THEPPS GUIDELIONEL MEEHAN

A Guide to the Personal Property Securities Act 2009 (Cth)

The PPS Guide – A Guide to the Personal Property Securities Act 2009 (Cth)

Lionel Meehan

Published in 2011 with the assistance of Woof Creative.

2011 First Edition

DisclaimerThis book and its contents are not legal advice. Readers should not rely on the contents of this book as advice, but should seek legal advice in the specific circumstances from a lawyer with appropriate expertise. The author, publisher and copyright owner (A) expressly disclaim and exclude all and any direct or indirect liability associated with any damage, loss or other consequences suffered by any person in reliance on the contents, views or other matters in this book, and (B) accept no responsibility for conduct of any person taken in reliance on the contents of this book, to the maximum extent permitted by law, including in respect of any inaccuracies, errors or misleading items, language, matters or conduct.

National Library of Australia Cataloguing-in-Publication entryAuthor: Lionel Meehan Title: The PPS Guide – A Guide to the Personal Property Securities Act 2009 (Cth) Edition: First edition ISBN: 9780987087911 (hbk) Subjects: Australia – Personal Property Securities Act 2009 Personal property – law and legislation – Australia Security law - Australia Dewey Number: 346.94047

©Lionel Meehan

This publication is copyright. All rights are reserved. No part of this work may be copied, reproduced, stored, recorded, transmitted or otherwise conveyed or made available other than as permitted under the Copyright Act 1968 (Cth) without written consent. Enquiries are to be addressed to the publisher.

All legislative material in this book may be subject to Commonwealth of Australia Copyright, and is reproduced with permission.

THE PPS GUIDEA Guide to the Personal Property Securities Act 2009 (Cth)

Lionel Meehan

v

About the Author Lionel Meehan is a solicitor admitted in New South Wales and

England and Wales. Lionel specialises in finance law, with particular interests in

restructuring, insolvency, personal and real property security, and banking law.

Lionel has studied and worked in the areas of finance, personal property security and banking and insolvency law for over 13 years. Developing an interest in the personal property security regimes in the United States and Canada from a comparative law perspective while completing a Master of Laws degree at Tokyo University, Lionel wrote his thesis on comparative aspects of floating charge law, covering Japanese, English, Australian and North American floating security interests over personal property. Lectures in secured transactions law during his undergraduate law degree at Murdoch University by the (now) Honorable Justice Ralph Simmonds introduced Lionel to this area.

Having worked as a solicitor in Sydney, London, Tokyo and now Melbourne, Lionel has developed interests in cross-border security and insolvency regulation, receivership and administration, special situations lending (lending to receivers, administrators and distressed companies), asset finance and receivables finance.

Lionel has been occupied over recent years working in London on distressed and insolvent bank matters, and more recently in Melbourne on secondary loan trading, distressed investing, restructuring and insolvency matters.

vi The PPS Guide

About this book & Acknowledgements

This book is the product of the “layering of ideas”. It started out as a series of jotted notes from my reading of the Personal Property Securities Act 2009 (Cth) (PPSA) that Australia had recently passed when I returned home to Australia in 2009 from working and living in London for an extended period.

I soon realised that the PPSA presented an opportunity to establish a text book. Given that the PPSA introduces so many new ideas into Australian law, I started allocating symbols and icons to these new ideas to help me remember them and appreciate their meaning and significance.

I showed some rough drawings to the guys at Woof Creative in Collingwood, Melbourne, who were known to me from having designed Jeremy Oliver’s The Australian Wine Annual in such fine style. Leonard, Andrew and Simon of Woof were on-board from the start, and between them they have conjured up a legal text in colour, which is designed for easy reading, easy reference, and fun.

The PPSA brings colour to Australian personal property security law, so nothing but a colour book would do. The book comprises three Parts, each of which are marked with charcoal coversheets. Each chapter is marked with a vivid orange coversheet, which delineate the chapters from each other when the book is closed. Icons are assigned to each key new concept introduced under the PPSA, and these icons appear in the chapters that discuss these ideas.

The icons in the book form the basis of what I call the PPS Framework, which is a step-process to remind readers of the key ideas under the PPSA that should be considered to analyse and solve security issues.

Perhaps the most fundamental idea that emerges from the PPSA is the priority of security interests and other interests in personal property. The PPSA could be viewed as a gigantic “priority game” in which the objective is to determine and maximise the priority-ranking of competing security interests and other interests in personal property. To this end, and to assist readers to play the game, there is a comprehensive “priority waterfall” that lists the order in which security interests and other interests in personal property

should rank. There are also priority diagrams to explain how priority disputes arise under the PPSA between competing security interests and other interests.

Various tables serve as ready-reckoners to explain matters including (A) the regulation of transactions as security interests under the PPSA, (B) the treatment of PPSA security interests in various insolvency procedures (receivership, administration or liquidation) and (C) the extinguishment (or not) of security interests when collateral is transferred.

