Laws3111 Lecture6 2011

Week 6 – Security Interests

  • General umbrella term used to describe any form of interest in goods used to secure a debt/obligation
  • Serves to mitigate creditors exposure/risk. Other methods include insurance, guarantors, etc.
  • General remedies include sale (right to proceeds), ownership, pursuit, and a separate and superior claim on the collateral in the event of bankruptcy.
  • Supported by policy – encourages wider variety of transactions and more efficient market if people know the other party will actually repay them.

Possessory Securities

  • Security assets actually possessed by the party owed
  • Pledge/Pawn: (a form of bailment) – requires actual/constructive possession, and grants the right to sell the property after an agreed upon or notified date. Note: Aus Pawnbrokers MUST be licensed, obey Qld statute
  • Possessory Lien: Right to RETAIN possession pending payment – but only to keep, not to sell/dispose. Must have actually worked on/with the chattle to create lien.

Securities based on Ownership (Non Possessory)

  • Mortgage: transfer of legal title from mortgagor to mortgagee to secure the loan from the mortgagee until the debt is repaid. Grants an equitable right of redemption for the amount already paid. Can be foreclosed to gain complete legal title
  • Equitable Mortgage: as above, but only equitable interest conveyed. Act made by legal owner must demonstrate a binding intention to create a security interest, but not sufficient (generally written) intention to create a legal mortgage.

Palgo Holdings v Gowans (2005)

  • Functional pawnbroking (retained goods until loan repaid) that they attempted to classify as ‘mortgage’ instead. Held determining the interest looks to intention of the parties, not merely possession.
  • Act had no broad definition of pawned goods, so it did not apply in this instance (Kirby dissenting, as always)
  • S3A of the pawnbrokers Act fixed this – Qld has NOT.

The Charge

  • Rights only enforceable once default has occurred – an equitable right to judicial remedies (receivership/order for sale) to resolve debt
  • Created by intention of parties – recorded in deed/contract
  • Traditionally differentiated by fixed/floating – but now overridden by PPSA

Non-traditional Security Interests

  • Hire-Purchase and Conditional Sales: Bailee has option to purchase at end of bailment. Vendor retains ownership until conditions are met for the purchase. Permitted by s 22 of the Sale of Goods Act
  • Retention of Title/Romalpa Clause: Seller reserves title until invoice (simple) or all money (All monies) owed to the seller have been paid. Can also extend to mixed goods and/or proceeds of sale if specific enough.

Romalpa Clause (AIV v Romalpa)

  • AIV retained title to aluminium AND ANY NEW ITEMS PRODUCED FROM IT until all monies outstanding were paid. Created a fiduciary interest for Romalpa to act on AIV’s behalf
  • AIV sued to recover stock and proceeds of sale – succeeded, but controversially
  • Romalpa style clauses now covered by PPSA

Statutory definition of ‘security interest’ – GMAC v Southbank

  • Southbank sold to Suzuki on a Romalpa Clause (monies to be held for Southbank). Suzuki sold vehicles to GMAC (Financier) and agreed to display/sell them for GMAC.
  • Dec 22nd, GMAC registerers interest – Southbank only registers in Jan
  • Held Southbank’s unregistered interest was extinguished at first instance, but Court of Appeal reversed – held that ‘secures’ was used in a broad context, and could have included the Romalpa clause.
  • High Court rejected that particular interpreted, but held that the Chattle Security Act (Vic) DID apply.

PPSA (Personal Property Securities Act 2009 (Cth))

  • Priorities payment of debts – who gets paid first in what circumstances
  • Determines whether a security interest can survive a sale/lease
  • Identifies effects of failure to register interests
  • Designed to merge 70+ statutes together, make it easy to identify the applicable law/registry, and minimise transaction costs
  • General, functional definition of security interest (s 12) but specifically declares and excludes some interests (s 8) (eg. Liens excluded)
  • Registered interest in leased assets may trump the rights of the unregistered lessor (NZ Bloodstock) – moral: Always ensure security interest is registered.

PPSA Enforceability

  • Attachment: Steps required to create security interest – identify asset, verify debtor can actually use it, verify debt it is guaranteeing, etc.
  • Perfection: Additional steps to increase priority of interest in the event of a default
  • Can apply to future advances/after acquired property if sufficient specific (s 18)
  • Only effective if attached to collateral – which requires grantor authority to act to give rise to that attachment (s 19)
  • Can defer attachment to a later time, rendering floating charges obsolete (s 19 (3)-(5))
  • Only enforceable against a third party if secured party possesses the collateral, OR has perfected the interest via control, or has a written agreement (s21 – sets out perfection)
  • Can potentially be extinguished under various conditions (we only really need to know ss 43 – 47)
  • Some provisions specify that the purchaser cannot obtain their own interest, or that they have to be unaware of the interest – others don’t. Be aware of the limitations for each – and the general policy considerations (try to encourage prompt/correct registration if/whenever possible)
  • Priority – PMSI > 1st Perfected > 2nd Perfected > 1st Unperfected > 2nd Unperfected
  • Specific Purchase Money Security Interest (PMSI) trumps more general ‘future’ registration.
  • No need for specific enforcement provisions to be known (chapter 4)