Secured parties have relatively simple objectives. They want their security interest to be enforceable against the grantor and third parties; they want their security interests to have priority over other security interests; and they do not want their security interests to be extinguished by a transfer of the collateral to third parties. Personal Property Securities Act 2009 (PPSA 2009) provides detailed rules on enforceability, priority and extinguishment.
Enforceability against the grantor
There are two aspects of enforceability. The first relates to enforceability of the security interest against the grantor. The core concept here is ‘attachment’. Section 19(1) of the PPSA 2009 provides that a security interest is enforceable against a grantor in respect of particular collateral only if the security interest has attached to the collateral.
When does attachment occur?
Attachment occurs when:
- the grantor of the security interest has rights in the collateral or the power to transfer rights in the collateral; and
- value is given for the security interest; or
- the grantor does an act by which the security interest arises.
- value is given for the security interest; or
Let us take each of these requirements in turn.
Rights in the collateral
First, a grantor has rights in the collateral, or the power to transfer rights in the collateral to the secured party even if the grantor does not own the collateral. On the other hand, mere possession of the collateral by a gratuitous bailee is not sufficient. Put simply, something more than mere possession but less than ownership is required. A person who has possession of the collateral under a lease or bailment for reward can grant a security interest in it. This may surprise secured parties who are familiar with the traditional property law principle embodied in the Latin maxim nemo dat quod non habet (a person cannot give what he does not have). PPSA 2009 modifies this principle. Legal or equitable title to the collateral is largely irrelevant under PPSA 2009.
The second part of the attachment rule is expressed in the alternative. Value must be given for the security interest or the grantor must do an act by which the security interest arises. ‘Value’ in this context simply means consideration sufficient to support a contract. In other words, the secured party must suffer a detriment in return for the grant of the security interest, for example by providing a loan or goods on credit. However, under PPSA 2009 the term ‘value’ is broader than the general contractual concept of consideration because it includes an antecedent debt or liability. This means that a security interest can be granted to secure repayment of a past debt or the performance of a past obligation.
While value must be given for the security interest, it is not necessary for the value to be given to the grantor. It could be given to another party, such as the debtor or obligor. Hence, PPSA 2009 contemplates third party security interests granted by one party in respect of the debt or obligations of another.
Actions causing the security interest to arise
The alternative way of satisfying the attachment requirement is for the grantor to do an act by which the security interest arises. This will normally be the act of entering into the security agreement with the secured party. Thus, security interests will usually attach when a grantor who has rights in the collateral or the power to transfer rights in the collateral signs the security agreement.
The time of attachment can be deferred to a later time specified in the security agreement but the mere reference to a floating charge in a security agreement will not defer the time of attachment. This is a fundamental change in the existing law. Attachment no longer refers to the time at which a floating charge crystallises into a fixed charge, for example upon the appointment of a receiver and manager or upon winding up or the cessation of the grantor’s business. Under PPSA 2009 attachment is simply the process whereby a security interest becomes enforceable against the grantor.
The role of the attachment rules
The attachment rules under PPSA 2009 serve as a reminder that the security interests recognised by the new Act are generally fixed securities subject to a statutory licence to deal with the collateral in the ordinary course of business. They also obviate the need for a written security agreement signed by the grantor in all cases. For example, a security interest could be enforceable against a grantor who knowingly received goods from a supplier subject to retention of the title terms contained in an invoice or delivery docket. This security interest would be enforceable as between the grantor and the supplier.
Attachment is an essential element in perfection but a security interest can attach without being perfected. Perfection is the subject of another Bulletin.
For further information, please contact:
|Dr James O’Donovan||Daniel Butler|
|Special Counsel||Special Counsel|
|(08) 9288 6804||(08) 9288 6714|