I was pleased to be invited to speak at the Law Society of Western Australia’s Property Law Update on 20 March 2019. The topic of my presentation was “The PPSA and the general law: How do they work together?” I invite you to read the paper I prepared for my presentation which will also be published in the May 2019 edition of the Law Society’s journal Brief.
The Personal Property Securities Act 2009 (CTH) (PPSA) has been in force in Australia for seven years. It remains a “complicated, provocative and yet fascinating scramble of legislation” which makes a substantial contribution to commercial law. It represents a significant rework of the general law relating to personal property securities, and overrules many historical common law and equitable rules that applied haphazardly on the basis of the form of a transaction despite the fact that many of those transactions essentially performed the same function. The PPSA’s innovation rests largely with its substance over form approach by applying uniform rules to all forms of transactions that create an interest in personal property “that, in substance, secures payment or performance of an obligation”. Each transaction that does this is defined to be a security interest. A charge, a chattel mortgage, a retention of title arrangement, a finance lease and a pledge, among others, each were subject to its own discrete legal rules under prior law, but is now characterised as a security interest under the PPSA. The varying legal treatment for personal property transactions that did not significantly differ in substance has largely been supplanted by the PPSA.
The PPSA is not, however, a law unto its own. Section 254(1) states:
This Act is not intended to exclude or limit the operation of any of the following laws (a concurrent law), to the extent that the law is capable of operating concurrently with this Act:
(a) a law of the Commonwealth (other than this Act);
(b) a law of a State or Territory;
(c) the general law.
“General law” is defined in s 10 to mean the principles and rules of the common law and equity.
How, therefore, do the general law and the PPSA work together? The answer to this question is often elusive. This paper will discuss this issue in the context of recent Australian case law.
Section 18(1) is a simple, but vital provision. It states: A security agreement is effective according to its terms. Section 10 defines security agreement to mean:
(a) an agreement or act by which a security interest is created, arises or is provided for; or
(b) writing evidencing such an agreement or act.
In most cases, a security agreement will be a document that evidences a consensual arrangement whereby one party grants a security interest in personal property to secure an obligation owing to another party. This could take the form of the transactions described in the introductory paragraph of this paper, or, as has developed since the PPSA has come into force, a general security deed or a specific security deed. These are all contracts. But, as section 3 of the PPSA succinctly points out: “This Act is a law about security interests in personal property.” It is not a law about contract. Section 18, therefore, is a supplementary provision indicating that the body of the general law of contract applies to support the PPSA. And while this preserves freedom of contract within the scope of the PPSA, section 254 should be a reminder that the rules of contract law remain subject to the statutory rules in the PPSA.
The Floating Charge
Nevertheless, arguments have been made that s 18(1) is not subject to the rules otherwise mandated by the PPSA. If this was the case, then parties would be free to contract around the substantive rules in the Act. One such argument has played out in the context of the floating charge, the inception of which dates from the late nineteenth century when the courts of equity in England responded to the need for companies to raise capital and sanctioned the ability of a company to secure a loan with a charge on its entire “undertaking”. The undertaking of a company included all of its present and future assets, including “circulating” assets such as stock-in-trade and book debts which, at that time, formed the greater part of most entrepreneurial companies’ assets. Companies needed to control these circulating assets and deal with them in the ordinary course of business in order to generate cash flow and sustain the business as a going concern.
The recognition by the courts of the all-assets charge created a conceptual problem at law. The equitable charge, as initially developed by the courts of equity, fastened on to specific assets and gave the holder an immediate proprietary interest in the assets subject to the charge. In order for a company to dispose of circulating assets free from the charge and collect the proceeds of sale, the company would have to obtain the consent of the holder. The need to obtain such consent for these types of assets would, however, paralyse the company’s business. Thus, to obviate the need for consent, the courts recognised a floating charge which did not have the ordinary incidents of a fixed charge.  The floating charge did not become fixed or fasten to specific assets until it crystallised which usually occurred upon the company’s insolvency when it could no longer operate as a going concern.
