- 17.1 What is perfection?
- 17.2 Consequences of non-perfection
- 17.3 Methods of perfection
- 17.4 Perfection by registration
- 17.5 Perfection by possession
- 17.6 Perfection by control
- 17.7 Temporary perfection
- 17.8 Perfection of security interests against proceeds
- 17.9 Perfection of PMSIs
- 17.10 Transfers of collateral and perfection
- 17.11 Relocations of collateral to Australia and perfection
- 17.12 Perfection matters not covered
Why perfection against proceeds is necessary
We have seen that security interests automatically attach to proceeds generated upon sales or disposals of original collateral1. However, attachment against proceeds is not enough – perfection against proceeds is also required to ensure:
(a) same priority time against proceeds: the security interest retains the same priority time as against proceeds that it enjoyed against the original collateral before the disposal;
(b) no invalidity against proceeds upon insolvency of grantor: the security interest is not on risk of being invalid in respect of the proceeds upon the grantor’s insolvency by “vesting in the grantor” in respect of proceeds upon the grantor’s liquidation or administration;
(c) secured parties can enforce security interests against the grantor despite the grantor’s administration:
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- secured parties holding security interests over the whole or substantially the whole of the property of a grantor2 can only appoint receivers over the top of administrators under section 441A of the Corporations Act 2001 (Cth) if their security interest is perfected3. Perfection against proceeds may in certain circumstances be critical to ensuring that an all-assets security interest is perfected against the whole or substantially the whole of the assets of a grantor to ensure that a secured party has the remedy of appointing receivers over the top of administrators pursuant to section 441A.
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secured parties who commence enforcement of their security interests before the grantor enters administration are generally permitted under section 441B of the Corporations Act 2001 (Cth) to continue to enforce despite the grantor later entering into administration (a moratorium upon enforcements ensues upon administration). However, section 441B will be amended (by virtue of section 441AA) and will not apply where a security interest is unperfected. Accordingly, where a secured party enforces before the commencement of an administration by appointing a controller or receiver, but the security interest in question is unperfected, any subsequent administration of the grantor appears to stay the enforcement, and presumably any appointed controllers or receivers would then need to retire in respect of assets over which the security interest remained unperfected. Proceeds could feature heavily in these situations, where security interests attach to but remain unperfected over proceeds; and
(d) Security interests are not extinguished upon transfers of proceeds: perfection against proceeds is important to ensure that a security interest that has attached to proceeds of original collateral is not on risk of being extinguished if the proceeds are further transferred or dealt with4.
Four ways to perfect against proceeds
There are four (4) ways to perfect security interests against proceeds, being:
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- Wide registration against original collateral tat covers proceeds too
- Automatic (sometimes called deemed) perfection against proceeds taht are ADI accounts, currency, cheques and certain insurance indemnity payments
- Registration against proceeds in the initial registration for the original collateral
- Temporary perfection for five (5) business days following the generation of proceeds
(a) Wide registration against original collateral that covers proceeds too: the registration of a security interest against original collateral (before any disposition to create proceeds) can be wide and so cover the class of collateral into which the proceeds fall. For example, if the registration against original collateral covers all present and after-acquired property of the grantor, then the registration will clearly be wide enough to cover any proceeds generated from the original collateral. If so, then the security interest is automatically perfected against the proceeds by virtue of the wide registration against original collateral5;
(b) Automatic (sometimes called deemed) perfection against proceeds that are ADI accounts, currency, cheques and certain insurance indemnity payments: there is no need to take extra steps to perfect a security interest against proceeds that take the form of money deposited into an ADI account, cash itself (currency), cheques or an insurance payment payable upon damage to the collateral6. There is no need to take extra steps to perfect against these forms of proceeds provided that a registration covers and adequately perfected the security interest in the original collateral. This is sometimes called deemed perfection;
(c) Registration against proceeds in the initial registration for the original collateral: if a secured party only registers narrowly against original collateral (for example, a truck mortgage is registered against the truck as original collateral), they can also register against proceeds generated from the original collateral (truck) in the future, at the outset when conducting the registration against the original collateral (the truck).
Secured parties can register against the following classes or items of proceeds (in addition to the original collateral)7:
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proceeds that are all present and after- acquired property – this will cover all proceeds generated from original collateral (the truck in the example); or
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any particular items of personal property. To do so, the secured party should register against the item(s) of proceeds in question, plus a class of collateral to which the item belongs. For example, a secured party could register against certain items of proceeds
of the truck in the example by registering against all trucks (for which the truck may be traded-in or exchanged), and motor vehicles, that are proceeds. The additional class of collateral is to assist in identifying the item of proceeds nominated; or
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any particular class of personal property, plus a wider class that wholly includes
the first class. Returning to the truck example, the secured party could register against certain classes of proceeds of the truck by registering against all accounts (generated from sale of the truck) and intangible property that are proceeds of the truck. Again, the additional wider class (intangible property) of collateral is to assist in identifying the class of proceeds nominated; and
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(d) temporary perfection for five (5) business days following the generation of proceeds: if a security interest is not otherwise perfected against proceeds, then the security interest is temporarily perfected against the proceeds for five (5) business days only. The secured party must take steps to perfect against the proceeds by a registration, or by taking possession or control of the proceeds8, within five (5) business days of the proceeds being generated, to preserve in respect of the proceeds the priority time that the secured party enjoyed against the original collateral. If there is no perfection within five (5) business days of the proceeds being generated then the security interest becomes unperfected against the proceeds – it can still be perfected thereafter, but loses the benefit of the earlier priority time held against the original collateral9.
The five (5) business day temporary perfection window for proceeds is short, and in reality many secured parties will not learn of disposals within that time period to enable them to perfect against proceeds to preserve their original priority times. Secured parties are well advised to remember that security interests automatically attach to proceeds upon transfers and disposals of collateral, and to ensure that initial registrations to perfect security interests are wide enough to cover all proceeds. Again, this can be done by either:
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- a initial wide registration against the original collateral,
- registration against all proceeds, or
- registration against specific classes or items of proceeds.
It is difficult to predict the form that proceeds may take before disposals occur, so it is best to register against all proceeds.
If doubt exists about the validity of a wide initial registration against original collateral (for example, for being seriously misleading10 - see the discussion at paragraphs 22.19.1 to 22.21.3 of Chapter 22 (Registration and the PPS Register)), the secured party can always limit the scope of the registration against the original collateral, and register against all proceeds generated from that original collateral11.
Notes:
1 PPSA section 32(1)(b)
2 The analysis of whether a security interest attaches to all or substantially all of the property of a grantor for these purposes is different for transitional security interests, and new PPSA security interests. For transitional security interests, the analysis does not include PPSA retention of title property such as leased assets or property subject to conditional sales (retention of title) transactions. By contrast, for security interests which arise under security agreements entered into after commencement of the PPSA, the analysis includes PPSA retention of title property.
3 Corporations Act 2001 (Cth) section 441AA
4 PPSA section 43, which applies to original collateral and proceeds alike – see section 42(a)(ii).
5 PPSA section 33(1)(b)
6 PPSA section 33(1)(c)
7 PPS Regulations, Schedule 1, Part 3, 2.4.
8 PPSA section 33(2) and (3)
9 PPSA section 33(3)
10 PPSA section 164. See also the New Zealand case of Simpson v New Zealand Associated Refrigerated Food Distributors Ltd (Court of Appeal) [2007] 2 NZLR 130, which holds that an overly wide registration is not void for being seriously misleading.
11 PSA section 153; PPS Regulations, Schedule 1, Part 2, paragraph 2.4
