Classes of collateral are important under the PPSA for various reasons. Classes of collateral are relevant to priority rules, because security interests over different classes of collateral are perfected in different ways, and potentially have differing priorities.
For example, control is one of the most powerful forms of perfection and defeats most other methods of perfection, regardless of priority time, or knowledge of other security interests in the same collateral.
However, security interests can only be perfected by control over six (6) classes of collateral, mainly financial collateral – see sub-section below. It is important to know which classes of collateral can be perfected against by control.
The venn diagram below symbolises the various classes into which the PPSA categorises collateral.
Classes of collateral are also relevant to perfecting security interests by registration. An online form called a financing statement is used to make a registration to perfect a security interest. A financing statement must place original collateral into a single class of nine (9) (excluding proceeds) prescribed classes for original collateral, listed in the table below (Table 5) at paragraph 10.2.141.
Security interests automatically attach to proceeds generated when original collateral is sold or transferred, as discussed later. If proceeds are nominated in a financing statement to perfect against proceeds generated, proceeds of collateral may also be described by class, as one of three classes listed in the second table (Table 6) at paragraph 10.2.14 below that deals with proceeds2.
To register against two or more types of collateral that belong to different classes, two separate registrations must be conducted, because the golden rule is that one registration only can be made against one class of collateral. However, two registrations can be made in the same application to register3
Classes of collateral are again relevant to matters such as whether the accession and comingling rules under the PPSA apply upon the accession or processing/comingling of collateral with/into other property. The accession and processing/comingling rules only apply to goods.
There is no alternative but to know and understand the classes of collateral into which the PPSA divides the broad topic of personal property.
Notes:
1. PPSA section 153(1) item 4(c) in the table, and PPS Regulations, Schedule 1, Part 2, section 2.3
2. PPSA section 153(1) item 4(d) in the table, and PPS Regulations, Schedule 1, Part 2, section 2.4
3. PPSA section 153(1) item 4 in the table, footnote.
