What is the PPSA?

The PPSA is a regime established by the Personal Property Securities Act 2009 (Cth) (PPSA) and the Personal Property Security Regulations 2010 (Cth).

These two pieces of legislation regulate and administer the Personal Property Security Register which is the register of security interests.

The register records all interests held in or over property. When it was established in 2009, the concept of fixed and floating charges had already been playing a significate role in Corporate Australia. However, the regime amended the concept of security interest and homogenised the system across states and territories.

What is a Security Interest?

The PPSA gives a functional definition of security interest, rather than one based on the type of arrangement (e.g. a mortgage or lien).

There are 2 broad categories of security interest under the PPSA:

1. An ‘in-substance’ security interest (section 12(1)); and
2. A ‘deemed’ security interest (section 12(3)).

An in-substance security interest consists of an interest in personal property and the interest in substance secures the payment or performance an obligation. For example, a security interest over manufactured metal roofing supplied to a retail hardware store on account.

A deemed security interest is a security interest as covered by section 12(3) which includes:

• An interest of a transferee under a transfer or an account or chattel paper;
• the interest of a consignor who delivers goods to a consignee under a commercial consignment
• the interest of a lessor or bailor of goods under a PPS lease.

For example, a manufacturer of machinery who consigns that machinery to a machinery seller for sale.

What property does security interest apply to?

Section 10 of the PPSA defines what personal property means. In essence, it is all property other than land, a right, an entitlement or an authority that is granted by the Commonwealth, State or Territory and declared not personal property.

While section 8 of the PPSA deals with arrangements and transactions which are excluded, one important feature of the PPSA is that it provides for a security interest to be granted over future property and over proceeds from dealings with collateral.

For example, if a security interest is registered over the property of a company, then as the company develops and acquires more machinery, that security interest could include ‘after-acquired property’.

How are security interests perfected?

It is crucial under the PPSA that security interest are perfected. In order to perfect a security interest, 3 things must be satisfied:

1. Attachment of the security interest in collateral (section 19)
2. Enforceability of the security interest in the collateral against 3^rd parties (section 20); and
3. Perfection by registration (on the PPSR), possession or control (section 21).

Section 19 makes it clear that a security interest attaches to collateral when:

• the grantor has rights in the collateral or,
• the power to transfer rights in the collateral to a secured party and,
• either:
  • value is given or,
  • the grantor does an act by which the interest arises.

For example, the Grantor signs a loan agreement and security agreement for the advancement of money to his company in exchange for an interest over the shares in the company. The grantor has the rights in the shares and particular value is given by the loan advancement.  

Section 20 makes it clear that a security interest is enforceable against a 3^rd party in respect of collateral if:

• the security interest is attached to collateral and,
• the secured party possesses the collateral or,
• the secured party has perfected the interest by control or,
• a security agreement that provides for the interest covers the collateral.

Section 21 makes it clear that the security interest needs to be perfected by registration on the PPSR, possessions of the collateral or control in the case of an ADI Account, investment instrument or other securities.

Ensuring that a security interest is perfected is paramount. If it is not perfected then it is likely to vest in the grantor on liquidation, administration or bankruptcy and the creditor will turn from a potentially secured creditor to an unsecured creditor.

Key Take Away

The PPSA can be a toothless tiger. While it may appear fierce, if not perfected and cared for, it loses its bite. 

The PPSA is a great tool to protect the interests of parties. It is essential for all parties to know how the PPSA can work and how it can especially work for their business.

If you would like to understand how you or your clients could better use the PPSA/PPSR regime, please reach out to James Frank on jfrank@franklaw.com.au or call (02) 9688 6023.

This is not legal advice. 

Image by Michael Gaida from Pixabay