The book is designed to be a “guide to understand” the PPSA, hence the title. It is small enough to fit into the handbag or manbag of any banker, lawyer, accountant, auditor, student or anyone for whom the PPSA is a key part of work or life. Its hardback design allows regular reference without tatter.

Thanks must go to the team at Woof Creative, Leonard Montagnana, Andrew Kammergruber and Simon Dransfield. They supported the project from the beginning, emphasised the idea over the dollar, and are good honest people. I commend them to anyone looking for design, creation, websites, advertising, marketing and guidance with publications.

Thanks go to Nicholas Fortune, solicitor. Nick kindly read drafts of this book, and provided insightful comments and inspiring ideas.

Thanks also go to Bruce Whittaker of Blake Dawson for reviewing and providing helpful comments on a final draft of this book, and Ross McClymont and Michael Sloan of Blake Dawson for supporting the book.

It has been a challenge in the extreme, but a pleasure, to write this book. My hope is that it contributes to the Australian PPS experience.

This book is dedicated to the late Lionel Joseph Meehan. I have not met anyone with greater courage or spirit.

Sincerely

Lionel Edwin Meehan September 2011

vii

should rank. There are also priority diagrams to explain how priority disputes arise under the PPSA between competing security interests and other interests.

Various tables serve as ready-reckoners to explain matters including (A) the regulation of transactions as security interests under the PPSA, (B) the treatment of PPSA security interests in various insolvency procedures (receivership, administration or liquidation) and (C) the extinguishment (or not) of security interests when collateral is transferred.

The book is designed to be a “guide to understand” the PPSA, hence the title. It is small enough to fit into the handbag or manbag of any banker, lawyer, accountant, auditor, student or anyone for whom the PPSA is a key part of work or life. Its hardback design allows regular reference without tatter.

Thanks must go to the team at Woof Creative, Leonard Montagnana, Andrew Kammergruber and Simon Dransfield. They supported the project from the beginning, emphasised the idea over the dollar, and are good honest people. I commend them to anyone looking for design, creation, websites, advertising, marketing and guidance with publications.

Thanks go to Nicholas Fortune, solicitor. Nick kindly read drafts of this book, and provided insightful comments and inspiring ideas.

Thanks also go to Bruce Whittaker of Blake Dawson for reviewing and providing helpful comments on a final draft of this book, and Ross McClymont and Michael Sloan of Blake Dawson for supporting the book.

It has been a challenge in the extreme, but a pleasure, to write this book. My hope is that it contributes to the Australian PPS experience.

This book is dedicated to the late Lionel Joseph Meehan. I have not met anyone with greater courage or spirit.

Sincerely

Lionel Edwin Meehan September 2011

viii The PPS Guide

Foreword

Justice Ralph Simmonds

The legislative complex represented by the Personal Property Security Act 2009 (Cth) (as amended), the delegated legislation under it and the associated changes to federal and state law is probably the most substantial body of new commercial law for which the Commonwealth has ever been responsible. Adapting to its intimidating bulk and distinctive vocabulary, all expressed in language some distance away from plain English drafting, is a daunting task for all commercial lawyers in this country.

Although the new law is not for the most part in force at the time I am writing this, there is already a large body of literature to assist the daunted commercial lawyer. Besides the Commonwealth web-site on it, there is, most notably, a commercial on-line service and a growing body of periodical literature.

Against this background of substantial legal change, and into this literary field, Lionel Meehan’s most useful text comes, making a distinctive contribution. More than anything else, his text is one best read, and able to be read, from end to end, as an introduction, in the best sense of that word, to how to live with the new law.

Lionel’s text offers memorable analytical frameworks for entering the world of the new law – including most helpful mnemonics and diagrams. Lionel’s text provides practical worked examples of what I expect will be most of the principal aspects of the expected operation of the new law – with the aid of the mnemonics, building nicely on those diagrams. And Lionel’s text raises sensible questions about some of the less clear features of the new law – which can be understood because of the mnemonics, those diagrams and the habits gained by grappling with those worked examples.

Unusually for a law book, if not other forms of legal literature, Lionel’s text can be read by starting at its end, in his text’s case the chapter ‘Summary of Key Changes to the Previous Law’, and then going back to the beginning.

The reader will find much of the analysis in Lionel’s text to be repeated. That repetition is useful in a text such as this one, to drive home the text’s main lessons on the new law, and to make the more

sophisticated treatments in later chapters easier to follow. For, while Lionel’s text is introductory, it is also sophisticated.

