To summarise, there are at least five (5) key reasons to perfect a security interest, being to:
(1) Make security interests strong
(2) Avoid security interests "vesting in the grantor"
(3) Preserve the ability to appoint receivers "over the top of" administrators, or appoint administrator
(4) Ensure the security interest covers proceeds
(5) Avoid extinguishment of unperfected security interests upon disposals of collateral
Make security interests strong in priority contests against other security interests granted in the same collateral by the grantor.
Unperfected security interests generally lose to perfected security interests1. Among perfected security interests, the general rule is that perfected security interests have priority by the time of perfection (called priority time), so generally the first to perfect wins. This is subject to security interests which have super priority, such as PMSIs and security interests perfected by control.
Priority is discussed further in Chapters 13 and 18 (Priority)
Avoid security interests "vesting in the grantor" upon the bankruptcy, administration or liquidation of the grantor. Most unperfected security interests are void upon the bankruptcy, administration or liquidation of the grantor because they “vest in the grantor”2
Preserve the ability to appoint receivers "over the top of" administrators, or appoint administrators – for “all-assets” security interests over the whole or substantially the whole of the property of a grantor, the secured party's ability to appoint a receiver during the 13 business day decision period following a grantor's administration under section 441A of the Corporations Act 2001 (Cth) requires the security interest to be properly perfected3.
Likewise, secured parties holding security interests over the whole or substantially the whole of a grantor’s assets can appoint an administrator under section 441B, but again only if their security interest is perfected4.
Further, to continue enforcing under a security interest where a controller (which includes a receiver) has been appointed before the company enters into administration, it appears that the security interest must be duly perfected5. Otherwise, the position is unclear but it appears that the subsequent appointment of administrators will prevent secured parties (under unperfected security interests) continuing to enforce. A receiver or controller appointed before the commencement of administration under an unperfected security interest would presumably have to retire;
Ensure the security interest covers proceeds – security interests automatically attach to proceeds generated where collateral is disposed of or otherwise dealt with6. However, security interests must also be perfected against proceeds. A wide registration against original collateral, wide enough to cover both the original collateral and any proceeds, will perfect against both the original collateral and proceeds7.
Alternatively, secured parties can register narrowly against original collateral (for example, a truck) and register wide against all proceeds generated from original collateral; and
Avoid extinguishment of unperfected security interests upon disposals of collateral – unperfected security interests are easily extinguished upon the sale or lease of collateral by the grantor for value, regardless of whether the buyer or lessee knows of the unperfected security interest8.
To recap, there are predominantly four ways to perfect a security interest, being:
1 registration
2 possession
3 control, and
4 temporary perfection9
Each of these four methods of perfection is briefly explained in turn below.
Perfection is discussed in more detail in Chapter 17 (Perfection) of Part 3: A Long Run Through.
Notes:
1 PPSA section 55(3)
2 PPSA section 267
3 Corporations Act 2001 (Cth) section 441AA
4 Corporations Act 2001 (Cth) section 436C(1A)
5 Corporations Act 2001 (Cth) section 441B
6 PPSA section 32(1)
7 PPSA section 33(1)(b)
8 PPSA section 43
9 Some commentators point to several instances where the PPSA deems perfection to arise automatically, in a different way to temporary perfection, to add deemed perfection as a fifth manner of perfection to the list, to make five (5) ways a security interest can be perfected. For example, a security interest is deemed to be automatically perfected against proceeds of original collateral that take the form of money deposited into an ADI account, currency, cheques and insurance indemnity payments, without any further step – this is an example of deemed perfection – see section 33(1)(c).
