PPSA - principles and terminology

Publication | 04 August 2011

Attachment

A security interest is only enforceable against the grantor (the person having an interest in the personal property and who grants the security interest) if the security interest has attached to the personal property.

“Attachment” is a new concept introduced by the PPSA. A security interest attaches to personal property when both the following requirements under s19(2) of the PPSA have been met:

“(a) the grantor has rights in the collateral, or the power to transfer rights to the collateral to the secured party; and

  (b) either:

(i) value is given for the security interest; or
(ii) the grantor does some act by which the security interest arises.”

Personal property is known as collateral if it is (or is anticipated to be) the subject of a security interest.

Perfection

Attachment alone can be insufficient for the secured party (the person who has taken the security interest) to enforce its rights against third parties, such as other people who have a different security interest in the same personal property.

For the secured party to protect its rights against third parties, it must perfect its security interest.

Perfection occurs when the security interest has attached to the property and:

  1. the secured party has possession (or for certain types of property, control) of the property, or
  2. a registration is effective with respect to the property.

Registration of security interests under the PPSA

Operational commencement of the PPSA will start on the registration commencement time, expected to be 31 October 2011. From this time, new security interests over personal property may be notified on the Personal Property Securities Register by lodging a Financing Statement. The PPS register will act as a “noticeboard” of security interests – it will not be a register of documents.

Temporary perfection period

Transactions which are not currently registrable security interests, but will become so after the registration commencement time, are temporarily perfected under the PPSA. Holders of these security interests will have 24 months (temporary perfection period) to perfect their security interests. It is preferable to perfect transitional security interests with effect from the registration commencement time, rather than rely on the temporary perfection period.

Migration of existing security interests

Many existing security interests that are registered on existing registers (e.g. a charge on the ASIC Register) are to be migrated across to the new PPS Register with effect from the registration commencement time. However, not all existing registers are migrating registers. Security interests registered on registers that are not migrated are treated as transitional security interests and are afforded 24 months temporary protection. The migration of data will commence from the migration commencement time, which will be at least 28 days before the registration commencement time i.e. early September 2011.

Priority between security interests

The PPSA sets out rules for dealing with competing priority interests. In other words, what happens when two or more entities claim a security interest in the same property?

The general rule is that a security interest in the property perfected earlier in time will take priority over a security interest in the same property perfected later in time, provided that continuous perfection has been maintained. Perfection by registration compared with possession does not change the priority interests: the key point is the time at which the perfection occurred. A purchase money security interest (PMSI) will take priority over a non-PMSI perfected security interest even if that non-PMSI security interest is perfected earlier. A PMSI must be registered within tight timeframes under the PPSA to attract this “super-priority”. A security interest perfected by control has a higher priority than a security interest perfected by any other means, other than a transitional security interest.

It is good practice to ensure that any security interest is governed by a security agreement and is registered as soon as possible after the registration commencement time. The time of registration will be easier to prove than time of possession if a dispute arises in relation to the priority of competing security interests.


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Mark Waddell

Mark Waddell

Sydney Melbourne
Bill Ryan

Bill Ryan

Melbourne