The second of a series of four consultation papers in connection with the review of the operation of the Personal Property Securities Act 2009 has been released.
The second consultation paper looks at and makes recommendations for amendment in relation to:
•the creation and perfection of security interests;
•the taking free rules (enforceability against third parties);
•the priority rules; and
•other dealings in collateral.
Perfection and insolvency: Pozzebon case note
The consultation paper observes that:
“The Act provides five ways in which a security interest can be perfected over collateral. If the security interest has attached to the collateral and is enforceable against a third party, it can be perfected by any of registration, possession or (for certain types of collateral) control. These modes of perfection all require the secured party do something, in order to make its security interest perfected for the purposes of the Act. A security interest may also be perfected, either temporarily or permanently, by force of a provision to that effect in the Act. These additional modes of perfection are automatic, and do not require that any particular action be taken by the secured party.”
The issue of perfection under section 21 of the PPSA was recently examined in Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd, in the matter of Australian Gaming and Entertainment Ltd (in liq) [2014] FCA 1034.
In a contest between a company’s liquidator and its lender the Federal Court of Australia decided that a security interest which was registered late was not enforceable against a company liquidator.
The security interest was created on 24 December 2013, but not registered until 19 May 2014. The company was placed into voluntary administration on 26 May 2014 and on 1 July 2014 the company entered liquidation.
Under section 588FL of the Corporations Act the lender becomes an unsecured creditor if the security interest is registered more than 20 business days after the security agreement was made.
The lender argued that perfection could occur by means other than registration.
Judge Collier commented:
38.Section 21(2) sets out alternative options of means of perfection of the security interest referable to registration, or possession, or control but only once s 21(1)(b)(i) and (ii) are satisfied.
39. To the extent that the applicant’s submission contemplates that attachment and enforceability are not fundamental pre-conditions to perfecting a security interest in all cases other than cases of temporary perfection, and that the perfection of a security interest by attachment, enforceability and registration is somehow a process out of the ordinary such that s 588FL(2) and (4) are irrelevant in this case, it is wrong.
40. As is made clear by s 21(1)(b) and s 21(2) of the PPSA, once a security interest has attached to and is enforceable against collateral, the means by which perfection of the security interest is completed may vary. One means is by registration of the security interest. Another means is by possession of the collateral by the secured party. A third means of perfection is by control (but only in relation to certain types of collateral).
41. It follows that when s 588FL(2)(a)(ii) refers to “the security interest [being] perfected by registration, and by no other means” that section is distinguishing “registration” as a means of perfection from “possession” and/or “control”. Section 588FL(2)(a)(ii) is not distinguishing “registration” from “attachment” and/or enforceability”. Indeed Note 4 to s 588FL(2) specifically states that the PPSA provides for “perfection by registration, possession or control, or by force of that Act (see s 21 of that Act)”…..
48. The purpose of the provisions in contention is clear. Section 588FL was inserted into the Corporations Act to prevent security interests being granted fraudulently by corporations with knowledge of an imminent administration, liquidation or deed of company arrangement, and to avoid property falling into the estate of a trustee or administrator or otherwise being claimed by unsecured creditors (Explanatory Memorandum, Personal Property Securities (Corporations and Other Amendments) Bill (Cth) 2010 cl 6.2).
49. Similarly the terms of s 21(1)(b) of the PPSA are unambiguous – attachment and enforceability plus one of the final means set out in s 21(2) of the PPSA (namely registration or possession or control) are necessary requirements for perfection of a security interest. This is apparent from the Outline of the Replacement Explanatory Memorandum, Personal Property Securities Bill (Cth) 2009 which states:
Perfection would occur when a security interest attaches to personal property and the secured party takes possession and/or control of the property or registers it on the PPS Register. The Bill would also provide short term ‘temporary perfection’ following certain events involving the collateral.
