Personal Property Securities in Practice. [1 ed.] 9780455500348, 0455500347

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PPS in Practice

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PPS in Practice NICHOLAS MIRZAI Barrister at Law, New South Wales Bar, Level 22 Chambers LLB (First Class Honours and University Medal)/B Bus (Fin) (UTS)

CHRISTOPHER ATHANASSIOS Solicitor, Principal, Miller & Prince Lawyers LLB (UTS)

Lawbook Co. 2018

Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 19 Harris Street, Pyrmont, NSW ISBN 978 0 455 5 00348

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ACKNOWLEDGEMENTS

First and foremost, Nicholas would like to thank his patient and loving wife Bernadette for her enduring support in the preparation of this text (and his practice at the New South Wales Bar). He would also like to acknowledge the gracious accommodation of Associate Professor Jason Harris — who is never too busy to answer a quick question and the support of his family Asher, Lorenza and Chantel. Nicholas is also thankful for each trusting client, instructing solicitor and inquisitive student — each of whom has, in their own way, assisted his refinement of thinking and approach to the PPSA. Finally, Nicholas is most grateful for the seemingly perpetual rigour of his co-author Christopher Athanassios — without whom this text would have never been produced. Christopher would like to thank his family, Adel, Magda, Miriam and Elizabeth for their endless love, support and encouragement in preparation of this text, starting his practice at Miller & Prince Lawyers and his LL.M. studies at the University of Technology, Sydney. He would also like to thank Associate Professor Jason Harris who has encouraged and supported the publication of this text. Christopher also thanks the infinite support of his clients, and Stewart, Matthew and John at MinterEllison for the opportunity to work in the banking and finance team. Finally, Christopher would like to express his sincere gratitude to his co-author, Nicholas Mirzai who pioneered the idea of this text and for his unwavering support, collegiality and mentorship both, throughout the preparation of this text and in practice. Nicholas and Christopher are also most grateful to Brereton J of the Supreme Court of New South Wales for writing the Foreword to this text.

ACKNOWLEDGEMENTS v

FOREWORD

This kindness will I show: Go with me to a notary, seal me there Your single bond; and, in a merry sport, If you repay me not on such a day, In such a place, such sum, or sums, as are Express’d in the condition, let the forfeit Be nominated for an equal pound Of your fair flesh, to be cut off and taken In what part of your body pleaseth me.1 Like Shylock, creditors are frequently not prepared to rely on a debtor’s promise to repay alone, or fear that the debtor may become insolvent, and so they seek security – some form of interest in the debtor’s property to which the creditor may have resort should the debtor default in repayment. And although the security interests created nowadays may be less extreme in some respects than that which would come to be construed by Portia as extending to “no jot of blood; the words expressly are, a pound of flesh”,2 security transactions today are ubiquitous, and not only in large commercial transactions the purchase on terms of a motor vehicle, or even of substantial household equipment, will typically involve the granting of a security interest. Yet while we teach Shakespeare, we do not in our schools teach even the basics of the fundamental notion of security transactions, and by and large citizens are left to learn, by osmosis or worse still by experience, their features, complexities and risks. 1 Shakespeare, The Merchant of Venice, 1.3.144 152. 2 Shakespeare, The Merchant of Venice, 4.1.314 315.

FOREWORD vii

The need for an accessible guide to the law of personal property securities was accentuated by the introduction of the Personal Property Securities Act 2009 (Cth). Modelled on similar legislation in Canada, the United States and New Zealand and drafted with an eye to the use of information technology on which its practical operation would depend, the Act has rightly been described as having revolutionised the law and practice of secured transactions, establishing a new regime for the creation, legal effect and enforcement of security interests in personal property and replacing several complex and fragmented sets of rules with a single set of rules for security interests in personal property.3 One key feature of this new set of rules is the prioritisation of substance over form, so that the Act defines as a security interest one 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)”,4 a notable example being the “PPS Lease”, by which the interest of a lessor under a so-called “operating lease” is now, in certain circumstances, treated as a security interest, which has radical implications for the nemo dat non habet rule. Another key feature is the onus of a secured party to perfect its interest, typically by timely registration on the PPS Register, lest the interest otherwise become ineffective, unenforceable or subject to other security interests. Despite the skilful, logical and comprehensive drafting of the Act, it was inevitable that new legislation involving such radical changes and having so extensive a reach would present some challenges for those who have to apply it, and unsurprising that it might give rise to the observation by the author of the report of the review of the Act’s impact on commerce after three years of operation, that “the levels of frustration and anxiety revealed in the submissions go beyond mere ‘teething problems’”.5 To mitigate this “frustration and anxiety”, and to address the need for an accessible and transparent reference, particularly for those who may

3 Bruce Whittaker, Review of the Personal Property Securities Act 2009: Final Report (2015) 3 https://www.ag.gov.au/Consultations/Documents/PPSReview/Reviewofthe PersonalPropertySecuritiesAct2009FinalReport.pdf. 4 Personal Property Securities Act 2009 (Cth) s 12(1). 5 Bruce Whittaker, n 3, 32.

viii PPS in Practice

not have the time or resources to engage directly with the legislation itself, the authors draw on their unsurpassed experience in practice in navigating the complex web of substantive and procedural rules to be found in and under the Act. They have produced a work which does much to demystify the Act and its operation and will aid the lay as well as the legal community to gain a practical understanding of notions which are fundamental to many routine commercial and consumer transactions. The authors are to be congratulated for a valuable addition to the learning on personal property securities law. The Hon Justice Paul Le Gay Brereton AM RFD

FOREWORD ix

PREFACE

The detail and complexity of the Personal Property Securities Act 2009 (Cth) (‘PPSA’) since its commencement in early 2012 has been well documented in the legal sphere. However, perhaps unlike many other areas of the law, an appreciation of the detail of the PPSA is, in our experience, a precondition to understanding what the regime is designed to achieve and how the provisions of the statute set about that purpose — even at a rudimentary level. The labour-intensive exercise of traversing the rules, exceptions to those rules and exceptions to the exceptions has, perhaps unsurprisingly, resulted in varying degrees of compliance amongst market participants with varying consequences. This text is designed to assist those who, knowingly or unknowingly, are affected by the workings of the PPSA on a day-to-day basis by addressing some of the more fundamental aspect of the regime and its impact on commercial business. Importantly, the PPS in Practice is not designed for any one particular audience. Certain aspects will assist those who take security over others, other aspects will aid those granting security and other aspects still speak to advising those external to the underlying transaction such as third party purchasers, insolvency practitioners and those professionals engaged to advise each of these respective parties. Broadly speaking, the first three parts of this book are dedicated to what the PPSA is, in a nutshell, and how one ought to go about establishing practices and procedures to ensure documentation and compliance mechanisms are appropriately in place. In this respect, consideration is had to the concept of taking security at a high level, the logistics of drafting a security agreement and how one should then perfect any resulting interest — including particularly dealings with the Personal Property Securities Register (‘PPSR’).

PREFACE xi

The final part of the text shifts focus to the consequences of failing to adopt appropriate systems and what particular aspects various stakeholders affected by the PPSA ought to consider when faced with the risk of a defaulting debtor. Further to emphasising the importance of the first three parts, part four is dedicated to problem-solving in a realistic and commercial manner with a view to providing the various stakeholders with the fundamental information they need to make informed decisions about particular circumstances and scenarios. On the whole, we hope that the PPS in Practice is received as an accessible and transparent reference on the PPSA, particularly for those who may not have had the time or resources to engage squarely with the legislation itself. Whilst legal practitioners will no doubt find utility in the precedential value of the annexures to this text, it is our ambition that audiences broader than legal practitioners will turn to this resource from time to time with a view to building a broader working knowledge of the PPSA and its intricacies. Nicholas Mirzai Christopher Athanassios

xii PREFACE

TABLE OF CONTENTS

Acknowledgements ................................................................. v Foreword ............................................................................. vii Preface ................................................................................ xi Table of Cases ..................................................................... xix Table of Statutes ............................................................... xxiii

PART 1 – INTRODUCTION 1 What Is the Personal Property Securities Act 2009 (CTH)? ...... 3 A working overview ................................................................ 3 What is a security interest? ..................................................... 5 What is an ‘interest in personal property’? ............................ 5 What does ‘secures payment or performance of an obligation’ mean? ............................................................. 9 Purchase money security interests ......................................... 13 Attachment ........................................................................ 14 Perfection .......................................................................... 15 General priorities ................................................................. 17 Failure to perfect a security interest ....................................... 18 PART 2 – TRANSACTIONAL – THE MECHANICS OF THE PPSA 2 What Is My Line of Business? — Pre-PPSA Considerations .... Does the business deal directly or indirectly with personal property? ............................................................... What is personal property? ............................................... Does the business deal with personal property? ................... Ascertaining what the business does ......................................

23 23 23 23 25

TABLE OF CONTENTS xiii

3 Does The PPSA Apply To Me and My Business? .................... Ascertaining when the PPSA applies to a particular transaction ......................................................................... The collateral ...................................................................... Accession and commingling .................................................. Accessions ..................................................................... Commingling .................................................................. Exclusions from the PPSA ..................................................... 4 Am I Taking a Security Interest and Who is Granting it to Me? ........................................................................ What is a security interest? ................................................... In substance security interests .......................................... Deemed security interests ................................................ Debtor vs grantor ................................................................. Grantors vs guarantors/indemnifying parties ............................. What is the primary obligation? .............................................. Legal entities and working out the appropriate grantor .............. Potential multiple grantors at the outset ............................. Who can be a grantor? .......................................................... Partnerships ................................................................... Trusts ........................................................................... Individuals ..................................................................... Corporations ................................................................... Has the security interest ‘attached’ to the collateral? ................ What if the security interest has not attached prior to default ..........................................................................

29 29 30 31 31 32 33

37 37 37 39 42 43 45 46 47 48 49 51 54 55 57 60

PART 3 – TRANSACTIONAL – DOCUMENTATION AND COMPLIANCE 5 If The PPSA Applies (Or May Apply), What Clauses Should You Consider For Your Agreements? ......................................... Taking security – what does this mean? .................................. Can the operation of the PPSA be carved out? ......................... What structure should the agreements adopt? .......................... Financing Transaction ..................................................... Suppliers of Goods .......................................................... Amending the Structure of an Existing Agreement ....................

xiv PPS in Practice

65 65 67 68 69 70 73

Financing Transaction ..................................................... Supplier of Goods ........................................................... The language of the security agreements ................................. What type of security interest am I taking? ......................... How is the collateral to be dealt with? ................................ How is the security discharged? ........................................ What interest do I want to have in proceeds? ...................... Abundance of Caution Clauses .......................................... Governing Law ................................................................ Other Provisions ............................................................. Other Matters to Consider ................................................

73 76 78 78 80 81 82 84 85 85 90

6 How Do I Protect My Security Interest and Ensure Its Priority? ......................................................................... 91 Perfecting a security interest ................................................. 91 Temporary perfection ........................................................... 92 Perfection by possession ....................................................... 93 Perfection by control ............................................................ 95 Due diligence in Corporate Transactions ............................. 96 Perfection by registration ...................................................... 97 Reasonable grounds to register a financing statement .......... 98 Requirements under s 153(1) ........................................... 99 Identifying the appropriate secured party and grantor ......... 100 Identifying the appropriate collateral class and sub-classes .................................................................. 101 Collateral descriptions ................................................... 103 Adopting multiple registrations in respect of the same security interest .................................................... 104 Dealing with transferred collateral ................................... 105 Amending a financing statement and its effect .................. 107 Timing requirements ..................................................... 110 Avoiding common errors ................................................. 112 Continuous perfection requirements ................................ 113 Perfecting a security interest in proceeds .............................. 114 What do I do if I have failed to appropriately perfect a security interest? ........................................................................... 115

TABLE OF CONTENTS xv

PART 4 – DEFAULT AND LITIGATION – LESSONS LEARNT AND LESSONS APPLIED 7 The Grantor .................................................................. Default and litigation from the perspective of the grantor: what does the grantor need to know? .................................... Prior to default – What registrations appear on the PPSR? ....... A PPSR search – the basics ................................................ Grantor review of PPSR results ............................................ Flagged results .................................................................. Amendment demands ........................................................ Administrative process ....................................................... Judicial process ................................................................ Errors on the PPSR ............................................................ Section 588FM and s 293 applications ................................ 8 The Secured Party ......................................................... Default and litigation from the perspective of the secured party: what does the secured party need to know? .................. PPSR searches .................................................................. Invalid registrations and vesting ........................................... Amending existing registrations to deal with defects or potential defects ............................................................................. Timing of registration errors ................................................ Extension of time applications ............................................. Jurisdiction, standing and procedural issues .......................... Urgency ........................................................................... Grounds for relief .............................................................. Accidental or due to inadvertence or some other sufficient cause .......................................................................... Prejudice to creditors and shareholders of the grantor ........ Just and equitable ............................................................. Terms and conditions ......................................................... Priority contests ................................................................ Like interests .................................................................... Timing inquiry to ascertain priority ....................................... Perfection by control .......................................................... Releases and express subordination ..................................... PMSIs and timing requirements ........................................... xvi PPS in Practice

121 121 122 123 124 125 126 126 127 128 129 131 132 132 133 135 138 139 139 141 142 143 144 145 145 147 148 150 151 152 152

Inventory PMSIs ........................................................... Non-inventory PMSIs ..................................................... Enforcing the security interest ............................................. Dealing with insolvency practitioners .................................... Adverse determinations ...................................................... Profit generating assets ...................................................... Non-cooperation and interlocutory injunctions ....................... Discharging registrations or providing express subordination? ... Dealing with other creditors ................................................

153 154 154 157 159 159 160 161 162

9 The Insolvency Practitioner ............................................ Appointment ..................................................................... Preliminary inquiries .......................................................... Errors on the PPSR other than errors in the financing statement ......................................................................... No identifiable security interest ...................................... Collateral no longer exists or exists in altered form ............. Preliminary determinations ............................................. Financing statement errors .................................................. Defined classes of defects .............................................. Serial number registrations ............................................. Identifying the grantor ................................................... PMSI registrations when the underlying interest is not a PMSI .......................................................................... Transitional security interests ......................................... Conclusions ................................................................. Vesting in the grantor – s 588FL of the Corporations Act 2001 and s 267 of the PPSA ....................................................... Extensions of time to comply .......................................... Checklist ..........................................................................

163 163 164

10 Third Parties and Taking Free/Extinguishment .................. What does it mean to take free? ........................................... Third party purchasers ........................................................ Engaging with the PPSR .....................................................

165 165 167 167 168 168 168 169 170 171 172 172 173 174 175 175 176 176

11 External Advisors and Consultants .................................. 179 Legal practitioners ............................................................. 179 Proper characterisation .................................................. 179

TABLE OF CONTENTS xvii

Drafting and language ................................................... Registering on the PPSR ................................................ Conceding errors and obtaining relief ............................... Know the statutory tools ................................................. Resist registering first and asking questions later ............... Correspondence and dealings within the profession ............ Accountants and auditors ................................................... Consultants and in-house counsel ........................................

180 181 182 182 183 183 184 185

Annexure A Exclusion of Enforcement Provisions .................. Annexure B PPSA Clause for Specific Security Agreement (or Deed) ........................................................ Annexure C PPSA Clause for Suppliers of Goods ................... Annexure D Dealing with Collateral ..................................... Annexure E Application of Payments ................................... Annexure F Extent of the Guarantor’s Liability ...................... Annexure G Representations and Warranties and Undertakings .................................................. Annexure H Enforcement Costs ........................................... Annexure I Fininancing Statements with Respect to Security Interests ......................................................... Annexure J Table Sourcing the Appropriate Information of a Secured Party/Grantor to Populate in a Financing Statement ...................................................... Annexure K Collateral Classes and Sub-Classes ..................... Annexure L Table Identifying the Classes of Collateral by Serial Number and Identifying the Appropriate Serial Number ......................................................... Annexure M Checklist Review for Financing Statement ........... Annexure N Grantor Request for Further Information .............. Annexure O Amendment Demand ....................................... Annexure P Originating Process .......................................... Annexure Q Insolvency Practitioner Checklist ........................

187 188 189 191 192 193 194 196 197

200 204

207 209 213 215 217 219

Index ............................................................................... 221

xviii PPS in Practice

TABLE OF CASES 123 Sweden AB v Appleyard Capital Pty Ltd (2014) 101 ACSR 629......................................................... 9.5.10 Accolade Wines Australia Limited, In the matter of [2016] NSWSC 1023................................................... 8.7.3 Amerind Pty Ltd, Re (receivers and managers apptd) (in liq) [2017] VSC 127.................................. 5.3.20, 5.3.21 Apex Gold Pty Ltd, In the matter of [2013] NSWSC 881...................................................... 8.7.3, 9.5.7 Appleyard Capital Pty Ltd, Re (2014) 101 ACSR 629............................................ 8.9.2, 8.9.8, 8.11.2, 9.5.10 Associated Alloys Pty Ltd v Metropolitan Engineering & Fabrication Pty Ltd (Voluntary Administrators Appointed) (Receivers and Managers Appointed) (1998) 16 ACLC 1633..................................... 1.2.19, 5.3.9 Associated Alloys v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588; [2000] HCA 25............... 1.2.19, 5.3.9 Barclays Bank Plc, Re [2012] NSWSC 1095...... 8.7.3, 8.9.8, 9.5.7 Buckeridge v Mercantile Credits Ltd (1981) 37 ALR 543.................................................................. 5.5.29 Byrnes v Kendle (2011) 243 CLR 253............................... 1.2.22 Campbell Finance Pty Ltd v Vivstan Packaging (Aust) Pty Ltd (in liq) [1998] 2 VR 340.......................... 8.9.2 Cardinia Nominees Pty Ltd, In the matter of [2013] NSWSC 32....................................................... 8.7.3, 8.9.2, 8.9.3, 9.5.7 Carpenter International Pty Limtied, Re [2016] VSC 118................................................................... 9.5.10

TABLE OF CASES xix

Carrafa, Goutzos & Lofthouse (as Liquidators of Relux Commercial Pty Ltd) (in liq) v Doka Formwork Pty Ltd (2014) 104 ACSR 163........................ 1.2.11, 1.2.14 Catombal Investments Pty Ltd, Re [2012] NSWSC 775.............................................................. 8.10.1 Central Cleaning Supplies (Aust) Pty Ltd v Elkerton (2014) 98 ACSR 52............................. 1.2.22, 5.3.13, 9.3.7 Central Cleaning Supplies (Australia) Pty Ltd v Elkerton (in His Capacity as Joint and Several Liquidator of Swan Services Pty Ltd) (in Liq) (2015) 321 ALR 181............................................... 1.2.23, 5.3.10, 5.3.13, 9.3.7 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337....................................... 1.2.22 Commonwealth Bank of Australia v Bobby Sailesh Anand [2011] NSWSC 613......................................... 5.5.30 Credit Lyonnais Australia Ltd v Darling (1991) 5 ACSR 703................................................... 5.5.30 Doka Formwork Pty Ltd, Re (2014) 104 ACSR 163.............. 4.1.19 Duke Contracting Australia Pty Ltd, Re [2017] NSWSC 767.............................................................. 6.5.35 Dura (Australia) Constructions Pty Ltd (ACN 004 284 191) (in Liquidation) (Receivers and Managers Appointed) v Hue Boutique Living Pty Ltd (formerly SC Land Richmond Pty Ltd) (ACN 106 117 506) (2014) 292 FLR 114..................................... 8.13.8, 11.1.8 Findlay v Jones [2015] NSWSC 277..................................... 8.9.8 Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) v General Electric International Inc (2016) 305 FLR 101............... 3.4.8–3.4.10, 8.7.10, 9.5.2 Freightlines Northern Territory Pty Ltd (1999) 32 ACSR 573.................................................................. 8.9.2 Giffen, Re [1998] 1 SCR 91............................................... 4.7.8

xx PPS in Practice

iTrade Finance Inc v Bank of Montreal (2011) FPPSR........... 11.1.8 KJ Renfrey Nominees Pty Ltd (Trustee), in the matter of OneSteel Manufacturing Pty Ltd v OneSteel Manufacturing Pty Ltd [2017] FCA 325........................ 8.9.10 Kris Cruisers Ltd, Re [1949] 1 Ch 138................................. 8.9.3 Macquarie Leasing Pty Ltd v DEQMO Pty Ltd [2014] NSWSC 1466.......................................................... 11.1.26 Maiden Civil (P & E) Pty Ltd, In the matter of [2013] NSWSC 852; (2013) 277 FLR 337........................................ 1.2.7, 1.4.4, 4.7.8, 8.7.10, 9.5.2 Metcash Trading Ltd v 8 Nai Investments Pty Ltd [2011] FCA 1400........................................................ 8.9.3 National Australia Bank Limited v Davis & Waddell (2003) 44 ACSR 296................................................... 8.9.3 National Australia Bank Limited v Davis & Waddell (Vic) Pty Ltd [2003] VSC 1........................................... 8.9.3 NCO Finance Aust Pty Ltd v Australian Pacific Airports (Melbourne) Pty Ltd [2013] FCCA 2274......................... 3.4.6 Norman v Federal Commissioner of Taxation (1963) 109 CLR 9..................................................... 1.2.26 Oceanic Sun Line Special Shipping Company Inc v Fay (1988) 165 CLR 197................................................. 1.2.22 OneSteel Manufacturing Pty Limited (administrators appointed), In the matter of [2017] NSWSC 21.............. 9.4.8, 9.5.2, 9.5.8 OneSteel Manufacturing Pty Ltd (administrators appointed), Re (2017) 118 ACSR 307.............................. 4.6.30, 6.7.21 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451...... 1.2.22 Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) [2017] NSWCA 8............................................. 3.4.6, 3.4.10 Primaplas Pty Ltd v Gelpack Enterprises Pty Ltd (in liq) [2015] NSWSC 1558................................................. 8.21.4

TABLE OF CASES xxi

Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217...................................................... 11.1.26 Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq) [1991] 2 Qd R 456.................................. 8.9.2, 8.9.3 SFS Projects Australia Pty Ltd v Registrar of Personal Property Securities (2014) 226 FCR 188............ 6.5.68, 8.4.6 SFS Projects Australia Pty Ltd v Registrar of Personal Property Securities (No 2) [2014] FCA 987......... 6.5.68, 8.4.6 Southern Engineering Services Pty Ltd (in liq), Re [2014] NSWSC 1882............................. 8.8.6, 8.9.8, 9.5.10 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165............................................................ 1.2.22 Transurban CCT Pty Ltd (in its own capacity and as trustee of the Transurban CCT Trust), Re [2014] NSWSC 1909........................................ 6.7.21, 8.7.2, 8.7.3 Universal Trucks and Equipment Ltd v Reynolds [2012] NZHC 483....................................................... 7.8.5 Warehouse Sales Pty Ltd (in liq) v LG Electronics Australia Pty Ltd (2014) 291 FLR 407...................................... 10.1.3 Williams v Frayne (1937) 58 CLR 710............................... 5.5.29

xxii PPS in Practice

TABLE OF STATUTES Commonwealth Air Services Act 1995 s 59 [3.4.6] Australian Capital Territory Partnership Act 1963 [4.6.6] Banking Act 1959 [8.15.4] Bankruptcy Act 1966 [6.5.80] s 55 [6.5.80] s 56E [6.5.80] s 57 [6.5.80] s 58(3) [5.1.8] s 58(5) [5.1.8] Corporations Act 2001 [4.6.24], [6.5.75], [6.5.78] s 9 [5.5.1] s 128 [4.6.26] s 129 [4.6.26] s 440B [5.5.1] s 440B-D [5.1.8] s 441A [5.5.1] s 471C [5.1.8] s 588FL [1.4.2], [8.4.7], [8.5.1], [8.5.2], [8.17.8], [8.22.4], [9.5], [9.5.6] s 588FL(2)(b) [8.4.9], [8.8.1] s 588FL(2)(b)(i) [5.3.21] s 588FL(2)(b)(ii) [5.4.18], [6.5.78], [8.4.8]

s 588FL(2)(b)(iv) [8.4.7], [8.4.8], [9.5.6] s 588FL(4) [8.5.1], [9.5.3] s 588FM [4.1.27], [5.4.17], [5.4.19], [5.4.28], [7.10], [8.4.8], [8.4.9], [8.5.2], [8.5.3], [8.6.1], [8.7.1], [8.7.3], [8.7.5], [8.7.9], [8.7.10], [8.7.11], [8.8.1], [8.8.2], [8.8.6], [8.9.1], [8.9.6], [8.9.8], [8.9.10]. [8.10.1], [8.11.1], [8.11.2], [8.11.3], [8.17.7], [8.17.9], [9.5.3], [9.5.6]–[9.5.10] s 588FM(2)(a) [8.10.1] s 588FM(2)(a)(i) [8.9.2] s 588FM(2)(a)(ii) [8.9.6] s 588FM(3) [8.9.10] s 588FN [8.5.1] s 588FO [1.7.5], [4.1.23] s 1321 [8.21.4], [8.21.5], [9.3.16] Ch 5 [5.4.20], [6.5.79] Pt 5.2 [5.1.8] Pt 5.3A [5.5.1] Personal Property Securities Act 2009 [6.5.75] s 8 [5.2.2], [5.5.21], [8.13.5], [11.1.7] s 8(1) [3.4.1] s 8(1)(b) [3.4.6]

TABLE OF STATUTES xxiii

Personal Property Securities Act 2009 — continued s 8(1)(c) [3.4.6] s 8(1)(f)(i) [3.4.6] s 8(1)(f)(ii) [3.4.6] s 8(1)(i) [3.4.6] s 8(1)(j) [3.4.6] s 8(5) [3.4.6] s 8(6) [3.4.6] s 8(ja) [3.4.6] s 10 [1.2.3], [2.1.1], [3.2.1], [3.3.1], [3.3.6], [4.1.5], [4.7.4], [6.5.24], [6.5.25], [6.5.50], [8.17.2], [9.4.16], [3.4.6] s 12 [2.2.6], [4.1.4], [11.1.6] s 12(1) [1.2.1], [1.2.24], [1.3.1], [3.4.6], [4.1.4], [4.1.12], [4.1.14], [4.1.23], [4.3.1], [4.7.3], [5.1.3], [5.2.4], [8.13(5)] s 12(2) [1.2.18], [1.2.24], [4.1.12], [5.4.6], [11.1.6] s 12(2)(d) [2.2.9] s 12(2)(j) [1.2.25] s 12(2)(k) [1.2.25] s 12(3) [1.2.7], [1.3.1], [4.1.14], [4.1.23], [4.3.1], [8.13(5)], [8.18.2] s 12(3)(a) [1.3.5] s 12(3)(c) [1.2.8] s 13 [1.2.8], [1.2.11], [1.2.13], [1.2.14], [2.2.10], [3.4.7], [4.1.17], [8.18.2], [11.1.6] s 13(1) [1.2.11] s 13(1)(b) [1.2.11], [1.2.12], [1.2.13]

xxiv PPS in Practice

s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s

13(1)(d) [1.2.13] 13(2) [3.4.7], [4.1.22] 14 [8.3.7], [9.4.14] 14(1) [1.3.2], [1.3.4], [5.5.13] 14(1)(a) [1.3.4] 14(1)(b) [1.3.4] 14(1)(c) [1.3.5] 14(1)(d) [1.3.5] 14(2) [1.3.4] 14(6) [5.5.11], [8.17.5] 14(6)(c) [5.5.12] 18(1) [7.1.2] 19 [1.4.1], [3.2.1], [4.7.1] 19(1) [5.4.7] 19(2) [1.2.4], [6.5.49] 19(3) [4.7.9] 19(4) [5.4.7] 19(5) [1.2.5], [1.4.4], [4.7.5], [4.7.8] 20(1) [6.5.49] 20(1)(a) [4.7.12] 20(2)(b)(i) [5.5.2] 20(6) [5.5.20], [6.6.3] 21 [1.5.4], [6.1.3], [6.5.49], [8.14.1] 21(1)(a) [6.1.3] 21(1)(b)(i) [4.7.12] 21(1)(c) [6.4.1] 21(2) [1.5.4] 21(2)(a) [6.1.3], [8.3.3] 21(2)(b) [6.1.3], [6.3.1] 21(2)(c) [1.5.5], [1.6.7], [6.1.3] 21(3) [6.5.12] 21(a) [6.2.1], [6.5.1] 22 [6.2.3] 24 [6.1.3], [6.3.4]

Personal Property Securities Act 2009 — continued s 24(1) [6.3.2] s 24(3) [6.3.4] s 24(4) [6.3.4] s 24(5) [6.3.4] s 24(6) [6.3.4] s 25 [1.6.7], [6.1.3] s 26 [1.6.7], [6.1.3] s 27 [1.6.7], [6.1.3] s 28 [1.6.7], [6.1.3] s 29 [1.6.7], [6.1.3] s 31 [6.6.11] s 31(1) [5.5.16] s 32 [4.3.3], [10.1.3] s 32(1)(b) [5.5.18] s 33(1)(a) [6.6.5] s 33(1)(b) [6.6.6] s 33(1)(c) [6.6.7] s 34 [4.5.8], [4.5.11], [6.2.3], [6.5.50], [6.5.54], [6.5.59] s 34(1)(c)(ii) [4.5.9] s 44 [2.1.10] s 44(1) [6.5.34] s 45 [2.1.10] s 46 [6.4.10], [10.2.5] s 47 [10.2.4] s 52 [6.5.53] s 55 [1.1.5], [1.6.3], [1.6.6], [1.7.2], [8.12.2], [9.4.13] s 55(2) [1.6.3], [6.5.10], [8.12.2] s 55(3) [1.6.4], [8.12.2] s 55(4) [1.6.3], [6.5.10], [8.12.2] s 55(6) [6.1.7], [6.3.6], [6.3.8], [6.5.90]

s s s s s s

s

s s s s s s s s s s s s s s s s s s s s s s s s s s

56 [4.5.11], [6.1.7], [6.3.8] 56(1) [6.5.90] 56(2) [6.5.91] 57 [1.5.5], [1.6.7], [6.4.2], [8.15.1], [8.15.4] 61 [8.16.1] 62 [1.3.3], [1.4.2], [5.5.13], [8.4.9], [8.13.3], [8.17.8], [9.4.14], [9.4.15] 62(2) [1.4.5], [1.6.5], [1.6.6], [5.5.13], [8.17.6], [9.4.16] 62(2)(b) [8.17.1], [8.17.2] 62(2)(b)(i) [6.5.82] 62(2)(b)(ii) [6.5.83] 62(3) [8.17.6] 62(3)(b) [6.5.85], [8.17.1] 62(3)(b)(i) [6.5.84] 62(3)(b)(ii) [6.5.84] 63 [8.14.2] 64 [8.15.4] 75 [8.15.4] 88 [3.3.2] 89 [3.3.3] 90 [3.3.4] 90(a) [3.3.5] 90(b) [3.3.5] 90(c) [3.3.5] 90(d) [3.3.5] 95 [5.5.47] 96 [5.5.47] 99 [3.3.8] 100 [3.3.9] 101 [3.3.10] 102 [3.3.11] 102(4) [3.3.12] 103 [3.3.13] 109(1) [5.2.4]

TABLE OF STATUTES xxv

Personal Property Securities Act 2009 — continued s 109(2) [5.2.4] s 111(1) [5.5.49] s 115 [5.2.3], [8.18.2], [8.18.3] s 115(1) [5.5.45], [5.5.46], [11.1.11] s 115(2) [5.5.48] s 117 [5.5.47] s 118 [5.5.47] s 120 [5.5.47] s 121(4) [5.5.47] s 123 [5.5.47] s 125 [5.5.47] s 126 [5.5.47] s 128 [5.5.47] s 129 [5.5.47] s 130 [5.5.47] s 132(3)(c) [2.2.10] s 132(3)(d) [5.5.47] s 132(4) [5.5.47] s 134(1) [5.5.47] s 135 [5.5.47] s 138A [5.5.47] s 138B [5.5.47] s 138C [5.5.47] s 142 [5.5.47] s 143 [5.5.47] s 150(1) [6.5.4], [6.5.7] s 150(2) [6.5.62] s 151 [3.1.4], [6.5.7], [6.5.8], [6.5.80], [11.1.25] s 151(1) [4.5.14], [4.7.12] s 151(3) [6.5.72] s 152 [6.5.5] s 153 [8.3.5]

xxvi PPS in Practice

s 153(1) [4.6.7], [6.5.14]–[6.5.18], [6.5.21], [6.5.26], [6.5.28], [6.6.3] s 153(2) [4.6.7] s 160 [6.5.17] s 162 [6.5.50] s 163 [8.3.3] s 164 [6.5.20], [6.5.50], [8.3.3] s 164(1) [6.5.41] s 164(2) [8.3.8] s 165 [6.5.20], [8.3.3], [8.3.5], [9.4.2] s 165(a) [8.3.5], [9.4.3] s 165(b) [8.3.5], [9.4.11] s 165(c) [8.3.5], [8.3.7], [9.4.12], [9.4.16], [9.4.18] s 165(d) [8.3.6] s 166 [6.5.50] s 167(2) [6.5.72] s 171(1)(a) [10.2.3] s 171(1)(b) [10.2.3] s 178 [7.6.3], [7.7.1], [11.2.27] s 179(1)(b) [7.7.1] s 179(1)(c) [7.7.2] s 180(3) [7.7.1] s 180(4) [7.7.1] s 180(5) [7.7.73] s 180(5)(b)(ii) [7.7.1] s 181 [7.7.1] s 182 [7.8.1] s 182(2) [7.8.1] s 182(4)(c) [7.8.4] s 191 [7.7.73] s 237(1) [5.5.33] s 237(2) [5.5.34], [5.5.35] s 239(1) [5.5.35]

Personal Property Securities Act 2009 — continued s 254 [8.13.9] s 267 [1.7.2], [4.5.11], [8.5.1], [8.5.2], [9.5] s 267(2) [8.3.2] s 267(iv) [6.5.80] s 267(v) [6.5.80] s 269 [1.7.5], [4.1.23] s 275 [5.2.7], [5.2.8], [5.3.7], [6.4.16], [7.8.8] s 275(1) [5.2.6] s 275(9) [5.3.7] s 275(9) [5.2.5] s 275(9)(a) [6.4.16] s 293 [4.1.27], [7.10], [8.4.9], [8.6.2], [8.17.6], [8.17.7], [8.17.9], [8.17.10], [8.22.4] s 293(1)(a) [6.5.85] s 293(3) [8.17.7] s 306(2) [6.2.3] s 307 [6.5.88] s 308 [6.2.3], [6.5.88] s 320 [1.6.8] s 322 [1.6.8] s 322(1) [6.2.4] s 337A [6.5.88], [8.3.7], [9.4.17], [9.4.18] s 339(5) [5.4.8] Ch 4 [5.2.3], [5.2.4], [5.5.49], [8.18.2] Ch 5 [6.5.1] Pt 2.5 [2.1.10], [10.1.3] Pt 2.6 [1.6.3], [8.12.2] Pt 5.3 [6.1.3] Pt 5.5 [10.2.2]

Pt 5.6 [7.6.2], [8.4.1], [11.1.22] Personal Property Securities Amendment (PPS Leases) Act 2017 [1.2.12], [1.2.13], [1.2.14], [4.1.18]–[4.1.20] s 13(1)(b) [4.1.19] Personal Property Securities (Migrated Security Interests and Effective Registration) Determination 2011 [5.4.15] Personal Property Securities Regulations 2010 [6.5.26], [6.5.28], [6.5.29] Sch 1 [6.5.18], [6.5.21] Sch 1, Cl 1.2 [4.6.8], [4.6.21] Sch 1, Cl 1.3 [4.6.28] Sch 1, Cl 1.4 [4.6.7], [9.4.8] Sch 1, Cl 1.5 [4.6.17], [9.4.9] Sch 1, Cl 2.2 [9.4.5] Sch 1, Pt 1, Cl 1.3(4) [7.3.2] Sch 1, Pt 1, Cl 1.5(5) [7.3.2] Sch 1 Pt 2 reg 2.4 [6.6.5], [6.6.9] Trade Practices Act 1974 [1.1.1] States and Territories New South Wales Partnership Act 1892 [4.6.6] Sale of Goods Act 1923 s 42 [3.4.6]

TABLE OF STATUTES xxvii

Storage Liens Act 1935 s 3 [4.1.6]

Victoria Partnership Act 1958 [4.6.6]

Supreme Court (Corporations) Rules 1999 r 14.1 [8.21.5]

Western Australia Partnership Act 1895 [4.6.6]

Northern Territory Partnership Act 1997 [4.6.6] Queensland Partnership Act 1891 [4.6.6] South Australia Partnership Act 1891 [4.6.6] Tasmania Partnership Act 1891 [4.6.6]

xxviii PPS in Practice

International Canada British Columbia Personal Property Security Act 1989 s 12 [4.7.8] s 12(1)(b) [1.4.4], [4.7.8] s 12(2) [1.4.4], [4.7.8]

PART 1 INTRODUCTION

1 WHAT IS THE PERSONAL PROPERTY SECURITIES ACT 2009 (CTH)? [1.1] [1.2] [1.3] [1.4] [1.5] [1.6] [1.7]

A working overview .......................................... 3 What is a security interest? ................................. 5 Purchase money security interests ........................ 13 Attachment ................................................ 14 Perfection ................................................. 15 General priorities .......................................... 17 Failure to perfect a security interest ....................... 18

[1.1] A working overview [1.1.1] The Personal Property Securities Act 2009 (Cth) (‘PPSA’) is a commercial piece of Commonwealth legislation designed to increase the transparency of what security interests have been taken over personal property of people and businesses in Australia. It has been suggested that the PPSA has been the largest commercial law reform since the introduction of the Trade Practices Act 1974 (Cth) (now the Australian Consumer Law).1 To that end, and perhaps unsurprisingly, its introduction and commencement has created some uncertainty and disruption amongst the relevant stakeholders affected by the reform predominately caused by lack of experience and guiding authority. [1.1.2] One of the main features which drives the transparency rationale behind the legislation is the creation of the Personal Property Securities Register (‘PPSR’) which, at the time of writing, is maintained by the Australian Financial Security Authority (AFSA) and is accessible at http://www.ppsr.gov.au. 1 Nicholas Mirzai, ‘A Period of Transition: Ch 9 of the Personal Property Securities Act 2009’ (2012) 20 Australian Property Law Journal 193.

WHAT IS THE PERSONAL PROPERTY SECURITIES ACT 2009 (CTH)? 3

[1.1.3] The PPSA creates a single set of legislative provisions regarding the taking of security interests in respect of personal property. It replaced over 70 different State and Territory legislative instruments which involved over 40 different registers with a single nationwide regime and register. [1.1.4] The PPSA is predicated on principles from overseas jurisdictions such as the United States, Canada and New Zealand, each of whom have enacted similar legislation. Whilst some of the founding principles underpinning the PPSA are consistent with the thinking and practice at common law, others principles differ materially from the legal structure which existed prior to its implementation. [1.1.5] As a starting point, the central idea is that if a party has taken a security interest over personal property, then that party bears the onus of putting the world at large on notice of their security interest if they wish to maintain a position of priority in respect of that particular personal property. Under the PPSA, the failure to properly put third parties on notice may result in the security interest being rendered ineffective, unenforceable or subject to other security interests.2 [1.1.6] Unlike its common law predecessor, the PPSA contains a broad definition for the term ‘security interest’ which encapsulates many transactions or arrangements that may not have traditionally been thought of as security interests. [1.1.7] One instance of a “security interest” is the provision of vendor credit pursuant to short term credit terms (such as 30-day trade terms). Even though one might not traditionally think of this as creating a security interest over the goods supplied, the transaction is likely caught by the statutory definition of a ‘security interest’ for the purposes of the PPSA, and for that reason one needs to be aware of the regime and how to comply with it to preserve one’s interest(s). [1.1.8] One of the most significant problems or issues which has emerged from the case law since the PPSA took force in Australia on 30 January 2012 is the failure to properly characterise the underlying interest and therefore, by necessity, the failure to appropriately perfect

2 For example, see the distinction between perfected and unperfected security interests: Personal Property Securities Act 2009 (Cth) s 55.

4 PPS in Practice

[1.2] What is a security interest? [1.2.1] The ‘substance over form’ definition of what constitutes a security interest is contained in s 12(1) of the PPSA which provides as follows: Meaning of security interest (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). [1.2.2] There are several central concepts in this functional definition which need to be considered carefully.

What is an ‘Interest in Personal Property’? [1.2.3] Section 10 defines the term ‘interest’ as “interest, in personal property, includes a right in the personal property.” [1.2.4] The phrase ‘right in the personal property’ is not otherwise defined by s 10 (or elsewhere in the PPSA), however, s 19(2) of the PPSA — which is the provision concerned with the attachment of a security interest to particular personal property — provides that: Attachment rule (2) A security interest attaches to collateral when: (a) the grantor has rights in the collateral, or the power to transfer rights in the collateral to the secured party; and (b) either: (i) value is given for the security interest; or (ii) the grantor does an act by which the security interest arises." (emphasis added)

WHAT IS THE PERSONAL PROPERTY SECURITIES ACT 2009 (CTH)? 5

1 What Is the Personal Property Securities Act 2009 (CTH)?

the resulting interest. In such circumstances, a prudent approach to complying with the legislation has been, in a number of instances, to assume that the PPSA applies to the underlying interest and to deal with the interest in a manner consistent with the PPSA — whether the PPSA applies or not.

[1.2.5] In respect of which rights are sufficient in order for a security interest to attach to particular collateral, s 19(5) of the PPSA provides that: Goods leased, bailed, consigned or sold under a conditional sale agreement (5) For the purposes of paragraph (2)(a), 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 (including an agreement to sell subject to retention of title) when the grantor obtains possession of the goods. [1.2.6] The upshot is that whilst ownership of the underling property would no doubt give the owner a sufficient ‘interest in personal property’ to create or grant a security interest over that property — ownership is not a prerequisite to granting a security interest to a third party. In certain circumstances, perhaps surprisingly, a possessory interest in the personal property is sufficient to create or grant a security interest in personal property under the PPSA.3 [1.2.7] Importantly, and what some would consider to be the most material departure from the common law approach to security interests over personal property, a security interest granted on the basis of a possessory interest is not restricted to the possessory interest. It is a security interest over the collateral itself — the priority of that interest being one determined by the PPSA (in most instances) and not by common law principles of title. That one can grant an interest to another in circumstances where they do not necessary have the underlying interest they are granting is a significant aspect of the PPSA.4 [1.2.8] In corroboration of the above, s 12(3) of the PPSA provides that:

3 See further, Bruce Whittaker, ‘The Scope of “Rights in the Collateral” In Section 19(2) of the PPSA Can Bare Possession Support Attachment of a Security Interest?’ (2011) 34(2) UNSW Law Journal 524. 4 See the analysis of Brereton J in Re Maiden Civil (P&E) Pty Ltd [2013] NSWSC 852; (2013) 277 FLR 337.

6 PPS in Practice

[1.2.9] Looking specifically at s 12(3)(c), s 13 of the PPSA defines the concept of a ‘PPS lease’ as: Meaning of PPS lease (1) A PPS lease means a lease or bailment of goods: (a) for a term of more than one year; or (b) for an indefinite term (even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment); or (c) for a term of up to one year that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed one year; or (d) for a term of up to one year, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of more than one year after the day the lessee or bailee first acquired possession of the property (but not until the lessee's or bailee's possession extends for more than one year). [1.2.10] Thus, a lessor/bailor who leases/bails personal property to a lessee/bailee for a period of more than one year creates a ‘security interest’ for the purposes of the PPSA irrespective of whether they intend to or not. [1.2.11] Equally, as part of the original design of the PPSA, a lessor/bailor who relinquishes possession of personal property for the benefit of a lessee/bailee for an ‘indefinite term’ creates a ‘security interest’ for the purposes of the PPSA.

WHAT IS THE PERSONAL PROPERTY SECURITIES ACT 2009 (CTH)? 7

1 What Is the Personal Property Securities Act 2009 (CTH)?

A security interest also includes the following interests, whether or not the transaction concerned, in substance, secures payment or performance of an obligation: (a) the interest of a transferee under a transfer of an account or chattel paper; (b) the interest of a consignor who delivers goods to a consignee under a commercial consignment; (c) the interest of a lessor or bailor of goods under a PPS lease.

