- 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)
Chapter 4 of the PPSA includes specific enforcement provisions which encompass various rights and remedies for secured parties, and certain protections for grantors.
However, Chapter 4 does not apply to the enforcement of various security interests, including1:
(a) receiverships: receivers appointed to the assets of companies2;
(b) deemed security: enforcements under the three deemed security interests, being transfers of accounts or chattel paper, PPS Leases and commercial consignments, but only where they do not secure obligations. If rent or other amounts remain owing, arguably Chapter 4 may apply3;
(c) certain investment instruments and intermediated securities: Chapter 4 does not apply to security interests over investment instruments perfected by possession or control, or security interests over intermediated securities perfected by control4. This means, for example, that share mortgages granted by high net-worth individuals and which are perfected by control will not carry helpful remedies such as the secured party purchasing or retaining collateral (see below);
(d) transitional security interests: Chapter 4 does not apply to the enforcement of transitional security interests, which are security interests that arise under security agreements entered into before the commencement of the PPSA;
(e) contracting out: Chapter 4 permits the grantor and the secured party to contract out of many of its provisions, and will not apply where the parties contract out in the security agreement or otherwise. Not all the provisions of Chapter 4 can be contracted out of, but many can. The discussion of Chapter 4 below identifies provisions that can be contracted out; and
(f) goods outside Australia: Chapter 4 does not apply to the enforcement of security interests in goods that are located outside Australia.
In summary, the main potential application of the PPSA enforcement provisions in Chapter 4 is to:
(a) individuals: security interests granted by individuals and to which Chapter 4 applies; and
(b) certain controllerships: the appointment of (non-receiver) controllers to the assets of companies under security interests to which Chapter 4 applies, such as conditional sales (by retention of title) transactions entered into after commencement of the PPSA (not transitional security interests)5. Chapter 4 (excluding section 131) may also apply to PPS Leases, transfers of accounts or chattel paper and commercial consignments (the deemed security interests) that secure obligations.
The Chapter 4 enforcement provisions of the PPSA also apply to consumer transactions regulated by the Australian Consumer Law6.
Does Chapter 4 apply to administration?
Query whether an administrator appointed (instead of a receiver) by a secured party holding a security interest over the whole or substantially the whole of a grantor's assets under section 436C of the Corporations Act 2001 (Cth) is a controller? Is the administrator in this case a person appointed to enforce a security interest, which is the definition of "controller" under the Corporations Act 2001 (Cth). The idea of a “controller” does not easily relate to an administrator because an administrator owes duties to all creditors, not just the appointing creditor. It seems unlikely that an administrator appointed in these circumstances would be a controller, and to that extent Chapter 4 of the PPSA would not apply.
If such an administrator is a controller (which seems unlikely), then the PPSA enforcement provisions in Chapter 4 may potentially apply within the parameters outlined above (paragraphs 24.8.2 and 24.8.3). If not a controller (which is likely to be the position), presumably the provisions of Chapter 4 would not apply.
Key Chapter 4 enforcement rights/remedies
The key enforcement provisions of Chapter 4 are discussed below, with indications in relation to each of whether the parties can contract out.
The discussion of Chapter 4 rights, remedies and other provisions below assumes that Chapter 4 applies to the security interest in question. From above, there are very significant exclusions from Chapter 4. The discussion below relates to the enforcement of security interests to which Chapter 4 applies.
Taking possession (seizing) collateral – section 123
Section 123 in Chapter 4 is unhelpfully vague but probably confirms a secured party's right to take possession of collateral to enforce a security interest following a default by the grantor.
Secured parties can take apparent possession of collateral where the collateral is too big or difficult to move from the grantor's premises7. The PPSA contemplates that secured parties may seize collateral by taking apparent possession where collateral cannot be readily moved from the grantor’s premises, or adequate storage facilities are not readily available. The PPSA is silent on how to take apparent possession, but, for example, apparent possession could conceivably be taken by changing the locks to a storeroom where collateral is located.
The PPSA confirms that a senior-ranking security interest has the superior right to take possession of collateral. A junior-ranking secured party can take possession of collateral upon enforcement, but later can be required to deliver up possession to a senior-ranking secured party if the collateral is not yet sold or disposed8.
Parties to a security agreement cannot contract out of this superior right of senior-ranking secured parties to take possession of collateral, or to require junior-ranking secured parties who have already taken possession of collateral to deliver up possession to them.
