We now have the first judicial guidance in Australia on the concept of "perfection by possession" under the Personal Property Securities Act 2009 (PPSA) (Knauf Plasterboard Pty Ltd v Plasterboard West Pty Ltd (In Liquidation) (Receivers and Managers Appointed)  FCA 866).
What is "perfection by possession"?
A secured party usually aims for its security interest to be enforceable against other people. To do that it must, amongst other things, either:
- be in possession of the property over which it has a security interest (other than as a result of seizing or re-possessing that property) - which is known as "perfection by possession";
- have "control" of the property over which it has a security interest - which is known as "perfection by control" and is only available for certain types of property; or
- have registered its security interest on the PPS register - which is known as "perfection by registration".
Key benefit of perfection
One of the key benefits of perfection is that it protects a security interest from "vesting" in the person who has granted the security interest if that person goes into administration, is wound up or, in the case of an individual, goes into bankruptcy.
Where a security interest has been granted by a company and the secured party only perfects it by registration (and not otherwise by possession or control), that secured party must comply with the timing requirements under section 588FL of the Corporations Act 2001 (Cth). It must make its registration against the company:
- within 20 business days after the security agreement that created the security interest came into force or, if earlier, the time that the company goes into administration or is wound up; or
- within the six months before the company goes into administration or is wound up.
If the registration is not made within those timeframes, the security interest will vest in the company immediately before it goes into administration or is wound up (unless the secured party had perfected its security interest by possession or control).
Facts of the Knauf Case
- Knauf Plasterboard Pty Ltd supplied plasterboard products to Plasterboard West Pty Ltd trading as Retroflex;
- Retroflex granted Knauf security interests in 2012 and 2014, but Knauf did not register those interests on the PPS Register until 3 February 2016;
- seven days after the Registration (on 10 February 2016) Knauf appointed receivers to Retroflex; and
- on 12 February 2016 the members of Retroflex resolved that it be wound up voluntarily, purportedly pursuant to section 491 of the Corporations Act (the "February Resolution").
Based on these facts:
- Retroflex argued that Knauf had failed to register its security interests within the timeframes required under section 588FL of the Corporations Act and that therefore Knauf's security interest had vested in Retroflex immediately before the February Resolution was passed; and
- Knauf argued that it had perfected its security interest by possession because it had appointed a receiver over the property before the February Resolution had been passed. It therefore said that section 588FL of the Corporations Act did not apply (because Knauf had perfected its security interest by possession and not only by registration).
The security interest did not vest
Justice Markovic held that the February Resolution was not validly passed and therefore, the appointment of a liquidator to Retroflex was invalid. That meant that section 588FL of the Corporations Act did not apply and Knauf's security interest had not vested.
She held that if the February Resolution been validly passed, Knauf's security interest would have vested in Retroflex as Knauf had:
- not complied with the timing requirements under section 588FL of the Corporations Act; and
- (in her view) not perfected its security interest by possession - the mere fact that Knauf had a right to appoint a receiver under its security agreement and in fact had made that appointment was not enough (and in any event the receiver had obtained possession of Retroflex's property by seizure).
The meaning of " perfect by possession"
In making her decision, Justice Markovic provided the first judicial guidance in Australia on what it means to perfect by possession. She noted that:
- in the context of the PPSA, "possession" has its common law meaning but that meaning is limited by sections 24(1) and 24(2) of the PPSA. That means that, to perfect a security interest by possession, a secured party must have actual or apparent possession of the property. It is not enough that a secured party has a contractual right (under the terms of its security agreement) to possess that property after a default;
- upon his or her appointment, a receiver is conventionally given authority to deal with the assets of the company to which he or she has been appointed (to the exclusion of others). That authority, however, does not itself amount to actual or apparent possession of those assets (because even after a receiver has been appointed, a grantor may retain actual or apparent possession of its assets); and
- one of the main purposes of the PPSA is to give notice of security interests to third parties. That purpose would not be satisfied if secured parties could avoid giving notice of their security interests before a default occurs by simply relying on a contractual right (hidden in their security agreement) to seize the property after a default occurs. Justice Markovic observed that there are sound policy reasons to understand seizure as including actions by a receiver pursuant to a security agreement.
The Knauf case once again shows the importance of secured parties properly perfecting their security interests. A registration for 25 years currently costs A$34. If the security interest is being granted by a company, a secured party must however ensure that (unless it can be confident that it has perfected by control or possession) it makes its registration within the time-frames required under section 588FL of the Corporations Act.