A wise man once said that there is nothing certain in this world, except for death and taxes. For all his timeless wisdom, Benjamin Franklin forgot to mention life’s third certainty – paperwork.
Though it is often tempting to overlook and push aside, filing the proper paperwork is essential. Especially when it comes to security interest. A business that grants a loan and obtains a security interest in the debtor’s personal property cannot legally enforce its rights against a defaulting debtor unless the interest is perfected. The most common way of perfecting a security interest is by registering it in the Personal Properties Securities Register (PPS Register). This is a publicly accessible register where secured parties can declare their interest in collateral by lodging a financing statement. Importantly, the date of registration is central to determining which party has priority enforcing their rights in circumstances where multiple parties have security interest in the same collateral.
Generally, perfected interests have priority over unperfected interests in the event that a debtor company goes into liquidation, voluntary administration or is subject to a deed of company arrangement.
In Re Maiden Civil Pty Ltd [2013] NSWSC 852 we find a cautionary warning against procrastinating the perfection of a security interest. In this case, Queensland Excavation Services Pty Ltd (QES) entered into a lease agreement to provide three Caterpillar excavators to Maiden Civil (P & E) Pty Ltd (Maiden). QES did not register itself as a lessor of the vehicles in the equivalent of today’s PPS Register despite the lease agreement affording it security interest in the property.
Maiden then borrowed funds from Fast Financial Solutions Pty Ltd (Fast) and secured the loan with personal property security interest in the three excavators. Unlike QES, Fast was prudent in registering its security interest in the collateral.
Shortly thereafter, Maiden defaulted on the loan and Fast appointed receivers who took possession of the three excavators. One of the main issues in the case was whether QES’s security interest was superior to Fast’s security interest.
The Court held that both QES’ lease agreement and Fast’s financing agreement gave rise to legitimate security interests in the excavators. However, Fast’s security interest was perfected by virtue of its registration, while QES’ security interest was not registered and therefore remained unperfected. Under s 55(3) of the Personal Property Securities Act 2009 (Cth) (PPS Act), Fast’s security interest obtained priority over QES despite the latter being the original owner. Fast’s receivers were entitled to retain possession and enact the sale of the vehicles in order to repay the loan.
Learning from QES’ Mistakes:
QES’ mistake was completely avoidable, yet the case shines a light on the strictness with which the principles or priority are applied. Therefore, it is paramount that you perfect your security interest as soon as possible.
In cases where only one party has security interest in collateral, s 267(2) of the PPS Act vests this security interest, if unregistered, in the grantor company immediately before its winding up, voluntary administration or execution of a deed of company arrangement. This means that if your security interest is unregistered then:
- It is unenforceable in the event of debtor default; and
- It will not have priority against a secured party who has perfected their security interest in the same collateral.
Perhaps having read this article, you have come to know the fourth and final certainty in life: It is certainly foolish to not perfect your security interest!
Disclaimer: This publication contains comments of a general and introductory nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional legal advice. You should always speak to us and obtain legal advice before taking any action relating to matters raised in this publication.