The PPSA, however, tries to abolish the floating charge to the extent that it relates to personal property subject to the legislation. It attempts to create more certainty by side-stepping the wayward legal precedents generated by the floating charge. The PPSA provides that a security interest in a circulating asset (such as “inventory” and “accounts” in PPSA parlance) takes immediate effect as a fixed security interest which is akin to a fixed charge. Sections 12 and 19 of the PPSA makes this explicit. Section 12 specifically includes a floating charge within the definition of security interest. Section 19 states that a security interest will attach when the grantor has rights in the collateral and clarifies in s 19(4) that a reference to a floating charge does not mean that the security interest does not attach upon the grantor acquiring rights in the collateral. Therefore, when a company grants a security interest in circulating assets, the security interest attaches as a fixed security as soon as the company acquires those assets. It no longer floats and it no longer needs crystallisation to become fixed.
A PPSA security interest in circulating assets operates like a fixed charge with an express or implied licence for the debtor to deal with these assets in the ordinary course of business. The PPSA contains rules enabling a grantor to grant security over circulating assets and still utilise the collateral in the ordinary course of business. These rules render the floating charge unnecessary and establish that circulating assets are capable of being subject to a fixed security.
First, s 32 states that a security interest will continue in the collateral if the secured party did not expressly or impliedly authorise the disposal. Since the secured party generally authorises the disposal of circulating assets, s 32 ensures that the grantor can dispose of the collateral free from the security interest just as it could with a floating charge. Furthermore, s 32 provides that the security interest that had been attached to the circulating asset will automatically attach to the proceeds generated from the disposal of that asset.
Sections 31 and 32 reconcile the fixed security with the freedom required to deal with circulating assets in the ordinary course of business. This is supported by Sifris J in the Victorian Supreme Court decision in Lewis & Anor v LG Electronics Australia Pty Ltd who said that s 32 is “equivalent to the concept of the floating charge whereby the chargor could, until crystallisation, sell inventory in the ordinary course of business free of the charge”. Tottle J in the Western Australian Supreme Court decision of Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) agreed. He stated:
Sections 31 and 32 of the PPSA make it unnecessary to use the mechanism of the floating charge in order to permit a grantor to give a creditor security over its collateral and to utilise the collateral in the ordinary course of its business. The effect of the s 32(1) provisions is to authorise a grantor to deal with collateral in the ordinary course of business and convert it into proceeds and for the security interest to attach to the proceeds without employing a floating charge.
Secondly, s 69 of the PPSA enables trade creditors to be paid from circulating assets subject to a fixed security interest. Section 69 provides that a trade creditor who receives payment of a debt owing by a grantor will take priority over a security interest in the funds paid. Therefore, even if a secured party has a fixed security interest in book debts and other accounts (property formerly subject to a floating charge), the trade creditor who receives payment from those funds will have priority to the funds.
Thirdly, s 46 of the PPSA also enables a grantor to carry on its ordinary course of business without a floating charge. Section 46 provides that a buyer or lessee of personal property takes the personal property free of a security interest given by the seller or the lessor if the personal property was sold or leased in the ordinary course of the seller’s or lessor’s business. Despite the fact that a secured party has a PPSA security interest attached to the grantor’s inventory, the grantor can deal with the inventory. Section 46 operates to ensure that a buyer or lessee takes free of a security interest.
While it seems abundantly clear from the language of the PPSA that the distinction between the fixed and floating charge has been obliterated for purposes of the Act, courts have been reticent to make any such bald assertions. For example, Gilmour J in the Federal Court decision of Langdon, in the matter of Forge Group Limited (Receivers and Managers Appointed) (in Liq) stated that despite the PPSA not distinguishing between a fixed and floating security interest, this was “not to say that the effect of the PPSA is to abolish the distinction…for all purposes. I do not need to determine that question.” Tottle J also observed in Hamersley v Forge that for “the purposes of this case it is unnecessary to reach the conclusion that the PPSA abolishes the general law distinction between fixed and floating charges over personal property.”
Hamersley v Forge involved a priority dispute between ANZ’s security interest in all of the present and after acquired property of Forge Group Power Pty Ltd (Forge) and the right of Hamersley Iron Pty Ltd (Hamersley) to set-off amounts it owed to Forge from amounts owing to it by Forge. At issue were various payments owing by Hamersley to Forge (Payments). The fixed nature of ANZ’s security interest was key. To generalise and simplify this issue to illustrate the point in this paper, under pre-PPSA law ANZ’s security interest in the Payments would likely have been characterised as a floating charge, in which case, mutuality for purposes of the insolvency set-off provision in s 553C of the Corporations Act 2001 (Cth) (Corps Act) would exist between the claims of Hamersley and Forge. In this scenario, Hamersley’s set-off rights would have priority over ANZ’s security interest because it was not a fixed security. However, under the PPSA, ANZ’s security interest is a proprietary interest akin to a fixed charge which prior law recognised as destroying mutuality and, therefore, on that analysis, ANZ should have priority. Tottle J came to this conclusion, but was overturned on appeal.
