New Zealand: Australia offers third route to perfection (in PPSA)

Brief Counsel

New Zealand companies registering a security interest in Australia need to be aware that the Australian Personal Property Securities Act (the Australian Act) offers a third route to perfection, not available in New Zealand.

The Australian Act, which has now been in force for around six months, is very similar to the New Zealand Act. But there are some important differences, many of which we have already discussed.

This Brief Counsel looks at another key difference – the concept of perfecting security interests by "control".

Perfection by control and "Super Priority"

Australia offers perfection by "control" in relation to certain financial assets, including bank accounts, intermediated securities and investment securities (as well as satellites and other space objects).

Importantly, any security interests perfected in this way have "super priority" over any other form of perfected security interest, including purchase money security interests.

If two interests are perfected by control, priority is determined by the order of perfection.

Control over bank accounts

A lender can have control of an account only if it is the "authorised deposit taking institution" (ADI) at which the account is held. The practical effect of this may be that a bank lender will be more likely to insist that borrowers have their transactional accounts with it so as to ensure repaid receivables are captured by the bank's security.

If a borrower does not have its bank accounts with its lender, perhaps because the lender is not an ADI, the lender may consider entering into priority arrangements with the borrower's bank to gain priority for any bank account security interests it holds.

Intermediated securities

An "intermediated security" is defined in the Australian Act as the rights of a person in a securities account maintained by an intermediary, such as a stockbroker, on that person's behalf.

In simple terms, a secured party has control of a security provider's intermediated security if there is an agreement in place that allows the secured party to instruct the intermediary directly or prevents the intermediary from acting without the secured party's consent.

Alternatively, a securities account can be "controlled" if it is in the secured party's name. There may be practical considerations that make this second option less attractive than entering into an agreement, including potential tax issues.

Amendments made to the Australian Act in May 2011 clarified what constitutes intermediated securities and introduced an additional test for control that:

"a secured party has control of an intermediated security if there is an agreement in force under which the secured party ... is able to initiate or control the sending of some or all electronic messages or other electronic communications by which the intermediated security could be transferred or otherwise dealt with."

This is intended to overcome difficulties in taking security over clearing house securities held in custodial accounts, such as those held with stockbrokers.

For Clearing House Electronic Subregister System or "CHESS" securities the difficulties arose when applying the original control requirements because the intermediary was technically the ASX Settlement and Transfer Corporation Pty Limited. It would not be practical for ASX to be receiving and dealing with copious notices from financiers seeking to control securities accounts.

The amendments should allow perfection by control of CHESS security interests to be achieved by entering into tripartite CHESS sponsorship agreements between a secured party, the debtor and its broker or other intermediary. These agreements will contain clauses to the effect that CHESS securities may not be dealt with without consent from the secured party. The form of sponsorship agreements is governed in part by the ASX Settlement Operating Rules.

Investment instruments

The term "investment instruments" includes shares, debentures, derivatives, foreign exchange contracts, assignable options and other financial products – but does not include intermediated securities.

Control of investment instruments is possible by being the registered owner, holding the certificates of title (if there are certificates) or being in a position to sell the collateral without further action by the security provider. A person may gain control of an investment instrument not evidenced by certificates if there is an agreement in place under which that person is able to initiate or control the instructions by which the instrument can be transferred.

In some cases, the steps to perfect a security interest by control will be the same as the steps for perfection by possession in New Zealand, such as obtaining the share certificates. There is no super-priority under the New Zealand Act for perfection of a security interest by way of control though. Section 97 of the New Zealand Act gives priority to a purchaser for value who takes possession of the investment security without knowledge of the perfected security interest, but this will not assist financiers who do not take possession.

It appears the Australian rules were drafted with CHESS-type securities in mind, which are now considered intermediated securities under the Australian Act. Where investment instruments exist only as book entries, which is still common in both countries, it seems that perfection by control will need to be effected by a secured party actually becoming the registered owner of the security.

Take-outs

Parties taking security in Australia should be alert to the risk that a third party could gain priority by taking control of financial assets.

If financial assets are a significant part of the security, lenders should consider taking control of the assets to protect their position.

We are seeing new Australian security documents drafted very widely to take account of this so borrowers and lenders will need to ensure these arrangements work for them both.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions