, if Ontario law applies, the outcome will depend on whether SP registered in Ontario.1 By contrast, the Australian PPSA is a federal statute and this forecloses the possibility of conflict of laws issues at the state level. Nevertheless, conflict of laws issues may still arise at the international level (assume, for instance, that in Example 1 Jurisdiction A is Australia and Jurisdiction B is New Zealand) and the Australian PPSA contains provisions addressing conflict of laws issues arising between Australia [page 430]

and other countries: see Re Maiden Civil (P&E) Pty Ltd; Richard Albarran and Bruce Alexander Pleash.2 14.2 The main provisions are in PPSA s 6, which defines the territorial reach of the statute and Pt 7.2 (ss 233–241) (the conflict of laws provisions). Other relevant provisions include: s 39, which enacts special rules for the case where the collateral consists of goods or other tangible property and is moved from a foreign jurisdiction into Australia during the currency of the security agreement; s 40, which enacts special rules for the case where the collateral consists of intangible property or financial property and the grantor relocates to Australia or transfers the collateral to a person located in Australia; and s 77, which covers the case where the applicable law is the law of a foreign jurisdiction which makes no provision for registration of security interests. According to the Explanatory Memorandum,3 the conflict of laws provisions in PPSA Pt 7.2 are based on similar provisions in the Saskatchewan and New Zealand PPSAs,4 and also on the UNCITRAL Legislative Guide on Secured Transactions.5 However, the Australian provisions depart from both these models in various respects identified below.

THE TERRITORIAL REACH OF THE PPSA 14.3 PPSA s 6 provides that the PPSA applies in any case where the grantor is an Australian entity.6 It goes on to say that the statute also applies if the collateral is: (1) goods or financial property located in Australia (subs 6(1));7 (2) an intermediated security if the intermediary is located in Australia (subs 6(1A)); (3) an account payable in Australia (para 6(2)(b)); (4) an ADI account (para 6(2)(d)); or (5) intangible property arising by operation of an Australian law (for example, intellectual property rights) (para 6(2)(e)).8 The statute also applies to a deemed security interest in an account or chattel paper — in other words, a transfer of an account or chattel paper — if the [page 431] transferor is an Australian entity or the account or chattel paper is payable in Australia: para 6(2)(c).9 14.4 There is no corresponding provision in either the New Zealand PPSA or the Saskatchewan PPSA, and the interaction between PPSA s 6 and the conflict of

laws provisions in Pt 7.2 contributes an additional layer of complexity to the resolution of conflict of laws issues. The main conflict of laws provisions are in: s 238, which provides, in part, that if the collateral is goods, the applicable law is the law of the jurisdiction where the goods are located; s 239, which provides, in part, that if the collateral is intangible property, the applicable law is the law of the jurisdiction where the grantor is located; and s 240, which provides, in part, that if the collateral is financial property, the applicable law is the law of the jurisdiction where the grantor is located. Assume that, in Example 1, Jurisdiction A is Australia and Jurisdiction B is New Zealand. PPSA para 6(1)(b) indicates that the Australian PPSA applies because Grantor is an Australian entity. However, New Zealand PPSA s 26 suggests that the New Zealand PPSA applies on the basis that the collateral is located in New Zealand. Assuming the case is litigated in Australia, the Australian court must give effect to PPSA para 6(1)(b) and the result is that the Australian PPSA applies. But that is not the end of the story, because the Australian PPSA includes the conflict of laws provisions in Pt 7.2 and s 238 points to the application of New Zealand law after all, because the goods are located in New Zealand. 14.5 Example 2. Grantor is a company incorporated in New Zealand. Grantor carries on business in New Zealand and Australia. Grantor gives SP1 a security interest in its Australian accounts. It subsequently transfers the same accounts to SP2 without SP1’s authority. SP1 and SP2 end up in dispute over the accounts.

Australian PPSA para 6(2)(b) indicates that the Australian PPSA applies because the disputed collateral consists of an account that is payable in Australia. However, New Zealand PPSA s 30 suggests that the New Zealand PPSA applies on the basis that Grantor is located in New Zealand.10 If the case is litigated in Australia, the court, having regard to para 6(2)(b), will conclude that the Australian PPSA applies. However, the court will then proceed to the conflict of laws rules in Australian PPSA Pt 7.2 and, as indicated above, s 239 points to the application of New Zealand law, given that Grantor is located in New Zealand. 14.6 The corollary of the foregoing analysis is that if the court concludes, on the basis of s 6, that the Australian PPSA does not apply, it cannot then rely on PPSA Pt 7.2 for resolution of conflict of laws issues. Assume that, in [page 432]

Example 2, the subject matter of the two transactions is not just Grantor’s Australian accounts, but also its New Zealand accounts. So far as the New Zealand accounts are concerned, the Australian PPSA does not apply because Grantor is not an Australian entity and the accounts are not payable in Australia. PPSA s 239 points to the application of New Zealand law given that Grantor is located in New Zealand. Given the operation of subs 6(2), however, s 239 does not apply. This leaves a gap because, while subs 6(2) provides that the Australian PPSA does not apply, it does not specifically say that New Zealand law applies instead. The result is that the courts will be forced back to the common law choice of law rules which favour the application of New Zealand law, having regard to Grantor’s location. 14.7 PPSA s 152 provides that a financing statement or financing change statement may be registered whether or not the collateral or the grantor is located in Australia. This provision must be read subject to s 6. So, for example, if the collateral comprises goods located outside Australia, but the grantor is an Australian entity, the PPSA (including s 152) applies: para 6(1)(b); likewise, if the grantor is located outside Australia (that is, the grantor is not an Australian entity), but the goods are located in Australia. On the other hand, if the goods are located outside Australia and the grantor is not an Australian entity, the PPSA (including s 152) does not apply.11

THE SCOPE OF PPSA PART 7.2 14.8 PPSA subs 234(1) provides that, in proceedings in an Australian court, the law of the jurisdiction specified by Pt 7.2 in relation to a security interest governs the validity, perfection and effect of perfection or non-perfection of the security interest. The provision reflects the basic principle that courts are bound by their own jurisdiction’s choice of law rules and so, in proceedings in a foreign court, Australian PPSA Pt 7.2 has no application. 14.9 The references in Pt 7.2 to a ‘security interest’ are to a security interest in the PPSA sense. For example, as a matter of English law, the interest of the seller or owner under a conditional sale or hire-purchase agreement is not a security interest: see 1.23–1.30 of this text. An Australian court may be called on to decide whether Australian or English law applies to a conditional sale or hire-purchase agreement. The seller’s or owner’s interest is a security interest in the PPSA sense and the Pt 7.2 provisions apply on that basis even though the Pt 7.2 provisions may ultimately lead the court to the conclusion that English law governs.

14.10 Subsection 234(1) refers to the ‘validity, perfection and effect of perfection or non-perfection’ of a security interest, and this terminology [page 433] is used throughout Pt 7.2. The same wording appears in the Canadian and New Zealand PPSAs, whereas the UNCITRAL Legislative Guide on Secured Transactions refers to: (1) the creation of the security interest; (2) the effectiveness of the security interest against third parties; and (3) the priority ranking of a secured creditor as against a competing claimant.12 PPSA subs 234(2) provides that Pt 7.2 does not affect the law that governs contractual obligations (including any obligations arising under a security agreement). This provision makes it clear that Pt 7.2 is concerned only with property rights created by a security agreement: ‘the contractual rights and obligations of the parties to a security agreement [are] subject to the law chosen by the parties and as evidenced by the terms of the contract’.13 It follows that the references throughout Pt 7.2 to the validity of a security interest relate to ‘whether a security interest is effective and enforceable between the parties, and not whether the security agreement itself is valid as a contract between the parties’.14 Attachment of a security interest is an issue going to validity in the first sense. On the other hand, questions going to the validity of the security agreement, such as misrepresentation or the contractual capacity of the parties, are not.15 Likewise, while the grantor’s obligation to repay the secured party may affect the validity of the security interest in the sense that if the obligation is invalidated the security interest becomes unenforceable, the obligation itself is a contractual one and so the law applicable to it is the law of the contract, not the law as indicated by PPSA Pt 7.2. 14.11 ‘Perfection’ has a special meaning in the PPSA context. In the PPSA sense, a security interest is perfected when: (1) it has attached; and (2) the secured party registers a financing statement or takes possession or control of the collateral, or if the security interest is temporarily perfected: PPSA s 19, discussed in Chapter 5 of this text. In other words, perfection is a two-step process and a security interest is by and large unenforceable against third parties until both steps are completed. But not all legal systems are the same in this respect. In some jurisdictions, a security interest may be enforceable against third parties without the need for publication, whether by registration or otherwise. For example, under English law, subject to the Sale of

Goods and Factors Acts, a conditional sale or hire-purchase agreement is effective against third parties per se : see 10.53–10.57 of this text. To make the PPSA Pt 7.2 provisions workable, perfection in this context should be taken as meaning perfection in the PPSA sense and also the functional equivalent in the relevant foreign jurisdiction. In the latter respect, perfection refers to whatever steps are required in the foreign jurisdiction to give the security [page 434] interest status, vis-à-vis third parties, equivalent to the status of a perfected PPSA security interest.16 14.12 The references in PPSA subs 234(1) and throughout Pt 7.2 to ‘the effect of perfection or non-perfection of a security interest’ also derive from the Canadian PPSAs. In Canada, the courts have read the words as referring to the secured party’s priority position relative to competing claimants, even though the outcome of such disputes does not always depend on whether the security interest is perfected or unperfected; for example, under the buyer in ordinary course provision in PPSA s 46, the buyer may acquire clear title to the collateral even though the security interest is perfected: see 10.21–10.47.17 Australian courts are likely to take the same approach, particularly having regard to the fact that the Explanatory Memorandum expressly acknowledges the UNCITRAL Legislative Guide on Secured Transactions as a partial basis for PPSA Pt 7.2 and, as indicated above, the UNCITRAL Guide identifies the relevant issue in terms of priorities.18 14.13 PPSA s 237 gives parties some freedom to contract around the choice of law rules in ss 238–240 by opting into the Australian PPSA. It provides that the parties may include in the security agreement a choice of law provision nominating Commonwealth law as the law governing the security interest and, provided the grantor is an Australian entity, this stipulation will override the statutory choice of law rules. The concession is not available if the collateral is an account, intellectual property or an intellectual property licence or if the security agreement comprises an outright transfer of an account or chattel paper.19 However, the provision is effectively limited anyway to cases involving a security interest in goods other than mobile goods. The reason is that, for goods, the identification of the applicable law turns on the location of the goods (s 238), whereas for other types of collateral the question turns on the location of the grantor (ss 239 and 240): see further

14.15–14.48 below. [page 435] So, for example, if the collateral comprises goods located in a foreign jurisdiction, PPSA subs 238(1) points to the application of the foreign law, even though the grantor is an Australian entity. In this case, s 237 allows the parties to stipulate for the application of Australian law instead. On the other hand, if the collateral comprises, say, accounts, and the grantor is an Australian entity, subs 239(1) points to the application of Australian law anyway.20 14.14 PPSA s 237 appears to derive from New Zealand PPSA s 26(1)(c), which provides that the validity, perfection, and effect of perfection or non-perfection of a security interest in goods, and a possessory security interest in other tangible property, is governed by the law of New Zealand if ‘the security agreement provides that New Zealand law is the law governing the transaction’. There is no corresponding provision in the Canadian PPSAs. The UNCITRAL Guide notes that ‘the conflict-of-laws rules applicable to the property aspects of secured transactions are matters that are outside the domain of freedom of contract’ and in most countries ‘the grantor and the secured creditor [are not] permitted to select the law applicable to priority’.21 The main reason is that, on first principles, a contractual choice of law provision cannot bind third parties.22 On the other hand, by necessary implication, a choice of law provision permitted under PPSA s 237 is binding on third parties. However, the potential prejudice to third parties is mitigated by the facts that the provision only applies if the grantor is an Australian entity and that it is significant only in cases where the security interest is in nonmobile goods. Section 237 in effect allows the parties to substitute a grantor’s location rule for the collateral location rule which normally applies where the collateral is goods. It might be argued that, if the grantor is an Australian entity, a third party should not be taken by surprise to discover that the security interest is governed by Australian law. In any event, one implication of s 237 is that if the collateral is non-mobile goods located outside Australia, and the grantor is an Australian entity, a third party looking for security interests should search in both the Australian PPS register and also in any equivalent register maintained by the foreign jurisdiction. The Statutory Review has recommended deleting s 237.23

SECURITY INTEREST IN GOODS The Main Rules 14.15 PPSA subs 238(1) provides that the validity of a security interest in goods is governed by the law of the jurisdiction (other than the law relating [page 436] to conflict of laws) in which the goods are located when the security interest attaches, under that law, to the goods.24 Example 3. Grantor is a company incorporated in Australia. Grantor carries on a manufacturing business in Australia and Ruritania. SP enters into an agreement in Australia with Grantor for the supply of raw materials, on conditional sale (retention of title) terms, to be delivered from SP’s warehouse in Ruritania to Grantor’s Ruritania plant. SP sends Grantor its standard form contract which sets out SP’s trading terms, including the retention of title provision, and stipulates that Grantor accepts the terms by placing an order with SP. There is no provision for Grantor’s signature. Grantor defaults on its payments and SP repossesses the goods. Grantor disputes SP’s action and commences proceedings in Australia to recover the goods. Under Ruritanian law, a security interest is invalid unless the security agreement is in writing and executed by both parties. The rule extends to conditional sale agreements.

The outcome of the dispute between SP and Grantor depends on whether Australian or Ruritanian law applies. If Ruritanian law applies, SP’s security interest is invalid and, prima facie at least, Grantor may recover the goods. On the other hand, if the Australian PPSA applies, SP’s security interest is valid and enforceable against Grantor: s 19 provides that a security interest is enforceable against the grantor only if it has attached to the collateral, but attachment does not depend on the security agreement being in writing or signed by the parties (see 4.11–4.23 of this text).25 According to PPSA subs 238(1), the conflict of laws issue depends on the location of the goods at the time SP’s security interest attached or, in other words, became effective and enforceable between the parties. This test gives rise to a conundrum on the facts of Example 3 because Grantor’s case depends on the proposition that Ruritanian law applies and, under Ruritanian law, SP’s security interest did not attach to the collateral. The solution is to read subs 238(1) as referring to putative attachment so that the applicable law is the law of the jurisdiction where the goods are located when the security interest attaches or would have attached but for the secured party’s failure to comply with that jurisdiction’s attachment requirements.26 Applying subs 238(1) to the facts of Example 3: SP’s security interest attached to the goods on the date of the conditional sale agreement

or otherwise, at the latest, when Grantor took delivery; in any event, the goods were located in Ruritania throughout and, therefore, Ruritanian law applies. 14.16 Subsection 238(1A) provides that the perfection, and the effect of perfection or non-perfection of a security interest in goods at a particular time, [page 437] is governed by the law of the jurisdiction (other than the law relating to the conflict of laws) in which the goods are located at that time. Example 4. Grantor is a company incorporated in Australia. Grantor carries on business in Australia and New Zealand. Grantor and SP enter into a security agreement in Australia under which Grantor gives SP a security interest in factory equipment located in New Zealand. SP registers a financing statement in the Australian PPS register. Grantor subsequently sells and delivers the equipment to T in New Zealand without SP’s authority. T is unaware of SP’s security interest. When SP learns about the sale, it claims the equipment from T.

Example 4 is a variation on the facts of Example 1 above. The outcome of the case depends on whether Australian or New Zealand law applies because SP’s registration perfects its security interest for the purposes of the Australian PPSA, but not the New Zealand PPSA: see 14.1–14.2 above. According to PPSA subs 238(1A), the conflict of laws issue depends on the location of the collateral at the time Grantor sold it to T. The collateral was located in New Zealand at the relevant time, New Zealand law applies and T takes the equipment free of SP’s unperfected security interest under New Zealand PPSA s 52. SP could have avoided this outcome by registering a financing statement in the New Zealand PPS register. Alternatively, given that Grantor is an Australian entity, the parties could have entered into a PPSA s 237 agreement stipulating that Australian law governs the security interest.27 14.17 Subsections 238(1) and (1A) provide that the governing law is the law of the jurisdiction where the goods are located at the relevant time, ‘other than the law relating to conflict of laws’. With the exception of subs 238(3), the other provisions in Pt 7.2 are subject to the same qualification. The purpose is to exclude the doctrine of renvoi. Example 5 illustrates the point. Example 5. Grantor, a company incorporated in Australia, gives SP a security interest in factory equipment located in Ruritania. Grantor subsequently sells and delivers the equipment to T in Ruritania without SP’s authority. T is unaware of SP’s security interest. When SP learns about the sale, it commences proceedings in Australia to recover the equipment from T.

As indicated above, PPSA subs 238(1A) provides that disputes of this nature are governed by the law of the jurisdiction where the goods are located at the time the competing claim arises. Assume that under Ruritanian conflicts law, such disputes are governed by the law of the jurisdiction where the grantor is located. If PPSA subs 238(1A) did not exclude the doctrine of renvoi, it would require the Australian court to apply Ruritanian law, including the relevant Ruritanian choice of law rule. The Ruritanian choice of law rule points to the law of the jurisdiction where the grantor is located and, since this is Australia, the court would end up applying Australian law after all. This outcome assumes that Ruritanian law itself excludes the doctrine of renvoi. [page 438] Otherwise, the analysis becomes even more complicated: the Australian court, as directed by PPSA subs 238(1A), will refer in the first instance to Ruritanian law, including Ruritanian conflicts law; the Ruritanian conflicts law will refer the court back to Australian law, including Australian conflicts law, but the Australian conflicts law will again refer the court back to Ruritanian law. To break the cycle, the Australian court would end up applying Ruritanian law as if a Ruritanian court had exercised jurisdiction.28 Happily, since most of the provisions in PPSA Pt 7.2 expressly exclude the doctrine of renvoi, these difficulties are largely avoided. In a case like Example 5, the court will simply apply Ruritanian law without reference to Ruritania’s own choice of law rule.

Relocation of Goods 14.18 Example 6. Grantor is a company incorporated in Australia. Grantor carries on business in Australia and New Zealand. On Date 1, Grantor and SP1 enter into a security agreement under which Grantor gives SP1 a non-PMSI security interest in factory equipment located in New Zealand. SP1 registers a financing statement in the New Zealand PPS register. On Date 2, Grantor relocates the equipment to Australia. On Date 3, Grantor gives SP2 a security interest in the equipment and SP2 registers a financing statement in the Australian PPS Register. On Date 4, SP1 learns about the Date 2 and Date 3 events and claims the equipment.

PPSA subs 238(1A) provides that the perfection, and the effect of perfection or non-perfection of a security interest at a particular time, is governed by the law of the jurisdiction where the goods are located at that time. In Example 6, since the

goods are located in Australia on Date 3 when SP2 acquires its security interest, Australian law applies. PPSA subs 55(3) provides that a perfected security interest has priority over an unperfected security interest in the same collateral: see 7.14–7.16. SP1’s New Zealand registration does not perfect its security interest for the purposes of the Australian PPSA. However, Australian PPSA s 39 enacts a temporary perfection rule in SP1’s favour.29 14.19 Subsection 39(1) provides that, in a case like Example 6, SP1’s security interest is deemed to have been continuously perfected in Australia from Date 1, when SP1 registered its financing statement in New Zealand, until Date 2 when Grantor relocated the equipment to Australia. Moreover, subs 39(3) provides that the security interest is temporarily perfected for 56 days from Date 2 or five business days after SP1 learns of the relocation (whichever is the earlier).30 To ensure its continuing perfected status, SP1 must register a financing statement or otherwise perfect its security interest in [page 439] Australia before the expiration of the grace period. Assume that SP1 complies with this requirement by registering a financing statement on Date 4 (which is within the grace period). In that case, SP1’s security interest is continuously perfected in Australia from Date 1 onward: (1) it is presumptively perfected under subs 39(1) from Date 1 until Date 2; (2) it is temporarily perfected under subs 39(3) from Date 2 until Date 4; and (3) it is perfected by SP1’s Australian registration from Date 4 onwards. On this basis, the dispute between SP1 and SP2 involves competing security interests both perfected by registration and the governing provisions are PPSA subss 55(4) and (5) (priority is determined by the order of the respective priority times). SP1’s priority time is Date 1, SP2’s priority time is Date 3 and so SP1 has priority. 14.20 On the other hand, if SP1 fails to reperfect its security interest within the grace period, it forfeits the benefit of the temporary perfection rule: subs 39(4). So, for example, if SP1 registers a financing statement on Date 4, but Date 4 is more than 56 days after Date 2, the results are as follows: (1) the security interest is deemed to be perfected in Australia from Date 1 until Date 2; (2) it is unperfected in Australia from Date 2 to Date 4; but (3) it is perfected in Australia from Date 4 onwards. Again, the dispute is between two security interests both perfected by

registration and so the governing provisions are PPSA subss 55(4) and (5). SP2’s priority time is Date 3, SP1’s priority time is Date 4 and so SP2 has priority.31 14.21 Example 7. Grantor is a company incorporated in Australia. Grantor carries on business in Australia and England. On Date 1, SP1 supplies Grantor with equipment on hire-purchase terms and delivers the goods to Grantor’s factory in England. On Date 2, Grantor relocates the equipment to Australia. On Date 3, Grantor gives SP2 a security interest in the equipment and SP2 registers a financing statement in the Australian PPS register. On Date 4, SP1 learns about the Date 2 and Date 3 events and claims the equipment.

In this case, SP1’s claim to the goods is not a security interest so far as the law of the foreign jurisdiction is concerned. Nor does the law of the foreign jurisdiction provide for the perfection of SP1’s claim, whether by registration or otherwise. Nevertheless, Australian PPSA s 39 still applies. The ‘security interest’ s 39 refers to is a security interest as defined in PPSA s 12 and the hire-purchase owner’s title is within the definition. Subsection 39(1) provides for continuous perfection of SP1’s security interest provided that, immediately before and on Date 2: (1) ‘the security interest was effective’; and (2) ‘the security agreement providing for the security interest was enforceable against third parties’. These conditions are satisfied in Example 7 because, under English law, SP1’s ‘security interest’ became effective and [page 440] the ‘security agreement’ became enforceable against third parties immediately the agreement was concluded and there are no additional perfection requirements. Assume that SP1 registers a financing statement in Australia on Date 4 (which is within the subs 39(3) grace period). In that case, SP1’s security interest is continuously perfected in Australia from Date 1 onwards: (1) it is presumptively perfected under subs 39(1) from Date 1 until Date 2; (2) it is temporarily perfected under subs 39(3) from Date 2 until Date 4; and it is perfected by SP1’s Australian registration from Date 4 onwards. On this basis, SP1 will have priority over SP2 under PPSA subss 55(4) and (5) (the first-in-time priority rule). 14.22 The purpose of s 39 is to distribute the risk of loss in an Example 6 or 7type case between SP1 and SP2. As the foregoing analysis demonstrates, the provision makes a concession in SP1’s favour by giving it a grace period to reperfect its security interest in Australia. This comes at a cost to SP2 because SP1’s security

interest is effectively undiscoverable until SP1 reperfects (Date 1–Date 4, in Examples 6 and 7). On the other hand, the provision gives SP2 some protection by limiting SP1’s grace period to a maximum of 56 days. This comes at a cost to SP1 who may not learn about the relocation until later. However, s 39 must be read subject to s 52, which provides that a buyer or lessee for new value takes free of a temporarily perfected security interest: see 10.68–10.70 of this text. Section 52 is not limited to consumer transactions, but it is substantially motivated by consumer protection concerns. The thinking is that buyers and lessees are typically more vulnerable than other types of third-party claimant, and so they should not be exposed to the risk created by s 39 and the other temporary perfection provisions.