[1.2.12] In Carrafa, Goutzos & Lofthouse (as Liquidators of Relux Commercial Pty Ltd) (in liq) v Doka Formwork Pty Ltd,5 (‘Doka’) Sifris J considered the concept of an ‘indefinite term’ and held that: The definition of PPS lease is found in s 13 of the PPSA which provides that a PPS lease means a lease or bailment of goods which falls into one of the categories set out in the subsections of s 13(1). Section 13(1)(b) provides that a lease or bailment of goods “for an indefinite term (even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment)“ is a PPS lease. The Doka Terms at cl 8.1 provide that the rental duration is as follows: 8.1 The duration of any rental period commences on the date which the ordered material leaves the Doka warehouse. Any rental period will end on the date the rented material is returned to the Doka warehouse. Any partial return and/or delivery of material shall be deducted pro-rata according to agreed rental rates. Therefore, the Doka Terms indicate that the lease was for an indefinite period only ending when the Formwork Equipment was returned to Doka.6 [1.2.13] Thus, ‘indefinite term’ in s 13(1)(b) did not mean ad infinitum, but rather, that the term or period of the lease or bailment is not defined or prescribed by the agreement. One way of avoiding this is to expressly prescribe the term or period of the lease or bailment such that it can be readily identified on the face of the written agreement.7 [1.2.14] In respect of the above, on 19 May 2017, the Personal Property Securities Amendment (PPS Leases) Act 2017 (Cth) received royal assent (‘the Amending Act’). The Amending Act makes two fundamental changes to s 13 of the PPSA:

5 (2014) 104 ACSR 163; [2014] VSC 570. 6 (2014) 104 ACSR 163 at 168 [24] [26]. 7 Although note the changes proposed at the time of writing by the Personal Property Securities Amendment (PPS Leases) Bill 2017 (Cth).

8 PPS in Practice

[1.2.15] The limitation to the Amendment Act, noting the effect it would have had on the Doka case referred to above, is that it does not apply retrospectively to leases in existence at the time the Amendment Act received royal assent. Instead, the Amending Act only applies to leases entered after 19 May 2017. To that end, it is likely that the original permutation of s 13 will continue to be of importance for the foreseeable future.

What does ‘Secures Payment or Performance of an Obligation’ Mean? [1.2.16] To secure payment or performance of an obligation, an agreement will, as a matter of substance, give the party owed payment or performance of the obligation some recourse to personal property in lieu of that payment or performance. [1.2.17] This can be in the form of retaining title to the underlying equipment supplied from party A to party B, it can be in the form of an express agreement granting an interest over particular property in exchange for finance or it can be in any other form provided that an interest in personal property is retained or granted to the party owed the payment or performance of an obligation. [1.2.18] Unlike with traditional security concepts, such as mortgages or charges, it is not always a simple task to ascertain whether the underlying agreement gives rise to an interest in personal property and whether that interest is derivative or secondary to payment or performance of an obligation by the obligor. [1.2.19] In this regard, s 12(2) of the PPSA usefully provides a list of examples as to what transactions may give rise to a security interest for the purposes of the PPSA:

WHAT IS THE PERSONAL PROPERTY SECURITIES ACT 2009 (CTH)? 9

1 What Is the Personal Property Securities Act 2009 (CTH)?

(a) the first of these changes is the alternation of the reference to ‘more than one year’ to ‘more than two years’; and (b) the second of these changes is the repeal of s 13(1)(b) of the PPSA and replacement with an amendment to s 13(1)(d) which effectively provides that an ‘indefinite lease/bailment’ only becomes a ‘PPS lease’ after more than two years of uninterrupted possession have expired.

(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); (e) a hire purchase agreement; (f) a pledge; (g) a trust receipt; (h) a consignment (whether or not a commercial consignment); (i) a lease of goods (whether or not a PPS lease); (j) an assignment; (k) a transfer of title; (l) a flawed asset arrangement. [1.2.20] Traditional security interests, such as fixed and floating charges, are generally well understood. However, conditional sale agreements — including the sale of personal property the subject of a retention of title type of arrangements — would not, at common law, constitute a registrable security interest in the same way as a fixed and floating charge.8 [1.2.21] Given the expanded definition as to what may constitute a security interest (and the regulatory requirements of perfecting that interest in accordance with the PPSA), one issue that has arisen is the creation of multiple security interests in circumstances where each interest is in fact the same except in relation to different personal property. [1.2.22] One way that this has arisen has been from the issuing of invoices which contain separate retention of title clauses specific to the collateral listed on the invoice. Instead of creating one security 8 See, Associated Alloys Pty Ltd v Metropolitan Engineering & Fabrication Pty Ltd (Voluntary Administrators Appointed) (Receivers and Managers Appointed) (1998) 16 ACLC 1633; Associated Alloys v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588; [2000] HCA 25.

10 PPS in Practice

[1.2.23] Such was the case in Central Cleaning Supplies (Aust) Pty Ltd v Elkerton,9 where Ferguson J held: The credit application must be construed using an objective approach to ascertain the intention of the parties as they have expressed it (not their subjective intention).10 Using that principle to construe cl 2, it seems to me that the parties must be taken to have intended that the terms to be incorporated were recorded in a separate document existing at the date of the agreement. There is no evidence of what those terms were (if they did exist). Rather, Central Cleaning wishes to rely on a clause on invoices that came after the credit application and that clearly treats each sale as a separate contract. In my view, once a sufficient time had passed, the ROT Clause formed part of each separate and individual contract of sale (by dint of the consistent course of conduct). But it was too late for it to be incorporated as a term of the credit application agreement by this method, coming as it did, after that contract had been entered into by the parties.11 While the retention of title condition was incorporated into the separate contracts that are the subject of this proceeding, that does not assist Central Cleaning because those contracts came after 30 January 2012. It was only those separate and distinct contracts that provided for the security interests, and the transitional provisions did not serve to perfect them.12 [1.2.24] Whilst the decision was overturned on appeal in Central Cleaning Supplies (Australia) Pty Ltd v Elkerton (in His Capacity as

9 (2014) 98 ACSR 52; [2014] VSC 61. 10 Toll ( FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [40]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 at [22]; Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 [98]. See also Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337. 11 Oceanic Sun Line Special Shipping Company Inc v Fay (1988) 165 CLR 197 at 228 per Brennan J. 12 (2014) 98 ACSR 52 at 60 1 [33] [34].

WHAT IS THE PERSONAL PROPERTY SECURITIES ACT 2009 (CTH)? 11

1 What Is the Personal Property Securities Act 2009 (CTH)?

interest which covers all personal property supplied, this leaves open the creation of multiple security interests which greatly increases the compliance cost of ensuring each interest complies with the PPSA.

Joint and Several Liquidator of Swan Services Pty Ltd) (in liq))13 the risk of creating multiple security interests by including retention of title terms on every discrete invoice remains. The better approach is to consider entering into a credit application or master agreement and to render all invoices subject to the terms of that agreement. [1.2.25] Whilst s 12(2) of the PPSA is helpful in some respects it risks being misleading in others. The important qualification to s 12(2) is that it is merely a list of examples through which s 12(1) ought to be read (namely, broadly) but through which not all listed categories necessarily give rise to a security interest in all cases. [1.2.26] This is clearly illustrated by s 12(2)(j) or s 12(2)(k) which provide that an assignment or transfer of title can be an example of a security interest. [1.2.27] Absent something more, an outright assignment of personal property or a transfer of title from party A to party B does not give rise to a security interest. Once title has been transferred or an assignment effected, there is no residual interest held by the assignor in the underlying collateral which might otherwise be properly characterised as a security interest.14 [1.2.28] That being said, a conditional assignment can constitute a security interest — for example, where the assignment is conditional upon payment of all costs due and payable in full or where debts are assigned as part of a factoring arrangement but which would flow back to the assignor at the termination of the facility. [1.2.29] What the above perhaps best exemplifies is the need to analyse the substance of the transaction over its form. To simply call something an assignment or transfer of title as opposed to a conditional sale or retention of title is insufficient for the purposes of the PPSA. One is required to look at the mechanics of the agreement in order to ascertain whether an interest in personal property has been granted or provided for to secure payment or performance of an obligation.

13 (2015) 321 ALR 181; [2015] VSCA 92. 14 See Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at 26 per Windeyer J.

12 PPS in Practice

[1.3.1] In addition to the ‘in substance’ security interest pursuant to s 12(1) and the ‘deemed’ security interest pursuant to s 12(3), certain types of security interests fall within the classification of the ‘purchase money security interest’ or ‘PMSI’. [1.3.2] Section 14(1) of the PPSA defines the PMSI as: Meaning of purchase money security interest General definition (1) 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; (c) the interest of a lessor or bailor of goods under a PPS lease; (d) the interest of a consignor who delivers goods to a consignee under a commercial consignment. [1.3.3] If a security interest falls within the definition of a PMSI it is important to recognise it as such in a timely fashion as the holder may have the benefit of priority as against general security interests (including generally security interests taken earlier in time in respect of the same collateral) pursuant to s 62 of the PPSA and provided that the relevant parts of s 62 have been complied with. [1.3.4] A PMSI generally arises in one of two ways and regard must also be had to the exclusions contained in s 14(2) even if s 14(1) has been satisfied: (a) the PMSI holder provides the underlying personal property to the grantor until the purchase price has been paid – such as on retention of title terms;15 (b) the PMSI holder provides funds (in whole or in part) to the grantor for the specific purpose of acquiring personal property that will

15 See Personal Property Securities Act 2009 (Cth) s 14(1)(a).

WHAT IS THE PERSONAL PROPERTY SECURITIES ACT 2009 (CTH)? 13

1 What Is the Personal Property Securities Act 2009 (CTH)?

[1.3] Purchase money security interests

become the subject of the PMSI and the funds are so applied by the grantor or on the grantor’s behalf.16 [1.3.5] Importantly, parties who provide personal property under a ‘deemed’ or s 12(3) security interest also obtain the benefit of a PMSI characterisation17 noting that the transfer of an account or chattel paper18 does not involve the transfer of the underlying personal property that gives rise to the interest in the account or chattel paper (and as such no PMSI characterisation is required as these security interests are likely, or ought to be, perfected by control). [1.3.6] It is therefore particularly important for those engaged in the business of bailing or leasing personal property to not only consider whether their business falls within the scope of the PPSA — but to also engage with the PPSA to ensure that the method of compliance adopted best protects the resulting interests which the business benefits from.

[1.4] Attachment [1.4.1] Section 19 of the PPSA addresses when a security interest ‘attaches’ to the underlying personal property. [1.4.2] The point of attachment is important in certain circumstances due to certain timing requirements imposed either by the PPSA19 or by parallel legislation amended in accordance with the implementation of the PPSA.20 [1.4.3] As discussed above at [1.2.5], subject to a contrary point in time specified in the express terms of the security agreement, attachment occurs when the grantor obtains the requisite rights or power to transfer rights in the personal property — typically upon taking possession. [1.4.4] In Re Maiden Civil (P & E) Pty Ltd,21 on the issue of attachment of a security interest, Brereton J held: 16 17 18 19 20 21

See Personal Property Securities Act 2009 (Cth) s 14(1)(b). See Personal Property Securities Act 2009 (Cth) s 14(1)(c) and (d). See Personal Property Securities Act 2009 (Cth) s 12(3)(a). See, eg, Personal Property Securities Act 2009 (Cth) s 62. See, for example Corporations Act 2001 (Cth) s 588FL. (2013) 277 FLR 337; [2013] NSWSC 852.

14 PPS in Practice

[1.4.5] For this reason, the compliance mechanisms put in place by the secured party who benefits from the creation of the resulting security interest ought to occur prior to the grantor obtaining possession of the underlying collateral — whether this is mandated by the PPSA or otherwise. [1.4.6] If this occurs, and the compliance is accurate in accordance with the requirements of the PPSA, then the secured party does not risk taking compliance steps later than the PPSA requires in order to afford the secured party the requisite position of priority consistent with the interest created.23

[1.5] Perfection [1.5.1] Many cases and commentaries speak of the need to perfect a security interest ‘by registering on the PPSR’. [1.5.2] Whilst perfection by registration is one of the means by which a secured party can perfect a security interest, what is actually registered on the PPSR is a financing statement and not the security agreement itself. [1.5.3] Further, perfection by registration is not necessarily the only way to perfect a security interest nor is it a preferable way in particular circumstances.

22 [2013] NSWSC 852 [26]. 23 See, eg, Personal Property Securities Act 2009 (Cth) s 62(2).

WHAT IS THE PERSONAL PROPERTY SECURITIES ACT 2009 (CTH)? 15

1 What Is the Personal Property Securities Act 2009 (CTH)?

Thus pursuant to s 19(5), Maiden — as a PPS lessee in possession of the Caterpillars — had rights in the Caterpillars, to which a security interest could attach. These rights are not limited to possessory rights, but include proprietary rights. Section 19(5) has equivalents in the New Zealand and Canadian PPS legislation from which the PPSA is derived. For example, the British Columbia Personal Property Security Act 1989 provides, by s 12(1)(b), that a security interest ‘attaches’ when the debtor acquires ‘rights in the collateral’, and s 12(2) states that ‘a debtor has rights in goods leased to the debtor … when he obtains possession of them in accordance with the lease’.22

[1.5.4] Section 21 of the PPSA relevantly provides that: Perfection – main rule (1) 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) subsection (2) applies. (2) This subsection applies if: (a) for any collateral, a registration is effective with respect to the collateral; or (b) for any collateral, the secured party has possession of the collateral (other than possession as a result of seizure or repossession); or (c) for the following kinds of collateral, the secured party has control of the collateral: (i) an ADI account; (ii) an intermediated security; (iii) an investment instrument; (iv) a negotiable instrument that is not evidenced by a certificate; (v) a right evidenced by a letter of credit that states that the letter of credit must be presented on claiming payment or requiring the performance of an obligation; (vi) satellites and other space objects. [1.5.5] Where one can perfect a security interest by control — see above at s 21(2)(c) — one ought to perfect by control rather than registering a financing statement on the PPSR. This is because perfection by control outranks any other security interest, including a purchase money security interest, as a matter of priority.24 [1.5.6] Perfecting a security interest is discussed further at [6.1].

24 See, eg, Personal Property Securities Act 2009 (Cth) s 57.

16 PPS in Practice

[1.6.1] Once a secured party has taken appropriate steps to perfect a security interest which has attached to the underlying collateral there is no further requirement imposed on the secured party by the PPSA. [1.6.2] What the secured party has at this point in time is a position of priority depending on the type of perfection, when the step to perfect occurred and the type of underlying interest. [1.6.3] As a general rule, and only in default of the other priority provisions contained in Pt 2.6 of the PPSA, where the types of interests engaged in a priority dispute (as they are both taken in the same collateral) are the same in character, the default position is that the first in time prevails.25 This is true in respect of two competing perfected security interests26 and two competing unperfected security interests.27 [1.6.4] A perfected security interest prevails against an unperfected security interest irrespective of whether the perfected security interest is earlier or later in time.28 [1.6.5] However, and importantly, if the interests are not alike, then the first in time does not necessarily prevail. For example, an earlier in time perfected general security interest does not prevail against a later in time PMSI taken over the same collateral.29 An example of where this might occur is the taking of an earlier in time ‘all present and after-acquired personal property’ (‘AllPAP’) security interest as against a later in time PMSI concerning goods supplied by the PMSI holder. [1.6.6] Again, the PMSI only prevails if it is perfected in accordance with the requirements of the PPSA — if that has not occurred then it may be the case that the earlier in time general security interest prevails.30

25 26 27 28 29 30

See, See, See, See, See, See,

eg, eg, eg, eg, eg, eg,

Personal Personal Personal Personal Personal Personal

Property Property Property Property Property Property

Securities Securities Securities Securities Securities Securities

Act Act Act Act Act Act

2009 2009 2009 2009 2009 2009

(Cth) (Cth) (Cth) (Cth) (Cth) (Cth)

s 55. s 55(4). s 55(2). s 55(3). s 62(2). ss 62, 55.

WHAT IS THE PERSONAL PROPERTY SECURITIES ACT 2009 (CTH)? 17

1 What Is the Personal Property Securities Act 2009 (CTH)?

[1.6] General priorities

[1.6.7] In addition to the general priority provisions, security interests perfected by control prevail against general security interests and PMSIs.31 This is inherently limited by the types of collateral over which a security interest may be taken and perfected by control.32 [1.6.8] Further, security interests which are transitional prevail against security interests which are non-transitional33 — although the utility of this is limited given the expiration of the transitional period affording for temporary perfection of transitional security interests.34

[1.7] Failure to perfect a security interest [1.7.1] As discussed above, once a secured party has taken appropriate steps to perfect a security interest there are no further prescribed obligation imposed on that secured party by the PPSA. [1.7.2] However, in the event that the secured party fails to perfect its security interest in accordance with the PPSA, the unperfected security interest will, as a matter of law, vest in the insolvent grantor35 or the secured party will lose priority to a competing secured party that holds a perfected security interest in the same collateral.36 [1.7.3] In the case of an unperfected security interest that vests in the insolvent grantor, the collateral (or proceeds derived from its realisation) will be made available for the benefit of the unsecured creditor/s of the insolvent grantor. [1.7.4] In this circumstance, the secured party that has failed to perfect its security interest is likely to have a claim against the grantor the equivalent of an unsecured creditor and will likely only be able to prove in the insolvency of the grantor (ordinarily in the form of lodging a proof of debt).

31 32 33 34 35 36

See, eg, Personal Property Securities Act 2009 See, eg, Personal Property Securities Act 2009 See, eg, Personal Property Securities Act 2009 See, eg, Personal Property Securities Act 2009 See, eg, Personal Property Securities Act 2009 See, eg, Personal Property Securities Act 2009

18 PPS in Practice

(Cth) s 57. (Cth) ss 21(2)(c), 25 29. (Cth) s 320 and related provisions. (Cth) s 322. (Cth) s 267. (Cth) s 55.

[1.7.6] In the case of the secured party that loses priority to a competing secured party, that competing secured party will enjoy first ranking priority over the collateral and will be entitled to recover any and all amounts owing in full before any subordinated interest is considered. [1.7.7] In this situation, the collateral forms part of the property that is secured to the competing secured party. [1.7.8] For example, an earlier AllPAP security holder that has perfected its security interest will have priority against a later in time AllPAP security holder that has failed to perfect its security interest on the PPSR. [1.7.9] Accordingly, and subject to an event of default, the collateral that is subject to the competing security interest will be made available for realisation only to the earlier AllPAP security holder and not the later in time AllPAP security holder. [1.7.10] Again, whilst the original secured party may retain some rights to the collateral (or a claim against the grantor in personam in lieu of such proprietary rights) the outright subordination of any such entitlement often renders moot any such entitlements, as a matter of commercial reality, such that having one’s security interest rendered unperfected is often entirely fatal to any real prospect of recovering the very thing the security interest was designed to protect in the first instance.

37 See Personal Property Securities Act 2009 (Cth) s 269; Corporations Act 2001 (Cth) s 588FO.

WHAT IS THE PERSONAL PROPERTY SECURITIES ACT 2009 (CTH)? 19

1 What Is the Personal Property Securities Act 2009 (CTH)?

[1.7.5] Whilst the secured party may retain a claim for damages to the extent of the value of the collateral in such circumstances,37 such a claim ranks equally with other of the grantor’s unsecured creditors.

PART 2 [P2] Transactional – The Mechanics of the PPSA [P2.1] This part focuses on pre-PPSA considerations and whether or not the PPSA applies to the day-to-day operations of a particular business — and to what extent. [P2.2] Generally, businesses that trade as lenders, other forms of credit providers, lessors, receivables purchasers, consignors and retention of title suppliers will discover that the PPSA is applicable to them in a direct sense and it has likely had a significant effect on internal processes. However, other businesses may also realise that certain aspects of the PPSA are applicable in certain circumstances and may wish to develop internal systems to respond to when the PPSA does apply. [P2.3] This part also speaks to the elements of commercial dealings which may be affected by the PPSA including documentation, business processes and systems and the management of risk.

2 WHAT IS MY LINE OF BUSINESS? — PRE-PPSA CONSIDERATIONS [2.1] Does the business deal directly or indirectly with personal property? ......................................... 23 [2.2] Ascertaining what the business does ...................... 25

[2.1] Does the business deal directly or indirectly with personal property? What is Personal Property? [2.1.1] By way of a short working definition, and aside from the statutory definition,1 personal property can be thought of as anything capable of being owned or which can be transferred outside of land or real property and anything affixed to that land. [2.1.2] Whilst personal property includes things which are tangible, such as furniture, cars or machinery, it is not limited as such and intangible property, such as intellectual property (for example, copyrights, trademarks and patents), accounts or currency, are also examples of personal property.

Does the Business Deal with Personal Property? [2.1.3] When approaching whether or not a business deals with personal property or is in the business of dealing with personal property — at a high level — the relevant governing mind ought to consider whether or not the business provides a service or a product.

1 See Personal Property Securities Act 2009 (Cth) s 10 (definition of ‘personal property’).

WHAT IS MY LINE OF BUSINESS?

PRE PPSA CONSIDERATIONS 23

[2.1.4] If the business provides a service, it ought to consider whether or not it utilises products in providing those services — recognising that the PPSA might apply to property of the business and to property that the business ultimately provides to a third party. [2.1.5] If the business provides a mixture of products and services — or it is unsure of how to characterise what it supplies — the business should err on the assumption that it provides products and may be affected by the PPSA. [2.1.6] Some examples of businesses that deal directly with personal property include: (a) a lender that advances money and takes security over personal property; (b) a supplier that supplies goods on retention of title terms and conditions; (c) an equipment financer that lends money to assist a borrower to acquire particular equipment; (d) a business that leases equipment or goods; and (e) a business that delivers goods to a consignee under a commercial consignment. [2.1.7] Some examples of businesses which deal indirectly with personal property include: (a) buying new or second-hand goods from a third party for use in one's business; (b) taking a consignment of goods under a commercial consignment; or (c) buying, trading or assigning financial property for a third party such shares or cash or other investment products. [2.1.8] Businesses which are directly engaged with personal property will almost invariably be concerned with and affected by the PPSA and its provisions. However, businesses which indirectly deal with property — perhaps not to secure any monies but that which may be used by other parties to have secured monies in the past — might also be affected by the PPSA. As a matter of commercial practicality, it is difficult to conceive a scenario where a business does not need to consider whether or not the PPSA applies to and whether the business is properly equipped to deal with its application.

24 PPS in Practice

[2.1.9] Elaborating on circumstances where a party might be indirectly affected by the PPSA, perhaps the most classic example is the third party who seeks to purchase personal property free from any encumbrance. Whilst they are not necessarily in the business of dealing with personal property — in fact the purchase might not even be made in the course of business — if the personal property is subject to prior encumbrances, the third party purchaser ought to understand that they do not necessarily take free from those encumbrances simply because they provide new value for the property in question.

[2.1.11] A business which finds itself in the above scenario, for example — even if it is a business which does not traditionally deal with personal property in a direct sense — ought to avoid the unexpected encumbrance of the personal property it may need to trade.

[2.2] Ascertaining what the business does [2.2.1] From the above, stakeholders should closely consider the nature of their business to ascertain whether the PPSA is applicable or not — and to what extent. It may be that certain aspects of the business are concerned with residual rights in personal property that is being supplied to a third party whilst other aspects of the business are concerned with what conditions follow the acquisition of particular property. [2.2.2] If aspects of the business concern dealings with personal property, there is a likely need to develop internal systems to deal with the PPSA.

2 See Personal Property Securities Act 2009 (Cth) Pt 2.5 generally, and particularly, ss 44, 45.

WHAT IS MY LINE OF BUSINESS?

PRE PPSA CONSIDERATIONS 25

2 What Is My Line of Business? — Pre-PPSA Considerations

[2.1.10] In the used car purchase from a private seller, for example, unless the third party purchase can take free from existing encumbrances (which it can in particular circumstances2), the purchaser may inherit the liabilities attached to the vehicle in addition to the vehicle itself.

[2.2.3] These internal systems ought to consider the development of operational policies and procedures (such as setting out what employees need to know and allocating resources for the training of staff), credit management and assessment, documentation, technology and how the business deals with third party customers, suppliers and other stakeholders — both by way of contractual agreement and in respect of less formal communications made by the business through its employees/agents. [2.2.4] In a general sense, raising or issuing credit and using personal property as security, buying, selling or leasing personal property or selling personal property on consignment are transactions that may attract the functionality of the PPSA and which would require a close examination of the standard form agreements used by the business. [2.2.5] By way of illustration, for businesses involved in buying and selling property, both the protocol employed by the purchasing agent and the protocol/documentation adopted by the selling agent ought to be closely considered. [2.2.6] When looking to ascertain whether or not the PPSA applies to a particular business, the types of transactions the business enters into with third parties is of importance. This is because the PPSA focuses on the transaction’s commercial substance to determine whether or not the transaction gives rise to a ‘security interest’.3 [2.2.7] The form that parties adopt to govern their transaction (for example, the name or structure of the document) or even who has title to the property in question, if the transaction concerns property — are not determinative of whether or not a security interest is created. [2.2.8] By way of illustration, where a commercial hire company leases a particular machine to a third party the form the document might take is a ‘lease’, ‘bailment’, ‘rental’ or ‘hire agreement’. The lessor business might include a clause which retains title and ownership of the relevant machine being leased throughout the life of the agreement. [2.2.9] However, when one reads the terms of the document one might find that at the end of the lease term the leasing party has the 3 See Personal Property Securities Act 2009 (Cth) s 12.

26 PPS in Practice

ability to acquire the machine for a nominal amount — this would tend to suggest that the agreement is more akin to a ‘hire purchase agreement’ as opposed to a conventional lease.4 [2.2.10] On the other hand, the term or period of the agreement might extend for 36 months, for instance, which may give rise to a ‘PPS lease’5 irrespective of whether there is a purchase term in the agreement or not.

[2.2.12] In such circumstances, stakeholders who are aware that the PPSA is applicable to their business or who are unsure ought to seek advice.

4 See Personal Property Securities Act 2009 (Cth) s 12(2)(d). 5 See Personal Property Securities Act 2009 (Cth) ss 13, 12(3)(c).

WHAT IS MY LINE OF BUSINESS?

PRE PPSA CONSIDERATIONS 27

2 What Is My Line of Business? — Pre-PPSA Considerations

[2.2.11] The short point is that the form of the document is likely to be regarded as insufficient and attempts by businesses to ‘contract out’ of the PPSA by describing or drafting their agreements in a particular way is not likely to assist.

3 DOES THE PPSA APPLY TO ME AND MY BUSINESS? [3.1] Ascertaining when the PPSA applies to a particular transaction ................................................ [3.2] The collateral .............................................. [3.3] Accession and commingling ............................... [3.4] Exclusions from the PPSA .................................

29 30 31 33

[3.1] Ascertaining when the PPSA applies to a particular transaction [3.1.1] The PPSA applies to transactions which, in substance, secure payment or performance of an obligation. It also applies to certain ‘deemed’ transactions predominately to ensure that issues concerning apparent ownership are dealt with in favour of the external third party (noting that a party in possession of a particular asset — particularly over an extended period of time — may appear to be the owner of the property to an external third party). [3.1.2] Whilst much has been written about when and how to characterise particular transactions and what the legislative text of the PPSA means, not all transactions fit neatly into the legislative definition and a business may be unsure whether a particular transaction or tranche of transactions that it has entered into falls within the scope of the PPSA. [3.1.3] Businesses looking for a short answer to the question should err on the side of caution and assume that the PPSA is applicable for the purposes of complying with it in the authors’ view. This is because the consequences of failing to comply in circumstances where the PPSA is applicable usually outweigh the cost of compliance.

DOES THE PPSA APPLY TO ME AND MY BUSINESS? 29

[3.1.4] The difficulty with adopting the short answer as a matter of practice is that whilst proper compliance with the PPSA may assist parties in circumstances where the PPSA applies it risks leading to an unfounded view that the PPSA applies in circumstances where it simply does not. Put another way, there might not be any statutory consequences which follow from compliance in circumstances where the underlying transaction is not properly characterised as one falling within the scope of the PPSA (provided that the complying party has a belief on reasonable grounds that a security interest has or will be created in the case of registering a financing statement on the PPSR1), but if the contracting party was of the view that the PPSA complied and relied on its operative provisions that might leave the contracting party without appropriate recourse in particular circumstances. [3.1.5] Attempting to apply a ‘one size fits all’ approach to the PPSA and compliance with it is also dangerous for the above reasons and the better approach is for stakeholders to adopt a style of checklist that identifies: 1. the different types of transactions the stakeholder regularly engages with; 2. whether or not any of the transactions concern personal property; 3. the industry sector that the transaction concerns and the ability to amend terms and conditions if required to; and 4. What processes are in place if the PPSA applies — and if the PPSA does not apply?

[3.2] The collateral [3.2.1] ‘Collateral’ means the personal property to which a security interest has attached2, or in respect of lodging a financing statement on the PPSR, it is the personal property described by the registration.3

1 See Personal Property Securities Act 2009 (Cth) s 151. 2 See Personal Property Securities Act 2009 (Cth) s 19. 3 See Personal Property Securities Act 2009 (Cth) s 10.

30 PPS in Practice

[3.2.2] It has been suggested that an over-arching objective of the PPSA is to improve the capacity of businesses to use their assets as collateral, and to secure finance more cost-effectively.4 [3.2.3] Identifying what it is that a security interest actually attaches to is not only important as a means of complying with the PPSA but it also allows the secured party to have a clear sense of the commercial value of the security being offered and whether or not the secured party requires additional or other forms of security in light of its exposure to a particular transaction in particular circumstances.

[3.3] Accession and commingling Accessions [3.3.1] For the purposes of the PPSA, the term ‘accession’ means goods that are installed in or affixed to other goods (which are readily identifiable), unless both the accession and the other goods are required or permitted by the regulations to be described by serial number.5

[3.3.3] The default priority rule is that a perfected security interests in an accession (which was perfected prior to the goods acceding), has priority over a claim made by a person with an interest in the whole.7 [3.3.4] Where a secured party has an interest in the accession and has failed to perfect that interest prior to the goods becoming an accession, priority is afforded to a perfected interest over the whole.8 [3.3.5] This applies to perfected interests for value;9 an assignee for value,10 perfected interest over advances made under a security

4 5 6 7 8 9 10

Bruce Whittaker Report [p 90]. See Personal Property Securities See Personal Property Securities See Personal Property Securities See Personal Property Securities See Personal Property Securities See Personal Property Securities

Act Act Act Act Act Act

2009 2009 2009 2009 2009 2009

(Cth) (Cth) (Cth) (Cth) (Cth) (Cth)

s s s s s s

10. 88. 89. 90. 90(a). 90(b).

DOES THE PPSA APPLY TO ME AND MY BUSINESS? 31

3 Does The PPSA Apply To Me and My Business?

[3.3.2] A security interest in goods that become an accession to other goods continues in the goods that acceded.6

agreement11 and perfected interest providing rights to retain the whole in satisfaction of the obligation secured.12

Commingling [3.3.6] For the purposes of the PPSA, goods that are commingled include goods that are mixed with other goods such that the original goods are indiscernible upon being processed or commingled.13 [3.3.7] The PPSA also regulates security interests in goods that become an unidentifiable part of a larger product or mass. [3.3.8] A security interest in goods, that are so manufactured, processed, assembled or commingled, continues in any commingled product of the goods with other goods, provided it is commercially impractical to restore the goods to their original state.14 [3.3.9] A security interest in goods, that subsequently become commingled, continues in the combined product and is to be treated as a perfected security interest that is taken in the combined collateral.15 [3.3.10] Section 101 of the PPSA restricts the value of the security interest in the commingled good to prevent the security holder from inappropriately increasing the value of a security interest as a result of the commingling process. [3.3.11] The priority rules which may apply in relation to multiple security interests perfected over different property which continue into the same product or mass are set out in the table below:16

11 12 13 14 15 16

See See See See See See

Personal Personal Personal Personal Personal Personal

Property Property Property Property Property Property

32 PPS in Practice

Securities Securities Securities Securities Securities Securities

Act Act Act Act Act Act

2009 2009 2009 2009 2009 2009

(Cth) (Cth) (Cth) (Cth) (Cth) (Cth)

s s s s s s

90(c). 90(d). 10. 99. 100. 102.

In the event of: Perfected security interest continuing in a product or mass

More than one perfected security interest continues in the same product or mass More than one unperfected security interest continues in the same product or mass

Priority Rule This perfected security interest has priority over an unperfected security interest continuing in the same product or mass Each perfected security interests share in the product/mass according to the proportion of their secured amounts After any perfected security interests, each security interests share in the product/mass according to the proportion of their secured amounts

[3.3.12] For the purposes of the above table, the obligation that is secured by a security interest does not exceed the value of the goods which is determined on the day they became part of the product or mass.17

[3.4] Exclusions from the PPSA [3.4.1] There are various types of personal property and interests that are excluded from the operation of the PPSA.19 [3.4.2] The justification for excluding certain arrangements from the PPSA is that, amongst other reasons, there are existing registration regimes that otherwise deal with the property being excluded (such as the Torrens title system that covers interest in land) or that the arrangement does not involve commercial finance which the PPSA primarily regulates (for example, general law liens).

17 See Personal Property Securities Act 2009 (Cth) s 102(4). 18 See Personal Property Securities Act 2009 (Cth) s 103. 19 See Personal Property Securities Act 2009 (Cth) s 8(1) (unless s 8(2) or (3) of the PPSA applies).

DOES THE PPSA APPLY TO ME AND MY BUSINESS? 33

3 Does The PPSA Apply To Me and My Business?

[3.3.13] A perfected purchase money security interest over commingled goods has priority over a non-purchase money security interest in the goods that continue in the commingled product.18

[3.4.3] Businesses (and their advisers) should be in a position to readily identify whether a transaction requires compliance with the PPSA. [3.4.4] If this is not possible, businesses ought to take a conservative approach and elect to register a financing statement on the PPSR even over transactions or collateral which is excluded from the PPSA in order to ensure that they are protected. [3.4.5] The merit in this approach is one of commercial consequence. The potential of losing priority over collateral or having the collateral vesting in the grantor, far exceeds the nominal value of registering a financing statement on the PPSR. [3.4.6] The most common exclusions, in the authors’ experience, include the following: (a) The PPSA does not apply to a lien, charge or other interest in personal property that arises under statute (other than the PPSA), unless the owner of the property agrees to the interest.20 There are many examples of statutory security devices such as, s 42 of the Sale of Goods Act 1923 (NSW) or s 59 of the Air Services Act 1995 (Cth). (b) The PPSA does not apply to a lien, charge or other interest in personal property that arises by operation of the general law.21 For example, under the general law,22 a mechanic has a possessory lien over a vehicle to secure the cost of the repairs. In this instance, the PPSA does not apply to such a lien. However, it should be noted that consensual liens that arise by virtue of an agreement, will not necessarily be excluded by the operation of the PPSA, as the parties may intend for the lien to operate as a security device.23 (c) The PPSA does not apply to an interest that is provided for by the creation or transfer of an interest in land.24 It also does not apply

20 See Personal Property Securities Act 2009 (Cth) s 8(1)(b). 21 See Personal Property Securities Act 2009 (Cth) s 8(1)(c). 22 See Personal Property Securities Act 2009 (Cth) s 10. ‘General law’ means the principles and rules of the common law and equity. 23 NCO Finance Aust Pty Ltd v Australian Pacific Airports (Melbourne) Pty Ltd [2013] FCCA 2274. 24 See Personal Property Securities Act 2009 (Cth) s 8(1)(f)(i).

34 PPS in Practice

25 26 27 28 29 30 31

See Personal Property Securities Act 2009 (Cth) s 8(1)(f)(ii). See Personal Property Securities Act 2009 (Cth) s 10. See Personal Property Securities Act 2009 (Cth) s 8(1)(i). See Personal Property Securities Act 2009 (Cth) s 8(5). See Personal Property Securities Act 2009 (Cth) s 8(1)(j). See Personal Property Securities Act 2009 (Cth) s 10. Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) [2017] NSWCA 8. 32 See Personal Property Securities Act 2009 (Cth) s 8(ja).

DOES THE PPSA APPLY TO ME AND MY BUSINESS? 35

3 Does The PPSA Apply To Me and My Business?

to the creation of an interest in a right to payment, or the creation or transfer of a right to payment, in connection with an interest in land, if the writing evidencing the creation or transfer specifically identifies that land.25 Land is defined as all estates and interests in land, whether freehold, leasehold or chattel, but does not include fixtures.26 The exclusions relating to land are designed to ensure that there is no intersection between the PPSA and the Torrens system of land title. Whilst the definition of ‘security interest’ under s 12(1) of the PPSA specifically refers to ‘personal property’ and excludes land, it would appear that these exclusions are specified for clarification purposes. (d) The PPSA does not apply to a right, entitlement or authority that is granted by or under the general law or by statute in relation to the control, use or flow of water.27 This right is further described to include a right that a person has against another person to receive (or otherwise gain access to) water.28 (e) The PPSA does not apply to interests in fixtures.29 For the purposes of the PPSA, fixtures means goods that are affixed to land but do not include crops.30 It has been held that the definition of fixtures under the PPSA was intended to import common law notions of affixation.31 As a matter of law, the courts will ascertain the objective intention of the parties to assess whether a chattel has become a fixture (and therefore become part of the land and excluded from the operation of the PPSA) or, whether it remains as a distinct personal property in its own right. (f) The PPSA does not apply to a security interest in personal property taken by a licenced pawnbroker32 if, the collateral is valued at less than or equal to $5000, and the interest arises in the ordinary course of a licensed pawnbroker business, and would not apply to

property that may, or must, be described by serial number in a registration.33 [3.4.7] Other forms of exclusions (outside of those squarely considered by s 8) may occur as a matter of substance. For example, in circumstances where a secured party can demonstrate that, notwithstanding that the transaction would otherwise fall within the definition of a ‘PPS lease’, and therefore a ‘security interest’ for the purposes of the PPSA, it falls within one (or more) of the exceptions set out under s 13(2) of the PPSA and therefore the PPSA does not apply.34 [3.4.8] In Forge Group Power Pty Limited (in liq) (receivers and managers appointed) v General Electric International Inc,35 General Electric International Inc contended that because it was not regularly engaged in leasing goods in Australia, the relevant lease could not be characterised as a ‘PPS Lease’ within the meaning of s 13(2)(a) of the PPSA and accordingly the PPSA could not be engaged. [3.4.9] The Court held that in ascertaining whether a person is (or is not) regularly engaged in the business of leasing goods, regard is to be had to the activity wherever it occurs, and it is not limited to the activity that solely occurs in Australia.36 [3.4.10] Whilst the Court also considered whether the collateral was a fixture and relevantly held that the collateral did not become a fixture, this element of the decision was ultimately appealed (albeit unsuccessfully).37

33 See Personal Property Securities Act 2009 (Cth) s 8(6). 34 See Personal Property Securities Act 2009 (Cth) s 13. 35 Forge Group Power Pty Limited (in liq)(receivers and managers appointed) v General Electric International Inc (2016) 305 FLR 101. 36 Forge Group Power Pty Limited (in liq)(receivers and managers appointed) v General Electric International Inc (2016) 305 FLR 101 at 107. 37 Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) [2017] NSWCA 8.

36 PPS in Practice

4 AM I TAKING A SECURITY INTEREST AND WHO IS GRANTING IT TO ME? [4.1] [4.2] [4.3] [4.4] [4.5] [4.6] [4.7]

What is a security interest? ................................ Debtor vs grantor .......................................... Grantors vs guarantors/indemnifying parties ............... What is the primary obligation? ........................... Legal entities and working out the appropriate grantor .... Who can be a grantor? ..................................... Has the security interest ‘attached’ to the collateral? .....

37 42 43 45 46 48 57

[4.1] What is a security interest? [4.1.1] The concept of a ‘security interest’, whilst broadly understood amongst the legal profession, differs depending on the context in which it is being considered. [4.1.2] In the common law sense, and speaking prior to the implementation of the PPSA, a security interest took a specific form at law, namely, a mortgage, charge, lien or pledge. [4.1.3] Whilst it cannot be said that the form of a particular instrument has ever determined the substance of it, form, namely the strictures of drafting, was of some significance as an interest which did not fall within one of the four classifications set out above did not, as a matter of law, constitute a security interest. The PPSA alters this position.

In Substance Security Interests [4.1.4] Under the PPSA, the concept of a security interest is dealt with by s 12, and specifically s 12(1), which provides that:

AM I TAKING A SECURITY INTEREST AND WHO IS GRANTING IT TO ME? 37

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). [4.1.5] Breaking up the statutory definition, an ‘interest in personal property’ means that the party taking security seeks to encumber or preserve a right of recourse to particular property (in the case of a security interest under the PPSA, that property is ‘personal property’, that is, not ‘real property’1). [4.1.6] This right of recourse is provided for by a transaction, which effectively means that the person granting the interest to the person taking the interest, have entered into some form of agreement or contract. An interest in personal property which is not created by a transaction or agreement, for example one created by force of law,2 would not be a security interest for the purposes of the PPSA. [4.1.7] Finally, the interest, in substance, secures payment or performance of an obligation. ‘Payment’ simply means satisfying a debt, whereas ‘performance of an obligation’ refers to a broader contractual promise, for example, performing a personal service such as painting a room or performing a haircut. [4.1.8] In seeking to put the definition back together, a security interest can be described as an ancillary, derivative, collateral or secondary obligation to some other primary obligation (the concept of which is considered further below). Put another way, if there is no primary obligation, or the primary obligation is satisfied in full, then there is no security interest. [4.1.9] Going one step further, the security interest exists to ensure or provide a means of ensuring the primary obligation agreed to between the parties is satisfied. [4.1.10] The reference to the words ‘in substance’ seeks to differentiate the statutory definition of a security interest in the position at common law. Under the PPSA, an agreement does not escape

1 See Personal Property Securities Act 2009 (Cth) s 10, ‘personal property’. 2 Such as a statutory security interest, see, eg, Storage Liens Act 1935 (NSW) s 3.

38 PPS in Practice

characterisation as a security interest simply because it does not fall within the conventional mortgage, charge, lien, or pledge. [4.1.11] One is required to look at the substance of the transaction, if, in effect, one forms the view that on a proper construction the agreement provides alternative recourse to personal property to a party to whom payment or performance of an obligation is owed then the agreement will constitute a security interest whether the parties intend for this or otherwise. [4.1.12] A broad reading as to what constitutes a security interest is also consistent with s 12(2) of the PPSA which provides a list of examples as to the types of arrangements which may, provided that s 12(1) is satisfied, constitute a security interest for the purposes of the PPSA. [4.1.13] A broad reading also exposes a commercial participant as risk than a narrow reading of the legislation. This is because even if the PPSA does not apply, establishing practices which ensure compliance with the regulatory regime presents no further risk outside of the administrative compliance cost if it turns out that the PPSA does not apply. The same cannot be said for the opposite position, namely, if the PPSA does apply and one does not comply with it, the results can be dire.

Deemed Security Interests [4.1.14] In addition to the ‘in substance’ security interest, the PPSA, at s 12(3), expressly specifies that particular types of transactions constitute security interest irrespective of whether or not the transaction otherwise satisfies s 12(1) of the PPSA.

[4.1.16] In respect of the above categories of transactions, the ‘PPS lease’ is likely to be the most common by a significant margin and it therefore forms the balance of the analysis considered below. [4.1.17] Section 13 of the PPSA expressly defines a ‘PPS lease’.

AM I TAKING A SECURITY INTEREST AND WHO IS GRANTING IT TO ME? 39

4 Am I Taking a Security Interest and Who is Granting it to Me?

[4.1.15] These transactions are the interest of a transferee under a transfer of an account or chattel paper, the interest of a consignor who delivers goods to a consignee under a commercial consignment and the interest of a lessor or bailor of goods under a PPS lease.

