Personal Properties Securities 15 hours
Donken
19bPPSPGSession3.pptxCopyright notice
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Secured Transactions in Commercial Law Session 3
Presented by
Professor Sheelagh McCracken
University of Sydney Law School
1 November 2019
Assessing the priority and reach of a security interest
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Scope of Session 3
Reminder: development of an analytical framework
Priority of a security interest
Some initial questions
Priority criteria
Default rules
Priority through perfection by control
Priority through a (duly perfected) PMSI
Subordination
Determining the time for resolving priority
Reach of a security interest
Accessions and processed or commingled goods
Taking free of a security interest
Proceeds
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1.Reminder: An analytical framework in a rules based system
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)
‘Special priority rules: eg
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. Priority of a security interest Some initial questions to consider
How important is priority?
(Saulnier: Session 1; Bank of Montreal v Innovation Credit Union: Session 2)
Where does issue of ‘priority’ fit? (see next slide)
What has to be checked before determining priority dispute?
What does ‘priority’ mean in this context?
PPSA: Part 2.6, esp Divisions 2-4 (see Guide in s 54)
PPSA terminology (cf Canadian PPSAs)
Priority
Subordination
Distinguish
Accessions and commingling (Parts 3.3, 3.4)
Taking free rules (Part 2.5)
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Priority Criteria Background: schemes for determining priority
At common law
2 relevant factors
…..
…..
Qualifications eg
…..
…..
Under a statutory scheme eg Corporations Act 2001 Ch 2K (repealed)
Starting point?
Date of registration
Qualifications? eg
position of floating charge holder
impact of notice?
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Priority criteria Under PPSA
Various sets of rules
Default rules
Special rules
Control
PMSI ‘super-priority’
Others
Eg Div 5: creditors receiving payment of debt; acquirers of negotiable instruments, chattel paper, negotiable doc of title
Div 6 s 74: execution creditors
Subject to agreement (‘subordination’: see s 61)
May catch security interests arising other than under the PPSA
See s 8(1), (2), s 73
Complex rules – always look at the Act itself!
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Default Rules (a) application (s 55)
| A | B | Priority criterion? | PPSA |
| perfected | unperfected | S 55(3) | |
| unperfected | perfected | S 55(3) | |
| unperfected | unperfected | S 55(2) | |
| perfected | perfected | S 55(4) |
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Note: Determining order of priority time for application of default priority rules (s 55(4), (5), (6); s 56)
Security interests must be continuously perfected (ss 10; 56)
Perfected at all times
May be perfected in 2 or more different ways
Includes temporary perfection (see s 21(1)(a) ‘perfected’)
Earliest of:
Registration
Perfection by taking possession or control
Temporary perfection or otherwise perfected by force of the Act
See The Healy Holmberg Trading Partnership v Grant
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Default Rules (b) Breadth
See Robert Simpson Co v Shadlock, citing McLaren with respect to the Canadian position
“The general rule of priority is built around the concepts of attachment and
perfection. No other statute has ever attempted to state even a single priority
rule, let alone one of such general application as s 35 [of PPSA Ont; Aus s 55]
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Default Rules (c) General queries
How relevant is legal/equitable nature of the competing security interests?
Bank of Montreal v Innovation Credit Union
How relevant is title?
How relevant is notice? Robert Simpson Co v Shadlock
What happens if both attach at the same time?
Royal Bank of Canada v Radius Credit Union
How relevant are general equitable principles? KBA Canada Inc
What happens about the proceeds? (s 32(5))
What happens if new advances are made? (s 58)
What happens if a security interest is transferred? (s 60)
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Default rules (d) More complex queries
What happens if collateral is transferred by grantor (eg of GSA)?
Assume: security interest continues & transferee does not take free: s 32; s 34 applies
(Priority position ultimately dependent on whether reperfected within period of temporary perfection (s 34))
Transferor-granted interest has priority over transferee-granted interest if former interest was perfected immediately before the transfer and has been continuously perfected (ss 66/67)
Meaning of ‘transfer’ in s 34?