The Destination of Goods Rule 14.23 Example 8. Grantor carries on a publishing business in New Zealand. On Date 1, SP1, an Australian firm, supplies Grantor with a printing press on conditional sale terms. Grantor takes delivery of the press at SP1’s Australian premises and immediately arranges for the press to be shipped to New Zealand. On Date 2, Grantor gives SP2 a security interest in the press and SP2 registers a financing statement in the New Zealand PPS register. On Date 3, SP1 finds out about SP2’s security interest and claims the press.

If Australian PPSA subs 238(1A) applied, the dispute between SP1 and SP2 would be governed by New Zealand law, because the press was located in New Zealand on Date 2. New Zealand PPSA s 27 corresponds with Australian PPSA s 39. It states that, provided SP1’s security interest was perfected in Australia on Date 1, it would be temporarily perfected in New Zealand for a grace period of up to 60 days commencing on Date 1, and if SP1 registered in New Zealand within that period its security interest would be continuously perfected in New Zealand from Date 1. 14.24 However, Australian PPSA subs 238(1A) does not apply in a case like Example 8; subs 238(2) applies instead. Subsection 238(2) provides, in [page 441] effect, that, if at the time SP1’s security interest attaches to the press, it was reasonable to believe that the press would be moved to New Zealand, then New Zealand law applies from the outset (Date 1).32 The purpose is to avoid the need

for SP1, in a case like Example 8, to register a financing statement in Australia. Instead, if subs 238(2) applies, SP1 can register in New Zealand on Date 1, making Date 1 its priority time for the purpose of the New Zealand PPSA priority rules. For subs 238(2) to apply, it must have been ‘reasonable to believe’ that the goods would be moved. In Example 8, SP1 presumably knew that Grantor’s business was in New Zealand and therefore it would have been reasonable for SP1 to believe that Grantor intended to move the press to New Zealand. SP1 could minimise any residual doubt by obtaining a statement from Grantor on Date 1 that Grantor intends to take the press back to New Zealand. 14.25 Modifying the facts of Example 8, assume now that Grantor takes delivery of the press on Date 1 but does not ship it to New Zealand until Date 3. In the meantime, on Date 2, Grantor gives SP2 a security interest in the press and SP2 registers a financing statement in Australia. SP1 registers a financing statement in New Zealand on Date 1. The rule in PPSA subs 238(2) only applies if ‘the goods are currently located in the destination jurisdiction’: para 238(2)(b). Given that, in the case under consideration, the press is still in Australia on Date 2 when SP2 acquires its security interest, subs 238(2) does not apply and subs 238(1A) applies instead. The result is that Australian law governs the dispute and, since SP1’s security interest is not perfected in Australia, SP2 has priority: PPSA subs 55(3).33 The position is different in Canada. The destination of goods rule in Saskatchewan PPSA s 6(1) applies if the goods are removed to their intended destination ‘not later than 30 days after the security interest attaches’, and there is a similar provision in the other Canadian PPSAs. Assume that, in the case under consideration, Date 3 is less than 30 days after Date 1. Under the Saskatchewan version of the rule, New Zealand law would apply and, since SP1’s security interest is perfected in New Zealand while SP2’s is not, SP1 would have priority. The downside of the Saskatchewan version is that it puts SP2 at risk for the 30 days between Dates 1 and 3 because SP1’s security interest is effectively undiscoverable during this period. But the downside of the Australian version is that it burdens SP1 with the risk that, between Dates 1 and 3, a third party may acquire a competing interest in the collateral. To guard against this risk, SP1 may want to register [page 442] a financing statement in Australia, but this would detract from the purpose of subs

238(2), which is to avoid the need for SP1 to register in Australia.34

The Mobile Goods Rule 14.26 Subsection 238(3) creates an exception to the location of goods rules in subss 238(1), (1A) and (2). Subsection 238(3) provides that, despite subss (1) to (2A), the validity, perfection and the effect of perfection or non-perfection of a security interest in non-consumer goods35 that are ‘of a kind normally used in more than one jurisdiction’ are governed by the law of the jurisdiction where the grantor is located when the security interest attaches.36 Subsections 235(3)–(5) provide that, for the purposes of the statute, a body corporate is located in the jurisdiction where it is incorporated; a body politic is located in the jurisdiction of the body politic; and an individual is located at their principal place of residence.37 Example 9. Grantor is a shipping company, incorporated in Australia. On Date 1, Grantor gives SP1 a security interest in all its present and after-acquired personal property and SP1 registers a financing statement in Australia. Grantor owns a large number of shipping containers which move between various destinations around the world. On Date 2, Grantor gives SP2 a security interest in all its present and after-acquired equipment (non-inventory commercial property) and SP2 registers a financing statement in Australia. On Date 3, Grantor defaults against SP1 and SP2 and they both claim Grantor’s containers.38

Applying subs 238(3), the law applicable to the dispute between SP1 and SP2 is the law of the jurisdiction where the grantor is located when the security interest attaches, Grantor is located in Australia on Dates 1 and 2 and so Australian law applies. The purpose of subs 238(3) is to avoid the need for a secured party to register, or otherwise perfect, its security interest in every jurisdiction through which the goods might pass.39 The justification is that, given the mobile nature of the collateral, third parties would reasonably expect [page 443] the law of the grantor’s location to apply, rather than the law of the collateral’s location from time to time.40 Assume that, in Example 9, Grantor relocates to New Zealand between Dates 1 and 2. Given that, for the purposes of the statute, a corporate grantor is located in the country where it is incorporated, a change in Grantor’s location is unlikely, though not impossible;41 a relocation is more likely if the grantor is an individual, because an individual’s location is determined by their place of residence and individuals move overseas more often than companies change

their country of incorporation. In any event, if Grantor does relocate, the dispute between SP1 and SP2 will be governed by New Zealand law and the outcome will depend on whether and when SP1 and SP2 register in New Zealand.42 PPSA s 40 addresses the grantor relocation issue, but the provision only applies where the collateral is intangible property or financial property and so it is not relevant to cases like Example 9. Section 40 is discussed in 14.38–14.39 below. 14.27 Subsection 238(3) applies where the collateral comprises goods ‘of a kind that is normally used in more than one jurisdiction’. The test is an objective one and the grantor’s actual use is irrelevant: see Gimli Auto Limited v BDO Dunwoody Limited.43 In Gimli, the court read ‘normally’ as meaning ‘commonly’. On this basis, to satisfy the mobile goods test, it is not necessary to prove that goods of the relevant kind are used across borders more than 50 per cent of the time; it is sufficient if goods of the relevant kind are used across borders in a substantial number of cases. The advantage of this interpretation is that it allows courts to take judicial notice of the issue, whereas the alternative reading requires a quantitative assessment and the parties may be forced to lead evidence on the point. 14.28 Shipping containers satisfy the objective test, even if the grantor has decommissioned some of its containers and now uses them for storage purposes in a single location. On the other hand, a printing press would probably not satisfy the test because it is not customary to shift heavy factory equipment from place to place and this conclusion would stand even if the grantor in a particular case has a practice of moving its equipment around. In [page 444] Re Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash,44 it was held that earth-moving equipment is not mobile goods. In Canada, it has been held that the mobile goods rule applies to a car used for commercial purposes, on the basis that cars are commonly driven across borders, even though, in the case under consideration, the car was only ever driven in a single province: see Gimli. But the position in Australia may be different. The Australian PPSA conflict of laws rules operate only at the international level and Australia does not share a land border with any other country. Therefore, subs 238(3) arguably does not apply to a motor vehicle located in Australia because, while Australian vehicles are commonly driven from state to state, they are not normally used overseas as well.45 Aircraft and

aircraft parts are goods normally used in more than one jurisdiction. So, too, are ships, but there is special provision for ships in subs 238(4): see 14.30 below. 14.29 In contrast to the other provisions in Pt 7.2 which expressly exclude the doctrine of renvoi, subs 238(3) expressly includes it (‘including the law relating to conflict of laws’). New Zealand PPSA s 30 and Saskatchewan PPSA s 7 are both similar in this respect. The doctrine of renvoi and its implications are discussed in 14.17 above.46 The reason for preserving the doctrine in the context of the mobile goods rule goes back to the early days of PPSA reform in Canada. According to Cuming, Walsh and Wood, ‘in its inception, the PPSA debtor location rule for mobile goods … was somewhat novel, and there was a perceived need to respect the fact that other jurisdictions might continue to apply some variation of [the location of the goods] approach’.47 However, the grantor’s location rule for mobile goods now has UNCITRAL’s endorsement and it is open to question whether deference to other jurisdictions on this score is still warranted.48 The Statutory Review has recommended amending s 238(3) to exclude the law relating to the conflict of laws.49

Security Interests in Ships 14.30 PPSA subs 238(4) applies if the collateral comprises a ship entered in a register of ships. It provides that if, according to the conflicts law of the country which maintains the register, title to the ship is governed by the law of that country then, despite subss (1)–(3), the law of that country also governs the perfection and effect of perfection or non-perfection of a security interest in the ship.50 The purpose of the provision is to ensure that the same country’s law governs both ownership of ships and security interests in them. [page 445]

SECURITY INTERESTS IN INTANGIBLE PROPERTY The Main Rules 14.31 PPSA s 239 applies where the collateral is intangible property, including accounts, ADI accounts, intellectual property and licences: see 2.28–2.50 of this

text. Subsections 239(1) and (2) apply where the collateral is intangible property other than intellectual property or an ADI account. Subsection 239(3) enacts special rules for intellectual property and subss (4) and (5) enact special rules for ADI accounts. Subsection 239(6) provides that the section does not apply to rights evidenced by a letter of credit. The reason is that security interests in letter of credit rights are separately provided for in s 240: see 14.41–14.47 below. Subsection 239(1) provides that the validity of a security interest in intangible property is governed by the law of the jurisdiction (other than the law relating to conflict of laws)51 in which the grantor is located52 when the security interest attaches.53 Subsection 239(2) provides that the perfection and the effect of perfection or nonperfection of a security interest in intangible property at a particular time is governed by the law of the jurisdiction (other than the law relating to conflict of laws) in which the grantor is located at that time.54 14.32 Section 239 adopts a grantor’s location rule for security interests in intangible property, in preference to a location of the collateral rule such as the rules in subss 238(1)–(2A) for a security interest in goods. There are various interrelated factors in support of this approach: (1) while it is easy enough to identify the location of goods and other tangible property, there is no clear agreement on how to identify the location of intangible property, such as an account (one possibility might be to say that the account’s location is determined by reference to the location of the account debtor, while another possibility might be to say the account is located in the place where payment must be made); (2) the law of the grantor’s location is easily ascertainable at the date of the security agreement; (3) the security agreement may cover multiple accounts and, if a location of the collateral rule applied, one account might be subject to the laws of Jurisdiction A, while another was subject to the laws of Jurisdiction B depending, for example, on where the account debtor happens to be located or where the account debt is payable; (4) the collateral may include both present and future accounts and a location of the collateral rule would be unworkable for accounts that had not yet been generated at the date of the security agreement; and (5) by contrast, under a grantor’s location rule [page 446] the applicable law is the same for all present and future accounts covered by the

security agreement.55

Intellectual Property 14.33 PPSA subs 239(3) applies where the collateral is intellectual property or an intellectual property licence.56 Paragraphs 239(3)(a) and (b) provide that, as a general rule, the applicable law is the law of the grantor’s location, the same as for other intangible property. But para 239(3)(c) enacts a special rule for the type of case illustrated by Example 10.57 Example 10. Grantor, a US company incorporated in New York, holds a patent granted under the Patents Act 1990 (Cth). Grantor gives SP a security interest in all its present and after-acquired personal property and SP registers a financing statement in the New York Article 9 register. Grantor subsequently assigns the patent to Transferee. SP and Transferee both claim the patent and the case is litigated in Australia.

Paragraph 239(3)(c) provides that the questions whether (1) a successor in title to the grantor’s interest in intellectual property takes it free of a security interest and (2) a security interest is valid against a transferee of the intellectual property, are governed by the law of the jurisdiction (other than the law relating to conflict of laws) under which the intellectual property is granted, if the law in question provides for public registration or recording of the security interest or of a notice relating to the security interest. The purpose of the provision is to ensure that, in a case like Example 10, the same country’s law governs both ownership of, and security interests in, intellectual property.58 In Example 10, the Australian PPSA, including the conflict of law provisions, applies because, although Grantor is located in the United States, the patent is Australian: PPSA para 6(2)(e). Applying para 239(3)(c), SP’s dispute with Transferee will be governed by Australian law if Australian law ‘provides for the publication, registration or recording of the security interest’. Australian law qualifies on this basis because a patent security interest is registrable in the PPS register.59 [page 447] 14.34 Example 11. Grantor, an Australian company, holds a US patent. Grantor gives SP a security interest in all its present and after-acquired personal property and SP registers a financing statement in Australia. Grantor subsequently assigns the patent to Transferee. SP and Transferee both claim the patent. The dispute is litigated in Australia.

In Example 11, the Australian PPSA, including the conflict of law provisions, applies because, although the dispute involves a US patent, Grantor is an Australian entity: PPSA para 6(2)(a). Applying para 239(3)(c), SP’s dispute with Transferee will be governed by United States law if United States law provides for registration of the security interest. Section 261 of the United States Patent Act60 provides that ‘an assignment, grant or conveyance of a patent shall be void as against any subsequent purchaser or mortgagee for valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office (PTO) within three months from its date or prior to the date of such subsequent purchase or mortgage’. It is unsettled whether this provision applies to security interests and also, if it does, how the provision relates to the Art 9 registration requirements and priority rules.61 But for the limited purposes of Australian PPSA para 239(3)(c), these issues do not matter. Revised Article 9 s 9-109(c)(1) provides that Art 9 does not apply to the extent that it is pre-empted by a federal statute.62 If Patents Act s 261 does apply to security interests, Art 9 may be pre-empted in a case like Example 11. On the other hand, if Patents Act s 261 does not apply to security interests, Art 9 continues to govern. Either way, therefore, United States law provides for the public registration or recording of patent security interests.63 [page 448]

ADI Accounts 14.35 Subsection 238(4) provides that a security interest in an ADI account is governed by the law of the jurisdiction (other than the law relating to conflict of laws) that governs the ADI account. However, subs 238(5) provides that the parties to a security agreement may agree in writing that the law of some other jurisdiction applies, provided that: (1) the ADI consents in writing; and (2) application of the other jurisdiction’s law would not be ‘manifestly contrary to public policy’. There is no corresponding provision in the New Zealand or Canadian PPSAs, which do not distinguish between bank accounts and accounts at large; this means that a security interest in a bank account is governed by the law of the grantor’s (depositor’s) location. The UNCITRAL Guide recommends that the governing law should be either: (1) the law of the jurisdiction in which the bank is located (Recommendation 210, Alternative A); or (2) the law of the jurisdiction whose law governs the account agreement (Recommendation 210, Alternative B). The UNCITRAL Guide justifies

Recommendation 210, Alternative B on the basis that ‘it would meet the reasonable expectations of the parties to the account agreement’.64 The Guide goes on to note that ‘third parties would be able to ascertain the law provided in the account agreement, as the grantor (the account holder) would normally supply information on the account agreement to obtain credit from a lender relying on the funds credited to the account’.65 14.36 The UNCITRAL Guide’s Recommendation 210, Alternative B is reflected in Australian PPSA subs 239(4), but subs 239(5) is novel. The provision would allow the parties to opt out of the subs 239(4) rule in favour of the grantor’s location, subject to obtaining the ADI’s consent. The parties might also opt for the law of some other jurisdiction but, again, only if the ADI consents and not if the choice would be contrary to public policy. The public policy qualification might apply where, for example, the parties’ choice of law was motivated by a desire to avoid substantive requirements in the banking or secured transactions laws of the jurisdiction whose laws govern the ADI account.66 Subsection 239(5) compromises the PPSA’s publication objective, because it means that a third party checking for security interests in the ADI account will not necessarily know where to search.67 For example, assume that Australian law governs the account agreement, a search in the Australian PPS register will not reveal a security interest if the parties to the [page 449] security agreement have agreed that, say, New Zealand law is to govern their security interest and the secured party has registered a financing statement in the New Zealand PPS register. To guard against this possibility, the third party will need to ask the grantor or the ADI whether the account is subject to any existing security interest and, if so, whether the security agreement contains a subs 239(5) choice of law provision. The Statutory Review has recommended deleting subs 239(5).68 14.37 Subsections 239(4) and (5) apply only to security interests in ADI accounts. Assume, for example, that the grantor, who is located in Australia, gives the secured party a security interest in an offshore bank account. Given that the foreign bank is not an ADI, subss 239(4) and (5) do not apply and the security interest will be governed instead by the law of the grantor’s location: subss 239(1) and (2).

Relocation of Grantor 14.38 Example 12. Grantor is a sole trader who lives in New Zealand, but carries on business in Australia and New Zealand. On Date 1, Grantor and SP1 enter into a security agreement under which Grantor gives SP1 a security interest in their present and future accounts. SP1 registers a financing statement in the New Zealand PPS register. On Date 2, Grantor leaves New Zealand to live in Australia. On Date 3, Grantor transfers all their present and future accounts to SP2 and SP2 registers a financing statement in the Australian PPS register. On Date 4, SP1 learns about the Date 2 and Date 3 events and claims priority over SP2. The dispute is litigated in Australia.

Australian PPSA subs 239(2) provides that the perfection and the effect of perfection or non-perfection of a security interest in intangible property at a particular time is governed by the law of the jurisdiction where the grantor is located at that time. In Example 12, since Grantor is located in Australia on Date 3, when the accounts are transferred to SP2, Australian law applies. PPSA subs 55(3) provides that a perfected security interest has priority over an unperfected security interest in the same collateral. SP1’s New Zealand registration does not perfect its security interest for the purposes of the Australian PPSA. However, Australian PPSA s 40 enacts a temporary perfection rule in SP1’s favour. The provision is in the same terms as s 39, which governs the relocation of goods, and the analysis of s 39 in 14.18–14.22 above is also relevant to s 40.69 The bottom line is that, in Example 12, if SP1 [page 450] complies with the requirements of s 40, its security interest will be deemed continuously perfected in Australia from Date 1 and, on that basis, it will have priority over SP2.70 14.39 Example 13. Grantor is a company, incorporated in New Zealand, which carries on business in Australia and New Zealand. On Date 1, Grantor 1 and SP1 enter into a security agreement under which Grantor 1 gives SP1 a security interest in a large batch of accounts. SP1 registers a financing statement in the New Zealand PPS register. On Date 2, in breach of its security agreement with SP1, Grantor 1 transfers the accounts to Grantor 2, an affiliated company incorporated in Australia. On Date 3, Grantor 2 gives SP2 a security interest in the accounts and SP2 registers a financing statement in the Australian PPS register. The Date 3 transaction takes place without SP1’s knowledge or consent. On Date 4, SP1 learns about the Date 3 transaction and claims priority over SP2. The dispute is litigated in Australia.

Section 40 applies both in the case where the grantor relocates to Australia (Example 12) and the case where the grantor transfers the collateral to a person who is located in Australia (Example 13). In Example 13, the consequences are that: (1) SP1’s security interest is deemed continuously perfected in Australia from Date 1 until Date 2; (2) it is temporarily perfected in Australia for 56 days from Date 2 or five business days after SP1 learns of the Date 2 transfer (whichever is the earlier), provided that, within the grace period, SP1 registers a financing statement in Australia naming Grantor 2 as the new grantor; and (3) if SP1 fails to reperfect its security interest within the grace period, it will forfeit the benefit of the temporary perfection rule with the result that its security interest is unperfected in Australia from Date 2. PPSA subs 239(2), read in conjunction with s 40, indicates that the dispute between SP1 and SP2 is governed by Australian law because Grantor 2 was located in Australia when SP2 acquired its interest in the accounts. Australian PPSA s 67 provides for priority of security interests in transferred collateral, stating that the transferor-granted interest has priority if it was perfected immediately before the transfer and has been continuously perfected since the transfer: see 7.38–7.46 of this text. Applying this provision to the facts of [page 451] Example 13, SP1 has priority over SP2, provided SP1 reperfected its security interest in Australia within the s 40 grace period.71

Priority of Security Interest if no Foreign Register 14.40 Example 14. Grantor is a company incorporated in Ruritania. Grantor carries on business in both Ruritania and Australia. Ruritania does not have a registration system for security interests in personal property. On Date 1, Grantor assigns its Ruritanian and Australian accounts to SP1. On Date 2, Grantor gives SP2, an Australian lender, a security interest in the same accounts. On Date 3, SP1 and SP2 both claim the accounts and the case is litigated in Australia.

Australian PPSA subs 239(2) provides that the perfection and effect of perfection or non-perfection of a security interest in intangible property is governed by the law of the grantor’s location (Ruritania, in Example 14). However, subs 77(2) creates an exception which is relevant to cases like Example 14.72 Subsection 77(2) applies where the governing jurisdiction does not have a registration system

and the disputed collateral is accounts. It provides that, in proceedings in an Australian court, a security interest in an account (SP1’s security interest, in Example 14) has priority over another interest in the account73 (SP2’s security interest, in Example 14) if SP1’s security interest is perfected by registration in Australia before SP2’s security interest attaches to the account.74 PPSA subs 6(2) provides that the statute applies to a security interest in intangible property if: (1) the grantor is an Australian entity; or (2) the intangible property is an account that is payable in Australia. On this basis, the rule in PPSA subs 77(2) applies to Grantor’s Australian accounts, but not the Ruritanian accounts. It follows that priority with respect to the Australian accounts will be determined by reference to PPSA subs 77(2), while priority with respect to the Ruritanian accounts will be determined by reference to Ruritanian law. The purpose of subs 77(2) is to protect parties in Australia who would otherwise have no means of easily verifying whether accounts with an Australian connection [page 452] are subject to a security interest under the law of the grantor’s location.75 The provision only applies if the case is litigated in Australia. If the case is litigated in Ruritania and the Ruritanian choice of law rule refers to the law of the grantor’s location, SP2 will be unprotected.76 Subsection 77(3) enacts a parallel rule for the case where the disputed collateral is financial property or an intermediated security.

