LAWS3484 - FInal Exam Note

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Effectiveness of a Security Interest

Attachment and perfection have been characterised as ‘central concepts’ of PPSA. Perfection in particular has been described as:

The process by which the holder of a security interest obtains the optimal level of protection offered by PPSA.

Graham v Portacom New Zealand Ltd [2004]

Under the PPSA, the protection depends on:

PPSA 2012 (Cth) 19 Attachment

20 Enforceability against third parties

21 Perfection – whether by force of the Act or by taking a requisite step, the step being the taking of possession or control of the collateral or making an effective registration.

Both concepts of attachment and EA3P are generally pre-requisites to perfection – by themselves, they are insufficient to offer the optimal protection, although:

• If the security interest is ‘attached’ – enforceable against the grantor and

• Compliance with EA3P – prevents the SI from being rendered unenforceable against a third party for lack of appropriate corroboration.

Consequences of non-perfection

1. The security interest risks loss of priority if not actually perfected;

2. Unperfected security interest may vest in the grantor on insolvency;

3. 3^rd party in certain circumstances take free of tan unperfected SI on buying or leasing the property.

Attachment

Attachment represents the time at which the secured party obtains an interest in the property. The SI is enforceable against the grantor only if the security interest has attached to the collateral.

PPSA 2012 (Cth)

19 Enforceability of SI against grantors - attachment Attachment required for enforceability

(1) A SI is enforceable against the grantor in respect of particular collateral only if the SI has attached to the collateral.

Attachment rule

(2) A SI attaches to the collateral when:

(a) The grantor has rights in the collateral, or power to transfer rights in the collateral to the SP; and

(b) Either:

(i) Value is given for the SI; or

(ii) The grantor does an act by which the SI arises.

Time of attachment

(3) Sub-s (2) does not apply if the parties to a SA have agreed that SI attaches at a later time, in which case the SI attaches at the time specified in the agreement;

(4) To avoid doubt, a reference in SA to a floating charge is not a reference to an agreement that the SI created by the floating charge attaches at a time later than provided under sub-s (2).

Goods leased, bailed, consigned or sold under a conditional sale agreement

(5) For the purposes of para (2)(a), a grantor has rights in goods that are leased or bailed to the grantor under a PPS lease, consigned to the grantor, or sold to the grantor under a conditional sale agreement (including an agreement to sell subject to retention of title) when the grantor obtains possession of the goods.

(6) Sub-s (5) does not limit any other rights the grantor may have in the goods.

Criteria for attachment

SI is said to ‘attach to collateral’ on the satisfaction of TWO criteria specified in PPSA s19(2).

• While the time at which the criteria are satisfied may coincide with the date of execution of written agreement, not necessarily always.

• It is possible for the SI to attach without any written agreement.

Criteria 1: Value is given by the secured party or grantor “does an act by which the SI arises

• The more straightforward criteria.

• ‘Value’ – includes not only consideration sufficient to support a contract but also antecedent debt or liability (s10).

• ‘Act’ – satisfied if grantor enters into a security agreement.

Criteria 2: Grantor must have ‘rights in the collateral’

• More problematic, phrase is undefined.

• ‘Rights’ include title, and ‘possession’ (s19(5)).

• Important to note that the rights of grantor under s19(5) are relevant:

o Not simply vis-à-vis the lessor, bailor or consignor or vendor under transactions specified in the subsection, o But also further SP seeking to take (or taken) a SI over

the grantor’s property, typically the grantor’s bank under GSA.

• Wording suggests – possession is also sufficient to enable a SI of 3^rd party such as the bank to attach to the collateral.

o I.e. lessor, bailor, consignor or vendor finds itself in a priority dispute with the bank as a 3^rd party.

Conceptual issued raised by s19(5)*****

Resulting characterisation of the grantor’s rights

• CAN & NZ: authority suggesting interest of lessee under PPS lease – grantor’s rights is a statutory proprietary interest, with the grantor having deemed ownership.

• This deemed ownership approach has been followed by NSWSC [ Re Maiden Civil]

• Whether this additional characterisation of rights as proprietary in nature is necessarily required under the terms of Australian PPSA is open to argument

• Whittaker report favours treating grantor as the owner, yet it is recommended that the stakeholders be provided with an opportunity to present such arguments.