Eg: What happens if the collateral is dealt with:
Under a lease that is a security interest?
Under a lease that is not a security interest?
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Priority through perfection by control
Rationale?
Only certain property capable of being controlled (s 21(2)(c))
Meaning of ‘control’: s 10; ss 25-29
For purposes of this course: ss 25, 75; s 27(1), (2), (3)
Rule: s 57
Control ‘trumps all’: s 57(1), (3)
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Priority through a (duly perfected) PMSI (a) Introduction to PMSIs
Benefit of PMSIs? – ‘super-priority’
Rationale?
………
………
Status of PMSI plus satisfaction of procedural requirements
Requirement of same grantor
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(b) Types of PMSIs
Types of PMSIs? (s 14(1))
…….
……. (see Unisource Canada Inc v Laurentian Bank of Canada; ACCS v Pettyjohn)
…….
…….
Exclusions? (s 14(2))
Refinancing issues ? (s 14(5))
See Samwise Holdings Pty Ltd v Allied Distribution Finance Pty Ltd
Mixed securities (s 14(3), (4)) (beyond scope)
Application of payments to particular obligations (s 14(6) (beyond scope)
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(c) Procedural requirements to obtain ‘super-priority’
PMSI v non-PMSI (s 62)
Perfected by registration
Time limits for registration
Inventory or its proceeds
Property (or proceeds) other than inventory
Statement that the security interest is a PMSI
(subject to s 64 (see Proceeds)
Competing PMSIs (s 63)
Which PMSIs?
Timing for perfection
Inventory
Non-inventory
Nb special priority interests:
priority of crops (s 85) and livestock (s 86) (beyond scope)
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Subordination
Purpose of subordination agreement? (s 61)
Effectiveness?
Question of construction
Is collateral subject to subordination?
Nature and effect of subordination
Is creditor within the scope of the subordination?
Chiips v Skyview Hotels
Gibbston Downs Wines Ltd v Perpetual Trust Ltd
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Determining the time for resolving priority
Case law?
‘when security interests “come into conflict”’
Sperry Inc v Canadian Imperial Bank of Commerce (1985)
Gibbston Downs Wines Ltd v Perpetual Trust Ltd (2013)
Meaning?
Appointment of receiver? Liquidator?
Commencement of enforcement action?
Other?
Alternative view?
When proceeds from realisation are available for distribution
‘more consonant with the principles, structures and operation of the PPSA’ (Cuming, Walsh & Wood)
Statutory interpretation
The ‘undignified race to the registry’
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DISCUSSION PROBLEMS*
1 .‘..on 1 January, to secure payment of a loan, a debtor, signs a security agreement giving the bank a security interest in his boat but retains possession of his boat. On 15 January, the debtor signs a security agreement giving a finance company a security interest in the same boat to secure payment of another loan and, on the same day, the finance company registers a financing statement. The debtor defaults under both security agreements.’ Who has priority?
Would the position change if the finance company knew of the existence of the security interest?
What would be the position if the bank registered on 5 January?
* (Scenarios 1 and 2 are taken from Widdup & Mayne, Personal Property Securities Act A Conceptual Approach, LexisNexis Butterworths Wellington Rev ed 2001 pp 108- 109 and Scenarios 3 and 4 are taken from Cuming, Walsh & Wood, Personal Property Security Law, Irwin Law Inc Toronto 2005 p 311, pp 313-314.)
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Discussion Problems (continued)
2. ‘….secured party A registers a financing statement against a debtor on 1 June and secured party B registers a financing statement on 1 July against the same debtor and the same collateral. On 2 July, the debtor signs a security agreement granting B a security interest in the collateral described in the financing statement and B advances a loan. Secured party A advances a loan and intends to get the debtor to sign a security agreement, but before that occurs, the debtor defaults under B’s security agreement and B seizes the collateral.’ Does B have priority?
