PPS Update

The Personal Properties Securities Act 2009 (PPSA) has now been in effect for 6 months. As the end of the two (2) year transition period approaches, it will be important for Australian businesses to be aware of their rights and obligations when dealing with the enforcement of security interests pursuant to the PPSA.

This article reviews the enforcement provisions contained in Chapter 4 of the PPSA and provides a summary of the important aspects.

Security Interests to which Chapter 4 Does Not Apply

Section 109 of the PPSA sets out the security interests to which Chapter 4 does not apply, including:

• A PPS lease or a commercial consignment that does not secure payment or performance of an obligation;
• A transfer of an account or chattel paper that does not secure payment or performance of an obligation;
• Security interests in goods that are located outside of Australia;
• A security interest in an investment instrument (share, derivative etc - refer to definitions in s10) or an intermediated security (rights of person in a securities account operated by an intermediatory eg. stockbroker) perfected by possession or control.
• Collateral that is used by a grantor predominantly for personal, domestic or household purposes.

Parties to a security agreement are able to contract out of provisions contained in Chapter 4 (where the security interest relates to collateral not predominantly used for domestic purposes) (s115).

When drafting or reviewing security agreements it will be important for each party to consider which (if any) sections of Chapter 4 should be excluded.

The ability to contract out of Chapter 4 provisions extends to dealings beyond the secured party and grantor. Parties holding a security interest in the same collateral may also contract out of enforcement provisions in dealings with one another.

When a Security Interest is Enforceable

A security interest is enforceable against the grantor once the security interest has attached to the collateral (s19(1)). A security interest attaches to collateral when (s19(2)):

i) A grantor has rights in the collateral, or the power to transfer rights in the collateral to the secured party; and
ii) Value is given for the security interest; or
iii) The grantor does an act by which the security interest arises (e.g. signs a security agreement).

A security interest is enforceable against a third party where the security interest has attached to the collateral and one of the following applies (s20(1)):

i) The secured party possesses the collateral; or
ii) The secured party has perfected the security interest by control; or
iii) The security agreement adequately covers/describes the collateral (refer to s20(2)).

The above summary provides only the basic requirements for a security interest to be enforceable. Simply having an enforceable security interest will not place a secured party in a strong position under the PPSA when dealing with competing security interests, an Administrator or Liquidator.

The final and most important step in ensuring that a security interest is enforceable is to perfect the security interest (refer to s21 or our previous update “PPS Reform – Understanding Security Interests: Perfection and Priorities” at www.smithhancock.com.au).

Perfection of a security interest is important for numerous reasons under the PPSA, but in the current context, an unperfected security interest will:

i) Rank behind any competing perfected security interests (s55); and
ii) Be unenforceable against an Administrator or Liquidator (s267)

What Enforcement Options Are Available to Secured Parties

The options available to secured parties differ depending on the form of the collateral covered by the security interest.

Enforcement relating to collateral comprising liquid assets (such as debtor accounts, bank accounts, chattel paper or negotiable instrument (eg. cheque, promissory note)) is dealt with under ss120 and 121 of the PPSA. In summary, a secured party enforcing its interest in liquid assets may do one or both of the following:

i) Write to persons owing money to the grantor and request payment directly within five (5) business days from the day the notice is received or the day the amount becomes due and payable.
ii) Seize any proceeds of the collateral to which the secured party is entitled.

The secured party proposing to enforce its security interest must, unless agreed otherwise, give ten (10) business days notice to higher priority interests and five (5) business days notice to the grantor, from the date of the proposed action.

When dealing with collateral not comprised of liquid assets, secured parties are able to seize the collateral (ss123 to 127) and then either:

i) Dispose of the collateral (ss128 to 132); or
ii) Retain the collateral (s132 to 136).

Once a secured party has seized the collateral, the secured party is entitled to a reasonable period in which to deal with the collateral (s125(2)). A higher priority secured party can request the seized collateral be handed over within five (5) business days and must pay the reasonable expenses of the lower priority secured party within 20 business days of delivery/proof of expenses, whichever is later.

Disposal

Subject to the terms of the security agreement, the secured party is able to dispose of the collateral by private or public sale, lease or license. Pursuant to s131, the secured party disposing of the collateral owes a duty to other persons with a security interest in the collateral and the grantor to obtain market value for collateral (where a market value is determinable).

The secured party is able to acquire the collateral by purchasing it through public sale (including auction or closed tender), for market value (or best obtainable value), provided that notice is given to other secured parties and the grantor at least ten (10) business days prior. The notice period does not apply in several circumstances provided in Section 130(5), including where collateral might perish before end of ten (10) business days.

A person takes the collateral being disposed of by the secured party free of all interests in the collateral of the grantor, the secured party who disposed of the collateral and all lower priority security interests.

Retention

A secured party can commence steps to retain collateral if ten (10) business days notice is given to the grantor and other secured parties in accordance with s135, and no objections are received within the notice period. Where an objection is received, the collateral must be disposed of in accordance with the provisions outlined above.

At the time the collateral passes to the secured party, the secured party takes the collateral free of its own security interest, the interests of the grantor and all lower priority security interests. Furthermore, the debt or obligation secured by the security interest held by the secured party retaining the collateral is extinguished. However, the debts or obligations to the lower priority secured parties are not extinguished.

How to Distribute Proceeds Following Enforcement (Seizure or Disposal)

Section 140(2) of the PPSA sets out the distribution priorities, which are summarised below:

i) Higher priority non-security interests (eg. statutory or equitable liens);
ii) Reasonable enforcement expenses;
iii) Obligations to higher priority interests;
iv) Obligations to the secured party (who seized/disposed of collateral);
v) Obligations to lower priority interests;
vi) The Grantor

In reference to (i) above, this would also include the payment of employee entitlements pursuant to s561 of the Corporations Act, 2001, where the secured party holds a circulating security interest (formerly floating charge) in the grantor’s property.

Impact of Chapter 4 of the PPSA on Receivers & Managers

S116(1) provides that Chapter 4 does not apply in relation to property while a person is a Receiver or Receiver & Manager. Part 5.2 of the Corporations Act, 2001 remains as the authority for the powers, functions and duties of Receivers, and other controllers, of the property of corporations. However, Chapter 4 will apply to a controller (other than a Receiver or Receiver & Manager) unless the parties to the security agreement contract out of the s116(2).