For me that sophistication is particularly to be seen in the way Lionel’s text permits the reader to appreciate one of the great virtues of the new law, while at the same time recognising its debt to previous law. That virtue of the new law is the way it compels commercial lawyers to engage with the law of modern secured transactions in something closer to those transactions’ own terms. This is what I have called elsewhere the way good law reform does not answer all of one’s questions, but rather gives one a better class of question. The contrast is with the terms of historical property law, with its legal and equitable interests, notice and mere equities, as well as associated law, particularly estoppel. At the same time it is important to appreciate the legacy for the new law of that other law, both in the way it has influenced the new law’s content, and the continuing relevance of some of that predecessor law.

Lionel’s text is not, and does not purport to be a comprehensive account of the new law. But after reading his text as I have suggested, as a whole, and preferably beginning with its end, an attentive commercial lawyer new to the new law will have acquired a capacity to recognise when they have a need to engage closely with it.

I congratulate Lionel on his text and commend it to all seeking a way into the new law.

Ralph Simmonds Justice Supreme Court of Western Australia

Perth, August 2011

ix

sophisticated treatments in later chapters easier to follow. For, while Lionel’s text is introductory, it is also sophisticated.

For me that sophistication is particularly to be seen in the way Lionel’s text permits the reader to appreciate one of the great virtues of the new law, while at the same time recognising its debt to previous law. That virtue of the new law is the way it compels commercial lawyers to engage with the law of modern secured transactions in something closer to those transactions’ own terms. This is what I have called elsewhere the way good law reform does not answer all of one’s questions, but rather gives one a better class of question. The contrast is with the terms of historical property law, with its legal and equitable interests, notice and mere equities, as well as associated law, particularly estoppel. At the same time it is important to appreciate the legacy for the new law of that other law, both in the way it has influenced the new law’s content, and the continuing relevance of some of that predecessor law.

Lionel’s text is not, and does not purport to be a comprehensive account of the new law. But after reading his text as I have suggested, as a whole, and preferably beginning with its end, an attentive commercial lawyer new to the new law will have acquired a capacity to recognise when they have a need to engage closely with it.

I congratulate Lionel on his text and commend it to all seeking a way into the new law.

Ralph Simmonds Justice Supreme Court of Western Australia

Perth, August 2011

x The PPS Guide

Contents

Part 1 - An Introduction to the PPSAChapter 1 - The PPSA & Secured Transactions 4

Chapter 2 - PPS Framework 10

Chapter 3 - Terminology 16

Chapter 4 - PPS Priority Diagram 24

Part 2 - The PPS FrameworkChapter 5 - The PPS Framework - A Recap 32

Chapter 6 - Security Interest 36

Chapter 7 - Personal Property 72

Chapter 8 - Attachment 84

Chapter 9 - Australian Connection 90

Chapter 10 - Classes of Collateral 96

Chapter 11 - Enforceability Against Third Parties 114

Chapter 12 - Perfection 120

Chapter 13 - Priority 132

Chapter 14 - Following Collateral and Value 154

xi

Part 3 - A Long Run ThroughChapter 15 - Why the PPSA? 164

Chapter 16 - Attachment 166

Chapter 17 - Perfection 178

Chapter 18 - Priority 218

Chapter 19 - Transitional Security Interests 316

Chapter 20 - Following Collateral Value upon Transfers 324

Chapter 21 - The Extinguishment Rules 334

Chapter 22 - Registration and the PPS Register 372

Chapter 23 - Vesting (Extinguishment) of Unperfected Security Interests upon Insolvency 398

Chapter 24 - Enforcement of PPSA Security Interests 406

Chapter 25 - Transfers of Accounts and Invoice Finance (Factoring) 468

Chapter 26 - Accession, Processing and Comingling of Goods 478

Chapter 27 - Knowledge – Sections 297 – 300 492

Chapter 28 - Circulating Security Interests (Floating Charges) 498

Chapter 29 - Summary of Key Changes to the Previous Law 510

xii The PPS Guide

Table of CasesAgnew v The Commissioner of Inland Revenue (PC) [2001] 2 AC 710: [13.007(e)]; [17.050]; [18.012(e)]; [28.006]; [28.027]; [28.031]

Artistic Builders Pty Ltd v Elliot and Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16: [24.153]

Arthur D Little (in administration) v Ableco Finance LLC, 27 March 2002, High Court Chancery Division: [28.026]

Central Mortgage Registry of Australia Ltd v Donemore Pty Ltd [1984] 2 NSWLR 128: [18.216]

Chrysler Corp v Adamatic Inc. (1973) 208 N.W. (2d) 97: [21.024]

Clyne v DCT (1981) 150 CLR 1: [28.012]

Codelfa Construction v State Rail Authority of New South Wales (1982) 149 CLR 337: [11.005]

Colwill v 601999 Saskatchewan Ltd [1999] 1 BLR 300: [24.089]

Composite Buyers Ltd v State Bank of New South Wales (1991) 3 ACSR 196: [18.222]; [18.223]; [24.070]

