Security interest

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Perfection [of a security interest] is not invulnerability The Personal Property Securities Act 2009 (PPSA) regulates the perfection of security interest (SI). A SI is defined as an interest in personal property provided by a transaction to secure payment or performance of an obligation.1 SI is created when it is attached to the collateral where the grantor holds rights in the collateral or the power to transfer rights in the collateral to the secured party (SP), provided that a value is given for the SI.2 Perfecting a SI means publicising the SI. Perfection includes temporary perfection, or when the SI is attached to the collateral and it is enforceable against a third party, provided that the SI has been registered, or the SP has possession of the collateral, or the SP has control of the collateral.3S21(2)(c) of PPSA states that controllable collaterals include ADI accounts, intermediated securities, investment instruments, letters of credit, and shares. Additionally, for the SI to be enforceable against third parties the SP must take possession or control of the collateral, or the grantor must have signed or adopted a security agreement containing the collateral's description.4 A perfected SI takes precedence over an unperfected SI in a priority contest of the collateral. 5 In Graham v. Portacom New Zealand Ltd [2004] 2 NZLR 528, the bank registered its SI and defeated the lessor who did not perfect its SI. However, being perfected does not mean that the SI is invulnerable. Perfection is subjected to several priority rules. Even if the SP has perfected its SI, it is possible that it might receive nothing or less than what it has given when the grantor defaults. When more than one SPs have perfected their SI in the collateral, the first perfected SI will prevail.6 The order of priority is determined by the occurrence of priority time such as the earliest of the registration time, the time the SP or another person on behalf of the SP perfects the collateral by taking possession or control of the collateral, and the time the SI is temporarily perfected or perfected by the force of PPSA.7 PPSA also requires a continuous perfection of the collateral for the priority time to be valid.8 ___________________________________________________________________________ 1 Personal Property Securities Act 2009 (Cth), s 12(1). 2 Personal Property Securities Act 2009 (Cth), s 19. 3 Personal Property Securities Act 2009 (Cth), s 21. 4 Personal Property Securities Act 2009 (Cth), s 20. 5 Personal Property Securities Act 2009 (Cth), s 55(3) 6 Personal Property Securities Act 2009 (Cth), s 55(4) 7 Personal Property Securities Act 2009 (Cth), s 55(5) 8 Personal Property Securities Act 2009 (Cth), s 55(6) The Purchase Money Security Interest (PMSI) is an exception to the priority rules in S55 of PPSA. PMSI includes a SI that secures all or part of the collateral's purchase price and it can be taken by a person who gives value to enable the grantor to acquire rights in the collateral, to the extent that the value is applied to acquire those rights.9 A perfected PMSI has super-priority over a perfected non-PMSI SI that is granted by the same grantor in the collateral or its proceeds.10 Even though the non-PMSI SI has been perfected earlier, the priority is given to PMSI. To enjoy the super-priority, the PMSI must be perfected by registration when the debtor obtains possession if the inventory is goods or when the PMSI is attached if the inventory is of any other kind, and before the end of 15 business days since attachment of PMSI or possession being granted to debtor. 11 However in a case where there is a non-PMSI SI perfected by control, it will take precedence over a PMSI.12 For example, if a bank perfects its SI by taking control over the debtor's property, it defeats any other methods of perfection, even though the control takes place in a later time. In the case where two or more SPs perfected their SIs by control, the SP who takes control first has priority.13 Another important factor to consider is that perfection by control is usually done by private agreement and therefore the perfection might not be publicised. 14 A seller, lessor or consignor who perfected its PMSI enjoys priority over other perfected PMSI by any other methods.15 The PPSA aims to protect them from the default of buyers or lessees. Therefore, in a priority competition between a lender and a supplier of goods, the supplier wins. This could place the lender in a bad position especially when the value of the collateral is less than the outstanding debt. In some circumstances, the SI is registered for perfection before it is created. For instance, if the SI is registered on 1 May and the attachment is on 5 May, the perfection is said to be on the date of attachment. However in a priority contest, the priority time is the date when the SI is registered.16 ___________________________________________________________________________ 9 Personal Property Securities Act 2009 (Cth), s 14(1)(a) and s 14(1)(b). 10 Personal Property Securities Act 2009 (Cth), s 62. 11Personal Property Securities Act 2009 (Cth), s 62(2)(b) and s 62(3). 12 Personal Property Securities Act 2009 (Cth), s 57 . 13 Personal Property Securities Act 2009 (Cth), s 57(2). 14 Horst Eidenmüller and Eva-Maria Kieninger, The Future of Secured Credit in Europe (Walter de Gruyter, Germany, 2008) p 150. 15 Personal Property Securities Act 2009 (Cth), s 57(2); see also Evan H. Krinick, 'Banks' Security Interests vs. Consignors' Claims: Unless Consignors Take Specific Steps Set Forth in UCC Section 2-326(3), Banks' Typically Have Priority to Consigned Goods.' (1999) Banking Law Journal, vol. 116, no. 8, pp. 718-728. 16 Personal Property Securities Act 2009 (Cth), s 55(5)(a). If the security agreement provides for future advance and the SI will have the same priority concerning all advances including future advances. 