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Personal Property Securities Act: attachment and perfection
Practical Law UK Legal Update 0-502-2129 (Approx. 4 pages)
Personal Property Securities Act: attachment and perfection
by Eamon Nolan and Keith Rovers, Minter Ellison
| Published on 04 May 2010 • Australia |
This article is part of the PLC Global Finance April 2010 e-mail update for Australia.
Speedread
In the March update we took an introductory look at the major issues flowing from Australia's adoption of the Personal Property Securities Act 2009 (establishing a national law governing security interests in personal property and is to commence in May 2011). This month, we focus on two of the Act's key concepts: attachment and perfection.
In the March update, we took an introductory look at the major issues flowing from Australia's adoption of the Personal Property Securities Act 2009 (Act) (which is due to commence in May 2011).
The Act establishes a national law governing security interests in personal property including (among other things) providing for a single register to replace the many existing registers that apply to various asset classes and security interests (including the register of company charges held by ASIC). The Act also introduces a comprehensive national law relating to creation, perfection, registration, priority, extinguishment and enforcement of personal property securities.
This month, we focus on two of those key concepts: attachment and perfection.
Attachment
'Attachment' and 'perfection' are concepts not previously given a distinctive legal meaning in the context of the law of securities in Australia. Under the provisions of the Act, a security interest is not effective in relation to personal property until it has attached to that property. Under section 19 of the Act, attachment is deemed to occur when both:
- The grantor has rights in the collateral, or the power to transfer rights in the collateral to the secured party.
- Either value is given for the security interest, or the grantor does an act by which the security interest arises.
A security interest which has attached to personal property is enforceable between the grantor and a secured party but not, merely by having attached, against third parties.
It is important to note that section 19 distinguishes between a grantor with ownership of collateral, and a grantor that simply has rights in it, and permits attachment to occur in either case.
The nature of the rights which a grantor must have in the collateral is not at this stage clear, but Dr James O'Donovan in his commentary 'Personal Property Securities Law in Australia' cites the judgment of Hansen J in the case of Graham & Gibson v Portacom New Zealand [2004] 2 NZLR 528, where he suggested at [28] (in the context of the equivalent New Zealand securities legislation) that "rights in the collateral…must be understood as requiring a bare right to possession or a power to convey a greater interest than has the debtor".
Perfection
The Act also permits the parties to vary the time of the attachment of the security interest to the collateral to (should they elect to do so) a later time of their mutual choosing. That is, a security agreement can allow for attachment to occur at some date in the future as agreed by the grantor and the secured party. However, a security interest which is merely 'attached' is not enforceable against third parties claiming a competing interest in the property unless one of the following has also occurred:
- The secured party possesses the collateral.
- The secured party has perfected the security interest by way of control.
- A security agreement that provides for the security interest:
- is signed by the grantor or is adopted or accepted by the grantor by an act specified in writing which was done with an intention of so adopting or accepting, and the evidence in writing describes the collateral (whether specifically or by statement that all the present and after-acquired property is taken); and
- contains a description of the collateral (whether by way of specific reference to the collateral or by way of statement that all present and after-acquired property are the subject of the security interest).
Enforceability against third parties, however, does not necessarily give a secured party priority ahead of purchasers and other secured parties. It is the achievement of perfection that provides the additional rights (over and above enforcement against third parties) that enables a party to ensure it achieves a priority secured position. That is, perfection's importance arises because its occurrence determines priority between competing interests in the collateral (whether of purchasers or competing secured parties).
A security interest may be perfected in four ways:
- By registering the collateral in accordance with the Act.
- By the secured party or a person on its behalf taking possession of the collateral.
- If the collateral is of a certain type known as controllable property, by the secured party or a person on its behalf taking control of the collateral (controllable property includes some intangible collateral such as certain types of bank accounts, investment entitlements and instruments, negotiable instruments and letters of credit, as well as tangible collateral such as satellites and other space objects which are rendered rather difficult to possess once they enter orbit).
- By obtaining temporary perfection in accordance with the Act. There are provisions conferring temporary perfection throughout the Act. Some examples of situations where a security interest may be temporarily perfected are:
- where the collateral is moved to Australia from another jurisdiction (section 40);
- if a security interest is not perfected in respect of the proceeds of collateral (the security is temporarily perfected under section 33 for five business days); and
- if collateral which is subject to a perfected security interest is transferred (the security is temporarily perfected under section 34 for up to two years).
The Act does contain additional specific rules which apply to the determination of what constitutes possession and control, both in a broad sense and in relation to specific assets.
In future articles, we will be taking a look at the other key concepts of the Act, namely:
- Extinguishment of security interests.
- The various priority rules as amongst competing security interests.
- Enforcement of security interests.
- Maintenance of the register and achieving registration.
- The transitional arrangements that will apply once the Act is introduced.