The Personal Property Securities Act (2009) Cth (PPSA) introduced a new regime for secured parties to protect their security interests in personal property. This generally involves secured parties registering their security interests on the Personal Property Securities Register to ensure they are perfected. However, secured parties do not always have to register their security interests on the PPSR for them to be perfected: they may also be perfected either by possession or by control. In this article, we discuss how control can perfect a security interest.
What security interests can be perfected by control?
The PPSA offers perfection by control in relation to certain financial assets such as bank accounts, intermediated securities and investment securities. Satellites and other space objects can also be perfected by control but we will not be looking at these in this article. Any security interest perfected by control will have “super priority” over any other form of perfected or unperfected security interest.
A secured party can have control of a bank account only if the secured party is the authorised deposit-taking institution (ADI) at which the bank account is held. This means that a lender is more likely to insist that a borrower has its transactional bank accounts with the lender so that any receivables repaid into the bank account are captured by the lender’s security.
If a borrower does not have its bank accounts with the secured party, for example because the secured party is not an ADI, the secured party may consider entering priority arrangements with the borrower’s ADI to ensure any security interest it holds in respect of the bank account takes priority over the security interest the ADI holds in respect of the bank account.
The PPSA defines an intermediated security as the rights of a person in a securities account that is maintained by an intermediary, such as a stockbroker, on that person’s behalf.
A secured party has control of a grantor’s intermediated security (i) if there is an arrangement that permits the secured party to instruct the intermediary directly or prevents the intermediary from acting without the secured party’s consent; or (ii) if the securities account is in the secured party’s name.
Amendments to the PPSA in May 2011 clarified what constitutes an intermediated security and introduced an additional test for control of an intermediated security. Accordingly, a secured party may also have control of a grantor’s intermediated security “if there is an agreement in force under which the secured party…is able to initiate or control the sending of some or all electronic messages or other electronic communications by which the intermediated security could be transferred or otherwise dealt with”.
The aim of this amendment was to overcome the difficulties involved in taking security over clearing house securities held in custodial accounts, such as those held with stockbrokers.
The PPSA defines investment instruments to include shares, debentures, derivatives, foreign exchange contracts, assignable options and other financial products. It does not include intermediated securities.
In order to control an investment instrument, a secured party must either:
- be the registered owner of the investment instrument;
- hold the certificates of title to the investment instrument (if any); or
- be in a position to sell the investment instrument without further action by the grantor.
Also, a secured party may gain control of an investment instrument not evidenced by certificates of title if there is an agreement allowing the secured party to initiate or control the instructions by which the investment instrument can be transferred.
Secured parties must be aware that a third party could take priority over their perfected security interests in bank accounts, intermediated securities and investment instruments by taking control of such bank accounts, intermediated securities and investment instruments. If this type of personal property is a significant part of a secured party’s security, that secured party should consider taking control of such property to protect its position. If you require guidance on whether your priority could be affected by a third party taking control or how you can take control of property yourself, please contact LegalVision today. Once of our PPSA experts will be able to assist!