[4.1.18] On or about 19 May 2017, the Personal Property Securities Amendment (PPS Leases) Act 2017 (Cth) received royal assent (‘the PPS Lease Amendment Act’). [4.1.19] The upshot of the PPS Lease Amendment Act was to repeal s 13(1)(b), which provided that a lease for an indefinite term (even if that term was less than 12 months) constituted a PPS lease,3 and to amend the references to 12 months to 24 months. [4.1.20] However, the PPS Lease Amendment Act only applies to leases entered after the commencement of the legislation. Thus, it is likely that for a significant period of time, the former definition of the ‘PPS lease’ as it appeared prior to the PPS Lease Amendment Act will apply. [4.1.21] Essentially, the former definition of the PPS lease was that any lease arrangement which could be interpreted as extending possession to personal property for a period of more than one year, either by force of one agreement or by force of several agreements which operated back to back, for example, automatically executing options to extend, or any lease which did not have a prescribed end time of 12 months or less, would constitute a ‘security interest’ for the purposes of the PPSA. [4.1.22] Given that such arrangements would give rise to a security interest unless one of the exceptions pursuant to s 13(2) was satisfied, those commercial participants in the business of leasing or bailing goods are also required to have a rudimentary understanding of the PPSA so as to ensure that any arrangement which does fall within the definition of a security interest carries with it processes to comply with the regulatory requirements of the PPSA. [4.1.23] Whilst there are effectively two ways for a transaction to fall within the scope of the PPSA, a transaction which satisfies only s 12(3) is not properly the subject of the Ch 4 enforcement provisions and there are also some statutory protections in place for certain aggrieved parties if they do not comply with the PPSA and are

3 See the ramifications of which in Re Doka Formwork Pty Ltd (2014) 104 ACSR 163.

40 PPS in Practice

not otherwise the holder of a security interest which does not satisfy s 12(1).4 [4.1.24] As a matter of commercial practice, if a party is in doubt about whether or not a particular transaction or line of transactions falls within the scope of the PPSA or not, that party should seek independent legal advice, particularly if the party is in the business of entering many different transactions with many different customers each of which take the same or similar form (for example, selling or leasing goods). [4.1.25] In the absence of seeking independent legal advice, or until such advice is sought, it is prudent for the commercial party to assume that the PPSA does apply and to take steps to comply with the regime even if, on balance, the regime is not likely to apply. [4.1.26] The difficulty with the simple assumption that the PPSA applies is that the compliance process will often, if not always, benefit significantly from independent legal advice. This includes not only a review of the documents giving rise to the existence of the security interest, but also whether or not the commercial party needs to perfect any such interest in any particular way (as opposed to any other available under the Act), the risks associated with failing to implement appropriate practices in accordance with such advice and an overview of the consequences.

4 See Personal Property Securities Act 2009 (Cth) s 269; Corporations Act 2001 (Cth) s 588FO.

AM I TAKING A SECURITY INTEREST AND WHO IS GRANTING IT TO ME? 41

4 Am I Taking a Security Interest and Who is Granting it to Me?

[4.1.27] Nonetheless, a commercial participant who is cognisant of the risk of the PPSA is invariably in a better position when compared with a party who is entirely ignorant of the existence of the PPSA and its operative provisions. The short point to be made here is that any step to comply with the regime is likely to be better than no step — one illustration of this is the growing body of cases concerning extending time to lodge financing statements on the PPSR in applications under s 588FM of the Corporations Act and/or s 293 of the PPSA.

[4.2] Debtor vs grantor [4.2.1] As a matter of law, the person who owes the primary obligation under a particular transaction need not also be the person who has sufficient rights in personal property which are capable of forming the basis of a security interest in support of that obligation. [4.2.2] One example of this is where Financier A lends money to Borrower B, a corporation, who is contractually obliged to pay that money back to Financer A in accordance with whatever the terms of the agreement are between them — but the underlying interest is backed by a security interest granted by Director C (who is the sole director of Borrower B). [4.2.3] In such a circumstance, the ‘debtor’ is Borrower B and the ‘grantor’ is Director C. If Borrower B does not make good on their obligation to repay Financier A, Financier A can take steps to enforce the security interest against Director C and/or sue Borrower B for breach of contract. [4.2.4] It may be readily appreciated that the debtor and the grantor are often the same party particularly when it is the debtor who receives the relevant consideration under the contract between it and the secured party such that it goes against commercial sensibilities for some other party to grant security over its personal property when it does not appear, on the face of the agreement, that the grantor receives anything in exchange for encumbering their property. [4.2.5] However, an appreciation that the debtor and the grantor need not necessarily be the same party is important in particular circumstances for example, with trading trusts. It is trite that a ‘trust’ is not a separate legal entity as a matter of law. Nevertheless, the popularity of the trading trust appears to be growing, at least in Australian commerce, which has ramifications under the PPSA and outside of the PPSA. [4.2.6] In this regard, a commercial participant needs to appreciate that whilst it is the trustee, often a corporation, that enters the agreement — it may be doing so either solely in its capacity as trustee of a trust, solely in its individual capacity or, more commonly, both in its capacity as trustee of trust and in its own right. Any security interest granted by the corporate trustee, in circumstances where it is

42 PPS in Practice

seeking to bind itself in its capacity as trustee, it is likely to grant a security interest over trust assets — therefore the proper grantor is the trading trust itself and not the corporate trustee. [4.2.7] The above should stir some difficulty in legal practitioners on the basis that it is difficult to accept that a legal construct which is incapable, as a matter of law, of owning or having any proprietary rights in property is somehow, as a creature of statute, able to grant a security interest in or over that property. However, this is precisely how the perfection requirements of the PPSA prescribe that a secured party perfect a security interest over the trustee of a trust. [4.2.8] Without seeking to delve too far into the specific perfection requirements (a topic which is considered elsewhere in this text), as with many aspects of the PPSA where there is no failsafe answer, the prudent secured party would provide two grantors of the underlying interest on any financing statement lodged to perfect by registration — being the trustee of the trust (be it a corporation or individual) and the Australian Business Number (‘ABN’) of the trading trust.

[4.3] Grantors vs guarantors/indemnifying parties [4.3.1] A grantor of a security interest is a party who has sufficient rights in personal property to bestow upon the secured party an interest in that personal property which then satisfies s 12(1) and/or (3) of the PPSA. [4.3.2] The term ‘grantor’ is adopted because they are the party conveying or ‘granting’ the security interest. Once granted, the security interest follows the personal property — and it is the personal property itself which is critical to the interest.

5 See Personal Property Securities Act 2009 (Cth) s 32.

AM I TAKING A SECURITY INTEREST AND WHO IS GRANTING IT TO ME? 43

4 Am I Taking a Security Interest and Who is Granting it to Me?

[4.3.3] If the identity of the grantor changes because the property is transferred, by way of example, then whilst there are compliance requirements in respect of recording such an interest, the security interest follows the collateral unless it is expressly specified in the security agreement that any such security agreement extinguishes upon transfer.5

[4.3.4] A ‘guarantor’ on the other hand, is a party the identity of which is critical to the agreement. [4.3.5] Put simply, a guarantee is a contractual promise whereby a party separate to the party who owes the primary obligation agrees to guarantee that obligation by creating a liability personal to them if the primary obligor fails to meet their obligations. [4.3.6] A party who agrees to an ‘indemnity’ goes one step further than a guarantor — whereby the party to whom the obligation is owed can elect to enforce the primary agreement against either the original obligor or the indemnifying party interchangeably. [4.3.7] An understanding of the different forms of ‘collateral’ or ‘ancillary’ rights which can, in certain circumstances, be imposed to ensure the primary obligation is made good is useful in everyday business. For example, in certain circumstances, a personal guarantee from the sole director of a corporate entity which does not own any property in its own right may be an effective way of mitigating against the insolvency risk of that corporate obligor. [4.3.8] Also — importantly — none of the above are mutually exclusive. A commercial party can elect to take a personal guarantee or indemnity and a security interest over the property of the underlying obligor for example. [4.3.9] What is commercially appropriate depends largely on the risk profile of the various contracting parties, their history of dealings together, the market within which the parties are operating and the commercial leverage of either of the parties. [4.3.10] Whilst this book focuses on the taking of security against personal property, the principles are translatable to taking a guarantee or indemnity — namely ensuring that whatever step is sought to be taken, that compliance with the applicable legal framework is complete to avoid fatal defects when seeking to enforce the relevant mechanism. [4.3.11] Ultimately, it makes very little commercial sense to incur the cost of half-measures if those half-measures ultimately provide no protection on the face of existing authority or will likely cost more by

44 PPS in Practice

way of enforcement than the commercial agreement is worth in the first place due to ambiguity or errors in attempts at compliance.

[4.4] What is the primary obligation? [4.4.1] The primary obligation is the stipulation for which the contracting parties agreed to contract in the first instance. It is the core purpose behind the meeting of the minds to create a legally binding agreement. [4.4.2] Beyond this, the primary obligation often dictates, or at least indicates, the best means of ensuring that it is satisfied. What is meant by this is that if the primary obligation is to pay monies then recourse to property which exceeds the value of the primary obligation is an effective way of ensuring that those monies are paid. [4.4.3] But what if the property that recourse is sought to be had to is already encumbered? In those circumstances it may be that a review of all of the property of the debtor/grantor is necessary and an ‘all assets’ type of security interest needs to be taken. [4.4.5] Alternatively, if the secured party takes the form of a supplier, then perhaps recourse to the goods they have supplied will be sufficient. Again, however, context is important as if the supply is in respect of livestock then by the time the security interest is enforced — the livestock may not be alive such that alternative means of taking security ought to be considered.

[4.4.7] A security interest which covers the value of goods supplied may be an appropriate and effective form of security, but what about the costs of taking that security interest out or the costs of enforcing the security interest should need arise? [4.4.8] The purpose of identifying the primary obligation that the commercial party is concerned with closely and with particularity at the outset of any commercial dealing is to best address what needs to

AM I TAKING A SECURITY INTEREST AND WHO IS GRANTING IT TO ME? 45

4 Am I Taking a Security Interest and Who is Granting it to Me?

[4.4.6] In addition to the different means by which security can be taken — and over different types of property — knowing what the primary obligation is and ensuring that the maximum possible means of recovery is made available can be critical.

be secured and to put in place appropriate mechanisms to afford such security.

[4.5] Legal entities and working out the appropriate grantor [4.5.1] In a simple arrangement between two individuals, ascertaining who the grantor is may be very simple. However, in commercial practice, such a task is not always so simple especially as the size of the transaction in question grows. [4.5.2] Nevertheless, properly identifying the proper grantor of a security interest is critical to the validity of that interest should the secured party seek to enforce it at a later stage. This is because where the secured party has failed to properly indicate the proper grantor(s), whatever step it may have taken to put the world on notice of its interest may, in and of itself, be misleading. [4.5.3] Take the following example: Party A supplies a tractor to Party B. It is a condition of the agreement between Party A and Party B that Party B does not sell, misappropriate or otherwise surrender possession of the tractor to any other party and that Party B is to return possession of the tractor to Party A at the end of the agreement — which is 30 months from the execution of the agreement. As part of the security agreement, Party A reserves all title to the tractor and lodges a financing statement on the PPSR in respect of the interest taken. Subsequently, and in breach of the agreement, Party B misappropriates the tractor and on-leases it to Party C. Sometime shortly thereafter, Party B and Party C enter external administration (within the meaning of Ch 5 of the Corporations Act 2001). [4.5.6] The immediate difficulty with the above scenario is identifying who is the proper grantor. Whilst Party A has a written agreement with Party B (and, if diligent, has taken steps to perfect whatever interest has arisen under that agreement against Party B), Party A is, or may be, ignorant of the position of Party C.

46 PPS in Practice

[4.5.7] An administrator appointed to Party C might reject a claim from Party A over the relevant collateral on the basis that no step to perfect was taken against Party C. In other words, a complete grantor search of Party C does not reveal any interest taken by Party A. [4.5.8] A secured party in this position ought to be aware of s 34 of the PPSA and the requirement that the secured party take appropriate steps to perfect in circumstances where collateral is transferred. [4.5.9] Whilst there may be a dispute as to whether transfer means something more than simply conveying or passing possession of the underlying collateral to another, a secured party who becomes aware of a transfer has five business days from the point in time at which actual or constructive knowledge of the transfer is at hand.6 [4.5.10] Of course, if Party B has properly perfected its interest over Party C then the issue is likely resolved by following the chain of registrations — Party B’s administrator seeks to enforce Party B’s registration over Party C and Party A seeks to enforce its registration over Party B.

Potential Multiple Grantors at the Outset [4.5.12] The above attempts to deal with circumstances where collateral is misappropriated or dealt with in a way which is inconsistent

6 See Personal Property Securities Act 2009 (Cth) s 34(1)(c)(ii).

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4 Am I Taking a Security Interest and Who is Granting it to Me?

[4.5.11] Whether or not Party A could, hypothetically, seek to perfect by registration upon receiving notice that Party C had gone into external administration in accordance with s 34 of the PPSA (noting the difficulties presented by s 267 of the PPSA) remains to be seen. In the authors’ view, the argument enjoys reasonable prospects of success in circumstances where the initial registration against Party B is valid and effective and the new registration occurs within five business days of acquiring such notice. The temporary perfection conferred by s 34 of the PPSA likely continues the chain of perfection required in order for Party A to assert continuous perfection, in accordance with s 56 of the PPSA, so as to defeat a s 267 claim from the external administrator of Party C.

with the original secured party’s understanding or intentions (as contained in its agreement with a grantor). [4.5.13] However, if the secured party is aware that it is dealing with a series of grantors who might change — for example, a corporate entity which trades in a corporate group and which circulates assets between companies in the corporate group — then the secured party has the ability to address the various potential grantors at the outset. [4.5.14] As a general rule, in the authors’ view, the secured party ought to perfect by registration (assuming registration is an appropriate means of perfection) against as many entities as might feasibly hold the collateral at any given point in time. In the case of a corporate group for example, a specific registration against each member of the corporate group should be made. The authors say this in circumstances where all the secured party is obliged to have before it can so register is a belief on reasonable grounds that they are or would become a secured party in relation to the relevant collateral.7 [4.5.15] In the case of a specific security interest or PMSI, this scatter-gun approach is appropriate because the PPSR registration only enlivens if that company holds the relevant collateral at the point in time at which the critical event occurs. It otherwise puts the world at large on notice of an interest which exists over collateral not in the hands of the relevant grantor — and therefore it is difficult to see how that grantor could be prejudiced by the registration. [4.5.16] Different rules apply, of course, if the secured party is taking an AllPAP.

[4.6] Who can be a grantor? [4.6.1] As a matter of law, only legal entities can own property. To speak, for example, of a trust owning property, is a legal nonsense — the trustee owns the property at law and the trustee must be a recognised legal entity. [4.6.2] When speaking of recognised legal entities, individuals and corporations come to mind. In the case of an individual, the premise is

7 See Personal Property Securities Act 2009 (Cth) s 151(1).

48 PPS in Practice

obvious. In the case of a corporation, there may be many different types of corporate entities (such as statutory corporations, body corporates or, more commonly, corporations limited by shares). [4.6.3] That being said, under the PPSA, title is indeterminate of priority and one does not need to have title to create a security interest. Indeed, one of the founding objectives of the PPSA is to reduce the stricture of legal construction and create transparency in dealings so that references to the PPSR reveals an accurate depiction of those with an interest over personal property of a particular entity. [4.6.4] For the above reason, the PPSA mandates perfection by registration against what might typically be considered to be unorthodox identifiers — including non-legal entities such as the ABN of a trading trust or the ABN of a partnership.

Partnerships [4.6.5] A partnership is a business structure that involves a number of legal persons (individuals or corporations) who carry on business together. Whilst not a legal construct in and of itself, a partnership requires a separate tax file number and, if carrying on an enterprise, often involves its own ABN for taxation purposes.

8 See Partnership Act 1963 (ACT); Partnership Act 1892 (NSW); Partnership Act 1997 (NT); Partnership Act 1891 (Qld); Partnership Act 1891 (SA); Partnership Act 1891 (Tas); Partnership Act 1958 (Vic); Partnership Act 1895 (WA).

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4 Am I Taking a Security Interest and Who is Granting it to Me?

[4.6.6] Partners in a partnership owe duties to one another and have the ability to bind other partners. Certain duties are prescribed by law8 and others flow as a consequence of a partnership agreement (to which the partner, often, must sign up to). Accordingly, it is crucial that secured parties review the partnership agreement to ascertain if it permits the applicable grantor to grant an effective security interest over the property. Secured parties must also ensure that there is no restriction or prohibition on the power to grant the security interest. To the extent that the partnership contains a prohibition of granting a security interest in the property, such agreement should be amended to permit the grantor to have sufficient rights to grant the security interest in the property.

[4.6.7] Where a security interest is granted by a partnership, the owner of the property the subject of the security interest must be one or more of the partners themselves. Notwithstanding this, cl 1.4 of Sch 1 of the PPS Regulations prescribes that: Secured party or grantor is a partner (1) For items 1 and 2 of the table in subsection 153(1) of the Act, this clause applies if the secured party or grantor is a partner in a partnership. (2) The details mentioned in each item of the table, from the source mentioned for the item, are prescribed for the partner mentioned in the item. (3) For subclause (2), the prescribed details are the details mentioned in the item of the table that: (a) applies to the partner; and (b) has the lowest item number. Item 1

2

Partner Partner of a partnership for which details of the partnership have been included on the transitional register, for a migrated security interest Partner of a partnership that holds or has an interest in collateral in the course of, or for, an enterprise that has been allocated an ABN

50 PPS in Practice

Details ABN, name of partner or name that identifies partnership, as recorded on the transitional register

Source Transitional register

ABN

Australian Business Register

Item 3

Partner Partner in any other partnership

Details Details mentioned in the item in the table in cl 1.2 that applies to the partner

Source Source of the details mentioned in the item in the table in cl 1.2 that applies to the partner

[4.6.8] From the above, it is only where the partnership does not have its own separate ABN that regard is to be had to the individual partners addressed by cl 1.2. [4.6.9] As a matter of practice, in circumstances where it is possible to include multiple grantors on a single financing statement to be lodged on the PPSR, there is merit, in the authors’ view, in lodging a registration listed the ABN of the partnership and any of the partners (including, perhaps, all of them) who may hold the relevant collateral at any point in time over the life of the security interest. [4.6.10] If there is an unreasonably large number of individual partners (consider, for example, a large law firm) then it might be necessary to do further due diligence inquiries to work out whether a subclass of the partners or perhaps only one partner actually holds legal title and/or possessory control of the relevant collateral on behalf of and for the benefit of the partnership. [4.6.11] From the above, simply lodging a financing statement against the partners themselves is insufficient notwithstanding that they may be the relevant party who has the requisite ‘rights’ in the collateral such that the security interest attaches in the first place.

[4.6.12] Much like a partnership, a trust is not a separate legal entity but rather a recognised legal construct which arises in several contexts. [4.6.13] There are many types of trusts, some of which have nothing to do with trade and commerce at all, such as charitable trusts or trusts designed to hold assets until particular beneficiaries reach a particular age.

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4 Am I Taking a Security Interest and Who is Granting it to Me?

Trusts

[4.6.14] Those that are involved in trade or commerce often hold an ABN and are taxed as distinct from the business of the trustee. [4.6.15] As there is no specific duty of disclosure as to whether or not a grantor of a security interest grants that interest in their capacity as trustee of a trust or in their individual capacity, a secured party may be left entirely unaware of the capacity within which the grantor has contracted with them. [4.6.16] That said it is common for a trustee, when executing documents as trustee of a trust, to specify that it is doing so in that capacity by including the words ‘as trustee for’ or ‘ATF’ followed by the name of the trust. [4.6.17] Where a grantor grants a security interest in their capacity as trustee of a trust, cl 1.5 of Sch 1 of the PPS Regulations provides that: 1.5. Secured party or grantor is a trustee (1) For items 1 and 2 of the table in subsection 153(1) of the Act, this clause applies if the secured party or grantor is: (a) a body corporate that is a trustee of a trust that: (i) has an ABN; and (ii) does not have an ARSN; or (b) any other trustee of a trust. (2) The details mentioned in each item of the table, from the source mentioned for the item, are prescribed for the trustee mentioned in the item. (3) For subclause (2), the prescribed details are: (a) for a trustee that is an individual – the details mentioned in the item of the table in cl 1.2 that: (i) applies to the trustee; and (ii) has the lowest item number; and (b) in any other case – the details mentioned in the item of the table that: (i) applies to the trustee; and (ii) has the lowest item number.

52 PPS in Practice

Item 1

2

3

Trustee Trustee of a trust for which details have been included on the transitional register, for a migrated security interest Trustee of a trust that holds or has an interest in collateral in the course of, or for, an enterprise that has been allocated an ABN Trustee of any other trust

Details Trustee details, as recorded on the transitional register

Source Transitional register

ABN

Australian Business Register

Trustee details mentioned in paragraph (3)(a)

Source mentioned in paragraph (3)(a)

[4.6.18] Again, notwithstanding the inability of the trust to hold any interest in property (and therefore the inability for the trust to grant any interest in such property) it is the ABN of the trust which is prescribed when perfecting by registration on the PPSR. [4.6.19] As with partners of a partnership, a prudent secured party would, in the authors’ view, include the requisite details of the trustee alongside the ABN of the trust when perfecting by registration.

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4 Am I Taking a Security Interest and Who is Granting it to Me?

[4.6.20] Further, it is prudent that secured parties review the trust deed to ensure that the trustee has the capacity, express power and authority to grant a security interest over the trust assets. Secured parties must also ensure that there is no restriction or prohibition on the power to grant a security interest pursuant to the trust deed. To the extent that the trust deed contains a prohibition of granting a security interest over the trust property, the trust deed should be amended to permit the trustee to have sufficient rights to grant a security interest over the trust property. In this regard, most trust deeds will provide provision/s that set out the procedure to amend the trust deed.

Individuals [4.6.21] The relevant table in respect of lodging a financing statement against an individual grantor is contained in cl 1.2 of Sch 1 of the PPS Regulations and provides as follows: Item 1

2

3

4

5

Individual Individual whose details are recorded in a transitional register, for a migrated security interest Individual grantor who is known to the secured party, because of the operation of the AML-CTF Act

Details Individual’s surname and given names, as recorded on the transitional register

Source Transitional register

Individual’s surname and given names, as known to the secured party, because of the operation of the AML-CTF Act Individual who Individual's holds a current surname and given driver's licence names, as recorded on the individual's driver's licence Individual’s Individual who surname and given holds a current proof of identity or names, as recorded current proof of age on a proof of identity or proof of card age card issued by a State or Territory body Individual who Individual’s holds a current surname and given Australian passport names, as recorded on the individual's current Australian passport

Current data known by the secured party, because of the operation of the AML-CTF Act

54 PPS in Practice

Current driver's licence issued by a State or Territory licensing authority to the individual Current proof of identity or current proof of age card issued by a State or Territory body to the individual

Current Australian passport issued to the individual

Item 6

7

8

Individual Details Individual’s Individual who holds a current visa, surname and given names, as recorded issued by the on the individual’s Australian current Australian Government visa Individual’s Individual who surname and given holds a current passport other than names, as recorded on the individual's an Australian current passport passport issued by the jurisdiction in which the individual ordinarily resides Any other individual Individual’s surname and given names, as recorded on the individual's birth certificate

Source Current Australian visa issued for the individual

Current passport issued by the jurisdiction in which the individual ordinarily resides

Birth certificate issued for the individual

[4.6.22] Whilst the most commonly accessible detail would likely be an individual’s drivers licence, a financial institution would likely have access to AML-CTF search results and is obliged to lodge a financing statement against the name which appears as a consequence of those results.

Corporations [4.6.24] A corporate entity is typically one incorporated under the Corporations Act 2001 (Cth) or its predecessors.

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4 Am I Taking a Security Interest and Who is Granting it to Me?

[4.6.23] If there is any discrepancy in the name recorded on an individual’s driver’s licence as against any other form of identifier that a secured party might have access to, the safest option, in the authors' view, is to lodge the financing statement against both variations of the result. A secured party can do this by inserting multiple grantors of the security interest. This might commonly be the case where the grantor has a middle name and sometimes uses the middle name, sometimes does not and sometimes uses the initial of their middle name.

[4.6.25] There is no issue at law with a body corporate owning or taking possession of property and as such granting a security interest is such property. Notwithstanding this, it is good practice for secured parties to review the relevant company constitution to verify that the company has power to grant security over its property and that there are no restrictions to this power. [4.6.26] In the case of secured parties that elect not to review company constitutions to verify this power, they may rely on certain statutory assumptions set out under ss 128 and 129 of the Corporations Act 2001 (Cth) — these include that a company's constitution has been complied with. However, if a secured party suspects that an assumption is incorrect, it may not rely on that assumption. [4.6.27] It should be noted that there are no equivalent statutory provisions that exist in respect of trustees and trusts. Accordingly, in each particular case it is vital to ascertain whether a trustee has the necessary power to grant a security interest. [4.6.28] Where this occurs, cl 1.3 of Sch 1 of the PPS Regulations provides that the secured party must include in any financing statement lodged on the PPSR the identifier which carries with it the lowest numerical value: Item 1

2

Body corporate Body corporate for which details have been included on the transitional register, for a migrated security interest Body corporate that is the responsible entity of a

Details Body corporate number or name of body corporate, as recorded on the transitional register

Source Transitional register

Registered scheme’s ARSN

National Names Index

registered scheme, if the scheme has an ARSN 3

Body corporate that ACN has an ACN

56 PPS in Practice

National Names Index

Item 4 5

Body corporate Details Source Body corporate that ARBN National Names has an ARBN Index Body corporate's Any other body Name of body constitution or corporate corporate, as provided for in body equivalent document corporate's constitution or equivalent document

[4.6.29] The most typical identifier is the ACN, ie item 3 above. [4.6.30] Importantly, in the case of Re OneSteel Manufacturing Pty Ltd (administrators appointed),9 Brereton J held that: the fact that the ABN happens to include the ACN does not mean that inclusion of the ABN equates to inclusion of the ACN. They are two different identifiers, issued by different agencies. In the relevant circumstances, the requirement was for the 9-digit ACN. Instead, an 11-digit ABN, the last 9 of which correspond with the ACN, was included. An 11-digit sequence is not the same ‘data’ as a 9-digit sequence which is included within it. Thus an ABN which happens to include the 9-digit ACN is nonetheless not the ACN.10 [4.6.31] It is therefore critical to include the precise identifier prescribed by the PPSA and PPS Regulations in order for there to be strict compliance with the perfection requirements.

[4.7.1] The concept of attachment is dealt with by s 19 of the PPSA and, on a plain reading, goes further than requiring ownership of or title in the relevant personal property. [4.7.2] Most commonly, a security attaches when the grantor has sufficient ‘rights in the collateral’ or the power to transfer such rights.

9 (2017) 118 ACSR 307; [2017] NSWSC 21. 10 (2017) 118 ACSR 307 at 312 3 [16].

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4 Am I Taking a Security Interest and Who is Granting it to Me?

[4.7] Has the security interest ‘attached’ to the collateral?

[4.7.3] The PPSA does not define the term ‘rights’, although the concept is inextricably linked to the term ‘interest in personal property’ which is found in s 12(1) of the PPSA. [4.7.4] The term ‘interest’ is defined by s 10 of the PPSA, although query the utility of the definition: ‘includes a right in the personal property’. [4.7.5] Section 19(5) assists in interpreting what ‘rights’ will be sufficient: Goods leased, bailed, consigned or sold under a conditional sale agreement. (5) For the purposes of paragraph (2)(a), 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 (including an agreement to sell subject to retention of title) when the grantor obtains possession of the goods. [4.7.6] Thus, under the PPSA, possessory rights in personal property are, in some circumstances, sufficient for the party in possession to create a security interest over the personal property. [4.7.7] Importantly, it is the personal property which then becomes the subject of the encumbrance and the resulting security interest is not restricted or limited to the rights available to the party granting the interest. Put another way, once a security interest has been granted, the holder of the security interest does not take a security interest over the possessory rights held by the grantor — but rather over the asset(s) the subject of those possessory rights themselves. [4.7.8] In Re Maiden Civil (P & E) Pty Ltd,11 Brereton J considered the significance of the attachment provision and held: Thus pursuant to s 19(5), Maiden — as a PPS lessee in possession of the Caterpillars — had rights in the Caterpillars, to which a security interest could attach. These rights are not limited to possessory rights, but include proprietary rights. Section 19(5) has equivalents in the New Zealand and

11 (2013) 277 FLR 337; [2013] NSWSC 852.

58 PPS in Practice

Canadian PPS legislation from which the PPSA is derived. For example, the British Columbia Personal Property Security Act 1989 provides, by s 12(1)(b), that a security interest ‘“attaches’ when the debtor acquires “rights in the collateral”, and s 12(2) states that ‘a debtor has rights in goods leased to the debtor … when he obtains possession of them in accordance with the lease’. In Re Giffen,12 Iacobucci J, delivering the judgment of the Supreme Court of Canada, said of that provision: [32] Thus, upon delivery of the car to the bankrupt, the lessor had a valid security interest in the car that could be asserted against the lessee and against a third party claiming a right in the car. However, the lessor’s security interest remained vulnerable to the claims of third parties who obtain an interest in the car through the lessee including trustees in bankruptcy. In order to protect its security interest from such claims, the lessor must therefore perfect its interest through registration of its interest (s 25), or repossession of the collateral (s 24). The lessor did not have possession of the car, and it did not register its security interest. Thus, prior to the bankruptcy, the lessor held an unperfected security interest in the car. …

… a trustee in bankruptcy, upon whom there devolved a chattel in the possession of the bankrupt under a commercial lease for a term exceeding a year, succeeds

12 [1998] 1 SCR 91; (1998) 155 DLR (4th) 332.

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4 Am I Taking a Security Interest and Who is Granting it to Me?

[36] I note that s 12(2) of the PPSA also recognizes that a lessee obtains a proprietary interest in leased goods. Section 12(2) states explicitly that ‘a debtor has rights in goods leased to the debtor … when he obtains possession of them in accordance with the lease’ (emphasis added). Thus, s 12 operates to ‘deem or recognize that a lessee has a proprietary interest’ (Buckwold and Cuming, supra, at p 471). The Saskatchewan Court of Appeal considered a provision similar to s 12 of the British Columbia PPSA in International Harvester and held that (at p 206):

to the contractual or ‘possessory’ interest of the bankrupt in that chattel, as well as the bankrupt’s statutory or ‘proprietary’ interest therein as conferred upon the debtor by s 12 of the Act. [Emphasis added.] [37] From the perspective of both the PPSA and the BIA the bankrupt, as lessee, can be described as having a proprietary interest in the car. … The Commonwealth Parliament, in enacting legislation that was modelled on the New Zealand and Canadian legislation, should be taken to have intended the same approach, which was by then well-established in Canada and New Zealand, to apply.13 [4.7.9] Pursuant to s 19(3), the parties to a security agreement can, notwithstanding an earlier conferral of possession, contractually provide that the security interest attaches to the collateral at a different point in time. [4.7.10] That being said, it is common for attachment to occur immediately upon the grantor obtaining possession of the underlying property (in the case of a PMSI) or upon the execution of the security agreement (in the case of an AllPAP).

What if the Security Interest Has Not Attached Prior to Default [4.7.11] At the time of the grantor’s default, a security interest is only enforceable against third parties if it has attached.14 [4.7.12] Equally, a security interest cannot be perfected (albeit it is possible to pre-perfect a security interest by registering prior to attachment or even before the security agreement comes to be — noting the express language of s 151(1)) until the security interest has attached.15 [4.7.13] Thus, if a security interest has not attached it is not enforceable against third parties and is not capable of perfection — as such, the secured party will have no ability to recover the property.

13 [2013] NSWSC 852 [26] [32]. 14 See Personal Property Securities Act 2009 (Cth) s 20(1)(a). 15 See Personal Property Securities Act 2009 (Cth) s 21(1)(b)(i).

60 PPS in Practice

Historically, the crystalisation of a floating charge would only apply to property in the hands of the chargor at the time of default — the same principle is applicable under the PPSA in respect of property to which the security interest has not attached.

4 Am I Taking a Security Interest and Who is Granting it to Me? AM I TAKING A SECURITY INTEREST AND WHO IS GRANTING IT TO ME? 61

PART 3 [P3] Transactional – Documentation and Compliance [P3.1] The first two parts of this text are centred on the purpose and the objectives of the PPSA as a legislative framework, the nature of a secured party’s business (and whether or not the PPSA applies to that business) and the salient concepts and features of the PPSA that all parties affected by it ought to be aware of. [P3.2] This part seeks to shift focus to assist the secured party in developing and adopting adequate structures in respect of its documents, practices and procedures to ensure that it complies with the requirements imposed by the PPSA and, ultimately, holds a perfected security interest in the relevant collateral. [P3.3] Ideally, a secured party who is cognisant of, and who takes steps to address the issues raised in this part, ought to be in a position where there are no additional requirements imposed by the PPSA. If this position can be reached then a secured party will not likely need to divert their mind back to the security interest unless and until the relevant grantor defaults on its respective obligations. [P3.4] The importance of compliance with the strictures of the PPSA is perhaps best demonstrated by the potential consequences that follow from non-compliance. Whilst these consequences are outside the realm of this part, and are otherwise the focus of Part 4 of this text, the secured party should take comfort that the exposure to these consequences will be significantly reduced if the step-by-step process set-out in this part is considered and, where necessary, applied to the secured party’s practices and procedures for each transaction. [P3.5] Consider the following example: Figure 1 Financier A enters into a facility agreement with Grantor B and Grantor B provides Financier A with an ‘all present and after-acquired personal property’ (‘AllPAP’) security interest.

Sometime thereafter, Supplier C accepts a credit application from Grantor B which allows Grantor B to purchase stock from Supplier C on 30-day payment terms (as opposed to requiring cash on delivery). As part of the credit application, Supplier C retains title to the stock unless and until paid for in full by Grantor B. In this respect, Grantor B grants Supplier C a ‘purchase money security interest’ (‘PMSI’) over the stock that is supplied by Supplier C. The above scenario is relatively simple in that it involves three stakeholders — Financier A, Grantor B and Supplier C — and categorically, two relevant security interest. This scenario is considered further in Ch 5 as it is quite a common scenario, albeit with added complexities and details, in commercial practice.

64 PPS in Practice

5 IF THE PPSA APPLIES (OR MAY APPLY), WHAT CLAUSES SHOULD YOU CONSIDER FOR YOUR AGREEMENTS? [5.1] [5.2] [5.3] [5.4] [5.5]

Taking security – what does this mean? ................... Can the operation of the PPSA be carved out? ............ What structure should the agreements adopt? ............. Amending the Structure of an Existing Agreement ........ The language of the security agreements ..................

65 67 68 73 78

[5.1] Taking security – what does this mean? [5.1.1] The taking of a security interest over property can be characterised as the creation of a supplementary or ancillary right which runs parallel to a primary obligation such that recourse can be had to the relevant property (otherwise referred to as ‘collateral’) can be exercised by the promisee upon the default of the primary obligation by the promisor. [5.1.2] A security interest is referred to at law as a right in rem — meaning a right ‘against the world’ — as unlikely the primary obligation, which will typically only be owed to the promisee by the promisor(s) who are actual parties to the relevant security agreement — the recourse to property is enforceable against all others, not just those who are party to the security interest. [5.1.3] Whilst the primary obligation typically takes the form of a debt, namely the contractual promise to pay, this is not always the

IF THE PPSA APPLIES … 65

case and a security interest can be taken to ensure that an obligation is performed outside of payment.1 [5.1.4] As may be self-evident, the holder of a security interest is in a more advantageous position than a promisee that merely relies on a promisor’s contractual undertaking to discharge a primary obligation. [5.1.5] At best, a promisee that merely relies on the promise retains the right to commence proceedings against the promisor for the relevant default and seek a judgment — commonly known as a right in personam. [5.1.6] Whilst this judgment may be subsequently enforced, as a result of a lack of payment by the judgment debtor, the promisee (in this capacity) does not have immediate recourse against any direct property of the promisor and faces significant enforcement difficulties if the promisor is simply without sufficient property to discharge the primary obligation. [5.1.7] At the risk of a judgment debt being unenforceable, inter alia, it is in the promisee’s interests to take steps to securing the underlying promise, as a default of the primary obligation will allow the promisee (in its capacity as secured creditor) to realise the relevant property (or collateral) and potentially discharge amounts owed to it — ultimately enhancing its ability to recover what is owed. [5.1.8] Further, and importantly, a secured creditor is also often able to stand outside of participating in the statutory process which follows the bankruptcy or insolvency of the grantor. Section 58(5) of the Bankruptcy Act 1966 (Cth), by way of illustration, makes clear that a secured creditor is not affected by s 58(3) and thereby retains the right to realise or otherwise deal with the collateral secured whether that collateral takes the form of personal or real property.2

1 See, ‘payment or performance of an obligation’ reference in the definition of ‘security interest’ at Personal Property Securities Act 2009 (Cth) s 12(1). 2 In respect of corporate grantors, see, Corporations Act 2001 (Cth) s 471C in respect of liquidations; Corporations Act 2001 (Cth) ss 440B D in respect of voluntary administrations; Also note there is no automatic moratorium in respect of Pt 5.2 receiverships and thus both secured and unsecured creditors retain their ability to enforce their rights, secured or otherwise, against the grantor.

66 PPS in Practice

[5.2] Can the operation of the PPSA be carved out? [5.2.1] Given the complexity of the PPSA, at least initially, certain stakeholders explored the possibility to completely carve-out its operation from their particular transaction. Some attempts included by expressly agreeing that the PPSA (in its entirety) does not apply and parties are therefore not required to comply with its requirements. [5.2.2] As a matter of law, stakeholders are incapable of contracting out of the PPSA in its entirety. The PPSA does not expressly provide for the ability to do so and applies if the 'substance' of the transaction gives rise to a security interest without regard to its form. Therefore, holders of security interests are obligated to comply with the PPSA, provided that the transaction in specie is, in fact, a security interest and is not otherwise expressly excluded by the PPSA.3 [5.2.3] Notwithstanding the above, the PPSA provides that where the collateral is not used predominately for personal, domestic or household purposes, the relevant parties to the security agreement may contract out of certain enforcement provisions specified in Ch 4.4 [5.2.4] Ch 4 equally does not apply to security interests in goods that are located outside of Australia5 nor does it apply to security interests which do not satisfy the ‘in substance’ test provided for by s 12(1)6 and therefore, consideration should be afforded to the underlying agreement that gives rise to the security interest to determine the nature of the security interest even if all parties accept that the PPSA applies.

3 4 5 6

See Personal Property Securities Act 2009 (Cth) s 8. See Personal Property Securities Act 2009 (Cth) s 115. See Personal Property Securities Act 2009 (Cth) s 109(2). See Personal Property Securities Act 2009 (Cth) s 109(1). The distinction between an ‘in substance security interest’ and ‘deemed security interest’ was discussed in Ch 4 above.

IF THE PPSA APPLIES … 67

5 If The PPSA Applies...

[5.1.9] In addition to this, the promisee, by taking a security interest, retains their contractual rights and may also commence proceedings against the promisor for any further amounts that are outstanding (if any).

[5.2.5] On the topic of contractual carve-outs, the PPSA also provides that an ‘interested person’7 may request certain information from the secured party that holds a security interest in the collateral. [5.2.6] Such information includes, but is not limited to, a copy of the security agreement, a statement in writing setting out the amount or the obligation that is secured by the security and the terms of payment or performance of the obligation.8 [5.2.7] Whilst this request is made available for the benefit of an ‘interested person’, the grantor can agree not to exercise its rights to make any request to the secured party for any such information, thereby waiving its rights under s 275 of the PPSA. [5.2.8] Annexure A may assist parties with an example of a clause that: a) excludes certain enforcement provisions of the PPSA; and b) waives the grantor’s rights to make a request to the secured party under s 275 of the PPSA. [5.2.9] It should be noted that, much like any other clause of any contract, this example clause should be tailored to each specific transaction and is subject to commercial negotiation. [5.2.10] Further, the enforcement provisions are discussed in more detail at [5.5.44] and regard should be had to this information when using the example clause provided in Annexure A below.

[5.3] What structure should the agreements adopt? [5.3.1] There are many methods to structure commercial agreements with each method tailored for the specific transaction to accommodate the commercial realities and legal implications relevant to the arrangement and the parties to the arrangement. [5.3.2] In the absence of being able to canvass every possible type of transaction, this text focuses on two primary transactions in the commercial realm, namely, the customary lender and borrower 7 An ‘interest person’ includes, (i) a grantor, (ii) a person with another security interest in the same collateral as that grantor, (iii) an auditor of a grantor, (iv) an execution creditor with an interest in the collateral or (v) an authorised representative of any (i), (ii), (iii) or (iv). See Personal Property Securities Act 2009 (Cth) s 275(9). 8 See Personal Property Securities Act 2009 (Cth) s 275(1).

68 PPS in Practice

Financing Transaction [5.3.3] Commonly, financiers will document the terms of a loan under a loan/facility agreement and if secured, the security interest will operate to secure the advancement/s under this loan/facility agreement. [5.3.4] Applying Figure 1 above, Financier A enters into a loan/facility agreement with Grantor B and the security that is granted is an ‘All present and after-acquired personal property’ security interest or an ‘ALLPAP’, which is regularly documented in the form of a ‘general’ security agreement (or deed). [5.3.5] Alternatively and, subject to commercial negotiation between Financer A and Grantor B, if Grantor B only provides security over a particular property (such as particular items of equipment or shares in a corporation), this form of security is regularly documented in the form of a ‘specific’ security agreement (or deed). [5.3.6] In respect of whether or not the terms of the loan (namely, the primary obligation) and the security interest (namely, the secondary contingency) ought to form part of one document or deed, it is advantageous for the terms of the security to be documented separately to the loan/facility agreement as it provides clarity, avoids confusion and allows parties external to the document, such as, potentially, a receiver, to easily identify their obligations and powers under the relevant security document without getting caught up in detail which does not necessarily concern them. [5.3.7] Additionally, and perhaps more importantly, in the event an interested party9 makes a request under s 275 of the PPSA to a secured party (for example, Financier A) to review the terms of the security agreement (or deed), that secured party can comfortably 9 An ‘interested person’ is defined under s 275(9) of the Personal Property Securities Act 2009 (Cth).

IF THE PPSA APPLIES … 69

5 If The PPSA Applies...

relationship in respect of a loan and the supplier and purchaser relationship in respect of a supply goods on retention of title (‘ROT’) arrangement. Figure 1 (on page 63) above illustrates how such transactions may arise in practice and will be referred to as a guide further below.

provide that security agreement (or deed) to that party, as the commercial terms of the loan/facility agreement are documented under a separate agreement (as oppose to commingling the loan/ facility agreement and the security in a singular document). This avoids complications with commercially sensitive details often contained in loan/facility agreements and the need to otherwise redact such information which would necessarily follow. [5.3.8] The suggested language to include in a general/specific security agreement (or deed) is discussed further at [5.5.1].

Suppliers of Goods [5.3.9] Prior to the enactment of the PPSA, ROT arrangements were not classified as a form of security interest and therefore suppliers were never required to register such an interest with the ASIC Register of Company Charges or other pre-PPSA registers.10 [5.3.10] However, since the commencement of the PPSA, an ROT arrangement likely satisfies the ‘in substance’ definition of a security interest for the purposes of the PPSA and it is very likely to be characterised as such.11 [5.3.11] Accordingly, suppliers should proactively ensure that their documentation is compliant with the PPSA, up-to-date with amendments deriving from the most recent jurisprudence in Australia, and, most importantly, that they have implemented effective processes and procedures to properly perfect any interest created to afford little to no room for error or compliance risk. [5.3.12] In this regard, first, it is fundamental that suppliers (and their advisors) structure their agreements to ensure that they adequately identify the source of the security interest.

10 See Associated Alloys Pty Ltd v Metropolitan Engineering & Fabrication Pty Ltd (Voluntary Administrators Appointed) (Receivers and Managers Appointed) (1998) 16 ACLC 1633; Associated Alloys v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588; [2000] HCA 25. 11 Central Cleaning Supplies (Australia) Pty Ltd v Elkerton (in his capacity as joint and several liquidator of Swan Services Pty Ltd (ACN 000 699 990) (in liq)) (2015) 321 ALR 181 at 185 [16].

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[5.3.14] The appropriate method to analyse the source of the security interest involves a close analysis of the formation of the contract, the underlying terms of the said contract and whether such terms create or give rise to a security interest in the relevant property that is the subject of the agreement. [5.3.15] Accordingly, it is suggested that suppliers should adopt the following structure: a) enter into an overarching agreement with the customer that provides for the standard terms and conditions (commonly referred to as the ‘terms of trade’) (‘Master Agreement’); and b) issue an invoice for each and every supply of good/s to the relevant customer (the grantor) (‘Invoice’). Each Invoice should then note that it is issued subject to the terms of the Master Agreement and not anything more. [5.3.16] If the above structure is not adopted but rather, the security interest (or an ROT clause) is expressly set out on each Invoice, it is arguable that each separate invoice will create a new and separate security interest each time one is issued to the customer. [5.3.17] This, unhelpfully, imposes a positive obligation on the secured party to ensure that it has perfected each new and separate security interest that arises by virtue of the notation on the Invoice. [5.3.18] In Central Cleaning Supplies (Aust) Pty Ltd v Elkerton13 the Court held that: The Credit Application must be construed using an objective approach to ascertain the intention of the parties as they have expressed it (not their subjective intention). Using that principle to construe cl 2, it seems to me that the parties must be

12 Central Cleaning Supplies (Australia) Pty Ltd v Elkerton (in his capacity as joint and several liquidator of Swan Services Pty Ltd (ACN 000 699 990) (in liq)) (2015) 321 ALR 181. 13 Central Cleaning Supplies (Aust) Pty Ltd v Elkerton (2014) 98 ACSR 52, 60; [2014] VSC 61, 33.