Con Stan Industries of Australia v Norwich Winterthur Insurance (Australia) (1986) 160 CLR 226: [11.005]

Daniel v Bank of Hayward (1988) 425 N.W. 2d 416 (Supreme Court of Wisconsin): [21.024]

Devaynes v Noble, Clayton’s Case (1816) 1 Mer 529: [20.022(c)]; [26.051(c)]

Electrical Enterprises Retail Pty Ltd v Rodgers (1988) 15 NSWLR 473: [13.007(b)]; [18.012(b)]; [18.031]

Electricity Supply Nominees Ltd v Thorn EMI Retail Ltd (1991) 63 P & CR 143 (CA): [24.170]

Esso Petroleum Co Ltd v Kingswood Motors (Addlestone) Ltd [1973] 3 All ER 1057: [29.042]

Ewart v Latta (1865) 4 Macq 983: [24.170]

Foskett v McKeown (HoL) [2000] 3 All ER 97: [20.022(c)]; [26.051(c)]

G&M Aldridge Pty Ltd v Walsh (2001) 203 CLR 62: [28.012]

Graham v Portacom New Zealand Ltd (High Court) [2004] 2 NZLR 528: [21.037]

Hamilton v Hunter (1982) 7 ACLR 295: [28.012]

Helicopter Fleet Management v Ellison (SCNSW, Windeyer J) BC9901504: [18.224]; [24.070]

Herman v First Farmers’ State Bank of Minier (1979) 392 N.E. 2d 344 (Supreme Court of Wisconsin): [21.024]

Hewitt v Court (1983) CLR 639: [13.007(a)]; [13.007(b)]; [18.012(a)]; [18.012(b)]; [18.031]

Hollinger, Inc. v. Hollinger Int’ l, Inc., 858 A.2d 342, 376-79 (Del. Ch. 2004): [24.095]

JNJ Investment Australia Pty Ltd v Sunnyville Pty Ltd [2006] QSC 249: [13.007(b)]; [18.012(b)]; [18.031]

Lam Soon Australia Pty Ltd v Molit (No 550 Pty Ltd) (1996) 70 FCR 34: [24.212]

Landall Holdings Ltd v Caratti (1984) 8 ACLR 1020: [28.011]

Luckins v Highway Motel (Carnarvon) Pty Ltd (1975) 133 CLR 164: [28.012]

Lyford v Commonwealth Bank (1995) 130 ALR 267: [28.012]

Metway Leasing Ltd v Narien Holdings Pty Ltd (SCNSW, Cohen J) (12 April 1991) (BC 9102116): [18.222]; [24.070]

xiii

Mathieson v Wahlen (1928) SR(NSW) 189 (Harvey CJ in Eq): [18.222]; [24.070]

Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293: [18.210]; [18.211]

National Bank of Canada v Merit Energy (2001) (Alberta Court of Queen's Bench): [24.113]

National Westminster Bank plc v Spectrum Plus Limited (HoL) [2005] UKHL 41: [13.007(e)]; [17.050]; [18.012(e)]; [28.006]; [28.026]

North Western Shipping & Towage Co Pty Ltd v Commonwealth Bank of Australia (Full FC) (1993) 118 ALR 453: [18.222]; [24.070]

Orix New Zealand Limited v Milne & Nicholls [2007] 3 NZLR 637: [21.029]

Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567: [6.012]

Re Anderson’s Engineering Ltd [2002] B.C.W.L.D. 528 (British Columbia Supreme Court): [21.019]; [21.025]

Re Australian Property Custodian Holdings Ltd (administrators appointed) (receivers and managers appointed) (2010) 80 ACSR 114: [24.096]

Re Bunbury Foods Pty Ltd v Nissho Iwai Australia (1984) 2 ACLC 639: [18.222]; [24.070]

Re Goldcorp Exchange Ltd (in receivership) [1994] 2 BCLC 578: [16.016]; [28.009]

Re Hallet’s Estate (1879) 13 Ch D 696 [26.051(c)]

Re Howe (1871) 6 Ch App 838 Ewart v Latta (1865) 4 Macq 983: [24.170]

Re Lind [1915] 2 Ch 345: [28.014]

Re Margart (1984) 9 ACLR 269 (SCNSW): [28.011]; [28.012]

Re Wait [1927] 1 Ch 606: [16.016]; [28.009]

Re Mas Good Industries (Australia) Pty Ltd [2000] WASC 155: [13.007(b)]; [18.012(b)]; [18.031]

Re 85956 Holdings Limited and Fayerman Brothers Limited (1986) 25 DLR (4th) 119: [24.090]

Rowella Pty Ltd v Hoult [1987] 1 Qd R 386, [1988] 2 Qd R 80: [24.093]

