Personal Properties Securities 15 hours
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Personal Property Securities LAWS 6956 Session 2
Presented by
Professor Sheelagh McCracken
University of Sydney Law School
12 October 2019
Making a security interest effective
Attachment
Enforceability against 3rd parties
Perfection
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Structure of Session 2
Reminder: development of an analytical framework
Attachment
Significance of attachment
Criteria for attachment (and also timing of attachment)
Impact of s 19(5)?
Attributes of attached security interest?
Impact of PPSA on the floating charge?
Enforceability against 3rd parties
Criteria (s 20)
The security agreement
Perfection
* Approach to achieving perfection
* Meaning of perfection
* Perfection by: possession; control; registration
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An analytical framework in a rules based system (Session 1)
Does a SI exist?
Threshold question (s 12; assuming s 6; subject to s 8)
When is a SI effective?
Central concepts
Attachment (s 19)
Enforceability against 3rd parties (s 20)
Perfection (s 21) – notion of ‘optimal protection’
What is the ranking of a SI?
Default priority rules (s 55)
‘Super-priority’ (ss 62, 63)
Control trumps all (s 57)
Other
What is the reach of a SI?
Continues after goods become an accession or commingled (Pts 3.3;3.4)
Buyer or lessee may take free (Pt 2.5)
Proceeds (s 32
What remedies does a SI confer?
Seizure (ss 123; 125); Disposal (ss 128; s 129); Retention (s 134)
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2. Attachment
Attachment as a concept of ‘central importance’ *
Other such concepts?
Position within analytical framework? Assumptions that:
there is personal property (s 10)
there is a security interest in that property provided by a transaction that either secures payment or performance or is of a specified kind (s 12, subject to s 8)
Addressing relationship between secured party and grantor
Position vis a vis 3rd parties? (discussed subsequently)
* Bank of Montreal v Innovation Credit Union, [20]
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Significance of attachment
Enforceable against the grantor (s 19)
Description (ss 10, 19):
Hamersley: statutory construction – ‘creation of proprietary interest’
Ordinary meaning [326]
Established legal meaning [329] (?)
Context [331]: s 12; s 20
Cf CA: assumes ‘without deciding’ court is correct: [136]
Attachment to ‘collateral’
Meaning of ‘collateral’ (s 10)
Position if collateral gives rise to ‘proceeds’? (s 32(1)(b); Session 3)
Pre-requisite for:
Enforceability against 3rd parties (s 20) (see below)
Perfection (s 21) (see below)
Impacts also on: eg
Resolving priority disputes in particular instances (Session 3)
Competing security interests are unperfected (s 55)
BUT ‘creates rights for all purposes’: Hamersley [345]. See also i-Trade.
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Criteria for attachment (and also timing of attachment)
2 major criteria (s 19(2))
Value is given for SI OR Grantor does an act by which SI arises
meaning of ‘value’? (s 10)
type of act?
Grantor has rights in the collateral (or power to transfer such rights)
Types of rights?
Ownership
Possession?
Equitable rights (eg beneficial interest under a trust)?
Is security agreement required?
Dura [120] Cf Whittaker Report Recommendation 54
Ability to postpone attachment
s 19(3): permits postponement
s 19(4): impact of reference in security agreement to floating charge
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Impact of section 19(5)?
Role of s 19(5)?
Lease or bailment under a PPS lease
Graham v Portacom New Zealand Ltd (Session 1)
Re Maiden Civil (P & E) Pty Ltd (Session 1)
Other transactions?
Eg Consignment; Conditional sale
Notion of ‘deemed ownership’? (In NZ, see also Waller; Rabobank)
Scope of s 19(5) limited
Position if grantor has legal possession by other means
Rabobank New Zealand v McAnulty: NZCA
Gray v Royal Bank of Canada
Position if grantor has ‘bare’/’actual’/’de facto’/’physical possession’/custody?
En Plas
JS Brooksbank (Session 1)
Position if transaction is a finance lease? Hire purchase?
Impact of analysis on other rights?
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Attributes of attached security interest?
Legal (statutory interest)?
