- 6.1 Security interests
- 6.2 Exclusion: set-off, combination of bank accounts and netting arrangements
- 6.3 Exclusion: quistclose and turnover trusts
- 6.4 Exclusion: general law and statutory liens
- 6.5 Exclusion: interests in personal property that arise by operation of the general law
- 6.6 Exclusion: pawnbrokers and assignments of contractual position (novations)
- 6.7 Summary of security interest transactions (1) - transactions regulated as security interests under the PPSA
- 6.8 Summary of security interest transactions (2) - transactions expressly excluded from regulation under the PPSA
- 6.9 Summary of security interest transactions (3) - transactions that fall outside the definition of security interest
- 6.10 Summary of security interest transactions (4) - transactions to which it is unclear whether the PPSA applies
Security interest is defined in section 12 of the PPSA. Section 8 lists interests to which the PPSA does not apply.
The PPSA has a much broader application than the former company charges system under Chapter 2K of the Corporations Act 2001 (Cth), but it does not apply to all transactions.
The security padlock symbol below represents transactions that are regulated as security interests under the PPSA.
Two elements to security interests – collateral AND secured obligations.
The definition of security interest under the PPSA has two legs, because it is fundamental to all security interests that there is secured property (collateral) and secured moneys (obligations). The collateral is there as a back-up to satisfy the obligations if the debtor cannot.
All transactions that both:
(A) grant an interest in personal property (the collateral), and
(B) in substance secure the payment or performance of an obligation, are likely to be regulated as security interests under the PPSA1.
The PPSA was amended before it commenced to change the definition of security interest to refer to an interest in personal property (instead of in relation to personal property), to make the scope narrower. The distinction becomes important when considering transactions of a contractual nature such as “step-in rights” granted to financiers in relation to key contracts entered into by a borrower – see the discussion of “step-in rights” in Table 4.
Tables 1 to 4 below discuss the transactions regulated as security interests under the PPSA.
Personal rights of action for repayment of a debt or other amounts such as guarantees, indemnities, letters of comfort and mere contractual subordination arrangements2 are not security interests under the PPSA. These transactions grant no interest in personal property – there is no collateral. These transactions merely provide rights to sue an additional party to satisfy secured obligations.
There must be some proprietary element to a transaction, whereby a right or other interest is granted or assigned in personal property, to secure an obligation, for it to be a security interest.
The PPSA has little regard to either the form of the transaction or who has title to the collateral3.
An exception to the requirement that there be secured obligations is that the PPSA treats three classes of transactions as security interests whether or not they secure obligations, because they are financing transactions. These are:
- transfers of accounts
- PPS Leases
- commercial consignments
as introduced at paragraph 3.3.1 of Chapter 3 (Terminology).
Exceptions - transactions that are expressly excluded from the PPSA.
Given that the definition of security interest under the PPSA is so wide, if dealing with a transaction that relates to personal property and which is even at risk of securing an obligation, the safest course will be to treat it as a security interest. It will often be easier to think in terms of exclusions and treat transactions as security interests, unless they are specifically excluded from the PPSA.
For example, the principal transactions that are excluded from the PPSA and which the PPSA does not regulate include4:
(a) set-off
(b) combination of bank accounts
(c) certain netting arrangements
(d) quistclose and turnover trusts
(e) general law and statutory liens
(f) interest in personal property that arise by operation of the general law - constructive and resulting trusts, marshalling rights, subornation rights, etc
(g) pawnbrokers
(h) assignments of contractual position (novation)
Notes:
1. PPSA section 12
2. PPSA section 12(6)
3. PPSA section 12(1)
4. There are other exclusions from the application of the PPSA, which are set out in sections 8, section 12(5) and 12(6)
