- 24.1 Five (5) key issues when enforcing security interests
- 24.2 Spot all security interests
- 24.3 Perfect all security interests
- 24.4 Maximise priority by seizing opportunities
- 24.5 Ascertain priorities
- 24.6 Appointing receivers “over the top” of administrators
- 24.7 Receivers can sell leased, consigned or retention of title collateral
- 24.8 Chapter 4 - Enforcement of security interests granted by individuals, and certain (non- receiver) controllerships of companies
- 24.9 PPSA Retention of Title Property
- 24.10 Enforcement regulation by class of security interest – PPSA Chapter 4 and the Corporations Act 2001 (Cth)
The key considerations when enforcing or preparing to enforce security interests under the PPSA include to:
(a) spot all security interests: ensure that all transactions that are regulated as security interests under the PPSA have been identified and that nothing is missed;
(b) perfect all security interests: ensure that all security interests are properly perfected, otherwise they are likely to be extinguished (vest in the grantor) upon the bankruptcy, administration or liquidation of the grantor;
(c) seize opportunities to maximise or improve the priority position by:
(i) perfecting against all available collateral before the onset of insolvency;
(ii) taking security interests where others have either not taken security interests, forgotten
to perfect security interests, or made mistakes when perfecting security interests, before the onset of insolvency. This may be possible because knowledge is (largely) irrelevant to priority under the PPSA. The voidable transaction risk to new security taken in the months leading up to bankruptcy, administration or liquidation must, of course, be assessed and managed in the circumstances;
(iii) perfecting by control against financial assets (shares, bonds, etc);
(iv) identifying and perfecting against proceeds if original collateral has been transferred or disposed;
(v) registering against serial numbers of serial numbered property to ensure effective registration (for consumer serial numbered property and commercial aircraft), and to prevent extinguishment of security interests if collateral is transferred (for all serial numbered property);
(d) ascertain priorities: work out the priority of all relevant security interests over relevant collateral of the grantor. Priority will inform how an enforcement or an insolvency is structured and controlled by determining the assets over which a receiver/controller, administrator or secured party has control, and can sell or contribute to a restructuring plan; and
(e) structure and plan enforcement and asset sales accordingly: putting the administration “trade on” provisions1 aside for the moment, a first- priority security interest is required to appoint a first-ranking receiver or controller to collateral, to take charge of the situation by exercising a power of sale to sell to a purchaser free of junior-ranking security interests.
Only a first-ranking security interest carries a power of sale that enables a receiver or controller to sell collateral free of (to “overreach”) all other security interests over the collateral. The power
of sale under a second-ranking security interest sells subject to the first-ranking security interest, which (in effect) requires the first-ranking secured party to give a release. See the discussion on overreaching junior security interests upon enforcement sales at paragraphs 24.157 to 24.165 below.
The relative priority of security interests will determine which secured party can enforce and realise assets, or which secured parties must consent to others doing so.
The PPSA includes an enforcement chapter, Chapter 4. Chapter 4. provides for various enforcement rights
and remedies for secured parties, and some limited protections for debtors and grantors. Chapter 4. will be of limited practical application because it does not apply to receiverships of companies, which are the dominant form of enforcement in Australia against companies.
Chapter 4 applies to:
(a) security interests granted by individuals; and
(b) certain (non-receiver) controllerships of companies, such as the enforcement of a conditional sale (retention of title) transaction, or a PPS Lease that secures obligations, by repossession of the property from the buyer/lessee (the appointment of a controller). However, the enforcement of transitional security interests will not be regulated by Chapter 42. The Corporations Act 2001 (Cth) may apply to the enforcement of transitional security interests granted by companies, without the provisions of Chapter 4.
Each of the five (5) key considerations relating to enforcement of security interests outlined above is discussed below. The discussion then turns to the enforcement rights and remedies contained in Chapter 4.
Notes:
1 The administration “trade on” provisions allow an administrator to continue to trade a business upon appointment, often pending a trade sale of the business, by selling property which is subject to security interests, including retention of title property, in the ordinary course of business, provided the administrator accounts to the secured parties for the proceeds. See Corporations Act 2001 (Cth), sections 442C and related provisions.
2 Amendments to the Corporations Act 2001 (Cth) provide that (A) controllers are anyone who has possession or control of property of a corporation for the purposes of enforcing a security interest, where (B) security interest is defined in sections 51 and 51A to specifically exclude transitional security interests.