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[5.3.13] As a matter of law, the Court construed the totality of any contractual arrangement and relationship between the relevant parties when determining the source of the security interest.12

taken to have intended that the terms to be incorporated were recorded in a separate document existing at the date of the agreement. There is no evidence of what those terms were (if they did exist). Rather, Central Cleaning wishes to rely on a clause on invoices that came after the Credit Application and that clearly treats each sale as a separate contract. In my view, once a sufficient time had passed, the ROT Clause formed part of each separate and individual contract of sale (by dint of the consistent course of conduct). But it was too late for it to be incorporated as a term of the Credit Application agreement by this method, coming as it did, after that contract had been entered into by the parties. [5.3.19] Whilst the primary judge’s decision was ultimately overturned on appeal, the risk of the characterisation remains, namely, that a separate security interest may arise by virtue of an Invoice noting an ROT clause.14 [5.3.20] By way of further example, in Re Amerind Pty Ltd,15 Robson J adopted the approach taken by the Court of Appeal in Central Cleaning Supplies and held that the master agreement entered into in about May 2012 created the security interest and therefore all future supplies of goods were made subject to the terms of that master agreement.16 [5.3.21] Accordingly the Court held that the registration on the PPSR should have been made within 20 business days of the date of the master agreement or at least six months before the critical date under s 588FL(2)(b)(i) of the Corporations Act 2001.17 [5.3.22] The important point to take away is that each contractual arrangement and relationship is to be analysed in its own right — as it is fundamentally different. Such is the process of contract construction. The precedential value of the above authorities is limited to the factual confines of the cases brought before the Court. In the authors’ view, it is unequivocally better to avoid the risk of a characterisation

14 15 16 17

(2015) 321 ALR 181; [2015] VSCA 92. Re Amerind Pty Ltd (receivers and managers apptd) (in liq) [2017] VSC 127. Re Amerind Pty Ltd (receivers and managers apptd) (in liq) [2017] VSC 127, 529. Re Amerind Pty Ltd (receivers and managers apptd) (in liq) [2017] VSC 127, 529.

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[5.3.23] The suggested PPSA security interest clause to be included in a Master Agreement is discussed further at [5.5.4].

[5.4] Amending the Structure of an Existing Agreement [5.4.1] Notwithstanding that the PPSA has been in force in Australia for more than five years, there remain extant commercial relationships and agreements which fail to make any reference to the PPSA or means of complying with it. The upshot is that if a secured party wishes to amend an existing agreement to adopt the suggested structures considered above, there are legal and commercial implications that should be assessed in advance.

Financing Transaction [5.4.2] Prior to the enactment of the PPSA and in respect of secured financing transactions, it was common for a company to charge all of its assets and effects to a principal financier which was ordinarily documented by way of a fixed and floating charge. [5.4.3] A fixed and floating charge incorporated a fixed component over the assets of a company which could not be dealt with by that company (chargor) without the chargee's (financier's) prior consent. [5.4.4] The charge also incorporated a floating component which would ‘float’ over the assets (typically these assets included cash, stock and book debts) that were allowed to be dealt with by the company in the ordinary course of its business. [5.4.5] In the event that the chargee withdrew its consent for the company to deal with those assets, the charge ‘crystalised’ and it would change from floating to fixed. This could require a communication or notice from the charge or it could occur automatically upon the occurrence of a particular event (commonly referred to as an ‘event of default’ which often set out a defined list of contingencies). [5.4.6] The PPSA no longer distinguishes between fixed and floating charges — all security interests are fixed. That said, the traditional

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which jeopardises or fails to reflect the actual intention of the secured party (particularly where the secured party has substantial dominion over the clauses to be included in its agreements).

fixed and floating charge security arrangement constitutes a security interest for the purposes of the PPSA.18 [5.4.7] Further, the PPSA does not accommodate or ascribe specific legal meaning to concepts such as ‘floating charges’ or ‘crystallisation’ — it merely requires that a security interest ‘attach’ to the underlying collateral.19 Specifically, s 19(4) of the PPSA provides that a reference in a security agreement to a floating charge is not taken to be an agreement that the security interest will attach at a late date. [5.4.8] Noting stakeholder resistance to changing the documentation giving rise to a security interest, the PPSA provides that where a security agreement references a floating charge, it is taken to be a reference to a security interest that has attached to a circulating asset.20 [5.4.9] Typically, a circulating asset is an account, inventory or other type of property that the grantor retains control over. [5.4.10] Alternatively, where the secured party has provided the grantor the right (or consent) to appropriate the collateral in the ordinary course of its business free of the security interest, such collateral would also likely fall within the meaning of a circulating asset. [5.4.11] Accordingly, the grantor is able to deal with or appropriate the circulating assets subject to the security interest in the same way that a chargor pursuant to a floating charge agreement could deal with or appropriate the charged property. [5.4.12] On the basis of the above, it is not strictly necessary for financiers (or comparable parties) to amend their existing fixed and floating charge agreements to accommodate to the language of the PPSA. [5.4.13] That being said, it is exceedingly important that financiers (or comparable parties) confirm that practices have been put into place to perfect their fixed and floating charges, both transitional and newly created, for the purposes of the PPSA. 18 See Personal Property Securities Act 2009 (Cth) s 12(2). 19 See Personal Property Securities Act 2009 (Cth) s 19(1). 20 See Personal Property Securities Act 2009 (Cth) s 339(5).

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[5.4.15] Accepting that some of these migrated registrations contained defects, as a matter of law, they remained effective until the migrated end time of the registration or, if the original registration did not have a migrated end time, until 31 January 2017.21 [5.4.16] Given that this time has now passed, financiers (or comparable parties) should assess their migrated registrations to determine if the security interest still carries commercial significance and, if so, if the registration connected with the security interest remains effective, failing which, the interest will be unperfected for the purposes of the PPSA. [5.4.17] In the event that a financier’s fixed and floating charge is unperfected for the purposes of the PPSA, a new registration should be attended to and, where necessary, an application should be made to a Court of competent jurisdiction to extend the time of registration.22 This is discussed in further detail at [8.6]. [5.4.18] Separately, in the case where a financier (or their adviser) has dated both the loan/facility agreement and the relevant security agreement (or deed) but no registration/s have been made on the PPSR in respect of that security agreement (or deed) within the prescribed timeframe for a corporate grantor,23 there are a number of options available to that financier to perfect their security interest and ensure the validity of the elected means of perfection. [5.4.19] It should be noted that the exercise of each of these options will be influenced by a range of commercial and legal factors, such as the amount of the advance, the cooperation of the corporate grantor, its state of solvency and the prospects of success of any court application:

21 Personal Property Securities (Migrated Security Interests and Effective Registration) Determination 2011 (Cth). 22 See Corporations Act 2001 (Cth) s 588FM. 23 See Corporations Act 2001 (Cth) s 588FL(2)(b)(ii).

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[5.4.14] In respect of perfection, the fixed and floating charge was previously registered with the ASIC Register of Company Charges by the financier (or its legal representative) and since the inception of the PPSA these registrations have been migrated to the PPSR.

Option 1:

Option 2:

Immediately register a financing statement/s on the PPSR. Given that such registration/s will very likely be out of the timing stipulations provided for by s 588FL of the Corporations Act 2001, an application should be made to a Court of competent jurisdiction to extend the time for registration on the PPSR.24 This is discussed in further detail at [8.6]. If no advance has actually been made in connection with or pursuant to the existing security agreement (or deed) or any other related agreement (such as the loan/facility agreement), necessitate the corporate grantor to enter a new security agreement (or deed), on the same terms. This will allow the parties to effectively re-date the security agreement (or deed) which will allow the financier (or secured party) to register a financing statement/s on the PPSR (only this time, within the 20 business day from the date of the new agreement (or deed)).

[5.4.20] In the event that a financier adopts Option 2, they might also seek to register a financing statement/s in respect of the former security agreement (or deed), for abundant caution. Where there is any risk that a Court would find that the monies were actually advanced under the former security agreement (or deed), this practice should be encouraged, as such registration/s will be effective, if within six months of that registration time, the corporate grantor has not entered into formal external administration (that is to say, enter into voluntary administration, receivership or liquidation within the scope of Ch 5 of the Corporations Act 2001 (Cth)).

Supplier of Goods [5.4.21] Suppliers that have not adopted the structure recommended above should consider their current transaction documents to determine if there is any exposure with the means by which the security interest is created. Exposure in this regard often takes the form of inconsistent clauses which create ambiguity (such as a clause 24 See Corporations Act 2001 (Cth) s 588FM.

76 PPS in Practice

[5.4.22] As a first step, it is suggested that suppliers determine the source of the security interest under its existing documents in respect of each client or customer. [5.4.23] Once the source of security is identified, the supplier could consider whether any other document or correspondence overlaps or speaks to the security in a way which might be inconsistent with the source document (for example, an invoice with a ROT clause). [5.4.24] Next, the supplier should limit the overlapping documents by either doing away with the practice completely or by adding terms to the supplementary documentation to make clear the source of the security interest. [5.4.25] If there is no ability to change the way in which the interest is created, the supplier will need to take positive steps to either effect multiple registrations on the PPSR or ensure that whatever is registered is broad enough by way of its description to cover all supplies even if each supply is properly the subject of a separate security interest. [5.4.26] In respect of compliance methods, it should be noted that the exercise of each of these options will be influenced by a range of commercial and legal factors, such as the value of the goods, the cooperation of the customer and its state of solvency, the reliance of the customer on the supply of the goods (as the goods may be the lifeblood of the customer's business) and the prospects of success of any court application. [5.4.27] Further, if the supplier has already made a series of supplies without regard to the form of taking security or complying with the PPSA — then legal advice should be promptly sought. [5.4.28] By way of example, a supplier in this scenario has several options:

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expressly stating that the parties do not intend any security interest to be created by the agreement whilst another clause expressly reserves title in favour of the supplier).

Option 1:

Option 2:

Register a financing statement on the PPSR in respect of each issued invoice. Whilst each of these registrations would be out of time (assuming that they are), an application must be made to a Court of competent jurisdiction to extend the time for registration on the PPSR.25 This is discussed in further detail at [8.6]. In the event Option 1 is not feasible, the Supplier should amend the terms of the existing agreement by way of variation deed (‘Variation Deed’). It should be a condition precedent in the Variation Deed that the customer pays all outstanding amounts currently owed to the Supplier and that the Supplier agrees to reduce the costs of goods for future supplies. If the customer is solvent, this arrangement would incentivise customers to make payment of all outstanding amounts that the Supplier was otherwise exposed to in the event the relevant customer enters into insolvency. Whilst the Supplier may believe its reduction in the costs of future supplies is a short term loss, consideration should be afforded to the total costs and benefit analysis of the commercial relationship. Further, if this option was exercised, the Supplier would also have to amend its documents to ensure the suggested structure discussed at [5.3.15] is adopted for all future supplies.26

[5.5] The language of the security agreements What Type of Security Interest Am I Taking? [5.5.1] In the case where a financier (or a comparable party) is taking an ALLPAP security interest (or an ALLPAP with exceptions), there are a number of key considerations that financiers (and their advisers) should note when drafting a general security agreement (or deed).

25 See Corporations Act 2001 (Cth) s 588FM. 26 See further, N Mirzai, ‘The PMSI Predicament’ (2016) 25 Australian Property Law Journal 76.

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Allens Linklaters, Ashurst, Herbert Smith Freehills, King & Wood Mallesons and Norton Rose circulated a memorandum in 2013 that provides a useful example of a PPSA clause that creates an ALLPAP security interest (‘PPSA Model Clauses’).27 The explanatory footnotes in the memorandum explain important principles including the preferable position that secured parties take security by way of transfer as opposed to a charge over certain collateral in certain circumstances. Administration In certain transactions it may be commercially agreed risk: between the secured party and the grantor that a particular asset or group of assets will be excluded from the security that is granted under the general security agreement (or deed). If this situation presents itself, secured parties should note that if they do not have security 'over the whole, or substantially the whole', of the grantor's property and the grantor subsequently enters into administration for the purposes of p 5.3A of the Corporations Act 2001, the secured party may be constrained, delayed or otherwise precluded from enforcing its security interest during the period of the administration. By way of brief explanation, during an administration of a company, there is a statutory moratorium that prohibits a security being enforced against the assets of the company except where the administrator has provided written consent or with leave of the court.28 An exception to this moratorium period is if the secured party has security ‘over the whole, or substantially the whole’, of the grantor’s property, this will permit the secured party to enforce its security during the first 13 business days from the date of appointment of the administrator.29

27 Allens Linklaters, Ashurst, Herbert Smith Freehills, King & Wood Mallesons and Norton Rose, PPSA model clauses General security agreement (16 May 2013) (accessed on 3 April 2017). 28 See Corporations Act 2001 (Cth) s 440B. 29 See Corporations Act 2001 (Cth) s 441A; s 9 definition of ‘decision period’.

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Security interest clause:

Secured money:

It is imperative that the security granted by the grantor to the secured party correctly secures the appropriate payment and/or performance of the obligation, failing which, the collateral the subject of the security cannot be realised to discharge that payment or obligation that is owed to the secured party.

[5.5.2] In the case where a financier (or a comparable party) is taking security over specific property, the description of the relevant property should be adequately described in the specific security agreement (or deed).30 Commonly, the specific security interest is over discrete property such as contracts, equipment or shares (owned or held by the grantor) in a company. [5.5.3] Annexure B provides an example charging clause to be inserted into a specific security agreement (or deed). For consistency, this example clause is akin to the charging clause set out in the PPSA Model Clauses save that it is limited to specific collateral. [5.5.4] In the case of suppliers of goods referred to at [5.3.23], Annexure C provides an example of a PPSA clause to be inserted (amongst the other terms) into the Master Agreement, with a view to establishing the Master Agreement as the source of the security interest. [5.5.5] After any type of agreement mentioned above is duly executed by the relevant parties; the secured party will then have to perfect the security interest in accordance with the requirements under the PPSA which is discussed further at [6.1].

How is The Collateral to be Dealt With? [5.5.6] As above, as a matter of law, all security interests for the purposes of the PPSA are fixed, namely, there is no such thing as a ‘floating’ security interest. [5.5.7] That said, a secured party may either impose restrictions on the grantor or permit the grantor to deal with the collateral the subject of the security interest.

30 See Personal Property Securities Act 2009 (Cth) s 20(2)(b)(i).

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[5.5.9] In respect of a specific security agreement (or deed), the condition imposed on the grantor in respect of how they deal with the collateral may be different to that of a general security agreement (or deed), as the secured party has an interest to protect the principal collateral and therefore the restriction to deal with this collateral should, at least at a high level, be more rigorous. [5.5.10] Annexure D provides an example clause in respect of addressing how the grantor deals with collateral. For consistency, this example clause is akin to cl 3 of the PPSA Model Clauses only that it is more restrictive.

How is the Security Discharged? [5.5.11] In respect of supply arrangements, the PPSA expressly provides that the parties to the agreement may contractually agree on the method in which payments must be applied in respect of the underlying obligations.31 [5.5.12] As a matter of law, where there are numerous obligations owed by a debtor to a secured party in several capacities (including on an unsecured, secured or purchase money security interest basis) and, in the absence of an express agreement between the grantor and that secured party, the debtor first satisfies the obligations that are unsecured, followed by the obligations that are secured and finally the obligations that are secured by purchase money security interest.32 [5.5.13] It is in the interest of the secured party to ensure that any purchase money security interest in the collateral is preserved to the maximum extent possible, as the secured party holds a ‘super-priority’ over the collateral,33 assuming that such an interest, first, falls within the requirements under s 14(1) of the PPSA, and second, is the 31 See Personal Property Securities Act 2009 (Cth) s 14(6). 32 See Personal Property Securities Act 2009 (Cth) s 14(6)(c). 33 See Personal Property Securities Act 2009 (Cth) s 62(2).

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[5.5.8] Clause 3 of the PPSA Model Clauses provides an example of such clause in the context of a general security agreement (or deed). This clause contemplates (amongst other things) that certain collateral may be dealt with by the grantor in the ordinary course of the grantor’s ordinary business.

subject of a PPSR registration which complies with s 62 of the PPSA (as relevant). [5.5.14] A secured party is thus encouraged to keep the purchase money security interest outstanding for as long as possible by ensuring that any money received is applied first to non-purchase money security interest. Annexure E provides an example clause for the method of application.

What Interest Do I Want to Have in Proceeds? [5.5.15] In the traditional form, proceeds means a return acquired as a result of the utilisation of a property or the consideration derived in respect of a transfer of a property. [5.5.16] Under the PPSA, ‘proceeds’ means identifiable or traceable personal property of the types set out under s 31(1) of the PPSA. [5.5.17] Given that most types of property are inherently capable of being transferred or appropriated, a secured party is, or should be, concerned with its security interest extending to proceeds. [5.5.18] As a matter of law, a security interest in the original collateral will attach to proceeds of that collateral, unless the security agreement (or deed) provides otherwise.34 [5.5.19] Secured parties ought to therefore ensure that proceeds are not excluded by the security agreement (or deed), unless commercially agreed between the relevant parties. [5.5.20] Further, as a matter of law, the security interest in the proceeds is enforceable against a third party whether or not the underlying security agreement (or deed) contains a description of the proceeds.35 [5.5.21] To establish that a secured party has priority in the proceeds, it must demonstrate that its security interest in respect of these proceeds is perfected under the PPSA (assuming such proceeds are

34 See Personal Property Securities Act 2009 (Cth) s 32(1)(b). 35 See Personal Property Securities Act 2009 (Cth) s 20(6).

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[5.5.22] It should also be noted that notwithstanding an ability to contractually, and by force of the PPSA itself, retain an interest in proceeds — the commercial reality of enforcing one's security interest against proceeds presents some significant and complex legal issues.37 [5.5.23] If, for example, the proceeds take the form of monies which are not held in a separate bank account but rather are mixed in the grantor's general account with all other monies, the appropriate question is, how does one know which monies belong to whom? [5.5.24] The ability to identify or trace proceeds should not be confused with the mechanics of doing so. The mechanics are something each secured party needs to think about. For instance, if a secured party insists, contractually, that the grantor hold certain monies in a separate bank account to avoid the risk of not being able to characterise which funds are proper proceeds of what collateral — can the secured party police this requirement? If they are not a signatory to the account, there is no real way that a secured party can ensure that all proceeds are deposited in such a fashion. [5.5.25] Similar issues arise not only in respect of monies in a mixed monies account but with types of goods which, by their nature, are mixed with other goods. A security interest in raw materials, by way of example, is inherently likely to be converted into a finished product before being sold for monies — there are two stages of commingling in this regard and the legal issues therefore multiply. [5.5.26] The type of industry and commercial realities are critical to the means by which enforcing a security interest against proceeds is to take place. If it is impossible or highly impracticable to trace proceeds upon enforcement then a secured party should consider imposing tighter trade terms (14 days instead of 30 days, for example) or taking

36 See Personal Property Securities Act 2009 (Cth) s 8. 37 See further, N Mirzai, ‘The Persistence of Equitable Doctrines with Respect to the Law Relating to Personal Property Securities: Assessing the Impact of the Personal Property Securities Act 2009 (Cth)’ (2013) 24 Journal of Banking and Finance Law and Practice 3.

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not excluded under the PPSA)36 — this is discussed further at [6.6].

alternative forms of security (such as a personal guarantee from the director(s) of a corporate grantor).

Abundance of Caution Clauses [5.5.27] In addition to the security granted pursuant to the underlying security document, generally (and subject to commercial negotiation), a secured party may request a guarantee and indemnity from a third party to guarantee and indemnify the payment or performance of the obligation of the debtor. [5.5.28] Subject to the terms of the guarantee and indemnity, the right of the secured party against the guarantor will generally be limited to a right in personam, as opposed to a right in rem (the difference between which is explained at [5.1]). [5.5.29] However, it is also worth considering the proposition that secured parties that fail to perfect a security interest against a grantor may reduce or eliminate the liability of the guarantor, as the secured party has an equitable duty to perfect its security interest.38 Accordingly, where a secured party has breached such a duty, ‘the surety is permitted in equity to be credited with the deficiency in reduction of their liability’.39 [5.5.30] Importantly, there is also authority that suggests that despite a secured party failing to adequately perfect a security interest against the primary debtor; such an omission will not reduce the liability of the guarantor, provided that there is an express term in the guarantee that protects the rights or remedies of the secured party under the guarantee and indemnity.40 [5.5.31] Secured parties are therefore encouraged to include such an express term in the guarantee and indemnity. Annexure F provides an example of such clause.

38 John Phillips and James O’Donovan, The Modern Contract of Guarantee (3rd ed, Thomson Reuters, 1996) 397. 39 Williams v Frayne (1937) 58 CLR 710, 738; Buckeridge v Mercantile Credits Ltd (1981) 37 ALR 543, 556 7. 40 Commonwealth Bank of Australia v Bobby Sailesh Anand [2011] NSWSC 613 [47]; Credit Lyonnais Australia Ltd v Darling (1991) 5 ACSR 703.

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[5.5.32] To avoid ambiguity, all security agreements (or deeds) should incorporate governing jurisdiction clauses. [5.5.33] If the grantor is an Australian entity, the parties to a security agreement (or deed) may agree that the governing law of a security interest is the law of a State or Territory in Australia.41 [5.5.34] However, in the case of certain intangible property, where the security interest is in an account, intellectual property (or an intellectual property licence) or that is a transfer of an account or chattel paper, the security agreement (or deed) cannot provide for a governing law.42 [5.5.35] In this instance, a secured party ought to be aware that the governing law of the security interest will be the law of the place in which the grantor is located.43

Other Provisions Representations and warranties [5.5.36] It is not unreasonable for a secured party to ensure that it has ring-fenced the collateral the subject of the security. [5.5.37] This is generally achieved by requesting the relevant grantor to make representations and warranties and undertakings under the security agreement (or deed). [5.5.38] These representations and warranties and undertakings also relate to the effectiveness of the security interest that is granted by the relevant grantor. [5.5.39] Annexure G provides example clauses for these representations and warranties and undertakings that may be included in a security agreement (or deed).

41 See Personal Property Securities Act 2009 (Cth) s 237(1). 42 See Personal Property Securities Act 2009 (Cth) s 237(2). 43 See Personal Property Securities Act 2009 (Cth) ss 237(2) and 239(1).

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Governing Law

Enforcement costs [5.5.40] In addition, a secured party should, where relevant, incorporate enforcement costs in the underlying security agreement (or deed) to ensure that the grantor/s is liable for all costs and expenses associated with the secured party (amongst other things) enforcing, maintaining or protecting its security (should it be required). [5.5.41] Annexure H provides an example clause for these enforcement costs that may be included in a security agreement (or deed). [5.5.42] It should be noted that as enforcement costs do not likely fall within the purchase price of the underlying collateral, there is some risk that any security interest extended to enforcement costs will not likely properly be the subject of a PMSI. [5.5.43] Ordinarily, one could deal with this by contractually providing that enforcement costs are to be paid out of any recovery first, however, at the time of enforcement it is likely that as the security interest is limited to the collateral, and the collateral may be made up entirely of the primary PMSI debt, any enforcement costs might ultimately only be recoverable as a matter of general, rather than PMSI, priority.44 Enforcement provisions [5.5.44] Whilst the above deals with how the security agreement (or deed) ought to deal with enforcement costs, a secured party should turn its mind to what enforcement provisions it should retain from the PPSA, exclude from its agreement (or deed) or, if there are any other enforcement provisions it wishes to include by way of contractual agreement. [5.5.45] As previously identified, the parties to a security agreement (or deed) may contract out of certain enforcement provisions under s 115(1) of the PPSA, provided that the collateral is not used predominantly for personal, domestic or household property purposes.45

44 Compare, Personal Property Securities Act 2009 (Cth) ss 55 and 62. 45 See Personal Property Securities Act 2009 (Cth) s 115(1).

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[5.5.47] The table below briefly identifies the enforcement provisions that parties may contract out of and also makes a recommendation as to whether secured recommends whether parties should contract out of such a provision. Enforcement

provision s 95

s 96

s 117

s 118

s 120

Explanation

Recommendation

This imposes an obligation on the Secured Party to give notice of removal of accession to the grantor The right to retain an accession

Parties should contract out of this provision as it may be onerous for the secured party Parties should not contract out of this provision Parties should not contract out of this provision

Secured party’s right to enforce security interest in personal property the same way as the interest in the land may be enforced under the land law Secured Party’s obligation to notify the grantor(s) of its decision to enforce its security interest under a land law Secured party’s right to issue a written notice to a third party (garnishee process) if the security interest is in liquid assets

Parties should contract out of this provision as it may be onerous for the secured party Parties should not contract out of this provision

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[5.5.46] Prior to agreeing to contract out of these enforcement provisions, a secured party should consider each of these enforcement provisions under s 115(1) on a case by case base, as some of these provisions may either be useful (in which case they ought to remain) or they may be onerous on the secured party (in which case they ought to be excluded).

Enforcement

Explanation

Recommendation

Secured party’s obligation to notify the grantor (s) of an action taken to issue a written notice to a third party (garnishee process) in respect of liquid assets Secured party’s right to seize collateral

Parties should contract out of this provision as it may be onerous for the secured party

provision s 121(4)

s 123

s 125

s 126

s 128

s 129

s 130

s 132(3)(d)

Secured party’s obligation to dispose of or take action to retain collateral seized under s 123 Secured party’s right to seize collateral by taking apparent possession of the collateral Secured party’s right to dispose of collateral that has been seized (whether under section 123 or otherwise) on default by the debtor Secured party’s right to dispose of collateral by purchasing the collateral itself in a public sale and paying at least the market value of the collateral Secured party’s obligation to notify the grantor(s) of disposal of collateral Secured party’s obligation to include any amounts paid to other secured parties in the statement of account following disposal of the collateral

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Parties should not contract out of this provision Parties should contract out of this provision as it may be onerous for the secured party Parties should not contract out of this provision Parties should not contract out of this provision

Parties should not contract out of this provision

Parties should contract out of this provision as it may be onerous for the secured party Parties should contract out of this provision as it may be onerous for the secured party

Explanation

Recommendation

provision s 132(4)

Secured party’s obligation to give six-monthly statements of account if it has seized collateral but not disposed of it within 6 months s 134(1) Secured party’s right to retain the collateral on default by the debtor (whether under section 123 or otherwise). s 135 Secured party’s obligation to give notice of retention of the collateral that is retained under section 134 ss 138A–138C Provides the procedures for seizure and disposal or retention of crops and livestock s 142 The right to redeem collateral by paying out or performing the obligations that are secured by the security interest and paying any enforcement expenses that are also secured by the security interest s 143 At any time before the secured party has disposed of or retained the collateral, a person has a right to reinstate the security agreement by paying, the amounts in arrears and secured enforcement expenses and remedying any other default that caused the secured party to dispose of or retain the collateral

Parties should contract out of this provision as it may be onerous for the secured party

Parties should not contract out of this provision

Parties should not contract out of this provision Parties should not contract out of this provision (if relevant) A secured party should elect to contract out of this provision

A secured party should elect to contract out of this provision

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5 If The PPSA Applies...

Enforcement

[5.5.48] The PPSA provides that even if the parties’ contract out of a particular provision, the provision will continue to the extent that it affects persons who are not parties to the security agreement (or deed).46 [5.5.49] Further, the rights, duties and obligations that arise under ch 4 of the PPSA (the enforcement provisions), must be exercised or discharged honestly, and in a commercially reasonable manner.47

Other Matters to Consider [5.5.50] Independently, when a secured party takes security over any property, it should always assess if there are any potential liabilities it may be exposed to as a result of holding that security (such as the interaction between it and other potential secured parties with other security interests over the same collateral) and whether such liabilities will impact the secured party, particularly in an enforcement scenario. [5.5.51] Accordingly, to avoid unnecessary exposure it is recommended that the secured party undertakes extensive due diligence over the property proposed to be charged by the grantor ahead of taking security. [5.5.52] In the instance of a financier, this due diligence may follow as a matter of course, however, this is not always the case and other, less sophisticated secured parties may either not be in a position to insist on extensive due diligence or may not have the ability to process the information in any event. [5.5.53] As with many aspects of compliance with the PPSA, one needs to become comfortable with the levels of exposure they are willing to take on ahead of creating a position of exposure as opposed to being surprised when the debtor does not pay or the grantor faces insolvency risk.

46 See Personal Property Securities Act 2009 (Cth) s 115(2). 47 See Personal Property Securities Act 2009 (Cth) s 111(1).

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6 HOW DO I PROTECT MY SECURITY INTEREST AND ENSURE ITS PRIORITY? [6.1] [6.2] [6.3] [6.4] [6.5] [6.6] [6.7]

Perfecting a security interest .............................. 91 Temporary perfection ...................................... 92 Perfection by possession .................................. 93 Perfection by control ...................................... 95 Perfection by registration .................................. 97 Perfecting a security interest in proceeds ................ 114 What do I do if I have failed to appropriately perfect a security interest? ....................................... 115

[6.1] Perfecting a security interest [6.1.1] A security interest that is appropriately perfected in accordance with the requirements of the PPSA avoids the possibility of it vesting in the grantor upon an insolvency event and also ensures that it has the best possible priority position as against another competing security interests taken over the same collateral. [6.1.2] The manner in which the security interest is perfected may dictate the strength of its priority position as against another secured party that also has a valid security interest in the same collateral. [6.1.3] The PPSA prescribes four methods of perfecting a security interest,1 three of which impose an active obligation on the secured party and the fourth which operates by force of the PPSA: a) perfection by registration;2

1 See Personal Property Securities Act 2009 (Cth) s 21. 2 See Personal Property Securities Act 2009 (Cth) s 21(2)(a), Pt 5.3.

HOW DO I PROTECT MY SECURITY INTEREST …? 91

b) perfection by possession;3 c) perfection by control;4 and d) temporarily perfection.5 [6.1.4] Whilst there are a number of methods to perfect a security interest, certain methods of perfection are only available in certain instances - this is discussed in further detail below. [6.1.5] The upshot is that a secured party should carefully consider each transaction separately to determine which method should be adopted to perfect its security so as to ensure the best priority position. [6.1.6] Further, it should be noted that a secured party is not restricted from perfecting its security interest in more than one way, in fact, it is recommended that a secured party perfect a security interest in more than one way (where available). [6.1.7] The reason for this is that it ensures that if the secured party fails to properly perfect its security using one method, it can rely on the other form of perfection (if appropriate), thereby maintaining its position and ensuring it has continuously perfected its security interest.6

[6.2] Temporary perfection [6.2.1] A security interest can be temporarily perfected by force of the PPSA.7 [6.2.2] This method of perfection does not impose an active obligation on the secured party (as oppose to the other three methods of perfection, which do impose an active onus on the secured party). That said where the PPSA allows a secured party to be temporary perfected, the underlying interest is deemed to be perfected until the relevant grace period expires.

3 4 5 6 7

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ss 21(2)(b), 24. ss 21(2)(c), 25 29. s 21(1)(a). ss 55(6), 56. s 21(a).

[6.2.3] As the name suggests, ‘temporary’ perfection is not permanent but rather has a fixed duration and, to some extent, does not put third parties on notice of the secured party’s security interest. [6.2.4] The premise behind temporary perfection is the provision of a statutory time period whereby the secured party can otherwise ensure that their security interest is perfected by some other means and to retain a position of priority from the first point in time at which the security interest became temporarily perfected (as opposed to some later time).

a) personal property that is in transit8 or collateral that is transferred;9 or b) in respect of transitional security interests,10 the PPSA provided a two-year grace period (from the registration commencement time11) for secured parties to otherwise perfect their security interests without loss of priority. [6.2.6] Whilst the temporary perfection period provided for by the transitional provisions has now expired,12 given that the PPSA makes other references to temporary perfection does not mean that the temporary perfection provisions are now obsolete.

[6.3] Perfection by possession [6.3.1] A secured party can perfect its security interest by possession;13 however possession as a result of enforcement (such as by seizure or repossession) will not constitute ‘possession’ as a form of perfecting a security interest.14 [6.3.2] The PPSA provides that a secured party will not have possession of personal property if the property is in the actual or 8 9 10 11 12 13 14

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22. 34. 308. 306(2). 322(1). 21(2)(b). 21(2)(b).

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6 How Do I Protect My Security Interest and Ensure Its Priority?

[6.2.5] The PPSA prescribes certain situations where a security interest will be temporarily perfected, for example:

apparent possession of the grantor or debtor, or another person on their behalf.15 [6.3.3] Whilst the PPSA imposes no restriction over the type of collateral that can be possessed, the commercial reality is that sometimes perfection by possession is not available to a secured party as the very purpose of the transaction being secured is to convey possession to the grantor (such as a lease or commercial consignment). [6.3.4] Section 24 of the PPSA provides the point in time in which possession will occur for the purposes of the PPSA which includes, goods transported by a common carrier,16 negotiable instruments not evidenced electronically,17 chattel paper evidenced electronically18 and investment instruments evidenced by a certificate.19 [6.3.5] A secured party may elect to perfect by possession as it protects the secured party against certain taking free provisions and ultimately eliminates the grantor’s ability to misappropriate the collateral (as they are not in possession of it). [6.3.6] As previously stated, where a security interest can be perfected by more than one method, and provided that it is continuously perfected,20 it will retain priority from the time the security interest was first perfected. [6.3.7] Given the above, where a secured party proposes to perfect its security interest by possession it is advisable to also perfect by registration. [6.3.8] This approach is recommended because if the secured party loses possession of the underlying collateral, even temporarily, (and it has only perfected by possession) it has failed to continuously perfect its security interest,21 which will result in its priority being postponed

15 16 17 18 19 20 21

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24(1). 24(3). 24(4). 24(5). 24(6). 55(6). 55(6).

to the point in time at which possession re-occurred rather than the first point in time in which possession was first obtained.22 [6.3.9] In this respect, the PPSR provides a more permanent form of perfection (provided that the registration has not been discharged inadvertently).

[6.4] Perfection by control [6.4.1] There are definitive classes of property that, if subject to a security interest, can be perfected by control: an authorised deposit taking institution (ADI accounts); intermediated securities; investment instruments; negotiable instruments that are not evidenced by a certificate; certain letters of credit; and satellites and other space objects.23

[6.4.2] A secured party that perfects its security interest by control (where available) has priority over any other security interest in the same collateral that is perfected by any other means.24 [6.4.3] It follows that secured parties should perfect their security interest by control wherever possible. [6.4.4] Notwithstanding the priority conferred on perfection by control, the authors are of the view that secured parties that are able to perfect a security interest by control should also seek to perfect by registration. The rationale behind this approach is that in the event a secured party inadvertently relinquishes its perfection by control, it may rely on its registration notwithstanding that the registration falls short of the priority benefits conferred on perfection by control. [6.4.5] Whilst the question of priority will not necessarily be resolved in favour of the party who has perfected by possession, it cannot respectfully be said that the underlying security interest was not continuously perfected in such circumstances.

22 See Personal Property Securities Act 2009 (Cth) s 56. 23 See Personal Property Securities Act 2009 (Cth) s 21(1)(c). 24 See Personal Property Securities Act 2009 (Cth) s 57.

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a) b) c) d) e) f)

Due Diligence in Corporate Transactions [6.4.6] In the context of corporate transactions, it should be noted that a purchaser proposing to purchase assets from a company that are subject to a security interest which has been perfected by possession or control, will not necessarily be put on notice of such interests from a search extracted from the PPSR (or a different platform which offers search functionality of the PPSR database). [6.4.7] As such, where the purchaser is purchasing assets which it will not take physical possession of, further due diligence will be required to verify whether the party in possession of the property has granted a security interest in the relevant assets. [6.4.8] Where this is the case, a deed of release may need to be procured from the holder of the security interest. [6.4.9] Section 46 of the PPSA provides that a purchaser of personal property takes the personal property free of a security interest granted by the vendor in that personal property if the personal property was sold in the ordinary course of the vendor's business. [6.4.10] The authors are of the view that purchasers should not rely on this provision and extensive due diligence should be conducted, as it would be unlikely that the sale of a business would be classified as a sale in the ordinary course of the vendor's business.25 [6.4.11] Accordingly, the purchaser of the assets should consider incorporating appropriate warranties in the sale agreement to ensure that the assets are not encumbered and are taken free from any security interest. [6.4.12] Importantly, unlike systems of registration which confer title by registration,26 the PPSR created by the PPSA is no more than a ‘notice based’ system of registration whereby the lodging of a financing statement on the PPSR does little more than put a third

25 See, Warehouse Sales Pty Ltd (in liq) v LG Electronics Australia Pty Ltd (2014) 291 FLR 407. 26 Consider Torrens Title, see further, N Mirzai and S Kang, ‘Systems of Registration: Synergies Between Torrens and the Personal Property Securities Regime’ (2012) 21 Australian Property Law Journal 32.

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party searcher on notice that an interest exists and contains several prescribed particulars. [6.4.13] What is not included is the extent to which the relevant collateral is encumbered, whether or not the grantor can deal with the underlying property — and if so on what conditions (if any), whether or not any representations and warranties have been made in respect of the collateral or otherwise and a number of other aspects of the arrangement between the grantor and the secured party in respect of the security interest — aspects which one would hope to find in the security agreement (or deed) itself.*

[6.4.15] Section 275 of the PPSA allows an ‘interested party’ to make such inquiries — and if there are any issues, it should be a condition precedent to any business acquisition that the grantor hand over any and all documents in respect of any PPSR registration or take steps to procure such documents noting s 275(9)(a).

[6.5] Perfection by registration [6.5.1] Perfection by registration27 on the PPSR is the most common form of perfection and governed by Ch 5 of the PPSA. [6.5.2] As above, the PPSR is a notice based system that publishes to the world at large, a secured party’s security interest in personal property. [6.5.3] In this respect the PPSR is not a register of security agreements (or deeds) that evidences the underlying security interest nor is it a register of title, it merely places third parties on notice that the secured party claims a security interest in the relevant grantor’s personal property. [6.5.4] Secured parties apply to the PPSR to register a ‘financing statement’ in respect of a security interest in personal property.28 *

See, Aubum Shopping Village Pty Ltd v Nelmeer Hoteliers Pty Ltd [2017] NSWSC 1230 at [62] and following. 27 See Personal Property Securities Act 2009 (Cth) s 21(a). 28 See Personal Property Securities Act 2009 (Cth) s 150(1).

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[6.4.14] A review of these security agreements (or deeds) will likely be very informative and revealing to a potential party looking to acquire a bundle of assets from a grantor.

[6.5.5] A financing statement or financing change statement may be registered irrespective if the relevant personal property is located in Australia or not or whether the person who owns or has rights in that property is located in Australia.29 [6.5.6] From a practical perspective, the PPSR is available online 24 hours a day seven days a week. Scheduled down time aside, one of the primary policy rationales behind the establishment of the PPSR was its ability to be always available.

Reasonable Grounds to Register A Financing Statement [6.5.7] Section 151 of the PPSA prescribes that a person must not apply to register a financing statement or financing change statement, which describes collateral, unless that person believes on reasonable grounds that, it is or will become a secured party in respect of that collateral.30 [6.5.8] If there is a breach of this provision there are civil penalties ascribed and set out under s 151 of the PPSA. [6.5.9] This provision is particularly useful in financing transactions in that it is possible for a financier to pre-register a financing statement or financing change statement (as applicable) in relation to a proposed transaction, provided that they believe on reasonable grounds that they will become a secured party in respect of certain collateral. [6.5.10] The benefit of pre-registration is that if the security interest comes to be, the point in time as which priority is conferred is the date of registration and not the date the security interest or security agreement (or deed) comes into force.31 [6.5.11] Accordingly, to ensure a financier obtains the optimal position of priority on the PPSR, it is recommended that: 1. prior to signing and closing the transaction, the financier (or its legal representative) conduct a PPSR search against the relevant

29 See Personal Property Securities Act 2009 (Cth) s 152. 30 See Personal Property Securities Act 2009 (Cth) s 150(1). 31 See Personal Property Securities Act 2009 (Cth) s 55(4); See also s 55(2).

98 PPS in Practice

[6.5.12] Whilst the approach above provides that perfection of a security interest will occur prior to attachment, the order of perfection and attachment does not matter for the purposes of ascribing priority under the PPSA.32 Put another way, one is able to pre-perfect their security interest. [6.5.13] To that end, it is recommended that, financiers (or comparable parties) that adopt the practice of registering financing statements prior to the attachment of the security interest, implement effective internal protocols and procedures to ensure an effective financing statement is registered or, if necessary, removed if the transaction does not materialise.

Requirements Under s 153(1) [6.5.14] Section 153(1) of the PPSA provides the requisite information that must be included in a financing statement or financing change statement. [6.5.15] It is imperative that this section be read concurrently with Sch 1 of the PPS Regulations and in respect of the details of the relevant grantor.

32 See Personal Property Securities Act 2009 (Cth) s 21(3).

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grantor(s). This will provide the financier (or its legal representative) with an overview of any registered security interest by any other secured party (if any). If there are any registrations on the PPSR, it may be a condition precedent for the grantor(s) to discharge or otherwise procure letters of comfort in respect of such registrations however, each financier will have its own credit requirements and this will be distinct for each separate transaction; and 2. provided that the financier is satisfied with the search extract and, if applicable, that certain registrations on the PPSR will be discharged or provided for at or prior to closing the transaction, the financier should register a financing statement prior to signing and completing its transaction with the grantor(s) in respect of the security interest which is about to come into existence.

[6.5.16] For convenience, the table set out under s 153(1) is set out in Annexure I. [6.5.17] In order for a financing statement to be effective for the purposes of s 160 of the PPSA, in the authors’ view, it is imperative that the financing statement contains the requisite data set out in the table under s 153(1) of the PPSA. [6.5.18] For example, item 1 of the table requires that the secured party details must be correctly identified. To correctly source the details of the secured party, reference should be made to Sch 1 of the PPS Regulations, which will provide the relevant details that must be sourced for each type of secured party.

Identifying the Appropriate Secured Party and Grantor [6.5.19] It is crucial to correctly identify the details of the secured party and the grantor in the case of secured party registering a financing statement on the PPSR. [6.5.20] In the event the details of the secured party or the grantor are recorded incorrectly on the registered financing statement, such a registration will be ineffective if there is a seriously misleading defect in any data relating to that registration or a defect mentioned under s 165 of the PPSA.33 [6.5.21] Whilst a defect in respect of identifying a secured party likely carries a lesser consequence,34 a defect in the identification of a grantor is in a very different and uncompromising category. Referring to a grantor by its ABN and not its ACN, by way of illustration, is a fatal defect for the purposes of s 153(1) of the PPSA and renders the registration entirely ineffective.35 [6.5.22] Therefore, the secured party (or their adviser) must use Sch 1 of the PPS Regulations to source the requisite details of the secured party and the grantor. Annexure J sets out a table identifying the type of grantor/secured party, the required information that ought to be 33 See Personal Property Securities Act 2009 (Cth) s 164. 34 See Re Transurban CCT Pty Ltd (in its own capacity and as trustee of the Transurban CCT Trust) [2014] NSWSC 1909, [4] [5] per Brereton J. 35 See Re OneSteel Manufacturing Pty Ltd (administrators appointed) (2017) 118 ACSR 307.

100 PPS in Practice

used for a grantor/secured party when registering on the PPSR and the reference to the relevant regulation.

Identifying the appropriate collateral class and sub classes [6.5.23] The process of registering a financing statement on the PPSR also requires the secured party to correctly identify the collateral class. [6.5.24] Firstly, the collateral must be described as consumer property or commercial property.36

[6.5.26] Commercial property means personal property other than consumer property.38 [6.5.27] Secondly, the collateral must belong to a single class of collateral prescribed by the PPS Regulations.39 [6.5.28] The PPSR divides the collateral classes into four main categories; Tangible property, General property, Intangible property and Financial property. These four categories each contain a number of classes including sub-classes which are described in further detail in Annexure K.

