Of course, to retain the priority of a security interest as against third parties, the grantee of the security interest must ensure that it is “perfected”.
But there are five ways of perfecting a security interest. The first is where the security interest arose before 30 January 2012: the transitional security interest is protected under s 322A of the Personal Property Securities Act 2009 (Cth) (PPSA). However, this no longer applies of course, because the 2 year transitional period ended on 30 January 2014. And so we are left with the other four: perfection by registration, perfection by possession and perfection by control (of controllable property) under s 27, and temporary perfection (for example, where goods are imported into Australia subject to a security interest under s 39(3)(b)).
Controllable property relates by and large to intangible property. If one retains the share certificate in relation to shares of a private company, then they are taken to “control” those shares. Control trumps registration even if it takes place after the registration of the earlier perfected security interest in the shares.
And what property is caught by the PPSA? The definition of “property” is extensive. It captures satellites and other space objects, intermediated securities and other exotic nomenclature. It even captures (as from 1 July 2012) carbon emission units: see s 5 of the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth). Nevertheless, the whole Act may have a very short shelf life, if the current federal government gets its way.
As at 31 December 2013, there were over 7.7 million registrations on the Personal Property Securities Register (PPSR). The register is suffering from overload and many large companies are writing letters to their grantees in standard form requesting the removal of perceived incorrect registrations.
For example, one of my clients (which supplies a large retailer with bathroom wares on a retention of title and consignment basis) recently received an “amendment demand” (under s 178) from the retailer demanding the removal of my client’s security interest, to the following effect:
The reason for this demand is that no collateral described in your registration secures any obligation owed by us to you, the secured party. Your organisation does not hold any security interest in respect of any asset of ours.
As it turned out, I considered that the registration was defective. It described the security as “non-inventory”. The client effected the registration itself and considered that the goods were not inventory at the time they were supplied because they were supplied on the basis that they be simply display goods, and not for sale, for four years. They could only be bought after they had been displayed for four years. But the definition of “inventory” includes “personal property held by the person for sale or lease”. Even though the sale could not take place for four years, there appeared no doubt that the goods were caught by the definition.
And so the registration was entirely ineffective: the registration was a seriously misleading defect (s 164) and therefore void: Adelaide Capital Corp v Integrated Transportation Finance Inc,1 holding that the failure to indicate that collateral covers inventory is a seriously misleading defect.
The PPSR operates as a noticeboard of security interests in personal property and not as a register storing copies of all underlying security agreements, and therefore the accuracy of the registration, especially the details of the collateral and the grantor, are very important.
Failing to register or failing to register correctly
Failing to register, or failing to register correctly, can affect the priority of the security interest (for example,perfection by control will usually take priority over prior perfection by registration, and a purchase money security interest (PMSI) registration will generally take priority over a prior registered general security interest under a general security agreement).
The adequacy of registration can also impact on the extent to which the security interest in the collateral may survive a transfer of the collateral by the grantor — commonly called the extinguishment risk. For example, consider s 46, which deals with goods acquired in the ordinary course of business.
Goods acquired in the ordinary course of business
A buyer or lessee will take free of a security interest if the property is purchased or leased from a seller/lessor 66 australian banking and finance June 2014 in the ordinary course of the seller’s business of selling or leasing property of that kind — however, only in circumstances where the seller granted the security
There are exceptions to this. For example, the taking free provision does not apply where the buyer/lessee holds the personal property as inventory and the property may or must be described by serial number. Another exception is where the buyer/lessee has actual knowledge that the sale or lease constitutes a breach of the security agreement.
Assume that Bank A has a perfected security interest in the transferor’s printing presses. The transferor is a magazine publisher. The transferor is not in the business of selling its printing presses. Nevertheless, the transferor
sells one of its printing presses to a dealer. The dealer does not acquire the printing press clear of Bank A’s security interest, because the dealer did not acquire its interest in the ordinary course of the transferor’s busi-
However, the dealer is in the business of selling printing presses. The dealer grants a security interest in the printing press to Bank B, so there are two security interests: one granted by the transferor and one granted by the dealer. They are both perfected. The dealer then sells the printing press to a transferee in the ordinary course of the dealer’s business of dealing with property of that kind. The transferee acquires the printing press free of Bank B’s security interest (unless they had actual knowledge of that security interest and knew the sale
was a breach of the security agreement), but subject to Bank A’s security interest because Bank A’s security interest was not granted by the dealer who is the immediate transferor. This changes the concept of bona fide purchase for value without notice
Completing the financing statement
Assume that a registration progresses on the basis that the online financing statement is completed and the applicable fee is paid. The purported secured party (grantee) needs to have a security interest at that time or a belief on reasonable grounds that the secured party is or will become a secured party in relation to the identified collateral: s 151.
