Security interests perfected by control defeat all other PPSA security interests in the same collateral, but are subject to:

Perfection by control has “super priority” in a similar fashion to PMSIs, although it is much stronger. Perfection by control can defeat security interests perfected in the same collateral that are prior in time, and can even defeat PMSIs, regardless of whether the secured party has knowledge of prior perfected security interests.

From above, perfection by control is only available for six (6) classes of collateral, the most common being ADI accounts, investment instruments (for example, unlisted shares and bonds) and intermediated securities (for example, ASX-listed shares). Perfection by control is also available for letters of credit, negotiable instruments not evidenced by certificate and satellites and space objects.

If two or more security interests are perfected over the same collateral by control, then the first to take control wins².

Security interests perfected by control over original collateral (for instance, shares), attach to proceeds of the original collateral with “control priority” – section 57(2A). An exception is where another security interest is perfected against the proceeds as original collateral (not proceeds) and is perfected by control – section 57(2A)(b).

Priority contest examples involving perfection by control

Diagram 3 (above) is based (as always) on the standard PPS priority diagram, but now an additional lender and secured party, Bank B, lends ten (10) million dollars to the debtor/ grantor D and takes a security interest over all D’s present and after-acquired property on 1 July 2012 after the PPSA has commenced. D has now borrowed from two banks, first Bank A on 1 January 2010, and later Bank B on 1 July 2012. D grants a full security package to Bank A on 1 January 2010, being a fixed and floating charge (security interest over all present and after-acquired property), which includes a security interest over D’s bank account (ADI account).

The fixed and floating charge and the bank account charge held by Bank A are duly registered at ASIC within 45 days. These securities will be transitional security interests and enjoy temporary perfection for up to 24 months until 2014. Given that Bank A’s security interests are registered at ASIC before the PPSA commences, they will be migrated to the PPS Register without Bank A having to do anything. Bank A should, however, assess whether additional registrations are required within the 24 month temporary perfection period to ensure proper perfection of migrated security interests.

July 2012 rolls around and the PPSA has commenced. On 1 July 2012 Bank B lends D money, and takes a security interest over all of D’s present and after-acquired property (transactions 4 and 5 in the diagram), and duly lodges a financing statement and registers that security on the PPS Register, nominating the class of collateral which is all present and after-acquired property.

Assume also that Bank B is the bank at which D holds its ADI account. Bank B does not take a specific security over the ADI account, although the ADI account will be covered by Bank B’s all-assets security interest. Bank B, by virtue of being the account bank at which the ADI account is held, will be perfected over the ADI account by control.

One year later D encounters financial difficulty and appoints administrators. Bank A responds by appointing receivers over all of D’s assets. The remedy of appointing receivers “over the top” of administrators remains and is largely unchanged under the PPSA, but the analysis divides between transitional fixed and floating charges on the one hand, and all-assets (general) security interests under the PPSA on the other hand.

In relation to transitional fixed and floating charges, the remedy of appointing receivers over the top of administrators during the 13 business day decision period under section 441A of the Corporations Act 2001 (Cth) following a grantor entering administration is intended to be preserved, unchanged, following commencement of the PPSA³. This right remains, provided that the fixed and floating charge (Bank A’s security interest in the example):

In relation to PPSA all-assets (general) security interests (Bank B's security interest in the example), the remedy of appointing over the top under section 441A is available if: 

Accordingly, it will be important for PPSA security agreements to be drafted such that they attach to all property over which the grantor can grant a security interest (to capture PPSA Retention of Title Property such as leased assets), in addition to property and interests owned and/or held by the grantor.

Returning to the example, the receivers appointed by Bank A attempt to withdraw money from the ADI account. Bank B has none of it. The receivers appointed by Bank A argue that they were appointed under a prior-dated and prior-perfected security interest, so Bank A has priority over the cash in the ADI account. Bank B counters that despite its security interest being perfected second, and despite Bank B knowing of Bank A and its lending to and security from D before Bank B lent money and took security from D, nevertheless Bank B has priority. Bank B argues that it, as account bank, is perfected by control over the ADI account, which defeats all other security interests regardless of priority time, or knowledge.

Who is correct, Bank A or Bank B? The answer lies in dividing the analysis between transitional security interests and PPSA security interests. Bank A is largely correct. Bank A prevails because perfection by control is subject to transitional security interests such as those of Bank A in our example – section 322A. However, if Bank A’s security interest over the ADI account (Bank B is the account bank) is a circulating security interest, the position becomes complicated, as explained below.

