- 23.1 Most unperfected security interests “vest in the grantor” (are extinguished) upon the bankruptcy, administration or liquidation of the grantor
- 23.2 Compensation for vested commercial consignments and PPS Leases
- 23.3 Unperfected security interests - protection of buyers for new value where secured parties or receivers appointed by them exercise a power of sale to sell collateral
- 23.4 Receivership or controllership without administration or liquidation
Most security interests that are unperfected upon the bankruptcy, administration or liquidation of the grantor are extinguished. The PPSA provides that most unperfected security interests vest in the grantor upon the grantor entering liquidation or administration.
Unperfected security interests that do not vest in the grantor upon the grantor’s bankruptcy, administration or liquidation include the following:
(a) deemed security interests: most of the deemed security interests, provided in each case that they do not secure the payment or performance of an obligation. That is1:
-
-
-
- transfers of accounts;
- commercial consignments; and
- PPS Leases,
-
-
do not vest in the grantor if they remain unperfected upon the grantor’s bankruptcy, administration or liquidation and they do not secure obligations. Other unperfected PPS Leases vest in the grantor upon bankruptcy, administration or liquidation;
(b) foreign law: security interests the perfection of which is governed by the law of a foreign jurisdiction – see paragraphs 17.2.13 and 17.2.14 of Chapter 17 (Perfection) for discussion; and
(c) turnover trusts: turnover trusts, which are commonly granted by junior creditors to senior creditors in intercreditor and priority agreements2. Unperfected turnover trusts do not vest in the grantor upon the grantor’s bankruptcy, administration or liquidation.
The significance of unperfected security interests generally being void upon the bankruptcy, administration or liquidation of the grantor is greater under the PPSA than for charges under the pre-PPSA Corporations Act 2001 (Cth) company charges system that were not registered within 45 days. The PPSA regulates a very wide range of transactions as security interests. A very wide range of (security interest) transactions are susceptible to being extinguished if they remain unperfected when the grantor enters bankruptcy, administration or liquidation.
This fact that most unperfected security interests vest in the grantor upon bankruptcy, administration or liquidation is a big stick to force secured parties to perfect their security interests. It is one of the methods the PPSA uses to ensure that all security interests are advertised to the world by being perfected, to address the problem of apparent ownership in personal property secured transactions (see the discussion at paragraphs 17.1.1 to 17.1.3 of Chapter 17 (Perfection) and Chapter 15 (Why the PPSA)).
Unperfected security interests remain valid until the grantor enters bankruptcy, administration or liquidation, but are susceptible to being subordinated to security interests that are perfected before them, and to being extinguished upon transfers of collateral (see Chapter 21 (The Extinguishment Rules) for discussion of the extinguishment rule in section 43).
Unperfected security interests will survive a receivership. However, a receivership will often prompt, or be prompted by, the appointment of administrators or liquidators, which would void most unperfected security interests.