SECURITY INTERESTS IN FINANCIAL PROPERTY AND LETTER OF CREDIT RIGHTS Introduction 14.41 PPSA s 240 applies where the collateral is financial property or rights evidenced by a letter of credit. ‘Financial property’ includes chattel paper, currency, documents of title, investment instruments and negotiable instruments: PPSA s 10 (see 2.11–2.22 of this text). As a general rule, the validity of a security interest in financial property or letter of credit rights is governed by the law of the grantor’s location at the time the security interest attaches, but if the security interest is a possessory one and the collateral is located in Australia, Australian law applies: subs 240(1)–(3). The perfection and effect of perfection or non-perfection of the security

interest at a particular time is governed by the law of the grantor’s location at that time but, again, if the security interest is a possessory one and the collateral is located in Australia, Australian law applies: subss 240(4)–(5).77 The grantor relocation rules in PPSA s 40 apply where the collateral is intangible property or financial property, and so the provision may be relevant in cases where the grantor location rules in s 240 refer to the law of a foreign jurisdiction and the grantor subsequently relocates to Australia. PPSA s 40 is discussed in 14.38–14.39 above. 14.42 In its application to chattel paper, currency, documents of title and negotiable instruments, PPSA s 240 is similar, in general terms, to the Canadian and New Zealand PPSAs.78 But it diverges from these models in its application to investment instruments. In Canada, the choice of law rule for investment instruments (‘securities’) varies, depending on whether the security is certificated or uncertificated. For certificated securities, the governing law [page 453] is the law of the place where the certificate is located, while for uncertificated securities the governing law is the law of the issuer’s jurisdiction.79 14.43 Australian PPSA s 240 does not apply where the collateral is an intermediated security because an intermediated security is not financial property within the meaning of the statute: see 2.11–2.27 of this text.80 Instead the relevant choice of law rule is in subs 6(1A), which provides that the statute applies to a security interest in an intermediated security if: (1) the intermediary is located in Australia; or (2) the grantor is an Australian entity.81 By contrast, the conflicts rules relating to intermediated securities (security entitlements) in the Canadian PPSAs focus exclusively on the intermediary’s jurisdiction and they make no reference to the grantor’s (debtor’s) location or place of incorporation.82 The reason for the focus on the intermediary’s jurisdiction is that an intermediary may maintain accounts on behalf of debtors located in different jurisdictions and, if a debtor’s location rule applied, the governing law may vary from one account to another. These variations might make the intermediary’s business unmanageable. The first of the rules in Australian PPSA subs 6(1A) addresses this concern. The second rule, which has no counterpart in the Canadian PPSAs, may put Australian law in competition with the law of other jurisdictions in cases where the intermediary is located outside Australia but the grantor is an Australian entity. In such cases, the

applicable law may end up depending on where the action is brought: if the case is heard in Australia, the Australian court would apply Australian PPSA subs 6(1A), but if the case is brought in the other jurisdiction, the court would apply its own country’s choice of law rule. The potential application of the Australian PPSA to intermediaries located in other jurisdictions is a risk that foreign intermediaries will have to take into account when dealing with Australian entities. To address these concerns, the Statutory Review has recommended enacting in Pt 7.2 a choice of law rule for [page 454] intermediated securities referring to the jurisdiction where the intermediary maintains the securities account.83

Validity Rules 14.44 PPSA subs 240(1) provides that the validity of a security interest in financial property is governed by the law of the jurisdiction (other than the law relating to conflict of laws)84 where the grantor is located85 when the security interest attaches.86 The same rule applies where the collateral comprises a right evidenced by a letter of credit stating that the letter of credit must be presented on claiming payment: subs 240(2): see 5.34–5.37 of this text.87 14.45 Subsection 240(3) creates an exception. It provides that Australian law applies if: (1) the security interest has attached ‘under the law of a place in Australia’; and (2) at the time of attachment, the collateral is located in Australia and the secured party has possession or control of the collateral. The provision appears to derive from the Canadian and New Zealand PPSAs, which provide that the validity of a possessory security interest in a negotiable instrument, a negotiable document of title, money and chattel paper is governed by the law of the jurisdiction where the collateral is situated.88 But it is hard to make sense of Australian PPSA subs 240(3) as drafted. If Australian law applies, attachment of a security interest is governed by the PPSA, not state and territory laws, and so the reference to attachment ‘under the law of a place in Australia’ is misconceived.89 But there are deeper problems. Attachment is a matter going to the validity of a security interest: see 14.10 above. Subsection 240(3) provides, in effect, that

Australian law governs the validity of a security interest if the security interest has attached under Australian law, but, to conclude that the security interest has attached under Australian law, the court must already have decided that Australian law applies.90 In determining whether Australian law governs the attachment of a security interest, the court must have regard to subs 240(1), which refers to the law of the grantor’s location at the relevant time.91 If the grantor is located [page 455] in Australia, Australian law applies by force of subs 240(1) and the court can disregard subs 240(3). On the other hand, if the grantor is not located in Australia, subs 240(1) indicates that Australian law does not apply and subs 240(3) cannot affect this outcome because it is predicated on the assumption that Australian law applies.92 14.46 Subsection 240(3) also only applies if the collateral is located in Australia at the time the security interest attaches and the secured party has possession or control. As a general rule, personal property is located in the jurisdiction where it is situated: subs 235(1). An uncertificated investment instrument is located in the jurisdiction the law of which governs transfer of the investment instrument; and electronic chattel paper is located in the jurisdiction the law of which governs the chattel paper: subs 235(2).93 14.47 To summarise, PPSA subss 240(1) and (4) enact a grantor’s location rule, while subss (3) and (5) provide for the application of Australia law in specified circumstances. Subsections 240(6) and (7) enact special rules for non-negotiable documents of title and uncertificated negotiable instruments. Subsection 240(6) provides that a security interest in a non-negotiable document of title is governed by the law of the jurisdiction in which the goods to which the document of title relates are located when the security interest attaches. Subsection 240(7) provides that a security interest in an uncertificated negotiable instrument is governed by the law of the jurisdiction (other than the law relating to conflict of laws) that governs the instrument.

Perfection Rules 14.48 Subsection 240(4) provides that the perfection and effect of perfection or

non-perfection of a security interest in financial property (including letter of credit rights) at a particular time is governed by the law of the jurisdiction (other than the law relating to conflict of laws) in which the grantor is located at that time. Subsection 240(5) creates an exception. It provides that Australian law applies if the collateral is located in Australia at the relevant time and the secured party has possession or control. Again, the origins of the provision appear to lie in the Canadian and New Zealand PPSAs, which provide that the perfection and effect of perfection or non-perfection of a [page 456] possessory security interest in a negotiable instrument, a negotiable document of title, money and chattel paper is governed by the law of the jurisdiction where the collateral is situated.94 If subs 240(4) or (5) refers the court to the law of a foreign jurisdiction which does not have a system for the registration of security interests, the special priority rule in subs 77(3) applies: see 14.40 above.

PROCEEDS 14.49 PPSA subs 241(1) provides that the validity of a security interest in proceeds is governed by the law of the jurisdiction (other than the law relating to conflict of laws) that governed the validity of the security interest in the collateral that gave rise to the proceeds.95 Example 15. Grantor is a company incorporated in Australia. Grantor carries on a retailing business in Australia and Ruritania. SP enters into an agreement in Australia with Grantor for the supply of inventory on conditional sale (retention of title) terms, to be delivered from SP’s warehouse in Ruritania to Grantor’s Ruritania plant. SP sends Grantor its standard form contract which sets out SP’s trading terms, including the retention of title provision, and stipulates that Grantor accepts the terms by placing an order with SP. There is no provision for Grantor’s signature. Grantor makes a sale to Customer, in the ordinary course of business, from the inventory supplied by SP. The sale is on 90-day terms. Grantor defaults on its payments and SP claims Customer’s account. Grantor disputes SP’s action and commences proceedings against SP in Australia. Under Ruritanian law, a security interest is invalid unless the security agreement is in writing and executed by both parties. The rule extends to conditional sale agreements.

Example 15 is a variation on the facts of Example 3, above. As in Example 3, the validity of SP’s security interest in the goods is governed by Ruritanian law because the goods were located in Ruritania when the security interest attached: Australian PPSA subs 238(1). Applying subs 241(1), the validity of SP’s security interest in

Customer’s account as proceeds is also governed by Ruritanian law and, since the security agreement was not executed by both parties, SP cannot claim Customer’s account. The outcome would be different if the account was original collateral. Assume, for example, that the security agreement gives SP a security interest not just in the inventory SP supplies, but also in Grantor’s present and future accounts. Now Customer’s account is part of SP’s original collateral and the governing choice of law rule is in PPSA subs 239(1), not subs 241(1). According to subs 239(1), the governing law is the law of the grantor’s location and, since Grantor is incorporated in [page 457] Australia, Australian law applies. The attachment rules in PPSA s 19 do not require execution of the security agreement and so SP’s security interest in Customer’s account is valid. In Canada, the choice of law rules are the same for both original collateral and proceeds.96 Applying this approach to the facts of Example 15, the grantor’s location rule governs SP’s security interest in the account, regardless of whether the account is original collateral or proceeds. 14.50 Subsection 241(2) provides that the perfection and effect of perfection or non-perfection of a security interest in proceeds is governed by the law of the jurisdiction (other than the law relating to conflict of laws) that governed the perfection and effect of perfection or non-perfection of the security interest that gave rise to the proceeds. Example 16. Grantor is a company incorporated in Australia. Grantor carries on a retailing business in Australia and New Zealand. On Date 1, SP1, a New Zealand supplier, enters into a conditional sale agreement with Grantor for the supply of inventory to Grantor’s New Zealand stores. SP1 registers a financing statement in New Zealand, also on Date 1. On Date 2, Grantor assigns its present and future accounts to SP2 and SP2 registers a financing statement in Australia. On Date 3, Grantor makes a sale to Customer, in the ordinary course of business, from the inventory supplied by SP1. The sale is on 90day terms. On Date 4, Grantor defaults against SP1 and SP2 and they both claim Customer’s account. The dispute is litigated in Australia.

The perfection and effect of perfection or non-perfection of SP1’s security interest in the inventory is governed by New Zealand law, because the inventory was located in New Zealand at all relevant times. Applying subs 241(2), the perfection and effect of perfection or non-perfection of SP1’s security interest in Customer’s account is also governed by New Zealand law. New Zealand PPSA s

66(a) provides that a perfected security interest has priority over an unperfected security interest in the same collateral. SP1’s registration on Date 1 perfects its security interest in the inventory. Assuming it is also sufficient to perfect SP1’s security interest in Customer’s account, SP1 will have priority over SP2 whose security interest is unperfected in New Zealand.97 Assume that the security agreement between SP1 and Grantor gives SP1 a security interest not only in the inventory it supplies, but also Grantor’s present and future accounts. Now Customer’s account is part of SP1’s original collateral and the relevant choice of law rule is in Australian PPSA subs 239(2), not subs 241(2). According to subs 239(2), the governing law is the law of the grantor’s location and, since Grantor is incorporated in Australia, Australian law applies. Australian PPSA subs 55(3) provides that a perfected security interest has priority over an unperfected security interest in the same collateral and, since SP1’s security interest is unperfected in Australia, SP2 has priority. As indicated above, in Canada the choice of law rules are the same for both original collateral and proceeds. Applying this approach to the facts of Example [page 458] 16, the grantor’s location rule governs the dispute between SP1 and SP2, regardless of whether Customer’s account is original collateral or proceeds.98

ENFORCEMENT OF SECURITY INTERESTS 14.51 Example 17. SP, an Australian company, holds a security interest in Grantor’s factory equipment. Grantor, also an Australian company, carries on business in Australia and Ruritania. At all relevant times, the equipment has been located at Grantor’s Ruritania factory. The security agreement contains a choice of law provision stipulating that the contract is governed by Australian law. Grantor defaults and SP seizes the equipment. SP sues Grantor in Australia, claiming the shortfall between the realised value of the collateral and the amount owing. Grantor resists, arguing that under Ruritanian law: (1) repossession is prohibited without a court order; and (2) deficiency actions are not allowed (in other words, the secured party can either enforce its security interest or sue the grantor on its personal obligation but it cannot do both).99

The threshold question for the court will be whether Australian or Ruritanian law governs the dispute. The conflict of laws provisions in Australian PPSA Pt 7.2 do not address enforcement of security interests. Australian PPSA para 6(1)(b) provides that the statute applies to a security interest in goods if the grantor is an

Australian entity, even if the goods are located outside Australia. The implication is that the Australian PPSA applies in Example 17 and that an Australian court must apply the Australian PPSA in preference to Ruritanian law. PPSA subs 109(2) provides that the PPSA Ch 4 enforcement provisions do not apply to security interests in goods that are located outside Australia. Reading subss 6(1) and 109(2) together, the PPSA, with the exception of the enforcement provisions, applies to SP’s security interest. The difficulty is that if the PPSA enforcement provisions do not apply, the court must look elsewhere to fill the gap. One option would be to apply Ruritanian law. This may be the approach the law-makers had in mind when drafting subs 109(2), but the Explanatory Memorandum sheds no light on the matter and an alternative possible construction is that, if PPSA Ch 4 does not apply, the court must instead look to the general law governing enforcement of security interests. On this basis, SP would be entitled to judgment provided that the applicable Australian law does not require a court order for repossession and does not prohibit deficiency actions. The analysis is different for collateral other than [page 459] goods. Assume that, in Example 17, the collateral is accounts and Ruritanian law restricts SP’s remedies in some way; for example, by prohibiting deficiency actions. Australian PPSA subs 6(2) provides that the PPSA applies to a security interest in intangible property that is an account if the grantor is located in Australia, even if the account is payable outside Australia. Consequently, an Australian court must apply the PPSA in the case under consideration. The PPSA Ch 4 enforcement provisions apply despite the fact that the account is payable outside Australia and there are no relevant restrictions in PPSA Ch 4 on SP’s remedies.100 14.52 The Canadian PPSAs do include choice of law rules for cases like Example 17. Procedural issues involved in the enforcement of a security interest are governed by the law of the jurisdiction in which the enforcement rights are exercised, while substantive issues are governed by the proper law of the contract between the secured party and the debtor.101 The distinction between procedural and substantive issues is not clear-cut, but procedural issues would include the need or otherwise for a court order before repossession and the need or otherwise for a public official to carry out the repossession, while substantive issues would include the nature and extent of the secured party’s remedies.102 Applying these rules to the

facts of Example 17, the issue as to whether SP required a court order before repossessing the equipment is, at least arguably, a procedural matter and so it is governed by Ruritanian law. On the other hand, SP’s right to maintain a deficiency action is a substantive matter and so it is governed by the proper law of the contract between SP and Grantor. Prima facie, the proper law is the law nominated in the parties’ choice of law clause, and on this basis Australian law applies.103 14.53 The UNCITRAL Guide recommends a different approach: in the case of a tangible asset, the governing law is the law of the jurisdiction where enforcement takes place, while in the case of an intangible asset the governing law is the law applicable to the priority of the security interest.104 The advantage of this approach is that it avoids the difficult distinction between procedural and substantive issues and also potentially time-consuming [page 460] inquiries into the proper law of the contract. Applying the UNCITRAL Guide’s approach to the facts of Example 17, Ruritanian law governs both issues, and so Grantor succeeds on both counts. The Statutory Review has proposed enacting in the Australian PPSA a choice of law rule based on the UNCITRAL recommendation.105

1.

2. 3. 4. 5.

6.

If Ontario law applies, T will take the equipment free of SP’s security interest if SP’s security interest is unperfected in Ontario: Ontario PPSA s 20(1)(c); if Saskatchewan law applies, T will take the equipment free of SP’s security interest if SP’s security interest is unperfected in Saskatchewan: Saskatchewan PPSA s 20(3). Compare Australian PPSA s 43, discussed in 10.5–10.10 of this text. [2013] NSWSC at [61]. Parliament of the Commonwealth of Australia, Senate, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009 (Cth), para 7.4. Saskatchewan PPSA ss 55–58; New Zealand PPSA ss 26–33. United Nations Commission on International Trade Law (UNCITRAL) Legislative Guide on Secured Transactions, United Nations, New York, 2010, Chapter X, available at . Paragraphs 6(1)(b), (1A)(b) and (2)(a). PPSA s 10 defines ‘Australian entity’ to mean: an individual who is located in Australia; (b) a company or registrable Australian body within the meaning of the Corporations Act 2001 (Cth); (c) a corporation sole established under a law of the Commonwealth, a state or a territory; or (d) a public authority or an agency or instrumentality of the Crown in right of the Commonwealth, a state or a territory. See also PPSA subss 235(3)–(5) (Location of person), discussed in 14.26 below.

7. 8. 9. 10. 11.

12. 13. 14. 15. 16.

17. 18. 19.

20. 21. 22. 23. 24.

25. 26. 27. 28. 29. 30. 31.

32.

See PPSA subss 235(1) and (2) (Location of personal property), discussed in 14.26 below. PPSA s 7 extends the application of the statute to Norfolk Island and other prescribed external territories. Section 6 fails to account for actual security interests in chattel paper. New Zealand PPSA s 29 provides that a debtor that is a body corporate is located in the country of incorporation. See above note 2, at para 5.23. The Statutory Review has recommended that the government give further consideration to whether s 6 is necessary: Bruce Whittaker, Review of the Personal Property Securities Act 2009: Final Report (Commonwealth of Australia, 2015), para 9.1.1 (‘Statutory Review: Final Report’). See above note 5, ch X, para 15. See above note 3, para 7.8. See above note 3, para 7.5. Ronald C C Cuming, Catherine Walsh and Roderick J Wood, Personal Property Securities Law, 2nd ed, Irwin Law, Toronto, 2012, p 184. Compare, for example, Saskatchewan PPSA s 8(2): For the purposes of ss 5, 6, 7 and 7.1, a security interest is perfected pursuant to the law of a jurisdiction if the secured party has complied with the law of the jurisdiction with respect to the creation and continuance of a security interest with the result that the security interest has a status in relation to other secured parties, buyers and judgment creditors and a trustee in bankruptcy of the debtor similar to that of an equivalent security interest created and perfected pursuant to this Act. The Statutory Review has recommended including a similar provision in the Australian PPSA: Statutory Review: Final Report, para 9.1.2.1. See above note 15, at 192–3. The Statutory Review recommends amending the legislation to clarify this point: Statutory Review: Final Report, para 9.1.2.3. According to the Explanatory Memorandum, the purpose of the exception for accounts is to ensure consistency with the United Nations Convention on the Assignment of Receivables in International Trade. An immutable grantor location rule is required for accounts so that ‘the law applicable to receivables is fixed to one location and secured parties would not have to ascertain which of a potential multitude of laws applies in a particular case’: see above note 2, at para 7.18. See above note 3, at para 7.14. See above note 5, ch X, para 13. See above note 5, ch X, para 13. Statutory Review: Final Report, para 9.1.6.1. The Review further recommends that if the provision is retained it should be limited to tangible personal property: para 9.1.6.2. Compare New Zealand PPSA s 26; Saskatchewan PPSA s 5(1). PPSA subs 235(1) provides that, for the purposes of the statute, personal property is located in the particular jurisdiction in which it is situated. In other words, the location of personal property means its physical location. There is a writing requirement in s 20, but this only affects the enforceability of the security interest against third parties. See above note 15, at pp 190–1. See above note 3, para 7.20. See above note 3, para 7.27. Compare New Zealand PPSA s 27; Saskatchewan PPSA s 5(3). ‘Has actual knowledge that the collateral has become relocated to Australia’: subpara 39(3)(b)(ii). For the meaning of ‘actual knowledge’, see 10.17–10.18 and 10.44–10.46 of this text. The Statutory Review has recommended amending s 39 to provide that the temporary perfection simply expires at the end of the grace period. It has also recommended extending the grace period to 60 days: Statutory Review: Final Report, paras 5.3.12.2 and 5.3.12.3. In other words, New Zealand law (other than the law relating to the conflict of laws) governs ‘the validity,

33. 34.

35. 36. 37.

38. 39. 40.

41. 42.

43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.

56. 57.

perfection and effect of perfection or non-perfection’ of the security interest. Subsection 238(2A) provides that subs 238(2) ‘applies from the attachment time’, in other words, Date 1 in Example 8. Compare Saskatchewan PPSA s 6; New Zealand PPSA s 26. Compare with the second example in Replacement Explanatory Memorandum, see above note 3, para 7.23, which appears to overlook the limitation in PPSA para 238(2)(b). There are other precautions SP1 might take; for example, SP1 might withhold delivery until Date 3 or, alternatively, insist on delivering the press to New Zealand itself. But these alternatives may be more costly for the parties. The New Zealand version of the destination of goods rule in New Zealand PPSA s 26(1)(b) is different again. It applies where the original jurisdiction is outside New Zealand and the destination is New Zealand, but not vice versa; on the other hand, the rule applies regardless of whether or when the goods are brought into New Zealand. Goods that ‘are not used predominantly for personal, domestic or household purposes’: para 238(3)(c). Compare Saskatchewan PPSA s 7(1) and (2); New Zealand PPSA s 30. For an individual grantor, the test is place of residence and not place of business, even if the grantor transacts in a business capacity. Contrast, for example, Saskatchewan PPSA s 7(1); New Zealand PPSA s 29. Example 9 is adapted from the examples in Replacement Explanatory Memorandum, see above note 3, para 7.25. The provision correspondingly avoids the need for multiple searches. See above note 3, paras 7.24–7.26. These considerations explain the consumer goods exception: a person acquiring the goods for personal, domestic or household purposes would be likely to assume that the governing law was the law of the place where the goods were located at the time they made the purchase. Contrast Saskatchewan PPSA s 7(1), which provides that a grantor is located at its place of business and, if it has more than one place of business, where its chief executive office is located. A similar issue may arise if, between Dates 1 and 2, Grantor (in Australia) transfers some or all of its containers to Transferee (in New Zealand) and, on Date 2, Transferee gives SP2 a security interest in the containers. Section 40 makes provision for this type of case but, again, only where the collateral is intangible property or financial property: see further, 14.38–14.39 below. (1998) 160 DLR (4th) 373 (ABCA). [2013] NWSC 852 at [62]. On the other hand, subs 238(3) may apply if the grantor is an Australian entity and the collateral is a motor vehicle located in, say, Europe, Canada or the United States. See also above note 3, at para 7.27. See above note 15, at p 215. See above note 5, at ch X, para 36 and Recommendation 204. Statutory Review: Final Report, para 9.1.7.3. There is a similar provision in some of the Canadian PPSAs: see, for example, British Columbia PPSA s 7(6). See 14.17 above. See PPSA s 235 (Meaning of located), discussed in 14.26 above. As in the case of subs 238(1), the reference is to actual or putative attachment: see 14.15 above. Compare New Zealand PPSA s 30; Saskatchewan PPSA s 7(2). See above note 5, ch X, paras 39–47 and Recommendation 208; see above note 3, para 7.29. See also United Nations Convention on the Assignment of Receivables in International Trade 2001, Art 22, which adopts a grantor’s location rule for assignments of receivables. The definition of ‘intellectual property’ in PPSA s 10 includes Australian intellectual property rights and also corresponding rights under the law of a foreign country. Compare with above note 3, para 7.31, which misstates the effect of subs 238(3). For ease of exposition, the following discussion focuses on patent security interests, but the analysis is similar for security interests in other types of intellectual property and intellectual property licences.

