Perfection is a term borrowed from US bankruptcy law.  It refers to the process whereby a security interest acquires the optimal protection available under Personal Property Securities Act 2009 (PPSA 2009).  A perfected security interest is not impregnable and it will not necessarily take priority over other security interests but perfection is nevertheless a desirable objective for secured parties.

There are four different ways in which a security interest can be perfected:

• by possession;
  
  
• by control;
  
  
• by registration; and
  
  
• by force of a temporary perfection provision in PPSA 2009.

We examined perfection by possession and control in a previous bulletin on 'Basic concepts: enforceability against third parties'.  It remains to consider perfection by registration and perfection by force of a temporary perfection provision.

PPSA 2009 provides for registration of security interests through filing a financing statement containing certain basic information about the parties, the collateral and the security interest.  The contents of a financing statement will be examined in a later bulletin.  A security interest perfected by control has priority over a security interest perfected by registration but perfection by control is restricted to the six different types of controllable property.  See a previous bulletin on 'Basic concepts: enforceability against third parties'.  It is expected that the vast majority of security interests under PPSA 2009 will be perfected by registration.

PPSA 2009 recognises nine situations in which it is impracticable or impossible to perfect a security interest.  In some situations it is unreasonable to expect a secured party to perfect a security interest as soon as the security interest arises.  (See O’Donovan, Personal Property Securities Law in Australia [25.1010]).  In these situations PPSA 2009 provides a period of temporary perfection to give the secured party time to perfect its security interest by taking possession or control of the collateral or, more commonly, by registering its security interest.  The period of temporary perfection is generally five business days after the relevant event but it can be as long as 56 days after collateral is relocated to Australia or 24 months after the registration commencement time, in relation to non-migrated transitional security interests that were in existence before PPSA 2009 came into effect.  If the secured party does not perfect its security interest within the period of temporary perfection, the security interest becomes unperfected at the end of the temporary perfection period.

Take an example of the operation of a temporary perfection provision.  Under s33(2) an unperfected security interest in proceeds is temporarily perfected for five business days after the perfected security interest in the original collateral attached to the proceeds.  Thus, where the security agreement describes the collateral as ‘farm equipment’ and the farm equipment is sold and the proceeds are used to purchase a yacht, the registration of the security interest in the original collateral, farm equipment, will not catch the yacht because it does not fall within the general concept of the proceeds of farm equipment.  If the farm equipment had been sold and the proceeds had been used to acquire other farm equipment, the new farm equipment would fall within the original registration as ‘proceeds’, according to the extended definition of that term in PPSA 2009.  But a yacht would not be ‘proceeds’ because it is not farm equipment.  For this reason, the original security interest would become unperfected and the secured party would have only five business days after the perfected security interest in the original collateral attached to the proceeds to register a security interest in the yacht. 

Temporary perfection is relevant for the purposes of determining priorities between competing security interests and on the grantor’s insolvency.  But temporary perfection will not generally protect the security interest from extinguishment where an innocent purchaser or lessee provides new value for the collateral with no knowledge of the temporarily perfected security interest.

There are dire consequences for a secured party whose security interest is not perfected.  First, it will lose priority to perfected security interests.  Secondly, an unperfected security interest vests in the grantor upon insolvency.  Finally, an unperfected security interest can be extinguished by a sale or lease to an innocent third party.  For these reasons, the main mantra under PPSA 2009 is ‘perfect or perish’.

There is a final point about the interaction of attachment and perfection.  Attachment can occur before or after perfection but perfection will not be possible unless attachment occurs.  In other words, a security interest can attach without being perfected, but a security interest cannot be perfected unless attachment occurs at some stage.

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