There are many classes of collateral under the PPSA. Unfortunately the PPSA is not overly clear about how they are relevant. It is a matter of making your own sense of them.
Broadly, there are classes of collateral against which security interests can be registered to perfect them. There are also other classes of collateral for other purposes. There are rules about perfecting security interests which differ depending upon whether the collateral falls into classes such as inventory, serial numbered property, circulating assets, proceeds and others. There are also rules about extinguishment of security interests upon transfers of collateral, which turn upon whether the collateral falls into classes such as inventory, serial numbered property, goods and others.
To summarise the key consequences and functions that classes of collateral have under the PPSA:
A. Accession and processing/comingling rules: these apply only to goods.
B. Perfection by control: security interests over six (6) classes of collateral (only) can be perfected by control. These classes of collateral are:
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- ADI accounts
- intermediated securities, for example,ASX- listed shares
- investment instruments, for example unlisted shares, bonds and units in managed investment schemes
- letters of credit
- negotiable instruments not evidenced by a certificate; and
- satellites and space objects
C. PMSIs - collateral: PMSIs are only possible for certain classes of collateral. It is not possible to take a PMSI over investment instruments (for example, unlisted shares and bonds), intermediated securities (for example, ASX-listed shares), “monetary obligations” (not defined in the PPSA, but presumably would include accounts (receivables)) or negotiable instruments1.
D. PMSIs - registration: registrations to perfect PMSIs must nominate that the security interest is a PMSI. There is further discussion on how to perfect PMSIs at paragraph 12.4.2 of Chapter 12 (Perfection).
E. PMSIs - inventory: PMSIs over collateral that is inventory in the hands of the grantor (inventory PMSIs) must be perfected early. PMSIs over collateral that upon acquisition by the grantor will be used as inventory in the grantor’s business must be perfected either before the secured party supplies goods to the grantor (for inventory that is goods), or before the security interest attaches (for inventory other than goods).
To assess whether collateral acquired on PMSI finance will be inventory in the hands of the grantor of a PMSI, the secured party will need to know about the grantor's business and how the collateral being acquired is/will be used in that business.
F. Inventory - extinguishment rules: the extinguishment rules, which protect purchasers and lessees who buy or take leases of collateral by extinguishing security interests over collateral in favour of buyers and lessees in certain circumstances, often do not apply where the collateral purchased or leased is held as inventory in the hands of the buyer or lessee.
In light of this, businesses that buy inventory for on-sale or consumption should make appropriate investigations about whether the inventory they buy is encumbered. See Chapter 21 (The Extinguishment Rules) for more detail on the extinguishment rules.
G. Circulating assets – control: a financing statement that registers a security interest may nominate that the secured party has control over circulating assets (see below for what circulating assets means). This is so that others can determine whether a security interest will be treated as a circulating security interest (the PPSA equivalent of a floating charge), and whether the security interest will be subordinated to employee entitlements and an administrator’s lien for costs upon an administration or liquidation of the grantor2.
Circulating assets are any collateral that the secured party gives the grantor express or implied authority to dispose of in the ordinary course of business3. However, mere consent from a secured party to dispose of particular item(s) of property is not sufficient to render collateral to be circulating assets. There must be some form of standing consent or authority from the secured party to the grantor to dispose of certain types of assets in the ordinary course of business of the grantor or similar, which is equivalent to the trading power of a chargor under a floating charge.
Certain classes of collateral are deemed to be circulating assets unless the secured party takes control of them. The deemed circulating assets are4:
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many forms of accounts arising in the ordinary course of business, except accounts or chattel paper that are sold by the grantor (by outright transfer)5
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accounts generated from sales of inventory
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inventory itself, but only where the grantor owns title to the inventory (not collateral that is leased, consigned or subject to retention of title purchase) - Corporations Act 2001 (Cth) section 51C
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ADI accounts (current accounts only, not term deposits), but not where the bank (ADI) holds a registered security interest over an ADI account held with it, and the registration nominates that the ADI has control over the ADI account, even if the ADI account is a current account6
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currency; and
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negotiable instruments
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H. Proceeds: proceeds are an extremely important class of collateral under the PPSA. Security interests under the PPSA automatically attach to proceeds generated upon the sale/disposal of original collateral unless the security agreement provides otherwise7. Assume there is a security interest over a truck. If the truck is sold to generate an account (debt payable by the buyer of the truck to the seller), then the account is proceeds of the truck. The security interest over the truck (original collateral) will automatically attach to the account generated from the sale of the truck (the proceeds).