58. 59.

60. 61.

62. 63.

64. 65. 66. 67.

68. 69.

70.

71.

72. 73. 74.

See above note 3, para 7.32. Patent security interests are also registrable in the Register of Patents pursuant to Patents Act 1990 (Cth) s 187. However, registration of a PPSA security interest in the Register of Patents does not affect priorities: Patents Act 1990 (Cth) subs 189(2A). See 2.37–2.38 of this text. 35 USC s 1-376. See Thomas M Ward and William J Murphy, ‘Security Interests in Intellectual Property under US Law: The Existing Dissonance and Proposed Solutions’ in Howard P Knopf (ed), Security Interests in Intellectual Property, Thomson Carswell, Toronto, 2002, p 455. In the leading case, Re Cybernetic Servs Inc 252 F3d 1039 (9th Cir, 2001), it was held, reading s 261 in the light of its meaning when enacted in 1870, that the provision did not cover secured transactions. For a critique of Cybernetic and a survey of the other cases, see Yongae Jun, ‘The Imperfect State of Patent Perfection’ (2011) 5 Akron Intellectual Property Law Journal 279. Uniform Commercial Code — Secured Transactions s 9–109(c)(1). The position in Canada is comparable. Section 49(3) of the Patents Act RSC 1985, c.P-4, requires the registration of patent transfers in the Canadian Patent Office, while s 49(4) provides that a patent transfer is void against any subsequent transferee if the transfer to the subsequent transferee has been registered. The statute does not define ‘transfer’ and so it is unclear whether s 49 applies to security interests. If so, it may at least partially pre-empt the PPSAs; if not, the PPSAs probably apply. One way or the other, therefore, Canadian law provides for the registration or recording of patent security interests: see Roderick J Wood, ‘The Nature and Definition of Federal Security Interests’ (2000) 34 Canadian Business Law Journal 65; Roderick J Wood, ‘Security Interests in Intellectual Property: Rationalizing the Registries’ in Howard P Knopf (ed), Security Interests in Intellectual Property, Thomson Carswell, Toronto, 2002, p 669. See above note 5, ch X, para 50. See above note 5, ch X, para 50. See above note 5, ch X, para 79. As a matter of Australian law, the issue only arises with respect to a security interest in the ADI account held by a party other than the ADI itself. A security interest in an ADI account held by the ADI itself is automatically perfected by control, and so a register search will not reveal the security interest anyway: see 5.23–5.24 of this text. Statutory Review: Final Report, para 9.1.8. The Statutory Review has recommended amending s 40 to provide that the temporary perfection simply expires at the end of the grace period. It has also recommended extending the grace period to 60 days: Statutory Review: Final Report, paras 5.3.12.2 and 5.3.12.3. Compare New Zealand PPSA s 31 and Saskatchewan PPSA s 7(3). Australian PPSA s 34 also applies in Example 12, given Grantor’s transfer of the collateral (the accounts). The result is that SP1’s security interest is also temporarily perfected under s 34 for the duration of the s 34 grace period: see 5.47–5.53 of this text. The s 34 grace period is different from the s 40 grace period. Assume SP1 registers in Australia within the s 40 grace period. Applying s 34, SP1’s security interest will not thereupon be perfected in Australia by registration; instead it will continue to be temporarily perfected under s 34 until the expiration of the s 34 grace period. As in Example 12, Australian PPSA s 34 also applies. Under s 34, SP1’s security interest is temporarily perfected for five business days after Date 4 (when SP1 learned about the Date 2 transfer). Under s 40, SP1 is temporarily perfected in Australia for the same five business days. The difference is that, under s 40, if SP1 fails to register within the grace period, it is deemed never to have been temporarily perfected, whereas failure to register within the s 34 grace period does not have retrospective consequences. The Statutory Review’s proposed amendment of s 40 is relevant in this connection: see above note 69. PPSA subs 77(4) makes it clear that subss 77(2) and (3) apply even if the law of another jurisdiction applies under subs 239(2) or 240(4) or (5). Whether or not the other interest is a security interest. Compare New Zealand PPSA s 32 and Saskatchewan PPSA s 7(4).

75. 76. 77.

78. 79.

80. 81. 82.

83. 84. 85. 86. 87. 88. 89.

90. 91.

92.

93.

94. 95.

See above note 15, at p 213. See above note 15, at pp 213–4. Subsection 240(6) enacts a special rule for non-negotiable documents of title; for example, a bill of lading which is marked non-negotiable. It provides that the governing law is the law of the jurisdiction where the goods to which the document relates are located. Subsection 240(7) enacts a special rule for security interests in negotiable instruments: it provides that the governing law is the law of the jurisdiction that governs the instrument. Compare Saskatchewan PPSA ss 5 and 7 and New Zealand PPSA ss 26 and 30. Except that the registration of a security interest is governed by the law of the debtor’s location. See, for example, Saskatchewan PPSA s 7.1. In New Zealand, for certificated securities (‘investment securities’), the governing law is the law of the place where the certificate is located, while for uncertificated investment securities it is the law of the place where the records of the clearing house or securities depository are kept: New Zealand PPSA s 26. Nor does s 239 apply, because an intermediated security is not intangible property within the meaning of the statute: see Chapter 2 of this text. An intermediary is located in Australia if the intermediary is a body corporate incorporated in Australia or if the intermediary is an individual whose principal place of residence is in Australia: PPSA subs 235(3). See, for example, Saskatchewan PPSA s 7.1; Securities Transfer Act SS 2007 c.S42.3 s 45. The Canadian provisions allow the intermediary and its customer to determine the intermediary’s jurisdiction by an express choice of law provision in their account agreement. There is no corresponding provision in the Australian PPSA. For a critical analysis of the Canadian provisions, see above note 15 at pp 219–22. Statutory Review: Final Report, para 9.1.4. On the meaning of the bracketed words, see 14.17 above. See subss 235(3)–(5) (Location of grantor), discussed in 14.26 above. As in the case of subss 238(1) and 239(1), the reference is to actual or putative attachment: see 14.15 above. The Statutory Review has recommended repealing subs 240(2) on the ground that subs 240(1) already covers the point: Statutory Review: Final Report, para 9.1.9.1. See, for example, Saskatchewan PPSA s 5; New Zealand PPSA s 26. The misconception is also apparent in the Explanatory Memorandum: see above note 3, ch 7, para 35, illustrating the application of PPSA subs 240(3) with an example that refers to a security interest which ‘has attached under the law of New South Wales’. The references in subs 240(3) are clearly to actual, not putative, attachment: compare with 14.15 above. That is, the date the security interest attaches (or would have attached but for the secured party’s failure to comply with the attachment requirements in the jurisdiction whose law governs the transaction): see 14.15 above. The Statutory Review has recommended amending subss 240(3) and (5) to provide that the choice of law rules for a possessory security interest in a negotiable instrument or any other tangible instrument that is regarded by the law as embodying the payment obligation it represents should be governed by the law of the place where the instrument is located: Statutory Review: Final Report, para 9.1.9.2. Section 235 could be read as meaning that the location of a certificated investment instrument is to be determined by reference to its physical location. By contrast, Corporations Act s 1070A(4) provides that a share is taken to be located in the place of the share register. The Statutory Review has recommended repealing subs 235(2) as a way of addressing this concern: Statutory Review: Final Report, para 9.1.5.2. But it is not clear that this measure would achieve the desired result because subs 235(1), standing alone, still suggests that physical location is the relevant factor. See, for example, Saskatchewan PPSA s 5; New Zealand PPSA s 26. Subsection 240(3) provides that s 241 applies despite any other provision in the statute. Subsection 241(3) provides that the section does not apply in relation to proceeds that are an account unless the account arises from the dealing that gave rise to the proceeds. In other words, the account must be

96. 97. 98.

99. 100. 101. 102.

103.

104. 105.

proceeds within the meaning of para (a) of the definition of proceeds in subs 31(1): see 11.8–11.30 of this text. See above note 15, at p 231. New Zealand PPSA s 46 governs the perfection of a security interest in proceeds. The UNCITRAL Legislative Guide on Secured Transactions recommends the approach taken in the Australian PPSA in relation to questions regarding the validity of the security interest. But for questions relating to effectiveness against third parties and priorities, it recommends the Canadian approach: see note 5 above, Recommendation 215. The Statutory Review proposes amending s 241 to bring it into line with the UNCITRAL Legislative Guide’s recommendation: Statutory Review: Final Report, para 9.1.10. Example 17 is loosely based on the facts of Cardel Leasing Ltd v Maxmenko (1991) 2 PPSAC (2d) 302 (ON Gen Div). The Statutory Review has recommended repealing subs 109(2): Statutory Review: Final Report, para 8.1.4. See, for example, Saskatchewan PPSA s 8(1). There is no corresponding provision in the New Zealand PPSA. Jacob S Ziegel and David L Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed, Butterworths, Toronto, 2000, p 105. Compare with above note 5, ch X, para 64, suggesting that whether the secured party’s remedies can be exercised without judicial process is a substantive matter. But the parties’ choice of law must be bona fide and lawful and there must be no reason for avoiding the choice on the grounds of public policy; in the absence of a valid choice of law provision, the proper law of the contract is the law of the jurisdiction with which the contract has its closest and most substantial connection: Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277. See above note 5, at ch X, paras 64–72 and Recommendation 218. Statutory Review: Final Report, para 9.1.3.

[page 461]

CHAPTER 15 Transitional Matters INTRODUCTION 15.1 This chapter is about how the Personal Property Securities Act 2009 (Cth) (PPSA) deals with security interests arising under agreements entered into before the PPSA took effect on 30 January 2012, including how it deals with security interests recorded on certain pre-existing registers. The governing provisions are in PPSA Ch 9. In time, these provisions will cease to be relevant and readers should no longer need to consult this chapter. However, given that the PPSA provides a transitional period of 24 months from the date of the PPSA becoming effective1 — and in some cases, 60 months — it may be a few more years before the transitional arrangements have ceased to be relevant to ongoing disputes and become purely of historic interest. Whenever new laws are introduced, affected parties incur compliance costs, particularly in the short term. One way to soften the blow is by giving time to adjust. Rather than coming into immediate effect on Royal Assent, the Act, or the key parts, can be brought into force at a later date. In the case of the PPSA, the fundamental differences between the new and old regimes, the costs involved in registration, the need for new technology for an online system, and the fact that the legislation affects property rights, all indicated to the government that there should be a ‘lead-in’ time between the PPSA’s enactment and the key provisions coming into operative effect. Therefore, the PPSA originally provided for its operative provisions to come into force no later than 1 February 2012.2 The government’s original intention was that commencement would be on 1 May 2010. As it transpired, that proved ambitious. Thus, although the formal commencement date for the Act was the day after Royal Assent (Royal Assent was on 14 December 2009), the operative date when the Act ‘starts to apply’ in respect of its key provisions, was revised three times. The date ultimately became 30 January 2012.3 While the main reason for postponement was to give government and industry time to implement the registration system and adapt ‘back office’ systems, this, in

[page 462] theory, has also given plenty of time for major stakeholders and their advisers to become familiar with the basic operation of the PPSA. 15.2 The PPSA draws a distinction between agreements entered into after the registration commencement date (RCT) and agreements entered into beforehand. The statute effectively provides for a 24-month-from-RCT transitional period for pre-existing security agreements. If the government had anticipated the delay between the enactment of the legislation and its eventual commencement date, it might not have been so generous. Other jurisdictions have been less so. In New Zealand, there was a six-month transitional period during which pre-existing security interests could be perfected and maintain their previous priority,4 but in New Zealand there was eventually a three-year gap between Royal Assent and implementation. In some Canadian provinces, the transition period was two or three years.5 In Ontario, except for interests in pre-existing registries, the legislation was expressed not to apply to security interests attaching prior to the commencement date and these continued to be governed by the previous law.6 This meant that the legislation applied to post-PPSA security interests, even if the security interest was provided for by a pre-PPSA security agreement. There were various reasons why the Australian Government decided on a transitional period to protect pre-existing security agreements. First, the PPSA affects property rights; in particular, it extends to certain title-based transactions which did not necessarily amount to security interests at common law. Second, the PPSA affects consumers and small businesses. Even though the delay gave advisers time to inform clients about the new law, and even though there was a government media campaign immediately before RCT, there remained some concern that small businesses and, to a lesser extent, consumers, might be caught out, particularly in relation to the extended scope of the statute.7 Third, and most importantly, the government was concerned about the possible application of para 51(xxxi) of the Australian Constitution, which relates to government expropriation of property and prohibits the acquisition of property other than on just terms.8 The government’s apparent concern was that since the statute affected [page 463]

pre-existing property rights, it might contravene para 51(xxxi).9 It is now well established that the regulation of private property rights can amount to the acquisition of property within the meaning of para 51(xxxi).10 It has been suggested that the imposition of an appropriate time limit allowing for the vindication of private rights might satisfy the requirements of the section, although in Smith v ANL Ltd,11 the majority, in the circumstances of the case, refused to accept a sixmonth period as sufficient. Out of an abundance of caution, PPSA s 252B provides that no provision of the PPSA applies to the extent that its operation would result in an acquisition of property from a person otherwise than on just terms.12 15.3 This excursus into constitutional law explains the government’s thinking in providing a relatively generous transitional period for pre-commencement security agreements. The government also decided, however, in a move on a scale unprecedented elsewhere, to take on responsibility for ‘migrating’ relevant security interests on most pre-existing state and Commonwealth registers, relieving secured parties from the need to register (even though they would have had the transitional period in which to do so), and relieving them of the cost of registration, which fell on the government.13 There are several possible reasons for this bold step. First, politically it may have made the proposed PPSA more palatable to major secured parties.14 Second, there should be less room for errors if the ‘translation’ of existing registrations onto the new register was done by the government in advance, rather than by secured parties.15 Third, the ability to control the migration process would allow an orderly time frame before other registrations started, and this would assist workflow and ease pressure on the computer system in the first days of the register’s operation.16 With hindsight, the decision to migrate on such a scale might be something the government will come to regret, since, as will be [page 464] discussed later in the chapter, there have been a number of legal and practical problems.

INITIAL APPLICATION OF ACT17 Registration Commencement Time 15.4 While the PPSA ‘commenced’ on 15 December 2009,18 s 310 provides that

the Act ‘starts to apply’ on a date called ‘registration commencement time’ (RCT).19 Despite its name, RCT is the time not just for commencement of the registration provisions, but the substantive provisions of the Act as well.20 After several postponements of the date from May 2010 onwards,21 RCT was ultimately set for 30 January 2012, on which date the register was opened for registrations by secured parties and searches.

Registration 15.5 The start time from which new registrations could be filed was RCT.22 However, that does not mean that as at 30 January 2012 there were no entries on the register, because the Registrar had power to enter registrations between 21 November 2011 and 30 January 2012.23 Importantly, he24 could do so in the case of migrated security interests, which are entries migrated across from certain preexisting state and Commonwealth registers.25

Fixed and Floating Charges 15.6 As discussed earlier in this text, the PPSA removes the need for continuing the old terminology of fixed and floating, or any other types of [page 465] charges, and the attendant concept of crystallisation.26 Section 318 provides that where Commonwealth or state legislation, or the parties to security agreements, continue to use the terms ‘fixed charge’ and ‘floating charge’, they will have the meanings set out in Pt 9.5 of the PPSA. However, Pt 9.5 does not apply to transitional security agreements or interests.27 The concern is to avoid interference with pre-RCT agreements by changing the meaning of contractual terms. Part 9.5 does have a close connection with insolvency, and this is covered in Chapter 13 of this text.

TRANSITIONAL PROVISIONS Introduction 15.7 The PPSA preserves the pre-RCT priority status of security interests arising

from agreements entered into before RCT. To do so, it uses the key concepts of a ‘transitional security agreement’28 and ‘transitional security interest’.29 Where security interests were registered on certain key registers, Parliament decided to ‘migrate’ the relevant data to the PPS register. These ‘migrated security interests’ were perfected by the Registrar — rather than the secured party — filing a financing statement; such registrations are indefinite (unless the registration on the old register was for a limited period)30 so that the secured party, in theory, does not have to take any future step, unless it wishes or needs to amend the financing statement as registered by the Registrar. For other pre-RCT security agreements, where migration was not applicable, the preservation of pre-PPSA priority was only for a maximum period of 24 months from RCT; if the secured party wanted to continue its existing priority beyond that period, it was necessary to register a financing statement, or otherwise perfect the security interest. The ‘grace period’ was 24 months.31 It terminated on 31 January 2014.32

Transitional Security Agreement 15.8 The key distinction for the application of the transitional provisions is whether or not the security agreement was entered into before RCT. [page 466] A ‘transitional security agreement’ is a security agreement33 that was ‘in force’ immediately before RCT, and continues in force at and after that time.34

Transitional Security Interest 15.9 A transitional security interest cannot exist independently of a transitional security agreement. The security interest must be provided for by an agreement, but the security interest might have arisen either prior to, at, or after RCT.35 This is important because many security interests, for example in after-acquired property, attach after the security agreement has ‘come into force’. It is to be noted that s 308 does not actually use the word ‘attach’. Instead it uses the word ‘arises’. Since Chapter 9 goes on to deem ‘attachment’ of transitional security interests to have occurred immediately before RCT,36 using a different word was crucial here. Security interests which arose prior to RCT will be transitional security interests

only if they would have been ‘security interests’ under the PPSA had it been in force when they arose.37 In other words, the relevant point of reference is the insubstance definition of ‘security interest’,38 rather than whether or not an interest would have amounted to a security interest under pre-PPSA law. For example, a simple retention of title agreement did not give rise to a security interest at common law, but under the PPSA it does.39 This treatment is consistent with the policy of preserving the supplier’s common law priority based on title, at least for the transitional grace period. If the security interest arises at or after RCT, under a transitional security agreement which, as in force immediately before RCT, provides for the granting of the security interest,40 it will still be a transitional security interest, provided the PPSA applies in relation to the interest.41 Therefore, if the transitional security agreement, on its terms immediately before RCT, does not provide for a particular security interest, then that security interest will not be covered by the transitional protections. 15.10 Assume a supplier agrees to sell goods to a customer from time to time on retention of title terms. The supplier sends the customer its terms of trade, including the retention of title provision, on the understanding that, by placing an order, the customer agrees to the terms. Does each order give rise to a separate security agreement or is there one security agreement under which [page 467] a new security interest arises each time the customer places a subsequent order on the same terms?42 The question is important in the context of the transitional provisions, because if each order gives rise to a new security agreement, the supplier will not have the benefit of the transitional provisions in respect of orders placed after RCT. On the other hand, if there is just one security agreement giving rise to a series of subsequent security interests, the transitional provisions will apply to all the security interests (even those arising after RCT), provided the security agreement itself predates the RCT. The Explanatory Memorandum anticipates the problem, suggesting that: … [a] security agreement would be able to expressly provide for ongoing supplies and therefore result in a series of security interests, provided the security agreement is in force prior to the registration commencement time and allows for future security interests to be granted; each security interest granted under that security agreement, regardless of whether it is granted before or after the registration commencement time, would be a transitional security interest. The secured party to such an ongoing

transaction would only need to register one financing statement to cover the ongoing transitional security interests. Where there is no formal agreement providing for ongoing supplies, generally each supply would be considered to be a separate contract or security agreement. Supplies made after the registration commencement time in this type of situation would each be made under a new security agreement. Security interests made after the registration commencement time would not benefit from the protection provided in the transitional provisions. The secured party to this kind of arrangement would need to register two financing statements; one to secure transitional security interests and a further registration to secure security interests arising after the registration commencement time.43

Contrary to what the Explanatory Memorandum says, there is no need for the agreement to be ‘formal’ in the sense of being in compliance with writing or evidential requirements. PPSA s 20, which imposes evidential writing requirements, does not apply to transitional security interests: PPSA s 311. For example, the agreement providing for the interest could be oral, arising from a course of dealing over time on the same terms. In any event, it is not apparent why two financing statements would be needed in the second scenario. One financing statement registered after RCT, provided it is made during the grace period and covers the relevant collateral, will protect all security interests covering the same collateral in respect of the grantor. It is true, though, that in respect of the pre-RCT security interests, subs 322(1) would time the continuous perfection from immediately before RCT, whereas for the post-RCT security interests, it would be the time of registration of the financing statement. [page 468] 15.11 The Explanatory Memorandum goes on to give examples which confirm that unless there is a ‘formal agreement providing for ongoing supplies’, any further supplies must give rise to a fresh security agreement, which may postdate RCT, and thus not qualify as a transitional security agreement. However, it is important to bear in mind that the facts might be more varied than the Explanatory Memorandum suggests. As indicated in 15.13 below, a security agreement takes effect according to its terms under PPSA Ch 9 too. It will still be necessary to interpret the contractual arrangements to ascertain whether supplies are pursuant to a pre-RCT security agreement. This issue has arisen in a number of reported cases and disputes.44 15.12 In Central Cleaning Supplies (Aust) Pty Ltd v Elkerton,45 the Victorian Court of Appeal took a different view from the court below on the interpretation of

the contractual arrangements, and concluded that there was a transitional security agreement. The Court of Appeal saw its decision as consistent with the Explanatory Memorandum passage set out above, which it cited. The definition of ‘security agreement’ in s 10 means ‘an agreement or act by which a security interest is created, arises or is provided for’. The court emphasised that each of these words had different work to do.46 While an agreement for the sale of goods which included a retention of title clause could be said to ‘create’ the security interest, an agreement or act will ‘provide for’ a security interest if it makes provision for the creation of the interest in the future or by some other agreement or act. The words ‘provides for’ a security interest in the definition of security interest supported this reading.47 The facts of the case were as follows, Swan had signed and lodged with Central, Central’s standard form credit application for 30-day terms, on 3 September 2009. Clause 2 of the document stated that ‘the supply of goods by the seller is governed by the Seller’s Standard Terms and Conditions as in force from time to time’. Central commenced to supply materials to Swan in response to its purchase orders, and after delivery, Central would render an invoice, on the back of which were the same conditions each time, including a retention of title clause. In the Supreme Court, the case was argued on the basis that the agreement between Central and Swan came into force on 3 September 2009, on Swan’s signing and lodging of the credit application. Central argued various bases upon which the retention of title was incorporated, including by reference or by course of dealing. Ferguson J held that the ROT clause was stated to be a ‘Condition of Sale’ referring to ‘goods the subject of this sale’. She found that the ROT clause applied in respect of each separate sale [page 469] when it appeared on each invoice, and that the latter were all post-contractual documents. But the Court of Appeal took a different view of the timing and manner of the contract formation. The court held that the lodging of the credit application was a unilateral offer by Swan, accepted by Central when it first supplied and invoiced for goods, which happened on 4 September. That first supply was on Central’s ‘Standard Terms and Conditions’ set out on the back of the invoice, and all future, invoices, and including the retention of title. The evidence showed clearly that these were Central’s standard terms. The court said that it did not matter that the credit application form did not set out these terms. Clause 2 of the credit form clearly bound Swan to accept them for all future supplies. The law

held the buyer to the terms even if he took the risk of not enquiring as to their detail.48 Neither was it relevant that each invoice expressed itself as only applying to the goods ‘the subject of this sale’. The application for credit was an agreement by Swan to be bound by Central’s standard terms in respect of each future supply, and the ROT clause was in existence at the time the agreement became binding on Swan; that is, when it received the first invoice for goods supplied. Therefore the agreement, which came into force prior to RCT, ‘provided for the grant of’ a security interest in relation to each future supply.