Sale of seized collateral – section 128
A secured party can sell (dispose) of collateral that they have seized from a grantor following default under a security agreement9.
A secured party may dispose of collateral by private or public sale, by lease (but only if the security agreement permits disposal by lease – a drafting point for security agreements), and in respect of intellectual property rights only by licence10.
10 business days notice to exercise power of sale – section 130
A secured party must give at least 10 business days notice (or such shorter period as is agreed with the relevant party) to both the grantor and any higher-ranking secured party of their intention to dispose of the collateral11. The notice must include the particulars set out in section 130(2)12.
Secured parties are excused from giving sale notices under section 130 if, after having made reasonable attempts, the secured party is unable to locate the relevant person (grantor or higher-ranking secured party)13.
For grantors entitled to receive a notice of intention to sell under section 130, they can waive the notice requirement in writing at any time after a default has occurred14.
For higher-ranking secured parties entitled to receive a notice of intention to sell under section 130, they can waive the notice requirement under section 130 at any time in writing15.
Accordingly, it is not clear whether the notice requirement under section 130 can be contracted out of on the part of the grantor in security or facility agreements (it can only be waived after a default has occured?).
Secured party may purchase collateral – credit bidding? – section 129
Where Chapter 4 applies it allows secured parties to buy the collateral.
To buy collateral, the secured party must notify each of the grantor and each senior-ranking secured party (if any) of its intention to buy the collateral. The secured party must also pay at least market value for the collateral, hold a public sale, and purchase the collateral at the public sale16.
The PPSA is silent on the point, but query whether, after a secured party has contracted to buy collateral and to pay the purchase price, the secured party could then set-off against the purchase price for the collateral the secured money owed to it. If a secured party can do this, then (in effect) the remedy looks like credit bidding. Credit bidding is using secured obligations owed to buy collateral by releasing secured obligations to the extent of the purchase price payable.
Retention of collateral - appropriation/credit bidding – sections 134 - 136
A remedy which also looks very much like credit bidding is retention of collateral under section 134 of Chapter 4. Section 134 permits secured parties to retain (appropriate) collateral in satisfaction of the secured moneys owed to them17.
To retain collateral the secured party must give notice of its intention to retain collateral to:
(a) the grantor; and
(b) for PMSI security interests, each secured party holding a registered security interest over which the PMSI has priority; or
(c) each registered secured party (whether senior or junior) if not a PMSI. The requirements for the notice are set out in section 135.
PMSI secured parties appear to have a slightly advantageous position if they wish to retain collateral because they need only give notice to junior-ranking registered secured parties, not all other secured parties as is the case for non-PMSI secured parties looking to retain collateral. Given PMSI super priority, there should be few senior-ranking secured parties that do not receive notices.
This right of secured parties to retain collateral is probably more appropriately called a right of appropriation. The Financial Collateral Directive18 in the European Union provides for secured creditors with security interests in "financial collateral" (broadly, shares, bonds or cash) to take the collateral in satisfaction of such part of the secured moneys as the value of the collateral represents. This right is called appropriation. The whole secured moneys are not necessarily extinguished by appropriation under the Financial Collateral Directive – if the collateral is worth less than the secured moneys, an unsecured debt remains.
The right to retain collateral under Chapter 4 does not apply to investment instruments (for instance, shares and bonds) or intermediated securities (for example, ASX-listed shares) where perfection is by possession or control19.
A key difference between the right of a secured party to buy collateral under section 129 on the one hand, and retain collateral under section 134 on the other hand, is that the whole secured moneys are extinguished upon a retention (section 134), even if the collateral is worth less that the secured moneys20. This makes retention similar to the general law remedy of foreclosure under mortgages which similarly extinguishes secured moneys. This is different from the EU Financial Collateral Directive right of appropriation (see paragraph 24.8.26 above), which does not extinguish outstanding secured moneys.
The parties can contract out of the Chapter 4 provisions relating to purchasing collateral, but it is less clear whether the provisions on retaining collateral can be contracted out.
Objection to secured parties buying or retaining collateral – sections 137 and 138
The rights of secured parties to buy collateral under section 129, or retain collateral under section 134, are quite weak. This is because either the grantor or any other secured party who is entitled to receive notice of a secured party’s intention to buy/retain collateral can object. The mere objection prevents the secured party from buying or retaining, and then the secured party must enforce by selling the collateral in the normal way21.