Royal Bank of Canada v 216200 Alberta Ltd [1987] 1 W.W.R. 545, Saskatchewan Court of Appeal: [21.021]

Simpson v New Zealand Associated Refrigerated Food Distributors Ltd (Court of Appeal) [2007] 2 NZLR 130: [17.075]; [22.070]

Sogelease Australia Pty Ltd v Boston Australia Ltd (1991) 26 NSWLR 1: [18.222]; [18.223]; [24.070]

Spittlehouse v Northshore Marine Inc. (Ontario Court of Appeal): [21.025]; [21.026]

Tricontinental v The Commissioner of Taxation (1988) 1 Qd R 474: [28.012]

Twinsectra Limited v Yardley and Others [2002] UKHL 12: [6.012]

United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673: [28.012]

Waller v New Zealand Bloodstock Ltd [2005] 3 NZLR 629: [24.113]

Wily v St George Partnership Banking Ltd (1998) 20 ACSR 1: [28.012]

xiv The PPS Guide

Table of Legislation

Commonwealth

Corporations Act 2001 (Cth)

Section 51A: [24.118(b)]; [24.210]

Section 51C: [28.001]

Section 51: [24.003]; [24.210]

Section 51F: [18.072]; [24.082]; [24.151]; [24.191]

Section 282: [18.213]

Section 420A: [24.149]; [24.153]; [24.151]; [24.152]; [24.196]; [24.198]

Section 433: [10.009(g)]; [18.077]; [22.010(d)]; [28.023]

Section 435B: [18.073]; [24.083]

Section 436C(1A): [12.005(c)]

Section 439A: [18.080]

Section 440B: [24.204]

Section 441A: [12.005(c)]; [17.006(d)(i)]; [17.071(c)]; [18.072]; [18.073]; [24.012]; [24.013]; [24.014]; [24.018]; [24.019]; [24.078]; [24.082]; [24.083]; [24.084]; [24.085]; [24.086]; [24.098]; [24.099]; [24.202]; [24.203]

Section 441AA: [12.005(c)]; [17.006(d)(i)]; [17.071(c)]; [18.072]; [23.021]; [24.014]; [24.015]; [24.082]

Section 441B: [12.005(c)]; [17.006(d)(ii)]; [17.071(c)(ii)]; [23.021]; [24.012]

Section 442C: [24.001(e)]

Section 443E: [10.009(g)]; [18.078]; [22.010(d)]; [28.023]

Section 444D: [24.212]

Section 561: [10.009(g)]; [18.077]

Section 562: [10.009(g)]; [18.077]; [28.023]

Section 553C: [6.012(a)]

Sections 588FA – FG: [8.008]; [16.007]; [17.056]; [18.080]; [18.086]; [23.019]; [24.051]; [24.209]; [24.211]; [24.216]

Section 588FJ: [18.080]; [24.051]

Section 588FL: [12.009]; [18.081]; [22.002]; [22.003]; [22.004]; [22.005]; [24.176]; [24.177]; [24.178]; [24.209]

Section 588FN: [22.006]; [24.178]

Section 1501A: [18.072]; [24.082]

Personal Property Securities Act 2009 (Cth)

Section 6: [17.116]

Section 6(1A): [9.004(a)]

Section 6(1)(b): [9.004(b)]

Section 6(2): [9.004(a)]

Section 8: [6.001]; [6.012]; [6.013]

Section 8(1)(b): Table 1 – liens arising under statute; [6.012(e)]

Section 8(1)(c): Table 1 – liens arising at general law; Table 3 – marshalling rights; Table 3 – subrogation rights; Table 3 – resulting/constructive trusts; [6.012(e)]; [6.012(f)]

Section 8(1)(d): Table 2 – combination of bank accounts; Table 2 – set off; [6.012]; [6.012(b)]

Section 8(1)(e): Table 1 – close out netting arrangements; [6.012(c)]; Table 2 – netting arrangements under the Payment Systems and Netting Act 1998 (Cth)

Section 8(1)(f)(i): Table 2 – leases of land

xv

Section 8(1)(f)(ii): Table 2 – security interests over leases of land

Section 8(1)(f)(iii): Table 2 – novations; [6.012(h)]

Section 8(1)(f)(v): Table 1 – assignments of insurances/annuities for loss to collateral; Table 2 – assignments of insurances/annuities

Section 8(1)(f)(vi): Table 2 – assignment of accounts for collection

Section 8(1)(f)(viii): Table 2 – assignment of accounts or negotiable instruments to satisfy a debt

Section 8(1)(f)(ix): Table 2 – assignment of accounts or chattel paper with sale of business

Section 8(1)(f)(x): Table 2 – “trust-backs”

Section 8(1)(h): Table 1 – trusts; [6.012(d)]

