Vol 11 (2014) - Issue 4

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When Ownership Isn’t Enough: Gaining and Losing Proprietary Rights under the Personal Property Securities Act

A fundamental common law concept is the rule that you cannot give a greater title than what you have. But if you are transacting in a jurisdiction that embraces personal property security legislation, such as the United States, Canada, New Zealand or Australia, a proprietary right of ownership may not be enough of a basis for you to stake a claim on your asset.
Since its induction into Australian law, the Personal Property Securities Act 2009 (Cth) ('PPSA') has courted controversy by disregarding traditional notions of ownership in favour of a system that revolves around the recognition of security interests created in personal property. In a dispute between competing security interests, what is relevant is not who has a true claim to ownership of the personal property, but which security interest is entitled to greater priority. The PPSA assigns priority by a regime which focuses on the 'perfection' of a security interest, most commonly by registration on a central search register, the Personal Property Securities Register ('PPSR'). Until a security interest is perfected, it is vulnerable as a third party may be granted a security interest by the person in possession of the collateral, and that security interest may have a higher priority than the security interest of the owner. If the appropriate mechanisms are not in place to preserve and protect the security interest, the lessor's right to deal with or recover its leased asset may be lost.
This article will explore the granting of security interests in leasehold property under the PPSA, the proprietary and possessory rights that arise in the leased goods, and the circumstances where a security interest can be subordinated to another interest, or even lost. This article will also explore how the loss of an unperfected security interest can potentially have the consequent effect of extinguishing an existing perfected security interest in the right circumstances.

Security interests under the PPSA
Under the PPSA, a security interest is an interest in personal property provided under a transaction which in substance secures the payment or performance of an obligation. Personal property is defined broadly to include tangible and intangible property, but excludes land, certain statutory licenses and property that becomes a fixture. The PPSA also deems certain transactions to create a security interest, including the interest of a bailor or lessor of goods under a PPS Lease, discussed further below.
To be enforceable against the grantor of the security interest, the security interest must attach to the collateral. Attachment occurs when the grantor:
a) has rights in the collateral, or the power to transfer rights in the collateral to the secured party; and
b) gives value for the security interest, or does some act by which the security interest arises.

For a security interest to be enforceable against third parties, the security interest must not only have attached to the property, but it must also comply with formal requirements. This means that the secured party must have possession of the collateral, perfected its interest in the collateral by control or the collateral must be 'covered' by a security agreement entered into in accordance with specific technical requirements.