A secured party who needs to give notice of a proposed purchase or retention of collateral to few or no other secured parties, has a stronger position because few, if any, secured parties will be able to object to the purchase or retention.
The grantor can always object to a secured party buying or retaining collateral. Accordingly, a secured party does not have an unfettered right to buy or retain collateral.
Reasonable enforcement – section 111
Chapter 4 requires that secured parties exercise their enforcement rights under the PPSA both honestly and in a commercially reasonable manner22. This sounds good, but from above we know that the PPSA enforcement provisions in Chapter 4 will not (in effect) apply to most security interests granted by companies. This obligation to enforce reasonably will apply predominantly to the enforcement of security granted by individuals.
Realisation duty of a secured party – section 131
Chapter 4 mirrors in section 131 the current Corporations Act 2001 (Cth) section 420A realisation duty which applies to receivers and controllers of companies. Upon secured parties or their receivers/controllers exercising a power of sale under a security interest to which section 131 applies (see below), section 131 requires that a secured party exercise all reasonable care to sell collateral for market value if the collateral has a market value. If there is no market for the collateral, the secured party should obtain the best price reasonably obtainable given the circumstances at the time of the disposal.
Section 131 applies predominantly to the enforcement of security granted by individuals, including the appointment of receivers to property of individuals23. Section 131 has been excluded from application to (non-receiver) controllerships of companies to which Chapter 4 otherwise applies, for example, retention of title sales where the seller repossesses.
Where (non-receiver) controllers are appointed to enforce security interests granted by companies, section 131 will not apply even where Chapter 4 applies (see paragraphs 24.8.2 and 24.8.3 above) by virtue of PPSA section 116(2). Chapter 4 (but not section 131) will apply to the deemed security interests (PPS Leases, commercial consignments and transfers of accounts) but only where they secure obligations. By contrast, the realisation duty in section 420A of the Corporations Act 2001 (Cth) will apply where a controller is appointed to property of a company, which must be judged in light of the definition of PPSA Retention of Title Property24. PPSA Retention of Title Property is discussed at paragraph 24.191 and below.
Section 420A appears not to apply to enforcement by appointment of receivers or controllers under leases, consignments, conditional sales by retention of title or other title-based transactions regulated as security interests under the PPSA. This is regardless of whether the security interest is a transitional security interest, or entered into after commencement of the PPSA. This result arises because:
(a) Part 5.2 (receiverships and controllerships) of the Corporations Act 2001 (Cth) does not apply to PPSA Retention of Title Property – property of a company for the purposes of Part 5.2 generally excludes PPSA Retention of Title Property; and
(b) the definition of controller (which includes a receiver) only relates to controllers appointed to property of a company, which excludes PPSA Retention of Title Property in Part 5.2.
The realisation duty in section 131 is exactly the same as section 420A of the Corporations Act 2001 (Cth), so it should not matter which of them applies, provided that one applies. Case law interpreting section 420A, which emphasises the importance of going through a thorough market-testing marketing campaign25, is very likely also to apply to section 131.
Statements of account – section 132
The grantor or any other holder of a (junior) security interest in collateral can request a senior-ranking secured party who has disposed of collateral by enforcement to provide a statement of account26. The statement must show the amount received upon disposal, the expenses incurred in the disposal, and any balance still owing by the grantor to the secured party.
This largely confirms the existing rights of grantors to compel secured creditors to account to them for expenses incurred, secured money outstanding, and amounts received upon disposals of collateral. This is often referred to as the right (of a mortgagor or chargor) to “an account” from the mortgagee.
This allows the grantor to see what has happened to collateral upon enforcement, and keeps the secured party honest and accountable.
Protection of buyers buying from a secured party upon enforcement - overreaching other encumbrances – section 133 and property law legislation
Whether the secured party purchases collateral itself, or sells collateral to a third party upon enforcement, section 133 of the PPSA confirms that the exercise of the power of sale provided for in section 128 of the PPSA will extinguish all security interests which rank behind the security interest under which the power of sale was exercised. The buyer takes free of these junior security interests, the selling secured party's interest, and of course the grantor’s equity of redemption in relation to the collateral.
If a security interest is not first-ranking, then an exercise of the power of sale under section 128 can only deliver to a purchaser title to the collateral which is subject to higher- ranking security interests.
