3. Third, acquisitions of interests in chattel paper, negotiable instruments and negotiable documents of title – sections 70, 71 and 72.
The PPSA includes special rules to facilitate the transfer (negotiation) of negotiable instruments, negotiable documents of title and chattel paper in priority to PPSA security interests which may be attached to them.
This is provided (in broad terms) the buyers or investors (persons taking an interest) in them:
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- provide value
- take possession or control over the instrument, document or chattel paper
- in most cases, acquire the instrument, document or chattel paper in the ordinary course of a business of acquiring negotiable instruments, documents of title or chattel paper of that kind; and
- in many cases, acquire the instrument, document or chattel paper without actual or constructive knowledge of either the existence of a security interest, or that the terms of a security agreement would be breached by the acquisition1
There is a more detailed discussion of these rules in paragraphs 18.6.1 to 18.6.20 of Chapter 18 (Priority) in Part 3: A Long Run Through.
These priority rules appear ahead of security interests perfected by control in the priority waterfall, because sections 70, 71 and 72 are clear that holders or acquirers of negotiable instruments, negotiable documents of title or chattel paper in compliance with the conditions in those sections have priority to PPSA security interests, which by definition should include security interests perfected by control (although the PPSA is not explicit on this point).
Security interests cannot be perfected by control over negotiable instruments evidenced by certificate, negotiable documents of title or chattel paper as original collateral. However, if a negotiable instrument, negotiable document of title or chattel paper represents proceeds of other original collateral against which a security interest was perfected by control (for example, shares), and that security interest (perfected by control) attaches to the instrument, document or chattel paper as proceeds with “control priority”2, then the priority rules in sections 70, 71 and 72 should defeat even security interests perfected by control. However, if the interest acquired is itself a security interest perfected by control (for example, over negotiable instruments not evidenced by certificate), section 57(3) appears to operate to give that security interest priority.
These priority rules appear in the waterfall below general law liens and statutory liens/ charges, because, while it is extremely difficult to provide a general statement of priority, it seems likely that liens or statutory charges over negotiable instruments, negotiable documents of title or chattel paper should have priority over ownership (or other similar) interests in them – otherwise the purpose of the lien or charge would be frustrated.
These priority rules are subject to the provisions of the Cheques Act 1986 (Cth) and the Bills of Exchange Act 1909 (Cth) - section 256
4. Fourth, control – section 57. Security interests perfected by control are very powerful and defeat other PPSA security interests in relation to both original collateral and proceeds, regardless of time of attachment, time of perfection or knowledge of prior security interests3.
Perfection by control is subject to perfected transitional security interests4. This is to preserve the priority of the existing pipeline of pre-PPSA transitional security interests, and ensure that they are not suddenly and unexpectedly subjected to the risk of being defeated by a new class of security interests introduced under the PPSA that can be perfected by control.
So far the priority waterfall has not dealt with the priority of PPSA security interests. The first three priority buckets in the waterfall relate to interests (not security interests) taken in collateral that is also subject to other PPSA security interests, and general law and statutory liens/charges (which are not PPSA security interests). Security interests perfected by control are the highest-ranking PPSA security interests in the priority waterfall, subject to the important exception in relation to transitional security interests.
Perfection by control is only possible for six (6) classes of collateral, mainly financial collateral, being:
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ADI accounts (bank accounts)
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intermediated securities (for example, ASX- listed shares)
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investment instruments (for example, unlisted shares, bonds, units in managed investment schemes, etc)
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letters of credit
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negotiable instruments not evidenced by a certificate; and
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satellites and space objects
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Perfection by control is subject to the priority buckets above it in the waterfall. This is because section 69 (creditors receiving payment of debts), section 73 (liens and statutory charges in the ordinary course of business) and sections 70, 71 and 72 (acquisitions of interests in negotiable instruments, chattel paper and negotiable documents of title) are clear on their terms that when they apply, PPSA security interests (which should include security interests perfected by control) are defeated
Notes:
1 PPSA sections 70, 71 and 72
2 The author's interpretation of section 57(2A) is that security interests perfected by control over original collateral (say shares) retain “control super priority” if the original collateral is sold and the security interest attaches to proceeds. The exception is where another security interest is perfected against the proceeds as original collateral by control – section 57(2A)(b).
3 PPSA sections 57(1) and 57(2A)
4 PPSA section 322A
