Knowledge under the PPSA
The operation of a limited number of provisions of the PPSA keys off whether certain persons have actual or constructive knowledge of certain matters.
Some key matters to which knowledge is relevant include:
(a) certain priority rules which govern the priority of interests (not security interests) taken in collateral. These are outlined in the first three priority buckets of the priority waterfall set out commencing at paragraphs 18.3.7 and 18.4.2 of Chapter 18 (Priority); and
(b) the extinguishment rules in general (see Chapter 21 (The Extinguishment Rules)).
Actual knowledge is fairly straight forward for individuals, although more involved for large corporations – when does a company know something? Constructive knowledge can also be tricky.
The PPSA includes a definition of constructive knowledge, which codifies much of the case law about constructive knowledge. The PPSA also includes provisions on the knowledge of a person, and the knowledge of a company.
No constructive knowledge of matters registered on the PPS Register
The PPSA clarifies the difficult area about whether matters registered on a register such as the new PPS Register will be within the constructive knowledge of persons or companies/entities, where no search of the register is conducted. The answer is no – matters registered on the PPS Register will not be within the constructive knowledge of a person or company/entity1.
Constructive knowledge of persons
Under the PPSA a person has constructive knowledge of a matter if they would have actually known about it by2:
(a) making inquiries that an honest and prudent person would ordinarily make in the circumstances; or
(b) making inquiries that an honest and prudent person would ordinarily make if they had the actual knowledge of the person in question (for example, the person might know a little bit, which would normally prompt investigation).
Constructive knowledge of companies
A company will be taken to have constructive knowledge of a particular circumstance if3:
(a) a director, employee or agent of the company who is responsible for acting on behalf of the company in relation to such a circumstance, knew of it; or
(b) a director, employee or agent of the company who is not responsible for the matter knew of
it, and if they had exercised reasonable care, they would have communicated the matter to a director, employee or agent of the company who is responsible for acting on behalf of the company on such matters.
The PPSA prescribes that it would be reasonable to communicate a matter to a director, employee or agent who is responsible for acting on behalf of a company on the matter, if either:
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- doing so would be part of the regular duties of the person in question; or
- the person in question who has actual knowledge, knows about the transaction or matter in question, and that the matter/ information would materially affect the transaction/matter4.
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It is not clear how the constructive knowledge provisions of the PPSA would operate in connection with information barriers (Chinese walls) and other similar confidentiality arrangements to which corporations may be subject.
Knowledge of buyers and the extinguishment rules upon transfers of collateral
The PPSA includes certain presumptions that buyers in transactions to acquire personal property know about certain matters, including for the purposes of the operation of the extinguishment rules (sections 43 to 52) upon the transfer of collateral.
A buyer of personal property will be presumed to have actual or constructive knowledge that either a transfer of collateral breached the terms of a security agreement that governs a security interest over transferred collateral, or that a security interest existed over transferred collateral, if the buyer is either:
(a) a member of the same household as the seller;
(b) an “associated entity” to the seller within themeaning of the Corporations Act 2001 (Cth); or
(c) the buyer of property is also a director or officer of the seller company.