Section 133 applies where Chapter 4 applies, which is predominantly to security granted by individuals, and certain (non-receiver) controllerships of companies (see paragraphs 24.8.2 to 24.8.3, and paragraphs 24.8.36 and 24.8.37, above).
Section 133 mirrors the pre-PPSA general law position in respect of mortgagees or chargees exercising powers of sale, which is that secured parties and receivers or controllers appointed by them under senior-ranking mortgages or charges can sell collateral free and clear of (and so extinguish) junior-ranking security interests over the collateral27. This is called overreaching or "selling through" junior security interests.
The power to overreach junior-ranking security interests exists in the property law legislation of the Australian States. For example, in Victoria, section 104 of the Property Law Act 1958 (Vic) provides that upon enforcement of a mortgage or charge granted by an individual or a company, the mortgagee or chargee or a receiver/controller appointed by them can exercise a power of sale and overreach (extinguish) junior-ranking encumbrances, but sells subject to senior ranking encumbrances.
Unfortunately, section 104 and its equivalents in other Australian States are not likely to be amended to expand their application to security interests under the PPSA, as, for example, the Corporations Act 2001 (Cth) definition of security interest will be so amended. However, in New South Wales, Queensland and Western Australia, references in state legislation to "charges" are taken to include PPSA security interests, which does the trick.
After commencement of the PPSA, the resulting situation for the exercise of a power of sale under a security interest granted by a company is as follows:
(a) mortgages or charges can overreach under section 104 or equivalents: if the security interest is drafted as a mortgage or charge28 (charge includes a PPSA security interest in NSW, Qld, and WA) that falls within the ambit of section 104 of the Property Law Act 1958 (Vic) or its equivalents in other States29, then a secured party or a receiver/controller appointed by them, and purchasers from them, could rely on these provisions to overreach and extinguish junior- ranking encumbrances upon the exercise of a power of sale.
The PPSA expressly preserves, and operates concurrently with, other Australian Commonwealth and State law which is not inconsistent30. In particular, the PPSA expressly preserves other law (which is not inconsistent) that operates to extinguish security interests31. This is precisely what section 104 in Victoria and its equivalents in other States do – these provisions extinguish junior-ranking security interests over collateral upon the exercise of a power of sale under a senior-ranking security interest; and
(b) section 133 of the PPSA cannot be relied upon for many security interests granted by companies: secured parties and receivers appointed by them to companies usually will not be able to rely on section 133. Section 133 only applies where Chapter 4 applies, which from above (paragraphs 24.8.2 and 24.8.3) is predominantly to security granted by individuals, and (non-reciever) controllerships of companies such as repossession under a conditional sale (by retention of title). Chapter 4 can also apply to the deemed security interests (PPS Leases, commercial consignments and transfers of accounts) if they secure obligations.
Where security interests are not mortgages or charges (charge includes a PPSA security interest in NSW, Qld, and WA) so as to fall within section 104 or its equivalents, such as conditional sales by retention of title, leases, trusts that secure obligations and other transactions which in substance secure obligations, and Chapter 4 does not apply to the security interest in question (see paragraphs 24.8.2 and 24.8.3 above for the application of Chapter 4), then secured parties of companies will need to argue and rely upon general law principles to reach the result that first- ranking security interests can overreach junior-ranking security interests when exercising a power of sale.
The PPSA preserves any general case law which would be relevant to extinguishment of junior-ranking security interests upon an enforcement sale32. It is, however, surprisingly difficult to find helpful cases in this area which confirm a senior-ranking secured party’s ability to sell and extinguish junior-ranking security interests over the same collateral33. This should, however, follow from general principles and the fact of first-ranking priority.
Buyers from secured parties exercising powers of salewill need to be especially careful of PMSIs and security interests perfected by control, given their super-priority. Buyers will take subject to these security interests unless they buy from secured parties who hold PMSIs or security interests perfected by control. Buyers of collateral from receivers, administrators or secured parties could consider taking specific releases of any super-priority security interests including PMSIs, or security interests perfected by control, where these super priority security interests exist but the power of sale by which the buyer purchases collateral is not exercised by these super-priority secured parties.
Reinstatement of security interests by curing defaults – section 143
Any person has the once-only right to reinstate a security interest that has fallen into payment arrears or default by paying the amounts in arrears and enforcement expenses incurred by the secured party, and otherwise by curing defaults34. This assumes that the right to reinstate has not been contracted out of (which it can be).
