Prior to the commencement of the PPSA, the general law of assignment (which relates similarly to security interests because security interests grant proprietary interests in collateral) provided that an assignment (including by way of security) cannot occur unless the property to which it relates (collateral for security interests) has been finally identified and allocated to the assignment or security interest. This means the property or collateral must be ascertained (identified) and appropriated (allocated) to the assignment or security interest. The PPSA partially overrides the general law principle of appropriation in respect of PPSA security interests¹.

In the context of the floating charge in particular, the principle of appropriation has given rise to significant doubt about whether a floating charge gives the chargee (secured party under the PPSA) an equitable proprietary interest in floating charge property before crystallisation.

This is because a floating charge carries a trading power, which gives the chargor standing permission to dispose of floating charge property free from the charge prior to crystallisation of the charge. This means there is no appropriation of floating charge property to the assignment by way of charge because there is never any property which is finally allocated to the charge – the floating charge property can be disposed of freely by the chargor, and is always turning over. Inventory and book debts (receivables) are prime examples.

To summarise the position, outside of the PPSA, under the general common law, the better view of the English authorities, and perhaps less certainly but also the Australian authorities², is that attachment in both legal and equitable assignments (including assignments by way of mortgage or charge) requires both³:

1. 1. ascertainment, which arises where property (or the interest) to be assigned (or mortgaged or charged) is precisely identified, and owned/ acquired by the assignor; and

   2. appropriation, which arises where ascertained items of property are consensually (that is, agreed to by both assignor/mortgagor and assignee/ mortgagee) allocated, with finality, to the assignment or security.

The thinking is that unless it is known exactly what property is the subject of an assignment or security interest, there is insufficient certainty to recognise a proprietary interest such as an assignment or security interest. This created real difficulty for floating charges, where the chargor (grantor) has a trading power and can dispose of charged property without the consent of the chargee (usually) within the ordinary course of the chargor’s business, meaning the floating charge property is not appropriated to the assignment by way of charge.

The PPSA recognises this difficulty and partially overrides the principle of appropriation by providing that security interests attach to after-acquired (future) property (once the property is acquired by the grantor) even if there is no appropriation⁴. Circulating assets (typical examples include inventory and accounts generated from inventory sales) turnover, and accordingly comprise (essentially) after-acquired property. Secured parties who hold security interests over circulating assets (circulating security interests), which are the equivalent of floating charges under the PPSA, now have an immediately attached security interest over the collateral (circulating assets). This is despite the grantor retaining a trading power - the ability to freely dispose of the collateral from the security interest in the ordinary course of business.

Despite this departure from pre-PPSA assignment and floating charge law, circulating security interests under the PPSA:

1. 1. relate to circulating assets, being assets that circulate within the ordinary course of business⁵; and

   2. upon the administration or liquidation of corporate grantors, remain subordinated to certain employee entitlements and liens of administrators – see the discussion commencing at paragraph 28.4.1 of Chapter 28 (Circulating security interests (floating charges)).

The fact that circulating security interests (the PPSA equivalent of floating charges) will now attach to circulating assets (floating charge property) even without appropriation does not alter the fact that they are partially subordinated upon an insolvency just as floating charges were subordinated under pre-PPSA law.

However, an attached security interest (the equivalent of a fixed charge) in circulating assets may, depending on the circumstances, assist secured parties under circulating security interests in priority disputes with other secured parties. This is because the secured party will have an immediate full security interest under the PPSA, not merely a contractual interest as is the better view of the floating chargee’s position before crystallisation. The position of a secured party under a circulating security interest should be stronger under the PPSA than the position of a floating chargee, especially where there are unauthorised disposals of collateral outside the ordinary course of business (trading power).

Circulating security interests are discussed in more detail in Chapter 28 (Circulating security interests (floating charges)).