- 6.1 Security interests
- 6.2 Exclusion: set-off, combination of bank accounts and netting arrangements
- 6.3 Exclusion: quistclose and turnover trusts
- 6.4 Exclusion: general law and statutory liens
- 6.5 Exclusion: interests in personal property that arise by operation of the general law
- 6.6 Exclusion: pawnbrokers and assignments of contractual position (novations)
- 6.7 Summary of security interest transactions (1) - transactions regulated as security interests under the PPSA
- 6.8 Summary of security interest transactions (2) - transactions expressly excluded from regulation under the PPSA
- 6.9 Summary of security interest transactions (3) - transactions that fall outside the definition of security interest
- 6.10 Summary of security interest transactions (4) - transactions to which it is unclear whether the PPSA applies
The following tables aim to summarise the principal transactions that are:
- regulated as security interests under the PPSA (Table 1),
- expressly excluded from regulation under the PPSA (Table 2)
- outside the definition of security interest (Table 3)
- unclear as to whether they are regulated under the PPSA (Table 4)
These tables are not exhaustive. They cover only the principal transactions and interests which may (or otherwise) be regulated as security interests under the PPSA.
Summary table 1 - transactions regulated as security interests under the PPSA
| Transaction | Secures an obligation? | Security interest under PPSA? |
|
Assignment of annuity or insurance contract as compensation for loss to collateral under security interest |
Yes |
Yes – PPSA section 8(1)(f)(v) In asset and other finance transactions such as aircraft financings, secured parties often take security interests over the proceeds of insurance for damage to or loss of the collateral being financed. |
|
Charge, fixed or floating |
Yes |
Yes – PPSA sections 12(2)(a) and 12(2)(b) |
|
“Chargeback” over ADI account or any obligation |
Yes |
Yes – PPSA sections 12(3A) and (4) The classic chargeback is where a person holds an ADI account at Bank A and grants a security interest over the ADI account to Bank A. Given that an ADI account is a debt owing from Bank A to its customer, can Bank A take security over a debt that it itself owes? The PPSA says yes in section 12(4)(b). |
|
Conditional sale/retention of title |
Usually |
Yes, if secures an obligation – PPSA section 12(2)(d) |
|
Consignment |
Possibly |
Yes, if secures an obligation – PPSA section 12(2)(h) Commercial consignments are regulated as security interests even if there are no secured obligations – they are deemed security interests – section 12(3)(b). |
| Transaction | Secures an obligation? | Security interest under PPSA? |
|
Farm-in right (right to acquire an ownership stake) in joint venture |
Possibly |
Yes, if it grants an interest in personal property to secure an obligation – PPSA section 12(1). Many Australian mining project and other joint ventures involve one venturer who contributes a mining title or tenement, and another venturer who will perform work or make expenditure to acquire a certain percentage interest in the tenement. This is called farming-in. If farm-in arrangements are structured such that the venturer with the tenement withholds the interest until farm-in obligations are completed to secure the farm-in obligations, they could be security interests. |
|
Flawed asset arrangement
|
Possibly |
Yes, but only if it grants an interest in personal property to secure an obligation – PPSA section 12(2)(l). A “flawed asset” arrangement includes where a payment obligation is made conditional to protect a creditor. For example, a bank holding an ADI account agrees with its customer that the money in the account is not repayable until the customer repays other loans to the bank. |
|
Lease of goods |
Possibly |
Yes, if secures an obligation – PPSA section 12(2)(i). Leases of goods for terms of over two (2) years, where the two year period includes extensions and holdover periods, are called PPS Leases. PPS Leases are regulated as security interests even if there are no secured obligations. PPS Leases are another example of a deemed security interest – see the row dealing with PPS Leases below. Leases must secure obligations to be security interests, except PPS Leases. PPS Leases are security interests whether or not they secure obligations – they are deemed security interests. Many operating leases of goods will be PPS Leases, provided the term exceeds two years. Operating leases for other collateral (other than goods) would need to be assessed for whether they secure obligations – if an operating lease secures repossession and enforcement costs upon default, is that sufficient? It is unclear. Most finance leases will clearly secure obligations. PPS Leases will be PMSIs – PPSA section 14(1)(c). Many other leases which are security interests will also be PMSIs, because they finance the acquisition of a new asset. Sale and leaseback transactions are not PMSIs – section 14(2)(a). Leases of goods may also be chattel paper. There are special priority rules which relate to buyers and takers of interests in chattel paper - see Chapter 13. |
| Transaction | Secures an obligation? | Security interest under PPSA? |
|
Mortgages |
Yes |