Identifying the Appropriate Serial Number [6.5.29] For the purposes of item 4(b) of the table set out under s 153(1) of the PPSA, the PPS Regulations prescribes that the following classes of collateral, when described as consumer property, must be described by serial number: a) aircraft; b) intangible property (that is, a design, patent, plant breeder's right, trade mark or a licence over any of these intangible property); 36 Item 4 para (a) of the table in s 153(1) of the Personal Property Securities Act 2009 (Cth). 37 See Personal Property Securities Act 2009 (Cth) s 10. 38 See Personal Property Securities Act 2009 (Cth) s 10. 39 Item 4 para (c) of the table in s 153 (1) of the Personal Property Securities Act 2009 (Cth).

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[6.5.25] Consumer property means personal property held by an individual that is not personal property held for carrying on an enterprise to which an ABN has been allocated.37

c) motor vehicles; d) watercraft; and e) aircraft that is an aircraft engine, airframe, helicopter or small aircraft, when described as commercial property, must be described by serial number. [6.5.30] In the case where the following classes of collateral are described as commercial property, the PPS Regulations prescribes that the following collateral may be described by serial number: a) motor vehicles; b) watercraft; or c) intangible property (that is, a design, patent, plant breeder’s right, trade mark or a licence over any of these intangible property). [6.5.31] Whilst the above classes of collateral that are described as commercial property may be described by the serial number, it is encouraged that secured parties (and their advisers) take steps to describe these classes of collateral with the appropriate serial number, if available, and, noting the risk of making an error in a particular serial number, should also consider perfecting by constituting a ‘master’ type of registration which provides for all supplies in an holistic way. [6.5.32] What is meant by this is that the secured party looks to effect a master registration on the PPSR at the commencement of the commercial relationship between the parties (such as the entering of a commercial credit agreement). That master registration provides, in a general way, a collateral description which broadly describes the relevant interest. [6.5.33] If it is in respect of supplying goods, for example, the collateral description provides something along the lines of: any and all goods supplied, provided or otherwise made available by the secured party to the grantor pursuant to [name of agreement] entered [date] as amended from time to time. [6.5.34] Upon making a subsequent supply of a serial number good, such as a motor vehicle, a separate registration ought to be made specifically in respect of that collateral noting the serial number. If this is done correctly, two registrations will apply to each item of collateral provided — the master and the specific. 102 PPS in Practice

[6.5.35] The basis for the specific registration is that a buyer or lessee may take the collateral free from any security interest if a search is conducted on the PPSR only by reference to the relevant serial number and such search does not disclose a registration by a secured party that has perfected a security interest.40 [6.5.36] The basis for the master registration is that if there are any errors in the specific registration, such as a typographical error in the serial number rendering the specific registration unsearchable, then the master registration may retain a position of perfection for the secured party.41

Collateral Descriptions [6.5.38] Subject to the collateral class selected by the secured party, a detailed description of the collateral in the free text field description may be required or appear as an option. This description in the free text field cannot exceed more than 500 characters. [6.5.39] If a secured party selects the ‘all present and after-acquired property — with exceptions’ as the appropriate collateral class, the property that is not subject to the security interest must be described in this free text field. [6.5.40] The use of this functionality will assist a third party searching the PPSR for security interests over particular personal property, as the description may indicate what property is covered by the security interest. [6.5.41] A clear description will also prove to assist a secured party, as it is may provide a third party searcher with all that they require such that they will not need to make a request for additional information about the security interest.

40 See Personal Property Securities Act 2009 (Cth) s 44(1). 41 Consider Re Duke Contracting Australia Pty Ltd [2017] NSWSC 767.

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[6.5.37] Annexure L sets out a table identifying the classes of collateral in respect of serial numbered property and the appropriate serial number that must be included in the financing statement.

[6.5.42] It is important that a secured party does not cause the description in the free text field to be incorrect or misleading, as this may result in a defective registered financing statement.42 To this end, where a secured party elects to use the free text field, it is encouraged that reference be made to the terms of the underlying security agreement (or deed) rather than attempting to re-invent or re-describe the interest taken. [6.5.43] Further, and as a strictly general rule, a broader registration ought to be preferred to one which is unduly restrictive as it is not likely that any interest taken beyond that which is appropriately described in the financing statement will benefit from the perfection connected with that financing statement. [6.5.44] A secured party should also monitor the substance of the transaction as if the type of property changes or the security agreement (or deed) is amended, regard should be had to the collateral description on the PPSR to reflect these variations (if necessary). [6.5.45] At the time of writing, and as a matter of practicality, the collateral description in the free text field can be amended at any time by registering a financing change statement on the PPSR.

Adopting Multiple Registrations in Respect of the Same Security Interest [6.5.46] It is not uncommon for secured parties to adopt the practice of lodging multiple registrations on the PPSR in respect of a security interest. In fact, it is encouraged for secured parties to adopt such practice, particularly where the secured party has doubt in respect of material issues — with or without the benefit of legal advice. [6.5.47] For example, and as is commonly the case in the equipment finance industry, there is ambiguity in respect of certain collateral that can arguably fall within the collateral class of ‘motor vehicle’ or ‘other goods’ or both. [6.5.48] To avoid the consequences of an erroneous registration, particularly where the registration fee is nominal when compared to 42 See Personal Property Securities Act 2009 (Cth) s 164(1).

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the value of the asset(s) being secured, secured parties are encouraged to register two financing statements on the PPSR under each alternative. Parties searching the PPSR ought to be aware of this preferred practice when interpreting the results of a PPSR search.

Dealing with Transferred Collateral [6.5.50] Where a grantor transfers collateral to a transferee, the PPSA recognises that the secured party's security interest may remain perfected provided that: a) the security interest remains attached to the collateral;43 b) the security interest is enforceable against third parties44 (noting that the Whittaker Review supports the view that a secured party is not required to enter into a new security agreement (or deed) with the new transferee (being the new grantor), as the existing security agreement (or deed) is sufficient);45 and c) the security interest is perfected,46 which is generally only by registration, as the secured party would not have possession or control (given that the collateral is transferred). [6.5.51] The PPSA contemplates that a transfer of collateral to a transferee that is subject to a security interest will make the transferee the new grantor. This is based on the apparent definition of grantor47

43 44 45 46 47

See Personal Property Securities See Personal Property Securities Whittaker Review, p 126. See Personal Property Securities See Personal Property Securities

Act 2009 (Cth) s 19(2). Act 2009 (Cth) s 20(1). Act 2009 (Cth) s 21. Act 2009 (Cth) s 10.

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[6.5.49] Similarly, certain suppliers of goods under retention of title arrangement have a practice of registering two financing statements on the PPSR. The first registration is in respect of a PMSI and the second registration is in respect of a non-PMSI. Amongst other reasons, the non-PMSI registration can prove to be valuable in a negotiation with a different secured party or receiver because of the doctrine of marshalling and in respect of recovering those aspects secured but perhaps not in respect of the purchase monies (consider the costs associated with procuring the agreement, enforcement costs etc).

at paragraph (e), which defines a transferee as a grantor and the note set out under s 166 of the PPSA, which provides that a change of the grantor may occur if the collateral described in the registration is transferred. In this case, the secured party's security interest may be temporarily perfected for a certain period,48 as the existing registration (over the transferor) may, from that point on, contain a material defect49 noting that the grantor is now the transferee. [6.5.52] To that end, secured parties are encouraged to register a financing statement, or a financing change statement, to reflect the transfer of a security interest, or of collateral, before or after the transfer.50 In the authors’ view, lodging a new financing statement ought to be preferred to amending an existing financing statement. In circumstances where there does not appear, on the face of the PPSA, to be any material difference between lodging a fresh registration and amending an existing one — the risk of making an unintentional amendment or resetting the priority time of an existing registration ought to be avoided. [6.5.53] Where a new financing statement is lodged, the secured party, where possible, should elect to link the new financing statement to the existing financing statement which notes the security interest taken over the original grantor. By doing this, the secured party is putting a third party searcher on notice of the earlier interest and earlier priority time. [6.5.54] Importantly and notwithstanding the above, secured parties should carefully note that the security interest that is temporarily perfected may be exposed to a buyer or lessee of collateral taking the collateral free from any security interest, unless the buyer or lessee has actual knowledge that the sale or lease constitutes a breach of the security agreement (or deed) that provides for the security interest.51 [6.5.55] The notion of perfecting a security interest against a new grantor, even if there is a contractual prohibition against the grantor dealing with the asset so as to create a new grantor, is not limited to a

48 49 50 51

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s s s s

34. 164. 162. 52.

transfer of the security interest. Section 34 of the PPSA provides for transfers in collateral. [6.5.56] The concept of ‘transfer’ is not defined or otherwise prescribed by the PPSA. It could mean a transfer by way of assignment, alternatively, it could mean a transfer in the literal sense ie, parting with possession — such as by way of creating a sub-lease or leased goods.

[6.5.58] An alternative approach to prohibition is to contractually provide for a mechanism for appropriation subject to controls over how the lessee perfects its own interest in the collateral (noting that the interest may be no more than possessory). In this way, the original secured party lessor may retain some control over the process. [6.5.59] Ultimately sub-leasing and the effect of s 34 is problematic for a secured party and practical means, such as installing GPS technology for motor vehicles by way of example, may allow a secured party to manage the actual risk of misappropriation or transfer without notice. [6.5.60] It was initially thought that the concept of chattel paper would go some way towards assisting the sub-lease issue outlined above. However, in circumstances where chattel paper has not enjoyed sufficient usage in Australia — and absent any decided cases on the point — the utility of chattel paper is not further considered.

Amending a Financing Statement and its Effect [6.5.61] There are certain details that can be amended on a financing statement that is registered on the PPSR. [6.5.62] To effect an amendment, a secured party applies to the PPS Registrar (via the government interface or a different platform which

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[6.5.57] Taking the cautious approach that transfer carries its broadest definition, a secured party who contractually prohibits a transfer of collateral will not necessarily be protected by that clause if both the lessee and sub-lessee enter insolvency as, at its highest, the contractual prohibition would be enforceable by way of a claim for damages for breach of contract. Even if successful, the claim would be one made against an insolvent entity.

offers registration functionality of the PPSR) to register a financing change statement to amend a registered financing statement.52 [6.5.63] Whilst details can be changed on a registered financing statement, advice should be sought to confirm if the financing statement (once amended) remains effective and continues to perfect the relevant security interest. [6.5.64] The following details can be amended on a registered financing statement:53 a) the end date of the registration (such as from a specified time to 'no stated end time'); b) add or remove grantors (although care should be taken when using the function to add a grantor, as the timing requirements discussed at [6.5.78] may not be complied with, therefore rendering the financing statement ineffective); c) the free text description in respect of describing a collateral (if applicable); d) indicating whether the security interest is subordinated; e) the giving of notice identifier (the reference number for a secured party); f) indicating whether the security interest extends to proceeds and the description; g) Vehicle Registration Number; h) Aircraft Nationality; and i) Aircraft nationality code and registration marks assigned pursuant to the Chicago Convention. [6.5.65] There is a fee associated with amending a registered financing statement. The effect of amending a registered financing statement is that the search certificate will note the date and time the registration was last changed. This certificate also provides a summary of the changes made to the financing statement. [6.5.66] Other details that are not enlisted above, including, but not limited to, the registration start time, collateral class (and type), the

52 See Personal Property Securities Act 2009 (Cth) s 150(2). 53 This information was sourced from the PPSR website what can be amended.

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serial number and grantor details cannot be amended on a registered financing statement. [6.5.67] In the authors’ view, given that any amendment to the a PPSR registration takes effect only from the time of the amendment and not retrospectively there is little to be gained from making an amendment to the financing statement. The basis for this is that any amendment risks resetting the time from which priority is conferred. It is better, in our view, to lodge a new financing statement and, if appropriate, link the new registration back to the old registration to demonstrate the link.

Discharging a Financing Statement [6.5.69] Ordinarily, if the obligations under the relevant security agreement (or deed) are fulfilled, a financing statement that was registered on the PPSR in respect of that security interest will need to be discharged. [6.5.70] A secured party can discharge a financing statement on the PPSR by: a) entering the appropriate registration number and the associated token number55 in the discharge section available on the online database; or b) entering the secured party group number and access code56 to access all the registrations made by that secured party on the

54 See, SFS Projects Australia Pty Ltd v Registrar of Personal Property Securities (2014) 226 FCR 188; SFS Projects Australia Pty Ltd v Registrar of Personal Property Securities (No 2) [2014] FCA 987. 55 The token number can be retrieved from the email address that was populated at the time the registration was arranged or that was allocated to the secured party group number. It is important that the token number remain confidential, as this number can be used to discharge a financing statement. 56 A secured party group (‘SPG’) is a system that assists secured parties to manage their registrations on the PPSR. An SPG can have one or more secured parties allocated to it however; once the SPG is set up you cannot add or remove a secured party from

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[6.5.68] Whilst the difficulty may seem remote, there have been cases where attempts to amend or transfer financing statements have resulted in the PPSR registrations being removed rather than transferred.54 The results can be catastrophic from a priorities standpoint.

PPSR. The secured party must then select the relevant registration number to discharge the financing statement. A secured party must ensure it selects the correct registration number as discharging the incorrect registration number will expose the secured party to an unperfected security interest that is not related. [6.5.71] Discharging a financing statement from the PPSR has an immediate effect in that it is contemporaneously withdrawn from the online database. At the time of writing, there are no associated fees to discharge a financing statement from the PPSR. [6.5.72] A secured party should note the requisite timeframe to discharge the financing statement from the PPSR. The timeframe to cause the discharge may be agreed between the secured party and the grantor under the terms of the deed of release or imposed by the PPSA.57 [6.5.73] A grantor should ensure that a duly executed copy of a deed of release is also collected at the time the parties agree to release the security interest. [6.5.74] The Australian Banker’s Association has issued a useful precedent entitled, ‘Release and Undertaking to Amend Registration’, which can be used by parties to either release or amend a registration on the PPSR.58

Timing Requirements [6.5.75] The PPSA and the Corporations Act 2001 impose strict timelines on the secured party to perfect a security interest.

that designated SPG. An SPG is identified by an SPG number and an access code. It is important to note that when an SPG is being set up, the allocated mailing address and email address must be correct as these addresses are used to serve the secured party with notices. Additionally, the PPSR also sends the verification statement and the token number to the email address allocated to that SPG each time a financing statement is registered on the PPSR. 57 Personal Property Securities Act 2009 (Cth) ss 151(3) and 167(2). 58 The Release and Undertaking to Amend Registration can be accessed from the Australian Banker’s Association website .

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[6.5.76] Compliance with the prescribed timeframes is mandatory and the failure to comply with such timing could potentially expose the secured party to an unperfected security interest. [6.5.77] In the event that a secured party fails to comply with the timing stipulations, there are remedies available under the PPSA and/or the Corporations Act 2001 which are discussed in further detail at [8.7] and [8.17]. Corporations

[6.5.79] In the event a security interest is perfected by registration more than 20 business days after the security agreement (or deed), such interest is liable to vest in the corporate grantor if it enters one of the specified external administration regimes (within the scope of ch 5 of the Corporations Act 2001 (Cth)) within six months from the date of the registration. This is discussed in further detail at [9.5]. Individuals [6.5.80] Unlike corporate grantors and in the case where the grantor is an individual, provided that a sequestration order is not made under the Bankruptcy Act 1966 (Cth) against that individual60 or the individual becomes a bankrupt by force of ss 55, 56E or 57 of the Bankruptcy Act 1966 (Cth),61 the secured party can perfect its security interest any time prior to such events. Notwithstanding this and for the abundance of caution, it is in the interest of the secured party to perfect its security interest as soon as reasonably practical after the reasonable belief for the purposes of s 151 of the PPSA has been formed.

59 See Corporations Act 2001 (Cth) s 588FL(2)(b)(ii). 60 See Personal Property Securities Act 2009 (Cth) s 267(iv). 61 See Personal Property Securities Act 2009 (Cth) s 267(v).

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[6.5.78] In the case where the grantor is a company for the purposes of the Corporations Act 2001 (Cth), the secured party has 20 business days from the date of the security agreement (or deed) to register an effective financing statement on the PPSR.59

PMSIs [6.5.81] A secured party that is granted a purchase money security interest and desires to benefit from the ‘super-priority’ must also register such interest within the specific timeframes prescribed under the PPSA. [6.5.82] In the case of inventory, perfection by registration must occur when the grantor obtains possession of the property where the collateral is goods.62 [6.5.83] Where the collateral is any other kind of inventory (ie non-goods), perfection by registration must occur at the time the security interest attaches to the property.63 [6.5.84] In the case of non-inventory, perfection by registration must occur before the end of 15 business days after the grantor possesses the property where the collateral is goods,64 or where the collateral is any other property (ie non-goods), the day the interest attaches to the property.65 [6.5.85] To the extent a secured party fails to perfect a purchase money security interest in personal property other than inventory within the time stipulations,66 an application to the Court can be made to extend the time for registration.67 This is discussed in further detail at [8.17].

Avoiding Common Errors [6.5.86] Secured parties (or their employees or agents) commonly make errors when registering a financing statement on the PPSR. [6.5.87] The Whittaker Report suggested that the PPSR was far too complex to understand,68 which is concerning in that the PPSR is a very common tool to perfect a security interest under the PPSA.

62 63 64 65 66 67 68

See Personal Property Securities Act See Personal Property Securities Act See Personal Property Securities Act See Personal Property Securities Act See Personal Property Securities Act See Personal Property Securities Act Whittaker Review Report, p 158.

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2009 2009 2009 2009 2009 2009

(Cth) (Cth) (Cth) (Cth) (Cth) (Cth)

s s s s s s

62(2)(b)(i). 62(2)(b)(ii) 62(3)(b)(i). 62(3)(b)(ii). 62(3)(b). 293(1)(a).

[6.5.88] Examples of common errors that have been identified on a financing statement are:

[6.5.89] Annexure M provides a checklist that may assist secured parties when registering a financing statement on the PPSR. This checklist should be used at the time the PPSR (or a different platform which offers registration functionality of the PPSR) issues a review (or summary) of the draft financing statement prior to confirming the registration.

Continuous Perfection Requirements [6.5.90] As indicated above, in order for a security interest to maintain priority under the PPSA, it must be continuously perfected at all times.70 [6.5.91] Section 56(2) of the PPSA permits a security interest to be perfected in two or more ways and therefore a secured party is not precluded from registering a financing statement on the PPSR despite perfecting by possession or control.

69 See Personal Property Securities Act 2009 (Cth) ss 307, 308 and 337A. 70 See Personal Property Securities Act 2009 (Cth) ss 55(6) and 56(1).

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a) The details of the secured party and grantor. For example, in the case of a secured party or grantor that is a corporation, the ACN should be used as the identifier not the ABN. b) The secured party under the security agreement (or deed) is inadvertently placed as the grantor on the financing statement and vice versa. c) The collateral class is incorrect (this might be because there is a misunderstanding of the collateral that is the subject of the security interest). d) Incorrectly describing the serial number of a collateral. e) Setting a registration end time in circumstances when there is no need to set an end time. f) Selecting the transitional box, when the underlying security interest is not a transactional security interest.69

[6.6] Perfecting a security interest in proceeds [6.6.1] In the case where a secured party has perfected a security interest by possession or control, ordinarily, a secured party would not deal with collateral in a manner inconsistent with its best interest, given that it is able to control the dealings of the collateral. If it proposes to do so, it must (amongst other things) first ensure that it has perfected its security interest over any proceeds. [6.6.2] Alternatively, where a secured party has perfected a security interest by registration, the position is different when ensuring that the secured party has also perfected its security interest in the proceeds. [6.6.3] Item 4(d) of the table in s 153(1) of the PPSA provides that any description of proceeds must comply with the PPS Regulations. [6.6.4] Section 20(6) of the PPSA provides that a security interest in proceeds is enforceable against a third party whether or not the underlying security agreement (or deed) contains a description of the proceeds. [6.6.5] In the case where the underlying security agreement (or deed) does not contain a description of the proceeds, the financing statement must describe that the security interest is in respect of proceeds.71 [6.6.6] Alternatively, where the underlying security agreement (or deed) expressly includes the extension of the security interest to proceeds of the original collateral, the financing statement does not need to expressly specify proceeds, provided that the original collateral is perfected by registration.72 [6.6.7] Additionally, a financing statement does not need to expressly specify proceeds, if the proceeds take the form of currency, cheques or an ADI account, or a right to an insurance payment or any other payment as indemnity or compensation for loss or damage to the

71 See Personal Property Securities Act 2009 (Cth) s 33(1)(a). The description must comply with Sch 1, Pt 2, reg 2.4 of the PPS Regulations for the purposes of item 4 para (d) of the table in s 153 of the PPSA. 72 See Personal Property Securities Act 2009 (Cth) s 33(1)(b).

114 PPS in Practice

underlying collateral, provided that the original collateral is perfected by registration.73 [6.6.8] In practice, secured parties usually select the 'proceeds' box which is offered as an option for certain collateral classes when preparing a financing statement. [6.6.9] If a secured party selects the ‘proceeds’ box, there is a further option to describe the proceeds.74

[6.6.11] A secured party should prudently evaluate if the definition of proceeds of particular collateral pursuant to the security agreement (or deed), may need to be broader than the definition of proceeds under s 31 of the PPSA. [6.6.12] If the definition of proceeds under the security agreement (or deed) needs to be more expansive, the secured party should ascertain if it is essential or preferred to register a separate financing statement on the PPSR.

[6.7] What do I do if I have failed to appropriately perfect a security interest? [6.7.1] A secured party that fails to appropriately perfect a security interest has remedies available under the PPSA and/or the Corporations Act 2001 which is discussed in further detail at [8.7] and [8.17].

73 See Personal Property Securities Act 2009 (Cth) s 33(1)(c). 74 Such description should comply with Sch 1, Pt 2, reg 2.4 of the PPS Regulations.

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[6.6.10] The default position should be ‘all present and after acquired property’, unless otherwise provided by the security agreement (or deed).

PART 4 [P4] Default and Litigation – Lessons Learnt and Lessons Applied [P4.1] The first three parts of this text are centred around what a secured party can and should do to ensure that their dealings comply with the requirements imposed by the PPSA. Once the secured party has satisfied itself that its agreements are perfected for the purposes of the PPSA — there is no additional requirement imposed on the secured party and it is unlikely that any issue will arise unless and until a relevant grantor of any relevant security interest defaults on its obligations to the secured party (and perhaps other of its creditors). [P4.2] This part shifts focus to the time of default and examines what occurs upon the default or the insolvency of the grantor and what steps and processes relevant stakeholders should have in place to avoid or best deal with priority or other contests which might consequentially arise. [P4.3] Take the following simple example: Figure 1 Financier A enters into a facility agreement with Grantor B and Grantor B provides Financier A with an ‘all present and after-acquired personal property’ (‘AllPAP’) security interest. Sometime thereafter, Supplier C accepts a credit application from Grantor B which allows Grantor B to purchase stock from Supplier C on 30-day payment terms (as opposed to requiring cash on delivery). As part of the credit application, Supplier C retains title to the stock unless and until paid for in full by Grantor B. A year or so later, Grantor B defaults on its obligations under both the credit application and the facility agreement and bother Financier A and Supplier C seek to enforce their respective rights to stock in the hands of Grantor B at the time of default.

In the above circumstance, both Supplier C and Financier A are in contest over the same property — unless either of them can establish a first ranking entitlement it is unlikely that they will receive any of the stock in satisfaction or partial satisfaction of amounts owed to them from Grantor B. [P4.4] The above scenario is referred to as a ‘simple example’' as it involves three stakeholders — Financier A, Grantor B and Supplier C — and two relevant security interest. [P4.5] In practice, there are often many relevant stakeholders, whose interests may or may not come into conflict upon the default of the grantor, and several tens, hundreds or thousands of relevant security interests taken by various parties over the grantor. [P4.6] Further, unsecured creditors may become interested stakeholders in property otherwise the subject of a particular creditor’s security interest should that security interest not be properly perfected for the purposes of the PPSA. As will be discussed over the course of this part, should a corporate grantor enter formal external administration (that is to say, enter into voluntary administration, receivership or liquidation within the scope of ch 5 of the Corporations Act 2001) or an individual grantor enter into bankruptcy; then the trustee in bankruptcy, voluntary administrator, receiver or liquidator may determine that the relevant security interest ‘vests’ in the individual/ corporate grantor for the benefit of creditors generally as opposed to allowing the secured creditor to carve out from the bankrupt/insolvent estate the property the subject of their relevant security. [P4.7] Further still, parties who have sought to purchase or otherwise acquire an interest in particular property free from any security interest (namely, those parties who seek to ‘extinguish’ or ‘take free from’ particular security interests) may, in particular circumstances, find themselves the subject of competing claims to such property especially if the property in question has not been paid for in full before the grantor defaults on its obligations to other creditors or enters into external administration.

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[P4.8] For the above reasons, whilst it is convenient to consider priority contests or the determination of competing proprietary rights as two party disputes, it is often far from the actual position in practice even for relatively smaller grantors (whereby smaller refers to the number of relevant stakeholders involved as opposed to any other measure) and how the PPSA prescribes for the resolution of such contests is not necessarily straightforward.

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7 THE GRANTOR [7.1] Default and litigation from the perspective of the grantor: what does the grantor need to know? .................... [7.2] Prior to default – What registrations appear on the PPSR? ................................................... [7.3] A PPSR search – the basics ............................. [7.4] Grantor review of PPSR results .......................... [7.5] Flagged results ........................................... [7.6] Amendment demands .................................... [7.7] Administrative process ................................... [7.8] Judicial process .......................................... [7.9] Errors on the PPSR ...................................... [7.10] Section 588FM and s 293 applications ................

121 122 123 124 125 126 126 127 128 129

[7.1] Default and litigation from the perspective of the grantor: what does the grantor need to know? [7.1.1] As alluded to above, by the time the grantor enters into external administration or defaults on its obligations to one or more of its creditors the consequences or contests which crystallise either do not involve the grantor (for example, in Figure 1 (on page 117) the priority contest is between Financier A and Supplier C) or the grantor is the subject of external administration and control such that any residual rights held by the grantor, contractually or in any of its property, are under the control of an external party. [7.1.2] That being said, there are several circumstances where steps taken or not taken by the relevant grantor may affect the relevant rights and interests of other stakeholders. Whilst this may be so, it is important to remember that the irrespective of what happens with the security interests granted by the grantor, each secured party likely retains its contractual rights as against the grantor1 and any attempt to 1 See Personal Property Securities Act 2009 (Cth) s 18(1).

THE GRANTOR 121

subvert or assist one creditor as against other creditors may further expose the grantor the liabilities which might not otherwise have arisen as a consequence of any particular default.

[7.2] Prior to default – What registrations appear on the PPSR? [7.2.1] As the PPSR record security interest taken over personal property for a particular grantor, that grantor will likely be acutely interested in what appears on the PPSR as against them prior to default on obligations owed to creditors or entering insolvency. If, for example, a Grantor allows particular registrations to appear against them on the PPSR when there is in fact no security interest connected to such registrations, then the Grantor may have significant difficulties obtaining finance if and when the need arises. [7.2.2] The need to ensure that the PPSR accurately reflects the actual position, whilst a concern for secured parties (as dealt with by Parts 2 and 3 of this text) is therefore also a concern for the grantor. Given this is the case, periodic reviews of the PPSR should form part of the grantor’s internal processes — the frequency of such reviews being dependant on the financial position of the particular grantor and the level of reliance of the grantor to external finance. [7.2.3] As a commercial matter, a grantor who has access to a facility which exceeds the value of current expenses will be less sensitive to its PPSR position than a grantor who does not have such access to capital. Similarly, a grantor who has a large amount of unencumbered property which it is relying on to access funds quickly should the need arise is likely to be more sensitive to retaining an unencumbered PPSR position than a grantor who has already used its property to obtain finance and any further security interest taken would be second ranking in any event. [7.2.4] That being said, irrespective of the commercial circumstance, a grantor’s ignorance of what appears on the PPSR against it is undesirable as it may divorce the grantor’s actual credit position from what it perceives its credit position to be. As this discrepancy often only comes to the attention of a grantor when the grantor looks to obtain capital (ie it is in a financially tight position) the failure to

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understand and quarantine the grantor's PPSR position may render it powerless to correct the PPSR position in time to obtain the finance it sought in the first instance.

[7.3] A PPSR search – the basics [7.3.1] First and foremost, there are a number of ways to conduct a PPSR search and a number of different platforms which offer search functionality of the PPSR database — none of which are necessarily right and none of which are necessarily wrong. A grantor should be encouraged to use a platform which displays results in the easiest way and the results should form part of the internal work papers of the grantor’s business.

[7.3.3] However, given that any one grantor may have multiple identification details — a more thorough search of each available identification detail is recommended. For example, a corporation which is not the trustee of a trust will likely have each of an ACN, an ABN (possibly more than one ABN) and a name. As the grantor is likely to know the various identification details that are capable of being searched against (as it goes by these identification details), this more complete search is not likely to be a difficult task. Whilst the cost of conducting a search against more than one identification detail is relatively higher (as separate parses of the PPSR database attract separate or multiple costs), the aggregate cost remains administrative

2 See above at [6.5]. 3 See Personal Property Securities Regulations 2010 (Cth) Sch 1, Pt 1, cl 1.3(4). 4 See Personal Property Securities Regulations 2010 (Cth) Sch 1, Pt 1, cl 1.5(5).

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7 The Grantor

[7.3.2] From the perspective of a grantor, the most important search is a search of its relevant identification detail — which is the detail which corresponds with the detail that the secured party is required to lodge any financing statement against when perfecting a security interest on the PPSR.2 To illustrate, for a corporation which is not a trustee of a trust, the relevant identification detail is likely the corporation’s ACN.3 For a trust (notwithstanding that the trust itself does not and cannot have any proprietary interest in the trust property) the relevant identification detail is the ABN of the trust.4

and a complete search will reveal a complete record of security interests attempted to be perfected against the grantor. [7.3.4] Once the grantor has conducted one or more searches (depending on the level of completeness that they are comfortable with), the data which is retrieved will need to be interpreted. Ordinarily, this review should be conducted by someone with an understanding of the PPSA generally and who is familiar with verification statements and search results produced by the PPSR. If the grantor has legal representation, the data produced from such a search ought to be provided to those legal representatives for their review and comment.

[7.4] Grantor review of PPSR results [7.4.1] If the grantor does not have legal representation, there are several high level pieces of information a grantor can look for to assist in understanding their PPSR position. [7.4.2] The first part of the results that should be reviewed is the identification detail which has been used to conduct the search. If that detail is incorrect then the whole of the search will need to be redone to ensure that the results displayed are correct and relevant. Unlike its overseas counterparts, the Australian PPSA and PPSR constitutes an ‘exact match’ system of searching such that there is no tolerance for even minor errors in the search. A typographical error, for example, will produce results for an entirely different entity and would mislead the grantor as to its PPSR position. [7.4.3] Once the grantor is satisfied that the search has been conducted against the correct identification detail, the next part of the results which should be reviewed is the summary section (if available) or a broad review of which secured parties have lodged a financing statement against the grantor at a high level. If any of the secured parties which appear on this list after a review of the data has been conducted are not familiar to the grantor then these entries should be flagged for further consideration. [7.4.4] Next, of the security interests for which the grantor recognises the secured party, the grantor should examine the field described as ‘Collateral description’ and see how the security interest has been

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described. At this stage, it is not likely that the grantor will have committed to memory each of the security interests it has granted so a review of the grantor's contracts should be conducted to match the registration to a particular security agreement (or deed). If the grantor is unable to isolate the security agreement (or deed) or does not recall entering into a particular security agreement (or deed) in respect of a particular registration then these entries on the PPSR ought to be flagged for further consideration. [7.4.5] The grantor should repeat the above high level process for each identification detail that the grantor has elected to search against as each will produce different results unless the grantor has used a third party interface which offers to conduct all of these searches as one search in which case the results will likely be produced in one bundle. [7.4.6] Depending on the nature of the grantor's business, the grantor may have very little or very many registrations to review. In circumstances where there are too many results for the grantor to dedicate a member of staff to review the data produced, external legal representation should be considered.

[7.5.1] Once the grantor has compiled a list of results for which the secured party is unknown or unfamiliar and/or the security interest is unknown or unfamiliar, the first step the grantor will need to take is to make an inquiry as to the nature of the registration. [7.5.2] At Annexure N of this text appears a pro-forma letter which can, with relevant and appropriate modification, be sent on the grantor’s letterhead to obtain further information about each registration for which the grantor is concerned. [7.5.3] The grantor should send a request, either in the form of Annexure N or in any other appropriate form, to each relevant secured party the subject of a flagged result. If there is no response or the response received is not in accordance with the grantor’s understanding of the commercial position between it and the purported secured party then the grantor should take further steps on its own or engage appropriate legal representation.

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7 The Grantor

[7.5] Flagged results

[7.6] Amendment demands [7.6.1] If, after reviewing its internal records against the further information provided by the purported secured party (assuming such information is forthcoming), the grantor remains of the view that the financing statement has been inappropriately lodged against the grantor or inappropriately or inaccurately purports to reflect the position between the grantor and the purported secured party, then the grantor ought to take steps to remove the impugned registration. [7.6.2] The PPSA has two mechanisms for dealing with such registrations, both of which are contained in Pt 5.6: 1. the Administrative Process; and 2. the Judicial Process. [7.6.3] Both the administrative process and the judicial process are premised on the lodgement of what is described as an ‘amendment demand’5 and how the amendment demand is dealt with. [7.6.4] At the time of writing, the PPSR website contains a guide to preparing an amendment demand.6 [7.6.5] A pro-forma Amendment Demand is set out at Annexure O to this text.

[7.7] Administrative process [7.7.1] In essence, the administrative process involves the following steps: 1. the grantor issues an amendment demand to the secured party;7 2. the secured party then has five business days after the date of the amendment demand to respond to the amendment demand;8 3. if no response is received within five business days then the grantor may issue an amendment statement to the Registrar of Personal Property Securities (‘the Registrar’);9 5 As defined by s 178 of the Personal Property Securities Act 2009 (Cth). 6 See ‘Registrar's Practice Statement No 4’ accessible at . 7 See Personal Property Securities Act 2009 (Cth) s 178. 8 See Personal Property Securities Act 2009 (Cth) s 179(1)(b). 9 See Personal Property Securities Act 2009 (Cth) s 180(3).

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4. the Registrar must then, as soon as practicable, issue an amendment notice to the secured party;10 5. the secured party then has a further five business days after the day the notice is given to respond to the amendment demand;11 6. if the secured party fails to respond or the response is unsatisfactory then the Registrar may effect the amendment noted in the amendment notice.12 [7.7.2] It is important to note that the administrative process is interrupted and stayed as soon as a judicial process is enlivened.13 [7.7.3] Further, a grantor or a secured party who is unsatisfied with the determination of the Registrar may appeal that decision before the Administrative Appeals Tribunal.14

[7.8] Judicial process

[7.8.2] Given the above, if a grantor or interested third party fears a misappropriation of the property the subject of an asserted erroneous or inappropriate financing statement, or there is some urgency to the resolution of whether or not a financing statement appropriately appears on the PPSR as against a particular grantor, then legal advice should be promptly sought before taking any further step. [7.8.3] The judicial process, much like the administrative process, is then aimed at resolving the status of the underlying security interest (ie, the process of proper characterisation as to whether or not a

10 11 12 13 14

See Personal Property Securities Act 2009 (Cth) s 180(4). See Personal Property Securities Act 2009 (Cth) s 180(5)(b)(ii). See Personal Property Securities Act 2009 (Cth) s 181. See Personal Property Securities Act 2009 (Cth) s 179(1)(c). See Personal Property Securities Act 2009 (Cth) s 180(5), note 3; Personal Property Securities Act 2009 (Cth) s 191.

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7 The Grantor

[7.8.1] The amendment demand is said to be a prerequisite to commencing the judicial process in accordance with s 182(2) of the PPSA. That being said, it is uncertain whether prayers for relief pursuant to s 184 compelling the Registrar (assuming the Registrar is a proper party to relevant proceedings) to do particular things in accordance with that section requires the lodging of an amendment demand as the relief thereby sought is not constrained to s 182.

security interest exists for the purposes of the PPSA and, if so, whether the financing statement on the PPSR accurately reflects the security interest). [7.8.4] The form of orders the Court can make are not exhausted by the PPSA (noting the inclusion of s 182(4)(c)). [7.8.5] That said, the judicial process must be exercised with caution by a grantor or interested third party as the role of the Court is to do little more than to ascertain whether or not a security interest exists rather than making definitive findings as to whether or not the security interest is necessarily valid or enforceable or first ranking as a matter of priority.15 [7.8.6] This is consistent with the ‘notice based’ system of registration which the PPSR provides for. Unlike the Torrens system of registration for dealings in land in Australia, the PPSR provides little more than notice to the world at large that a security interest exists and for which the searcher must then make further inquiries. [7.8.7] From the perspective of the grantor, unless there is no evidence to suggest that a security interest exists, the judicial process should be approached with caution noting the adverse cost exposure connected with litigation generally. [7.8.8] That said, the administrative process, the amendment demand and the request for information in accordance with s 275 are each powerful and relatively inexpensive tools to allow the grantor to deal with registrations lodged against it/them and internal processes should be put in place or the functioned outsourced to appropriate legal practitioners to attend to such tasks.

[7.9] Errors on the PPSR [7.9.1] If, after conducting the above analysis, the grantor, or the grantor’s legal advisors, recognise particular defects or errors on the PPSR, the grantor does not have any legal obligation to point those errors out to the relevant secured party, unless it prejudices itself for example, by attempting to seek funding. That said, the grantor may, 15 See Universal Trucks and Equipment Ltd v Reynolds [2012] NZHC 483 at [36] [39] per Mallon J.

128 PPS in Practice

depending on the relationship between it and the secured party, wish to alert the secured party to potential errors contained on the PPSR with a view to correcting or improving the accuracy of the PPSR in respect of the grantor. [7.9.2] There are no formal means by which this alert is to be prepared or communicated.

[7.10] Section 588FM and s 293 applications [7.10.1] From time to time, a grantor of security interests may be served with or receive notice of judicial proceedings whereby the relief sought takes the form of orders pursuant to s 588FM of the Corporations Act 2001 and/or s 293 of the PPSA. [7.10.2] Whenever a person or entity receives formal judicial proceedings there is little substitute for legal advice and legal advice should be sought. It is also often the case that relief pursuant to these sections is sought on short notice and thus the grantor will need to form a view quickly about their relevant rights and interests and whether they wish to be actively involved in the litigation.

[7.10.4] This is because both s 588FM of the Corporations Act 2001 (Cth) and s 293 of the PPSA are directed at amending the time for the secured party to properly perfect a security interest already granted by the grantor at a previous point in time. The grantor’s concern with any such security interest after its creation by execution of the relevant security agreement (or deed) is unlikely to have any bearing on the secured party. The creation of rights came to be upon the execution of the underlying agreement and is unlikely to be affected, subject to a contractual stipulation to the contrary, by any further view of the grantor. To put this another way and, assuming that an external

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[7.10.3] In the first instance, and without seeking to substitute diligent and timely legal advice, such an application is unlikely to concern a grantor beyond the grantor ensuring that the security interest the subject of the relevant application has been properly granted by it. Once the grantor is satisfied of this, there is rarely any need for the grantor to do more than file a submitting appearance (if at all) or to send a letter to the applicant that the grantor either consents or at least does not oppose the application.

administrator has not been appointed to the grantor, even if the grantor wishes to oppose the grant of relief pursuant to s 588FM of the Corporations Act 2001 (Cth) or s 293 of the PPSA, it is difficult to see what basis the grantor could rely on. It is not prejudiced by the application — any such prejudice would have arisen at the time of entering the contract and not by the unilateral mistake of the secured party in not registering its interest earlier nor could the grantor have relied on any such failure to register in any meaningful way. [7.10.5] The position may be different if the grantor is in external administration, ie the party who receives the application is the external administrator and not the grantor in specie. The position of the external administrator is considered separately. [7.10.6] If, contrary to the above, the grantor considers that it is materially prejudiced by the bringing of the application then the grantor ought to be heard at a hearing of the application in the usual way. The grantor should note that it will be exposed to cost considerations should it be unsuccessful in its resistance and for this reason the most sensible commercial course would be to: 1. contact the secured party applicant, or their legal representatives, to discuss any concerns the grantor may have with the making of the application or to inquire as to what the application is for. It is likely that the applicant or their legal representatives will be in a position to address your questions and will be interested in assisting in circumstances where s 588FM and s 293 are both sections requiring the applicant to appeal to the discretion of the Court; 2. obtain legal representation or a legal opinion as to the source of prejudice, if any, and the steps which ought to be taken – such advice is likely to be confined to the facts and circumstances of the particular case for which advice is sought and the usual risks of relying on advice in a broader context are equally applicable for s 588FM and s 293 type applications; and 3. if you are unsure or wish to have further time to consider your position, appear, or organise for a legal practitioner to appear on your behalf, before the Court at the next return of the matter and request a brief further period to consider your position and potentially put on evidence in the proceedings.

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8 THE SECURED PARTY [8.1] Default and litigation from the perspective of the secured party: what does the secured party need to know? ................................................. [8.2] PPSR searches ........................................... [8.3] Invalid registrations and vesting ......................... [8.4] Amending existing registrations to deal with defects or potential defects ......................................... [8.5] Timing of registration errors ............................. [8.6] Extension of time applications ........................... [8.7] Jurisdiction, standing and procedural issues ............. [8.8] Urgency .................................................. [8.9] Grounds for relief ........................................ [8.10] Just and equitable ...................................... [8.11] Terms and conditions .................................. [8.12] Priority contests ........................................ [8.13] Like interests ........................................... [8.14] Timing inquiry to ascertain priority ..................... [8.15] Perfection by control ................................... [8.16] Releases and express subordination .................... [8.17] PMSIs and timing requirements ........................ [8.18] Enforcing the security interest .......................... [8.19] Dealing with insolvency practitioners ................... [8.20] Adverse determinations ................................. [8.21] Profit generating assets ................................ [8.22] Non-cooperation and interlocutory injunctions ......... [8.23] Discharging registrations or providing express subordination? .......................................... [8.24] Dealing with other creditors ............................

132 132 133 135 138 139 139 141 142 145 145 147 148 150 151 152 152 154 157 159 159 160 161 162

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[8.1] Default and litigation from the perspective of the secured party: what does the secured party need to know? [8.1.1] A party who has taken a security interest over personal property will likely seek to exercise or enforce that interest upon the default of the grantor or should the grantor enter external administration (subject to commercial considerations and tolerances). The ability of the secured party to achieve this is likely contingent on their compliance with the PPSA, should the PPSA apply, and whether or not Parts 1 to 3 of this text have been properly complied with. [8.1.2] For the above reason, prior to taking any enforcement step, whether provided for contractually or otherwise, a secured party ought to inform themselves of the PPSR position in respect of the particular grantor over which enforcement action is contemplated — not only in respect to their own security interest but also in respect of any competing security interest, the priority of any such interest and the sentiment of other interested stakeholders to create difficulties for the secured party. As with the grantor, where it is commercial appropriate, a diligent secured party ought to seek legal advice prior to taking any step to enforce a security interest.

[8.2] PPSR searches [8.2.1] As discussed at 7.1 above, there are a number of ways of conducting a search of the PPSR. It is likely that a secured party who has lodged financing statements on the PPSR can use the same platform or interface for searching the PPSR. If a secured party is not comfortable searching the PPSR and interpreting the data which is retrieved from such as search then legal advice should be sought. [8.2.2] Depending on the type of security interest taken by the secured party, a secured party will be largely concerned with two elements: 1. is the registration valid so as to survive the grantor entering external administration; and 2. does the registration entitle the secured party to first ranking priority — and if not, is there enough residual equity in the

132 PPS in Practice

underlying collateral so as to make taking enforcement action commercially viable?

[8.3] Invalid registrations and vesting [8.3.1] One of the highest risks with taking enforcement action is that the grantor will either elect or be forced to enter external administration before or in conjunction with the retrieval of the underlying collateral. [8.3.2] If this occurs and the secured party fails to hold an effective registration on the PPSR, then s 267(2) of the PPSA likely applies. Section 267(2) is in the following terms: Security interest vested in grantor (2) The security interest held by the secured party vests in the grantor immediately before the event mentioned in paragraph (1)(a) occurs.'1 [8.3.3] There are a number of ways in which a secured party can fail to hold an effective registration. An effective registration, as a matter of law, requires more than an attempt by the secured party to lodge a financing statement on the PPSR. It requires the registration to survive the provisions of the PPSA which render a registration ‘ineffective’.2 Further, a security interest cannot be said to be ‘perfected by registration’ where the registration is not ‘effective’.3 [8.3.4] In addition to the above, a financing statement which simply fails to include the particulars required by the PPSA to be included within that financing statement will not likely constitute an effective registration (irrespective of whether or not the financing statement also falls foul of the provisions rendering ineffective particular registrations).