If the secured party has accelerated the secured moneys following default, then reinstatement of the security interest dis-applies the acceleration of all amounts owed. Arrears (not the full accelerated amount) and enforcement costs incurred by the secured party must be paid35, and other non-payment defaults must be remedied36.
The right to reinstate a security interest by paying arrears and curing other defaults can only be exercised once.
Any person, not just the grantor, can, it seems, pay off arrears and cure other defaults to dis-apply an acceleration by a secured party and reinstate a security interest. The most obvious persons to do so are the grantor and the debtor (if different to the grantor).
Persons (other than the grantor or the debtor) who pay arrears and cure a payment default may have rights to subrogate to security interests held by the secured party, because they have paid off part of the secured party's debt. If the security agreement does not exclude subrogation, the subrogation (if available) is likely only to be permitted once the secured party has been repaid in full37. However, the general law of subrogation is not entirely clear as to whether a totally unrelated party (a party who is not otherwise liable to pay the secured obligations, whether as a borrower (primary liability) or guarantor (secondary liability)) can pay off amounts owing and then subrogate to security interests or other rights held by the recipient to secure the amounts paid off38.
Waterfall – application of realisation proceeds – section 140
A mandatory application of proceeds waterfall in section 140 applies to sale proceeds received by a secured party upon enforcement of security interests to which Chapter 4 applies. Having said that, it merely confirms the position that security interests are repaid in order of priority.
The mandatory waterfall provides that reasonable expenses incurred in enforcing security interests can be claimed. This may limit a secured party's ability to claim enforcement expenses which are unusually large or not easily justifiable. It is difficult to see that this changes the existing law.
Where security agreements are very short on provisions, such as supply agreements that include retention of
title security interests, the ability to claim reasonable enforcement expenses may be extremely helpful to the secured party. This is because the security agreement may not otherwise contain any enforcement expenses indemnity which permits the secured party to claim enforcement expenses.
Enforcement of security interests over crops and livestock
Chapter 4 includes specific enforcement rights in relation to security interests in crops and livestock (sections 138A to 138C). These are not discussed here.
Registration window - 20 business days – Corporations Act 2001 (Cth) section 588FL
From above, consequential amendments to the Corporations Act 2001 (Cth) to implement the PPSA will add a new section 588FL. Given its consequences upon enforcement and insolvency, section 588FL is briefly discussed in this enforcement context as well (section 588FL is also discussed in paragraph 12.3.3 of Chapter 12 (Perfection)).
Section 588FL effectively means that secured parties who perfect by registration only must register within 20 business days of the grant of a security interest (not 45 days as was the case for company charges under Chapter 2K of the Corporations Act 2001 (Cth)). Section 588FL sets up a system whereby if a grantor becomes insolvent (liquidation or administration), then any security interests that are:
(a) perfected by registration only; and
(b) granted in the six (6) months leading up to the grantor’s insolvency; and
(c) not registered within 20 business days of grant,
vest in the grantor and are extinguished.
Section 588FL does not apply to transfers of accounts or chattel paper, commercial consignments, or PPS Leases, which in each case do not secure obligations39.
The upshot of this rule is that well advised secured parties will not take the risk that a grantor becomes insolvent within six (6) months of extending credit or making a loan and taking security. The practice of registering security interests in Australia will change to either pre-registration, or registration within 20 business days of grant.
Before taking enforcement steps under a security interest granted within the preceding six (6) months, secured parties and their advisors should check that the security interest was registered within 20 business days of grant. This is in addition to conducting the usual assessment of whether the “green” (granted within six months of insolvency) security interest is on risk of being a voidable transaction such as a preferance.
Enforcing security interests over both personal property and land in accordance with land law – sections 117 and 118
The PPSA is conscious of the fact that it only applies to personal property, yet many security interests attach to both personal property and land. Alternatively, there may be separate security interests over personal property and land that secure the same obligations of the same debtor.
Where the same obligations are secured by security interest(s) over both personal property and land, the secured party can elect to enforce the security interest(s) in accordance with the law that regulates the security interest over land40. This right exists provided the security interest over personal property is first-ranking, or all higher- ranking secured parties over the personal property in question have consented.