Section 8(1)(i): Table 2 – water rights

Section 8(1)(j): Table 2 – assignment of interests in fixtures

Section 8(1)(ja): Table 2 – pawnbroker security interests

Section 8(1)(jb): Table 2 – security interests over superannuation interests

Section 8(1)(k): Table 1 – statutory licences; [7.002(b)]

Section 8(2): [18.028]

Section 8(3): Table 1 – mortgage-backed securities

Section 8(6): Table 1 – pawnbroker security interests

Section 12(1): Table 1 – farm in rights; Table 4 – swaps/derivative transactions; Table 1 – trusts; [1.006]; [6.001]; [6.005]; [6.009]

Section 12(2)(a): Table 1 – charges

Section 12(2)(c): Table 1 – mortgages

Section 12(2)(d): Table 1 – conditional sales

Section 12(2)(f): Table 1 - pledges

Section 12(2)(g): Table 1 – trust receipts

Section 12(2)(h): Table 1 - consignments

Section 12(2)(i): Table 1 – lease of goods

Section 12(2)(j): Table 1 – transfers/assignments

Section 12(2)(k): Table 1 – transfers/assignments

Section 12(2)(l): Table 4 – swaps/derivative transactions

Section 12(3A): Table 1 - chargebacks; [17.053]; [29.021]

Section 12(3)(a): Table 1 – transfers of accounts/chattel paper; [29.044]

Section 12(3)(c): Table 1 – PPS Leases

Section 12(4): Table 1 - chargebacks; [17.053]; [29.021]

Section 12(5): [6.012]

Section 12(5)(a): Table 2 – licences (contractual)

Section 12(6): Table 2 – subordination arrangements; [6.007]; [6.012]

Section 14(1): [16.012]

Section 14(1)(a): [16.008]; [16.011]

Section 14(1)(b): [8.010]

Section 14(1)(c): [14.008]; [18.131]

Section 14(2): [13.007(f)]

Section 14(2)(b): [10.009(c)]; [18.225(d)]

Section 15: [17.040(c)]

Section 15(7): [17.061]

Section 18(3): [16.016]; [16.018]; [28.016]

Section 19(2): [8.005]; [16.006]

The Personal Property Securities Act 2009 (Cth) (PPSA) will implement one of the most significant changes to Aus-tralian finance law in Australia's history.

The PPSA aims to simplify and codify (restate) the law of secured transactions (mortgages, charges and other transactions that grant interests in personal property to secure obligations) for personal property in Australia.

The PPSA should make the law of secured transactions easier to find, and understand, for all concerned.

Part 1An Introduction to the PPSA

1.001 - 4.006

The PPSA and secured transactions

PPS framework

Terminology

PPS priority diagram

Chapter 1

The PPSA & Secured Transactions

1.001 - 1.018

The PPSA

What are secured transactions, and what is personal property?

Where did the PPSA come from?

Why the PPSA?

4 The PPS Guide - Part 1: An Introduction to the PPSA

1 PPSA section 12(1).

The PPSA 1.001 The Personal Property Securities Act 2009 (Cth) (PPSA)

is anticipated (at the time of writing) to have effect in Australia from sometime in early 2012.

1.002 The PPSA introduces an entirely new secured transactions (mortgages, charges, pledges and other security interests) system in Australia for personal property.

What are secured transactions, and what is personal property?

1.003 A secured transaction is where a security interest such as a mortgage is granted to secure an obligation such as a loan.

1.004 Secured transactions and security interests always have two features, secured property (collateral under the PPSA) and secured money (or obligations). The collateral is there as a back-up to satisfy the obligations if the person who owes the obligations (debtor under the PPSA) cannot.

1.005 If a person (the grantor under the PPSA) buys a car on lease finance, the leasing company (secured party under the PPSA) retains title, leases the car, and will have remedies to repossess and sell the car if lease payments are not made. The lease gives the leasing company rights against collateral (the car) to secure obligations (rental payments). Many car leases will be classic security interests under the PPSA.

1.006 The PPSA applies to all transactions that grant an interest in personal property to secure the payment or performance of obligations. The PPSA has little regard to either the form of the transaction or who has title to the collateral1. The car lease in the example above may be a security interest despite the financier being a lessor and not a mortgagee or chargee holding a mortgage or charge over the car.

1.007 Turning to personal property, the meaning of personal property is discussed in Chapter 7 (Personal Property). Personal property is essentially everything other than

5The PPSA & Secured Transactions

1.001 - 1.012

land and buildings, water rights, most mining rights and tenements, certain trade licences such as fishing licences, and gaming, betting and casino licences (there are other exclusions).

1.008 The PPSA applies to security interests over a huge array of property interests, including intellectual property, financial assets such as shares and bonds and units in managed investment schemes, contractual rights and many other valuable rights and interests.

Where did the PPSA come from?