1 Whereby the event mentioned in para (1)(a) refers to the grantor entering administration (bankruptcy or insolvency). 2 See Personal Property Securities Act 2009 (Cth) ss 163 165. 3 See Personal Property Securities Act 2009 (Cth) s 21(2)(a).

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[8.3.5] Section 165 of the PPSA prescribes particular circumstances as defective and therefore ineffective irrespective of whether or not the defect otherwise constitutes a 'seriously misleading defect'. In essence these errors are:

1. failing to register against a serial number of collateral (or the correct serial number noting that there is no tolerance for typographical errors) which the PPSA requires to be registered by serial number;4 2. failing to register against the requisite ‘grantor’s details’ as required by s 153 of the PPSA (see above at [6.5.16]) such that no search of the PPSR by reference only to those details would reveal the relevant registration;5 and 3. indicating that the security interest constitutes a PMSI when the interest does not constitute a PMSI.6 [8.3.6] At the time of writing, no further defect has been prescribed in accordance with s 165(d) of the PPSA. [8.3.7] Additionally, and notwithstanding its non-inclusion in s 165, s 337A of the PPSA provides that: Registration defective if collateral is not covered by transitional security agreement Without limiting section 164 (defects in registration), a registration that discloses that collateral is covered by a transitional security agreement is ineffective to the extent that it describes collateral that is not covered by a transitional security agreement. On a plain reading of s 337A it appears that the ‘transitional box’ operates in a similar way to the ‘PMSI box’ and the operation of s 165(c). [8.3.8] Further, if a financing statement contains a ‘seriously misleading defect’ then it too will be rendered ineffective so as to disentitle the secured party from the benefit of perfection by registration. A seriously misleading defect need not actually mislead any party — the test at law is an objective one.7 [8.3.9] If, upon a proper search, a secured party is concerned that a registration upon which it intends to rely prior to and following the

4 5 6 7

See See See See

Personal Personal Personal Personal

Property Property Property Property

134 PPS in Practice

Securities Securities Securities Securities

Act Act Act Act

2009 2009 2009 2009

(Cth) (Cth) (Cth) (Cth)

s s s s

165(a). 165(b). 165(c). 164(2).

taking of an enforcement step contains a defect legal advice should be sought. Without intending to be exhaustive, the secured party should check each registration upon which it intends to rely to ensure that: 1. the registration has not ceased, ie the end time is some time after the proposed enforcement step; 2. the grantor's details are correct and in accordance with the PPS Regulations; 3. the secured party has been correctly identified; 4. the collateral description sufficiently covers the property over which the enforcement step is sought to be taken; 5. if the security interest is a PMSI, the answer to the PMSI inquiry is ‘yes’ (if not, the answer to the PMSI inquiry is ‘no’); 6. if the security interest is transitional, the answer to the transitional inquiry is ‘yes’ (if not, the answer to the transitional inquiry is ‘no’); and 7. if there have been any amendments to the financing statement, what those amendments constitute and whether or not the secured party needs an extension of time order to make good the amendments or otherwise. [8.3.10] If any of the above are incorrect the secured party should hold off on enforcing its security interest. Instead, the secured party may want to consider lodging a further financing statement to correct the errors and seek appropriate orders from the Court extending time to make good such registrations. Whether this is appropriate or not should be the subject of legal advice on a case by case basis. Applications to extend time to register are considered further below at [8.7] and [8.17].

[8.4.1] As discussed above at [7.6], there are formal processes contained in Pt 5.6 of the PPSA whereby a secured party can be requested (or compelled) to either show cause as to the existence of a security interest or to lodge a financing change statement amending or removing an existing registration from the PPSR.

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[8.4] Amending existing registrations to deal with defects or potential defects

[8.4.2] On the other hand, the financing change statement can be used by the secured party voluntarily to attempt to correct what appears on the PPSR in particular circumstances. Importantly, not all fields can be amended — for example, at the time of writing, a security interest cannot be recorded as a PMSI and then be amended subsequently to record it as a non-PMSI.8 [8.4.3] Further still, there is nothing in the PPSA which provides that an amendment to the PPSR has any retrospective force — that is to say, the change or amendment is not likely to be treated, as a matter of law, as reflecting the position on the PPSR as at the registration commencement time but rather only from the point in time at which the amendment or change occurred. Given that priority for interests perfected by registration is afforded in accordance with the time the interest was registered (and not when the interest was necessarily created or when it attached), the timing of the effectiveness of the registration is likely to be important. [8.4.4] As the effect of an amendment is unlikely to be retrospective, amending a registration and lodging a new registration appear to have a similar effect. For this reason, it is preferable to create a new registration on the basis that no one registration says anything about the validity of any other registration and multiple registrations can be lodged, for abundant caution, to perfect the same security interest. [8.4.5] The above course also serves the potentially important function of preserving the priority time of the existing registration. Given that there are many ways to amend a PPSR registration there is some exposure that instead of effecting the desired amendment, an undesired change may be made which may affect the registration in specie. [8.4.6] An example of the above is where a secured party seeks to transfer their security to another but instead of assigning the necessary tokens to the new secured party, the original secured party instead discharges the existing registrations. Whilst the PPSA does not prevent the new secured party from creating a new registration in place of the old registration, the priority afforded to the new registration will, absent some intervening factor, be from the time of 8 See above at [6.5.64].

136 PPS in Practice

its lodgement and not the time of the initial registration. In many instances, this will defeat the security and significantly impinge upon its value.9 [8.4.7] Further, whether the amendment or creation of a new registration is preferred by the secured party, the secured party will need to be conscious of when the step to amend or lodge a new financing statement occurs. This is because whilst the PPSA does not impose a timing requirement on perfection by registration as a matter of validity, s 588FL of the Corporations Act 2001 does contain a timing stipulation which provides that a security interest which is perfected by registration more than 20 business days after the security agreement (or deed) creating the interest came into force is liable to vest in the grantor (noting that this provision applies only to corporate grantors) if the grantor enters external administration within six months from the date of the registration.10 [8.4.8] If a secured party wishes to mitigate its exposure against the grantor’s solvency for six months then the secured party may approach the Court to seek orders pursuant to s 588FM of the Corporations Act 2001 (Cth) such that s 588FL(2)(b)(ii) does not apply but rather s 588FL(2)(b)(iv) applies. Extension of time applications are dealt with further at [8.7].

9 See SFS Projects Australia Pty Ltd v Registrar of Personal Property Securities (2014) 226 FCR 188; [2014] FCA 846; SFS Projects Australia Pty Ltd v Registrar of Personal Property Securities (No 2) [2014] FCA 987. 10 See Corporations Act 2001 (Cth) s 588FL(2)(b)(ii).

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[8.4.9] Equally, if the security interest constitutes a PMSI and has otherwise been registered such that it falls within one of the categories of s 588FL(2)(b) of the Corporations Act 2001 (Cth), the security interest may still face priority difficulties if it has not been registered in accordance with s 62 of the PPSA. In certain circumstances, orders extending time to perfect a PMSI can be sought (in a fashion similar to s 588FM of the Corporations Act 2001 (Cth)). Section 293 applications are dealt with further at [8.17].

[8.5] Timing of registration errors [8.5.1] Noting the above reference to the timing stipulations contained within s 588FL of the Corporations Act 2001 applicable in the case of the corporate grantor, if a secured party has the benefit of a security interest which has been perfected by registration — such registration being effective in all ways except in respect of compliance with s 588FL — the operative vesting provision is not s 267 of the PPSA but rather s 588FL(4) of the Corporations Act 2001 which provides that: Vesting of security interest in company (4) The PPSA security interest vests in the company at the following time, unless the security interest is unaffected by this section because of section 588FN: (a) if the security interest first becomes enforceable against third parties at or before the critical time — immediately before the event mentioned in paragraph (1)(a); (b) if the security interest first becomes enforceable against third parties after the critical time — at the time it first becomes so enforceable. [8.5.2] A security interest which may vest in accordance with s 588FL of the Corporations Act 2001 may, on application of the secured party wishing to rely on the registration to perfect such a security interest, be remedied by application to the Court for relief pursuant to s 588FM. Importantly, similar relief does not appear to be available for security interests which vest in accordance with s 267 of the PPSA (ie, there is no equivalent provision to s 588FM of the Corporations Act 2001 in the PPSA). [8.5.3] A secured party who falls within this category should be minded to seek legal advice expeditiously as applications pursuant to s 588FM are subject to the discretion of the Court which is, as a general rule, more minded to grant the relief sought if the grantor is solvent or closer to solvent than if the grantor is insolvent. Further difficulties arise if the grantor entered external administration prior to the filing of the application for relief pursuant to s 588FM. Extension of time applications are considered further below at [8.7].

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[8.6] Extension of time applications [8.6.1] A secured party who has either failed to lodge a financing statement in respect of a PPSA security interest or who has discovered defects or potential defects in registrations it made previously which it wishes to correct by way of amendment or new registration will likely benefit from the bringing of an application pursuant to s 588FM of the Corporations Act 2001 to extend time in respect of such registrations. [8.6.2] One application to the Court can be used to seek to extend the time to register multiple different security interests. One application to the Court can also be made to seek ancillary relief (for instance, by way of s 293 of the PPSA). If a decision is taken to bring an application before the Court, legal representation should be obtained and advice sought.

[8.7] Jurisdiction, standing and procedural issues [8.7.1] The appropriate jurisdiction for an application pursuant to s 588FM of the Corporations Act 2001 is the Supreme Court of each respective Australian State or Territory or the Federal Court of Australia. [8.7.2] Each grantor of each security interest over which an order will be sought ought to be a defendant to the proceedings.11 [8.7.3] Initially, applications of this nature were brought ex parte on the basis that any right or interest of the grantor in the application was confined to the contract and was not properly the subject of any relief sought by an application for orders pursuant to s 588FM.12 This view has since been criticised by the Court in more recent applications and a secured party ought to join such parties to proceedings.13

11 See Re Transurban CCT Pty Ltd (in its own capacity and as trustee for the Transurban CCT Trust) [2014] NSWSC 1909, [16]. 12 See, eg, In the matter of Apex Gold Pty Ltd [2013] NSWSC 881; Re Cardinia Nominees Pty Ltd [2013] NSWSC 32; Re Barclays Bank Plc [2012] NSWSC 1095. 13 See In the matter of Accolade Wines Australia Limited [2016] NSWSC 1023; Re Transurban CCT Pty Ltd (in its own capacity and as trustee for the Transurban CCT Trust) [2014] NSWSC 1909.

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[8.7.4] Perhaps more importantly any party whose interests are or may be affected by orders sought ought to be joined to the application. In this regard, any secured party with a registration which covers

collateral which is also the subject of the relevant registration (whether earlier in time or later in time) ought to be a party to the proceedings. This will include parties with discrete security interests in the same collateral (which may or may not be capable of being ascertained from the collateral description of each relevant registration) in addition to any AllPAP security interest holder. [8.7.5] Where there is more than one registration which requires s 588FM relief, the process of ascertaining whether or not there are any competing security interests which ought to be joined to the proceedings becomes more labour intensive. Equally, where the grantor has granted many other security interests (in some cases into the thousands) the task of isolating relevant parties to the application is likely to take some time. [8.7.6] It may be convenient to separate relevant defendants into categories, for example, the First Defendant(s) is/are the grantor or grantors, the Second Defendant(s) is/are any earlier in time AllPAP holder or holders, the Third Defendant(s) is/are any later in time AllPAP holder or holders, the Fourth Defendant(s) is/are any secured party/ies with a discrete security interest over the same collateral. [8.7.7] In respect of discrete security interests and collateral descriptions, given that the PPSR provides no more than notice of an existing security interest, it may be necessary for the secured party to ascertain the actual security agreement (or deed) to which the registration relates in order to form a view on whether or not the competing security interest is or may be affected by the orders sought. [8.7.8] It should be said that once a party is joined to proceedings they are treated as such in the ordinary way, that is to say, they have an entitlement to be heard on the application and the question of costs may become a significant issue where multiple parties wish to be heard. [8.7.9] For the above reasons and complexities, prior to bringing any application seeking relief pursuant to s 588FM of the Corporations Act 2001, legal advice and representation should be sought. [8.7.10] Further, whilst this text is not aimed at exploring jurisprudential analysis of the legislation in any particular detail, there is a view that an application pursuant to s 588FM of the Corporations Act 2001

140 PPS in Practice

must be commenced prior to the appointment of an external administrator as the basis for extending time to register a financing statement in respect of a security interest is of no practical utility if the security interest has already vested in the grantor. [8.7.11] Irrespective of the force of that view and its correctness or otherwise, a secured party who faces the vesting of a security interest ought to consider, amongst any other relevant factors and issues, the making of a s 588FM application even after the appointment of external administrators as a means of dealing with the undesirable outcome of the vesting provisions.14 [8.7.12] At Annexure P appears a pro-forma ‘Originating Process’ which, tailored appropriately for the particular circumstances of the application, may be used to bring an application seeking relief pursuant to s 588FM of the Corporations Act 2001.

[8.8] Urgency [8.8.1] In light of the vesting outcome which may follow from a PPSR registration which falls foul of the requirements of s 588FL(2)(b), applications for orders pursuant to s 588FM have typically been brought on an urgent basis before the duty judge of the relevant jurisdiction. [8.8.2] Noting the appropriateness of joining all parties who are or may be affected by orders made pursuant to s 588FM, it is unlikely that any substantive making of orders will occur on the first listing of the matter (whether in a duty capacity or as part of a general Court list).

14 As for which, see, Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) v General Electric International Inc (2016) 305 FLR 101; [2016] NSWSC 52; Re Maiden Civil (P&E) Pty Ltd (2013) 277 FLR 337; [2013] NSWSC 852.

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[8.8.3] That said, applications to extend time to register particular security interests remain time sensitive in character as the solvency/ insolvency of the grantor is a relevant consideration in the exercise of the Court's discretion. It is therefore common for an applicant to seek interlocutory orders for short and substituted service which will allow the matter to be brought back before the Court expeditiously.

[8.8.4] Substituted service, often by email or other electronic means, also likely allows the applicant (or their legal representatives) to effect service with greater expedition and may lower the cost of service particularly if there is a large amount of material or multiple defendants who are a party to the proceedings. [8.8.5] Expedition or urgency is also contingent on the position of any relevant grantor such that if the grantor is already subject to external administration and the external administrator of the grantor is content for the application to be made then the urgency of the application is mitigated by that sentiment. [8.8.6] A secured party who is concerned with the appropriation or misappropriation of the underlying property the subject of the relevant interest can, on the back of an application pursuant to s 588FM of the Corporations Act 2001 or otherwise, seek interim asset preservation relief or an interlocutory injunction restraining the party in possession from dealing with the underlying property unless and until there has been a resolution or determination in respect of the substantive application.15 [8.8.7] In circumstances where the relevant grantor is subject to external administration before any application is brought, prior to pursuing any form of interlocutory relief on the basis of asset preservation, the sentiment of the external administrator ought to be sought. If, for example, the external administrator is content to provide a written undertaking which provides for effectively the same relief as would an interlocutory injunction then no such injunction is necessary. [8.8.8] The appropriateness of the form of undertaking or interlocutory application is case dependant and legal advice should be sought expeditiously if there is any risk of misappropriation of the underlying collateral.

[8.9] Grounds for relief [8.9.1] Relief pursuant to s 588FM of the Corporations Act 2001 can be granted by the Court on several bases:

15 See, Re Southern Engineering Services Pty Ltd (in liq) [2014] NSWSC 1882.

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1. the failure to register was accidental or due to inadvertence or some other sufficient cause; or 2. the failure to register is not of such a nature as to prejudice the position of creditors or shareholders; or 3. it is just an equitable to grant relief.

Accidental or due to inadvertence or some other sufficient cause [8.9.2] In Re Appleyard Capital Pty Ltd,16 the term ‘inadvertence’ was considered and the Court held that: For the purpose of s 588FM(2)(a)(i), ‘inadvertence’ includes failure to advert to or understand the requirement for registration within the specified period, and innocent error in the sense of failure to register through ignorance of the legal requirement to do so,17 or of the consequences of not doing so.18 [8.9.3] This builds on the analysis of the term in Re Cardinia Nominees Pty Ltd19 where the Court held that: ‘inadvertence’ may also be established where a party operates under a mistake as to the consequences of failing to register a security interest.20 The approach adopted in the case law of treating a matter of that kind as amounting to inadvertence is consistent with the emphasis placed in the case law upon the benevolent operation of predecessor sections, at least where an error of a secured creditor in not attending to registration of its

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16 (2014) 101 ACSR 629; [2014] NSWSC 782. 17 Sanwa Australia Finance Ltd v Ground Breakers Pty Ltd (in liq) [1991] 2 Qd R 456; (1990) 2 ACSR 692; Campbell Finance Pty Ltd v Vivstan Packaging (Aust) Pty Ltd (in liq) [1998] 2 VR 340; (1996) 22 ACSR 109; Freightlines Northern Territory Pty Ltd (1999) 32 ACSR 573, 576; In the matter of Cardinia Nominees Pty Ltd [2013] NSWSC 32, [14] [16]. 18 (2014) 101 ACSR 629 at 633 [10]. 19 [2013] NSWSC 32. 20 Sanwa Australia Finance Ltd v Ground Breakers Pty Ltd (in liq) [1991] 2 Qd R 456 at 461; (1990) 2 ACSR 692 at 695; National Australia Bank Limited v Davis & Waddell (Vic) Pty Ltd [2003] VSC 1; (2003) 44 ACSR 296; Metcash Trading Ltd v 8 Nai Investments Pty Ltd [2011] FCA 1400 [8].

security within time is innocent and does not result from any disregard of its statutory obligations.21 22 [8.9.4] If a secured party wishes to assert that the failure to lodge a financing statement in respect of its security interest was ‘accidental’ or ‘due to inadvertence’ then the secured party ought to adduce evidence of that accident or inadvertence. [8.9.5] Often this can be achieved by demonstrating the internal processes (or lack of such processes) in place for interacting with the PPSR (including by way of lodging financing statements) and providing at what point the accident or inadvertence was realised and changes made.

Prejudice to Creditors and Shareholders of the Grantor [8.9.6] An important consideration in any application pursuant to s 588FM is whether or not there is any prejudice to creditors or shareholders of the grantor. This is so irrespective of whether or not s 588FM(2)(a)(ii) is relied on by the applicant or otherwise. Prejudice to other creditors becomes a more important consideration when the solvency of the grantor is in issue or the evidence is that the grantor is insolvent. This is because in such circumstances it is more likely that the registration over which extension of time orders are being sought is likely to be relied on to prefer one security interest to others or as against unsecured creditors. [8.9.7] When considering such prejudice, the categories of creditors to consider are two-fold: 1. other secured creditors who may have a competing security interest in the relevant collateral; 2. unsecured creditors generally. [8.9.8] In respect of other secured creditors, in accordance with the discussion above at [8.7.4], the preferred view is that such creditors ought to be joined to the proceedings where they will have an opportunity to ventilate any such prejudice.

21 Re Kris Cruisers Ltd [1949] 1 Ch 138 at 142; National Australia Bank v Davis & Waddell (2003) 44 ACSR 296 at 310 [67]. 22 [2013] NSWSC 32 [16].

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[8.9.9] In respect of unsecured creditors, it is clear that if particular collateral does not vest in the grantor immediately before the external administrator is appointed that such assets will not be available to be realised for their benefit. This is no doubt prejudicial to unsecured creditor claims and indeed, where there is residual surplus, to shareholders. However, this is not prejudice relevant to s 588FM.23 [8.9.10] Relevant prejudice is that which examines whether or not the relevant creditor for which prejudice is being considered would have looked at the PPSR and relied on that account when engaging with the grantor at a time when the PPSR did not display the secured party's registration. [8.9.11] If the answer to this inquiry is that the relevant creditor would have acted differently (a factual question) then it can be said that such a party would be prejudiced in such circumstances and orders pursuant to s 588FM ought not be made or would be made on such terms and conditions as would alleviate or address such prejudice.24

[8.10] Just and equitable [8.10.1] The making of s 588FM orders on the basis that it is ‘just and equitable’ is often satisfied by examining the inquiries stipulated by s 588FM(2)(a) ie, that the failure to register was accidental, due to inadvertence or not of a type which would prejudice creditors and shareholders. That said, it is not so limited nor is it limited to particular factual matters.25

[8.11] Terms and conditions

23 See Re Appleyard Capital Pty Ltd (2014) 101 ACSR 629 at 640 [30] [31]; See also Findlay v Jones [2015] NSWSC 277, [6]; Re Southern Engineering Services Pty Ltd [2014] NSWSC 1882; Re Barclays Bank Plc [2012] NSWSC 1095, [18]. 24 See Corporations Act 2001 (Cth) s 588FM(3). 25 See Re Catombal Investments Pty Ltd [2012] NSWSC 775, [20]; KJ Renfrey Nominees Pty Ltd (Trustee), in the matter of OneSteel Manufacturing Pty Ltd v OneSteel Manufacturing Pty Ltd [2017] FCA 325, [28].

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[8.11.1] Part of the earlier applications pursuant to s 588FM (brought on an ex parte basis) was to preserve liberty to a third party external administrator within six months from the making of the order to

approach the Court to amend, vary or set aside the orders made. This was said to preserve the position of unsecured creditors (noting that the external administrator must act in the interest of creditors generally) without needing to hear from such a party — noting that at the time of the application it is often the case that the grantor is solvent and therefore there is no external administrator who might otherwise assert an argument in the interest of creditors generally. [8.11.2] Because of the availability or preservation of liberty to reconsider an extension of time, even where it appears that the grantor company is or may be insolvent, orders pursuant to s 588FM may be granted. As the Court held in Re Appleyard: In practice, the strictures of Re Flinders Trading Co have not been applied, and it has been commonplace, even when it appears that the company may be insolvent and liquidation or administration is imminent, to extend time subject to a ‘Guardian Securities condition’ reserving leave to any liquidator or administrator appointed within six months to apply to set the order aside. This course, or one similar to it, was taken in Re a Ltd Co (Long Innes J), where solvency was dubious; in Re L H Charles (Clauson J), where liquidation was in contemplation; in Re Cinema Art Films (Myers CJ); in Re Guardian Securities (McLelland J), where there was ‘no evidence whatsoever as to the solvency or otherwise of the company creating the charge’ (at 98); and in Bevillesta (Robson J), where the evidence of solvency was inconclusive. In recent times in this court, such orders have been made in Cardinia Nominees (Black J), where again the evidence of solvency was inconclusive; in In the matter of Apex Gold Pty Ltd (Hammerschlag J), where administration was imminent; and in Black Opal IP (Brereton J), where there was some but less than comprehensive evidence of solvency.26 [8.11.3] In light of the various elements which may or may not be necessary in each application pursuant to s 588FM of the Corporations Act 2001, at Annexure P appears a pro-forma ‘Originating Process’ which, tailored appropriately for the particular circumstances

26 (2014) 101 ACSR 629 at 639 [28].

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of the application, may be used to bring an application seeking relief pursuant to s 588FM of the Corporations Act 2001.

[8.12] Priority contests [8.12.1] In addition to concerning itself with the validity of the underlying registration upon which a secured party must rely to enforce its PPSA security interest, a secured party equally ought to concern itself with the priority position of its security interest. [8.12.2] The default priority rules are contained in s 55 of the PPSA within Pt 2.6 of the PPSA (which contains the sections which determine priority contests between PPSA security interests). By way of summary, the following table indicates the prevailing party should a priority contest arise between two PPSA security interests taken over the same collateral: Figure 2 Earlier in Time Unperfected Unperfected Perfected Perfected

Later in Time Unperfected27 Perfected28 Unperfected29 Perfected30

[8.12.3] When considering the question of default priorities, there are two inquiries which need to be made — the order of which is important:

27 28 29 30

See See See See

Personal Personal Personal Personal

Property Property Property Property

Securities Securities Securities Securities

Act Act Act Act

2009 2009 2009 2009

(Cth) (Cth) (Cth) (Cth)

s s s s

55(2). 55(3). 55(3). 55(4).

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1. Are the interests ‘like’ — namely, are the interests of the same character? 2. If the answer to the first question is ‘yes’, which interest attached (in circumstances where both security interests were unperfected at the critical time) or which interest was perfected (in circumstances where any of the interests were perfected in any way at the critical time) first?

[8.12.4] The character of the underlying interests is important as the default priority rules (along with other priority rules) only apply where the interests being considered are like interests. If a priority contest involves two unlike security interests then the resolution of any priority dispute is not likely to be by reference to timing but rather by reference to some other rationale or provision.

[8.13] Like interests [8.13.1] Consider the following example: Figure 3 Party A takes a security interest over all the present and after-acquired personal property of Party B in exchange for the provision of a loan facility. Party A perfects the security interest by registration. Sometime thereafter, Party C supplies Party B with a box of widgets on 30 day payment terms and retains title to those widgets until paid for in full by Party B. Prior to supplying Party B with the widgets, Party C lodges a financing statement on the PPSR in respect of the widgets and notes that the interest taken is a PMSI. Shortly thereafter, Party B defaults on obligations owed to Party A and Party C. Party A and Party C both seek to enforce their respective security interests over the box of widgets on account of monies owed to them. [8.13.2] In the above circumstances, the security interests held by Party A and Party C are not like interests. Party A holds an AllPAP security interest which is a general security interest perfected by registration. Party C on the other hand holds a purchase money security interest over the box of widgets. [8.13.3] Provided that the PMSI has been correctly registered, the PMSI prevails against general security interests irrespective of when the PMSI was taken or when the PMSI was perfected31 — the timing inquiry simply does not arise as the interests are not like interests. 31 See Personal Property Securities Act 2009 (Cth) s 62.

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[8.13.4] It may also be the case that a priority contest may not be resolved by the PPSA notwithstanding the fact that one of the security interests falls within the scope of the PPSA and the perfection requirements have been complied with by the relevant secured party. [8.13.5] This is the case where either of the interests in dispute does not fall squarely within the scope of the PPSA. This may be because of the application of s 8 of the PPSA,32 or simply because the definition of a ‘security interest’ has not been met.33 [8.13.6] Consider the following example: Figure 4 Party A sued Party B for breach of contract. As part of the litigation, Party B sought security for costs from Party A as a condition of it prosecuting its case. The Court granted Party B security for costs and Party A paid a sum of $100,000 into Court as security. Sometime shortly thereafter, Party C provided Party A with a finance facility and in exchange took an AllPAP security interest over Party A. Party C lodged a financing statement on the PPSR in respect of its AllPAP. Party A ultimately failed in its litigation against Party B. Party A then entered external administration. Party C asserted that it was entitled, ahead of Party B, to the monies held by the Court on account of security for costs on the basis that a perfected security interest defeats an unperfected security interest.

[8.13.8] The issue is whether or not the payment of money into Court by Party A at the request of Party B created a ‘security interest’ within the meaning of the PPSA. As the payment of funds is not consensual 32 See above at [3.4]. 33 Within the meaning of s 12(1) or (3) of the Personal Property Securities Act 2009 (Cth).

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[8.13.7] When looking to resolve the conflict between Party C and Party B in the above illustration the AllPAP, absent information to the contrary, likely constitutes a PPSA security interest.

ie, it is not the subject of Party A’s consent, it is unlikely that this constitutes a security interest for the purposes of the PPSA. [8.13.9] Such was the case in Dura v Hue where the Victorian Court of Appeal held that the PPSA could not be invoked to resolve priority contests where either of the security interests in the priority disputer was not governed by or otherwise fell within the scope of the PPSA.34 [8.13.10] In addition to the above, s 254 of the PPSA relevantly provides that: Concurrent operation – general rule (1) This Act is not intended to exclude or limit the operation of any of the following laws (a concurrent law), to the extent that the law is capable of operating concurrently with this Act: (a) a law of the Commonwealth (other than this Act); (b) a law of a State or Territory; (c) the general law.

[8.14] Timing inquiry to ascertain priority [8.14.1] The general rule where there are like interests involved in a priority dispute is that the first interest in time prevails. The rationale for this is that the later in time interest could have taken notice of the first in time interest (whereby the purpose of perfection within the meaning of s 21 of the PPSA is to provide such notice). [8.14.2] However, the 'first in time' rule is not an absolute rule and the nature of the interests is again critical to the inquiry. For example, if a priority dispute arises in respect of two PMSIs over the same collateral, the dispute is resolved by affording priority to the seller, lessor or consignor of the collateral as against the party who provided the funds to acquire the property the subject of the sale, lease or consignment.35

34 See Dura (Australia) Constructions Pty Ltd (ACN 004 284 191) (in Liquidation) (Receivers and Managers Appointed) v Hue Boutique Living Pty Ltd (formerly SC Land Richmond Pty Ltd) (ACN 106 117 506) (2014) 292 FLR 114; [2014] VSCA 326. 35 See Personal Property Securities Act 2009 (Cth) s 63.

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[8.15] Perfection by control [8.15.1] Further still, not all methods of perfection rank equally from a priority perspective. Security interests perfected by control, by way of example, trump general security interests in the same collateral irrespective of when perfection by control occurs or the competing form of perfection occurs and irrespective of the nature of the competing security interest. For example, a security interest perfected by control defeats a PMSI over the same collateral.36 [8.15.2] Consider the following example: Figure 5

[8.15.3] In the above circumstances, Party C would likely prevail on account of it perfecting its security interest in its account by controlling that account. [8.15.4] Whilst the account is in the name of Party B, Party B can do no more than direct Party C to do certain things with the account — 36 See Personal Property Securities Act 2009 (Cth) s 57.

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Party A provides Party B with a box of widgets on 30-day trade terms and retains title to the widgets unless and until paid for in full by Party B. Party A lodges a financing statement on the PPSR in respect of the security interest, noting that the security interest constitutes a PMSI, and indicates that the security interest extends to all proceeds. Sometime thereafter Party C, with whom Party B does its banking, provides Party B with a loan facility and as part of the security in support of the loan Party B grants a security interest over an account it holds with Party C (and the monies which flow into that account). Party B on-sells most of the widgets obtained from Party A in the ordinary course of business and deposits the proceeds from the sales into the account it holds with Party C. Shortly thereafter Party B defaults on its obligations to both Party A and Party C. Party A and Party C both seek to take the monies in the account held with Party C pursuant to their relevant securities.

this constitutes controlling the account (as all authorised deposittaking institutions37 (ADIs) do with accounts they hold in favour of their customers).38

[8.16] Releases and express subordination [8.16.1] In addition to the priority rules provided for by the PPSA, a party who holds a first ranking security interest over particular collateral can voluntarily subordinate its priority position by agreement.39 This might occur if the obligations owed to the priority secured party are bought out or the registration contained on the PPSR contains a broad collateral description which was not intended to cover the collateral for which the release or express subordination is sought. [8.16.2] A secured party who has analysed the data which appears on the PPSR against a particular grantor and who is concerned that particular interests might take priority to the interest it is seeking to enforce may, in particular circumstances, consider obtaining an express release from the relevant secured party/ies. The concern the secured party have is the potential to put a potentially competing interest on notice that you are seeking express subordination effectively after the event (ie after both securities have been taken) and that of itself may cause the potentially competing interest holder to take steps against the original secured party’s interest. [8.16.3] For the above reason, express subordination or releases of particular interests are often considered prior to taking or creating a separate security interest and not at a later stage. If a secured party identifies a potential need to obtain the benefit of express subordination at a later stage, ie after the creation of the security interest then legal advice should be sought.

[8.17] PMSIs and timing requirements [8.17.1] The concept of a PMSI is discussed at [1.3]. Importantly, it is the way in which compliance with the PPSA priority provisions occurs

37 Within the meaning of the Banking Act 1959 (Cth). 38 See Personal Property Securities Act 2009 (Cth) ss 57, 64, 75. 39 See Personal Property Securities Act 2009 (Cth) s 61.

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and not the characterisation of a security interest as a PMSI which grants the PMSI the super priority or prevailing priority as against general security interests taken over the same collateral (subject to security interests perfected by control).40

Inventory PMSIs [8.17.2] In the case of an inventory PMSI, or a PMSI which is taken over ‘inventory’41, if the PMSI is not perfected by registration prior to the point in time at which either the grantor obtains possession of the collateral or when the security interest otherwise attaches — then s 62(2)(b) of the PPSA cannot be relied on and the security interest is unlikely to have the benefit of prevailing as against existing perfected security interests over the same collateral (for instance, an earlier in time AllPAP security interest). [8.17.3] For inventory PMSIs, there does not appear to be any way to extend time for the secured party to extend time to perfect by registration so as to otherwise obtain the benefit of PMSI priority. A secured party who discovers that they do not have the benefit of perfection by registration indicating that the underlying security interest is a PMSI ought to take steps to perfect by registration indicating that the security interest is a PMSI before any further property is supplied from the secured party to the grantor. Alternatively, a secured party should adopt the approach discussed at [5.4.28] (Option 2).

[8.17.5] As to how to whether or not a PMSI holder has the ability to determine which payment goes to which account, s 14(6) of the PPSA

40 See Personal Property Securities Act 2009 (Cth) s 62(2)(b), (3)(b). 41 As defined by Personal Property Securities Act 2009 (Cth) s 10.

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[8.17.4] If the above occurs then the secured party will have the benefit of PMSI priority in respect of all personal property supplied to the grantor from that point onwards. For that reason, if the secured party has the contractual ability to designate which payments received from the debtor/grantor are to be allocated to which accounts — the secured party ought to allocate all payments to earlier debts over which the PMSI priority might not apply.

provides that the contractual agreement can specify this. This is discussed further at [5.5.14].

Non inventory PMSIs [8.17.6] In respect of non-inventory PMSIs, s 62(3) of the PPSA is likely applicable — as opposed to s 62(2) — such that the failure to perfect by registration indicating that the security interest is a PMSI can be rectified by the secured party applying to the Court for relief pursuant to s 293 of the PPSA. [8.17.7] The considerations relevant to an application pursuant to s 293 of the PPSA are set out in s 293(3) and are similar in substance to those applicable to applications pursuant to s 588FM of the Corporations Act 2001. [8.17.8] Given that the time stipulation is 20 business days for the purposes of s 588FL of the Corporations Act 2001 and 15 business days for the purposes of s 62 of the PPSA, it is likely, but not necessarily inevitably, that a breach of one timing requirement will also breach the other. [8.17.9] As a matter of procedural expediency, there is no reason why s 588FM and s 293 relief cannot be sought in one Court application (should it be the case that the security interest(s) that the applicant seeks to rely on require extensions of time for the purposes of both sections). [8.17.10] At Annexure P appears a draft set of prayers for relief in respect of seeking orders pursuant to s 293 of the PPSA.

[8.18] Enforcing the security interest [8.18.1] If, having considered the above or having received legal advice in respect of the above, a secured party is satisfied that the security interest upon which it intends to rely is sufficient so as to entitle the secured party to enforce its security interest then steps to enforce may be taken. [8.18.2] Provisions aimed at regulating the enforcement of security interests the subject of the PPSA are dealt with in Ch 4 above. That being said, Ch 4 of the PPSA does not apply to ‘deemed security

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interests’ being those security interests defined as ‘security interests’ by force of s 12(3) of the PPSA.42 Ch 4 can also be limited by the security agreement (or deed) between the parties.43 [8.18.3] Initially, it was common practice for legal advisers to provide advice that where possible a secured party should oust the operation of the enforcement provisions of the PPSA. However, a careful review of the provisions referred to by s 115 of the PPSA reveals that some of the provisions work to the benefit of the secured party and consideration should be had at the time the security agreement (or deed) is drafted to what enforcement provisions should be retained — this is discussed in further detail at [5.5.44]. Of course, the ability to contractually alter any aspect of the PPSA is subject to the respective bargaining power of each contracting party. [8.18.4] Ordinarily, enforcement of a security interest follows at least one piece of correspondence which notes the amount in arrears (or obligation which has not been attended to), the amount of delay involved in the default, what the addressee needs to do in respect of the default and what will occur if the addressee does not attend to the requirements of the default letter. It is not uncommon for a default letter to be sent on the letterhead of the secured party themselves, although equally it is often sent on solicitor letterhead. [8.18.5] The reason why analysis of the position of the security interest upon which the secured party wishes to rely in taking enforcement steps is important prior to the issuing of a default letter is because once the addressee receives the default letter they are in a position to take steps to deal with the underlying property in a way inconsistent with the interests of the secured party — such as by entering external administration.

42 See also Personal Property Securities Act 2009 (Cth) s 13 in respect of the concept of the ‘PPS lease’. 43 See Personal Property Securities Act 2009 (Cth) s 115.

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[8.18.6] Also, as a practical matter, the secured party should be aware of where the collateral the subject of the security interest is situated prior to issuing a letter of default. Forensically, a threat on letterhead which is unenforceable due to logistical difficulties puts the secured

party in a weaker position when looking to resolve a dispute than it would have been had it approached the matter in a different way. [8.18.7] If there is a risk of misappropriation at or prior to the sending of the letter of default then steps ought to be taken to mitigate against that exposure. Formal Court processes may be one way of facilitating the relinquishing of possession of the underlying asset such that it cannot be misappropriated. [8.18.8] Enforcing a security interest might equally be difficult or impossible where the collateral over which the security interest has been taken has changed form. For example, where the secured party is a supplier of raw materials which are used to make a finished product, by the time the secured party may seek to enforce its security interest — there may be no raw materials at hand. [8.18.9] In such circumstances, a secured party may need to take steps to themselves have an external administrator appointed to the relevant grantor such that control of the assets is removed from the hands of the party who has been unable to pay its debts. [8.18.10] It should be noted that tracing a security interest from raw materials into a finished product is not a simple task. The task becomes further complicated when the finished product has been sold and monies deposited into a mixed monies account held with an ADI. Even if the security agreement (or deed) upon which the secured party relies requires monies from the sale of property the subject of a retention of title type of clause are to be segregated from other monies, the reality is that this often does not occur. [8.18.11] In the above circumstances, legal advice should be obtained to prevent taking enforcement steps prematurely or in circumstances where the amount that can actually be realised is not significant when compared with the cost of the exercise. [8.18.12] If the security interest has been successfully enforced, such that the property is back in the hands of the secured party, then the underlying obligation is not at an end. If the realisable value of the property is not equal to the amount secured then the secured party may sue on the contract in the ordinary way for any shortfall. This is particularly the case where the value of the secured property is not particularly relevant to the contractual obligation — for example,

156 PPS in Practice

where the collateral in question is being leased. In such circumstances a claim for the return for the asset and a claim in damages for rent not paid is not uncommon.

[8.19] Dealing with insolvency practitioners [8.19.1] A creditor who is otherwise unfamiliar with the PPSA will likely become familiar with it upon the entering of external administration of one of its customers/clients/contracting parties. At this stage, it is common for all creditors to be provided with correspondence from an insolvency practitioner (whether they have registered a financing statement on the PPSR or are otherwise known to be creditors of the grantor) requesting the documentation in support of the security interest held by that creditor. [8.19.2] Unfortunately, it is at this stage in many instances where the secured creditor often first discovers errors or omissions in their registration (if there is a registration on the PPSR in connection with the security interest at all). [8.19.3] When dealing with insolvency practitioners, secured parties are advised to consider their position carefully and take steps to obtain as much information as is possible about the administration of the grantor prior to providing a response to the external administrator.

[8.19.5] Once information concerning the administration of the grantor is to hand (or such information cannot be obtained), the secured party should review their internal material relevant to the particular grantor. Information which is likely of importance includes, but is not limited to: 1. any security agreement (or deed) or contract between the them and the grantor;

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[8.19.4] Notwithstanding that communications from external administrators may appear on their letterhead, it is almost invariably the case that external administrators send such correspondence with the benefit of legal advice. Secured parties who elect not to obtain legal advice prior to corresponding with external administrators run the risk of misstating the position and jeopardising chances at putting their best position forward.

2. any internal payment records in respect of the grantor including debts paid and debts not paid; 3. any verification statements from the PPSR in respect of any registrations made for that particular grantor; 4. in the case of a supply relationship, copies of any invoices and delivery receipts (where available) or any other documentation concerning supplies made to the grantor; 5. in the case of a finance arrangement, copies of accounts or financials specific to that particular grantor; and 6. any communications made with the grantor (including any demands for payment or otherwise). [8.19.6] Once as much of the above information as is available has been obtained, a review of the PPSR position should be considered. [8.19.7] Whether or not a security interest takes priority over other security interests likely depends on the status of other secured creditors. For this reason, it is often beneficial for the secured party to conduct their own PPSR search of the grantor to ascertain whether any other security interests have been taken over collateral the subject of the secured party’s security interest. If other security interests appear on the PPSR, the secured party ought to assume that the other secured parties hold valid security interests in connection with those registrations (whether that is correct or not). [8.19.8] If it is the case that the security interest appears to be properly perfected by registration in such a way as would entitle the secured party to collect the collateral the subject of the security then the material should be compiled and copies made available for the benefit of the external administrator. [8.19.9] If a secured party elects to communicate with an external administrator without the benefit of legal advice, liberty should be reserved by that secured party to seek that advice at a later stage. For example, if an external administrator requests a response to particular correspondence within a certain amount of time, a secured party should, in the necessary circumstances, seek any further time that would or may be necessary should legal advice be sought at a subsequent stage.

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[8.20] Adverse determinations [8.20.1] If, having supplied the external administrator with the requested information in respect of a security interest, the external administrator forms the view that the registration relied upon is defective or the security interest does not, in whatever way, entitle the secured party to maintain its interest in the underlying collateral then a communication either on a preliminary or final basis will likely be sent to the secured party to that effect. [8.20.2] A recipient of an adverse determination should, as with the initial request for information, consider the correspondence carefully before taking any next steps. The determination will often refer to the reason for which a particular claim or assertion has been rejected and that or those reason(s) will need to be considered carefully by the secured party. As above, given that the determination is likely based on the operation of the PPSA or the position at law, legal advice should be sought. [8.20.3] If the secured party forms a different view in respect of the determined outcome then that view ought to be appropriately communicated to the external administrator in a timely fashion. [8.20.4] Unless and until the competing views are resolved, the secured party should seek to preserve the status quo in respect of the underlying assets. One way of achieving this is to seek a written undertaking from the external administrator that they will not appropriate or deal with the underlying collateral unless and until the position has been resolved one way or another.

[8.21] Profit generating assets [8.21.1] Whilst maintaining the status quo in respect of assets which take the form of inventory or stock may be appropriate (subject to

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[8.20.5] It goes without saying that all communications with the external administrator need to be carefully considered as it is not uncommon for the evidence in proceedings concerning security interests to include all correspondence exchanged between the parties.

perishability), it is, in circumstances of profit generating assets, only part of the consideration for the secured party. [8.21.2] For the lessor of a PPS lease, by way of example, if the external administrator is of the view that the asset the subject of the lease has vested in the grantor – they will not likely be paying further rental for the asset (on the basis that the asset is now the property of the grantor). If litigation commences on account of resolving whether the external administrator’s view is correct as opposed to the secured party's view, this could take upwards of 12 months to resolve. [8.21.3] Storing the asset will no doubt incur cost, but perhaps more importantly, the failure of either party to utilise the asset to generate revenue over the life of the litigation will result in a potential damages claim one way or the other for the losing party. [8.21.4] Against this, should the asset be put to use by some form of commercial agreement between the parties, there remains important issues as to what happens if the asset is damaged or misappropriated whilst being put to work, to whom are the proceeds of the work transferred to and on what basis and who can enforce rights should the new lessee default. [8.21.5] There are no simple answers to these issues and the appropriateness of a particular approach is highly case dependant. The important point is that the options are considered with a view to mitigating overall exposure to both sides. [8.21.6] If there is no feasible way of putting a profit generating asset to work whilst a dispute is determined, the dispute may warrant expedition. Evidence in support of expedition should include the likely cost incurred by the losing party if the case is not decided with expedition.

[8.22] Non-cooperation and interlocutory injunctions [8.22.1] Ordinarily, the above factors including maintaining the status quo and how the asset can be put to work until a dispute is determined (where appropriate) are matters which are worked out with the cooperation of both the external administrator and the secured creditor.