Under s 150, the Registrar is bound to accept the application unless it is frivolous, vexatious or offensive, or contrary to the public interest.
A few seconds after registration, a verification statement is sent to the secured party by email, as well as a registration token. The token is a password unique to the registered security interest and is essentially the “key” to that registration. It enables the holder of the token to amend the registration or discharge it. It should not be given to others!
I have seen clauses in security agreements which provide for payment to be made to the secured party and for the secured party to give a signed undertaking to discharge the security by registering a financing change statement (which is the way to do it), but also which provides for the secured party to divulge to the grantor (borrower) the token so that the grantor can double check what the grantee is doing, or otherwise effect the discharge themselves. Such an arrangement should only be entered into with caution.
In addition, the secured party who receives the verification statement from the Registrar has a statutory duty (under s 157) to provide a copy of that statement as soon as practicable to the grantor. But this can be contracted out of under s157(3) if the collateral is commercial property. Most security agreements provide this contract-out clause. Try and ensure that the relevant security document does include appropriate contract-out provisions if possible.
The financing statement is not intended to provide comprehensive details regarding the nature and extent or the terms of the security interest held in specified collateral, but it is only intended to give notice to third parties of the existence of a security interest. Section 275 provides, however, a mechanism by which “interested parties” in relation to a security interest can request a copy of the security agreement and some additional information from the secured party. Unless a confidentiality agreement provides otherwise, the information must be divulged within 10 business days from when the secured party receives the request.
The fields are generally straightforward, except where you come to the section dealing with the grantor and the grantor is a trust without an Australian Business Number (ABN). If it does not have an ABN, you are unable to register the security interest against the trust by identifying it as a trust. You have to go to the next row headed “other” and then type in the name of the trust — say, “the John Smith Family Trust”.
Of course, John Smith may subsequently change the name of his trust, might he not? He might then also change the trustee of the trust from being a corporate trustee to an individual or vice versa. This may make subsequent searching very difficult. Subsequent enforcement might be even more of a challenge. There is australian banking and finance June 2014 67 nothing new here, except for the fact that the grantee has been unable to register its security interest under the heading “Trust”, but only under the heading “Other”, and this clearly does not assist the grantee in circumstances which are already difficult to navigate.
When identifying the relevant collateral classes to select, it is important to appreciate that a security agreement may cover a number of collateral classes and a financing statement may need to be registered for more than one collateral class. In other words, multiple registrations may be required in respect of a single security agreement. It is important to always consider whether multiple registrations are required to perfect a single security interest. For example, you may need to make multiple registrations in connection with (1) a general security deed to take into account any PMSIs, control, or serially numbered goods; (2) a security interest in shares and in book debts; and (3) particular types of grantors.
Defects in registration — ss 164–6
The register is unforgiving in relation to incorrect registrations. There are various defects which can affect registration:
- Seriously misleading data entries: A secured party’s priority may be lost (and therefore a liquidator will be invalidly appointed) if the relevant regis-
tered financing statement is seriously misleading— s 164. Section 165 of the PPSA deals with seriously misleading registrations and defects. For example, recording the grantor’s name as “Technology” when the name is actually “Tecnology”: Fairbanks Corp v Royal Bank of Canada.2 Also, overseas cases establish that a registration is seriously misleading if it fails to indicate that collateral covers inventory. Recent examples of seriously misleading defects are where a financier had incorrectly disclosed the company’s director as the grantor of the security interest instead of the company which the director controlled. Another related to two motor vehicles, where the financier mistakenly recited in the financing statement that the dealership that sold the vehicles to the company was the grantor rather than the company — they got “grantor” and “grantee” mixed up in the financing statement.