17 For example, on 1 June the bank registered its SI over the property of the debtor . The attachment and perfection take place when the security agreement is executed on 3 June. On 4 June the bank gives an advance and on 5 July it gives another advance to the debtor. Both advances given by the bank enjoy priority as they are covered by the 1 June registration. However the issue is that if another creditor lends money to the same debtor between 4 June and 5 July, he will lose priority to the bank, unless the he obtains a PMSI or control over the property. If a SI in the collateral is perfected but a SI in the proceeds is not perfected, the SI in the proceeds is temporarily perfected for 5 business days starting from the time the SI in the collateral attaches to the proceeds. Therefore, the SP must re-perfect the SI to have continuous perfection. 18 Sometimes there could be two SPs competing for the SI granted by two debtors. For example, A has continuously perfected its SI in F's property. F sells property to E without A's consent and E grants SI in the property to B. The transferor-granted SI has priority over the transferee-granted SI. 19 This means if A perfects initially but does not continuously perfect its SI, or the SI is unperfected then B takes the property free of the SI. 20 A perfected SI in a good that has become an accession takes priority over the SI in the whole, unless the perfection of SI in the whole takes place earlier than the accession's SI perfection.21 If someone wished to perfect his SI in a truck, he would have to check whether or not the tyres are subject to any SI, or he might lose the tyres when the grantor defaults. Perfection of SI for crops which secures an advance for the production of the crops takes precedence over other SI in the same crops granted by the same grantor and the default rules in S55 will apply if there are more than one competing SIs.22 A SI arising under the statutory or general law such as non-consensual SI takes priority over a PPSA SI, provided that the SI arises in the ordinary course of business and the acquirer does not know that the acquisition is a breach of the security agreement. 23 ___________________________________________________________________________ 17 Personal Property Securities Act 2009 (Cth), s 58. 18 Personal Property Securities Act 2009 (Cth), s 33(2). 19 Personal Property Securities Act 2009 (Cth), s 66 and s67. 20 Personal Property Securities Act 2009 (Cth), s 43 (1). 21 Personal Property Securities Act 2009 (Cth), s 88, s 89 and s 90; see also s99 which states that the security interest continues in a product or mass although the identity of the initial good is lost in the manufacturing, processing, assembling or commingling process. 22 Personal Property Securities Act 2009 (Cth), s 85. 23 Personal Property Securities Act 2009 (Cth), s 73(1). There are some situations where the buyer or lessee of the property takes it free of SI and the SP still loses even though it has perfected its SI. 24 They take it free if they do not have knowledge that the property is subject to a SI, provided that the property is sold or leased in the ordinary course of the seller's or lessor's business of that that kind of property.25 Another situation is that if the property may or must be described by serial number and the SP fails to disclose the serial number when registering its SI, the buyer or lessee eventually gets a clear title of the property, provided that the buyer or lessee does not hold the property as inventory or they are not a party to the transaction. 26 Also, without knowing that the transaction is a breach of the security agreement, a buyer or lessee takes free of the SI if the search of the register by serial number of the motor vehicle one day before the SP registers its SI does not reveal a registration.27 They also take personal, domestic or household property free of SI if the market value given to the property is no more than $5,000 or any prescribed amount by the regulations.28 These two situations only apply when the property is acquired for a new value. In conclusion, the PPSA does not entirely eliminate the risks that a SP's perfected SI may face when there are more than one SPs of the collateral or in the situation where the innocent third party can take the collateral free of SI. The perfection remains vulnerable until the current legislation is amended to enable the SPs to have a better protection of their SI when they have perfected the SI. ___________________________________________________________________________ 24 Jason E. Pauls, 'Priority and perfection of a security interest in a patent: does the Patent Act preempt the UCC?.' (1998) Commercial Law Journal, vol. 103, no. 4, pp.450-470. 25 Personal Property Securities Act 2009 (Cth), s 46(1); see also Steven O. Weise, 'U.C.C. Article 9 - Personal Property Secured Transactions. (Uniform Commercial Code Survey).' (1992) Business Lawyer, vol. 47 no. 4, pp. 1593-1644. 26 Personal Property Securities Act 2009 (Cth), s 44(1) and s 44(2). 27 Personal Property Securities Act 2009 (Cth), s 45(1). 28 Personal Property Securities Act 2009 (Cth), s 47(1). Bibliography Evan H. Krinick, 'Banks' Security Interests vs. Consignors' Claims: Unless Consignors Take Specific Steps Set Forth in UCC Section 2-326(3), Banks' Typically Have Priority to Consigned Goods.' (1999) Banking Law Journal, vol. 116, no. 8, pp. 718-728. < http://primo-direct-apac.hosted.exlibrisgroup.com/UWA:TN_gale_ofa63269168>. Graham v. Portacom New Zealand Ltd [2004] 2 NZLR 528. Horst Eidenmüller and Eva-Maria Kieninger, The Future of Secured Credit in Europe (Walter de Gruyter, 2008). Jason E. Pauls, 'Priority and perfection of a security interest in a patent: does the Patent Act preempt the UCC?.' (1998) Commercial Law Journal, vol. 103, no. 4, pp. 450-470. <http://search.ebscohost.com/login.aspx?direct=true&db=lft&AN=502468172&site= ehost-live>. Steven O. Weise, 'U.C.C. Article 9 - Personal Property Secured Transactions. (Uniform Commercial Code Survey).' (1992) Business Lawyer, vol. 47, no. 4, pp. 1593-1644. < http://primo-direct-apac.hosted.exlibrisgroup.com/UWA:TN_gale_ofa13234428>. 1 21270883
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