Enforceability 15.13 PPSA subs 18(1) provides that a security agreement is effective according to its terms. This provision applies to transitional security agreements too. But as far as the enforceability of transitional security interests against third parties is concerned, PPSA s 311 provides that the law which applied prior to the PPSA will apply so that the new writing requirements in PPSA s 2049 cannot be imposed on a transitional security agreement, which may or may not conform to them depending on the facts. It could be argued that the pre-PPSA law as to ‘enforceability of a security interest against third parties’ included the rules which gave or denied priority to that interest. However, clearly that is not what is intended in s 311, as it would undermine the PPSA’s priority rules for transitional security interests. Instead, the phrase should be taken to refer to other pre-PPSA rules, if any, for the validity and enforceability of the security agreement when it was entered into, and which were preconditions, under the old law, for enforcement against the grantor and third parties.

Attachment 15.14 Attachment is a precondition for perfection,50 and transitional security interests have to be perfected (as to which see below at 15.15–15.16) [page 470] in order to have priority over other perfected PPSA security interests, and to be effective on insolvency. To ensure that the pre-RCT priority of transitional security interests is not affected by the timing of acts or events which, in PPSA terms, would

amount to attachment of the security interest, and given the difficulties of pinpointing the time of attachment in the case of migrated security interests, s 321 provides that all transitional security interests are ‘taken to attach to the collateral’ (emphasis added) immediately before RCT, for the purposes of the priority rules in s 55 and the definition of ‘perfection’ in s 21. This is irrespective of whether the security interest actually arose before, at, or after, RCT.51 Example 1. SP enters a general security agreement in July 2011 with Grantor, taking a fixed and floating charge over all Grantor’s present and after-acquired property. On 1 March 2012, Grantor takes possession of a new combine harvester.

Attachment is taken to occur on (or strictly ‘immediately before’) RCT, that is, on 30 January 2012. Clearly, this is not when attachment would have occurred if the security agreement had been entered into on 1 February 2012, that is, after RCT. In that case, 1 March 2012 would be the attachment date, that is, when Grantor took possession of the collateral.52 While s 321 assists to preserve the perfection and priority position of transitional security interests, the definition of ‘attachment’ in PPSA s 19 will still apply for other purposes. Thus, as between the secured party and the grantor, s 19 applies. While in almost all cases, this will make no practical difference since value will have been given and the security agreement entered into, it might apply between the secured party and grantor if they have expressly agreed to postpone the date for attachment.53

Perfection 15.15 A transitional security interest is perfected from the time immediately before RCT, by force of PPSA subs 322(1).54 This provision governs both the fact, and the timing, of perfection.55 As with attachment, the subs 322(1) perfection rule applies irrespective of whether the security interest arises before, at, or after RCT. Indeed, subs 322(1) provides that even if a security [page 471] interest arises after the expiry of the ‘grace period’, it will still be perfected from the time immediately before RCT. This covers the situation where the secured party under a transitional security agreement, before expiry of the ‘grace period’, perfects by registration of a financing statement, and thereby secures continuous perfection56 from the time immediately prior to RCT, even though the security

interest does not arise until after the end of the grace period. As discussed below, however, it would be a different matter if the secured party had not registered a financing statement until after the end of the 24-month period. 15.16 PPSA subs 322(2) sets out several circumstances in which the perfection of transitional security interests by reason of subs 322(1), will ‘stop being perfected’ in that way: (a) when the security interest is ‘otherwise perfected’ by registration, possession or control;57 (b) at the end of the month that is 24 months after RCT;58 and (c) where a registration of a migrated security interest by the Registrar on migration is amended by the secured party. This last situation is dealt with in 15.22–15.26 below. Thus, if a secured party perfects a transitional security interest by any method, the security interest ceases to be perfected ‘by force of the Act’, and becomes perfected by reason of the perfection the secured party has procured. In this respect, the case is similar to other examples of ‘temporary perfection’ in the PPSA. In the case of a transitional security interest, the secured party could have reperfected at any time between 30 January 2012 and 31 January 2014; if it waited until after that time, it would no longer fall under subs 322(1) and would be unperfected. PPSA subs 56(2) provides for continuous perfection by whatever method,59 and thus operates to ensure that, provided there is no gap between the ‘temporary’ perfection under subs 322(1), and the secured party’s subsequent perfection before expiry of the grace period, then the interest will maintain its priority from the time immediately before RCT. Example 2. SP1 lends for general business purposes of Grantor and takes a security interest in all Grantor’s present and after-acquired property on 5 January 2012. On 1 May 2013, Grantor takes out a further loan with SP2 for general funding and SP2 takes a security interest in Grantor’s inventory and equipment. SP2 immediately registers a financing statement. SP1 registers a financing statement on 2 March 2014. In April 2014, Grantor defaults and SP2 seizes inventory and equipment.

Because SP1 did not register until 2 March 2014, it was unperfected for the three days between the end of the grace period and 2 March, so its perfection is now timed from 2 March 2014, the date of registration. SP2’s [page 472] registration is therefore first in time and SP2 has priority in respect of the disputed collateral.60

Perfection by Possession 15.17 Even though perfection is determined and measured by reference to the ‘registration commencement time’, the s 322 perfection rules apply equally to possession and control.61 Thus, for a non-migrated security interest, a secured party protected by the ‘temporary’ grace period could take possession before expiry of that period, and its security interest would be continuously perfected.62 Example 3. SP has a security interest in a painting owned by Grantor. SP perfects the security interest by taking possession of the painting on 5 January 2012. SP returns the painting to Grantor on 28 February 2012 for a dinner party held by Grantor. On 3 March SP registers a financing statement covering the painting, and on 1 May Grantor returns the painting to SP.63

In this case, the ‘temporary perfection’ of the grace period does not protect SP. If a secured party already had possession at RCT, then its interest is not perfected by force of the Act, but by having earlier taken possession.64 As long as perfection is continuous, it will be taken to have occurred immediately before RCT.65 If, however, at any time after RCT, SP gives up possession and does not register a financing statement prior to doing so, the security interest will have the status of an unperfected transitional security interest. If SP later registers a financing statement, its priority will date from the time of the financing statement, not from immediately before RCT.66 This seems at first glance to put a secured party who has possession at RCT in a worse position than a party with a non-migrated transitional security interest who was not in possession at RCT, because the latter has 24 months in which to perfect without losing their pre-RCT priority time. Conversely, the possessor at RCT is only protected in this way if they retain continuous perfection by whatever method, or combination of methods of perfection. However, this outcome is consistent with the policy of the Act. Transitional security interest holders should be no worse off than they were preRCT. But if a party voluntarily gives up possession and thereby loses continuous perfection, it is not unfair [page 473] that it loses the protection of the grace period. The case is the same as where a party ‘assents’ to the Act by registering a financing statement during the grace period for a fixed time, which then expires, leaving the party unperfected.67

Enforcement of Transitional Security Interests 15.18 PPSA Ch 4, dealing with enforcement of security interests,68 does not apply to transitional security interests.69 The purpose of the transitional security interest provisions is to preserve, at least for a time, the rights of the parties, not to remove or interfere with existing contractual rights. The concern about ‘acquisition on just terms’ mentioned above, is relevant here too. Thus, the enforcement provisions under the security agreement (if any), and other general law provisions, will apply.

MIGRATED SECURITY INTERESTS Introduction 15.19 The governing provisions are located in PPSA Pt 9.4 Div 6. PPSA s 332 provides that a security interest is a migrated security interest if: (1) it is a transitional security interest; (2) it was registered in a transitional register; (3) the registration in the transitional register was duly authorised by the law under which the register is maintained; (4) the registration details in the transitional register are given to the PPSA Registrar; and (5) the registration in the transitional register was effective at the time of the handing over. As s 322 makes clear, migrated security interests are a subset of transitional security interests. Therefore, a migrated security interest can only arise where the security agreement was entered into prior to RCT, and remained in force at that time.70 Since the PPS register is a facility for the registration of security interests, the s 322 definition provides for migrated security interests and there is no reference to migrated security agreements.71

Migration Time 15.20 The ‘migration time’ was required by the Act to commence no later than 28 days prior to RCT.72 Ultimately, the migration time started from [page 474] 21 November 2011.73 In reality, much of the preparatory work had been undertaken in the two years since Royal Assent, but the migration of data was completed within the month leading up to RCT. PPSA s 332 states that only those

entries actually on the relevant transitional register at the time the data is migrated should be registered by the Registrar during the migration period.74 If an interest is not migrated because, although registrable, it was not on the register before migration time, then no financing statement will be entered in respect of it by the Registrar. It would still be a transitional security interest, but by virtue of subs 322(3) and PPS Regulations reg 9.2, it will not be treated as perfected immediately before RCT.75

Transitional Registers 15.21 A transitional register76 means one in which data in relation to personal property is held in a Commonwealth, state or territory register. Approved data in a transitional register was transferred, during the migration period, to the Registrar.77 However, no list of transitional registers is found in the PPSA, or the Regulations. The latter allow for data from transitional registers to be entered on the register,78 and the PPSA provides that the Registrar may issue determinations as to classes of personal property held in a transitional register, that must then be protected by the Registrar issuing a financing statement.79 A list of transitional registers appears, at the time of writing, on the PPSR (register) website.80 Originally, data from 40 registers was to be migrated, but this was later reduced to 26. The main reason was that not all existing registers, even if they provided for registration of security interests, gave priority by reason of such registration, and if the government were to migrate those that did not, it would prejudice the relative priority rights of secured parties who had chosen not to register in the transitional register.81 For example, intellectual property registrations were not migrated because, although the [page 475] intellectual property statutes may have permitted registration of security interests, it was not mandatory, and did not accord priority to such interests.82 The transitional registers included three Commonwealth registers: the register of ships,83 the ASIC register of company charges and the fisheries register. The ASIC register, and the state registers of encumbered motor vehicles or motor vehicle securities constitute the major volume of migrated entries, and other state transitional registers include (varying between different jurisdictions) bills of sale, mortgages or liens on the following collateral types: crops, stock, wool, fruit, and also registers of cooperative

charges.84 As discussed in Chapter 3, there is a significant list of excluded state and territory personal property. To the extent that such data was contained in a transitional register, it was not migrated; the most important examples relate to various licences and leases, for example mining, aquaculture and natural resources, but there are other cases as well.85 Transitional registers closed for new entries upon completion of migration, prior to RCT.86 They remain available for historical information, and the records must be kept for seven years. They may still need to be consulted to determine or evidence priorities in some cases, as discussed below, where priorities continue to be affected by entry of registrable charges on such registers, for example the ASIC register of company charges.87

Perfection 15.22 Since migrated security interests are transitional security interests, the discussion above in relation to attachment, enforceability and enforcement applies to them too. However, perfection requires separate discussion. The Registrar registered financing statements for migrated security interests at the ‘registration time’ of RCT,88 at which point they became perfected by his registration.89 As transitional security interests, PPSA subs 322(1) ensured their continuous perfection from the time immediately before RCT, so there could be no argument of a scintilla temporis prior to the Registrar’s registration.90 PPS Regulations, reg 9.2 ‘prescribed’ an excepted class under PPSA subs 322(3), where an interest was registrable on a transitional register prior to RCT, but was not registered on a transitional register prior to RCT. In Maiden Civil, the court held that it was not open to the lessor under a PPS lease who had not registered a financing statement to argue that its transitional security interest was nevertheless perfected prior to RCT. The court found that it was [page 476] registrable in the Northern Territory register of interests in motor vehicles, but was not registered on that, or indeed on any other, transitional register.91 15.23 The important difference between the ‘temporary perfection’ of nonmigrated transitional security interests, and the perfection for migrated security interests by the Registrar’s registration, is that the latter does not last merely for a

temporary ‘grace period’, so that in theory, there is no step required to be taken by the secured party in order to maintain its pre-RCT priority. This statement must be qualified in two respects. First, if the transitional register provided that the registration of an interest was only effective for a limited time, then PPSR registration will only last for the unexpired period that remained under the transitional registration.92 The following example is taken from the Explanatory Memorandum.93 Example 4. SP1 has a security interest in Grantor’s car. The security interest was registered on the NSW register of encumbered vehicles and is migrated to the PPS register. SP1’s security interest is taken to be perfected from immediately before RCT until the time the registration would have ended in accordance with the law under which the register of encumbered vehicles was maintained.

The second qualification is that in some cases, secured parties with migrated security interests may still be prudently advised to amend the financing statement registered by the Registrar, due to defects or errors arising in the migration of data discussed next.

Errors and Deficiencies in Migrated Data 15.24 The government anticipated that allowance would have to be made for the form of data as recorded, or required, under transitional registers, being different from the content and form required for a financing statement under the PPSA.94 While it would be for the Registrar to determine the class of ‘equivalent’ data to be migrated, an exact fit was impossible.95 The requirements for financing statements are set out in PPSA s 153 and in the PPS Regulations.96 There may be a significant variation between the content and form of the data in a transitional register and that prescribed under the [page 477] PPSA.97 This is particularly true of the ASIC register of company charges, given that it is not a register in respect of security interests in general, but of categories of charge.98 The Corporations Act 2001 (Cth)99 sets out specific categories of charge that must be registered, although as explained below, ASIC practice was to permit lodging of instruments which covered more than just these specific categories — a standard ‘fixed and floating’ charge in a corporate debenture would cover the specified classes of collateral required to be registered, but would also charge other

classes that were not required to be registered. ASIC, in transferring the data to the PPS register, has described all charges on its register as ‘all present and afteracquired property’ in conformity with PPSA s 153 and the Regulations.100 While this description may be appropriate for the majority of cases, it is not appropriate for cases where the charge was taken over specific equipment or intangible property. 15.25 The state and territory motor vehicle securities statutes provided for registration of motor vehicle security interests against the vehicle’s serial number, not the grantor’s name and date of birth, so the registers did not include information about the grantor of the security interest. By contrast, a PPSA registration must disclose the vehicle’s serial number if the vehicle is consumer property, and cannot disclose the grantor’s details; in the case of commercial property, registration against serial number is optional, but in any event the registration must disclose the grantor’s details.101 Where a motor vehicle security interest is migrated to the PPS register, the registration will not include the grantor’s details. Does this mean that if the motor vehicle is commercial property, the registration is ineffective under PPSA ss 164 and 165?102 The issue is addressed by s 337, which gives the Registrar power to determine that registrations in a stated class are effective despite stated types of defect. The effect of a determination is to protect a registration from the operation of ss 164 and 165 until the end time of the original registration or, if the original registration does not state an end time, for a period of 60 months after RCT. The Personal Property Securities (Migrated Security Interests and Effective Registration) Determination 2011 provides for the application of PPSA s 337 to the case under consideration, and others like it. 15.26 However, s 337 is not a panacea. The definition of ‘migrated security interest’ includes the element that the registration in the transitional register must have been ‘duly authorised by the law under which the register was [page 478] maintained’.103 Take, for example, the ASIC register of company charges mentioned above. Corporations Act 2001 (Cth) s 266 required registration of specified company charges but, as a matter of practice, ASIC accepted registrations not falling within the required list. Though the statute did not expressly prohibit such registrations, it would be hard to argue that the statute itself ‘duly authorised’ them.104 If the registrations were not ‘duly authorised’, it would mean that on

migration, the affected charges would not satisfy the definition of a migrated security interest. This could render the registration of the security interest ineffective and thus unperfected, particularly given that all ASIC company charges have been migrated as ‘all present and after-acquired property’ on financing statements.105 It is unlikely that such a point would be upheld in court because: (1) it is clearly not what was intended by the Act; (2) it would undermine the entire migration scheme and the transitional nature of the provisions (forcing consideration of the ‘effective’ and ‘duly authorised’ status of entries on transitional registers);106 and (3) s 337 would arguably have to be read subject to s 252B which protects the ‘just terms’ requirement’. Nevertheless, secured parties may not wish to risk this level of uncertainty. It is noted that the Registrar’s 2011 Determination referred to in the previous paragraph, refers simply to ‘authorised’, rather than ‘duly authorised’; while this may have been intended to clarify that s 337 will govern such charges and bring them within the 60-month grace period, the wording of s 337 cannot be overridden without further legislation.107 Whatever the correct interpretation, prudence would suggest, in relevant cases, amending or re-registering a financing statement in respect of charges that were registered, but were not required to be registered, in a transitional register. 15.27 With hindsight, the migration process could have been done differently, or not at all. At the very least, its objectives have been diluted and the burden placed substantially on secured parties to amend or reperfect their registrations. As the government has not provided any compensation fund for loss caused by migration, we must hope that stakeholders, practitioners and, if it comes to it, the courts, will take a purposive approach. The government [page 479] will hope that the 60-month grace period for secured parties to rectify the PPS register will suffice to protect the government from ‘just terms’ arguments, especially in the absence of a compensation fund.108 15.28 If the Registrar registered data which was not within the class of migratable data, then the PPSA will apply as if the data had never been included in the register; in other words, the secured party will be unprotected. The Registrar, however, has power to issue a determination for classes of data, stating a time by which the Registrar will issue financing change statements to correct the error.109

The Registrar also has wide powers to remove or restore data on the register, and to register a financing change statement to correct errors or omissions made by the Registrar. In these cases, the Act will apply as if the mistake had never been made.110 This is different from the normal effect of a financing change statement, which is that the amendment takes effect from the time the financing change statement is registered.111 15.29 The migration process may also have led to a registration stating that certain collateral is covered by a transitional security agreement, when in fact that is not the case. In such circumstances, the registration will be ineffective to the extent that it covers collateral that does not fall within the scope of the transitional agreement,112 so the onus is on the secured party to amend the registration, by filing a new financing statement.113 There have also been significant practical errors arising out of the migration process. Some of these came to light prior to the migration process,114 and other errors were not foreseen.115 Nevertheless, it is important to emphasise that over 5 million migrated and pre-loaded registrations were entered. This is an impressive achievement, and despite the above references to deficiencies, anticipated or otherwise, and some administrative teething problems, it arguably might have been a better outcome than any of the alternatives. However, it is also important that neither secured parties nor searchers should suffer uncompensated loss solely attributable to the migration rules and process. [page 480]

PRIORITIES Introduction 15.30 PPSA subs 320(1) provides a ‘guide to how [the PPSA] applies to the determination of priorities involving transitional security interests’. The table incorporated in subs 320(1) identifies four types of priority dispute involving transitional security interests. The four scenarios in the subs 320(1) table are a convenient way of discussing the possible priority situations. The s 55 default priority rules116 are relevant in some cases, so the provisions in Pt 9.4 are not a selfcontained code for transitional security interests. As discussed above, for transitional security interests, attachment and perfection are deemed to have occurred immediately before RCT.117 When the Guide refers to a ‘perfected transitional

security interest’, it means one that is continuously perfected at the time of the priority dispute,118 including by virtue of s 321, and thus continuously perfected from immediately before RCT; conversely, an ‘unperfected transitional security interest’ means one that has ‘stopped being perfected’, for example where the 24month period came to an end without the secured party registering a financing statement.119

Transitional vs Non-transitional Security Interests 15.31 The first priority situation to consider is between a transitional security interest perfected by virtue of PPSA s 322 and an unperfected security interest, whether or not the latter is transitional. In such a situation, the default rule in subs 55(3) governs and the perfected security interest has priority.120 Example 5. SP1 purchases Grantor’s accounts in November 2011. In March 2012, SP2 takes a security interest in all Grantor’s present and after-acquired personal property and proceeds. SP2 does not file a financing statement as it has not heard about the new PPSA. SP1 continues to collect debts from Grantor’s customers through to June 2012. In June 2012, Grantor defaults on its obligations to SP2 under the security agreement. SP2 claims Grantor’s outstanding accounts and also the collections on paid accounts. SP1 disputes SP2’s claim.

SP1 has a deemed security interest in the accounts: PPSA para 12(3)(a).121 SP1’s security interest is perfected by force of subs 322(1) with effect from immediately before RCT, and for the duration of the grace period. SP2’s security interest is unperfected and therefore, applying subs 55(3), SP1 has priority with respect to the disputed accounts and their proceeds. [page 481]

Perfected Transitional vs Perfected Non-transitional Security Interests 15.32 The ‘deemed’ time of perfection rule for transitional security interests in PPSA subs 322(1) means that a transitional security interest (if continuously perfected) will always be prior in time to a perfected non-transitional security interest, since the latter could not be perfected until RCT, whereas the former is taken to have occurred ‘immediately before’ it. Subsection 55(4) states that as between two or more currently perfected security interests in the same collateral, the priority time order in subs (5) applies.122

Example 6. On 5 January 2012, SP1 consigns goods to Grantor under a commercial consignment arrangement. On 30 January 2012, SP2 takes a security interest in all Grantor’s inventory to secure an overdraft facility. SP2 registers a financing statement that day covering the inventory. In July 2012, SP2 issues demand for repayment and seizes the inventory. SP1 and SP2 both claim the inventory.

SP1’s interest in the inventory is a deemed security interest for the purposes of the PPSA.123 Its security interest is perfected, by force of PPSA s 322, from immediately before 30 January 2012 (RCT), whereas SP2’s security interest was (inevitably) perfected later, on 30 January 2012. Therefore, applying PPSA subs 55(4), SP1 has priority.