3. ‘SP1 and D are in loan negotiations. D agrees to give SP1 a possessory security interest in its collateral and leaves the collateral in the possession of SP1 pending the successful completion of the loan negotiations. D then grants a security interest in the collateral to SP2 who perfects it by registration. SP1 and D subsequently enter into a loan agreement.’
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Discussion Problems (continued)
4. SP1 and SP2 are both granted security interests in the same collateral by the same debtor. SP1 perfects by possession on 1 January…. SP2 perfects by registration on 1 February…. SP1 perfects by registration on 1 March…. and thereafter releases possession of the collateral to the debtor.’
What would be the position if ‘SP1 perfects by registration on 1 January….. and SP2 by registration on 1 February….. SP perfects by possession on 1 March….. SP1’s registration thereafter lapses or is discharged.’
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Discussion Problems (continued)
5. ‘Example 12: On Day 1, SP1 takes a security interest in all Company’s present and after-acquired personal property and registers a financing statement. On Day 2, SP2 negotiates the sale to Company of a printing press for use in Company’s publishing business. Company agrees to make a 20 per cent down payment on the purchase price and to pay SP2 the balance by installments under a Romalpa agreement. Company borrows the amount of the down payment from SP3 and gives SP3 a security interest in the press. SP3 registers a financing statement on Day 3. SP2 registers its financing statement on Day 5. Company defaults and SP1, SP2 and SP3 all claim the press.’
6. Example 13: On Day 1, SP1 takes a security interest in all Company’s present and after-acquired personal property and registers a financing statement. On Day 2, SP2 negotiates the sale to Company of a printing press for use in Company’s publishing business. Company borrows 60 per cent of the purchase price from SP2 and gives SP2 a security interest in the press. Company borrows the remaining 40 per cent of the purchase price from SP3 and gives SP3 a security interest in the press. SP3 registers a financing statement on Day 3. SP2 registers its financing statement on Day 5. Company defaults and SP1, SP2 and SP3 all claim the press.’
(Examples in Q 5 and 6 are taken from Duggan, ‘Romalpa Agreements Post –PPSA’ (2011) 33 Sydney Law Review 645.)
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3. Reach of a security interest
3 initial questions to consider
Where does issue of ‘reach’ fit? (see next slide)
What has to be checked before determining the reach?
What does ‘reach’ mean in this context?
How may reach of security interest be extended?
Accessions (Part 3.3)
Commingling (Part 3.4)
Proceeds (ss 31-33)
How may reach of security interest be restricted?
Taking free of security interests (Part 2.5)
Terminology
Points to note
Range of circumstances
Statutory right of subrogation
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Reminder: An analytical framework in a rules based system
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)
‘Special priority rules: eg
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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(a) How may reach be extended? Overview
Security interest in goods
Meaning of goods (s 10)
Goods may become
An ‘accession to other goods’ (Pt 3.3; Guide: s 87); or
An ‘unidentifiable part of a larger product or mass’ (Pt 3.4; Guide s 98)
Compare common law position
Roman law classification
Accessio; commixtio; confusio; specificatio
Purpose of common law rules?
Contrast with purpose of PPSA provisions
See Guide in s 87 and s 98
“readjustment of rights” of parties?
NB: SI in accession or in processed or commingled goods may lose out to person taking free (notes to ss 88, 99)
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Scenarios? (See Replacement Explanatory Memorandum)
Grant A borrows money from Finance B to buy a new motor for its pump, which is placed into the pump. Before Finance B registers its security interest [sic] in the motor on the PPS Register, Grant A offers the pump as security for a loan from Bank A, which advances the money and perfects its security interest in the pump through registration.
