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01 Dec 2019

The power (and mess) of security interests

Nifty tricks and common pitfalls of PPSR.

It will be hard for anyone to argue that the Personal Properties Securities Act 2009 (PPSA) has delivered any greater clarity for parties seeking appropriate security over financial dealings and for insolvency practitioners navigating the convoluted piece of legislation. The time, cost and resources still spent by insolvency practitioners and secured parties arguing over the legal interpretation is undoubtedly not what the legislatures intended nor envisaged, but here we are, some seven years since operation still without clear guidance on several issues around security interests.

By no means is this a substantive list of all potential issues, but rather a quick guide to some common areas that may be of interest to those advising and dealing in this space.

Registering against the trust, not the corporate trustee

This one still appears to baffle many, even those who specialise with significant experience in asset financing. Section 153(1) of the PPSA, subregulation 5.5(1) and Schedule 1 of the Personal Property Securities Regulations 2010 (PPSR) specifies that where the grantor entered the agreement as a trustee of a trust holding an Australian Business Number (ABN), the registration must be recorded over the trust’s ABN for it to be valid.

Only recently we came across a matter where a well-known finance company failed to register its security interest over a motor vehicle against the trust’s ABN, despite the finance agreement clearly disclosing that the grantor was a corporate trustee of a trust and the trust’s ABN. Unfortunately, for the finance company, they registered its interest on the Personal Property Securities Register (PPSR) over the company’s Australian Company Number (ACN). We advised the finance company of the defect and our intentions to sell the asset for unsecured creditors’ benefit.

You may wonder if doubling down—registering against both the ABN and ACN—as a solution. I am unaware of specific case law; however consideration must be given to whether a second and arguably unjustified registration may expose the secured party to civil penalties under section 151(1) of the PPSA. For a small extra registration cost it may well be worth running the risk.

Let’s just register and tick all the boxes

On the surface you could consider this sound advice to mitigate risk of your security interest being invalid. However, some registrations may fall under what is considered a “seriously misleading defect” and invalidate the security interest.

Common mistakes that may lead to deeming a security interest invalid are:

  • incorrectly identifying it as a transitional interest

  • incorrectly identifying it as an AllPAAP (All Present and After-Acquired Property) interest

  • incorrectly identifying a security interest as a PMSI (Purchase Money Security Interest)

In fact, we found all three instances above on one file alone, which led to the financiers losing substantial amounts of money to other lower-ranked secured creditors and unsecured creditors.

Nothing trumps a PMSI, right?

Section 64 of the PPSA gives power to allow a financier’s non-PMSI to take priority against a pre-existing PMSI. How can this be?

A hypothetical scenario best illustrates this:

Mr Supplier supplies stock to Ms Retailer and registers a PMSI against Ms Retailer in respect of its security agreement that includes a retention of title clause extending to any stock sale proceeds.

Ms Retailer subsequently sells that stock on credit terms to customers. At this stage, Ms Retailer has not received money from customers (accounts receivable) to pay Mr Supplier for the original purchase.

Mr Retailer then sells its accounts receivable to Mr Financier through a debtor factoring arrangement. Subject to particular conditions being met, Mr Financier could register a security interest against the accounts receivable that would take priority over Mr Supplier’s PMSI.

So, what are these conditions in the scenario above?

Mr Financier must give notice by way of a form approved by the Registrar to all secured parties with a pre-existing PMSI either 15 business days before registration or the day the security interest attaches to the account.

This may leave Mr Supplier exposed and should negotiate additional security from Mr Retailer to protect his exposure.

Tenants vs landlords

In tough retail conditions, tenants find it difficult to meet ongoing overhead costs, with the largest sting being rent.

When tenants negotiate or renegotiate lease terms with landlords, tenants must be aware of what security landlords are seeking to ensure that tenants have the flexibility in dealing with its own assets within the premises. Landlords often include clauses that create security over all tenant’s assets and even prevent the tenant using its own assets for future finance that the tenant may want to leverage.

Depending on what side of the fence you sit on, it is critical that proper consideration is made to the extent and power of PPSA clauses being included in lease agreements.

For more information on this and other insolvency matters, contact your local Worrells principal, or go to our complimentary resources at

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