Present property? Bank of Montreal v Innovation Credit Union
Future property? Royal Bank of Canada v Radius Credit Union
Fixed
As a consequence of s 19(2): see Hamersley
Over present property
Over future property
Security agreement may provide for SI in future property (s 18(2))
Attaches without specific appropriation (s 18(3))
But grantor must have ‘rights’ (s 19(2)
Notion of ‘inchoate security interest’
Interest acquired at time of execution of security agreement?
Royal Bank of Canada v Radius Credit Union (Session 3)
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Impact of PPSA on the floating charge? Has the floating charge been abolished?
‘For the purposes of this case it is unnecessary to reach the conclusion that the PPSA abolishes the general law distinction between fixed and floating charges over personal property’: Hamersley [337]. See also [340].
* Views?
Abolished (Duggan & Brown [1.36])
Not abolished?
S 12(2) recognises floating charge BUT
Impact of s 19(2)?
SI is proprietary (“fixed”)
No room for floating charge to operate
Crystallisation becomes irrelevant: Hamersley [334]
* Distinction from security interest attached to circulating assets (see Session 4)
Note
ability to give ‘licence’
Effectiveness of security agreement (s 18)
Impact of dealing clause? (s 32(1) – Session 3)
ability of buyer or lessee to take free (ss 42-53 – Session 3)
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Discussion Problem
X, a printing company, telephoned its bank last Wednesday to arrange a temporary loan to buy a new photocopier, offering an existing printer by way of security. The bank agreed during the course of that conversation to advance funds on Friday of last week and to forward documentation for X to sign. That documentation arrived this morning (Monday) and was signed by the CEO of X. Jane, the sales manager, will purchase the photocopier this afternoon.
When did the security interest attach to the printer?
If the bank and X had agreed in the conversation on Wednesday that X would also give the bank security over the new photocopier, when would that security interest attach?
The bank now requires X’s parent company, Pco to give a guarantee and security in support of that guarantee. Pco executes in favour of the bank a guarantee and a security interest over equipment which Pco leases from Sco. Has the bank’s security interest attached to Pco’s equipment?
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For noting Personal Property Securities Act 1999 (NZ) s 40
S 40 Attachment of security interests generally
A security interest attaches to collateral when –
value is given by the secured party; and
the debtor has rights in the collateral; and
except for the purpose of enforcing rights between the parties to the security agreement, the security agreement is enforceable against third parties within the meaning of s 36. [emphasis added]
………………
Based on Personal Property Security Act 1993 s 12 (Saskatchewan)
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3. Enforceability against 3rd parties
Examples of transactions where concept is relevant?
Preliminary issue: Who is a 3rd party?
Meaning of concept? (s 20)
First stage: SI enforceable against 3rd parties
Ie corroboration of
existence of security interest
scope of security interest
Compare attachment: enforceable against grantor
Thereafter:
Priority position vis-a vis other secured creditors (Session 3)
Position vis a vis buyers and lessees
Will security interest continue in the collateral? (Session 3)
Will buyers and lessees take free? (Session 3)
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Criteria (s 20)
Attachment (s 19)
AND
One of the following applies:
Secured party possesses the collateral
See discussion of possession under ‘perfection’ (see below)
What collateral?
Meaning of possession (ss 10, 24)
OR
Secured party has perfected the security interest by control
See discussion of control under ‘perfection’ (see below)
OR
Security agreement providing for the SI covers the collateral
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The security agreement: * legal framework
Definition (s 10: ‘security agreement’; ‘provides’)
Agreement or act by which SI is created, arises, or is provided for
See Central Cleaning
or
Writing evidencing such an agreement or act
See eg Doka Formwork; Maiden Civil
Effective according to its terms (s 18)
Assumes valid formation under general contract law
Operation of s 254 (concurrent operation of general law to extent capable)
Subject to restrictions under s 257
May provide for SI in after-acquired property
May provide for future advances
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The security agreement (continued): * contents
Possible content? Eg
“Licence to deal” (s 32)
Prohibition on assignment
Effectiveness? (s 79)
Remedies
Ability to include contractual remedies (s 110)
Ability to contract out of statutory remedies (s 115)
Note: SA is not registrable
Cf registration of financing statement (Session 4)
Financing statement may be registered before SA executed
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The security agreement (continued) * coverage (s 20(2))
SA covers collateral if:
SA evidenced by writing (definition? (s 10) Doka Formwork) that is:
Signed by grantor (see ss3) OR
Adopted or accepted by grantor by appropriate act or omission
Ie reasonably appears to be done with intention of adopting or accepting the writing
Doka Formwork; Citadel Financial Corporation
[writing to be adopted [14)];
AND
Writing contains:
Description of particular collateral
OR
Statement that SI is taken in all of present and after acquired property
OR
Statement that SI is taken in all of such property EXCEPT specified items or classes
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Discussion Problem
Is the security interest enforceable in the following situations:?* Against whom?