Security interests must also be perfected against proceeds.
Continuing with the truck example, if the original registration against the truck is wide and covers classes of collateral wide enough to include proceeds of the truck (for example, all present and after-acquired property), then there will be no need to take additional steps to perfect against proceeds on the disposal of the truck because proceeds are already covered by the original registration8. Alternatively, a secured party could register narrowly against the original collateral (truck), and register wide against proceeds by registering against all proceeds generated from the original collateral9.
If a registration is not wide enough to cover proceeds (the account generated on sale of the truck in the example), the security interest registered against the original collateral (truck) will be temporarily perfected against the account as proceeds of the truck for five (5) business days only10. The secured party must register or otherwise perfect against the proceeds within the five (5) business day temporary perfection window to retain continuous perfection, being the priority time held against the truck (original collateral), also against the account generated from the sale of the truck (proceeds).
For completeness, where proceeds generated from transfers of original collateral under security interests perfected by registration take the form of money deposited into an ADI account, currency, cheques or insurance indemnity payments for damage to collateral, then security interests are automatically perfected against these proceeds without any need for registration or other perfection11. This is provided that a registration covered and adequately perfected the security interest against the original collateral.
To protect a secured party’s position it will be very important to ensure that a security interest registration covers proceeds, either through a wide registration against original collateral, or by registration specifically against classes of collateral wide enough to cover all conceivable proceeds.
I. Serial numbered property – registration: serial numbered property is another very important class of collateral under the PPSA. Security interests over serial numbered property, being aircraft, watercraft (ships and boats), certain intellectual property (patents, trade marks, designs and plant breeder’s rights) and motor vehicles, should be registered against the serial numbers of the collateral.
For security interests over serial numbered property that is consumer property (for example, a personal car or watercraft) and commercial aircraft, the registration is defective unless it lists the serial number12. See paragraphs 22.19.1 to 22.21.3 of Chapter 22 (Registration and the PPS Register) for discussion of defective registrations. For all serial numbered property, security interests are on serious risk of extinguishment if the collateral is sold or transferred, unless the registration correctly lists serial numbers13.
The nine (9) classes of collateral against which security interests can be registered.
The relevance the nine (9) classes of original collateral against which security interests can be registered under the PPSA is summarised in the first table below (Table 5). The second table below (Table 6) deals with registration against proceeds. Hopefully these tables bring some structure to the PPSA’s rules, and how the PPSA treats the various classes of collateral.
From above (paragraph 10.2.2), there are other classes of collateral which the PPSA uses for purposes other than registration, so the tables below do not cover all matters relevant to classes of collateral. The nine (9) classes of original collateral in Table 5 are those used by the PPSA for the registration of security interests.
Hopefully these tables will serve as useful reference guides when conducting registrations of security interests. Registrations must be made against only one of the nine (9) classes of original collateral. Running across Table 5 from left to right, there is commentary on some of the issues that arise for each of those classes of collateral against which secured parties can register.
Notes:
1 PPSA section 14(2)(b)
2 Corporations Act 2001 (Cth), section 433 (receivership), section 443E (administration) and sections 561 and 562 (liquidation).
3 PPSA section 340(1)(b)
4 PPSA section 340(5)
5 PPSA section 340(4A)
6 PPSA section 340(2) and 341A(1)(a)(i)
7 PPSA sections 31 and 32(1)
8 PPSA section 33(1)(b)
9 PPSA section 33(1)(a)
10 PPSA section 33(2)
11 PPSA section 33(1)(c)
12 PPSA section 153 - Item 4(b) in the table, section 165(a)
13 PPSA sections 44 and 45