One of Hamersley’s arguments was that ANZ’s security agreement was structured as a floating charge and, therefore, it should take effect in accordance with its terms as provided by s 18(1) such that ANZ had no greater rights under the PPSA than it would have enjoyed under the general law applicable to a floating charge. Although Tottle J rejected this argument, the Court of Appeal focused on the terms of ANZ’s security agreement which contained the incidences of a floating charge whereby Forge, not ANZ, had control over and the benefit of the Payments and “the absence of control means that the charge operates as a floating charge over Forge’s claims”. As such, for the purposes of insolvency set-off, mutuality of interest existed giving Hamersley’s set-off rights priority over ANZ’s security interest. The Court’s analysis was not impressed with the fixed nature of ANZ’s security interest and insolvency set-off precedent holding that a fixed interest destroys mutuality. The Court stated:
Therefore, the critical question when assessing mutuality is not the classification of a charge over receivables as fixed or floating, but whether the chargor has the right to use payments received for its own benefit.
The Court justified this approach because s 18(1) stated that the security agreement was effective according to its terms.
The Court stated:
Nothing in the PPSA denies the operation of the provisions of the GSA which entitle Forge to use payments received from Hamersley under the Contracts for its own benefit. To the contrary, as noted at  above, s 18(1) of the PPSA provides that a security agreement such as the GSA is effective according to its terms.
Although the Court downplayed the significance of ANZ’s fixed security interest by focusing on the fact that ANZ’s security agreement gave Forge control over the Payments, the decision suggests it is open to the parties under s 18(1) to overrule the specific provisions of the PPSA and it is open to the courts to apply the law on floating charges despite the PPSA. Indeed, s 18(1) does not specify that it is subject to the PPSA. Contrast the equivalent sections in other PPSA jurisdictions. The Canadian PPSAs state Subject to this Act and any other Act, a security agreement is effective according to its terms. New Zealand’s PPSA states Except as otherwise provided by this Act or any other Act or rule of law or equity, a security agreement is effective according to its terms. It is doubtful that the drafters of the Australian PPSA by omitting such language intended that parties could override fundamental provisions of the PPSA such as s 12 and s 19 which underpin the entire scheme of the legislation.
Section 257 of the PPSA does, however, restrict the extent to which a security agreement is effective according to its terms by stating that s 18(1) is subject to:
(a) a law of the Commonwealth (other than this Act);
(b) a law of a State or a Territory;
(c) the general law.
Professors Duggan and Brown state that a literal reading of s 257(2) could mean that the parties may contract out of the PPSA altogether, “but any such carte blanche would defeat the purpose of the reforms”.  They state further:
To avoid this outcome, the bracketed words in subs 257(2) should be read as applying only to the extent that the PPSA specifically preserves the parties’ freedom of contract.
Canadian commentators address the extent to which the PPSA applies to restrict the law of contract. It is the proprietary effect of the security agreement – the security interest itself – to which the PPSA applies to restrain freedom of contract. Section 18 is needed to establish that the remaining contractual aspects of the security agreement are left to contract law. It does not operate to enable parties to contractually change the nature of the security interest because ss 12 and 19 of the PPSA speak to the proprietary effect of the security agreement which is mandated by the PPSA. These provisions specifically establish that a security interest embodied in a security agreement is fixed and proprietary even if the terms of the contract indicate it is a floating charge and the grantor has the benefit of circulating assets.
Australian commentators support this view. They state in the context of s 18(1) that the PPSA is largely concerned with any security interest which may arise by operation of the agreement. It is not concerned with the agreement’s primary obligations. General contract law applies for enforcement remedies in personam, but the PPSA applies for enforcement remedies in rem.
