It is quite common for individuals and businesses to agree to use some kind of property as a means for others to secure a loan or rectify a debt. However, most people are unaware of how to protect their own in-substance or deemed interests, especially when a situation arises where people in the transaction fail to pay or go bankrupt. These processes involve having an understanding of a security interest. This Legal Kitz blog will cover what all this legal jargon means and how to best protect your interests.
What is a security interest?
A security interest is a legal right granted by a debtor to a creditor over the debtor’s property. This interest or right enables the creditor to possess and take the property if the debtor defaults in any transaction by failing to perform their obligations or make payments. You may have heard this being described as collateral and the person who receives the security interest is known as a secured party.
An example is a person requesting a loan for a car. To be a secured financial transaction, the borrower grants the loan company a security interest over the car as it is an asset which will help the lender to secure owing finances if necessary. If you buy, sell, lease or hire goods, it is important to properly understand these terms and processes to protect your security interest over any goods.
Security interests arise under the Personal Property Securities Act 2009 (Cth) (PPSA) and the Personal Property Security Regulations 2010 (Cth). These two pieces of law regular and administer the Personal Property Securities Register (PPSR) where people register their security interests across Australian States and Territories.
The PPSA defines security interests under Section 12 as belonging to two broad categories; “In-substance’ security interests and “deemed’ security interests.
What is an “in-substance” security interest?
An in-substance security interest covers the majority of security interests. It consists of interests in personal property where the interest in substance will secure the payment or performance of an obligation.
What is a deemed security interest?
A deemed security interest covers other commercial arrangements which may arise such as:
- Interests of a transferee under a transfer or an account or chattel paper;
- Interests of a consignor who delivers good to a consignee under commercial consignments; and
- Interests of a lessor or bailor of goods under a PPS lease.
So what sort of property can people have a security interest in?
A party to a transaction can claim a security interest in personal property. Under section 10 of the PPSA, this means all property other than things which are granted by the Commonwealth, State or Territory as not personal property which is usually land, a right, entitlements or an authority. Some examples which are personal property include:
- Owned land;
- Fixtures on the land;
- Shares;
- Cars;
- Livestock;
- Intellectual property; and
- Chattels.
This interest can also be in future property or proceeds from dealings with collateral. For example, if a finance company takes an interest in the property belonging to a company, this can be extended to property obtained after the security interest is established.
I am a business owner, how do I protect a security interest in a client’s property?
It is vital to any secured party that a security interest in personal property is perfected under the PPSA. In doing so, the creditor will gain protections under real property law and be prioritised against unperfected security interests. In order to achieve this, the creditor must establish three things:
- Attachment of the security interest in the collateral. This occurs when the grantor has rights in the collateral, the power to transfer rights in the collateral to a secured party and either a value is given or the grantor does an act by which interest arises;
- Enforceability of the security interest in the collateral against third parties. This is possible when the security interest is attached to collateral, the secured party possesses the collateral or perfected the interest by control or a security agreement is reached that provides for any interests covering the collateral; and
- Perfection by registration on the PPSR, possession or control. To register, a secured party will need to complete an application with details of the security interest and lodge this application within a specified time frame.
Legal advice
The processes in understanding, protecting and navigating your security interest in personal property in compliance with the PPSA can be complex. If you require assistance with a security interest matter, you should seek legal advice. Legal Kitz is passionate about protecting businesses and can ensure you feel supported in achieving the steps required! Click here to book a FREE consultation with one of our highly experienced solicitors today, or contact us at [email protected] or by calling 1300 988 954.