The security interest of Bank A would be subordinated in relation to the ADI account to employee entitlements and any administrator’s lien, upon the (corporate) grantor’s receivership, administration or liquidation, if the ADI account is a current account (not a term deposit)⁷ and Bank A (Bank A is not the account bank) does not have control over the account by virtue of a bank account control agreement or similar (see discussion at paragraph 17.6.10 of Chapter 17 (Perfection)). Current ADI accounts (that can be transacted upon daily) are circulating assets to a secured party who is not the account bank, unless the secured party has taken the authority to operate the account under a bank account control agreement⁸.

The security interest of Bank B may not, however, be subordinated as a circulating security interest over the ADI account provided that Bank B is the account bank at which the ADI account is held, and Bank B has a registration in place that nominates that Bank B has control over the ADI account. Account banks are given this advantage under the PPSA⁹.

The resulting position is somewhat unclear. The better view is that Bank A has priority over Bank B in relation to the ADI account, and then Bank A may suffer some subordination upon D’s insolvency to the extent the ADI account is a circulating asset and there are claims for employee entitlements and the administrator’s lien.

To focus on the second-ranking and most recently-granted security interest held by Bank B, if D, already
in administration, later enters into liquidation (because creditors at the second creditor’s meeting in D’s administration resolve to place D into liquidation under section 439A of the Corporations Act 2001 (Cth)), then Bank B’s security interest is on low risk of being set aside by a liquidator as a preference or other voidable transaction. First, Bank B’s security interest secured new advances to D, in which case it is very unlikely to be a voidable transaction. Second, a year passed following the grant of the security interest to Bank B before D’s administration. The six month periods during which preferential payments¹⁰ and floating charges¹¹ can be set aside would have passed. Even so, from above, Bank B took security
for new advances, so Bank B’s security is unlikely to be a voidable transaction.

Further, there is no risk that Bank B’s security interest would vest in the grantor under section 588FL of the Corporations Act 2001 (Cth) for not being registered within 20 business days of grant because more than six months have elapsed since the grant of the security interest.

Opportunities to lend into existing security structures on a super-priority basis using perfection by control

Provided that the grantor has assets that can be perfected against by control, and existing secured parties have not already perfected their security interests by control over those assets, then secured parties coming along second can lend money, take security interests and perfect by control, and potentially defeat existing first-registered secured parties holding PPSA security interests granted after the commencement of the PPSA. Perfection by control will not defeat transitional security interests – Bank A cannot be defeated by secured parties such as Bank B perfecting their security interests by control following the commencement of the PPSA. Perfection by control defeats other perfected PPSA security interests, including PMSIs, regardless of priority time, and regardless of knowledge, but not transitional security interests¹². 

Financial collateral such as shares, bonds, units in managed investment schemes, derivates and similar assets that can be perfected against by control, offer opportunities for further lending/borrowing to secured parties and grantors. Secured parties can lend into an existing security structure, perfect first by control against financial assets like shares or bonds, and take a first priority position. Existing secured parties should protect themselves against being defeated in this manner against financial collateral, either by perfecting by control first themselves, or ensuring that they have the benefit of event of default or other covenants in their loan or security agreements which would be breached by other secured parties perfecting by control over financial collateral.

Both the grantor and the incoming secured party looking to perfect by control in these circumstances would need to be very careful of negative pledge restrictive covenants in existing loan or security agreements to which the grantor may be subject from other financiers, which may prohibit the grant of further security or the incurrence of further financial indebtedness. Restrictive covenants that prohibit the grant of further security would not void any further security granted¹³. However, any such breach of covenant would likely be an event of default that might precipitate enforcement by other financiers. An incoming secured party would also need to be careful of (the tort of) inducing a breach of contract by encouraging the grantor to grant further security in breach of restrictive covenants.

Further, security granted just prior to the onset of insolvency carries the risk of being set aside as a preference or other voidable transaction¹⁴.

Perfection by control is subject to liens arising in the ordinary course of business

These contests may arise, for example, where a professional trading trustee has a right of indemnification and lien to secure that indemnity over trust assets, and the trust assets include ADI accounts or shares and bonds (investment instruments) that are subject to security interests perfected by control.

Liens should defeat security interests perfected by control in these circumstances. This follows from section 73(1) which provides that liens defeat all PPSA security interests to the extent they enjoy the “super priority” accorded under that provision, and this, by definition, should include PPSA security interests perfected by control.

Liens can be excluded from section 73(1) “super priority” either under the legislation under which a statutory lien arises, or by legislative instrument made under sections 73(7) and 73(8) in the case of general law liens.

Perfection by control over ADI accounts is subject to payments made out of the ADI account