Temporary perfection is "automatic perfection" which the PPSA applies to certain classes of security interests for fairness. Temporary perfection temporarily protects security interests for a short period to give the secured parties under them an opportunity to actually perfect under the PPSA, so that continuous perfection (and so their original priority time) is preserved.
The key security interests and classes of collateral to which temporary perfection is relevant include:
- transitional security interests
- proceeds
- collateral brought into Australia
- transfers of collateral
Transitional security interests:
Transitional security interests are security interests that arise under security agreements entered into before the commencement of the PPSA in early 2012.
Transitional security interests are temporarily perfected without any act by the secured party for up to two years until early 2014. This is to permit secured parties time to actually perfect under the new PPSA system, which they must do by early 2014.
Transitional security interests that are registered on certain registers of security interests before the commencement of the PPSA in early 2012 (the main example will be ASIC-registrable charges, but there are many other registers of security interests around Australia that will be migrated to the PPS Register), should be automatically migrated to the PPS Register, and be pre-registered on the PPS Register, ready for the commencement of the PPSA in early 2012. Migrations may not be sufficient to fully protect transitional security interests, in which case secured parties may wish to conduct an additional registration.
Transactions that were unregistrable before the commencement of the PPSA but will become regulated as security interests under the PPSA are the true transitional security interests. They will not be migrated to the PPS Register. Temporary perfection for transitional security interests such as these will be important, and lasts until early 2014. Key examples of these transactions include leases of goods (if not registered on the motor vehicle encumbrances registers), conditional sales by retention of title, sales of accounts (receivables), consignments, trusts that secure obligations and many security interests granted by individuals.
Proceeds:
Security interests automatically attach to proceeds when original collateral is disposed or transferred, and must also be perfected against proceeds. Perfection against proceeds, if necessary (if the registration against the original collateral does not cover the class of property into which proceeds fall), must be within 5 business days of the proceeds being generated. In other words, security interests are temporarily perfected against proceeds for five (5) business days following proceeds being generated1.
There is no need to perfect against proceeds which take the form of currency, money deposited into an ADI account, cheques or insurance indemnity payments for damage to collateral, because there is automatic perfection against these classes of proceeds provided that a registration covered and adequately perfected the security interest against the original collateral2.
Collateral brought into Australia:
Security interests granted in foreign jurisdictions over collateral that is later brought into Australia, which are sufficiently enforceable under the applicable foreign law (see paragraphs 17.11.1 to 17.11.22 in Chapter 17 (Perfection) for discussion), are temporarily perfected for3:
- 5 days from the time the secured party acquires actual knowledge that the collateral has been brought into Australia to create a connection to Australia for the PPSA to apply; but subject to
-
a maximum temporary perfection period of 56 days from the time the collateral enters Australia, regardless of whether the secured party knows the collateral has entered Australia;
Transfers of collateral:
Where collateral is sold or leased without extinguishing existing security interests attached to the collateral (because, for example, the buyer or lessee did not come within one of the ten (10) extinguishment rules to take the collateral free of security interests – see Chapter 21 (The Extinguishment Rules) for discussion) – existing security interests granted by the seller or lessor continue in the transferred collateral and are temporarily perfected against the buyer or lessee for up to 24 months (see below).
Sales of collateral to buyers are tricky because they mean that the owner, and so the grantor of
a security interest, changes. The change in the owner/grantor means that any registrations to perfect a security interest over the collateral no longer work because they relate to the wrong party, the previous owner. This is because registrations are made primarily against the grantor, except for serial numbered property that must be registered by serial number (consumer serial numbered property and commercial aircraft). This is why temporary perfection against the new owner or lessee is extended to security interests which are not extinguished by a transfer.
If a security interest is not extinguished for the benefit of a buyer or lessee by one of the ten (10) extinguishment rules upon the transfer of collateral4, then the security interest continues in the collateral in the hands of the new buyer, and is temporarily perfected against the buyer for the longer of:
- 24 months; or
- where the buyer has granted a security interest that attaches to the acquired collateral, either:
-
- if the secured party of the seller (original secured party) has not consented to the transfer, five (5) business days after the original secured party learns (obtains actual or constructive knowledge of the buyer's details to enable the original secured party to re-perfect against the buyer) that the collateral has been transferred, subject to a maximum period of temporary perfection of 24 months5; or
-
if the original secured party has expressly or impliedly consented to the transfer, and so knows about the transfer, five (5) business days from the transfer date6.
Notes:
1 PPSA section 33(2)
2 PPSA section 33(1)(c)
3 PPSA section 39
4 PPSA section 34(3)
5 PPSA section 34(1)(c)(ii)
6 PPSA section 34(1)(c)(i)