The courts’ penchant for breathing life back into the floating charge can be attributed in large part to the circulating security interest regime under the Corps Act. The term “circulating security interest” is defined in the Corps Act to accommodate the changes to the law enacted under the PPSA to the extent that such changes affect the insolvency rules in the Corps Act. Section 51C of the Corps Act defines the term to mean a security interest that is governed by the PPSA that has attached to a “circulating” asset within the meaning of the PPSA. Circulating asset is defined in s 340 of the PPSA to include, inter alia, accounts and inventory, unless the secured party has control over such assets. Control essentially denotes that they are not circulating. The fact of the secured party’s control means the assets are not in circulation. Section 51C also defines circulating security interest to mean a floating charge. As a result, the Court of Appeal in Hamersley v Forge found that a floating charge under the Corps Act is “treated in the same way as a security interest attached to the circulating asset under the PPSA.”
However, the fact that s 51C includes a floating charge within the definition of circulating security interest does not mean that parties to a security agreement over a circulating asset can opt out of the priority rules in the PPSA in favour of the floating charge. Nor does it mean the floating charge continues to exist with respect to personal property subject to the PPSA. Floating charge is included in the definition because some personal property is carved out of the scope of the PPSA in which case the priority rules of the PPSA do not apply and a floating charge remains possible with respect to such personal property. The Payments, what the Court refers to as “Forge’s claims”, are property clearly subject to the PPSA and, therefore, not capable of being subject to a floating charge.
Nevertheless, the Court stated that insofar as ANZ’s security agreement “invokes the operation of the general law…the charge operates as a floating charge over Forge’s claims.” As discussed above, there is no ability for ANZ’s security agreement to invoke the floating charge with respect to Forge’s claims. The PPSA’s substance over form approach means that a floating charge is treated the same as any other security interest. The parties to a security agreement can no longer agree to have a floating charge so that all the legal incidents of the floating charge apply to their transaction. They can agree that a security interest attaches to collateral at a later time, but not that it is subject to the pre-PPSA law of a floating charge.
The circulating asset regime contributes to the deception that the floating charge is alive and well. Despite the legislators’ intent to remove the distinction between the fixed and floating charge for purposes of the PPSA, the legislators did not wish to alter the priority payment regime with respect to a winding up under the Corps Act. Prior to the enactment of the PPSA, these payments were made in priority to the claims of secured creditors over assets subject to the secured creditor’s floating charge. With the demise of the floating charge under the PPSA, came the development of the concept of circulating assets which intends to capture the type of assets previously subject to the floating charge so as not to disrupt the priority payment regime. However, it is a mistake to assume that the concept of circulating assets means the law on floating charges remains applicable to circulating assets subject to the PPSA. A security interest in a circulating asset is a fixed security interest in that asset despite being a circulating asset and even if the security agreement characterises it as a floating charge.
Now that the PPSA has been enacted, determining priority creditor entitlements for the most part requires an analysis of the nature of the asset. If it is the type of asset described in s 340(5) of the PPSA, then priority creditors will have priority. This differs from prior law where the analysis focused on the nature of the security interest (that is, whether the charge was fixed or floating). However, under the PPSA, an asset that is not described by s 340(5) can still be circulating if:
…the secured party has given the grantor express or implied authority for any transfer of the personal property to be made, in the ordinary course of the grantor’s business, free of the security interest.
If the asset does not fall within s 340(5), then the analysis as to whether it is circulating will depend on the agreement between the parties as to whether the grantor is free to dispose of the asset in the ordinary course of business.
The decision in Langdon, in the matter of Forge Group Limited (Receivers and Managers Appointed) (in Liq) dealt with whether ANZ’s security interest was circulating for the purposes of s 433 of the Corps Act. At issue in this case were moneys received by the receivers from the ATO as a tax refund. If the refund was characterised as a circulating asset, then it would be distributed to priority creditors. If the refund was not a circulating asset, then ANZ would have priority under its security agreement. The Court found that the tax refund was not “property” in the hands of the receivers upon their appointment and was not caught by s 433. However, the Court went on to consider whether the tax refund was a circulating asset in that ANZ gave Forge express or implied authority for the transfer of the tax refunds in the ordinary course of business. The Court found that since the receiver’s application to the ATO resulted in the refund, it did not arise in the ordinary course of business for purposes of s 340(1)(b) and was not a circulating asset.