Unperfected Transitional vs Unperfected Non-transitional Security Interests 15.33 As explained above, an ‘unperfected transitional security interest’ is one that has lost the ‘temporary’ perfection it had under subs 322(1). In this situation, there is no reason why the transitional security interest should continue to retain any transitional advantage. Thus, the default rule in subs 55(2) applies, so that the order of attachment will be decisive. Example 7. SP1 holds a fixed and floating charge over all Grantor’s present and after-acquired property under a debenture executed in July 2011. The charge was never registered under the ASIC register of company charges. SP2 extends a line of credit to Grantor under an agreement entered into on 1 March 2012, secured on all Grantor’s inventory and proceeds, for which SP2 registers a financing statement in March 2012 to last one year, properly describing the collateral. In March 2014, Grantor receives a large shipment of trucks which it has purchased. In April 2014, Grantor defaults on both loan agreements and a dispute ensues between the two financiers over the proceeds of the trucks.

SP1’s transitional security interest was perfected under PPSA subs 322(1) for the duration of the grace period, but when the grace period expired on 31 January 2014, SP1’s security interest became unperfected. SP2 chose to register for a oneyear period only, so its security interest also became [page 482] unperfected in March 2013. Neither secured party reperfected prior to the dispute. Therefore the time of attachment will govern. Although neither security interest actually arose until Grantor took possession of the shipment in March 2014, SP1’s security interest is ‘taken to attach’ immediately before RCT, whereas SP2’s security interest attached when Grantor acquired the trucks in March 2014. Therefore SP1

will have priority.

Perfected Security Interest vs Unperfected Transitional Security Interest 15.34 This case is simply dealt with by the default priority rule, and as one would expect, the perfected security interest, whether transitional or not, will have priority over an unperfected one, even if the latter is a transitional security interest which was perfected until the expiration of the grace period.

Disputes between Competing Perfected, or Competing Unperfected, Transitional Security Interests 15.35 Priority disputes between two transitional security interests that are both perfected, or both unperfected, are dealt with by s 323. Where priorities cannot otherwise be determined under the PPSA, then the security interests have the priority that they would have had under pre-RCT law, as if the PPSA had not been enacted. The s 55 default priority rules are of no assistance here, given that both attachment and (assuming it is continuous) perfection are taken to have occurred ‘immediately before RCT’. Thus, the only PPSA priority rules that could possibly apply would produce a tie. The solution in s 323 is to revert to the rules that would have applied prior to commencement of the PPSA, so the dispute is determined as if the PPSA had not been passed. Example 8. On 23 December 2011, SP1 is granted a fixed and floating charge over Grantor’s present and after-acquired property for $100,000. SP1 does not register its charge in the ASIC register of company charges, prior to the PPS registration commencement time on 30 January 2012. On 28 December 2011, SP2 takes a fixed and floating charge over Grantor’s property for $25,000. SP2 was aware of SP1’s charge. On 29 December 2011, SP2 registers the charge in the ASIC register of company charges. SP2’s registered charge is migrated to the PPS register. On 1 June 2012, Grantor defaults on its obligations to SP1 and SP2 and they both take steps to enforce their security interests.

SP1 had 45 days from the date of creation of its charge to register in the register of company charges.124 The 45 days had not expired at the PPSA registration commencement time and so SP1 holds a transitional security interest despite its failure to register in the register of company charges. SP1’s transitional security interest is a non-migrated security interest. SP2 also holds a transitional security interest which is a migrated security interest. Under s 322, both the migrated and non-migrated transitional security interests are perfected from immediately before RCT. The dispute arises during the ‘grace

[page 483] period’ and it would be determined as if the PPSA had not been enacted: s 323. On this basis, SP1’s charge would have priority, because Corporations Act s 280 gives priority to an unregistered charge over a registered charge where the registered chargee has notice of the unregistered charge at the time of the registration. It is to cater for cases like this that the ASIC register of company charges remains available to search, even though it is closed for new entries.125 The outcome in Example 8 preserves the pre-commencement position. Neither party is any worse off than they would have been had the PPSA not been passed. 15.36 Although the Registrar will have disclosed on the financing statement that a registration is a migrated security interest, and which register it came from, the secured parties will have to rely on their own records, and historical records of any relevant transitional register, in any dispute. If a dispute is between two nonmigrated security interests — for example if neither were registrable under previous law — the common law rules will apply, so matters such as title, priorities between legal and equitable interests, and the rule in Dearle v Hall126 for assignments and so on, will still be relevant. The case law on fixed and floating charge priorities will still be relevant to that extent.127 15.37 If there is a priority dispute between a migrated security interest (for example, a company charge) and a non-migrated one (such as retention of title terms of trade), the pre-PPSA law will apply. (Depending on the nature and extent of the retention of title claim, it is likely that it will prevail over the migrated company charge.)128 NCO Finance Australia Pty Ltd v Australian Pacific Airports (Melbourne) Pty Ltd129 illustrates the application of s 323 to priority disputes between migrated and non-migrated security interests. The facts of the case were that a car owner had abandoned the vehicle at the Melbourne airport short-term car park in September 2011, and after a while, the airport authority towed it to the long-term car park, where it remained at the time of the hearing in August 2012. The car owner had defaulted on a loan agreement and the plaintiff was assignee of the debt owed to the finance company. The plaintiff sought the return of the vehicle from the airport authority. The finance company had registered its security interest in the vehicle on a transitional register, the Queensland register of encumbered vehicles in August 2011, and this was migrated by the Registrar prior to RCT. The airport authority had a contractual lien for parking fees, which the court found to be a ‘repairer’s lien’

within the meaning of the broad definition in s 10(4) of the Chattel Securities Act 1987 (Vic). The Chattel Securities Act [page 484] provided that such a lien ranked in priority to any registered security interest, irrespective of its time of registration. The court held that s 323 applied, since both security interests were perfected prior to RCT, pursuant to s 322. The pre-PPSA law thus applied to determine priority, so the airport authority’s lien prevailed. 15.38 If, after the expiry of the grace period, two transitional security interests have become unperfected under subs 322(2) because neither secured party has taken any perfection step during the grace period, then, attachment for both interests having been taken to occur immediately prior to RCT, the common law priority rules again will apply. A special transitional rule applies if the insolvency of either the grantor or one or both secured parties, is involved: see 15.40 below.

Control 15.39 Control, as a mode of perfection, only applies to certain collateral types.130 Section 322A, however, enacts a special priority rule for contests between a security interest perfected by control, and a transitional security interest. Section 57 provides that control trumps other perfection methods. Section 322A creates an exception where the competing security interest is a transitional security interest. Were it not for s 322A, the transitional security interest would have a different priority from its pre-commencement priority, contrary to the constitutional restriction referred to above. Therefore, in priority disputes between a transitional security interest continuously perfected since RCT, and a security interest currently131 perfected by control, the transitional security interest prevails, despite s 57. If the security interest perfected by control is a transitional security interest, s 322A does not apply. Instead, the transitional priority rules discussed above will apply, under which the outcome will depend on whether the competing security interest is a transitional or non-transitional security interest.

Insolvency

15.40 If a transitional security interest ceases to be perfected (for example, because the secured party fails to register a financing statement during the grace period), and is unperfected immediately before a relevant insolvency proceeding in respect of the grantor,132 then the consequences will be the same as for all other PPSA security interests; the security interest will ‘vest’ in the insolvent grantor, or trustee in bankruptcy under s 267 of the PPSA.133 If a grantor became subject to a relevant insolvency procedure (i.e. one covered by s 267) during the grace period, then any transitional security interest will [page 485] retain its pre-commencement priority and will be effective on insolvency, given that it is perfected under subs 322(1).134 15.41 Section 324 enacts a special rule for the case where after 31 January 2014 priority falls to be determined between two secured parties on the insolvency of the grantor or of either or both secured parties,135 where at least one of those interests is a transitional security interest that has not been perfected (apart from deemed perfection under subs 322(1)). It provides that, in this situation, the PPSA must be applied as if s 322 had not been enacted. Subsection 324(2) makes it clear that other provisions of Pt 9.4 Div 2 still apply, for example s 321 (attachment) and s 323 (where priority otherwise unable to be determined). Since subs 322(1) prescribes both the timing and the fact of perfection, any subsequent perfection, for example later registration after the grace period, will not be retrospective to the date immediately before RCT. Any priority dispute between two secured parties where one or both was a transitional security interest not otherwise perfected during the grace period, will thus be determined by the order of actual perfection, rather than any ‘deemed’ perfection under subs 322(1). However, s 267 provides that unperfected security interests as at the date of insolvency of the grantor will vest in the grantor and this will usually mean that no such priority dispute falls to be determined by reference to s 324. This leaves the situation where one or both secured parties is insolvent. In that case, and where one or both are transitional security interests not otherwise perfected during the grace period, the order of attachment rule in subs 55(2) will apply, as subs 322(1) cannot apply. If both secured parties in that situation held transitional security interests, so that they are deemed by s 321 to attach prior to RCT, then s 323 would apply, so that the pre-

PPSA priority rules would be engaged.

1. 2. 3. 4.

5. 6. 7.

8.

9. 10.

11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

22. 23.

This period expired on 31 January 2014. PPSA ss 306, 309–310. The Act was amended in late 2011 to enable the Minister to extend the date beyond 1 February 2012, but this power was not ultimately needed. Personal Property Securities (Migration Time and Registration Commencement Time) Determination 2011. Personal Property Securities Act 1999 (NZ) ss 193–201; see Michael Gedye, Ronald C Cuming and Roderick J Wood, Personal Property Securities in New Zealand, Thomson Brookers, Wellington, 2002, pp 559–83. See Rebecca Hope, ‘Migrated Security Interests: Lost in Transition’ (2011) 34 University of New South Wales Law Journal 646 at 658. Personal Property Security Act 1967 RSO c.73 s 64; see Fred M Catzman, Personal Property Security Law in Ontario, Carswell, Toronto, 1976, p 241. The Statutory Review found that many users, particularly small businesses and consumers, are still unaware of the PPSA, the PPS register, and its relevance to them: Bruce Whittaker, Review of the Personal Property Security Act 2009: Final Report, Commonwealth of Australia, 2015 (‘Statutory Review: Final Report’), chs 3 and 10, available at . Parliament of the Commonwealth of Australia, House of Representatives, Replacement Explanatory Memorandum on the Personal Property Securities Bill 2009, paras 9.4–9.8 (‘Replacement Explanatory Memorandum’). Thanks to Dr Matthew Stubbs, Adelaide Law School, for the text and accompanying footnotes in the remainder of this paragraph. Commonwealth v Tasmania (1983) 158 CLR 1, 283–4 (Deane J) [Tasmanian Dam case]. The interference by regulation must, however, be sufficiently great to amount to an ‘acquisition of property’: Smith v ANL Ltd (2000) 204 CLR 493 at 505 (Gaudron and Gummow JJ); Telstra Corporation Ltd v Commonwealth (2008) 234 CLR 210 at 233–4 (Gleeson CJ, Gummow, Kirby, Hayne, Heydon, Crennan and Kiefel JJ). (2000) 204 CLR 493. See White v Spiers Earthworks Pty Ltd [2014] WASC 139, rejecting an argument that this section applied to prevent an unregistered security interest vesting in the grantor under PPSA s 267. There is no fee for registration of any transitional security interests during the 45-month ‘grace period’. See above note 5, at p 648. Unfortunately, errors have occurred in the data transfer process, for example the omission of 6000 ASIC registrations. Despite these best-laid plans, there were technological problems with the register on its first day and weeks of operation, requiring the Registrar to encourage parties to postpone or stagger entries and searches. PPSA Pt 9.3. PPSA s 2. PPSA subs 306(2), s 310. PPSA s 310. Personal Property (Migration Time and Registration Commencement Time) Determination 2011. Initially, RCT was to be 1 May 2010, but there were three further postponements to allow time for the government and stakeholders to prepare systems. The last possible RCT date under the Act, as originally enacted, was 1 February 2012: see subs 306(2). A later amendment to allow the Minister to extend this date was in the event, not required. PPSA s 315. Personal Property Securities (Migration Time and Registration Commencement Time) Determination

24. 25.

26. 27.

28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

45. 46. 47. 48. 49. 50. 51. 52. 53. 54.

2011. The current Registrar is Mr Gavin McCosker, and his predecessor (the first holder of the office), was Mr David Bergman; therefore, the Registrar is referred to as ‘he’ in the text. PPSA s 336. In addition, there was provision for ‘preparatory registration’ of pre-existing ‘transitional security interests’ and certain other data regarding personal property. This enabled pre-loading of preexisting security agreements by bulk users, which would be effectively registered at RCT. The Registrar also had power to pre-load other data about personal property, such as impounded motor vehicles. As at 25 January 2012, there were 1.4 million pre-loaded registrations and 4.8 million migrated security interests on the register. See 4.44–4.54 of this text. PPSA s 318. The Statutory Review has, in any event, recommended that (as foreshadowed in the Note to PPSA s 338), the provision in s 339 regarding the interpretation of the language of ‘charge’, ‘fixed charge’ or ‘floating charge’ in legislation or security agreements, should now be deleted: Statutory Review: Final Report, para 9.3.2. PPSA ss 10 and 307. PPSA ss 10 and 308. The PPSA provides a limit on the duration of a financing statement for consumer property, of seven years. See subs 153(1), Item 5, and 6.50 of this text. See, for example, above note 8, para 9.22. PPSA subs 322(1). RCT was 30 January 2012, but the Registrar treated the end of the transitional period as 31 January 2014. ‘Security agreement’ is defined in s 10, to which the ‘in substance’ definition of ‘security interest’ in s 12 is related: see PPSA s 307, and Chapter 3 of this text. PPSA s 307. Few, if any, security interests will arise ‘at’ RCT, as this would be midnight of 29 January 2012. PPSA s 321. PPSA ss 308(a), 310. See 3.2–3.23 of this text. PPSA s 12. PPSA subpara 308(b)(i). PPSA subpara 308(b)(ii), s 310. If it is an excluded interest under s 8, for example, then it is not a PPSA security interest, transitional or otherwise. See Craig Wappett, Steve Edwards and Bruce Whittaker, Personal Property Securities in Australia (LexisNexis looseleaf), para 6.400. See above note 8, at para 9.15. See Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92; Industrial Progress Corp Pty Ltd v Wilson [2013] WASC 225; see also David Brown, ‘PPSA and Transitional Provisions: When the ROT Starts’ (2012) 12 Insolvency Law Bulletin 208. [2015] VSCA 92. At [17]. The definition of ‘security agreement’ in PPSA s 10 states that ‘a security agreement provides for a security interest if the interest arises under the agreement’. Citing Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] 4 VR 559, 562 per Callaway JA. See 4.24–4.44 of this text. See 5.1–5.3 of this text. PPSA s 321. See 4.26 of this text. Note that since s 20 does not apply to transitional security interests, its writing and other requirements will not have to be complied with. Perfection by force of the Act, as under s 322, is treated as ‘perfection’ of a security interest under the

55.

56. 57. 58. 59. 60.

61. 62. 63. 64. 65. 66. 67. 68. 69. 70.

71.

72. 73. 74.

75. 76. 77. 78. 79. 80. 81.

main perfection rule in PPSA para 21(1)(a). It can be seen from para 21(1)(a) that temporary perfection is separately referred to from perfection ‘otherwise by force of this Act’. While the 24-month period in effect amounts to a long but temporary period of perfection for non-migrated transitional security interests, it is not strictly ‘temporary perfection’ under the PPSA. The circumstances when temporary perfection occurs are discussed at 5.38–5.40 of this text. PPSA s 56. PPSA para 322(2)(d). PPSA para 322(2)(f). See 5.41–5.42 of this text. PPSA para 322(2)(f) states that at the expiry of the grace period, a transitional security interest ‘stops being perfected’ under subs 322(1). It does not then stop being a transitional security interest. Instead, unless it has, before the expiry of the grace period, been perfected in some other way, it becomes an unperfected transitional security interest, which has implications for its priority. In relation to control, however, there is a special priority provision in the case of transitional security interests: see 15.39 below. PPSA para 322(2)(d); the same is true of perfection by control. See 5.41–5.42 of this text, citing this example from the Explanatory Memorandum as an illustration of loss of continuous perfection in a possession case. PPSA para 322(2)(d). See NCO Finance Australia Pty Ltd v Australian Pacific Airports (Melbourne) Pty Ltd [2014] FCCA 2274. PPSA ss 21, 25–29. This is the rationale used in the Replacement Explanatory Memorandum: see above note 8, at paras 9.5–9.6. See Chapter 12 of this text. PPSA s 314. The possibility that a pre-RCT security agreement or interest might arise between migration time and RCT has been administratively dealt with by a ‘sweep-up’ of the transitional registers in the final weekend before RCT. Instruments lodged with some transitional registers (for example, the Australian Securities and Investments Commission (ASIC) register of company charges) may in practice have been migrated so that they can be found in the PPS register, but this is irrelevant to the application of the PPSA which provides for notice filing not instrument filing: see 6.12–6.19 of this text. PPSA s 306. Personal Property Securities (Migration Time and Registration Commencement Time) Determination 2011. The Regulations exclude security interests which were registrable on a transitional register, but which were not actually registered, from taking advantage of transitional security interest perfection status: PPSA subs 322(3) and PPS Regulations reg 9.2. See Re Maiden Civil (P & E) Pty Ltd; Albarran v Queensland Excavation Services Pty Ltd [2013] NSWSC 852. PPSA s 10 and para 330(a). See PPSA ss 10 and 194 (Pt 5.9) for establishment of the office of the Registrar. PPSA para 48(c) and PPS Regulations reg 5.3(d). PPSA subs 333(1). See . See also above note 40, at para 6.700. Other reasons related to absence of registrations; inapplicability of the PPSA to the personal property in the particular register due to its exclusion from the Act under referral legislation or otherwise; and lack of necessity to protect short-term registrations by making them migrated security interests: see Commonwealth of Australia, Personal Property Securities Regulations: A Discussion Paper, 2009, Attorney-

82. 83. 84. 85. 86. 87. 88. 89. 90. 91.

92. 93. 94.

95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.

107. 108.

109. 110. 111. 112.

General’s Department, para 292. See above note 40, at ch 4.9. Ship mortgages only. And, in the Australian Capital Territory, a general register of deeds and instruments. See further, 3.40–3.78 of this text. See White v Spiers Earthworks Pty Ltd [2014] WASC 139 at [43]–[44]. See, for example, Corporations Act 2001 (Cth) s 1502, inserted by Personal Property Securities (Corporations and Other Amendments) Act 2010 s 3 and Sch 1, Item 187. PPSA s 333. See PPSA para 322(2)(a). PPSA s 333. See Re Maiden Civil (P & E) Pty Ltd; Albarran v Queensland Excavation Services Pty Ltd [2013] NSWSC 852 at [54]–[55]. The court rejected, for various reasons, a further argument that the appropriate transitional register was the Queensland register, even thought it was not registered there either. See also White v Spiers Earthworks Pty Ltd [2014] WASC 139 at [32]. In the case of consumer property, the registration can only last seven years: PPSA s 153, Item 5. See above note 6, at para 9.20. This was first identified in 2006: see Commonwealth of Australia Attorney-General’s Department, Review of the Law on Personal Property Securities: Discussion Paper — Registration and Search Issues (2006), pp 73– 75. See PPS (Migrated Security Interests and Effective Registration) Determination 2011, 25th November 2011, made pursuant to PPSA subs 333(1). PPSA s 153; PPS Regulations Sch 1. See further, 6.40–6.60 of this text. A number of examples of the mismatch between transitional register and PPS register prescribed details are listed in Wappett, Edwards and Whittaker, above note 42, at para 6.1200. For details on the extent of the possible variance, see above note 5, at p 665, and above note 42, at para 6.1200. Section 266, now repealed, subject to Corporations Act 2001 (Cth) s 1506 for pre-closure registrable charges. See above note 5, at p 665; and see . See 6.35–6.36 of this text. See 6.54–6.65 of this text. See above note 42, at para 6.800. See Corporations Act 2001 subss 262(1), 263(1) and 265(2), (8). See above note 42, at 6.1100, and above note 5, at p 669. See Hope’s rationale for a possible strict interpretation. See above note 5, at p 669, note 13. However, in response to Hope’s explanation, the requirement in PPSA para 332(c) for the transitional registration to be ‘effective’ is for the purpose of indicating that it must be extant immediately prior to RCT, not focusing (unlike (d)) on the nature of its registrable status, and see the broader phrase in the Registrar’s 2011 Determination. The Registrar’s Determination was issued subsequently to Hope’s article, and after several stakeholders and commentators had raised the issue, see further above note 42, at para 6.800. Such funds were provided in some Canadian provinces, where loss was suffered by reason of Registrar error, particularly where the registers were initially paper-based: see, for example, Personal Property Security Act 1967 RSO c.73 s 44(1). PPSA s 334. PPSA ss 183–188. See also SFS Projects Australia Pty Ltd v Registrar of Personal Property Securities [2014] FCA 846. PPSA subs 160(2); see 6.66–6.71 of this text. PPSA s 337A.

113. See 6.65 of this text. 114. Some are referred to by Hope, see above note 5 at pp 667, 670. 115. A number of these should be rectified by administrative arrangement or secured party registration or amendment, by the time of publication of this text, but further detail can be found in above note 42, at 6.1400–6.1500, and updates can be found at . 116. See 7.4–7.20 of this text. 117. See 15.13–15.18 above. 118. PPSA subs 320(3). 119. Less commonly, perfection by the secured party during the ‘grace period’ may have then lapsed or become ineffective, leading to a gap in continuous perfection. 120. See 5.59–5.60 of this text. 121. See 3.24–3.30 of this text. 122. See 7.4–7.10 of this text. Subsection 55(5) also provides a priority time for cases involving possession or control, but these are separately discussed. 123. Paragraph 12(3)(b): see 3.31–3.32 of this text. 124. Corporations Act 2011 (Cth) s 263. 125. See PPS (Corporations and Other Amendments) Act 2010 (Cth) Sch 1, and above note 6, at para 2.19. 126. 38 ER 475; (1828) 3 Russ 1 (ChD). 127. See, for example, Sogelease Australia Ltd v Boston Australia Ltd (1991) 26 NSWLR 1. 128. See Anthony Duggan, ‘Romalpa Agreements Post-PPSA’ (2011) 33 Sydney Law Review 645. 129. [2014] FCCA 2274. 130. See 5.22–5.37 of this text. 131. That is, at the time of the priority dispute. 132. The different, but overlapping, requirements under Corporations Act 2001 (Cth) s 588FL are dealt with in Chapter 13. 133. PPSA s 267: see 5.59–5.60 of this text. 134. Unless it has done something to lose the benefit of ‘temporary’ perfection during the grace period, such as, for example, giving up possession without reperfecting, see 15.17 above. 135. It is not clear why s 324 should apply in a case where either or both secured parties are insolvent. Since when has it been a principle of insolvency law (other than in set-off) that if a party becomes insolvent its property rights as a creditor should be legally affected? It should be noted that s 324 does not refer to commencement of specific insolvency proceedings, but simply to an ‘insolvent’ grantor or secured parties. PPSA s 10 defines ‘insolvency’ and ‘insolvent’ by reference to para 51(xvii) of the Australian Constitution, and the latter simply provides law-making powers over ‘bankruptcy and insolvency’, without defining insolvency. Presumably the courts would confine its meaning to a formal insolvency proceeding with a defined insolvency prerequisite, such as liquidation. However, it would have been preferable to list the separate proceedings, as in PPSA s 267.