Yes – section 12(2)(c). Note that section 12(2)(c) only refers to chattel mortgages, which is potentially misleading. Mortgages of contractual rights, intellectual property and other personal property are likely to be security interests under the PPSA, caught by the general definition of security interest in section 12(1) which covers all transactions that grant an interest in personal property to secure obligations. |
|
Mortgage-backed securities transactions = securitisations |
Possibly |
Potentially – PPSA section 8(3) and PPS Regulation 1.5. Mortgage-backed securities is defined in s286 of the Duties Act 2001 (Qld) to mean (broadly) any interest in a mortgage pool, or any bond, note or instrument payment of which relies upon a mortgage pool. It does not include mortgages or transfers of mortgages alone. Mortgage-backed securities would capture residential mortgage-backed securities (RMBS) and commercial-mortgage backed securities (CMBS), the common forms of notes or bonds issued to investors in securitisations. The PPS Regulations (Regulation 1.5) clarify (to some extent) that the PPSA applies to notes or bonds issued in securitisation transactions (ie, the mortgage-backed securities themselves) as personal property, and in addition to each element of the wider securitisation transactions (see below) in which mortgage-backed securities are issued. Various elements of a securitisation transaction could potentially be security interests, such as:
|
| Transaction | Secures an obligation? | Security interest under PPSA? |
|
Pledge |
Yes |
Yes – PPSA section 12(2)(f) |
| PPS Lease (lease of goods for more than two years) | Possibly |
Yes – PPSA section 12(3)(c) PPS Leases are security interests even if they secure no obligations – PPS Leases are deemed security interests. |
|
Transfer/Assignment (outright) |
Possibly |
Yes, if secures an obligation – PPSA sections 12(2)(j) and (k) Note that transfers of accounts (see below) are deemed security interests. Transfers of other personal property are security interests if they secure obligations. A “Repo” or repurchase transaction is an example of a transaction involving an outright transfer which, depending on how structured, could be a security interest. This is where securities such as bonds are transferred in exchange for a cash payment. The securities (or an equivalent number of them) are subject to being repurchased later in exchange for payment of a cash sum. Repos are very important transactions for banks and similar institutions to raise cash from their securities holdings (the “trading book” of a bank). |
|
Transfers of accounts or chattel paper
|
Unlikely but possible |
Yes – PPSA section 12(3)(a) Transfers of accounts or chattel paper are deemed security interests. They are regulated as security interests whether or not they secure obligations. |
|
Trusts |
Possibly |
Yes, if secures an obligation – PPSA section 12(1). If a trust secures an obligation it should be a security interest. Trusts can be used in a similar fashion to equitable mortgages to convey an equitable interest in personal property to secure an obligation. Interestingly, the PPSA does not mention in the definition of security interest in clause 12 whether trusts (except trust receipts - see below) that secure obligations are security interests. Only quistclose trusts (refer to paragraph 6.3.2) are excluded from being security interests in section 8(1)(h). This tends to suggest that all other trusts can be security interests if they secure obligations, but the PPSA is silent on the point. The PPSA excludes turnover trusts from the rule that unperfected security interests vest in the grantor upon bankruptcy, administration or liquidation. This also suggests that trusts can indeed be security interests, otherwise why would it be necessary to exclude turnover trusts from the rule that unperfected security interests vest in the grantor upon bankruptcy, administration or liquidation. The prudent course is to treat trusts which secure obligations as security interests. |
| Transaction | Secures an obligation? | Security interest under PPSA? |
| Trusts for sale | Often |
Yes, if secures an obligation – PPSA section 12(1) Many mining project joint venture agreements provide that upon default by a venturer, that defaulting venturer’s share of minerals extracted shall be held by the project operator on trust for sale, sold, and the proceeds applied to remedy obligations not performed by the defaulting venturer such as contribution of equity to the project or exploration work etc. It depends on how trusts for sale are structured and whether they secure obligations, but trusts for sale of this nature appear likely to be security interests. |
| Trust receipt | Likely |
Yes, if secures an obligation – PPSA section 12(2)(g) Trust receipts can arise in international trade financings. Assume that a bank is in receipt of a bill of lading in respect of goods for which the bank has issued a letter of credit to the seller to pay for them. If the bank releases the bill of lading to the buyer (the bank’s customer) to permit the buyer to collect the goods at port, the buyer would often declare a trust over the bill of lading in its possession in favour of the bank, as security for the buyer’s obligation to reimburse the bank for amounts funded under the letter of credit to pay for the goods. The bank releases the bill of lading to the buyer, but the buyer declares a trust over the bill of lading back to the bank – the buyer is in receipt of the bill of lading subject to a trust – trust receipt. |