What this means in practice will depend on the prevailing circumstances. For example, two areas of regulation of security interests over land that may arise are as follows:
(a) notice periods before sale of land upon enforcement: in every Australian State the general rule is that a secured party over land must issue a power of sale notice to a grantor who gives security over land, before a power to sell the land upon enforcement arises. Land is valuable and special. The law requires that a secured party give the grantor notice of an intention to sell land upon enforcement. This gives the grantor an opportunity to repay the secured obligations, redeem the security, and save their land.
In relation to Torrens-system land, the relevant provision in New South Wales is section 57 of the Real Property Act 1900 (NSW), and in Victoria is section 76 of the Transfer of Land Act 1958 (Vic).
The power of sale notice provisions differ slightly from State to State, but most involve two elements. First, the secured party must as a general rule give the grantor one-month’s notice of their intention to sell land upon enforcement of the security interest, during which time the grantor can repay the secured party and redeem the security to regain the land.
Second, the requirement for one-month’s notice often only applies in relation to payment defaults under the security agreement. By contrast, if there have been covenant defaults (breaches of non-payment covenants in the security agreement such as a covenant to insure the land and buildings), then the one-month notice period before sale can often (but not always) be dispensed with (contracted out of if there is clear language to exclude the requirement for notice in the security agreement). If the one- month notice period is validly dispensed with, then a secured party could sell the land without giving the grantor a one-month period to redeem.
Returning to the PPSA, one implication for secured parties holding security over both personal property and land of electing to enforce in accordance with land law is that if the secured party has the benefit of a non-payment default (covenant default), and has validly dispensed with the requirement to give one-month’s notice to the grantor before selling land in the security agreement, then the secured party seemingly could sell both the land and personal property together, following a default, without giving the grantor any notice.
This might be advantageous where notice periods apply under the PPSA before a secured party can enforce and sell collateral. For example, a secured party looking to sell collateral under a security interest to which Chapter 4 of the PPSA applies must give ten (10) business days notice (or another agreed notice period) to the grantor and other higher-ranking secured parties before selling or disposing of collateral41 - see the discussion above at paragraphs 24.8.15 to 24.8.19. This notice requirement might be able to be side-stepped and a quick sale implemented if the secured party elects to enforce in accordance with land law, and the land law power of sale notice period has been validly dispensed with;
(b) foreclosure: foreclosure, which is where a mortgagee enforces security over land by taking the land in satisfaction of secured obligations, is a cumbersome remedy. Similar remedies exist under the PPSA, being to buy collateral (section 129) or retain collateral (section 134). However, the remedies of buying or retaining collateral under Chapter 4 of the PPSA are only available where Chapter 4 applies, which is to certain security interests granted by individuals, and certain (non-receiver) controllerships of companies (see paragraphs 24.8.2 and 24.8.3 above). Further, they are not available if either the grantor or other secured parties entitled to receive notice of intention to buy or retain the collateral object (see the discussion above at paragraphs 24.8.30 to 24.8.32).
If a secured party elects to enforce security over the personal property and land in accordance with land law, they may be able to side-step these blockages to buy or retain collateral, by foreclosing against collateral in accordance with land law.
However, land law foreclosure is usually a difficult and cumbersome remedy42, and usually extinguishes secured obligations in their entirety even if they exceed the value of the land.
Secured parties should think carefully about their enforcement strategy before electing to enforce in accordance with land law, to ensure the land law remedy sought is in fact more favourable.
There are, no doubt, many other opportunities to take advantage of enforcement remedies available to secured parties under land law. Much will depend on the circumstances. Land law remedies should be very carefully evaluated before an election is made, as the above discussion hopefully bears out.
Garnishee notices - enforcement of security interests over liquid assets (accounts, chattel paper and negotiable instruments) – section 120
The PPSA includes a remedy for secured parties to garnish (step in to) payments owing to a grantor under accounts (receivables), chattel paper (examples of chattel paper include the original documents for leases of goods and conditional sales by retention of title in respect of specific goods) and negotiable instruments, to enforce security held over these so-called “liquid” assets.
Accounts, chattel paper and negotiable instruments comprise payments owing to a grantor. If a secured party holds security over these assets, then following default by a grantor, a secured party can give notice to the person who owes payments to the grantor under an account, chattel paper or negotiable instrument to make all further payments instead to the secured party43.
Upon receipt of a notice from the secured party under section 120, persons who owe payments to a grantor under accounts, chattel paper or negotiable instruments are obliged to pay those amounts to the secured party within five (5) business days of the amounts becoming due44.