1.009 Australia did not develop the PPSA. It is a tried and tested system that originated in the United States in the 1950’s. It was then introduced in the Canadian provinces starting in the 1970’s. New Zealand implemented a PPSA system predominantly based on the Saskatchewan (a Canadian province) legislation in May 2002.

1.010 There does not appear to be key piece of overseas legislation on which Australia has based its PPSA. Rather, the Australian PPSA is a composite mix of the New Zealand, Canadian and United States legislation. The explanatory memorandum to the Australian PPSA simply states that the PPSA has been based on New Zealand, Canadian and United States examples. There does not appear to be a close base model law which Australians can refer to for clues. The New Zealand and Canadian PPSAs are likely to be the closest reference examples to the Australian PPSA.

1.011 The PPSA will implement such significant changes to Australian financing transactions that it will touch some aspects of the lives of almost every Australian.

1.012 This book is a guide to the PPSA, hopefully with sufficient detail so that readers can find where they are going, but not so much detail that readers get lost in the PPSA forest. It is designed primarily for practitioners, companies and students operating in spaces affected by the PPSA, such as lawyers, insolvency accountants, auditors, bankers and

Chapter 4

PPS Priority Diagram

4.001 - 4.004

8 The PPS Guide - Part 1: An Introduction to the PPSA

4.001 When thinking about PPSA issues it will be useful to refer to examples and diagrams instead of just thinking in words alone.

4.002 The examples used in this book are all based upon diagram 1, the basic priority diagram shown above and introduced at paragraph 3.004 of Chapter 3 (Terminology).

4.003 To explain the transactions in the basic PPS priority diagram:

(a) the debtor/grantor "D" enters into a loan agreement with the secured party Bank A. The loan agreement provides for a loan facility that permits two drawdowns. The first drawdown of $50 million dollars is made on 1 January 2010, before commencement of the PPSA. The second

(Australia)

Bank A(Secured Party)

1

2

3

Debtor/Grantor

Key

motor vehicle

accounts

ADI account

1 $50 million loan, 1 January 2010

2 $50 million loan, 1 August 2012

3 Security interest over all present and after-acquired property (fixed and floating charge), granted 1 January 2010

(Australia)

Bank A(Secured Party)

1

2

3

Debtor/Grantor

(Australia)

Bank A(Secured Party)

1

2

3

Debtor/Grantor

(Australia)

Bank A(Secured Party)

1

2

3

Debtor/Grantor

Diagram 1

9PPS Priority Diagram

4.001 - 4.004

drawdown of $50 million dollars is made by D on 1 August 2012, after commencement of the PPSA. The loans are indicated on the diagram in green, by arrows leading from Bank A to D;

(b) D grants a fixed and floating charge (all-assets security interest) to Bank A at the inception of the loan agreement on 1 January 2010. This security interest is indicated on the diagram in blue, by arrows leading from D to Bank A. The blue line that encircles the entirety of D indicates that the fixed and floating charge covers all of D's assets;

(c) D's assets are shown in orange. D owns a motor vehicle, accounts (receivables) and an ADI account (bank account).

4.004 The basic PPS priority diagram is intended to bring out what are likely to be the three major issues under the PPSA, namely:

(a) first, spot all security interests: spotting all the transactions that will be regulated as security interests under the PPSA; and

(b) second, resolve priority contests: resolving priority contests between competing security interests in the same collateral.

As we shall see, determining the priority of security interests is very much the end-game because priority is often the solution in itself, or a means to a solution to many PPSA issues. Priority is key; and

(c) third, following value upon disposals of collateral: determining whether:

(i) security interests are extinguished upon sales or leases of collateral to others, and so whether buyers and lessees of collateral take the collateral free from, or subject to, a security interest; and

(ii) security interests have recourse to proceeds generated from disposals of original collateral, which is likely if they attach and are perfected against both the original collateral and proceeds generated from it.

Chapter 14

Following Collateral and Value

14.001 - 14.012

Security interests continue upon transfers of collateral

Security interests automatically attach to proceeds

12 The PPS Guide - Part 2: The PPS Framework

1 PPSA section 32(1)(a).

Security interests continue upon transfers of collateral

14.001 The general rule under the PPSA is that security interests continue in collateral when collateral is either sold or leased to another person and the transfer generates proceeds, unless one of the ten (10) extinguishment rules (see Chapter 21 (The Extinguishment Rules)) applies to extinguish the security interest for the benefit of the buyer or lessee. This means that, unless buyers or lessees of personal property are very careful to bring themselves within one of the ten (10) extinguishment rules and obtain the benefit of having security interests over the personal property they buy or lease extinguished, secured parties can enforce their security interests against buyers or lessees and potentially repossess property from them.

14.002 Practically, in large transactions, purchasers, lessees and financiers to them should insist that any outgoing secured parties to any seller or lessor entities provide unconditional releases of security over any property acquired, rather than rely on the extinguishment rules.

