PPSA – Practical Implications for Corporate Transactions

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The boundaries of the meaning of ‘Security Interest’

An ‘in substance’ security interest

To be a security interest under s 12(1) of the PPSA, a transaction needs to be an ‘in substance’ security for payment or performance of an obligation. The commercial substance of a transaction is to be considered rather than its legal characterisation.

Leasing and S 46 – taking free

A buyer or lessee will take free of a security interest if the property is purchased or leased from a seller/lessor in the ordinary course of the vendor’s business of selling or leasing property of that kind however only in circumstances where the vendor granted the security interest.

Vesting Rules

(a) Unperfected security interests

An unperfected security interest ranks behind perfected security interests in a priority competition, and is at risk of being subrogated (not extinguished) if the collateral is sold or leased to a third party.

(b) Subrogation of rights on taking free

The taking free provisions (Part 2.5) do not extinguish or defeat the security interest. The secured creditor’s security interest is merely subrogated to the security interest of the transferor (the lessor or seller).

(c) Vesting

Moving to vesting, an unperfected security interest vests in the grantor if the grantor becomes the subject of an insolvency process. See s 267 of the PPSA.

(d) Additional exposure to vesting

Section 588FL of the Corporations Act 2001 provides that a security interest given by a company will vest in the company if the security interest is perfected by registration only and has been registered for less than six months, unless it was registered within 20 business days after the security agreement came into force.

Other Taking free rules

Taking free rules and unperfected security interests

A person takes collateral free of the security interest where, as a buyer or lessee for value, the security interest is unperfected – s 43.

Further taking free provisions include s 47 – personal, domestic or household goods.

Essentially, s 47 provides that a buyer of personal property for new value who intends to buy or lease the property predominantly for personal, domestic or household purposes takes the personal property free providing it is not worth more than $5000 or such other greater prescribed amount.

Taking free and s 32

Section 32(1)(a) provides that if collateral gives rise to proceeds, then the security interest continues in the proceeds unless the security agreement provides otherwise. It does not continue in the collateral if the secured party expressly or impliedly authorises a disposal giving rise to the proceeds.

The hidden implications of the PPSA on guarantees

A key risk to financiers is if a guarantee becomes discharged prior to the principal debt being repaid.

Whilst a guarantor may at the outset of the guarantee authorise the lender to vary the principal contract, an exception to this rule is that if the variation is too substantial, then the guarantor’s obligations may be discharged without further express consent.[1]

Although it is generally conceded that the PPSA does not classify a guarantee as a security interest, the lender has an equitable obligation to perfect any security interests obtained from the principal debtor[2] and if they fail this obligation, the guarantor will be discharged from its obligations.

Esoteric matters

Section 13(1)(d) – timeframes for registering PPS lease

See s 13(1)(d) which deals with the lessee retaining uninterrupted possession for a period of more than one year and where the lease arrangement is not an in-substance security interest.

Corporations Act, Part 5.7B, Division 2A

The 20 day rule applies from when “the security agreement that gave rise to the security interest came into force” (s 588FL(2)(b)(ii) in the Corporations Act). This is inconsistent with s 13(1)(d).

The general problem is where security agreements are signed well before the grantor has possession of the relevant collateral.

Problems with fixtures

PPSA does not apply to land or fixtures. It defines fixtures as anything “affixed” to land. But this is different to the common law definition, which is dependent on intent.


Formerly the holder of a charge over the whole or substantially the whole of a company’s property was entitled to appoint an administrator over the company’s property – s 436C of the Corporations Act. In assessing this, consideration now needs to be given to “PPS retention of title property”. This is defined in s 51F of the Corporations Act.

By applying the test in s 12, the interest of the lessor in the property left behind by the lessee is a security interest for the purposes of the PPSA. As such, the interest will need to be perfected under s 21(2)(a).

[1]Triodos Bank N.V. v Ashley Charles Dobbs [2005] EWCA CIV 630.

[2]Wulff v Jay (1871-1872) LR 7 QB 756.

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