In its treatment of s 433 of the Corps Act, the Court acknowledged that the use of terms such as “fixed” and “floating” charges does not avoid the operation of the PPSA. Nevertheless, in determining the date for fixing assets caught by s 433, the Court proceeded with an analysis founded on whether ANZ’s security interest was a floating charge or a fixed charge rather than on whether the refund was a circulating asset as per the definition in s 340 of the PPSA. In response to the Department of Employment’s argument that the Refund was a circulating asset, the Court stated:
Were it otherwise a floating charge would, in effect, float indefinitely even after the appointment of the Receivers. This would be to ignore the agreement between the secured party and the grantor that assets, subject to a floating charge, could be dealt with only in the ordinary course of business. The secured party would be denied recourse to assets which upon the appointment of the Receiver were subject to a fixed charge…. However upon the appointment of the receivers, there is no longer a floating charge. The Refund is captured by the fixed charge.
The decisions in Langdon and of the Court of Appeal in Hamersley v Forge illustrate the conceptual difficulties in the transition from applying the historically entrenched law on floating charges to that of the new law introduced by the PPSA.
Intangible property and possession
The PPSA has also introduced new terms for personal property. The PPSA defines these categories of personal property: goods, chattel paper, currency, document of title, investment instrument, negotiable instrument, intermediated security and intangible. These categories are defined so that any personal property subject to the Act will fall into just one of the categories. Intangible is defined to mean personal property that is not financial property, goods or an intermediated security. This category operates as a catch-all so that personal property that does not fall within any of the other categories of personal property will be an intangible. The categories are defined so that intangibles are truly “intangible” – incapable of being physically possessed. Accounts, ADI accounts and intellectual property are sub-categories of intangible and also defined in the Act. The different categories of personal property are identified so that rules in the PPSA will apply specifically to that personal property when it is inappropriate or unworkable for those same rules to apply to other categories of personal property.
Possession is another key concept in the PPSA. Security interests in personal property need to be perfected in order to be enforceable against, and have priority over, third parties with competing claims to the same property. While registering a financing statement on the Personal Property Securities Register (PPSR) is the most common method of perfecting a security interest, taking possession of the personal property subject to a security interest is another. Taking possession of intangibles, as defined by the PPSA, is not possible so this method of perfection is not available for security interests in intangibles.
In Knauf Plasterboard Pty Ltd v Plasterboard West Pty Ltd (In Liquidation) (Receivers and Managers Appointed), the Federal Court considered the meaning of possession under the PPSA. Section 21 of the PPSA states that a security interest is perfected if a registration is effective with respect to the collateral. In that case, the secured party’s registration was not effective. Section 21 also states that a security interest can also be perfected if “the secured party has possession of the collateral (other than possession as a result of seizure or repossession).” The secured party argued that it had perfected by possession when it appointed receivers who took control over the assets of the grantor.
The Federal Court was called upon to consider whether the common law meaning of “possession” which included constructive possession should be imported into the PPSA. The secured party argued that the receivers had possession because they had the power to deal exclusively with the assets of the grantor. Markovic J held that possession under the PPSA had the common law meaning, modified to the extent provided for in s 24 of the PPSA which limited possession to “actual or apparent” possession such that constructive possession is not sufficient under the PPSA.
The secured party also argued that intangible property could be perfected by possession. Court then considered the possession of intangible property. The Court rejected the submission that “all intangible assets” could be perfected by possession. The Court correctly pointed out that a conceptual limitation exists to perfect intangible property by possession because intangible property cannot be physically possessed. However, the actual definition of intangibles in the PPSA, which includes only property that cannot be physically possessed, was overlooked. The Court stated that “certain classes of intangibles”, those that have a physical embodiment including chattel paper, investment instruments and negotiable instruments, are capable of being perfected by possession. While it is correct that security interests in chattel paper, investment instruments and negotiable instruments can be perfected by possession, the Court was imprecise because these types of personal property are not “intangibles” for the purposes of the PPSA despite being classified as intangibles at common law. While this misnomer does not affect the result in the case, it could matter in other situations because the rules under the PPSA that apply to intangibles specifically are not intended to apply to chattel paper, investment instruments or negotiable instruments.
Although intangibles can also be compared to “choses in action”, this general law term is not used in the PPSA and is not equivalent. Nevertheless, despite the enactment of the PPSA, courts continue to refer to choses in action, and the rules of common law and equity developed in relation to assignments of choses in action, despite the fact that the PPSA has changed the law considerably as it relates to the assignment of choses in action. The concept of “account” is central under the PPSA. An account falls within the definition of intangible, but is a specifically defined sub-category which means a monetary obligation that arises from disposing of property or from granting a right or providing services in the ordinary course of a business. Under pre-PPSA law, these would roughly equate to book debts and would also be choses in action. The definition of account, however, specifically excludes from its definition other types of personal property that may have been considered some form of a chose in action under prior law. These include an ADI account (that is, a bank account), chattel paper (including the monetary obligation evidenced in the chattel paper), an intermediated security (the rights of a person in securities held by an intermediary), an investment instrument (shares, bonds etc) and a negotiable instrument (bills of exchange, letter of credit).
