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There is no denying that ‘security interest’ is legal jargon. However, unlike most legal jargon, ‘security interest’ is something you should know more about, especially if you are a business owner. Each time you borrow money, you will be requested to give the lender a security interest over some of your property as collateral. Therefore, having a working knowledge of security interests and the legal concepts that underpin them could benefit you when having conversations with the lender and negotiating a debt arrangement. This article explains: 

  • what a security interest is; 
  • the law around security interests; and 
  • a step-by-step process on how to ‘perfect’ a security interest.

What is a Security Interest? 

Security interest refers to an interest in property granted to another person as security for a debt or another obligation the property owner owes the person receiving the security interest. Further, a person granting the security interest is a grantor, and the person who receives the security interest is a secured party. A grantor can grant a security interest in any of their property, including: 

  • land;
  • fixtures on the land; 
  • shares; 
  • cars; 
  • chattels; 
  • livestock; and
  • intellectual property. 

The collateral property subject to a security interest is often called secured property.

The law around security interests granted over land and fixtures on the land (called real property) and certain licences like mining tenements, is different from the law on other types of property (called personal property). This article focuses on ‘perfecting’ security interests over personal property. 

Perfected Security Interest vs Unperfected Security Interest

Perfecting a security interest is crucial from a secured party’s perspective because it provides that secured party with certain protections under the law. Usually, priority will go to perfected security interests over unperfected security interests when it comes to enforcement.

Theoretically, a grantor can grant a security interest over the same personal property to different people. Suppose the grantor finds itself in a position where it cannot repay its debts. In that case, secured parties can enforce their rights over the secured property due to their security interests.

For instance, the secured parties may sell the secured property to meet the debt the grantor owes them. But who gets paid first? This is where priority comes in. The proceeds will be paid to meet the debts of the secured parties in the order of their priority. 

Perfected security interests have priority over an unperfected security interest. Further, the priority between perfected security interests is in the order of their registration, with the first registered security interest having the highest priority. The priority among unperfected security interests is determined based on the timing of the attachment of the security interest. However, as with anything in law, there are exceptions to this. Thus, we explain the concepts of registering and attaching security interests below.  

Steps to Perfect the Security Interest 

Here are three steps to perfect a security interest:

Step 1: Attach the Security Interest to the Collateral Property

The attachment of a security interest to collateral property is a legal concept. To ‘attach’ a security interest to the collateral property, firstly, the grantor must have an interest in the secured property subject to the security interest. For example, the grantor must own that collateral property. 

Secondly, the secured party must have given a value to have that security interest, or the grantor must have done something that has created the security interest. Providing a debt is an example of where a secured party has provided a value to the grantor for having the security interest in the collateral. 

When a security interest is created, or there is an exchange of value for a security interest, the security interest is said to be ‘attached’ to the collateral property subject of the security interest. Even oral agreements between parties can create a security interest. 

Step 2: Enter into a Security Agreement that Documents the Granting of the Security Interest

As mentioned above, an oral agreement can trigger the attachment of a security interest to the relevant collateral property. However, for that security interest to be perfected, there must be a written security agreement. The security agreement must also: 

  • reference the collateral personal property subject to the security interest; and 
  • have the signature or acceptance of the grantor

This makes the security interest enforceable against third parties. 

For completeness, it must be emphasised that an oral agreement cannot give rise to a perfected security interest even if it is registered. This is because the security agreement is not accounted for in writing. The alternative of this step is for the security interest to be perfected by possession or control. 

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Step 3: Attend to the Registration of the Security Interest on the PPSR to Perfect the Security Interest (Unless Perfected Through Possession or Control)

The most common way to perfect the security interest is to register it on the Personal Property Securities Register (the PPSR). The PPSR is like a government-run noticeboard that is publicly accessible. Therefore, everyone can see the security interests perfected over any entity by looking at the PPSR. This gives clarity and transparency regarding security interests that entities grant

The registration process involves: 

  • opening an account with the government agency that manages the PPSR;
  • completing an application with the details of the security interest; and 
  • lodging this application with the government agency within specific time frames. 

This process can be complex, so it is best to leave the registrations of security interests to the lawyers to manage. 

Again, the alternative of perfecting the security interest by registration is to have possession or control of the collateral property. 

Possession v Control 

Control

A security interest can be perfected by control where the secured party controls the secured property. This includes: 

  • personal property like shares;
  • publicly traded securities like bonds; and 
  • bank accounts. 

A secured party controls shares where it possesses the original share certificates for those shares and an instrument that allows the secured party to transfer the shares.

Additionally, a secured party controls publicly traded securities where it can instruct the intermediary, like a stockbroker, who controls those securities to deal with the security interest in a certain way.  

Further, a secured party has control over a bank account if it has the authority to use and manage the bank account at its discretion. Importantly, a security interest on collateral property under the control of the secured party will have super-priority over all other perfected or unperfected security.

Possession

Under the law, a security party perfects a security interest by possession where they possess the secured property. It must be more than just a right to possess the secured property. Additionally, the possession must not have occurred through repossession or seizure of the secured property.

Key Takeaways

A security interest is an interest over property that the owner grants as collateral to another person to whom they owe a debt or other obligation. You must perfect the security interest, so if there is a circumstance where the secured party must take enforcement action against the grantor, the secured party can have priority over the other creditors of the grantor. In Australia, you can perfect a security interest by: 

  • registration on the PPSR; 
  • possession; or 
  • control.  

This article has discussed the legal concepts around security interest and steps to perfect a security interest over personal property. However, if you want to know more about perfecting security interest or are currently in the process of borrowing money which includes granting security interest over your property, LegalVision’s banking and finance lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is a security interest?

A security interest is an interest in property granted to another person as security for a debt or another obligation owed to the person receiving the security interest. The person granting the security interest is a grantor, and the person who receives the security interest is a secured party.

What is the PPSR?

The Personal Property Securities Register (the PPSR) is like a government-run noticeboard that is publicly accessible. Registering a security interest on the PPSR is the most common way to perfect it. As it is a public register, everyone can see the security interests that are perfected in this manner by looking at the PPSR.

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