Section 120 is silent on the point, but presumably persons who pay a secured party after receiving a notice under section 120 receive a good discharge for the debt by paying the secured party.
If a security interest is not first-ranking over accounts, chattel paper and negotiable instruments, then a notice must be given to each higher-ranking secured party giving them notice of intention to serve a notice under section 120 to garnish “liquid” assets45.
Notes:
1 PPSA section 109. (link)
2 PPSA section 116(1). (link)
3 PPSA section 109(1). (link)
4 PPSA section 109(3). (link)
5 The definitions of controller (section 9) and security interest (section 51A) have been amended or added to the Corporations Act 2001 (Cth) to provide that any person who has possession or control of property of a company for the purposes of enforcing a charge, lien, pledge or PPSA security interest (defined in section 51) is a controller. The definition of security interest specifically excludes transitional security interests.
6 See PPSA section 109(5). Some provisions of Chapter 4 of the PPSA are dis-applied to consumer security.
7 PPSA section 126. (link)
8 PPSA section 127. (link)
9 PPSA section 128. (link)
10 PPSA section 128(2). (link)
11 PPSA section 130(1). (link)
12 PPSA section 130(3). (link)
13 PPSA section 144(a). (link)
14 PPSA section 144(b). (link)
15 PPSA section 144(c). (link)
16 PPSA sections 129 and 130.
17 PPSA section 134. (link)
18 European Directive (2002/47/EC), as implemented (for example) in the United Kingdom under the Financial Collateral Arrangements (No. 2) Regulations 2003.
19 PPSA section 109(3). (link)
20 PPSA section 136(5)(a). (link)
21 PPSA section 137. (link)
22 PPSA section 111. (link)
23 PPSA section 116(3). (link)
24 The phrase PPSA retention of title property is defined in section 51F of the Corporations Act 2001 (Cth), and is used in different ways throughout the Corporations Act 2001 (Cth).
25 See for example Artistic Builders Pty Ltd v Elliot and Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16.
26 PPSA section 132. (link)
27 For example, Property Law Act 1958 (Vic), section 104; Conveyancing Act 1919 (NSW) section 112.
28 The legislation differs by State, but some legislation applies to mortgages, charges and liens, which may or may not be helpful depending on the security interest in question.
29 See section 112 of the Conveyancing Act 1919 (NSW); section 86 of the Property Law Act 1974 (Qld); section 60 of the Property Law Act 1969 (WA); section 49 of the Law of Property Act 1936 (SA); section 23 of the Conveyancing and Law of Property Act 1884 (Tas).
30 PPSA section 254(1). (link)
31 PPSA section 254(2)(g). (link)
32 PPSA section 254(1)(c) read with section 254(2) (g).
33 The position is further complicated where a power of sale is sought to be exercised under an equitable mortgage, and the question arises whether a conveyance of the legal estate to a purchaser can be achieved. See the discussion in Fisher & Lightwood’s Law of Mortgage (Second Australian Edition – Lexis Nexus, Butterworths, 2005), at paragraphs 20.49 and 20.50.
34 PPSA section 143. (link)
35 PPSA section 143(1)(a) (i). (link)
36 PPSA section 143(1)(b). (link)
37 The general law of subrogation to security interests upon a third party (other than the principal debtor) repaying the secured moneys is that subrogation is permitted only once the secured party is repaid in full and can no longer be prejudiced by the subrogation. Otherwise, the subrogating party may end up competing with the secured party for repayment. See Ewan McKendrick, Goode on Commercial Law (4th Ed, 2010, Penguin Books) at page 818, citing Re Howe (1871) 6 Ch App 838, and Ewart v Latta (1865) 4 Macq 983.
38 See Charles Mitchell and Stephen Watterson, Subrogation – Law and Practice (2007, Oxford University Press), at paragraph 2.18, citing Electricity Supply Nominees Ltd v Thorn EMI Retail Ltd (1991) 63 P & CR 143 (CA).
39 Corporations Act 2001 (Cth) section 588FN. (link)
40 PPSA sections 117 and 118.
41 PPSA section 130. (link)
42 An account of amounts owing under the mortgage is usually required for foreclosure. Further, the mortgagor is usually permitted a six month period within which to redeem the mortgage. See generally chapter 21 in Fisher & Lightwood’s Law of Mortgage (Second Australian Edition – Lexis Nexus, Butterworths, 2005).
43 PPSA section 120. (link)
