At a glance, the term “security interest” comes across like any other piece of legal jargon – vague, self-aggrandising and something belonging to the pages of law textbooks.
Unfortunately, this is a dangerous assumption to hold especially for business owners.
Whenever businesses provide loans, enter hire-purchase agreements, or lease goods, they should consider registering a security interest so that they can protect their capital. Failure to do so exposes a business to unnecessary risks, the most dangerous of which is that they are never able to recover the full value of the lost property where the grantor is insolvent or bankrupt.
This article seeks to explain what a security interest is, why it should be registered and how to register an interest.
What is a security interest?
Put simply, a security interest is when a right in property is granted by one person (grantor) to another (secured party) with the purpose of securing a debt or another obligation which is owed to the person receiving the security interest. Although there are some exceptions (e.g. bailments), the vast majority of security interests are only valid if they are created by a transaction or agreement which is both consensual and secures the repayment of a debt or the performance of some sort of obligation.
The use of a security interest varies on a case-to-case basis, with the most common scenario being when a grantor defaults on a payment provided for by the agreement that establishes the security interest. In these instances, secured parties may be entitled to take back goods and pursue legal action to ensure enforcement of the repayment. Alternatively, if the grantor becomes insolvent, the party holding the security interest is considered a secured party and benefits by having priority in repaying the grantor’s outstanding debts.
A variety of commonplace examples exist which most people would be familiar with, the most obvious being a mortgage – where a bank, through a contract, receives a security interest in a person’s property in exchange for providing them a loan.
What does it mean to register a security interest, and why should you do it?
Many secured parties come to discover a horrible truth when they attempt to realise a secured asset in the above scenarios – that their security interest was never actually valid and is not enforceable as a matter of law. This can be true even in situations where there are security agreements or retention of title clauses.
The easiest way to avoid this danger – and other issues that might arise – is by registering the security interest on the Personal Property Securities Register (PPSR) in accordance with the Personal Property Securities Act 2009 (Cth) (PPSA). The advantage of registering on the PPSR is twofold:
- In the process of registering, you ensure that your security interest meets the requirements outlined by the PPSA (the act governing security interests) meaning your security interest is actually valid and enforceable in the eyes of the law.
- The PPSR operates like a public notice board allowing secured parties to have transparency about who does and doesn’t have a secured interest.
Beyond the administrative benefits of registering, it also has a significant impact on the type of security interest that is created.
Types of security interest
Security interests can come in two forms – either a normal security interest or a purchase money security interest (PMSI). A PMSI arises when the money you are securing was used by the grantor to fund all or part of the purchase price of the property which has created the debt that is being secured. For example, if you gave a loan to allow the grantor to finance the purchase of a car, then your security interest is a PMSI since the money lent was directly used to make the purchase.
The distinction between PMSI and normal security interests is an important one when it comes to discussing the different types of security interests, namely perfected and unperfected. Basically, your security interest is unperfected until you register it on the PPSR. The moment it is registered, it becomes perfected and as the names suggest, a perfected security interest is better than an unperfected one.
Because a grantor can grant a security interest to multiple different parties in the exact same property – the question of who gets what is determined by the priority ranking of the various secured parties, which is all determined by the type of security they have. The rankings are relatively straightforward:
- Perfected security interests rank higher than unperfected security interests.
- If your security interest is the same type as someone else’s (e.g. both have perfected interests) then whoever first registered their security interest on the PPSR ranks higher.
- However, if you have a perfected PMSI, you rank higher than everyone when it comes to that particular secured property including people who perfected their normal security interest earlier than you registered you perfected PMSI. You can think of the perfected PMSI as a super security interest.
How to register
Registration on the PPSR is relatively simple and can be broken down into two steps.
- Gather all necessary information ranging from proof it is a PMSI interest to the details of the grantor and secured party.
- Importantly, you’ll need to know the type of collateral you have an interest in – is it commercial (property used by a business) or is it consumer (property used by an individual).
- A list of the different classes of collateral (what type of property you have an interest in) can be found on the PPSR website.
- Create a PPSR account and follow the registration process.
- Although this step is tricky and should be left to lawyers, it is possible to do it yourself through the PPSR website.
Things to consider when registering
Are you within the Time Limit?
There are strict rules around how long you have to register your security interest once the agreement which is creating the interest has been executed. If you are registering against a corporate grantor, you must register within 20 working days of the grantor signing the agreement or more than 6 months before the grantor starts insolvency.
When it comes to PMSI’s, you need to register within 15 working days from when the grantor gets possession of the property or, if the good supplied will be part of the grantor’s inventory, before the grantor gets possession of the property.
Maintenance and Renewal of Security Interest?
When you register on the PPSR, the time period for which you can register your interest varies. If the property you are registering is consumer property or serial numbered property, you can only register your interest for a maximum of 7 years after which, if you do not renew, the security interest will lapse and be taken off the PPSR.
For other properties, the duration of the registration is more flexible and can range from up to 7 years, up to 25 years or indefinitely (no stated end time). Like with consumer and serial number property registered security interests, you will need to renew your interest before it expires for these other types of properties too.
Is the Agreement which is granting the Security Interest worded properly?
The actual wording of agreements or clauses which give rise to a security interest are particularly since a failure to account for specific details places your security interest in jeopardy. This could be because of a variety of reasons such as the security interest doesn’t actually attach to the property you wanted it to or you have a limited definition of who the grantor is.
These clauses can be finicky and change greatly based on the circumstances meaning it is important to seek legal advice when creating or executing these types of agreements.
Conclusion
Security interests are a crucial and important part of running a business yet they pose an enormous risk to your businesses if registered incorrectly or not registered at all. If you have any queries or concerns, it is best to consult a solicitor in order to protect yourself and your company.
Feel free to touch base with our friendly team of legal professionals if you have questions regarding registering security interests.
DISCLAIMER: This article is intended to provide general information and should not be relied upon as legal advice. Formal legal advice should be sought if you are concerned about, or require particular advice applicable to your specific circumstances in relation to, any topics covered in this article.