Introduction
Accounts (book debts, receivables and other payables generated from disposing property, or in the ordinary course of a business1) are very significant assets to Australian businesses.
The PPSA provides that all security interests attach to proceeds of collateral generated when original collateral
is disposed. Where proceeds are accounts, this will mean that security interests will attach to accounts (as proceeds) generated when original collateral is sold and payment of the purchase price is deferred to a future date. Security interests will maintain the same priority against the accounts as proceeds as they enjoyed against the original collateral, provided they are also perfected against the accounts as proceeds.
Accordingly, secured parties taking security interests in accounts as original collateral must be very careful about being defeated in relation to the accounts by other higher- ranking security interests that may attach to the accounts as proceeds.
This chapter explains how the PPSA treats this situation, and preserves a space for invoice financiers to buy, or take security over, accounts as original collateral that are generated from sales of inventory (only inventory).
The PPSA also includes other provisions relating to the assignment of accounts. This chapter also briefly discusses those provisions.
Security interests over accounts as original collateral generated from inventory sales - a space for invoice financiers (purchasers or secured parties over accounts) - section 64
A secured party looking to purchase or take a security interest over accounts as original collateral that may either exist currently, or be generated in the future, should search the PPS Register for existing security interests, including PMSIs, over (A) the existing accounts, (B) collateral the sale of which may have generated the existing accounts, and (C) collateral that may generate accounts in the future.
If there are existing perfected security interests over existing accounts either as original collateral or as proceeds, then the PPSA is unclear but it appears that the priority of those security interests over existing accounts cannot be upset under section 64 of the PPSA.
If there are existing PMSIs over inventory of a grantor, which inventory when sold in the future will generate accounts (proceeds) to which the PMSIs will attach and be perfected against with PMSI super-priority, that appears to be the main space where an incoming invoice financier can give secured parties holding PMSIs over inventory a section 64 notice in the prescribed form, informing them (the inventory PMSI holder(s)) that they will be trumped over all accounts generated from the sale of inventory nominated in the notice2.
This rule creates a space for invoice financiers to operate, to buy or take security interests over (the PPSA is unclear but it seems) accounts generated in the future from inventory sales, free from defeat by PMSIs over the underlying inventory sold that would otherwise attach to the accounts as proceeds with PMSI super-priority. The rule appears not to affect existing accounts – from above, if there are security interests that are attached to and perfected against existing accounts (it is unclear but seemingly either as original collateral or as proceeds) of a grantor, then the priority of these security interests in relation to existing accounts (seemingly) cannot be upset by the priority rule in section 64.
To summarise this rule in section 64 that preserves a space of invoice financiers to operate, security interests (including outright transfers) granted for new value over future accounts as original collateral that are (in the future to be) generated from sales of inventory, defeat PMSIs (only PMSIs) that may attach to the same accounts as proceeds of sales of inventory. This is provided the secured party either (A) registers over the (future) accounts before the PMSI registers over the inventory, or (B) alternatively, the secured party over the (future) accounts gives 15 business days notice in accordance with section 64 to the holder(s) of the inventory PMSI(s) before the attachment of the security interest over the accounts or before the registration to perfect the security interest over the accounts (whichever is earlier)3. A section 64 notice requires a description of (existing?) inventory which when sold will generate the accounts over which the incoming secured party has priority.
Put another way, the PPSA protects secured parties who take a security interest over (which includes a transfer of) accounts to be generated in the future from the sale of inventory as original collateral and not proceeds, from being defeated by PMSIs over the inventory sold attaching to the accounts as proceeds. This is one instance where “normal” security interests will defeat PMSIs.
This is why security interests over accounts generated from inventory sales granted for new value appear ahead of PMSIs in the priority waterfalls commencing at paragraphs 18.3.7 and 18.4.2 of Chapter 18 (Priority). However, it is clearly a very limited priority rule because it only appears to operate in relation to future accounts (see discussion below) generated from inventory sales.
Prospective operation only – future accounts only?
The PPSA is not clear on this point, but the priority rule under section 64 appears to operate only prospectively. Secured parties taking security interests over accounts generated from sales of inventory as original collateral for new value, to take priority over inventory PMSIs, must either (A) register a security interest against the accounts with a priority time ahead of any inventory PMSIs over the inventory sold that attach to the accounts as proceeds, or (B) give a prescribed form notice to holders of inventory PMSIs registered over inventory, describing the inventory that may be sold in the future to generate accounts. These conditions appear to dictate that security be taken over future accounts, before inventory is sold. If this is correct, secured parties taking security interests in accounts do not appear to be able to take priority over PMSIs that have already attached to accounts generated from sales of inventory and have an earlier priority time.
“Normal” security interests and security interests perfected by control are not defeated?
Further, this priority rule in section 64 mentions nothing about “normal” (non-PMSI) security interests such as all-assets security interests, which could equally attach to inventory, and accounts as proceeds generated when inventory is sold. The priority rule in section 64 alone (but see the discussion of section 59 at paragraph 18.8.20 of Chapter 18 (Priority)) does not appear to permit the defeat of “normal” PPSA security interests, only PMSIs.
This priority rule is, however, subject to perfection by control. Presumably, once accounts are collected and
the money deposited into an ADI account, the account bank (perfected by control) would win if owed money
and holding a security interest over the ADI account. Invoice financiers should be careful about bank account arrangements, and are likely to require collection accounts to be held either with them if they are a bank buying or taking security over the accounts, or at an independent bank that has no other lending to the grantor.
Accounts generated from inventory sales only (not provision of services)
The priority rule in section 64 applies to accounts generated from the sale of inventory. On its face section 64 does not apply to accounts generated from performance of services. This is probably a non-issue because it seems unlikely there would be PMSIs over service-inputs that trace through and attach to accounts generated from services provided.
Compensation for “subordinated” inventory PMSIs
If inventory PMSIs that attach to accounts (as proceeds) generated from sales of inventory are subordinated to security interests over those accounts as original collateral under the priority rule in section 64 outlined above, then the PMSI secured party is compensated by being taken to have a PMSI over the new value (the loan, and possibly property purchased with those funds) provided by the secured party over the accounts as original collateral4. The inventory PMSI secured party need not take any further steps to perfect against the new value – that perfection is deemed – it occurs automatically by force of section 64(3) of the PPSA.