The PPSA applies to security interests in accounts, transfers of accounts by way of security and even outright sales that do not involve securing an obligation. Under the PPSA, these are all considered “security interests in accounts” and the rules apply uniformly to them except in certain specific situations. The PPSA does not distinguish between legal and equitable assignments for purposes of priority over security interests in accounts.
In Hamersley v Forge, the Court of Appeal commented that the parties approached the issue of the proper construction of the PPSA and the Corporations Act on the basis that the statutory instruments were to be construed “in the context” of the general law background. While it is beyond the purpose of this paper to explore in detail whether this approach is appropriate given the extensive changes the PPSA has made to the law, the point for this paper is that the Court proceeded to illustrate the general law on assignments of choses in action without directly addressing the parts that are overruled or affected by the PPSA. The Court deals with accounts under the PPSA forty or so pages later in its decision, but still fails to address how the rules in the PPSA relate to the general law of assignments of choses in action.
The Court states that “Forge’s claims against Hamersley are legal choses in action” without stating that these are now characterised as “security interest in accounts.” The distinction between legal and equitable assignments of choses in action is discussed without any reference to the fact that these transactions are both subject to the PPSA and the PPSA makes no such distinction. It states that “[s]uccessive equitable assignments of an interest in personal property are governed by the particular rule in Dearle v Hall(emphasis added). In fact, they are now governed by the PPSA which overrules the rule in Dearle v Hall with priority rules founded primarily on the time of registration not the first to notify the account debtor. The Court’s decision gives the impression that the general law of assignments of choses in action has not been materially adjusted by the PPSA.
Constructive trust v tracing into proceeds
The case of In the matter of O’Keeffe Heneghan Pty Ltd (in liquidation); Aus Life Pty Ltd (in liquidation); Rocky Neill Construction Pty Ltd (in liquidation) trading as KNF Group (a firm) (No 2) (O’Keeffe) provides a situation whereby the application of general law could produce a different result from the application of the rules under the PPSA. The Court imposed a constructive trust which gave priority to one secured party. Although not raised fully in the case, the application of the rules under the PPSA may have given priority to the competing secured party. If the application of the priority rules under the PPSA provides an answer to a priority dispute, it is questionable whether the imposition of a constructive trust appropriate.
In O’Keeffe, the three companies in liquidation operated as a partnership (Partnership). In 2013, each of the companies and the Partnership granted security to CBA over all present and after-acquired property. While CBA perfected its security interest in the assets of each of the companies by registering on the PPSR, it did not register with respect to the Partnership. In 2016, the Partnership granted to IFG Network Australia Pty Ltd (IFG) a security interest in all of the Partnership’s present and after-acquired property including specifically its receivables to secure debts owing to IFG. IFG perfected this security interest by registering on the PPSR.
In 2017, the Partnership transferred from its account with CBA $240,000 dollars to an account, also held with CBA, of Rocky Neill Construction Pty Ltd (RNC) one of the partnership companies. These funds were then transferred to an offshore bank account through OzForex Ltd (OzForex). This transfer failed and OzForex repaid the funds to the liquidators of RNC. IFG appointed receivers over the assets of the Partnership and claimed the OzForex funds as property belonging to the Partnership and subject to IFG’s security interest.
The Court accepted that the payments by the Partnership to RNC were made in breach of fiduciary duty owed by the companies to the Partnership. IFG requested that the Court impose a constructive trust as a remedy for the breach which would return the funds to the Partnership. CBA contested the imposition of the constructive trust alleging that IFG was relying on the constructive trust to improve its security position over CBA’s security position.
In the alternative, IFG claimed its security interest in the transferred moneys could be traced into the funds in RNC’s account as proceeds. The Court, however, did not find it necessary to determine this claim because it already ordered the return of the moneys to the Partnership by imposing a constructive trust.