[page 487]

Chapter 16 Aircraft Security Interests and Other International Developments INTRODUCTION 16.1 On 26 May 2015, Australia acceded to the Cape Town Convention on International Interests in Mobile Equipment (aircraft) (‘the Convention’).1 The Convention establishes an international registry for security interests in aircraft objects and it enacts priority rules for competing interests. It also prescribes formal requirements for agreements within its scope and enacts a set of remedies exercisable by the secured party (‘creditor’) if the debtor defaults. Australia’s accession to the Convention followed its enactment of the International Interests in Mobile Equipment (Cape Town Convention) Act 2013. Section 7 of the Act provides that the Convention and its associated Protocol2 have the force of law as part of the law of the Commonwealth, so far as they relate to Australia. Section 8 provides that the provisions of the Convention and Protocol prevail over domestic laws to the extent of any inconsistency (including the Personal Property Securities Act 2009 (Cth)), and s 8 confers jurisdiction on the Federal Court and state and territory Supreme Courts in relation to matters arising under the Act.3 The Act commenced operation on 1 September 2015. Paragraphs 16.2–16.21 below discuss the Convention and Protocol in more detail. Paragraphs 16.22–16.34 survey other significant international developments. [page 488]

AIRCRAFT SECURITY INTERESTS4 Application of Convention

Collateral type 16.2 The Convention provides for the constitution and effects of an international interest in certain categories of mobile equipment, including aircraft, aircraft engines and helicopters (Convention Art 2). The Protocol supplements this provision by stating that the Convention applies in relation to aircraft objects as provided by the terms of the Protocol and that the official title of the Convention and Protocol is the ‘Convention on International Interests in Mobile Equipment as applied to aircraft objects’.5 ‘Aircraft object’ is defined to mean airframes, aircraft engines and helicopters.6

Transaction type 16.3 The Convention applies only to ‘international interests’ as defined, namely the interest: (1) granted by a chargor under a security agreement; (2) vested in the seller under a title reservation agreement; and (3) vested in the lessor under a leasing agreement.7 It will be immediately apparent that, unlike the PPSA, the Convention preserves the formal distinction between security interests in the strict sense and title retention arrangements: see 1.23–1.30 of this text. The main significance of this approach is in the remedies context, where the secured party’s (creditor’s) rights vary depending on the type of interest it holds: see further, 16.16–16.18 below. The distinction does not matter in the priorities context because all three types of interest are registrable in the international register and the priority rules are the same in all three cases: see further, 16.9–16.10 below. The Protocol extends the Convention’s application to sales.8 It follows that a buyer can register its interest under a sale in the international registry. There are no priority rules for disputes between competing buyers. The main consequence of extending the registration [page 489] facility to sales is that it enables a searcher to trace back the chain of title to the original owner as a precaution against possible competing claims.

Connecting factor 16.4 The Convention applies when, at the time of the conclusion of the

agreement creating or providing for the international interest, the debtor is located in a Contracting State. The fact that the creditor is situated in a non-Contracting State does not affect the applicability of the Convention.9

Interpretation and Applicable Law 16.5 The Convention is to be interpreted having regard to ‘its purposes as set forth in the preamble, to its international character and to the need to promote uniformity and predictability in its application’.10 The Convention and Protocol are to be read together and interpreted as a single instrument and, to the extent of any inconsistency, the Protocol prevails.11 Matters on which the Convention is silent are to be determined by reference to the ‘applicable law’.12 The applicable law means ‘the domestic rules of the law applicable by virtue of the rules of private international law of the forum State’.13 The Convention and Protocol allow a Contracting State to exclude or modify certain provisions by declaration. Australia has made a declaration pursuant to Protocol Art XXX(1), one consequence of which is to attract the application of Art VIII, dealing with choice of law. This provides that the parties to an agreement may agree on the law which is to govern their contractual rights and obligations. On the other hand, non-contractual rights and obligations, including the creditor’s rights against third parties, continue to be governed by the terms of the Convention or, in relation to matters on which the Convention is silent, by the applicable law.

Formal Requirements 16.6 An agreement creating an international interest to which the Convention applies must: (1) be in writing; (2) relate to an object of which the chargor, conditional seller or lessor has power to dispose; (3) enable the object to be identified; and (4), in the case of a security agreement, enable the secured obligations to be determined (though without necessarily stating [page 490] the maximum sum secured).14 To comply with requirement (3), the agreement must set out the manufacturer’s serial number, the name of the manufacturer and the model designation.15

Registration Validity and time of registration 16.7 The establishment and operation of the registry is governed by Convention Chs IV–VII and Protocol Ch III. The registry is based in Dublin; it is fully electronic, accessible on a worldwide basis and open for business at all hours. In common with the PPSA regimes, the international register employs a notice filing system, and advance registrations (registration of ‘prospective international interests’) are permissible.16 If a prospective international interest becomes an international interest, it is treated as being registered from the time of the original registration, provided the registration was still current at the time the formal requirements are complied with: see 16.6 above.17 An international interest or a prospective international interest may be registered by either party to the agreement, but only with the consent in writing of the other party.18 A registration is effective from the date it is entered on the registry database so as to be searchable,19 and it remains effective until it is discharged or until expiry of the period specified in the registration.20

Discharge of registration 16.8 A registration may be discharged by or with the consent of the party in whose favour it was made.21 Once the secured obligation has been discharged, the debtor may serve a written notice on the holder of the interest demanding discharge of the registration, and the interest holder must comply ‘without undue delay’.22 If a prospective international interest has been registered, the prospective debtor may demand discharge of the registration at any time before the prospective creditor gives value or commits to giving value.23 If a registration ought not to have been made, or is incorrect, the debtor may serve a written notice on the holder of the interest demanding discharge or amendment of the registration and the interest holder must comply ‘without undue delay’.24 [page 491]

Priorities Registered interest versus later registered or unregistered interest

16.9 A registered interest has priority over any subsequently registered interest and also over any unregistered interest.25 This rule applies even if the firstmentioned interest was acquired or registered with actual knowledge of the competing interest and it extends to value given by the holder of the firstmentioned interest with knowledge of the competing interest.26 These provisions are similar to the PPSA priority rules, including the rule governing priority for future advances in PPSA s 58: see Chapter 7 of this text.

Registered and unregistered interest versus buyer 16.10 The buyer of an object acquires title subject to an interest that was registered at the date of the acquisition. Correspondingly, a buyer takes free of unregistered interests.27 A conditional buyer or lessee takes subject to an interest registered prior to the registration of its seller’s or lessor’s international interest while, correspondingly, it takes free from unregistered interests even if it knew about them.28

Non-consensual security interests 16.11 The definition of ‘registered interest’ in Convention Art 1 includes a ‘registrable non-consensual right or interest’ and Art 20(2) provides that a registrable non-consensual right or interest may be registered by the holder. Article 40 allows a Contracting State to declare the categories of non-consensual security interests which it wants to be registrable under the Convention and Art 1 defines ‘registrable non-consensual right or interest’ to mean any interest that is the subject of an Art 40 declaration. The priority rules in Art 29 apply to registrable nonconsensual security interests in the same way they apply to consensual interests. Australia has not made a declaration under Art 40. However, it has made a declaration under Art 39. Article 39 allows a Contracting State to declare categories of non-consensual rights or interests which have priority over other interests under that state’s law and which it wants to have priority over a registered international interest. The Australian declaration specifies statutory liens registered in accordance with the Air Services Act 1995 (Cth).

Subordination of interests

16.12 Article 29(5) provides that the priority between competing rights and interests may be varied by agreement between the interest holders. Article 20(2) provides for the registration of subordination agreements and Art 29(5) provides that the assignee of a subordinated interest is not bound by [page 492] the subordination agreement unless the agreement was registered at the date of the assignment.

Proceeds 16.13 Article 29(6) provides that any priority given to an interest in an object extends to proceeds. However, ‘proceeds’ is narrowly defined in Art 1 to mean money or non-money proceeds arising from the loss or destruction of the object (insurance payouts and the like). Since the Convention is silent on disputes involving proceeds in the broader sense, the applicable law applies. If the applicable law is Australian law, the secured party wanting priority for other kinds of proceeds (for example, sale proceeds) can achieve its objective by registering its international interest in the PPS register, either including a description of the proceeds in the registration or, alternatively, allowing the default collateral description for proceeds to apply: see 11.39–11.51 of this text.

Accessions 16.14 Protocol Art I defines ‘aircraft object’ as including airframes, and it defines ‘airframe’ as including ‘all installed, incorporated or attached accessories, parts and equipment’. Convention Art 29(7) provides that the Convention does not affect the rights of a person in an item held prior to its installation on an object if under the applicable law those rights continue to exist after the installation. It also provides that the Convention does not prevent the creation of rights in an item which has previously been installed on an object where under the applicable law those rights are created. If Australian law is the applicable law, the effect of Convention Art 29(7) is to attract the operation of PPSA Pt 3.3 governing accessions. These provisions establish that a security interest in an accession is not lost upon

installation and that a security interest may be given in an accession even after its installation. The provisions enact priority rules to determine competing claims between the holder of a security interest in an accession and the holder of a security interest in the host goods: see 9.2–9.16 of this text.

Effect of Insolvency 16.15 Convention Art 30(1) provides that in insolvency proceedings against the debtor, an international interest is effective if prior to the commencement of the insolvency proceedings the interest was registered. Australian PPSA s 267 provides, in general terms, that an unperfected security interest is ineffective against the grantor’s insolvency administrator (see Chapter 13 of this text). Registration in the international register does not perfect an international interest for PPSA purposes and so, if PPSA s 267 applied, the insolvency administrator would take the collateral free of the interest unless the interest was perfected by one or other of the methods provided for in the PPSA itself. But this would be inconsistent with the outcome provided for by Convention Art 30(1) and the Convention provision prevails: see 16.1 above. Corporations Act s 588FL provides, broadly speaking, that a security interest may be ineffective against the grantor’s insolvency administrator [page 493] even if it is perfected at the time of the insolvency event, unless the security interest is registered in the PPS register (1) at least six months before the commencement of the insolvency proceedings; or (2) within 20 business days of the security agreement coming into force (see Chapter 13 of this text). As with PPSA s 267, the application of this provision may lead to an outcome which is inconsistent with Convention Art 30(1) and, in that case, again the Convention provision prevails. Convention Art 30(2) is relevant where the international interest is not registered in the international register. It provides that ‘nothing in this Article impairs the effectiveness of an international interest in the insolvency proceedings where that interest is effective under the applicable law’. If Australian law is the applicable law, the governing provisions are PPSA s 267 and Corporations Act s 588FL. The upshot is that if an international interest is not registered in the international register, it will be ineffective against the grantor’s insolvency administrator unless it is registered in the PPS register at the time of the insolvency event and within one

or other of the periods identified in Corporations Act s 588FL.

Default Remedies Chargee’s remedies 16.16 Convention Ch 3 sets out the creditor’s remedies in the event of the debtor’s default. The debtor and creditor may agree in writing on the events that constitute a default for the purposes of Ch 3 and, in the absence of any such agreement, ‘default’ means a default which substantially deprives the creditor of what it is entitled to expect under the agreement.29 Article 8 applies where the creditor is a chargee under a security agreement, while Art 10 applies where the creditor is a conditional seller under a title reservation agreement or a lessor under a lease agreement. Article 8(1) provides that, in the event of default, the chargee may exercise any one or more of the following remedies: (1) take possession or control of the charged object; (2) sell or grant a lease of the object; and (3) collect or receive any income or profits from the management or use of the object. The chargee may exercise these remedies ‘to the extent that the chargor has at any time so agreed’. In other words, the chargee may only exercise its rights under Art 8(1) to the extent that they are expressly provided for either in the security agreement itself or some subsequent agreement. The chargee’s Art 8(1) remedies are also ‘subject to any declaration that may be made by a Contracting State under Article 54’. Article 54 allows a Contracting State to declare that any remedy provided for by the Convention may only be exercised by the leave of a court. Australia has made a declaration under Art 54 to the effect that all remedies may be exercised without a court application unless the Convention specifies otherwise. A chargee proposing to dispose of an object must give ‘reasonable prior notice’ in writing to the debtor and any guarantor and also to any other person having rights in the object who has given the chargee reasonable prior notice of their [page 494] interest.30 Convention Art 9(4) gives the debtor a right of redemption; at any time after default and before the creditor disposes of the object, the debtor or any interested person may discharge the security interest by paying out the secured obligation. Any sum collected by the chargee following disposition of the object

must be applied towards discharge of the secured obligation and (unless a court orders otherwise) any surplus must be paid first to the holders of subsequently ranking interests which have been registered or, alternatively, of which the chargee has notice, and second, to the debtor.31 16.17 Convention Art 9(1)–(3) gives the chargee an alternative remedy which is in substance a right of foreclosure (vesting of ownership of the object in the chargee in satisfaction of the secured obligation). The chargee may exercise its rights under Art 9 if all interested parties agree or, alternatively, pursuant to a court order. A court may make an order only if the amount of the secured obligation ‘is commensurate with the value of the object’; in other words, the court may not make an order if the value of the object substantially exceeds the amount owing. The chargee’s rights under Art 9(1)–(3) are subject to the debtor’s right of redemption under Art 9(4).

Conditional seller’s and lessor’s remedies 16.18 Convention Art 10 provides that in the event of default under a title reservation agreement or lease agreement, the conditional seller or lessor may terminate the agreement and take possession or control of the object or, alternatively, apply to the court for an order authorising either of these courses of action. The first part of the provision is subject to any declaration made by a Contracting State under Art 54. As indicated in 16.16 above, Australia has made a declaration stating that the Convention remedies may be exercised without the leave of a court unless otherwise specified in the Convention. The upshot is that, at least so far as Australia is concerned, the remedies specified in the first part of Art 10 may be exercised without the leave of a court, while the second part of the provision appears largely redundant. The most conspicuous difference between Art 8 and Art 10 is that under Art 10, the debtor (buyer or lessee) has no right to any surplus following termination of the agreement. Nor does the debtor have a right to notice before the seller (lessor) disposes of the repossessed object and, likewise, there is no right of redemption.

De-registration and export requests 16.19 Protocol Art XIII allows for a procedure known as the ‘irrevocable deregistration and export request authorisation’ (INDERA).32 An INDERA

[page 495] is a document signed by an aircraft registration holder authorising a creditor to procure the de-registration and export of the aircraft. Article XIII(2) provides that an INDERA must be in substantially the prescribed form and it must be submitted for recordation to the registry authority.33 Protocol Art IX provides that, in addition to the other remedies outlined above, a creditor in whose favour an INDERA has been issued may assert its right under the INDERA to procure the de-registration and export of the aircraft.34 Article IX(5) sets out the obligations of the registry authority upon receipt of a request for de-registration and export and Art XIII(4) provides that the registry authority must ‘expeditiously co-operate with and assist’ the authorised party in the exercise of its Art IX remedy. The Art IX remedy may not be exercised without the prior written consent of the holder of any prior ranking registered interest.35 A chargee who is proposing to exercise the remedy otherwise than pursuant to a court order must give reasonable prior notice to the debtor and any guarantor and also to any other person with an interest in the object who has given reasonable prior notice to the chargee.36

General provisions 16.20 Protocol Art IX(3) provides that any remedy given by the Convention must be exercised in a commercially reasonable manner and that this requirement is deemed to have been satisfied where the remedy is exercised in conformity with a provision of the agreement (except if the provision is ‘manifestly unreasonable’). Convention Art 12 provides that, apart from the remedies specified in the Convention itself, a creditor also has any additional remedies permitted by the applicable law or provided for in the agreement, to the extent that they are not inconsistent with the Convention’s mandatory provisions. The mandatory provisions include Art 8(4) (notice before disposition by chargee); (5) (distribution of the proceeds of disposition); and (6) (debtor’s right to surplus) and Art 9(3) (limitation on court’s jurisdiction to make a foreclosure order) and (4) (chargor’s right of redemption).37 Convention Art 13 provides for application to a court for interim relief pending the final determination of a creditor’s claim. However, the provision is subject to any declaration a Contracting State may make under Art 55, and Australia has made a declaration stating that it will not apply Art 13.

[page 496] Article 14 provides that any remedy provided for by the Convention must be exercised in conformity with the procedure prescribed by the law of the place where the remedy is to be exercised.

Remedies in insolvency 16.21 Protocol Art XI deals with the exercise of the creditor’s remedies in the debtor’s insolvency proceedings. It enacts two alternative sets of provisions, Alternative A and Alternative B, and Contracting States can choose between them by declaration made pursuant to Art XXX(3). Australia, in common with most other countries, has opted for Alternative A. Under Alternative A, upon the occurrence of an insolvency-related event,38 the insolvency administrator or the debtor must surrender possession of the aircraft object no more than 60 days from the date the creditor would have been entitled to possession under the terms of the Convention or the agreement unless the default is cured and the insolvency administrator or debtor has agreed to perform all other obligations under the agreement.39 During the 60-day period, the insolvency debtor or administrator must ‘preserve the aircraft object and maintain it in accordance with the agreement’. Protocol Art XI(8) deals with the exercise of the Art IX de-registration and export remedy in the debtor’s insolvency. It provides that the remedy must be made available by the registry authority and the administrative authorities in a Contracting State no later than five working days after receiving notice from the creditor that it is entitled to the remedy and the applicable authorities must ‘expeditiously co-operate with and assist’ the creditor in the exercise of the remedy. Article IV(3) provides that the parties may, by agreement in writing, exclude the application of Art XI.40

Other Protocols 16.22 A second Protocol, (the Luxembourg Protocol) in relation to rolling stock, was adopted in draft form at a conference held in 2007 and steps have been taken to establish an international registry under the auspices of OTIF, the Intergovernmental Organisation for International Carriage by Rail.41 For obvious geographical reasons, Australia and New Zealand are not members of

[page 497] OTIF, but there are many European members to which the Protocol is more relevant, and the EU has approved the Protocol. It is based closely on the Aircraft Protocol and so it is consistent with the overall objective of achieving a common scheme of regulation for all types of high-end mobile equipment.42 The Luxembourg Protocol will not come into force until OTIF confirms that the proposed registry is fully operational.43 16.23 The third Protocol (the Space Protocol), covering space assets, was adopted on 9 March 2012 at a meeting in Berlin, but is not yet in force.44 One difficult issue was how to establish a connection between a space object and a territorial jurisdiction, whether by building on existing treaties concerning objects in outer space, through a ‘control’ test or a registration obligation.45 As Rosen points out, obviously ‘techniques to recover rolling stock will have to differ from those for space property’.46 Australian PPSA para 21(2)(c) provides that a security interest in satellites and other space objects may be perfected by control, but there are no rules in the statute for obtaining control of these types of collateral: see 5.22 of this text.47 A possible future project under the Cape Town Convention is the development of a protocol dealing with matters specific to agricultural, mining and construction equipment.48 [page 498]

OTHER INTERNATIONAL INITIATIVES Introduction 16.24 This section outlines a number of relevant initiatives by international or regional organisations, and other law reforms in certain national jurisdictions. It is not intended to be a comprehensive or detailed explanation or analysis of all of these developments, but rather to highlight the most influential and significant developments and documents. Awareness of the initiatives of international bodies should make us alive to future areas of development, and enable Australia to participate in international fora. The main international bodies active in the field of secured transactions have been the United Nations Committee on International

Trade Law (UNCITRAL), the International Institute for the Unification of Private Law (UNIDROIT), the International Finance Corporation (IFC) (a member of the World Bank Group), the European Bank for Reconstruction and Development (EBRD), the Organization of American States (OAS) and the Asian Development Bank (ADB). Awareness of legal developments in this area amongst Australia’s closer trading partners is also important for those dealing with such transactions.

UNCITRAL Legislative Guide on Secured Transactions 16.25 The Legislative Guide on Secured Transactions49 was adopted by the United Nations General Assembly on 11 December 2008. The UNCITRAL website describes the Guide as follows:50 The overall objective of the Guide … is to promote low-cost credit by enhancing the availability of secured credit. To assist states in modernizing their secured transactions laws, the Guide contains commentary and legislative recommendations on all issues that need to be addressed in a modern law on security rights in all types of movable asset, tangible or intangible (including goods, equipment inventory, receivables, letters of credit, bank accounts, negotiable instruments, negotiable documents and intellectual property). The Guide follows a functional and integrated approach to secured transactions, relying on a concept of ‘security right’ that includes all types of right in movable property created by agreement to secure payment or other performance of an obligation, regardless of the form of the transaction or the terminology used by the parties, as well as on a public registry that provides notice of a security right to third parties. As a result, the Guide applies to secured transactions, retention-oftitle sales, financial leases, transfers of goods and assignments of receivables for security purposes, as well as (for limited purposes) outright assignments of receivables.

[page 499] The Guide was prepared by UNCITRAL’s Working Group VI (Secured Transactions) in collaboration with Working Group V (Insolvency) and it complements the UNCITRAL Legislative Guide on Insolvency Law.51 There was also coordination with UNIDROIT to avoid overlap with the Cape Town Convention (Mobile Goods)52 and the Geneva Convention (Intermediated Securities).53 It is impossible in this brief overview to do justice to the 503-page Guide, but it provides an invaluable explanation of all the main aspects of Art 9-type regimes. The Guide identifies alternative legislative options on a range of issues, for example the treatment of assignments, leases and consignments and various conflict of laws matters, and it explains the policy arguments for and against the alternative approaches. The conflict of laws provisions in Australian PPSA Pt 7.2 are based in

part on the Guide’s recommendations: see 14.2 of this text. UNCITRAL Working Group VI has recently prepared a text specifically addressing the implementation of a registry of security interests in movable assets.54 The need for this Registry Guide is unclear. The supposed justification is that the Legislative Guide on Secured Transactions is insufficiently detailed on registration matters. But far from this being the case, the main Guide contains more operational detail than the Registry Guide. The latter may have been developed with the idea of identifying and explaining the main issues for the benefit of registry officials. Further, Working Group VI is currently working on a draft Model Law on Secured Transactions (and accompanying Guide to Enactment). The draft Model Law is intended to complement the existing UNCITRAL Guides by providing a legislative text recommended to states for incorporation into their national law.55 16.26 In recent years there have been numerous other publications by international bodies relating to the registration aspects of secured transactions law, including: • • •

EBRD, Publicity of Security Rights: Guiding Principles for the Development of a Charges Registry (2004); EBRD, Publicity of Security Rights: Setting Standards (2005); ADB, Guide to Movables Registries (2002); [page 500]

• •

Organization of American States (OAS), Model Registry Regulations: Model Inter-American Law on Secured Transactions (2009); and International Finance Corporation (World Bank Group) Secured Transactions Systems and Collateral Registries (2010).