Grant A owns a large telescope at its observatory. Bank A has a registered security interest [sic] in Grant A’s telescope. Grant A orders a replacement mirror from Supplier S. Supplier S supplies and installs the mirror in the telescope before the terms of payment are agreed. Grant A and Supplier S later agree that payment for the mirror is to be made within 30 days of the installation and [gives] Supplier S a security interest in the mirror. ….Grant A defaults on its obligations to Bank A. Bank A seeks to enforce its interest in the telescope.
Grant A is a furniture maker. Finance A has a perfected security interest of $1,000 in glue owned by Grant A. Finance B has a perfected security interest of $10,000 in timber owned by Grant A. Grant A uses the glue and timber to make a table. The value of the glue that Grant A uses to make the table on the day that Grant A makes the table is $50. The value of the timber is $200. Finance A and Finance B are the only persons with security interests in the table. The market collapses and the table is worth $100. What would Finance A and Finance B be able to recover on enforcement of their security interests?
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(i) Accessions Meaning
Meaning at common law
Two issues:
Incorporation of one chattel into another, but still identifiable
Progeny of animals
Tests? ‘injurious removal’ for chattels
Distinction between principal (dominant) chattel and minor chattel
Compare meaning under PPSA
Differences?
Exceptions?
Examples?
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Accessions Steps in the analysis
SI continues in the accession (s 88)
Default rule (s 89), subject to:
where SI has attached at time of accession, but not yet perfected (s 90)
Position where SI attaches only after goods become an accession (s 91)
Rationale?
Note provisions re enforcement (see also Remedies: Session 4)
Minimum damage on removal (s 92)
Entitlement to reimbursement for damage (s 93)
Provisions as to when notice is required (s 95)
Person entitled to whole who is subordinate may retain accession if:
Obligation to higher ranking SI is performed or
SP is paid value of accession at time payment is made (s 96)
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(ii) Processed or commingled goods When does it happen? Impact?
When does it happen?
Goods lose identity
‘unidentifiable part of a larger product or mass’ (s 98)
Position at common law
Commingling; specification
Position under PPSA
Goods subsequently become part of a product or mass (s 99)
Impact of PPSA?
SI in goods continues in product or mass if identity of goods is lost in the product or mass
‘lost’ if not commercially practical to restore
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Processed or commingled goods Priority Conflicts
Conflict with person who has SI in the whole
Normal default rules (s 55)
BUT perfection of SI in those goods treated as perfection of SI in product or mass, but only for purpose of priority default rules (s 100)
Limit on value (s 101)
Conflict with other SPs with continuing SIs (s 102)
Perfected v unperfected
All perfected – sharing
All unperfected – sharing
Priority of perfected PMSI that continues in product or mass (s 103)
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(b) How may reach be restricted: Taking free of a security interest: Overview
General concept (Diagram of transactions)
Starting point (s 32)
On dealing giving rise to proceeds (eg sale, lease),
SI continues in collateral unless
Disposal authorised by SP
Agreed that dealing would extinguish SI
SI attaches to the proceeds (unless contrary agreement)
SI is temporarily perfected (s 34), BUT see s 34(3)
Meaning (see Guide in s 41: Part 2.5)
’taking free’
Not ‘extinguishment'
‘Priority’ rule?
Range of purposes
Statutory right of subrogation (s 53)
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Taking free: Terminology and Points to note
Terminology
Value/ new value (s 10)
Actual knowledge/ constructive knowledge (s 10; ss 297/298)
Points to note
Type of knowledge of breach of security agreement required
Actual or constructive?
Value or new value to be given
Take free of SI or of SI given by seller or lessor
Who can take free?
Generally applies to a buyer or lessee
Not to a secured party (s 42)
Wider- taking currency, investment instrument or intermediated security
Which property?
Personal property? Motor vehicles? Specific? Eg investment instrument
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Taking free: Range of circumstances
11 circumstances (ss 43-52)
More than 1 rule may apply
Balancing of risk
Underlying principles? (see Boxall)
SP insufficiently diligent
Impractical for purchaser to become aware of SI
Preservation of market integrity
Protection of low value personal items
Exceptions?
Focus
S43 (unperfected SI)
S 52 (temporarily perfected SIs)
S 47 (low value personal property)
S 46 (ordinary course of business)
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Taking free: issues arising out of PPSA s 46
Meaning of:
Buyer?
Camco Inc v Olson Realty
Royal Bank of Canada v 216200 Alberta Ltd
Spittlehouse v Northshore Marine Inc
Stockco Ltd v Gibson
Warehouse Sales Pty Ltd v LG Electronics Pty Ltd
Ordinary course of the seller’s or lessor’s business of selling or leasing personal property of that kind?
See Gedye
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Taking free: Discussion Problems (REM)
G obtains secured finance from Bank A and purchases a forklift. Bank A does not register a financing statement. G then sells it to B. Can B take free of the security interest?
A is primarily in the business of leasing repairing and rebuilding cranes. A’s practice is to sell a crane if it becomes obsolete, deteriorated beyond its useful life, or difficult to lease. A sells one of its cranes to B. The sale is the only sale that year. Would B take free of any security interest?
Bank A takes a security interest in goods owned by G, arranging for a bailee to possess the goods on its behalf. The property is returned to G for sale. G, in breach of the security agreement, sells the goods to C two days later. Would C take free of the security interest?
Y buys an antique chair at a garage sale for $4,000. He does not believe the market value to be more than $5,000 and is not aware that similar chairs are selling for $6,000 at the local antique shop. Would Y take free of any security interest?
Would the position be different if he was aware of the chairs at the local antique shop?
Would the position be different if the object he bought was a chainsaw that is valued at $2,000 and is generally available from stores at $3000?
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(c) Proceeds Introduction
New or familiar concept?
Compare pre-PPSA arrangements
Floating charge
Retention of title
Statutory right to proceeds consequent on security interest: s 32(1)(b)
Distinguish ‘following the collateral’ (s 31(1)(a))
Distinction between security over property as original collateral and property as proceeds
Advantages of proceeds claim?
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References in previous topics?
Attachment: on a dealing giving rise to proceeds
attachment to proceeds, subject to contrary agreement (s 32(1)(b))
Enforceability against 3rd parties
irrespective of lack of description in security agreement(s 20(6))
Perfection of security interest in proceeds
Relevant step (s 21(1)(b))
Automatic perfection (s 21(1)(a))
‘otherwise perfected’: SI in original collateral perfected by reg
With complying description (s 33(1)(a))
With appropriate coverage (s 33(1)(b))
If proceeds are of a particular type (s 33(1)(c))
Temporarily perfected (s 33(2))
Priority
Default rules: Time of registration, possession or perfection (s 32(5))
PMSI: s 62 super-priority extends to proceeds (subject to s 64)
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Meaning of ‘proceeds’
Definitions: ss 10, 31
notion of exchange or substitution
Different to accessions, commingling
Key elements
Identifiable or traceable personal property
Identifiable?
Traceable?
Nb s 31(2)
See ACC of Sask v Pettyjohn
Types of personal property (s 31(a)-(e))
Grantor to have an interest in the proceeds (or power to transfer rights in the proceeds) (s 31(3))
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Discussion Problems (examples from Cuming, Walsh & Wood (2nd ed 2012) Ch 11
SP takes a security interest in D’s truck. D sells the truck to B and takes an automobile in trade. D later sells the automobile to C and takes a snowmobile in trade. Does SP have a claim on the snowmobile?
SP takes a security interest in D’s truck. D uses the truck to generate revenue through the transportation of goods. Does SP have a claim on the profits?
SP takes a security interest in a drill press. D sells the drill press to B1. B! is unable to assert any of the buyer-priority rules, so that SP has the right to enforce the security against it. B1 later sells the drill to B2 and receives a router in trade. Does SP have a claim on the router?
SP takes a security interest in gold plate. That gold plate is applied to jewellery. Does SP have a claim on the jewellery?
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