- Incorrect serial numbers or other grantor details: s 165(a) and (b).
- Claiming a security interest is a PMSI when it is not: s 165(c).
However, despite the operations of ss 164 and 165, some defects do not make the registration ineffective, and a grace period for errors not arising by mistake or omission of the secured party is given under s 166. Under this section, temporary perfection is provided for the earliest of (1) 60 months from the defective date; (2) the registration end time; and (3) five business days from
when the secured party obtaining actual or constructive notice of the defect.
An example of a defect that is not immediately fatal is a defect mentioned in s 165(a), which may occur if there is a change in the serial number of the collateral. This may occur, for example, where a patent application number is changed to a different patent number when the patent is registered on the patents register.
Another example is where there is a change of a grantor if the collateral described in the registration is transferred. A further example is if the grantor changes their name: s 165(b).
Removal of registered security interests
The PPSR allows a secured party to remove, discharge or amend a registration. Once the registration is removed or discharged, then it is no longer available for searching even by way of historical archive. For this reason, a release can only be effected with either the access code for the secured party group (SPG) or the token for the relevant registered security interest. So, the process requires the cooperation of the secured party to effect the removal or discharge of the security interest.
Where a security interest is registered against the collateral class, “All present and after acquired property — no exceptions”, then it may be appropriate to request the removal of the “All present and after acquired property — no exceptions” registration and replace it with an “All present and after acquired property — with exceptions” registration, if the secured party will allow
Where a partial release is sought in respect of some specific collateral, and the financing statement recites an “All present and after acquired property — with exceptions” registration, it may not be necessary to replace it. If the registration included some generic exclusionary provisions, such as ”except any personal property of the grantor which is not from time to time subject to a security agreement in favour of the secured party”, then one would not need to consider replacing it.
What can be amended?
If errors are discovered in a financing statement, what can be amended without having to discharge the registration and start over, potentially losing priority? The following can be amended:
- the description of the collateral;
- the end time for the registration;
- whether the registration is subordinate to another registration;
- the description of the proceeds;
- the secured party group; and
- grantors (which can be added or removed).
The collateral class cannot be amended. The serial number of serially numbered goods cannot be amended.
Correcting the Register
To correct the register, an Amendment Demand can be served on the secured party by the grantor under s 178, but only where no collateral described in the registration secures any obligation owed by the grantor to the grantee or the secured party does not hold any security interest in respect of any asset of the grantor.
If the secured party does not comply with the amendment demand, then the Demand may be enforced by way of administrative process (by following ss 180 and 181) or judicial process (pursuant to s 182), both found in Div 3 of Pt 5.6.
Under s 186, incorrectly removed data can be restored by the Registrar on the Registrar’s initiative.
Shortcomings of the Register
One commonly agreed shortcoming of the Register is that there is no way a search can be undertaken for all “charges” registered in the name of a particular grantee (secured party).Also, the Register ignores spaces between characters and it is not case sensitive, so a search for “Jon Quil” will also show “JONQUIL” in the results. Punctuation is ignored and noise words like “the”, “Mr” and “and” are not taken into account by the Register.
One of the key issues is adequately describing the collateral in the financing statement. It is recommended that the very wording that appears in the underlying security agreement be used where necessary. However, if the goods are not described in the security agreement, then the following wording seems to work for the majority of cases:
All goods previously supplied by the grantee to the grantor and all goods yet to be supplied by the grantee to the grantor in either case whether by rent or sale or consignment or bailment or otherwise.
Adequacy of the PPSR
But even a search of the PPS Register will not disclose higher ranking security interests that are not perfected by registration or that are subject to a temporary perfection. Complete reliance cannot be placed on the PPS Register because a security interest might have been perfected by possession or control before another security interest was perfected by registration.
Checkout all the security agreements entered into by the customer. The bank should make enquiries about the location of the collateral and how long it has been in Australia, and who currently has possession of the collateral.
Banks will also need to search the state carve-out registers, such as water rights and licences under the Water Management Act 2000 (NSW) in respect of rural property.
1. Adelaide Capital Corp v Integrated Transportation Finance Inc (1994) 6 PPSAC (2d) 267.
2. Fairbanks Corp v Royal Bank of Canada  ONCA 385.