March 2012 PPSA Newsletter Practical Worked Examples

Personal Property & Securities Act (“PPSA”)

In recent times, we have been including articles in our newsletters on the introduction of the PPSA.

Our March 2012 newsletter makes specific reference to the terms:

• Asscession
• Processed and commingled goods
• Proceeds

Provided below are some examples of how we anticipate the provision of the PPSA will be applied in various scenarios. Examples 1, 3, 4 and 5 are based on the material provided in the Explanatory Memorandum for the PPSA.

Accessions

Worked Example 1:
Company A (the Grantor) borrows money from Financier B (Secured Party 1) to buy a new motor for its pump, which is placed into the pump. Before Financier B registers its security interest in the motor on the PPS Register, Company A offers the pump as security for a loan from Bank C (Secured Party 2), which advances the money and perfects its security interest in the pump through registration.

Question 1: Which Secured Party has a higher priority in the motor?

Worked Answer 1:

Bank C has priority over Financier B to the motor because Bank C acquired for value an interest in the whole (the pump) before the security interest in the accession (the motor) was perfected.

Bank C’s search of the register would not have disclosed Financier B’s security interest, and Bank C was entitled to assume that its perfected security interest would have the highest priority of any security interests attached to the pump

Worked Example 2:

Supplier B (Secured Party 1) provides a car motor to Company A (Grantor) and perfects a Purchase Money Security Interest (“PMSI”) at the time Company A takes possession of the motor. The motor is installed into a motor vehicle which is covered by an existing circulating asset security interest (formerly a “floating charge”) in favour of Bank C (Secured Party 2) over the whole of Company A’s property.

Question 2: Which Secured Party has a higher priority in the motor?

Worked Answer 2:

Supplier B has priority over Bank C to the motor because Supplier B has a perfected PMSI which affords it a higher priority in the motor than Bank C’s interest in the motor vehicle as a whole.

Supplier B is entitled to exercise rights in the accession and is not required to give notice to Bank C which has a lower priority security interest (s95) but Supplier B must not damage the motor vehicle as a whole (s92) or must reimburse other Secured Parties for any damage caused in the removal of the car motor (s93).

Damage does not extend to inconvenience of the removal of the goods (ie. motor) or to the diminished value in the goods as a whole (ie. motor vehicle) resulting from the removal of the accession (Personal Property Securities Bill 2009 Explanatory Memorandum 3.20)

Bank C would be entitled to retain the accession if Supplier B is paid the market value of the accession. If required, the market value can be obtained by a Court order determining the amount payable for the retention of the accession.

Processed & Commingled Goods

Worked Example 3:
Company A (Grantor) is an ice cream manufacturer. Supplier B has a perfected PMSI of $1,000 in sugar supplied to Company A. Supplier C has a perfected PMSI of $10,000 in dairy products supplied to Company A.

Company A uses the sugar and dairy products to make a batch of ice cream. The cost value of the sugar that Company A uses to make the batch of ice cream is $50. The cost value of the dairy products that Company A uses to make the batch of ice cream is $200.

Supplier B and Supplier C are the only persons with security interests in the batch of ice cream. Because the market for ice cream collapses, the batch of ice cream is worth $100 (ie. sale value).

Question 3: Which supplier has a higher priority and what amount is each supplier entitled to recover from the $100?

Worked Answer 3:

Supplier B and Supplier C have equal priority in the batch of ice cream.

On enforcement of their security interests, Supplier B is entitled to recover $20 (or 50/250th of $100). Supplier C is entitled to recover $80 (or 200/250th of $100).

Worked Example 4:

Company A is a furniture-maker. Supplier B has a registered security interest of $1,000 in glue owned by Company A. The cost value of the glue that Company A uses to make a table on the day that Company A makes the table is $50.

The sale value of the table is $1,000, being for the timber, glue, labour and skill of the furniture maker.

Question 4: How much is Supplier B entitled to recover on enforcement of its security interest?

Worked Answer 4:

s101 of the PPSA provides that:

Any priority that a security interest continuing in the product or mass has over another security interest in the product or mass is limited to the value of the goods on the day on which they became part of the product or mass.

Therefore, on enforcement of its security interest, Supplier B could recover no more than $50, being the cost value of the glue used to make the table on the day the table was made.

Proceeds

Worked Example 5:
Company A grants Bank B a security interest in its sapphires. Company A then transfers the sapphires to Customer C in exchange for rubies without Bank B’s authorisation.

Question 5: What are the proceeds in this instance? Does Bank B have an interest in the proceeds?

Worked Answer 5:

Bank B would have a security interest in the rubies as proceeds of the sapphires.

Worked Example 6:

Company A owns a warehouse in which it stores furniture finished goods inventory over which Financier B has a perfected circulating asset security interest of $15,000 in the finished goods inventory. The security interest includes an adequate description of proceeds.

The warehouse is engulfed by fire and the finished goods inventory is completely destroyed. The cost value of the stock lost at the date of the fire is $10,000.

Company A receives an insurance payment of $100,000 from its insurers covering the loss of the plant, equipment and stock. Of the $100,000 payment, $12,000 is allocated by the insurer for the lost finished goods inventory. There are no other perfected security interests against Company A.

Question 6: What amount is Financier B able to claim from the insurance payment?

Worked Answer 6:

Financier B’s security interest transfers to the proceeds of the collateral. In this instance the proceeds of the collateral include a right to an insurance payment as compensation for the loss of the collateral (i.e. the finished goods inventory lost in the warehouse fire) (refer to s31(b) of the PPSA).
Financier B is entitled to $12,000 of the $100,000 insurance payment being the proceeds of the collateral.