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    Competing Business Security Interests: When your security may not be as secure as you think pt.2

    Oct 8, 2020 1:26:00 PM

    There are a number of different ways a business or individual may choose to secure their interest in another business. This article explores in more depth a charge registered pursuant to the Personal Property Securities Act 2009 (Cth) (‘PPSA) on the Personal Property Securities Register (‘PPSR) or a PPSA security interest. In particular this article will look at priority rules.

    For information on what a PPSA security interest is, and different PPSA interests please read our article Competing Business Security Interests: When your security may not be as secure as you think pt.1.

    Priority Matters

    A PPSA interest only becomes a concern when a company is unable to pay off the amount they owe. Naturally, the main concern is if the company in question goes into liquidation, how will the competing interests of creditors be played out.

    Accordingly, the PPSA has specified priority rules, that is the types of PPSA interests that have priority over other PPSA interests. As a result, it is important that you know what type of interest is most appropriate for you or your company, and where it falls in the priority line.

    Priority Rules

    In short there are some general priority rules to be aware about:

    1. A perfected security interest will have priority over an unperfected security interest;
    2. Perfection by control will have priority over perfection by other means;
    3. If two competing security interests are perfected other than by control, then priority is determined by who registered their interest first; and
    4. If two competing security interests are not perfected, then priority will be determined by order of attachment.

    The secured party which has priority, is given priority over the proceeds of the collateral thereby ensuring that you as a creditor are more protected.

    Super Priority?

    In our previous article we looked at different types of PPSA interests. In particular we looked at in general, if your interest is registered against a particular personal property (or group of identifiable personal property) when it comes to priority interests, you will be paid first in relation to that particular personal property. This is known as a Purchase Money Security Interest (PSMI).

    A PSMI is important to keep in mind as they have super priority. That is, if you have a perfected PSMI then you will be given priority over the collateral to which the PSMI relates above all else. Clearly this will mean that the collateral must be easily recognisable as the collateral to which your PSMI relates, and must be able to be distinguished at the time of liquidation as well. For example, it may not be enough to simply state you have collateral over laptops, if the company owns other laptops. The particulars must be specific enough to enforce the super priority of the PSMI. In that situation of laptops, serial numbers may be an appropriate identification method.

    We note that there are other priority rules which we do not propose to go into in this article.

    Comingled goods

    It is evident that clear identification over the collateral in which you have PSMI interest is important. These requirements must be specified in the security agreement or deed that you or your company has with the party granting security. But what happens if even after you have taken all reasonable steps, your collateral becomes comingled with collateral under another PMSI.

    This is the situation with comingled goods.

    In short comingled goods create serious issues for the creditors trying to maintain their priority in relation to the comingled goods. The matter becomes furthermore complex when the company in liquidation itself has purchased goods which form part of the comingled goods and there is a further security interest in relation to any collateral which does not fall under the PSMI. We do not propose to address this complex situation here, as ultimately in many situations it is in the interests of all parties to consider their respective positions and attempt to agree on a mutually suitable outcome.

    Nevertheless, we do note that where there are comingled goods a PSMI is not extinguished if the collateral that relates to the PSMI clearly forms part of the comingled goods. Rather any proceeds obtained from the comingled goods are apportioned to the competing PSMI’s in the ratio of their PSMI’s.

    For example:

    Company A has a PSMI over $10,000 worth of black handbags.

    Company B has a PSMI over $100,000 worth of black handbags.

    If, for whatever reason, the black handbags become comingles then the competing PSMI’s are over comingled goods.

    If all handbags are sold, and there is $110,000 worth of proceeds of sale then there is no issue. Company A will receive their full $10,000 and Company B will receive their full $100,000.

    More often then not however the handbags are sold, and they only sell for less, say $100,000. In these circumstances the proceeds are apportioned according to the value of the PMSI’s in place. That is Company A will receive 9.1% or $9,100 and Company B will receive 90.9% or $90,900.

    Take Home

    It is important to secure any debt you may have against a business in some form, and the PPSA can be a useful tool in doing this.

    However it is not one size fits all and it is important to consider the other possibly competing security interests that the grantor of the security may already have before entering into an agreement with them.

    If you have further questions, please contact us at frank@franklaw.com.au. 

    This is not legal advice. 

    Andrea Harrold

    Written by Andrea Harrold