V sells an industrial furnace to P under a ‘proposal’ that contains a reservation of title clause. P has not signed the proposal. P delivers to V a signed purchase order referring to the proposal.
Bank manager says to customer that bank will advance a loan if customer provides security. Customer agrees orally to grant a security interest over machinery but does not sign any security agreement. The bank registers a financing statement. Customer then approaches a finance company and executes a security agreement in relation to the same machinery in favour of the finance company. The bank subsequently attempts to enforce its security interest.
* Widdup & Mayne (pp 93-95)
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4. Perfection
Major ‘new’ concept
Central concept: Bank of Montreal v Innovation Credit Union at [21]
‘optimal level of protection’: Graham v Portacom NZ at [12], Hamersley at [108]
Position in the analysis?
Purpose?
Why does the secured party perfect?
………. (s 267)
………. (s 43)
……….. (s 55)
What is the underlying statutory rationale?
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Approach to achieving perfection
Distinguish from approach to registration of charges in previous regime under Corporations Act 2001 (Cth)
Why did a secured creditor register?
At what stage did the secured creditor register?
Consider impact of ‘effective registration’ under PPSA
Registration of a financing statement (NOT a security interest)
One means of taking one step towards perfection
Perfection as a ‘state of being’
Generally 3 criteria for perfection (s 21)
Attachment (s 19: see above);
Enforceability against 3rd parties (s 20: see above)
One of 3 steps: effective registration/possession/control
Order of steps? (s 21(3))
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Meaning of perfection?
Relevant provisions: s 10 (dictionary); s 21(‘the main rule’)
Methods
Statutory mechanism (s 21(1)(a))
Temporarily perfected (ss 33-40)
Eg s 33 (proceeds); s 34 (transfer of collateral); s 35 (goods returned for dealing)
‘Otherwise perfected’ (Session 3)
Eg s 33 (proceeds); s 100 (commingling)
Secured party takes action to achieve status (s 21(1)(b), s 21(2))
Security interest is attached
Security interest is enforceable against 3rd parties
Take one of 3 steps
Register effectively OR
Have possession OR
Have control
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Meaning of perfection (continued)
Availability of steps
for any collateral - register or have possession (BUT is it any collateral?)
For specified collateral (s 21(2)(c)) – have control
Choice?
Ability to protect yourself as a potential secured party
Register a financing statement
Note: s 151: must not apply to register unless believe on reasonable grounds that person described as secured party is or will become a secured party
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Perfection by possession of collateral
Rationale for recognition?
Meaning of taking possession (ss 10, 24)
Scope of ‘possession’
Common law meaning: actual or constructive
PPSA meaning?
‘meaning affected by s 24’ (s 10)
Possession is exclusive: Flown; Sperry (cf on receivers: Knauf)
Possession of certain documents may be sufficient eg share certificates (s 24(6))
Possession of goods held by a bailee (s 22)
Possession through enforcement action insufficient
s 21(2)(b). See also ss 123; 126; Cf s 20(1)(b)(i);
Sperry; Knauf
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Perfection by control of collateral
Specified types of property (s 21(2)(c))
ADI account
Intermediated security
Investment instrument
Negotiable instrument not evidenced by certificate
Right evidenced by certain letters of credit
Satellites and other space objects
Meaning of ‘control’ for particular types of property (ss 25-29)
See in particular:
s 25 (ADI account)
s 27(1)-(3) (certificated investment instruments)
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Perfection by registration with respect to collateral
Applies to any collateral
Including proceeds in some circumstances (s 33) (See Session 3)
‘effective registration’ (Session 4)
s 10, Part 5.4 – ss 160-168
s 164 – general rule – defective registration
Often done as a practical matter in conjunction with other steps
Examples?
Security interest over shares (possession or control)
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