The liquidators raised the issue that CBA had priority over IFG despite the fact that it failed to register on the PPSR. CBA had essentially perfected its security interest in the Partnership’s accounts by control which gave it priority over any other security interest in the account regardless of the fact that it was not registered on the PPSR. The imposition of the constructive trust in effect landed the moneys back into the Partnership account over which CBA had control. CBA thus had priority over the funds. The Court reasoned that CBA would have had priority over IFG in the funds in the Partnership account if they had not been transferred to RNC and then to OzForex so the imposition of the constructive trust did not affect CBA’s priority position as CBA initially alleged.
The Court’s analysis seems sound enough. However, a question must be asked whether the imposition of a remedial constructive trust is capable of operating concurrently with the PPSA in accordance with s 254. How would the priority dispute be resolved under the PPSA if the Court had not imposed the constructive trust to plant the moneys back into the Partnership’s bank account with CBA?
The Court accepted that the transfer of the funds by the Partnership to RNC’s account and then to OzForex gave rise to proceeds and that both CBA’s security interest and IFG’s security interest attached to the moneys as proceeds. However, as discussed above, the Court found it was unnecessary to continue this point due to the imposition of the constructive trusts. If we set aside the constructive trust and apply the PPSA, does the result change? Assuming for the moment that the funds in the hands of RNC or OzForex or the liquidators are, indeed, proceeds for the purposes of the PPSA as the Court accepted, then s 32(5) provides that the time of perfection of the original collateral (that is, the CBA bank account) is the time of perfection in relation to the proceeds of the collateral. If this is the rule, then CBA’s security interest will have priority over IFG’s as it was perfected by control in 2013 while IFG’s was perfected by registration in 2016.
However, the transfer of the funds out of CBA’s bank account means that CBA no longer had control over those proceeds. An argument can be made that CBA’s security interest in the proceeds was no longer perfected because the funds were no longer in the account. Section 33(1) states that a security interest is proceeds is perfected only if a registration describes the proceeds or a registration covers the original collateral. CBA does not have a registration. Therefore, it is questionable that CBA’s security interest in the proceeds is perfected, in which case, IFG has priority because it has a registration perfecting the original collateral and the proceeds.
Section 33(2) also relates to CBA’s security interest in proceeds. It states that if a security interest in original collateral is perfected (that is, CBA’s security interest in the bank account perfected by control), but a security interest in proceeds is not perfected (CBA’s security interest in the funds transferred out of the bank account), then the security interest is temporarily perfected for a 5 business day period after the transfer. If the security interest in the proceeds is not perfected within those 5 business days, then it becomes unperfected. CBA did not perfect its security interest in the transferred funds. Therefore, under this rule, it became unperfected and IFG’s perfected security interest would have priority.
The above analysis applies if the transferred funds were actually proceeds for purposes of the PPSA. But as raised by the liquidators, the transferred funds were not proceeds. The Court declined to deal with this issue because it was unnecessary due to its finding of the constructive trust. However, as alleged above, if the application of the priority rules under the PPSA provides an answer to a priority dispute, the imposition of the constructive trust is inappropriate. The definition of proceeds requires that the grantor of the security interest has an interest in the proceeds. In this case, the Partnership as the grantor of the security interest transferred the funds gratuitously to RNC who transferred them to OzForex. This transfer did not generate proceeds that became the property of the Partnership. The definition of proceeds requires a dealing with the original collateral that gives rise to a replacement asset for the grantor. For example, if the grantor sells an asset subject to a security interest, the sale gives rise to an account owing from the purchaser of the asset. This account is property of the grantor to which the security interest in the original asset will attach. In this case, the funds were transferred to RNC and no asset arose from this dealing. Therefore, the funds once transferred cannot be proceeds for the purposes of the PPSA.
Section 34 deals with this point. If collateral is transferred, and at the time of the transfer a secured party held a perfected security interest in the collateral, the security interest remains perfected for a temporary period. Both CBA and IFG had a perfected security interest in the bank account, CBA by control and IFG by registration. This section provides that CBA’s security interest will be temporarily perfected for a period of 24 months after the transfer while IFG’s security interest will remain perfected until the end time of the registration. Therefore, it seems that both security interests were perfected by the time the funds were paid to the liquidator. As CBA perfected its security interest in the bank account by control in 2013 and IFG perfected its security interest in the bank account in 2016, CBA has priority.
If it is appropriate to impose a constructive trust rather than apply the rules of the PPSA (arguable), then CBA has priority over the funds as found by the Court. If, however, the rules of the PPSA should be applied and, as found by the Court, the funds are proceeds, then the rules seem to apply to give IFG priority over the funds. An argument could succeed, however, that the funds are not proceeds for the purposes of the PPSA. If that was the case, then the rules in the PPSA would apply to give CBA priority.
The above discussion demonstrates that the manner in which the PPSA sits amongst the backdrop of the general law is complicated. The extent to which the PPSA has overridden historical common law and equitable rules relating to personal property securities is not abundantly clear. The PPSA is not a complete code and the general law continues to operate to the extent that it is capable of operating concurrently with the PPSA, and much of the general law is necessary to support the objectives of the PPSA. The courts can expect to deal with many more issues relating to how the PPSA meshes with the general law.
 Linda Widdup, Personal Property Securities Act – Concepts in Practice (LexisNexis 2016 4th ed) 3.
 PPSA, s 12(1).
 Re Spectrum Plus Ltd (In Liquidation)  UKHL 41;  2 AC 680. The development of this charge on a corporation’s entire undertaking began with Holroyd v Marshall (1862) 10 HL Cas 191 where the Court recognised the efficacy of assigning future property in equity.
 Re Spectrum Plus Ltd (In Liquidation)  UKHL 41;  2 AC 680 at .
 Re Panama, New Zealand and Australian Royal Mail Co (1870) 5 Ch App 318 is regarded as the first case to recognise the floating charge.
 This issue played out in Canadian and New Zealand courts when their PPSAs were being considered. See The Royal Bank of Canada v Sparrow Electric Corp  1 SCR 411 (SCC); Bank of Montreal v Innovation Credit Union  3 SCR 3 (SCC); Royal Bank of Canada v Radius Credit Union Ltd  3 SCR 38 (SCC); Commissioner of Inland Revenue v Stiassny  NZCA 93 and Waller v New Zealand Bloodstock Ltd  3 NZLR 629 (CA).
 Duggan and Brown, Australian Personal Property Securities Law (2nd ed, 2016) [4.48].
  VSC 644 .
  WASC 152 as .
  FCA 170 at .
  WASC 152 at .
  WASC 152;  WASCA 163.
 Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed)  WASC 152 at .
  WASCA 163 at .
  WASCA 163 at .
  WASCA 163 at .
 Duggan and Brown, Australian Personal Property Securities Law (2015, 2nd ed) 104.
 Cuming, Walsh and Wood, Personal Property Security Law (2012, 2nd ed Toronto) 288.
 Harris and Mirzai, Annotated Personal Property Securities Act 2009 (Cth) (2014, 2nd ed) 107.
 Perfecting a security interest by taking control of assets that are otherwise “circulating assets” fulfils the policy of the Act. See Knauf Plasterboard Pty Ltd v Plasterboard West Pty Ltd (In Liquidation) (Receivers and Managers Appointed)  FCA 866 at  where the Court states that the methods for perfecting a security interest under the PPSA are “all directed to the objective of a secured party giving public notice of its security interest.” A secured party who doesn’t give public notice by registering must perfect by possession or control which takes the assets from the possession or control of the grantor and, therefore, will not deceive the public into believing these assets are not subject to a security interest.
  WASCA 163 at .
 See the definition of “personal property” in PPSA s 10 which excludes land and any personal property declared not to be personal property for the purposes of the PPSA.
  WASCA 163 at .
 PPSA, s 19(3).
 Corps Act, ss 433, 555-561. Also see PPSA, s 140.
 PPSA, s 340(1)(b).
  FCA 170.
 Defined to include the categories of chattel paper, currency, a document of title, an investment instrument and a negotiable instrument.
 PPSA, s 20.
  FCA 866.
  FCA 866 at .
 PPSA, s 12(3).
  WASCA 163 at  – .
  WASCA 163 starting at .
 (1828) 38 ER 475.
 PPSA, part 2.6.
  NSWSC 1958.
 In the Canadian PPSA context see Jacob S Ziegel, “The Unwelcome Intrusion of the Remedial Constructive Trust in Personal Property Security Law: Ellingsen (Trustee of) v. Hallmark Ford Sales Ltd” (2001) 34 Canadian Business Law Journal 460.
 PPSA, s 25.
 PPSA, ss 57 and 75.