Whether the possession of goods obtained by the grantor by means other than pursuant to a transaction specified in s19(5) is sufficient for SI to attach to the goods.

• E.g. thief with stolen goods – legal interest of possession.

• One argument: thief has insufficient rights for the purposes of s19 and hence that the bank cannot acquire a SI.

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• In the meantime, on Date 3, Grantor gives SP2 a security interest in the suits and SP2 registers a F/S on the same day.

• Date 4 marks the end of 5 business days from Date 2.

Grantor defaults and SP1 and SP2 both claim the suits.

• Applying s22(2), SP1’s security interest is temporarily perfected for the five business days from Date 2 to Date 4, and thereafter it is perfected by possession.

• Applying ss 55(4) & (5) SP1’s priority time is Date 2, the date Carrier issued the bill of lading; SP2’s priority time is Date 3 and so SP1 has priority over SP2.

Temporarily perfected v perfection by possession – Example Grantor is a clothing manufacturer.

• On Date 1, Grantor gives SP1 a security interest in 200 men’s suits stored in Melbourne warehouse

• On Date 2, Grantor delivers the suits to Carrier for shipment to Grantor’s Sydney premises and Carrier issues a bill of lading. SP1 takes possession of the bill of lading on the same day.

• On Date 4, Grantor negotiates the sale of the suits to a Sydney retailer and SP1 returns the bill of lading to Grantor so that Grantor can take delivery of the suits from Carrier.

• On Date 5, SP1 registers a F/S. Date 5 marks the end of 5 business days after Date 4.

• In the meantime, on Date 3 Grantor gives SP2 a security interest in the suits and SP2 registers a F/S on the same day.

Grantor defaults and SP1 and SP2 both claim the suits.

• SP1’s security interest is initially perfected by possession on Date 2 when it takes possession of the bill of lading.

• Applying s35, it is temporarily perfected from Date 4 to Date 5, and is perfected by registration thereafter.

• Since there is no break in perfection, SP1’s security interest is continuously perfected from Date 2, notwithstanding the changes in the method of perfection, and so its priority time is Date 2.

• SP2’s priority time is Date 3 and so SP1 has priority over SP2.

Note: s55(6) provides that a time is priority time for a security interest only if the security interest remains continuously perfected.

Section 56 provides that a security interest is continuously perfected if it remains perfected at all times even if there are changes in the method of perfection.

Where both security interests are unperfected and order of attachment becomes priority criterion,

• Issue arises where the unperfected security interests both cover property to be acquired in the future.

o As both interests will attach when the grantor acquires rights in the property – s19(2)

Competing unperfected interests– Example

• On Date 1, SP1 takes a security interest in Grantor’s ALLPAAP and registers a F/S on the same day.

• On Date 2, SP2 takes a security interest in Grantor’s racehorse and registers a F/S on the same day.

Grantor later defaults and SP1 and SP2 both claim the racehorse. Their dispute ends up in litigation and the court finds that both parties misstated Grantor’s details in their F/S, so their registrations are invalid.

• Since both registrations are invalid, both interests are unperfected and so priority depends on the order of attachment – s55(2).

• On the facts it seems that SP1’s security interest attached on Date 1 and SP1 has priority.

Competing unperfected – Example 2

• On Date 1, SP1 takes a security interest in Grantor’s ALLPAAP and registers a F/S on the same day.

• On Date 2, SP2 takes a security interest in Grantor’s all present and after-acquired accounts and registers a F/S on the same day.

• On Date 3, Grantor sells goods to Customer on 90-day terms.

Grantor later defaults and SP1 and SP2 both claim Customer’s account. Their dispute ends up in litigation and the court finds that both parties misstated Grantor’s details in their financing statements and so their registrations are invalid.

• Here, the security interests attached simultaneously on Date 3 – which was when Grantor acquired rights in the collateral

• No provisions in PPSA – courts must turn to common law principles – priority turns on the respective dates of the security agreements.

Is there a time for when priority dispute has to be determined?

Is there a time after which it is not possible to register?

• NZ: suggests that relevant time may be “the time when the security interests come into conflict -Gibbston Downs Wines Ltd v Perpetual Trust Ltd [2012] approving Sperry Inc. v Canadian Imperial Bank of Commerce

• Canada: (some commentators) it should be possible to perfect up until sale of collateral – “it is not until enforcement proceedings are fully executed that priorities become fixed and crystallised by the extinction of the security interest”

‘Same grantor’ requirement?

• S55 refers to interests in ‘same collateral’ but makes no reference to whether it must be given by ‘same grantor’.

• Issue of whether the omission is deliberate – resulting in the provision catching further transactions

Situation – different grantors?

Situation where lease (not PPS lease) entered into between lessor and lessee, both of whom have given a GSA over their P&F assets to respective banks.

• If lessee’s bank claims the property, the owner relies on its ownership interest which is not a security interest, as lease is not a PPS lease (and not finance lease)

• However, it could be argued that a claim by lessor’s bank is in competition on the basis that both banks have ‘security interests in the same collateral’

• Such a result would seemingly be controversial.

Double grantor examples Double Grantor– Example

• On Date 2, Grantor 1 gives SP1 a security interest in its printing press and SP1 registers a F/S.

• Previously, on Date 1, Grantor 2 had given SP2 a security interest in Grantor 2’s ALLPAAP and SP2 registered a F/S on the same day.

• On Date 3, Grantor 1 sells the printing press to Grantor 2.

The sale is outside the ordinary course of Grantor 1’s business.

• On Date 4, SP1 learns about Grantor 1’s sale of the printing press. It immediately registers a new F/S incorporating Grantor 2’s details and claims the printing press from Grantor 2. SP2 disputes SP1’s claim.

• SP1’s security interest ceases to be perfected by registration on Date 2 when Grantor 1 sells the printing press.

• However, it is temporarily perfected from Date 2 until Date 4 when it is again perfected by registration – s34.

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will have priority over SP1, even though SP1 was the first to register.

PPSA 2012 (Cth) 14 Meaning of PMSI

(1) A PMSI means any of the following:

(a) Seller’s PMSI: A security interest taken in collateral, to the extent that it secures all or party of its purchase price;

(b) Lender’s PMSI: A security interest taken in a collateral by a person who gives value for the purpose of enabling the grantor to acquire rights in the collateral, to the extent that value is applied to acquire those rights;

(c) The interest of a lessor or bailor of goods under PPS lease;

(d) The interest of a consignor who delivers goods to a consignee under a commercial consignment

14(2) Exceptions – MAKE SURE IT IS NOT EXCLUDED NB: The list does not include Finance Lease / Hire Purchase Agreement – Whittaker views this as a mistake & will be included in amendment of the Act.

However, under the Deemed Ownership View:

• Would argue that hire purchase is amounts to a ‘sale’ and hence will be included under Seller’s PMSI

Canadian cases on ‘Lender’s PMSI’

Unisource Canada Inc v Laurentian Bank of Canada (2000) Facts • Plaintiff supplied paper products to a commercial printing business, the debtor. In the usual course, the printing business would place an order for paper products which the plaintiff supplier would fill.

• The Bank (RBC) lent money in a sale-leaseback transaction involving equipment.

• RBC interest was first in time and the supplier’s second.

• Laurentian Bank (LB) refinanced the equipment.

• Instead of taking an assignment of RBC’s interest, LB paid down the remaining balance of the loan and gave money so the debtor could exercise option to purchase equipment.

• Debtor went bankrupt.

• LB claimed a PMSI.

Issue Upon refinancing, was there an acquisition of new rights – hence effectively granting LB a PMSI?

Held Ontario Court of Appeal found that this was sufficient to allow the debtor to acquire rights in the collateral.

• The debtor acquired title to the collateral (ownership rights)

• LB’s (re)financing did not merely alter the manner in which the debtor financed the press. It enabled PG to acquire further rights in the press that it previously did not have (less than ownership rights ownership rights).

o PG was able to acquire title to the equipment NB Also, the conclusion supports policy reasons –

incentives for banks to refinance.

However, under DEEMED OWNERSHIP view, LB’s interest would not be a PMSI, because there is no acquisition of new rights:

• As PG had deemed ownership, and hence by becoming owners there were no new rights.

Agricultural Credit Corp of Sask v Pettyjohn Facts • Purchase of a herd of cattle – the buyer arranged

a bank loan, secured against the cattle, to finance the purchase and, when there was a delay in the loan funds coming through, obtained interim finance to pay the seller.

• Upon receipt of the loan funds, the buyer used them to repay the interim financier.

Held The court held that the bank had a PMSI, as the buyer applied for the bank loan before making the purchase and, on this basis, the interim finance arrangement and the bank loan were in substance two stages in one overall transaction:

(1) The interim financier loaned the buyer money to enable the buyer to acquire the collateral; and (2) The bank loaned the buyer money to repay the

interim financier.

Therefore indirectly, the bank’s loan enabled the buyer to acquire the loan.

Lender’s PMSI – Example

SP1 has a security interest, perfected by registration on Date 1, in Grantor’s ALLPAAP. SP2 lends Grantor money to purchase a herd of cattle from Seller and takes a security interest in the cattle to secure repayment. SP2 registers a F/S on Date 2. As events turn out, Grantor draws on an alternative source of funds to pay for the cattle and uses SP2’s money for another purpose.

• SP2 has a security interest in the cattle, but it is not a PMSI because Grantor did not apply the value SP2 provided to buy the cattle.

• The result is that in a priority dispute between SP1 and SP2, SP2 does not have the benefit of the PMSI super-priority rule and the default priority rule in s55 applies instead.

PMSI Exception – Example

Grantor runs a publishing business and its assets include a number of printing presses. Grantor sells one of the presses to SP who, in turn, leases the press back to the Grantor for 3-year term.

• SP’s lease gives it a security interest in the press for the purposes of the statute, but the security interest is not a PMSI because it falls under the s14(2) exception.

PPS Leases – Example

Grantor is in the road construction business. On Date 1, SP1 takes a security interest in Grantor’s ALLPAAP and registers a F/S. On Date 2, SP2 supplies Grantor with a steamroller under a 2-year operating lease. On Date 3, Grantor defaults against SP1 and SP2 and they both claim the steamroller.

• The contract between SP2 and Grantor is a PPS lease and so the statute applies on the footing that SP2 holds a deemed security interest – s12(3).

• Statute treats SP2’s interest as a PMSI – hence special priority rules in s61 apply; and provided SP2 complies with the s62 registration requirements, it will have priority over SP1.

NB: if default rules applied, even if SP2 registers a F/S on Date 2, its interest would be subordinate to SP1 if the default priority rules in s55 applied as SP1’s priority time is Date 1.

Procedural requirements

In order to gain benefit of ‘super-priority’, PMSI must comply with further procedural requirements. (If not, default rules apply) A PMSI’s ability to take priority over a non-PMSI depends on:

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• S43(1) provides that a buyer or lessee of personal property

‘takes free’ of an unperfected security interest.

• In case of a lease, the outcome depends on whether the transaction between Grantor and T is an in-substance security agreement, a PPS lease or neither.

• Only when lease is one of the two, T is a ‘buyer’ for the purposes of s43(1) and the provision applies on that footing.

Accounts – example

SP holds an unperfected security interest in Grantor’s accounts.

Grantor later transfers the accounts to T for $10,000.

• Although T is a buyer, s43(1) does not apply – as the transaction between Grantor and T creates a deemed security interest T’s favour -12(3)(a) and s43 does not apply to acquisition of interest in PP if the interest taken is itself a security interest – s42(b).

• S55 applies instead and the result is that T will have priority over SP (if perfected)

o However, given the transaction is actually an outright sale and only a deemed security agreement, ‘priority’

must mean that SP loses its security interest in the accounts altogether and T acquires clear title.

2 transfers – example

SP holds an unperfected security interest in Grantor’s truck.

• On Date 1 – Grantor sells the truck to T1 for $10,000;

• On Date 2 – SP registers a financing statement;

• On Date 3 – T1 sells the truck to T2 for $12,000.

• SP’s security interest was unperfected on the date of the sale to T1 s43(1) applies and T1 takes truck free of SP’s security interest.

o SP’s registration on Date 2 does not affect this outcome.

• T2 also acquires the truck clear title because SP no longer has a security interest in the truck.

2 transfers and temporary perfection – example II SP holds a security interest in Grantor’s truck perfected by registration.

• On Date 1 – Grantor sells the truck to T1 for $10,000.

• On Date 2 – SP accidentally discharges the registration.

• On Date 3 – T1 sells the truck to T2 for $12,000.

• Since SP’s security interest was perfected on date of sale to T1, s43(1) and takes the truck encumbered by SP’s security interest.

• Grantor’s sale to T1 triggers application of s34 SP’s security interest ceases to be perfected by registration on Date 1 and becomes temporarily perfected instead.

• SP’s security interest hence remains perfected despite of its discharge of registration on Date 2.

• However, T2 is protected by s52 – buyer of goods takes title clear of a temporarily perfected security interest.

Section 43 and proceeds – Example

SP holds an unperfected security interest in Grantor’s truck.

• On Date 1 – Grantor sells the truck to T1, taking T1’s computer in part payment with the balance of the price payable in cash.

• On Date 2 (which is more than 5 business days later) – Grantor sells the computer to T2.

• SP’s security interest in the truck extends to the computer as proceeds – s32(1).

• S42(a) – taking free rules apply to both original collateral and proceeds.

• Applying s43(1), T1 takes the truck free of SP’s security interest.

• Similarly, T2 takes the computer free of SP’s security interest.

Issues arising out of Section 46

PPSA 2012 (Cth)

46 Taking personal property free of security interest in ordinary course of business

A buyer or lessee of personal property takes the personal property free of a security interest given by the seller or lessor, or that arises under section 32 (proceeds-attachment), if the personal property was sold or leased in the ordinary course of the seller’s or lessor’s business of selling or leasing personal property of that kind.

Buyer

• Does SOGA apply in determining what is a sale?

Ordinary course of the seller’s or lessor’s business of selling or leasing personal property of that kind?

2 step process

The provision is NOT expressly limited to retailers or to cases where the disputed collateral is inventory in the seller’s hands.

Camco Inc v Olson Realty

According to the decision in Camco, a sale may be in the ordinary course of the seller’s business, even if the transaction is secondary to the seller’s main line of activity, provided that the seller engages in such transactions on a systematic basis.

Ordinary course of business - example

Grantor runs a printing business. SP has a security interest in all the Grantor’s present and after-acquired personal property, perfected by registration. Grantor owns a number of superseded printing presses. It sells one of the presses to T without SP’s authority.

• Printing press is non-inventory commercial property, but this fact alone does not prevent s46 from applying.

• If the sale to T was a one-off transaction, a court is likely to conclude that subs 46(1) does not apply because there is no pattern of dealing on Grantor’s part.

o The transaction is, in effect, a private sale between Grantor and T: Stockco Ltd v Gibson and Stiassny.

• If the Grantor, however, has a practice of selling off its superseded equipment and does so on a fairly regular basis

the court might conclude that the sale to T is in the ordinary course of business even though the transaction is incidental to the Grantor’s main business activity.

Stockco Limited v Gibson v Stiassny

The NZ Court of Appeal held that, courts should not conclude too readily that a sale is in the ordinary course of the grantor’s business.

In other words, the buyer in ordinary course provision should not

‘be interpreted in a way that allows the debtor to make a sudden change of business strategy and thereby broaden the freedom provided by the section (and narrow the protection provided to the secured party by the section’.

A sale to a related company is not necessarily outside the ordinary course of business.

Warehouse Sales case

With regards to the grantor selling it to related company (subsidiary) – the court held that the grantor regularly carried on business this way and it was ‘no less part of its ordinary business

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LAWS3484 - FInal Exam Note

Effectiveness of a Security Interest

Attachment

Criteria for attachment

Conceptual issued raised by s19(5)*****

Is there a time for when priority dispute has to be determined?

Procedural requirements

Issues arising out of Section 46

Buyer

Ordinary course of the seller’s or lessor’s business of selling or leasing personal property of that kind?

Table of Contents

Security Interests - Introduction ... 1

Effectiveness of a Security Interest ... 6

Priority ... 12

Reach of a security interest ... 20

Enforcement ... 28

Insolvency Implications ... 32