On 1 July 2012, the Personal Property Securities Act 2009 (Cth) (PPSA) was amended to include emissions units within the definition of personal property. That means emission units can be the subject of a PPSA security interest.
Financiers and other secured parties will need to be aware of the implications of the new carbon pricing mechanism for their customers' businesses and if they intend to take security over the emission units, to follow the requirements under the PPSA to effectively create and perfect any such interests.
The PPSA definition of "investment instrument" covers many types of financial products, including shares, debentures and derivatives. From 1 July 2012, it has been expanded to include:
- an Australian carbon credit unit; 1
- a carbon unit; 2 and
- each eligible international emissions unit. 3
As a result, Emissions Units are collateral capable of being the subject of a security interest under the PPSA regime.
Security interests in Emissions Units
Emissions Units are issued by way of electronic entry in the Australian National Registry of Emissions Units (ANREU) and are not represented by any form of paper certificate. The ANREU is an electronic system designed to track the ownership of Emissions Units but it does not record the existence of security interests in respect of those Emissions Units.
A person who holds Emissions Units in their ANREU account may grant a security interest to a secured party. However, a security interest in Emissions Units cannot attract PMSI status because 'investment instruments' are expressly excluded from the definition of PMSI's for the purposes of the PPSA.4
Security interests over Emissions Units can be perfected by either:
- registration on the Personal Property Securities Register (PPSR); or
- control. 5
A security interest over an Emissions Unit can be perfected by registration on the PPSR using the collateral description of 'investment instrument'. In most cases, a secured party's General Security Agreement (GSA) will be sufficient to create a security interest over an Emissions Unit and the secured party may wish to consider updating its registration to include that new collateral.
However, registration on the PPSR may not be effective to perfect the security interest in the Emissions Unit with the highest priority. That is because 'investment instruments' can also be perfected by control and the PPSA provides that a security interest perfected by control takes priority over an interest perfected by any other means.
Perfection by control
Perfection by control occurs when a secured party takes all steps necessary to be in a position to sell collateral without further action by the grantor.
In respect of Emissions Units, this can occur in two ways:
- The secured party becoming an authorised representative 6 in respect of the grantor's ANREU account; 7 or
- The secured party becoming the registered holder of the grantor's Emissions Units (i.e. by way of transfer).
A secured party can have control of Emissions Units while they are held in the grantor's ANREU account via an agreement between the secured party (as authorised representative) and the grantor enabling the secured party to initiate or approve account transactions such as sending instructions, transferring or surrendering the Emissions Units.8
However, secured parties who accept Emissions Units as collateral without becoming the registered owners of the Emissions Units will need to be aware that Emissions Units can be surrendered, relinquished or otherwise cancelled regardless of the fact that they are subject to a security interest. 9
The better method of perfecting a security interest over Emissions Units is for the secured party to become the registered holder of the Emissions Units. A secured party seeking to perfect their security interest in this way will need to open an ANREU account to hold the Emissions Units and ensure the grantor signs all necessary documents to give effect to the transfer. The secured party will also need to have mechanisms in place to enable them to identify the underlying ownership of Emissions Units in their ANREU account so they can be transferred back to the grantor when the security interest is discharged.
Implications for financiers
Secured parties relying on their GSA's and All-PAAP registrations may lose their priority in respect of Emissions Units if another secured party perfects a security interest in the same Emissions Units by control. Whilst control may be considered a better method of perfection (where available), secured parties should also consider registering their security interest on the PPSR to:
- record the existence of the security interest and give "notice" to third parties; and
- satisfy the continuous perfection 10 requirements under the PPSA should there be a temporary break in the secured party's perfection by control (i.e. removal of the secured party as "authorised representative" by the grantor).
It is imperative that secured parties have a clear understanding of the implications the PPSA has in relation to Emissions Units and follow the requirements under the PPSA to ensure that their security interests are effectively perfected.
1within the meaning of section 5 of the
Carbon Credits (Carbon Farming Initiative) Act 2011
2within the meaning of section 5 of the Clean Energy Act 2011(Cth).
3mentioned in paragraphs (a), (b), (c) and (d) of the definition of eligible international emissions unit in section 4 of the Australian National Registry of Emissions Units Act 2011 (Cth).
4section 14(2) of the PPSA.
5note that perfection by possession would not be an option as it is not possible to have possession of uncertificated investment property.
6regulation 9 of the Australian National Registry of Emissions Units Regulations 2011(Cth).
7section 27(4)(b) of the PPSA.
8Personal Property Securities Register 2012. Information Sheet: Taking Security over Emissions Units Viewed 3 September 2012
10section 56 of the PPSA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.