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[8.22.2] However, if the external administrator does not provide written undertakings which seek to maintain the status quo or takes steps to realise an asset which is the subject of a live dispute as to whether or not a secured party is entitled to that asset then the secured party can seek relief by way of an interlocutory injunction preventing the external administrator from taking such steps. [8.22.3] On the issue of whether or not there is a serious question to be tried, the substantive application ought to be one seeking declaratory relief from a superior Court of record that the security interest relied on is valid and that the registration relied on is valid. Ancillary delivery up orders might also be sought. [8.22.4] Alternatively, s 1321 of the Corporations Act 2001 provides a means by which a secured creditor can appeal from an act, omission or decision of an external administrator. It has been used by a secured creditor to challenge an adverse determination from an external administrator.44 [8.22.5] Ordinarily, an application pursuant to s 1321 of the Corporations Act 2001 will need to be brought within 21 days of the act, omission or decision — subject to leave being granted by the Court outside of that time frame.45

[8.23] Discharging registrations or providing express subordination?

[8.23.2] In such circumstances, the secured party may want to avoid any protracted litigation or even being a party to ongoing litigation in

44 Primaplas Pty Ltd v Gelpack Enterprises Pty Ltd (in liq) [2015] NSWSC 1558. 45 See, for example, Supreme Court (Corporations) Rules 1999 (NSW) r 14.1; However, consider also the new Div 90 of the Insolvency Practice Schedule (Corporations) introduced by the Insolvency Law Reform Act 2016 (Cth).

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[8.23.1] Secured parties who become involved in litigation or receive letters from external administrators on the basis of security interests for which they have lodged a financing statement on the PPSR may find, upon review of their internal records, that the security interest in issue has been brought to an end or does not cover the collateral over which a competing claimant is seeking to assert a priority right.

circumstances where they have no material interest in the resolution one way or the other. [8.23.3] A secured party in such circumstances should carefully consider the basis of the registration made and whether the security interest upon which the registration was first made still has any work to do. If there is work being done by the security interest, discharging the registration puts the secured party at risk in respect of the other parts of the security interest which the secured party may wish to enforce. [8.23.4] For the above reason, discharging a registration on the PPSR should be the last step taken by a secured party where it is confident that the interest no longer has any work to do (for example, if the debt has been paid in full). This is because whilst a secured party may have the ability to re-register on the PPSR, the priority time and timing consequences46 will reset to the re-registration date and not the date of the initial registration. [8.23.5] A secured party who wishes to reserve its priority position can alternatively provide the interested party with a deed of subordination or release which effectively states that the secured party does not have an interest in the underlying collateral or that the secured party agrees that any interest that it does have will not outrank the interest of the other party should an issue of priority arise. [8.23.6] If a secured party is not sure, and does not want to obtain separate legal advice, providing a deed of subordination or release to one particular party should be preferred to releasing or discharging a registration on the PPSR generally.

[8.24] Dealing with other creditors [8.24.1] Considerations applicable to dealing with external administrators largely apply to dealing with other creditors (whether secured or otherwise).

46 For example, pursuant to s 588FL of the Corporations Act 2001 (Cth); s 293 of the Personal Property Securities Act 2009 (Cth).

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9 THE INSOLVENCY PRACTITIONER [9.1] Appointment ............................................. [9.2] Preliminary inquiries ..................................... [9.3] Errors on the PPSR other than errors in the financing statement ...................................... [9.4] Financing statement errors .............................. [9.5] Vesting in the grantor – s 588FL of the Corporations Act 2001 and s 267 of the PPSA ........................ [9.6] Checklist .................................................

163 164 165 168 172 174

[9.1] Appointment [9.1.1] An external administrator, first and foremost, should concern themselves with the validity of their appointment. Whilst there are a number of ways that appointment can occur, in the voluntary administrator and receiver and manager sense, a secured creditor with a substantial enough security interest can (with the benefit of particular documentation and in particular circumstances) make the appointment. [9.1.2] If the appointment occurs via a secured creditor, previously the external administrator would concern itself with the validity of the language used to create the security interest ie, the security agreement (or deed) itself and whether or not the security agreement (or deed) first, allows for the appointment and second, that the conditions giving rise to the right to appoint have occurred. [9.1.3] In light of the requirement that a secured party perfect its security interest on the PPSR, an external administrator might also need to consider the registration status of the security interest. If the security interest upon which the appointment has occurred is not validly registered such that the interest vests in the grantor upon their

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appointment then there is a live issue as to whether or not the appointment is valid in the first instance. [9.1.4] Whilst reasonable minds may differ as to the status of such an appointment, an external administrator may want to seek legal advice and judicial direction concerning the validity of their appointment prior to taking any active step in accordance with their appointment.

[9.2] Preliminary inquiries [9.2.1] Once an external administrator is satisfied as to the validity of their appointment, the external administrator should conduct a comprehensive search of the PPSR to identify the security interests which have been lodged against the grantor company (noting that the same search should also be conducted in the case of a trustee and a bankrupt individual). [9.2.2] A comprehensive search is one which likely goes beyond the use of the grantor details required by the PPSA to be included when lodging a financing statement against a particular grantor. For example, in the case of a corporate grantor who is not acting as trustee of a trust, an external administrator would be advised to conduct a search against the ACN (as required by the PPSA), but also against the ABN (and if there is more than one ABN — then against the ABNs operated by the company) and against the company name. [9.2.3] At the preliminary stage, whether a security interest is valid or not is not the external administrator’s primary concern. What should be of concern to the external administrator, at least at a preliminary level, is ensuring that each party who may have an interest or stake in the administration is accounted for. [9.2.4] Once a comprehensive search has been conducted, legal advice should be sought to assist in the interpretation of the data identified. At this stage, further searches may be necessary, for instance in the case of a grantor with serial numbered goods in its possession (motor vehicles for example), serial number searches may be required. [9.2.5] The collection of data should then be analysed and considered and correspondence prepared and sent to each relevant secured party notifying that party of the external administrator’s appointment and

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[9.3] Errors on the PPSR other than errors in the financing statement [9.3.1] There are several errors which may appear on the PPSR and an external administrator will need to have an acute understanding of what these potential errors might be such that determinations can be made expeditiously and correctly with a view to progressing the administration. [9.3.2] Additionally, certain transactions entered into by the grantor company may constitute or give rise to a ‘security interest’ for the purposes of the PPSA in circumstances where there is no registration on the PPSR. [9.3.3] As with communications made by a secured party, no determination ought to be made by an external administrator without seeking legal advice or without forming a view as to the status of each registration and security interest connected with that registration.

No Identifiable Security Interest [9.3.4] A significant error which will not necessarily appear from a review solely of the PPSR is a secured party’s lack of a security interest in support of a PPSR registration. [9.3.5] Importantly, the PPSR provides no more than notice that a particular security interest is or may subsist in respect of particular collateral. Once on notice, the party on notice ought to inquire as to the validity of the security interest by requesting the security agreement (or deed) itself and checking to see that the collateral description registered is actually provided for by the security agreement (or deed). [9.3.6] Where the security agreement (or deed) does not contain language, as a matter of substance, which would otherwise cause one to determine that a security interest has been created or the PPSR registration does not reflect the actual security interest taken (in

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requesting any documents in support of any registration which appears on the PPSR (amongst any other formal requirements contingent on that particular appointment — for example, a first meeting of creditors in respect of a voluntary administration).

circumstances where the PPSR registration is seriously misleading) the underlying registration relied on may be ineffective. [9.3.7] A similar outcome may follow where there are multiple security agreements or multiple invoices connected to one registration. If multiple security interests are perfected by one registration that one registration must be capable of so perfecting multiple interests. A restrictive collateral description or reference to one particular agreement may be fatal to a secured party's claim.1 [9.3.8] Soon after appointment, an insolvency practitioner who has conducted a PPSR search in respect of the company over which they are appointed ought to contact parties who have lodged a financing statement indicating that they have a security interest over particular collateral in respect of the company. [9.3.9] An appropriate request for documentation would likely include: a) any agreement between the company and the relevant creditor; b) any amendment(s) to that agreement; c) any terms of trade connected with the agreement (and which might not be expressly a part of the agreement); d) any invoices or further documentation in respect of work performed or goods provided to the company; and e) any further information or qualitative description of the security that the creditor may want to provide. [9.3.10] Once the documentation has been provided, if the insolvency practitioner is of the view that the documentation supports the existence of the security interest the subject of the relevant registration on the PPSR then the insolvency practitioner should either isolate the relevant property to which the security interest relates and ensure that such property is not misappropriated, or, particularly where segregation is not possible, invite the creditor to identify the collateral the subject of their security interest and the basis for their assertion. [9.3.11] It is not uncommon for creditors to be asked to inspect the premises of the company (and there may be more than one premises) 1 See Central Cleaning Supplies (Australia) Pty Ltd v Elkerton (in His Capacity as Joint and Several Liquidator of Swan Services Pty Ltd) (in liq) (2015) 321 ALR 181; [2015] VSCA 92 (which reversed the decision in Central Cleaning Supplies (Aust) Pty Ltd v Elkerton (2014) 98 ACSR 52; [2014] VSC 61).

166 PPS in Practice

Collateral No Longer Exists or Exists in Altered Form [9.3.12] There will be circumstances, depending on the nature of the company’s business, where the collateral the subject of a particular security interest will not be in possession of the company at the time the insolvency practitioner is appointed and ceases control of the company's premises. [9.3.13] The relevant collateral may be commingled and thereby it may take the form of different property by the time the insolvency practitioner is appointed. Alternatively, the relevant collateral may have been sold or otherwise misappropriated such that any security interest could only attach to the proceeds of the appropriation (if at all) and often amongst a sea of competing claims. [9.3.14] Where the property the subject of a security interest is not clearly identifiable, the above difficulties, amongst others, will likely result in the need for the insolvency practitioner to consider principles of co-mingling of assets and tracing of monies into a mixed monies account. If the insolvency practitioner is uncertain as to how these issues are to be resolved, the practitioner should consider obtaining legal advice and/or approaching the Court for judicial directions.

Preliminary Determinations [9.3.15] If a creditor fails to provide the relevant documentation in support of their registration on the PPSR and/or the documentation does not, on the insolvency practitioner’s view, give rise to the security interest asserted, then the insolvency practitioner can and should issue a preliminary determination in respect of the relevant interest and provide a further reasonable period to respond. [9.3.16] A final determination ought not be made unless all information, documentation and consideration has been given to the security interest in question as a creditor faced with an adverse determination may commence formal proceedings against the company, and perhaps the insolvency practitioner, in respect of the determination.

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for the purposes of identifying and isolating the property which is the subject of an asserted security interest.

[9.3.17] Given the exposure to having proceedings commenced against the company and/or themselves, an insolvency practitioner ought to also consider commercial factors ancillary to the company’s strict legal rights. If, for instance, an adverse determination in respect of a secured creditor's security interest would result, at a practical level, in the purported secured creditor receiving the relevant property in any event (as perhaps there are no other creditors of the company) then forcing the determination of strictly legal issues may be commercially difficult to justify.

[9.4] Financing statement errors [9.4.1] Given the centrality of the PPSR to the PPSA regime, errors in what appears on the PPSR often have a significant impact on the effectiveness of a creditor's registration. Whilst some errors are deemed to render ineffective the entire registration, other errors, defects or omissions may, on a qualitative assessment, render a registration ineffective although the position is less certain.

Defined Classes of Defects [9.4.2] Section 165 of the PPSA sets out three defined classes of defects which render a PPSR registration ineffective (with the potential for four or more prescribed defects to be included by way of the PPS Regulations).

Serial Number Registrations [9.4.3] If the PPSA and the PPS Regulations mandate the inclusion of a serial number when perfecting by registration, and the secured party fails to register with the inclusion of the collateral’s serial number, then the registration is likely to be ineffective by force of s 165(a). [9.4.4] It is important to note that not all failures to include serial numbers, even when the underlying collateral has a defined serial number — such as a motor vehicle, will produce this outcome.

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[9.4.6] That being said, the defect operates both ways, that is to say, if a registration is made in respect of serial number goods against the correct serial number — but the collateral is not classed as ‘consumer property’ but rather ‘commercial property’ then such a registration, absent more, will be insufficient to satisfy the fundamental details required to be included in a registration on the PPSR.

Identifying the Grantor [9.4.7] One of the most critical aspects in relation to perfecting a security interest by registration on the PPSR is correctly and accurately identifying the grantor of the security interest. [9.4.8] In respect of a corporate grantor, who is not a trustee of a trust, the relevant identifier is, in most instances, the Australian Company Number (‘ACN’).2 Lodging a financing statement by reference to the grantor company’s name or its Australian Business Number (‘ABN’) in such circumstances is not likely to satisfy the statutory requirements even where the ACN is the same number as the ABN — albeit the ABN containing some extra digits or numbers.3 [9.4.9] Where the corporate grantor is the trustee of a trust, the particular which needs to be included in a financing statement is the ABN of the trust.4 This is so notwithstanding that a trust, by definition, cannot have an interest in personal property (and therefore cannot grant a security interest in such property). [9.4.10] Even if an insolvency practitioner has diligently conducted PPSR searches in respect of the ACN, ABN and name of the grantor company over which they are appointed, the validity of registrations against data which is not prescribed by the PPSA must be scrutinised

2 See Personal Property Securities Regulations 2010 (Cth) Sch 1, cl 1.4. 3 See Re OneSteel Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21. 4 See Personal Property Securities Regulations 2010 (Cth) Sch 1, cl 1.5.

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[9.4.5] The PPS Regulations at Sch 1, cl 2.2 provide that the serial number must only be included when the collateral is described as ‘consumer property’ and not ‘commercial property’ (compare the language of cl 2.2(1)(a) with cl 2.2(1)(c)).

carefully such that property of the company can be dealt with in the interest of all of the company's creditors. [9.4.11] The failure of a secured party to adhere to the identification of the grantor requirements under the PPSA and the PPS Regulations can render the registration entirely ineffective.5

PMSI registrations when the underlying interest is not a PMSI [9.4.12] If a security interest is not a PMSI in circumstances where the financing statement reveals that the interest is a PMSI, the registration may be entirely ineffective.6 [9.4.13] This is distinct from the school of thought that the registration ought to enjoy the benefit of ordinary priorities (as set out by s 55 of the PPSA) in circumstances where the non-PMSI has been misdescribed. The better view is that the interest is entirely ineffective as it is misleading for the secured party to put out to the world at large that its priority position is higher than it actually is. [9.4.14] The position is somewhat different where the underlying interest does fall within the definition or characterisation of a PMSI, as provided for by s 14 of the PPSA, but for which compliance with s 62 of the PPSA is lacking. [9.4.15] Take the following example: Figure 6 Supplier A enters into an arrangement with Customer B in respect of the supply of widgets on the basis that Customer B will pay for the widgets within 60 days of purchasing them from Supplier A. Supplier A retains title to the underlying widgets unless and until paid for in full by Customer B. Supplier A does not appreciate that the interest created may fall within the scope of the PPSA until 12 months after the

5 See Personal Property Securities Act 2009 (Cth) s 165(b). 6 See Personal Property Securities Act 2009 (Cth) s 165(c).

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[9.4.16] In the above circumstance, whilst it is correct for Supplier A to specify that the interest taken is a PMSI, the PMSI priority afforded to Supplier A could only relate to personal property supplied after the PMSI registration.7 The registration is thus not likely to be ineffective by force of s 165(c) of the PPSA, but rather have its effect limited by scrutinising the date of the registration.

Transitional Security Interests [9.4.17] Section 337A of the PPSA is in the following terms: Registration defective if collateral is not covered by transitional security agreement Without limiting section 164 (defects in registration), a registration that discloses that collateral is covered by a transitional security agreement is ineffective to the extent that it describes collateral that is not covered by a transitional security agreement. [9.4.18] On a plain reading, the language of s 337A is substantially similar to s 165(c) of the PPSA in respect of misleading PMSI registrations.

7 Assuming ‘widgets’ are properly characterised as ‘inventory’, see Personal Property Securities Act 2009 (Cth) s 10. See also Personal Property Securities Act 2009 (Cth) s 62(2).

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contractual relationship was first entered and Customer B is late on a number of payments. Supplier A, upon discovering the PPSA ramifications of being unperfected, lodges a financing statement on the PPSR describing the security interest as a PMSI. Two months later Customer B enters external administration. Supplier A asserts that all widgets supplied are covered by its PMSI and that its interest prevails against other interests in the widgets (such as a competing AllPAP held by Bank C) by force of s 62 of the PPSA.

Conclusions [9.4.19] As there are a number of ways in which a registration may not properly perfect a creditor's security interest — a close and detailed review of the PPSR position over the company that an insolvency practitioner is likely necessary.

[9.5] Vesting in the grantor – s 588FL of the Corporations Act 2001 and s 267 of the PPSA [9.5.1] As with registrations that are ineffective due to the content contained in the financing statement itself, there are certain timing requirements which may, in certain circumstances, cause a security interest to vest in the grantor entity over which the insolvency practitioner has been appointed. [9.5.2] The effect of the vesting provisions pursuant to s 588FL of the Corporations Act 2001 and s 267 of the PPSA has been considered in several cases, domestically and abroad.8 [9.5.3] Without seeking to paraphrase the requirements of s 588FL, where the grantor is a corporation, an insolvency practitioner should closely examine security interests which have been registered within six months of the relation-back date. If any of those registrations occurred outside of 20 business days from the date of the security agreement (or deed) giving rise to the security interest (and no orders have been sought by that creditor pursuant to s 588FM of the Corporations Act 2001) then vesting pursuant to s 588FL(4) may occur. [9.5.4] No such timing requirement exists for non-corporate grantors. [9.5.5] Contrary to a late registration or a registration outside of 20 business days of its creation and within six months of the corporate grantor entering external administration, if there is no registration at all, then s 267 of the PPSA applies as the security interest can be said to be ‘unperfected’.

8 See Re OneSteel Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21; Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) v General Electric International Inc (2016) 305 FLR 101; [2016] NSWSC 52; Re Maiden Civil (P&E) Pty Ltd (2013) 277 FLR 337; [2013] NSWSC 852.

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Extensions of Time to Comply

[9.5.7] Where the grantor is not in external administration and the PPSR registration pre-dates the appointment of an external administrator, subject to satisfying the requirements of s 588FM of the Corporations Act 2001 the application is not otherwise contentious.9 [9.5.8] However, if a financing statement has not at least been lodged in respect of a security interest prior to the appointment of external administrators then it is unlikely that relief pursuant to s 588FM will be available to aid the aggrieved creditor.10 [9.5.9] A more difficult category is where a registration has occurred prior to the appointment of an external administrator but the application for relief pursuant to s 588FM post-dates the appointment. [9.5.10] There is authority to support the proposition that the appointment of an external administrator is not an automatic bar to the seeking of relief pursuant to s 588FM of the Corporations Act 2001.11 [9.5.11] The exposure to an external administrator in challenging the validity of a registration on the basis of timing is a difficult one particularly where the property in question is profit generating and the hearing of proceedings may, even in diligently prepared cases, take some time. In that circumstance, an external administrator who utilises company assets to defend the position that s 588FM is not

9 See Re Barclays Bank Plc [2012] NSWSC 1095; Re Cardinia Nominees Pty Ltd [2013] NSWSC 32; Re Apex Gold [2013] NSWSC 881. 10 See Re OneSteel Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21 at [65] [78] per Brereton J. 11 See Re Carpenter International Pty Limtied [2016] VSC 118 at [217], [236] per Cameron J; Re Southern Engineering Services Pty Ltd (in liquidation) ACN 000 091 716 [2014] NSWSC 1882; Re Appleyard Capital Pty Ltd; 123 Sweden AB v Appleyard Capital Pty Ltd (2014) 101 ACSR 629; [2014] NSWSC 782 at [22] [24] per Brereton J.

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[9.5.6] Section 588FL(2)(b)(iv) provides that notwithstanding the timing requirements provided for by s 588FL — a later time can be ordered by a Court pursuant to s 588FM.

available after their appointment ought to obtain legal advice and perhaps judicial direction in respect of such a case.

[9.6] Checklist [9.6.1] At Annexure Q appears an inclusive checklist for insolvency practitioners, at any appointment level, to consider when first appointed.

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10 THIRD PARTIES AND TAKING FREE/EXTINGUISHMENT [10.1] What does it mean to take free? ........................ 175 [10.2] Third party purchasers .................................. 176 [10.3] Engaging with the PPSR ............................... 176

[10.1] What does it mean to take free? [10.1.1] To take free or extinguish a security interest is, in simple terms, to acquire an interest in personal property irrespective of and without being subject to any security interest(s) and indeed, in some instances, eliminates entirely any such security interest(s). [10.1.2] Certain types of collateral, such as inventory or stock, carry with them an implied notion that they will be dealt with in the ordinary course of business and upon being sold to a third party purchaser — any security interest in the collateral will fall away. This does not necessarily mean that the security interest will disappear but rather that it will attach to a different form of property (often the proceeds of sale, ie money). [10.1.3] Section 32 of the PPSA, whilst not strictly within the taking free provisions provided for by Pt 2.5 of the PPSA, speaks to this implicit character of certain collateral.1 [10.1.4] A third party who does not take free from existing security interests likely takes their interest in any such personal property subject to such interests.

1 See Warehouse Sales Pty Ltd (in liq) v LG Electronics Australia Pty Ltd (2014) 291 FLR 407; [2014] VSC 644 at [43] per Sifris J.

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[10.2] Third party purchasers [10.2.1] A party who wishes to acquire an interest in personal property (including an ownership interest) will be concerned with the PPSA, and particularly what appears on the PPSR, with a view to ensuring that they actually obtain what they bargain for. [10.2.2] The types of searches which a third party can conduct for the purposes of the PPSA are dealt with by Pt 5.5. [10.2.3] Typically, a search will be performed by reference to the grantor’s details (as required to be included)2 or by reference to a serial number of particular collateral,3 such as a motor vehicle. [10.2.4] If the third party purchaser is acquiring the personal property in question for personal, domestic or household use and the value of the property is less than $5000 then the third party need not perform any search of the PPSR in order to take free from an existing security interest (should there be any), unless they are aware of such a security interest or the property can be described by serial number.4 [10.2.5] A similar rule applies if the third party purchaser acquires their interest in the ordinary course of business.5

[10.3] Engaging with the PPSR [10.3.1] There are many ways and many different interfaces or platforms for engaging with the data which appears on the PPSR. [10.3.2] Contrary to the official nature of the website http://www .ppsr.gov.au/ there is no official force to the PPSR website and the only aspect mandated by the PPSA is the creation of the register itself and the data which sits behind the interface. [10.3.3] That being said, the data which appears from verification statements deriving from the PPSR is the data that ought to be sought or identified by a third party searcher looking to rely on what appears on the PPSR.

2 3 4 5

See See See See

Personal Personal Personal Personal

Property Property Property Property

176 PPS in Practice

Securities Securities Securities Securities

Act Act Act Act

2009 2009 2009 2009

(Cth) (Cth) (Cth) (Cth)

s s s s

171(1)(a). 171(1)(b). 47. 46.

[10.3.4] For third party searchers who have become familiar with third party interfaces or Business to Government (‘B2G’) platforms, typically the data which appears is derived directly from the PPSR in any event. [10.3.5] Whilst particular data must appear in a financing statement in order to properly perfect a security interest, depending on the commercial sensitivity of a particular acquisition or the property being searched, a third party searcher ought to arm themselves with as much information as is available in respect of particular property to avoid any dispute.

Figure 7 Third Party A wishes to acquire a sophisticated piece of machinery in the course of commercial business from Party B. The machinery has a serial number but Third Party A is not sure whether the machinery would constitute a ‘motor vehicle’ for the purposes of the PPSA. Third Party A conducts a PPSR search against the serial number of the machinery and a registration appears in respect of Party C. Third Party A also conducts a search against the ACN of Party B (who is a company and who does not hold the machinery on trust) but Party C’s registration does not appear as Party C has not perfected by registration against Party B's ACN. [10.3.7] In the above circumstances, even if Party C’s security interest may not be properly perfected by registration this is an issue which ought to be resolved prior to Third Party A acting on the information which appears on the PPSR. [10.3.8] If nothing else, it is very unlikely, from a purely commercial standpoint, that a secured party who has perfected improperly to accept that the collateral has been taken free from and Third Party A would likely become involved in judicial proceedings in respect of whether or not it properly took free from Party C’s security interest. [10.3.9] In addition to performing the serial number search and the ACN search, Third Party A would be advised to perform a general

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[10.3.6] Consider the following example:

grantor search against the ABN and the company name of Party B. This may reveal other security interests which may attach to the relevant machinery (such as an AllPAP). Again, the rationale in attending to these searches is to ascertain what types of security interests exist without scrutinising the validity or otherwise of such interests. [10.3.10] To proceed with an acquisition in circumstances where it is almost invariably the case that a secured party will challenge the acquisition and the taking free is very unlikely to be a commercially sensible irrespective of the validity of particular registrations as a matter of law.

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11 EXTERNAL ADVISORS AND CONSULTANTS [11.1] Legal practitioners ...................................... 179 [11.2] Accountants and auditors .............................. 184 [11.3] Consultants and in-house counsel ...................... 185

[11.1] Legal practitioners [11.1.1] The difficulties and elements to be aware of relevant to each discrete class of persons discussed in this book are each concerns which a legal practitioner ought to be aware of (and more) when looking to advise on PPSA issues. [11.1.2] Further, whether legal advisors intend on providing advice and direction in respect of the PPSA or otherwise, a rudimentary understanding of the PPSA is critical. [11.1.3] The main difficulty with developing a rudimentary understanding is the use of an entirely unique lexicon, in certain cases (consider PMSI, AllPAP, perfection etc) and an interrelation of those concepts with counter-intuitive applications — such as the movement away from the nemo dat quod non habet principle familiar to pre-PPSA property lawyers. [11.1.4] There are now several ‘concepts’ texts on the market concerning both the Australian and the foreign PPS position which can assist new practitioners to develop a conceptual understanding of the PPSA.

Proper Characterisation [11.1.5] Outside of this working understanding, the most critical point to make is that legal practitioners must develop a compass for when the PPSA applies (or could apply) and when it plainly does not apply. The

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inability to recognise the broad circumstances which may give rise to PPSA considerations has been part of the difficulty in providing timely advice to the broader commercial market which has resulted in some of the case law. [11.1.6] The breadth of the PPSA is made clear by a thorough reading of ss 12 and 13 (in addition to s 10 where appropriate in respect of newly defined terms). Section 12(2) of the PPSA presents a series of examples, each of which a legal practitioner should feel comfortable characterising. [11.1.7] Further, s 8 needs to be well read and understood — not just in respect of those more definitive exclusions — such as land and fixtures, but also in respect of statutory security interests, such as the storer’s lien, and excluded property, such as insurance proceeds. [11.1.8] The question of proper characterisation is critical and a legal practitioner should either feel confident in their assessment of the particular interests at play or seek further advice on the question. Despite being one of the first inquiries made, it is, in many instances, decisive of the balance of the issues in dispute.1

Drafting and Language [11.1.9] The use of precedents, in both litigation and transactional legal work, always involves a difficult balance of including what is right and tailoring what needs to be adjusted to fit a particular scenario or transaction. [11.1.10] In an ideal world, each separate agreement (and each separate clause dealing with the PPSA) would be tailored specifically for a particular deal or transaction. In reality, the use of blanket clauses or model language is a common part of drafting. [11.1.11] The most significant concern legal practitioners should have is failing to understand why particular PPSA clauses are included. Blanket exclusion of all enforcement provisions pursuant to s 115(1) 1 See, by way of example, iTrade Finance Inc v Bank of Montreal (2011) FPPSR 700 125; [2011] 2 SCR 360; Dura (Australia) Constructions Pty Ltd (ACN 004 284 191) (in Liquidation) (Receivers and Managers Appointed) v Hue Boutique Living Pty Ltd (formerly SC Land Richmond Pty Ltd) (ACN 106 117 506) (2014) 292 FLR 114; [2014] VSCA 326.

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of the PPSA is one example of legal practitioners perhaps not engaging with ch 4 of the PPSA closely enough to recognise that blanket exclusions may not be appropriate in all cases (and indeed, perhaps, in any case). [11.1.12] Clients who are still operating off standard terms or agreements which do not provide for the PPSA expressly ought to be encouraged to consider revising their terms of trade. [11.1.13] Some care needs to be exercised between sounding like you are simply attempting to charge the client more for your services and genuinely protecting their interests. Given the emergence of case law, with some fairly significant adverse outcomes for those who have failed to properly comply with the PPSA, exposing a client base to the difficulties is not likely to be difficult.

Registering on the PPSR

[11.1.15] This response is perhaps not surprising given the potential adverse consequences of failing to properly perfect a security interest on the PPSR. [11.1.16] If a view is taken that PPSR registrations are to be attended to by the legal practitioner, then a cautious approach to registering ought to be adopted and where any of the answers are unclear — all options ought to be covered. For example, where there is a partnership with two partners granting a security interest, a registration ought to occur whereby the partnership ABN and the two partners themselves are registered against. [11.1.17] One practical suggestion on account of preventing the making errors in critical identifiers is to assign two separate persons to the task of registering any financing statement. One practitioner inputs the relevant data and the other performs a relevant search. Unless both parties make the exact same error (even if an error is made), any critical information which is in error will be isolated in this

EXTERNAL ADVISORS AND CONSULTANTS 181

11 External Advisors and Consultants

[11.1.14] Certain legal practitioners, who have had varying degrees of involvement with the PPSA in both an advisory and transactional capacity, have implemented firm-wide policies refusing to attend to the lodgement of financing statements on the PPSR.

fashion — of course, qualitative errors in collateral descriptions or other ‘seriously misleading defects’ will not necessarily be eliminated by adopting this approach.

Conceding Errors and Obtaining Relief [11.1.18] Legal practitioners who fail to properly perfect by registration and whose client’s interest(s) now fall outside of the statutory timeframes ought to act expeditiously and prudently. [11.1.19] The temptation to ‘ride it out’ or act only if and when an issue crystallises (such as upon the default of the grantor) can have disastrous consequences for the underlying security interest holder. [11.1.20] Recognising and dealing with issues expeditiously, whilst potentially a costly exercise — particularly if rectification requires Court approval after the event, should be undertaken honestly and without undue delay.

Know the Statutory Tools [11.1.21] If advising on PPSA issues and a contest of priority arises (or some competing entitlement to the same collateral arises) a practitioner well versed in the processes of such a dispute is invariably better equipped for the resolution of any such issues. [11.1.22] The amendment demand process in respect of financing statements pursuant to pt 5.6 of the PPSA is one example of this, however, the mantra is true also at the drafting level. A well informed practitioner preparing a clause for the allocation of funds secured by a PMSI is invariably better equipped to ensure the maximisation of the client's security as compared to a practitioner who, whilst aware of the PMSI construct, does not sufficiently grasp the distinction in the different ways such a construct can be dealt with. [11.1.23] Whilst the PPSA is primarily focused on substance over form, expressing the substance in the right form often eliminates any equivocation or argument which might otherwise threaten to prejudice a client's security interest.

182 PPS in Practice

Resist Registering First and Asking Questions Later [11.1.24] Given the difficulties which may arise as a consequence of failing to perfect by registration, there may be a temptation to develop a practice of 'registering first and asking questions later' when dealing with the PPSA. [11.1.25] Notwithstanding the potential to expose oneself to the civil penalty attached with the failure of a belief on reasonable grounds that a security interest has or will arise,2 this approach to the PPSA and compliance with it risks mischaracterising the underlying interest which in turn may give the client an unrealistic expectation as to the priority or otherwise of their interest. [11.1.26] An important distinction ought to be drawn between registering cautiously (ie, registering against multiple potential grantors or registering one security interest in two ways to cover alternative findings in respect of the underlying interest) and registering in circumstances where there is no underlying security interest to register.3

Correspondence and Dealings within the Profession [11.1.28] This is perhaps a comment about communications in litigation generally, as opposed to strictly PPSA litigation, but hostility and threatening communications are of limited usefulness. [11.1.29] Suggesting that one's understanding of the PPSA position as ‘misconceived’ or ‘plainly wrong’ rarely, if ever, adds to the expeditious resolution of material issues in dispute. On the other

2 See Personal Property Securities Act 2009 (Cth) s 151. 3 See Macquarie Leasing Pty Ltd v DEQMO Pty Ltd [2014] NSWSC 1466 at [23] per Rein J; See also Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217.

EXTERNAL ADVISORS AND CONSULTANTS 183

11 External Advisors and Consultants

[11.1.27] Ultimately, there is little substitute for proper characterisation of the underlying interest in issue and any perceived shortcut by way of registering a financing statement in respect of an interest (or purported interest) which has no place on the PPSR is likely to come undone quickly upon receipt of an amendment demand in accordance with s 178 of the PPSA.

hand, accurate references to material in support of a particular position (such as a provision of the PPSA or the paragraph of a decision) is often very instructive. [11.1.30] The same can be said for dealings between insolvency practitioners and creditors in respect of particular security interests. Often the taking of a particular position more accurately reflects the sentiment of the parties rather than the position at law. The legal profession, as unemotional advisors, should stand well outside of such exchanges.

[11.2] Accountants and auditors [11.2.1] Traditionally, one might not think of accounting obligations involving or relating to legal notions of security. However, the financial viability of an individual or entity, and particularly their ability to obtain funds if necessary, will inevitably involve an assessment of their equity position. [11.2.2] An individual or entity with encumbrances registered against them on the PPSR will likely find it very difficult to raise capital without dealing with those registrations (and, if mismanaged, at a time when it is unlikely that resources are to hand to deal with what appears on the PPSR). [11.2.3] The accounting profession, furnished with the financial information relevant to an individual or entity, is well equipped to consider the ramifications of erroneous registrations which appear on the PPSR — and likewise consider what registrations that individual or entity have attended to with a view to protecting their own interests. [11.2.4] Whilst the provision of advice, legal or otherwise, in respect of what appears on the PPSR and how to properly perfect particular security interests (or remove incorrect financing statements) requires a good degree of caution — the searches themselves and a rudimentary sorting of results which derive from the PPSR is a service that an accounting professional may be able to provide. [11.2.5] This would have considerable value given the broad reach of the accounting profession for taxation purposes, and if the history of the implementation of the PPSA is anything to go by — recognising

184 PPS in Practice

that the PPSA may apply to a particular individual or entity appears to be half the issue.

[11.3] Consultants and in-house counsel [11.3.1] A consultant or in-house counsel responsible for ensuring that an entity is PPSA compliant ought to establish practices for identifying issues with expedition. [11.3.2] Experience shows that processes are often developed at an introductory phase (for example, when the PPSA took force in Australia in January 2012) but are not since revised to take into account developments in the law. [11.3.3] The difficulty with allowing documentation, standard terms or registration processes which to date have not been reviewed are likely similar to ignoring the need to revise documentation in the first instance.

[11.3.5] Because of the way in which registrations are likely made (at the equivalent of a data entry level) the emergence of what might appear to be a simple error on its face, such as recording a security interest as transitional — when it is not, can have catastrophic consequences if performed throughout the whole of an entity’s registrations. Correcting incorrect registrations, whilst necessary, can be a difficult and expensive process. [11.3.6] For the above reasons, engaging external, independent advice when setting up and reviewing processes at different points in time is advisable. The day-to-day management of the PPSR position of a particular individual or entity does not likely require constant external supervision or advice — but the setting up of protocols to follow likely does. [11.3.7] Consultants and in-house counsel who are tasked with attending to PPSR registrations should also consider setting up

EXTERNAL ADVISORS AND CONSULTANTS 185

11 External Advisors and Consultants

[11.3.4] A periodic review of security interests which satisfy a commercial materiality threshold (which will differ for each relevant entity) is sensible. Equally, a review of internal processes for lodging financing statements on the PPSR is prudent and encouraged.

trackers for case law which emerges on the subject of the PPSA. As with legal practitioners, if a review of the legal developments are troubling, external advice and consultation should be sought promptly.

186 PPS in Practice

ANNEXURE A EXCLUSION OF ENFORCEMENT PROVISIONS Clause [XX] – Non-applicable PPSA provisions a) To the extent that the law permits: i. the parties agree that for the purposes of s 115(1) and s 115(7) of the PPSA, the Secured Party does not need to comply with sections [XX], [XX] and [XX] of the PPSA [Note: the Secured Party is to select sections (as applicable) from the list set out in s 115(1) of the PPSA]; ii. if the PPSA is amended after the date of this agreement (or deed) to allow the parties to exclude other provisions of the PPSA (‘Further Excluded Provisions’), the Secured Party may notify the Grantor that any of the Further Excluded Provisions are also excluded; and iii. the Grantor agrees not to make, or cause to be made, any request for information to the Secured Party under s 275 of the PPSA.

Annexure A

ANNEXURE A

EXCLUSION OF ENFORCEMENT PROVISIONS 187

ANNEXURE B PPSA CLAUSE FOR SPECIFIC SECURITY AGREEMENT (OR DEED)1 Clause [XX] – Security Interest a) The Grantor grants a security interest in the Collateral to the Secured Party to secure payment of the Secured Money. b) [optional and to be included if relevant to the transaction] The parties acknowledge that for the purposes of section 14(a) of the PPSA, the security interest in the Collateral secures all or part of the purchase price for the Collateral and is a purchase money security interest. c) [optional and to be included if relevant to the transaction] The parties acknowledge that for the purposes of section 14(b) of the PPSA: a. the Secured Party provides value for the purposes of enabling the Grantor to acquire rights in the Collateral; and b. the security interest in the Collateral granted under this document is a purchase money security interest, to the extent that the value provided by the Secured Party is applied to acquire such rights. Note: The following defined terms are to be inserted in the definition section of the specific security agreement (or deed). Collateral means all of the Grantor’s, right, interest or power to grant a security interest in [insert an adequate description of the specific property, an example is set out below]: [if the Collateral is equipment] 1. the [describe equipment, for example, motor vehicle, watercraft, airframe etc.] and any proceeds of sale. Secured Money means [this definition should be broad to ensure that all money, obligations and liabilities that are owing or payable under or in relation to the transaction document(s) are covered by the security interest] 1 This example clause is largely based on the PPSA Model Clauses Allens Linklaters, Ashurst, Herbert Smith Freehills, King & Wood Mallesons and Norton Rose, PPSA model clauses General security agreement (16 May 2013) (accessed on 27 August 2017).

188 PPS in Practice

ANNEXURE C PPSA CLAUSE FOR SUPPLIERS OF GOODS Clause [XX] – Personal Property Securities Act 2009 (Cth) In this clause [XX]: Customer means [XX]. Goods means any good/s or product/s supplied by the Supplier to the Customer. PPSA means the Personal Property Securities Act 2009 (Cth). PPSR means the Personal Property Securities Register. Purchase Money Security Interest has the meaning given by section 14 of the PPSA. Supplier means [XX].

ANNEXURE C PPSA CLAUSE FOR SUPPLIERS OF GOODS 189

Annexure C

a) The Customer acknowledges that this agreement gives rise to a security interest in the Goods supplied to the Customer for the purposes of the PPSA. The security interest created under this agreement is a Purchase Money Security Interest. The Customer grants to the Supplier a security interest in all the Goods supplied to the Customer, which secures the Customer’s payment or performance of its obligations to the Supplier. b) Other than the security interest created under this agreement, the Customer must not grant a security interest over the Goods to any other party, without the prior written consent of the Supplier. c) Without the Supplier's prior written consent, the Customer must not allow the Goods to become commingled or accede to any other property, or allow any other property to accede to the Goods. d) If the purchase price for the Goods is not fully and finally paid by the Customer and the Customer sells or otherwise disposes of the Goods, it does so as the Supplier’s fiduciary agent. The Customer acknowledges that the proceeds of such sale or other disposal constitutes property of the Supplier and are thereby held by the Customer on trust for the Supplier. e) The Customer undertakes: i. to provide all information necessary to enable the Supplier to perfect its security interest in the Goods for the purposes of the PPSA;

f)

ii. not to change (without giving the Supplier 15 business days' prior written notice) any of its details as disclosed under this agreement and that is recorded in a financing statement registered on the PPSR (including its ACN or, in the case it acts as trustee of a trust, any ABN allocated to that trust); and iii. to pay or reimburse all costs and expenses incurred by the Supplier in connection with the registration of a financing statement. To the extent permitted by law the Customer irrevocably waives its right to receive notice of any verification statement (as defined in the PPSA).

190 PPS in Practice

ANNEXURE D DEALING WITH COLLATERAL1 Clause [XX] – Dealing with Collateral The Grantor must not do, or agree to do, any of the following: a) create or allow another interest (including, but not limited to, any security interest) in any Collateral; or b) dispose, transfer, assign, or part with possession, of any Collateral. Note: To the extent that there are exceptions for dealing with the collateral, the above clause should be amended to accommodate for these exceptions, an example of this is set out below.

Clause [XX] – Dealing with Collateral The Grantor must not do, or agree to do, any of the following: a) create or allow another interest (including, but not limited to, any security interest) in any Collateral other than, [insert agreed interest allowed over the collateral]; or b) dispose, transfer, assign, or part with possession, of any Collateral except for [interest details of agreed disposal].

Annexure D 1 This example clause is based on the PPSA Model Clauses (cl 3) Allens Linklaters, Ashurst, Herbert Smith Freehills, King & Wood Mallesons and Norton Rose, PPSA model clauses General security agreement (16 May 2013) (accessed on 27 August 2017).

ANNEXURE D DEALING WITH COLLATERAL 191

ANNEXURE E APPLICATION OF PAYMENTS Clause [XX] – Applications of Payments The parties agree that for the purposes of section 14(6) (a) of the PPSA, the Secured Party may apply, as the Secured Party designates, any payments received in respect of any obligations that are secured by the security interest under this document. This includes but is not limited to, the principal amount, the interest or any other amounts owing to the Secured Party, to permit the Secured Party to maintain any purchase money security interest.

192 PPS in Practice

ANNEXURE F EXTENT OF THE GUARANTOR’S LIABILITY Clause [XX] – Guarantor’s Liability not extinguished The Secured Party’s [Financier’s] rights and the Guarantor’s liabilities under this agreement (or deed) is not affected by any act, or failure to act, by the Secured Party [Financier] or, by anything else that might otherwise affect the Secured Party’s [Financier’s] rights or the Guarantor’s liabilities under the laws relating to guarantees, including the fact that the Secured Party [Financier] does not: a) register any security interest capable of being registered on the PPSR; b) perfect any security interest in accordance with the requirements under the PPSA; c) enforce any security interest; or d) execute this document properly or at all.

Annexure F ANNEXURE F EXTENT OF THE GUARANTOR’S LIABILITY 193

ANNEXURE G REPRESENTATIONS AND WARRANTIES AND UNDERTAKINGS Clause [XX] – Representations and Warranties The Grantor represents and warranties to the Secured Party that: a) (Grantor details) the details of the Grantor are true, complete and accurately reflects the information sourced by the Secured Party for the purposes of the PPS Regulations in order to register an effective financing statement on the PPSR; b) (Security Interests) the Secured Property (or Collateral) is free from any security interest and, all relevant authorisations have been properly obtained to grant the security interest that arises under this document; c) (location of Secured Property (or Collateral)) all of the Secured Property (or Collateral) is located in Australia; d) (Serial numbered Secured Property (or Collateral)) it has no item of Secured Property (or Collateral) which the PPS Regulations require or permit to be described by its serial number on a financing statement registered on the PPSR; and e) (ownership of Secured Property) it is, or will be, the legal owner of the Secured Property (or Collateral).

Clause [XX] – Undertakings The Grantor must: a) (Grantor details) not change, or cause to change, any of its details as set out in this document without giving the Secured Party 15 days' prior written notice; b) (modifications relating to the Secured Property (or Collateral)) immediately notify the Secured Party: i. if any of the Secured Property (or Collateral) becomes a fixture; ii. if any of the Secured Property (or Collateral) is moved outside of Australia; and

194 PPS in Practice

iii. if the Grantor has acquired any Secured Property (or Collateral) that incorporates serial number(s) for the purposes of the PPS Regulations and provide such details to the Secured Party; c) (location of Secured Property (or Collateral)) not move the Secured Property (or Collateral) outside of Australia; d) (Interest of Secured Party) at all times protect the Secured Party’s interest and title in respect of the Secured Property (or Collateral); and e) (value of the Secured Property) not do or allow anything to be done which will reduce the value of the Secured Property (or Collateral). Note: If a secured party is concerned about particular collateral (such as shares held/owned by the grantor in a company, equipment or a vital contract), the representations and warranties and undertakings should be enhanced in respect of that collateral.

Annexure G ANNEXURE G REPRESENTATIONS & WARRANTIES & UNDERTAKINGS 195

ANNEXURE H ENFORCEMENT COSTS Clause [XX] – Enforcement costs a) The Grantor must pay or reimburse the Secured Party (on a full indemnity basis), all costs and expenses of the Secured Party in connection with: a. appointing a Receiver or Receiver and Manager; b. enforcing, exercising or protecting its security interest under this document; c. maintaining, protecting or realising the Secured Property (or Collateral); and d. a default by the Grantor.

196 PPS in Practice

ANNEXURE I FININANCING STATEMENTS WITH RESPECT TO SECURITY INTERESTS A financing statement with respect to a security interest (including such a financing statement as amended by the registration of a financing change statement) consists of data that complies with the following table: Financing statements with respect to security interests Item Data about: Details of data 1 The secured The details prescribed by the regulations, in party relation to each secured party, of:

2

3

The grantor

Giving of notices

(a) the secured party; or (b) a person nominated by the secured party who has authority to act on behalf of the secured party. Whichever of the following is applicable: (a) if the collateral is consumer property, and is required by the regulations to be described by serial number–no grantor's details; (b) if the collateral is consumer property, and is not required by the regulations to be described by serial number – the grantor's name and date of birth, as evidenced in accordance with the regulations, and no other details; (c) in any other case–the grantor's details as prescribed by the regulations. The following:

Note: For identifiers, see s 289.

ANNEXURE I FININANCING STATEMENTS WITH RESPECT … 197

Annexure I

(a) an address (including an email address or fax number) for the giving of notices to the secured party (or secured parties) relating to the registration; (b) details of any identifier provided for the giving of notices to the secured party (or secured parties).

Financing statements with respect to security interests Item Data about: Details of data 4 The collateral A collateral description in accordance with all and proceeds of the following rules: (a) the collateral must be described as one of the following: (i) consumer property; (ii) commercial property; (b) the collateral may or must be described by serial number, if allowed or required by the regulations; (c) the collateral must belong to a single class of collateral prescribed by the regulations; (d) any description of proceeds must comply with the regulations.

5

Note: 2 or more types of collateral that belong to different classes prescribed by the regulations must be described in separate registrations. However, 2 or more registrations can be effected through a single application. The end time For all the collateral described in the for statement, the following data: registration (a) for collateral other than consumer property or property described by a serial number: (i) no stated end time; or (ii) an end time for the registration no later than the time (the default time) that is the end of the day 25 years after the registration time; or (iii) if the registration is amended to include or change (but not omit) an end time – an amended end time for the registration no later than the time (the default time) that is the end of the day 25 years after the amendment time for that amendment; (b) for consumer property, or property described by a serial number: (i) an end time for the registration no later than the time (the default time) that is the end of the day 7 years after the registration time; or

198 PPS in Practice

Financing statements with respect to security interests Item Data about: Details of data

6

7

8

(ii) if the registration is amended to change the end time – an amended end time for the registration no later than the time (the default time) that is the end of the day 7 years after the amendment time for that amendment. Subordination An indication of whether the security interest is (or is to be) subordinated to any other security interest. However, this indication need not be included. Security An indication of whether the security interest interest is, or is to be, a purchase money security interest (to any extent) if the security interest is in respect of a class of collateral prescribed by the regulations for the purposes of this item. Details of the matter prescribed by the Any matter prescribed by regulations, whether or not the matter also comes under any of the other items in this the table. regulations

Annexure I ANNEXURE I FININANCING STATEMENTS WITH RESPECT … 199

ANNEXURE J TABLE SOURCING THE APPROPRIATE INFORMATION OF A SECURED PARTY/GRANTOR TO POPULATE IN A FINANCING STATEMENT Type of Secured Party/Grantor

Individual2

Prescribed information–the source of Relevant which is to be identified by the lowest item regulation number set out below (as applicable) pursuant to the PPS Regulations – Sch 1 cl 1.2 1. For a migrated security interest, the details to be used are the Individual's surname, given names and date of birth, as recorded on the transitional register3 2. The current data of the Individual's surname, given names and date of birth, as known to the secured party because of the operation of the AML-CTF Act4 3. The Individual's surname, given names and date of birth, as recorded on the current driver's licence issued by a State or Territory licensing authority 4. The Individual's surname, given names and date of birth, as recorded on the current proof of identity or current proof of age card issued by a State or Territory 5. The Individual's surname, given names and date of birth, as recorded on the current Australian passport

2 For the purposes of a security interest that is granted or held, an Individual includes a sole trader who has an ABN for the enterprise but does not include an individual who is a partner in a partnership or a trustee of a trust. 3 This item applies only to a registration by the Registrar under s 333(2) of the Personal Property Securities Act 2009 (Cth). 4 Anti Money Laundering and Counter Terrorism Financing Act 2006 (‘AML/CTF Act’).

200 PPS in Practice

Type of Secured Party/Grantor

Prescribed information–the source of Relevant which is to be identified by the lowest item regulation number set out below (as applicable) pursuant to the PPS Regulations – Sch 1

5 This item applies only to a registration by the Registrar under s 333(2) of the Personal Property Securities Act 2009 (Cth).

ANNEXURE J TABLE SOURCING THE APPROPRIATE INFORMATION … 201

Annexure J

6. The Individual's surname, given names and date of birth, as recorded on the individual's current Australian visa issued by the Australian Government 7. The Individual's surname, given names and date of birth, as recorded on the individual's current passport issued by the jurisdiction in which that individual ordinarily resides 8. For any other individual, the Individual's surname, given names and date of birth, as recorded on the individual's birth certificate that is issued for that Individual 1. For a migrated security interest, the cl 1.3 Body details to be used are the body corporate that corporate’s number or name whose is a trustee details are recorded on the and has an transitional register5 ARSN or is not a trustee of a 2. The body corporate’s registered trust that has scheme’s ARSN sourced from ASIC, an ABN if the body corporate is the responsible entity of a registered scheme, if the scheme has an ARSN 3. The body corporate’s ACN sourced from ASIC 4. The body corporate’s ARBN sourced from ASIC 5. For any other body corporate, the name of the body corporate, as provided for in body corporate's constitution or equivalent document

Type of Secured Party/Grantor

Partner in a partnership

Trustee

Prescribed information–the source of Relevant which is to be identified by the lowest item regulation number set out below (as applicable) pursuant to the PPS Regulations – Sch 1 1. For a migrated security interest, the cl 1.4 details to be used are the ABN, name of partner or name that identifies partnership, as recorded on the transitional register6 2. The ABN sourced from the Australian Business Register, if the partner of a partnership holds or has an interest in collateral in the course of, or for, an enterprise that has been allocated an ABN 3. For any other partner in any other partnership, the details mentioned in cl 1.2 are to be used for that partner 1. For a migrated security interest, the cl 1.5 details to be used are the Trustee details, as recorded on the transitional register7 2. The ABN sourced from the Australian Business Register, if Trustee of the trust holds or has an interest in collateral in the course of, or for, an enterprise that has been allocated an ABN

6 This item applies only to a registration by the Registrar under s 333(2) of the Personal Property Securities Act 2009 (Cth). 7 This item applies only to a registration by the Registrar under s 333(2) of the Personal Property Securities Act 2009 (Cth).

202 PPS in Practice

Type of Secured Party/Grantor

Body politic

Prescribed information–the source of Relevant which is to be identified by the lowest item regulation number set out below (as applicable) pursuant to the PPS Regulations – Sch 1 3. For any trustee of any other trust: a. in the case of an individual trustee, the details mentioned in cl 1.2 that has the lowest item number; and b. in any other case, the details mentioned in the relevant table that applies to the trustee and that has the lowest item number. 1. For a migrated security interest, the cl 1.6 details to be used are the body politic details, as recorded on the transitional register8 2. The ABN sourced from the Australian Business Register, if the body politic that holds or has an interest in collateral in course of, or for, an enterprise that has been allocated an ABN 3. For any other body politic as otherwise described in paragraph 2 above, the name of the body politic described in the constitution of the body politic

Annexure J 8 This item applies only to a registration by the Registrar under s 333(2) of the Personal Property Securities Act 2009 (Cth).

ANNEXURE J TABLE SOURCING THE APPROPRIATE INFORMATION … 203

ANNEXURE K COLLATERAL CLASSES AND SUB-CLASSES Broad Categories a) Tangible property

b) General property

Classes and Sub-classes i.

Motor vehicle – for the definition of a ‘motor vehicle’ refer to the PPS Regulations9 ii. Watercraft – for the definition of a ‘watercraft’ refer to the PPS Regulations10 iii. Aircraft – this collateral class also includes further sub-classes: ‘aircraft engine’, ‘airframe’, ‘helicopter’ and ‘small aircraft’. For the definition of a ‘aircraft’, ‘aircraft engine’, ‘airframe’, ‘helicopter’ and ‘small aircraft’ refer to the PPS Regulations11 iv. Agriculture – means personal property that is crops or livestock12 v. Other goods – means personal property that is goods, other than agriculture, aircraft, motor vehicles and watercraft13 i. All present and after-acquired property – no exceptions – for the definition of ‘all present and after-acquired property’ refer to the PPS Regulations14 ii. All present and after-acquired property – with exceptions – means all present and after-acquired property, except for an item or class of personal property stated in the financing statement for the interest.For the definition of ‘all present and after-acquired property, except’ refer to the PPS Regulations15

9 For the definition of motor vehicle refer to reg1.7 sub reg (2) or (3) of the Personal Property Securities Regulations 2010 (Cth). 10 For the definition of watercraft refer to definition under regs 1.6 and 9.1 of the Personal Property Securities Regulations 2010 (Cth). 11 For the definition of aircraft refer to definition under reg 1.6 of the Personal Property Securities Regulations 2010 (Cth). 12 Regulation 1.6 of the Personal Property Securities Regulations 2010 (Cth). 13 Schedule 1 of the Personal Property Securities Regulations 2010 (Cth) Pt 2, 2.3(2). 14 Regulation 1.6 of the Personal Property Securities Regulations 2010 (Cth). 15 Regulation 1.6 of the Personal Property Securities Regulations 2010 (Cth).

204 PPS in Practice

Broad Categories c) Intangible property

d) Financial property

Classes and Sub-classes i.

Account– means property that is a monetary obligation that arises from disposing of property or from the granting of a right or the provision of services in the ordinary course of business16 ii. General intangible – is used to describe all other intangible property that is not an ‘account’ or ‘intellectual property’ iii. Intellectual property – this collateral class also includes further sub-classes: ‘copyright’, ‘design’, ‘patent’, ‘plant breeder’s right’, ‘trade mark’ and ‘circuit layouts’. It also covers licences over these types of intellectual property i. Chattel paper – means a document or documents, that evidence either or both: a) a monetary obligation and a security interest in, or lease of, specific goods; or b) a monetary obligation and a security interest in specific intellectual property or specific intellectual property licence17 ii. Currency – means currency of Australia or of any other country18 iii. Document of Title – means a document issued by or addressed to a bailee that covers goods in the bailee’s possession and states that the goods identified will be delivered to a specified person or to the bearer or the order of a named person19 iv. Intermediated security – means the rights of a person in whose name an intermediary maintains an account to which interests in financial products may be credited or debited or an account that is a record of holdings and transfers of interests in financial products20

Annexure K

16 17 18 19 20

Personal Personal Personal Personal Personal

Property Property Property Property Property

Securities Securities Securities Securities Securities

Act Act Act Act Act

2009 2009 2009 2009 2009

(Cth) (Cth) (Cth) (Cth) (Cth)

s s s s s

10. 10. 10. 10. 15.

ANNEXURE K COLLATERAL CLASSES AND SUB CLASSES 205

Broad Categories

Classes and Sub-classes v.

Investment Instrument –means any of the financial products enlisted under the defined term of ‘Investment Instrument’ under section 10 of the PPSA21 vi. Negotiable interest – means a bill of exchange; a cheque; a promissory note; any document that evidences a right to payment if, a) the document is transferred by delivery in the ordinary course of business, or b) the document satisfies the law governing negotiable instrument; or a letter of credit that states that it must be presented on claiming payment22

21 Personal Property Securities Act 2009 (Cth) s 10. 22 Personal Property Securities Act 2009 (Cth) s 10.

206 PPS in Practice

ANNEXURE L TABLE IDENTIFYING THE CLASSES OF COLLATERAL BY SERIAL NUMBER AND IDENTIFYING THE APPROPRIATE SERIAL NUMBER23 Collateral

Requisite information

Aircraft (that is, an aircraft engine, airframe or helicopter): A small aircraft:

a) b) c)

the manufacturer's number; and the manufacturer's name; and the manufacturer's generic model designator

a)

the nationality and registration marks assigned to it under the Chicago Convention the vehicle identification number; or if it has no vehicle identification number but has a chassis number – the chassis number; or if it has no vehicle identification number or chassis number – the manufacturer's number the official number; or if it does not have an official number – the hull identification number; or if it is an outboard motor for regulation 1.6 – the manufacturer's number the design number issued by IP Australia; or if it does not have a design number – the design application number issued by IP Australia

A motor vehicle a) b)

c)

Watercraft

b) c) d)

Design

a) b)

Reviewed (tick to confirm)

Annexure L 23 The information set out in the table above is sourced from Sch 1 of the Personal Property Securities Regulations 2010 (Cth) Pt 2, 2.2(3).

ANNEXURE L TABLE IDENTIFYING THE CLASSES OF COLLATERAL 207

Collateral

Requisite information

Reviewed

(tick to confirm) Patent

a)

the patent number issued by IP Australia; or b) if it does not have a patent number – the patent application number issued by IP Australia; or c) if it does not have a patent number or a patent application number – a PCT number24 Plant breeder's a) the plant breeder's right number right issued by IP Australia; or b) if it does not have a plant breeder's right number – the plant breeder's right application number issued by IP Australia Trademark a) the trade mark number issued by IP Australia; or b) if it does not have a trade mark number – the trade mark application number issued by IP Australia

24 The PCT number means an international application number, issued under para 30(2)(b) of the Patent Cooperation Treaty done at Washington 19 June 1970, amended on 2 October 1979 and modified on 3 February 1984 and 3 October 2001; or if there is no international application number, an international publication number issued by the World Intellectual Property Organization.

208 PPS in Practice

ANNEXURE M CHECKLIST REVIEW FOR FINANCING STATEMENT It should be noted that subject to the type of collateral type and collateral class that the secured party selects, certain options will only become available in certain circumstances. For example, in the case where the collateral type is consumer and the collateral class is serial numbered, the identity of the grantor cannot be inserted. Information to consider

Reviewed

(tick to confirm) Secured Party a)

Grantor

Collateral Type Appropriate Collateral Class should be selected26

Is there a designated Secured Party Group Number which is linked to the relevant Secured Party? b) If no to a), insert the correct details of the Secured Party. Reference should be made to Sch 1 of the PPS Regulations and the underlying security agreement (or deed) a) Reference should be made to Sch 1 of the PPS Regulations to source the correct details of the Grantor and the underlying security agreement (or deed) a) Is the collateral type commercial or consumer?25 a) Tangible property i. Motor vehicle ii. Watercraft iii. Aircraft iv. Agriculture v. Other goods

Annexure M 25 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. Commercial property means personal property other than consumer property: see s 10 of the Personal Property Securities Act 2009 (Cth). 26 The Collateral Classes are described in further detail at Annexure J.

ANNEXURE M CHECKLIST REVIEW FOR FINANCING STATEMENT 209

Information to consider

Reviewed

(tick to confirm) b)

c)

d)

Duration of registration27

a)

General property i. All present and after-acquired property – no exceptions ii. All present and after-acquired property – with exceptions. Is the description adequate and not misleading or defective under the PPSA? Intangible property i. Account ii. General intangible iii. Intellectual property A. Circuit layout B. Copyright C. Design D. Patent E. Plant breeder’s right F. Trade mark Financial property i. Chattel paper ii. Currency iii. Document of Title iv. Intermediated security v. Investment Instrument vi. Negotiable interest What is the designated end time? i. 25 years – this should be diarised to extend the end time, if necessary ii. Less than 25 years in which case an end time must be inserted this should be diarised to extend the end time, if necessary iii. No end time

27 In the case where ‘consumer property’ is selected as the Collateral Type, a registration cannot be more than seven years and if the collateral is serial numbered the registration cannot identify the relevant grantor.

210 PPS in Practice

Information to consider

Reviewed

(tick to confirm) PMSI

a)

b)

Inventory

a) b) c)

Assets a) subject to b) control Proceeds

a)

Is the underlying security interest a PMSI? Reference should be made to the underlying security agreement (or deed) and s 14 of the PPSA If the answer to a) is yes, this option must be selected28 and the registration made within the prescribed time frame set out under s 62 of the PPSA Is the collateral inventory?29 If the answer to is yes, this option should be selected to confirm that the collateral the subject of the security interest is inventory Are the assets subject to control?30 If the answer to a) is yes, this option should be selected to confirm that the current assets are subject to control Are there proceeds to be claimed by the secured party? Unless the underlying security agreement (or deed) provides otherwise, the default position should be yes and the description in the box should be ‘all present and after acquired property’

Annexure M 28 Item 7 of the table set out under s 153(1) of the Personal Property Securities Act 2009 (Cth). 29 The meaning of ‘inventory’ is defined for this purpose in Pt 9.5 of the Personal Property Securities Act 2009 (Cth) s 341. 30 The meaning ‘control’ is defined for this purpose in Pt 9.5 of the Personal Property Securities Act 2009 (Cth) s 341.

ANNEXURE M CHECKLIST REVIEW FOR FINANCING STATEMENT 211

Information to consider

Reviewed

(tick to confirm) Subordination a)

Transitional

GONI

Is the security interest (or will the security interest) be subordinated to any other security interest? b) If the answer to a) is yes, this option should be selected to confirm the registration is subordinate to another registration31 a) Is the underlying security agreement (or deed) and the security interest transitional?32 b) If the answer to a) is yes, the option should be selected to confirm that the registration is transitional a) Is the appropriate GONI (giving of notice identifier) included to easily reference the security interest in the case the grantor or a third party makes contact with the secured party regarding the registration

31 It should be noted that item 6 of the table set out under s 153 of Personal Property Securities Act 2009 (Cth) provides that the indication of subordination need not be included. 32 Personal Property Securities Act 2009 (Cth) ss 307 and 308.

212 PPS in Practice

ANNEXURE N GRANTOR REQUEST FOR FURTHER INFORMATION [Formal parts omitted] [Insert date] Dear [x]

Re: Financing statements lodged on the Personal Property Securities Register (PPSR) against [insert grantor name] We have recently conducted a review of the PPSR in respect of financing statements lodged against us and have found the following registration(s) lodged by you against us: • [Insert list of registration numbers and the corresponding GONI numbers relevant to each flagged registration for the particular secured party in question – NOTE: A separate letter will need to be prepared and issued if there is more than one secured party for which flagged registrations have arisen, however, one letter can be used for multiple different registrations made by one secured party.] We are unaware of the security interest(s) which we have granted to you which might otherwise be the subject of the above registration(s) and request that you provide us with:

The above request is made in accordance with section 275(1) of the Personal Property Securities Act 2009 (Cth).

ANNEXURE N GRANTOR REQUEST FOR FURTHER INFORMATION 213

Annexure N

1. A copy of the security agreement that provides for the security interest; 2. A statement in writing setting out the amount or the obligation that is secured by the security interest and the terms of payment or performance of the obligation as at the date of this letter; and 3. A written approval or correction of an itemised list of personal property attached to the request indicating in which items of property the security interest is granted as at the date of this letter.

Please send the above information to: • [insert appropriate email address and/or postal address] within 14 days of the date of this letter. Should you fail to comply with the above request please note that we reserve all rights and our ability to rely on this correspondence for any purpose including in respect of any costs incurred. Yours sincerely,

214 PPS in Practice

ANNEXURE O AMENDMENT DEMAND [Formal parts omitted] [Insert date] Dear [x]

AMENDMENT DEMAND PURSUANT TO SECTION 178 OF THE PERSONAL PROPERTY SECURITIES ACT 2009 (CTH) (PPSA) This is an amendment demand which is provided under section 178 of the PPSA. [If the grantor recognises a contractual relationship or previous dealings between them and the purported secured party the amendment demand is directed to, insert a brief description of that relationship and annex any documentation or security agreement giving rise to that relationship to this letter.] We have recently conducted a review of the Personal Property Securities Register (PPSR) and have found the following registration(s) lodged by you, [insert name and address for service of secured party] against us:

We request that you [remove/change] the above registration(s) as [insert reason for amendment demanded, for example: we are unaware of the security interest(s) which we have granted to you which might otherwise be the subject of the above registration(s) and

ANNEXURE O AMENDMENT DEMAND 215

Annexure O

• [Insert list of registration numbers relevant to each flagged registration for the particular secured party in question – NOTE: A separate letter will need to be prepared and issued if there is more than one secured party for which flagged registrations have arisen, however, one letter can be used for multiple different registrations made by one secured party. If the secured party has a "Giving of Notice Identifier" which will appear in the relevant registration – provide this notice alongside the relevant registration number it is contained within.]

therefore require you to lodge a financing change statement to end effective registration because no collateral described in the registration secures any obligation (including a payment) owed by us to you; OR upon review of the [insert name of relevant security agreement(s)] the following collateral [state the personal property in issue] does not secure any obligation (include a payment) owed by us to you. OR all obligations and payments owed to you have been satisfied in full.] Annexed to this letter is a copy of evidence in support of the changes requested in this letter. This demand is made by [full name of the grantor and the name and capacity of the person who is the signatory on the letter acting on behalf of the company – if the grantor is a company] Please direct any response to this letter to [insert email address and/or postal address]. Should you fail to comply with the above request please note that we reserve all rights and our ability to rely on this correspondence for any purpose including in respect of any costs incurred. Yours sincerely,

216 PPS in Practice

ANNEXURE P ORIGINATING PROCESS [FORMAL PARTS OMITTED] ORIGINATING PROCESS This is an application pursuant to section 588FM of the Corporations Act 2001 (Cth) (Corporations Act). The [Plaintiff/Applicant] seeks to extend time for it to perfect [describe security interest] granted to it by the [Defendant/Respondent] for the purposes of section 588FL(2)(b)(iv) of the Corporations Act. On the facts stated in the supporting affidavits, the Plaintiff/Applicant seeks:

ANNEXURE P ORIGINATING PROCESS 217

Annexure P

1. An order pursuant to section 588FM of the Corporations Act fixing [date] as the time for the purposes of subparagraph 588FL(2)(b)(iv) by which the [Plaintiff/Applicant] is to perfect any security interest granted to it by the [Defendant/Respondent] in [describe collateral] as referred to in PPSR registration number [relevant PPSR registration number]. 2. An order that liberty be reserved to any liquidator, administrator or deed administrator who may be appointed to the [Defendant/ Respondent] to apply to discharge or vary Order 1 if any winding up of the [Defendant/Respondent] occurs, or an administrator is appointed to the [Defendant/Respondent] under sections 436A, 436B or 436C of the Corporations Act, or the [Defendant/ Respondent] executes a deed of company arrangement within 6 months of [date of registration]. 3. A direction that Orders 1 and 2 are to be entered forthwith. 4. Such further or other order as this Honourable Court deems appropriate.

[FORMAL PARTS OMITTED] ORIGINATING PROCESS This is an application pursuant to section 293 of the Personal Property Securities Act 2009 (Cth) (PPSA). The [Plaintiff/Applicant] seeks to extend time for it to perfect [describe PMSI] granted to it by the [Defendant/Respondent] for the purposes of section 62 of the PPSA. On the facts stated in the supporting affidavits, the Plaintiff/Applicant seeks: 1. An order that, pursuant to section 293(1) of the PPSA, the number of business days set out in section 62(3)(b) be extended by the appropriate number of business days relevant such that PPSR registration number: [PPSR registration number] falls within the time period prescribed by section 62(3)(b) of the PPSA as extended by this order. 2. A direction that order 1 is to be entered forthwith. 3. Such further or other order as this Honourable Court deems appropriate.

218 PPS in Practice

ANNEXURE Q INSOLVENCY PRACTITIONER CHECKLIST

ANNEXURE Q INSOLVENCY PRACTITIONER CHECKLIST 219

Annexure Q

Task Performed A. PRELIMINARY INQUIRIES 1. Conduct a comprehensive search of the Personal Property Securities Register against all identifiers relevant to the grantor (for example, the ACN, ABN and company name). 2. Send correspondence to each relevant entry which appears informing that party of appointment and requesting documentation from the creditor in support of the registration which appears. 3. If no documentation is forthcoming, send further request for documentation and/or preliminary determination in respect of particular security interest. B. STOCKTAKE 4. Perform stocktake to see what personal property is to hand and to which particular security interests may have been taken C. INDIVIDUAL REGISTRATION ANALYSIS 5. Review each creditor's documentation in support of their security interest against the registration which appears on the PPSR (or furnish a legal practitioner with such documentation to perform such an analysis). 6. Review each PPSR registration and ask: a. Is the grantor correctly identified? b. Is the collateral description accurate? c. Does the timing of the registration fall within the statutory requirements in respect of the particular interest being relied upon? i. Section 588FL of the Corporations Act 2001 (Cth)? ii. Section 293 of the Personal Property Securities Act 2009 (Cth)? d. Is the registration correct in respect of the PMSI inquiry? e. Is the registration correct in respect of the transitional inquiry? f. Is the registration misleading in any other way? (Has the registration expired for example?)

Task Performed D. DETERMINATIONS 7. Notify each creditor about the view taken in respect of their security interest and provide time for objections. 8. Wait appropriate timeframe for time for objections to either expire or further action to be taken by creditor. 9. Advance external administration to deal with property in accordance with determined views or judicial intervention (if a determination becomes contested).

220 PPS in Practice

INDEX

Accessions, 3.3.1 3.3.5 Accountants, 11.2 Advance payment, 5.4.19 Adverse determinations, 8.19 Agreements commercial agreements see Commercial agreements conditional sale agreements, 1.2.18, 1.2.19, 1.2.27 hire purchase agreements, 2.2.9 lease agreements, 2.2.8 2.2.11 loan/facility agreements, 5.3.3 5.3.4, 5.3.6 master agreements, 1.2.23, 5.3.15, 5.3.23, 5.5.4 security agreements see Security agreements All present and after-acquired personal property (AllPAP) security interest, 1.6.5, 1.7.8 1.7.9, 4.5.16, 5.3.4, 5.5.1, 8.7.4, 8.13.6 AML-CTF data, 4.6.22 Appointment insolvency, 9.1 ASIC Register of Company Charges, 5.3.9, 5.4.14 Assets circulating assets, 5.4.8 5.4.11 fixed and floating charges, 5.4.3, 5.4.4 profit generating assets, 8.20 trust assets, 4.2.6, 4.6.20 Assignment of personal property, 1.2.25 1.2.28 Attachment collateral, 3.2, 5.4.7

security interest, 1.2.4 1.2.5, 1.4, 3.2.3, 4.7 timing, 1.4.2 Auditors, 11.2 Australian Banker’s Association ‘Release and Undertaking to Amend Registration’ 6.5.74 Australian Business Number (ABN), 4.2.8, 4.6.18, 4.6.19, 4.6.30, 6.5.21, 7.3.3, 9.2.2, 9.4.8 Australian Company Number (ACN), 4.6.29, 4.6.30, 7.3.2, 9.2.2, 9.4.8 Australian Financial Security Authority (AFSA), 1.1.2 Bankruptcy, 5.1.8 Business and personal properties, 2.1.3 2.1.11 ascertainment, 2.2 direct dealings, 2.1.6, 2.1.8 indirect dealings, 2.1.7, 2.1.8, 2.1.9 2.1.11 internal systems, 2.2.2 2.2.3 PPSA applicability, 3.1 Business to Government (B2G) platforms, 10.3.4 Caution clauses, abundance of, 5.5.27 5.5.31 Charitable trusts, 4.6.13 Chattel paper, 1.3.5, 6.5.60 Checklist insolvency, 9.6 Circulating assets, 5.4.8 5.4.11

INDEX 221

Collateral, 3.2, 4.3.3, 4.7, 5.2.3, 5.5.13 altered form, 9.3.12 9.3.14 attachment, 3.2, 5.4.7 as commercial property, 9.4.6 as consumer property, 9.4.5 descriptions, 6.5.37 6.5.44, 7.4.4, 8.7.7 descriptions, restrictive, 9.3.7 enforcement costs, 5.5.43 exclusions from PPSA, 3.4.4, 3.4.5 identification of class and sub classes, 6.5.22 6.527 misappropriation, and grantors, 4.5.12 security agreements, 5.5.6 5.5.10 transferred, 6.5.49 6.5.60 Commercial agreements, 5.3.1, 5.3.2 financing transaction, 5.3.3 5.3.8 goods suppliers, 5.3.9 5.3.23 security agreements, 5.5 Commercial agreements, amending, 5.4.1 financing transaction, 5.4.2 5.4.20 goods suppliers, 5.4.21 5.4.28 Commingled goods, 3.3.6 3.3.13 Compliance time extension, 9.5.6 9.5.11 Conceding errors and obtaining relief, 11.1.18 11.1.20 Concurrent operation, 8.13.9 Conditional sale agreements, 1.2.18, 1.2.19, 1.2.27 Consultants, 11.3 Continuous perfection requirements, 6.5.90 6.5.91 Control perfection of security interest by, 1.5.5, 6.1.3, 6.4, 8.15.1 Corporate grantors, 4.6.24 4.6.31, 5.4.18 Corporate transactions due diligence in, 6.4.6 6.4.16 Corporations perfection of security interest, 6.5.78 6.5.79

222 PPS in Practice

Correspondence and dealings within the profession, 11.1.28 11.1.30 Credit application security interest, 1.2.23 Crystalisation, 5.4.5, 5.4.7 Debtors vs grantors, 4.2 Decision period definition of, 5.5.1 Deed security agreement see Security agreements (or deed) trust deeds, 4.6.20 Deemed security interests, 1.3.5 definition of, 4.1.4 4.1.27 Default event of, 5.4.5 grantors’ perspective, 7.1 secured parties’ perspective, 8.1 security interest not attached prior to, 4.7.11 4.7.13 priorities, 8.12.2 8.12.4 Defects amending registrations to deal with, 8.4 defined classes of, 9.4.2 seriously misleading defect, 8.3.5, 8.3.8 Discrete security interests, 8.7.4, 8.7.7 Drafting and language, legal practitioners, 11.1.9 11.13 Due diligence, 5.5.51, 5.5.52 in corporate transactions, 6.4.6 6.4.16 Encumbrances, 2.1.9, 2.1.10 and indirect business dealing with personal properties, 2.1.9 2.1.10 Enforcement costs, in security agreements, 5.5.40 5.5.43 Enforcement provisions, in security agreements, 5.5.44 5.5.49 Event of default, 5.4.5

External administrator, 4.5.11, 7.1.1, 7.10.5, 8.1.1, 8.5.3, 8.7.9, 8.7.10, 8.8.7, 8.11.1, 8.18.4, 8.19.3 8.19.5, 9.1 External advisors and consultants accountants, 11.2 auditors, 11.2 consultants, 11.3 in house counsel, 11.3 legal practitioners, 11.1 Fee associated with amending a registered financing statement, 6.5.65 registration fees, 6.5.47 Financial property, 2.1.7, 6.5.27 Financing statements amendment and its effect, 6.5.61 6.5.68 discharge of, 6.5.69 6.5.74 effectiveness, 6.5.17 6.5.18, 6.5.78 errors, 9.4 lodging new statement, 4.6.21 5.6.23, 6.5.51 6.5.52 PPS Regulations, 4.6.28 PPSR see Personal Property Securities Register (PPSR) registering two statements, 6.5.47 6.5.48 registration, 6.5.7 6.5.13 registration avoiding common errors, 6.5.86 6.5.89 Financing transaction commercial agreements, 5.3.3 5.3.8 commercial agreements, amending, 5.4.1 Fixed charges, 1.2.18, 1.2.19, 5.4.3 5.4.8, 5.4.13 5.4.14 perfection of, 5.4.13 5.4.17 Floating charges, 1.2.18, 1.2.19, 5.4.3 5.4.8, 5.4.13 5.4.14 perfection of, 5.4.13 5.4.17

General property, 6.5.27 Goods suppliers commercial agreements, 5.3.9 5.3.23 commercial agreements, amending, 5.4.21 5.4.28 Governing law security agreements, 5.5.32 5.5.35 Grantors administrative process, 7.7 amendment demands, 7.6 appropriate grantor, identification of, 6.5.19 6.5.21 bankruptcy, 5.1.8 corporate grantor, 5.4.18 corporations, 4.6.24 4.6.31 debtors, 4.2 default and litigation from the perspective of, 7.1 eligibility, 4.6 errors on PPSR, 7.9 flagged results, 7.5 vs guarantors/indemnifying parties, 4.3 identification, 9.4.7 9.4.11 individuals, 4.6.21 4.6.23 insolvency, 5.1.8 judicial process, 7.8 legal entities, 4.5 multiple grantors, 4.5.12 4.5.16 partnerships, 4.6.5 4.6.11 potential multiple grantors, 4.5.12 4.5.16 PPSR search, 7.3 prejudice to creditors and shareholders of, 8.9.6 8.9.7 registrations on PPSR, 7.2 review of PPSR results, 7.4 rights, 4.7.3 4.7.5 section 293 of PPSA application, 7.10 section 588FM of Corporations Act application, 7.10 security agreements, 5.5.8

INDEX 223

Grantors – continued security attachments, 4.7.2 security interest attached to the collateral, 4.7 trusts, 4.6.12 4.6.20 Guarantee, 4.3.5 Guarantors/indemnifying parties, 4.3 Hire purchase agreement, 2.2.9 In-house counsel, 11.3 “In substance” security interest definition of, 4.1.4 4.1.13 Independent legal advice deemed security interests, 4.1.24 4.1.26 Individual grantors, 4.6.21 4.6.23 Individuals perfection of security interest, 6.5.80 Insolvency appointment, 9.1 grantors, 5.1.8 secured parties, 8.18 Intangible property, 6.5.27 Interest, definition of, 4.7.4 Interest in personal property, 4.1.5 4.1.6 definition of, 1.2.3 Interested person information required for, 5.2.5 5.2.7 Invoices, 1.2.21, 5.3.15 5.3.19 Judgment debt unenforceability, 5.1.7 Just and equitable, 8.10 Lease, 2.2.8 agreements, 2.2.8 2.2.11 hire purchase agreement, 2.2.9 PPS lease see PPS lease Legal practitioners, 11.1 Like interests, 8.13 Loan/facility agreement, 5.3.3 5.3.4, 5.3.6

224 PPS in Practice

Master agreement, 5.3.15, 5.3.23, 5.5.4 security interest, 1.2.23 Multiple grantors, 4.5.12 4.5.16 Non-cooperation and interlocutory injunctions, 8.21 Non-identifiable security interest, 9.3.4 9.3.11 Non-purchase money security interest (non-PMSI), 5.5.14, 6.5.48, 8.4.2 and PMSI registrations, 9.4.12 9.4.16 Ownership corporate entities, 4.6.2 individual entities, 4.6.2 interest in personal property, 1.2.6 legal entities, 4.6 possessory interest, 1.2.6, 1.2.7 Partnerships, 4.6.5 4.6.11 Payment contractual promise to pay, 5.1.3 definition of, 4.1.7 secures payments, 1.2.7, 1.2.15 1.2.28 in substance security, 4.1.7 Perfection of fixed and floating charges, 5.4.13 5.4.17 Perfection of security interest, 6.1 accessions, 3.3.1 3.3.5 by control, 1.5.5, 1.6.7, 6.1.3, 6.4, 8.15.1 failure to, 1.7, 3.3.4, 6.7 general priorities, 1.6, 3.3.11 by possession, 6.1.3, 6.3 in proceeds, 6.6 by registration, 1.5.1 1.5.4, 4.5.10 4.5.11, 4.6.4, 4.6.19, 6.1.3, 6.5 temporarily perfection, 6.1.3, 6.2 timing requirements, 6.5.75 6.5.77 Performance of an obligation, 1.2.15 1.2.28, 4.1.7

Personal properties, 5.1.8, 6.4.10 collateral, 3.2 definition of, 2.1.1 2.1.2 exclusions from PPSA, 3.4 possessory rights, 4.7.6 4.7.7 Personal Property Securities Act 2009 (PPSA), generally applicability to transactions, 3.1 carving out of operations, 5.2 defined, 1.1.1 exclusions from, 4.3, 5.2.2 founding principles, 1.1.4 one size fits all approach, 3.1.5 Personal Property Securities Register (PPSR), 3.2.1, 4.1.27, 4.5.15, 6.5.1 6.5.6, 6.5.87 discharging financing statement on, 6.5.69 6.5.74 engaging with, 10.3 errors on, 7.9, 9.3 flagged results, 7.5 legal practitioners registering on, 11.1.14 11.1.17 priority on, 6.5.11 registrations on, 7.2, 11.1.14 11.1.17 results review, 7.4 review of, 9.4.19 search, 7.3 Possession perfection of security interest by, 6.1.3, 6.3 Possessory interest ownership, 1.2.6, 1.2.7 Possessory rights, 4.7.6 4.7.7 PPS lease, 1.2.7 1.2.11, 1.2.13, 3.4.7 3.4.10, 4.1.15 4.1.17 agreements, 2.2.10 2.2.11 definition of, 1.2.8 indefinite term, 1.2.10 1.2.12, 4.1.19 PPSA Model Clauses, 5.5.1, 5.5.3, 5.5.8, 5.5.10 Preliminary determinations, 9.3.15 9.3.7

Preliminary enquiries, 9.2 Primary obligation, 4.3.5, 5.1.2 5.1.3, 5.1.7 collateral or ancillary rights, 4.3.7 contractual promise to pay, 5.1.3 definition of, 4.4 security interest, 4.1.8 Priority contests, 8.12 Priority disputes, 8.14 Proceeds interests in, 5.5.15 5.5.26 perfection of security interests in, 6.6 Proper characterisation, 11.1.5 11.1.8 Purchase money security interests (PMSIs), 1.3, 1.6.6, 1.6.7, 5.5.13 5.5.14, 6.5.48, 8.4.2, 8.4.9, 11.1.22, P3.5 definition of, 1.3.2 inventory PMSIs, 8.17.2 8.17.5 like interests, 8.13.3 multiple grantors, 4.5.15 non inventory PMSIs, 8.17.6 8.17.10 and non PMSI, 8.3.5 over commingled goods, 3.3.13 perfection of security interest, 6.5.81 6.5.85 registrations, in non PMSI circumstances, 9.4.12 9.4.16 and timing requirements, 8.17 Real property, 5.1.8 Registrar, 7.7 Registrations collateral, 3.2.1 conscious and circumstantial, 11.1.26 effective registrations, 8.3.3 of financing statements, 5.4.20, 6.5.7 6.5.13 multiple registrations on the PPSR, 5.4.25, 6.5.45 6.5.48 notice based system, 7.8.6

INDEX 225

Registrations – continued perfection of security interest by, 1.5.2 1.5.3, 4.5.10 4.5.11, 4.6.4, 4.6.19, 6.1.3, 6.5 Relevant identification detail, 7.3.2 Relief, 8.9 Resist registering first and asking questions later practice, 11.1.24 11.2.27 Retention of title (ROT), 5.3.2 Review of PPSR, 9.4.19 Rights definition of, 4.7.3 in the personal property, 1.2.3 1.2.4 sufficiency, 4.7.5 Secured creditor, 5.1.8 Secured party adverse determinations, 8.19 dealing with other creditors, 8.23 default and litigation from the perspective of, 8.1 defects or potential defects, amending registrations to deal with, 8.4 express subordination, 8.22 identification of, 6.5.19 6.5.21 insolvency, 8.18 invalid registrations and vesting, 8.3 inventory PMSIs, 8.17.2 8.17.5 jurisdiction, 8.7 just and equitable, 8.10 like interest, 8.13 non cooperation and interlocutory injunctions, 8.21 non inventory PMSIs, 8.17.6 8.17.10 perfection by control, 8.15 PMSIs and timing requirements, 8.17 PPSR search, 8.2 priority contests, 8.12 procedural issues, 8.7 profit generating assets, 8.20 registrations discharge, 8.22

226 PPS in Practice

releases and express subordination, 8.16 relief, 8.9 security interest enforcement, 8.18 standing, 8.7 terms and conditions, 8.11 time applications extension, 8.6 timing inquiry to ascertain priority, 8.14 timing of registration errors, 8.5 urgency, 8.8 Secured party group (SPG), 6.5.70 Secures payment, 1.2.7, 1.2.15 1.2.28 Security agreements (or deed) administration risk, 5.5.1 caution clauses, abundance of, 5.5.27 5.5.31 collateral, 5.5.6 5.5.10 due diligence, 5.5.51 5.5.52 enforcement costs, 5.5.40 5.5.43 enforcement provisions, 5.5.44 5.5.49 exposure levels, 5.5.53 governing law, 5.5.32 5.5.35 interests in proceeds, 5.5.15 5.5.26 language of, 5.5 potential liabilities assessment, 5.5.50 representations and warranties, 5.5.36 5.5.39 review of, 6.4.15 secured money, 5.5.1 security interest clause, 5.5.1 supply arrangements, 5.5.11 5.5.14 Security interest accessions, 3.3.1 3.3.5 AllPAP security interest, 1.6.5 assignment or transfer of title, 1.2.25 1.2.28 attachment, 1.4, 4.7 attachment rule, 1.2.4 1.2.5 collateral, 3.2, 4.3.3, 4.7 commingled goods, 3.3.6 3.3.13 compliance mechanisms, 1.4.4 1.4.5

Security interest – continued conditional sale agreements, 1.2.27 debtors, 4.2 deemed, 4.1.14 4.1.27 definition of, 1.1.6, 1.2, 4.1 exclusions from PPSA, 3.4 general priorities, 1.6, 3.3.11 grantors see Grantors in substance, 4.1.4 4.1.13 and invoices, 1.2.21 multiple interests, 1.2.20 1.2.23, 3.3.11 not attached prior to default, 4.7.11 4.7 13 partnerships, 4.6.5 4.6.11 perfection, 1.5, 6.1 perfection, failure to, 1.7 possessory interest, 1.2.6, 1.2.7 PPS lease, 1.2.7 1.2.11, 1.2.13 primary obligation, 4.4 purchase money security interests (PMSI), 1.3 as a right in personam 5.1.5, 5.5.28 as a right in rem 5.1.2, 5.5.28 security agreements see Security agreements (or deed) source of, 5.3.14 taking free or extinguishment, 10.1 talking of, 5.1 transaction types, 1.2.19 transfer of an account or chattel paper, 1.3.5 trusts, 4.6.12 4.6.20 type of, 5.5.1 5.5.5 Serial number identification, 6.5.28 6.5.36 registrations, 9.4.3 9.4.6 Seriously misleading defect, 8.3.5, 8.3.8 Short term credit, 1.1.7 Source of security, 5.4.23 Statutory tools, 11.1.21 11.1.23 Subordination, 8.16 Substituted service, 8.8.4

Suppliers of goods commercial agreements, 5.3.9 5.3.23 commercial agreements, amending, 5.4.21 5.4.28 Taking free or extinguishment, 10.1 Talking security, 5.1 Tangible property, 6.5.27 Temporarily perfection, 6.1.3, 6.2 Terms and conditions, 8.11 Terms of trade, 5.3.15 Third party, 10.2 business and personal property transactions, 2.2.6 2.2.8 purchase of personal property free from any encumbrance, 2.1.9 2.1.10 Transactions corporate transactions, due diligence in, 6.4.6 6.4.16 financial transactions, 5.3.3 5.3.8, 5.4.2 5.4.20 PPSA applicability, 3.1 third party, 2.2.6 2.2.8 types, 1.2.18 1.2.19 Transfer of title, 1.2.25 1.2.28, 4.5.9 Transferred collateral, 6.5.49 6.5.60 Transitional security interests, 9.4.17 9.4.18 Trusts, 4.6.12 4.6.20 deed, 4.6.20, 5.3.4 Unperfected security interests, 1.6.3, 1.6.4, 1.7.3, 9.5.5 Urgency, 8.8 Variation deed, 5.4.28 Vendor credit, 1.1.7 Vesting in grantor, 9.5 Warranties, 5.5.36 5.5.39 Whittaker Report, 6.5.87

INDEX 227