Given this wealth of advice, no country or agency responsible for setting up a personal property securities register can be in any doubt as to the key legal and policy issues and the various legislative options. On the other hand, with the move towards electronic, and particularly online registration, there are technological implementation and risk issues which must also be addressed and these may impact on the legislative framework.

UN Convention on the Assignment of Receivables in International Trade 16.27 The United Nations Convention on the Assignment of Receivables in International Trade (the Receivables Convention) was adopted in 2001 but has so far only been signed by three countries and acceded to by one.56 The Convention will not enter into force until ratified, approved or acceded to by five jurisdictions. In June 2011, the United States State Department advised the Commercial Finance Association that it was preparing to submit ratification of the Convention to the US Senate, but this has still not happened. It is believed that many other jurisdictions are waiting for the United States to ratify.57 It should also be noted that the principles of the Convention are incorporated into the UNCITRAL Legislative Guide on Secured Transactions, and so states that have adopted the Guide’s recommendations can be taken to have accepted the principles in the Receivables Convention. Receivables financing encompasses factoring, securitisation and other forms of asset-based finance. All types of assignments of receivables are within the Receivables Convention. Like the Cape Town Convention discussed above, the Receivables Convention is designed to facilitate the flow of credit by clarifying and harmonising the effect of assignments of receivables with cross-border impact where the assignor and debtor, or the assignor and assignee, are in different states. Provided the assignor is in a Contracting State, the Receivables Convention will apply.58 The Convention applies only to the international assignment of receivables (where the assignor and the assignee are in different jurisdictions) and to the assignment of international receivables (where the assignor and the account debtor are in different jurisdictions). [page 501] However, the Convention may affect a domestic assignment of a domestic receivable if: (a) it is in conflict with an international assignment of the same receivable; or (b) it is part of a series of subsequent assignments, one of which falls within the scope of the Convention.59 The Convention removes legal obstacles to receivables financing transactions by: (a) validating assignments of future receivables and bulk assignments and by partially invalidating anti-assignment clauses;60 (b) removing the uncertainty surrounding issues such as the effectiveness of an assignment as between the assignor and the assignee and as against the account

debtor; (c) clarifying the law applicable to key issues, such as the priority between competing claims; and (d) providing a substantive law regime governing priority between competing claims that states may adopt on an optional basis.61

UNIDROIT Convention on Substantive Rules for Intermediated Securities62 16.28 The UNIDROIT Convention on Substantive Rules for Intermediated Securities (the Geneva Securities Convention) was adopted in Geneva on 9 October 2009, Bangladesh being the only signatory. To date, the Convention has not been ratified, approved or acceded to by any countries. The adoption process was expected to begin after publication of the Official Commentary, which was published in 2012.63 However, the global financial [page 502] crisis, commencing in 2008, has thrown up litigation, for example in relation to the treatment and pooling of client moneys in Lehman intermediary entities, which may have delayed and discouraged adoption of this US-inspired model.64 The Convention builds on the Hague Convention on the Law of Intermediated Securities (2006), which itself has been signed by only three countries, but which has been influential in work on European Directives. The Hague Convention provides a framework for conflict of laws issues where an intermediary in an indirect holding system is involved, but the Geneva Convention attempts to harmonise substantive aspects of this relationship. In particular, the Convention includes provisions relating to: the rights of the investor against the intermediary; the transfer of intermediated securities; the intermediary’s obligations with respect to the holding or availability of sufficient securities to satisfy investors’ entitlements and related matters; and the taking of a security interest in intermediated securities (‘collateral transactions’). The Australian PPSA has adopted some of the Geneva Convention’s terminology. In particular, following the Geneva Convention’s lead, it uses the expression ‘intermediated security’ rather than ‘security entitlement’ to describe the type of collateral in question;65 and the definition of ‘intermediated security’ in PPSA subs 15(1) mirrors the Geneva Convention version: see 2.19 and 2.25–2.26 of this text. The use in Australia of language borrowed from the Geneva Convention suggests that at the time of the PPSA’s enactment, Australia

contemplated the possibility of adopting the Convention in future.66

EBRD Model Law on Secured Transactions 16.29 The first version of the EBRD Model Law (the Model Law) appeared in 1994 and the second version in 2004.67 While flexible enough to encompass civil law systems, the Model Law has been particularly influential in the transitional economies of central and eastern Europe. In the last few years, this has extended to the southern and eastern Mediterranean.68 Its limited aims are set out in the Introduction: One principle which has guided the drafting of the Model has been to produce a text which is compatible with the civil law concepts which underlie

[page 503] many central and Eastern European legal systems and, at the same time, to draw on common law systems which have developed many useful solutions to accommodate modern financing techniques. The aim underscores the economic function of a law on secured transactions … Although the Model should be the basis for modern legislation covering a wide range of sometimes complex matters it had to be kept simple in order to be of practical use for market economies in transition. The Model Law is therefore a basic system on which more sophisticated rules can be developed.

The Model Law is limited to business finance, though it is stated in the Introduction that it could be extended to consumer transactions in countries where adequate consumer protection laws are in place.69 The Model Law adopts the concept of a unitary security interest, which it refers to as a ‘charge’. The Model Law allows for a charge over inventory and after-acquired property, and the ability of a charge-holder to sell its enterprise as a going concern. The Model Law does not cover ‘deemed’ security interests such as assignments of accounts and leases, but it does provide for simple retention-of-title arrangements by deeming title to have passed to the purchaser and treating the vendor as holding a security interest (‘unpaid vendor’s charge’) to secure payment of the purchase price.70 The unpaid vendor’s charge does not require registration or a charging instrument, but it expires after six months unless converted to a registered charge. The person giving the charge is required to be the ‘owner’ of the property charged. The stated explanation is that ‘if a person has a right to transfer title, then he has the right to charge the property’.71 The Model Law provides for registration of charges and it recognises possessory charges which do not have to be registered. However, in contrast to the

Art 9 and PPSA approach, priority between competing charges as a general rule turns on the date of creation of the charge, not the date of registration.72 The Model Law is, by design, not a comprehensive system of regulation and it leaves many details to be fleshed out by local law, particularly in relation to insolvency matters.

Regional and National Initiatives Pacific Islands 16.30 Principally due to the work of the ADB’s Private Sector Development Initiative in the region over the last decade,73 PPSAs have been enacted in [page 504] the Federated States of Micronesia (2006), the Republic of Marshall Islands (2007), Vanuatu (2008), the Solomon Islands (2008), Tonga (2010), Papua New Guinea (2012),74 Palau (2012)75 and Samoa (2013). Registries have been established, except in Samoa and Papua New Guinea, where steps have been taken towards their implementation. Despite the fact that all these statutes derive from the same ADB project, they are not uniform. The local variations between the statutes are a reflection of political and historical factors. For example, in Tonga, the legislation extends to a security interest in a building or other improvement to real property, and rented buildings for periods over one year are within the system. In other respects, and subject to some linguistic nuances, the Tongan statute resembles the Canadian and New Zealand PPSAs.76

Asia 16.31 The IFC has been active in a number of regions, assisting with and promoting more effective and harmonised secured transactions laws, including collateral registries. While this has sometimes led, in some jurisdictions, to adoption of a model based on a functional definition of security interests with notice filing and other key features of a system derived from an Art 9 or PPSA model, a more limited model working with existing laws and concepts, particularly in civil law jurisdictions, has also brought improvements and in particular, consolidation of

existing registries. For example, in Indonesia, 158 registries have been replaced by one. In Vietnam,77 Decree No 83 of 2010, a revised version of an earlier Decree, provided for a national registration system of personal property security interests, based on notice filing.78 It established a single registration regime for secured transactions, with a centralised general registry for movable property and four specialised registries for sea-going vessels, aircraft, land use rights and immovable property. The registry system does not apply to all security arrangements but, for the types of security interests covered, it does form a system for governing priorities irrespective of knowledge. It extends only to security created by pledge, mortgage or asset-based guarantees (that is, collateral surety, a form of surety secured by security) and not to security rights created by operation of law. The system was initially paper-based but in 2012 was converted to an online register. In neighbouring Cambodia, the ADB has assisted since 2006 in developing legislation and a noticefiling registration system based on an Art 9 model which is now in operation. The IFC has recently been assisting with secured transactions projects in Indonesia, the Philippines, Myanmar and Laos. In China, it assisted with reforms which led to a new Property Law in 2007, online notice-based security interest registers for accounts receivables in 2007, [page 505] and leasing in 2009.79 Significant legislative developments have occurred in India with the establishment of a central registry, CERSAI, in 2011, which covers land mortgages as well as security over movable property.80 The IFC has been assisting with similar reform projects with reform initiatives in Thailand, Sri Lanka, Bangladesh and Nepal, and also in several Central Asian countries.

Other regions 16.32 In Africa, the OHADA (Harmonisation of business law in Africa) initiative covering several sub-Saharan states led to a 2010 uniform Act covering registration of movable property security. The IFC has also assisted with registration systems in Ghana, Liberia, and Malawi (2013), the latter due to be operative in late 2015, being based on the New Zealand PPSA.81 Personal property security legislation is currently in progress in Zambia and Nigeria. As mentioned earlier, the

EBRD has had a secured transactions project in the MENA countries (Middle East and North Africa), including Morocco, and this region is also an important current focus of the IFC. In Latin America and the Caribbean, along with IFC and UNCITRAL, the OAS Model Inter-American Law on Secured Transactions and its Model Registry Regulations (2009) has been influential, having now led to legislation and register systems being established in most Central American states and Jamaica in the last few years.82

Jersey 16.33 The Security Interests (Jersey) Law was enacted in 2011 and came into force in January 2014. The Law is based on draft legislation prepared by Professor Roy Goode in 2009.83 In common with New Zealand, the Jersey Law borrows from the Saskatchewan and New Brunswick PPSAs and it cross-refers to equivalent or similar provisions. The Law also refers to the UNCITRAL Receivables Convention (see 16.27 above). There is an online registration system, with details of the financing statement requirements to be laid down in Regulations. At present, the Law only applies to intangible movable property such as accounts and investment property. However, it is expected, following consultations that took place in early 2012, that it will soon be extended to tangible movables.84 [page 506]

United Kingdom 16.34 Article 9-based reform is not a new idea in the United Kingdom. It formed the basis of the recommendations of the Crowther Committee Report in 1971, the Diamond Report in 1989,85 and the Law Commission’s Consultative Report on Company Security Interests in 2004.86 The Law Commission’s Consultative Report recommended an Art 9-based scheme, incorporating the amendments contained in revised Art 9. The final report retreated to some extent from the original recommendations (for example, it recommended retaining the distinction between fixed and floating charges), but by and large it adhered to the Art 9 approach.87 However, the government rejected the Law Commission’s recommendations, opting instead for amendments to the law relating to registration of company charges, including the establishment of an electronic UK-wide register

to be integrated with the proposed Scottish Register of Floating Charges to avoid the need for multiple registrations and searches.88 In 2010, a Secured Transactions Law Reform Project was established to consider again the case for Art 9-type reforms. The Project has a Steering Committee chaired by Lord Saville, and the Director is Professor Louise Gullifer of the University of Oxford. The Project group includes judges, academics, lenders and legal practitioners. Following a one-day seminar on the case for reform, held in London in early December 2011, working groups have been established to study and make recommendations on a range of key issues. The Project has held a number of conferences, and its work is being followed by the government.89 The Project’s preliminary paper describes ‘serious shortcomings in the law of England and Wales as it relates to security over personal property’.90 Given London’s status as one of the world’s leading financial centres, and the reputation of English commercial law, there is a pressing need for a modern personal property security law which is responsive to the needs of the commercial and financial community. The paper calls for a ‘radical overhaul’ of the current law. It describes the PPSA [page 507] regime as ‘tried and tested’, referring to a New Zealand survey by Professor Mike Gedye,91 which reports that 97 per cent of respondents prefer the PPSA to the prior law. The Project report also refers to the ‘wide ranging review and economic impact assessment’ which was undertaken in Australia prior to enactment of the Australian PPSA. In the face of growing support in Europe for the Art 9/PPSA approach, the Project report suggests that England should have its own model ready before the matter comes to be negotiated in Europe.92 On the other hand, the City of London Law Society, while recognising the need for reform of England’s secured lending laws, does not favour the Art 9 approach and is in the process of developing a more limited proposal.93

1.

2.

The text of the Convention is available at . Sixty-five states are party to the Convention, including the United States, New Zealand, China and Singapore. A full list is available at the above website. Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (‘the Protocol’), available at .

3. 4.

5. 6.

7. 8. 9.

10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

31. 32. 33.

See also PPSA s 256 (as amended) providing that the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 prevails over the PPSA to the extent of any inconsistency. The following account is an overview only. For fuller details, see Roy Goode, Official Commentary on the Convention on International Interests in Mobile Equipment and the Protocol Thereto on Matters Specific to Aircraft Equipment, 3rd ed, UNIDROIT, Strasbourg, 2013; See also Roy Goode, ‘Security Interests in Mobile Equipment: Lawmaking Lessons from the Cape Town Convention’ (2014) 35 Adelaide Law Review 59; Nicholas Humphrey and Vernon Nase, ‘The Cape Town Convention 2001: An Australian Perspective’ (2006) 31 Air and Space Law 5 and references cited there. Protocol Art III. Protocol Art I. Each of these expressions is, in turn, defined: see Protocol Art 1. An important consequence of these definitions is to exclude small aircraft from the scope of the Convention; for example, the definition of ‘aircraft engine’ excludes lower powered engines, while the definition of ‘aircraft frame’ applies only to frames certified to transport at least eight persons, including crew. Convention Art 1, ‘international interest’, Art 2. See also Convention Art 1 ‘security agreement’, ‘lease’ and ‘title reservation agreement’. Protocol Art III, authorised by Convention Art 41. See also Art V (enacting rules governing the formalities, effects and registrations of contracts of sale). Convention Art 3. Article 4 enacts a set of debtor location rules for the purposes of Art 3. By virtue of Protocol Art IV(1), the Convention also applies in relation to a helicopter or aircraft frame which is registered in an aircraft register maintained by a Contracting State. In Australia, the register to which this provision refers is the Australian Civil Aviation Aircraft Register maintained by the Civil Aviation Safety Authority pursuant to the Civil Aviation Act 1988 (Cth) and Civil Aviation Regulations 1988 (Cth). Convention Art 5(1). Convention Art 6. Convention Art 5(2). Convention Art 5(3). Convention Art 7; Protocol Art V(1). Protocol Art VII. Convention Art 19(4). Convention Art 19(4). Convention Arts 19(1) and 20. Convention Art 19(2), (3). Convention Art 21. Convention Art 20(3). Convention Art 25(1). Convention Art 25(2). Convention Art 25(4). Convention Art 29(1). Convention Art 29(2). Convention Art 29(3). Convention Art 29(4). Convention Art 11. A chargee giving 10 or more working days prior written notice of a proposed disposition is deemed to have satisfied the ‘reasonable prior notice requirement’: Protocol Art IX(4). The disponee under an Art 8 sale takes free of any other interest over which the charge has priority: Art 9(5). Convention Art 8(6). Article XIII(1) states that the provision only applies where a Contracting State has made a declaration pursuant to Art XXX(1). Australia has made this declaration. In Australia, the registry authority is the Civil Aviation Safety Authority (CASA) and the procedures for making and recording an INDERA are set out in the International Interests in Mobile Equipment (Cape

34.

35. 36. 37. 38. 39. 40.

41. 42.

43. 44.

45. 46. 47.

48.

49.

50. 51.

52. 53. 54.

Town Convention) Rules 2014 (Cth). See also Protocol Art XIII(3), expressly limiting the availability of the Art IX remedy to the authorised party under an INDERA, and providing that the remedy may only be exercised in accordance with the authorisation and applicable aviation safety laws and regulations. Protocol Art IX(2). Protocol Art IX(6). This provision is limited to charges and does not apply to other types of creditor. The reason is that the provision parallels the notice requirement in Convention Art 8(4). Convention Art 15. Defined in Protocol Art 1. Article IX(3) allows Contracting States to specify the maximum length of this waiting period by declaration made pursuant to Art XXX(3) and Australia has specified 60 days. In addition to the provisions described in 16.2–16.21 above, Convention Ch IX also contains a detailed set of rules applicable to the ‘assignment of associated rights’ (rights to payment or performance by the debtor of obligations under an agreement). For discussion of these provisions, see Goode, above note 4. The register was scheduled to be operational from 2013, but this has been delayed; see Work Programme 2014/2015, p 33, available at . See further, Howard Rosen, ‘Creating an International Security Structure for Railway Rolling Stock: An Idea Ahead of its Time?’ (1999) 4 Uniform Law Review 313; Steven Harris, ‘The International Rail Registry’ (2007) 12 Uniform Law Review 531. See and above note 41. Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Space Assets, as adopted by a diplomatic Conference, held in Berlin, from 27 February to 9 March 2012. See . See . See above note 42, at p 318. The Statutory Review has recommended that perfection should be by registration, pointing out that the Space Protocol itself provides for perfection principally by registration, not control: see Bruce Whittaker, Review of the Personal Property Securities Act 2009: Final Report, Commonwealth of Australia, 2015, available at (‘Statutory Review: Final Report’), at para 5.3.10. The Cape Town Convention has generated a substantial volume of academic literature. Of particular note are the Official Commentaries on each Protocol (Aircraft Protocol (3rd ed, 2013); Rail Protocol (2nd ed, 2014) and Space Protocol (2013)), available from , each written by Professor Sir Roy Goode, who was a member of the steering group for the Protocols. In addition, a Cape Town Convention (CTC) Academic Project has been launched as a joint initiative of the Universities of Oxford (under Professors Goode and Gullifer), and Washington: see . The aims of the Project, sponsored by the Aviation Working Group and UNIDROIT, include facilitation of academic study of the CTC and Protocols, in particular by creating a repository of legislative and other materials, a journal, conferences, teaching materials, and legal and economic assessments. There is an annual conference, held since 2012. United Nations Commission on International Trade Law, UNCITRAL Legislative Guide on Secured Transactions, United Nations, New York, 2010, Ch X, available at . See . See UNCITRAL Legislative Guide on Secured Transactions, para 79: ‘many of the provisions of a secured transactions law intersect with rules of debtor–creditor law, banking law and practice, as well as insolvency and civil procedure law. The Guide acknowledges the need to achieve coherence of the overall regime at each of these points of intersection’. See 16.1–16.21 of this text. See 16.28 of this text. UNCITRAL Guide on the Implementation of a Security Rights Registry, 2013, at

55.

56.

57.

58.

59.

60. 61.

62.

63.

64.

65. 66. 67. 68. 69.

. See Note from the Secretariat, 24 July 2015, A/CN.9/WG.VI/WP.65, prepared for the 28th session, Working Group VI, Vienna 12–16 October 2015, at . United States, Luxembourg and Madagascar, and Liberia (accession), see . See Franco Ferrari, ‘UNCITRAL Draft Convention on Assignment in Receivables Financing: Applicability, General Provisions and the Conflict of Conventions’ (2000) 1 Melbourne Journal of International Law 1. The Secured Lender (Commercial Finance Association trade journal), ‘CFA Issues Paper Urging Senate Ratification of UN Receivables Convention’, October 2010, . Spiros Bazinas, ‘Lowering the Cost of Credit: The Promise in the Future UNCITRAL Convention on Assignment of Receivables in International Trade’ (2001) 9 Tulane Journal of International and Comparative Law 259. See the short summary of the United Nations Convention on the Assignment of Receivables in International Trade (2001) on the UNCITRAL website: . Compare Australian PPSA s 81: see 2.31 and 12.72 of this text. United Nations Convention on the Assignment of Receivables in International Trade (2001), Explanatory Note–UNCITRAL summary: . An earlier Convention in this area, of narrower scope, is the UNIDROIT Convention on International Factoring. It was signed in Ottawa in 1988 and has been ratified by seven countries, including the United Kingdom and the United States. It formed the basis for the Receivables Convention, which now supersedes it, to the extent that they are inconsistent. At the same time in Ottawa, the same countries signed the UNIDROIT Convention on International Financial Leasing. This came into force in 1995 and has since been ratified by several European and African countries: see . See further, as to the leasing convention, Ronald C C Cuming, ‘Legal Regulation of International Financial Leasing: The 1988 Ottawa Convention’ (1989–1990) 7 Arizona Journal of International & Comparative Law 41. UNIDROIT has also developed a Model Law on Leasing (2008), particularly to assist in developing and transitional economies: see . October 2009, . See also Information for Contracting States in respect of the Convention’s references to sources of law outside the convention, S78B/CEM/2/ DOC.2, November 2011, . Hideki Kanda, Charles Mooney, Luc Thévenoz, Stéphane Béraud and Thomas Keijser, Official Commentary on the UNIDROIT Convention on Substantive Rules for Intermediated Securities, Oxford University Press, Oxford, 2012. Re Lehman Brothers International (Europe) [2012] UKSC 6; [2010] EWCA Civ 917. A conference on Intermediated Securities and Legal Risk took place in London on 26 November 2011, at which several of the counsel in Lehman took part. See also Phillip Paech, ‘Market Needs as Paradigm’ in Pierre-Henri Conac, Ulrich Segna and Luc Thévenoz (eds), Intermediated Securities: The Impact of the Geneva Securities Convention and the Future European Legislation, Cambridge University Press, Cambridge, 2013, at pp 31– 32. ‘Security entitlement’ is the expression used in Art 8 of the United States Uniform Commercial Code and also the Canadian Securities Transfer Acts: see 2.23 of this text. Statutory Review: Final Report, para 5.3.4; and see further, 2.19, 2.25–2.26 and 5.27 of this text. . Including Turkey, Morocco, Jordan, Egypt and Tunisia. European Bank for Reconstruction and Development (EBRD) Model Law, ,

70. 71. 72. 73.

74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84.

85. 86.

87.

88. 89. 90. 91. 92.

93.

Introduction, Point 3. See above note 69, Art 9. See above note 69, Art 5.2. See above note 69, Art 17.2. For a recent overview of the state of the work, see ADB, Unlocking Finance for Growth: Secured Transactions Reform in Pacific Islands Economies, Manila, Philippines, September 2014, . See . Secured Transactions Act 2012, 14/5/12. See . A Guide to Movables Registries, Law and Policy Reform at ADB, 2002. Decree No 8 in 2000.