14.003 Security interests will not continue in collateral disposed if the secured party has expressly or impliedly consented to the disposal, or agreed that their security interest will be extinguished upon disposals1. This will be the case, for example, for circulating assets disposed of in the ordinary course of business of the grantor. This is essentially the territory of the circulating security interest (floating charge equivalent under the PPSA).

Security interests automatically attach to proceeds

14.004 The PPSA is clear that upon transfers or disposals of collateral, not only do security interests continue in collateral if not extinguished under the extinguishment rules, but security interests also automatically attach to the proceeds generated upon transfers or disposals of

13Following Collateral and Value

2 PPSA section 32(1). The grantor and the secured party can contract out of this, by providing in the security agreement or otherwise that a security interest will not attach to proceeds of collateral.

3 PPSA section 32(5).4 PPSA section 31.

14.001 - 14.007

collateral2. Security interests have the same priority against proceeds as they had against the original collateral (that is, security interests retain their priority in proceeds), provided they are duly perfected against the proceeds3. See paragraphs 17.072 to 17.075 of Chapter 17 (Perfection) for how to perfect against proceeds.

14.005 The arrow that is "following personal property" in the symbol below represents both (A) the ability of secured parties to follow collateral into the hands of buyers or lessees and continue to assert their security interests when collateral is disposed of by grantors if the buyer or lessee does not come within an extinguishment rule, and (B) the fact that security interests automatically attach to proceeds generated when collateral is disposed.

14.006 Even if a security interest is extinguished upon a transfer of collateral, the secured party has a claim against proceeds generated by the transfer if they were perfected against the original collateral, and they are perfected against the proceeds generated from the transfer. The proceeds must remain identifiable or traceable4. See paragraph 17.070(b) of Chapter 17 (Perfection) for further discussion of the meaning of proceeds.

14.007 Claims against proceeds have the potential to significantly mitigate loss to secured parties from collateral being disposed in unauthorised ways.

14 The PPS Guide - Part 2: The PPS Framework

14.008 For example, take a variation of the basic PPS priority diagram below, diagram 2, with the addition of a PMSI transaction for the debtor/grantor D to acquire a motor vehicle on finance. Assume that D acquires a motor vehicle on finance from a car dealer (Car Lessor) through a lease for a term of five (5) months. The car lease will be a PPS Lease (lease of a serial numbered good for a term exceeding three months), and so a PMSI (PPS Leases are PMSIs5).

5 PPSA section 14(1)(c).

Buyer

3

4

CarLessor

(Secured Party)

1

2

(Australia)

Debtor/Grantor

Key

accounts

ADI account

motor vehicle

1 Lease of car, 5 month term

2 Security interest (lease) over car

3 Car purchase price (payment)

4 Sale (purported) of car

Buyer

3

4

CarLessor

(Secured Party)

1

2

(Australia)

Debtor/Grantor

Buyer

3

4

CarLessor

(Secured Party)

1

2

(Australia)

Debtor/Grantor

Buyer

3

4

CarLessor

(Secured Party)

1

2

(Australia)

Debtor/Grantor

Diagram 2

15Following Collateral and Value

6 PPSA section 32(2).

14.008 - 14.012

Assume the motor vehicle is equipment in D’s hands and that the Car Lessor’s equipment PMSI is registered within 15 business days of supply of the motor vehicle to D, and the registration nominates PMSI, and nominates the serial number of the motor vehicle, so all is regular.

14.009 Assume next that D (a mere lessee) purports to sell the motor vehicle to a buyer B for a cash payment into D’s ADI account. Query whether D can sell the car as a mere lessee, but that aside, the buyer B does not (cannot) come within an extinguishment rule, because B does not (cannot) obtain a clear search of the PPS Register against the serial number of the motor vehicle before buying, given that the Car Lessor’s security interest is duly registered against the serial number of the motor vehicle. See Chapter 21 (The Extinguishment Rules) for detail on the extinguishment rules in general, and on the extinguishment rule in section 45 which deals with private sales of motor vehicles subject to security interests. In this situation, the PMSI security interest of the Car Lessor will not be extinguished and will continue to attach to the motor vehicle in the hands of the unlucky buyer B, and also attach to the sale proceeds paid by B to D and deposited into D’s bank account.

14.010 Further, the PPSA provides that secured parties in these circumstances can enforce their security interests against both the car in the hands of the unlucky buyer B, and the proceeds that the buyer B paid for the car and which are deposited into D’s ADI account, limited to the value of the car when sold to B6.

14.011 The ability of secured parties to follow collateral upon transfers if their security interest is not extinguished is significant because it means that secured parties are placed in a strong position.

14.012 The PPSA attempts a balancing act between protecting the interests of secured parties, and protecting the interests of buyers or lessees of property to ensure they can take property free and clear from security interests.