1. PPSA SEMINAR PPSA Security Agreements Update Jason Harris Associate Professor, UTS Faculty of Law Jason.Harris@uts.edu.au 02 95143772

2. Outline PPSA: A current snapshot PPSA security agreements overview Whittaker Report on ‘security agreements’ Recent decisions on PPSA security agreements 2

3. PPSR statistics: March 16 Qtr Approx 2m searches (56% serial no property) Only 5.6% of searches are done by casual users Only 1.5% of all searches are of individual grantors Approx 507,000 new registrations (8.9m total current) Still more than 3.1m transitional interests registered 50% of all registrations are for motor vehicles 24.6% for "other goods"; 19% ALLPAP 72.9% of registrations are for commercial prop 3

4. PPSA: Security agreements The PPSA is not a complete code It assumes the parties will enter into a security agreement A security agreement is effective according to its terms (s18(1)) Security interest concept is based on a consensual transaction that gives rise to an interest in personal property Dura (Australia) Constructions P/L v Hue Boutique Living P/L [2014] VSCA 326 Definition (s10): "security agreement " means: (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 Verbal security agreement will be effective against grantor is security interest has attached to collateral (s19) 4

5. PPSA: Security agreements Although a security agreement may be verbal, this creates several legal risks: 1. Security interest will only be effective against 3 rd party if: Secured party possesses collateral (not by repossession) (s20(1)(b)(i)) Secured party perfects by control of the collateral but only for certain intangible collateral (s 20(1)(b)(ii)) So even if you register on PPSR, this won’t limit rights of 3 rd party against the collateral 2. Perfection by registration on PPSR will be impossible- because this requires enforceability against 3 rd parties (s21) This will give rise to taking free rule (s43), vesting rule (s267) and Corps Act vesting rule (s588FL) as well as losing priority to perfected security interest (s55(3)) 5

6. Enforcement against 3 rd parties (s20(1)(b)(iii)) Security agreement must cover the collateral in compliance with s20(2), which imposes 2 requirements: 1. A security agreement evidence by writing, that is: Signed by the grantor; or Adopted or accepted by the grantor by an act, or omission, that reasonably appears to be done with the intention of adopting or accepting the writing 2. The writing evidencing the agreement contains: (i) a description of the particular collateral; (ii) a statement that a security interest is taken in all of the grantor's present and after- acquired property; or (iii) a statement that a security interest is taken in all of the grantor's present and after-acquired property except specified items or classes of personal property. The description of the collateral must be more detailed than ‘consumer property’ or ‘commercial property’ (s20(4)) If described as inventory then collateral must be held by grantor as inventory (s20(5)) 6

7. Key risks for security agreements Is it a one-off contract, or an ongoing agreement subject to multiple orders? eg, master supply agreement/credit agreement and individual purchase orders/invoices Do the provisions change over time? Has notice been given? PPSR registration can cover multiple supplies for the same collateral class Does it include more than 1 document? Do they reference each other? Ensure that references are kept up to date as versions change Does it include standard form documents? (eg T&Cs) Note risk: void for uncertainty or incompleteness 7

8. Key risks for security agreements Has it been properly signed by someone authorised to sign it? Signature of grantor Who has authority in your organisation to sign contracts? Corporations Act 2001 (Cth) s127 Authority of agents to sign and bind company (CA ss128-129) If not properly signed, has it been ‘adopted or accepted by the grantor by an act, or omission’? eg, continuing to accept goods delivered and to pay invoices Be careful about consent provisions (eg transfers s34) 8

9. Whittaker report: security agreements Must evidence in writing be of all terms of a security agreement or just the terms of the security interest and the collateral? Does s20(2)(b) description rules serve a useful purpose? Proposes revision of s 20(2): “(2) (a) A security agreement covers collateral in accordance with this subsection if the items described in paragraph (b) are evidenced by writing that is: (i) signed by the grantor (see subsection (3)); or (ii) adopted or accepted by the grantor by an act, or omission, that reasonably appears to be done with the intention of adopting or accepting the writing. (b) The items referred to in paragraph (a) are: (i) the security interest that is provided for by the security agreement; and (ii) a description of the collateral that is sufficient to enable it to be identified.” 9

10. Recent decisions Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92 (12.5.15) Re Gelpack Enterprises Pty Ltd (in liq) [2015] NSWSC 1558 (3.9.15) Forge Group Power Pty Ltd (in liq)(rec and man apptd) v General Electric International Inc [2016] NSWSC 52 (11.2.16) Re Carpenter International Pty Ltd [2016] VSC 118 (24.3.16) 10

11. Central Cleaning CC supplied cleaning equipment to Swan Services from Sept 09 Swan signed a ‘credit application’ that stated that all supplies were ‘subject to standard terms and conditions’ Purchase order, then delivery (with delivery docket) and then invoice issued. Invoice contained ROT clause CC did not register on PPSR Goods delivered between Nov 12 and May 13 Swan entered VA in May 13 and then liquidation CC sought return of goods from the liquidator Liquidator rejected claim (argued unperfected security interest) CC claimed it had a transitional security interest Did CC have a security agreement in force immediately before 30.1.12? What made up the security agreement? 11

12. Central Cleaning Security agreement definition applied ‘an agreement or act by which a security interest is created, arises or is provided for’ ROT clause involved the contract ‘created the security interest’ Credit application was an offer by Swan, accepted by CC when delivering goods on credit Providing ROT on each invoice in same terms made these terms the ‘standard terms and conditions’ Providing ROT clause applied to ‘goods supplied by this invoice’ did not mean that each supply was a separate contract Contract came into force when 1 st supply was given Result: CC had transitional security interest 12

13. Re Gelpack Primaplas supplied resins to Gelpack Resins used to produce plastic products (co-mingling) Supplies subject to ROT under general T&Cs Gelpack went into liquidation owing Primaplas $1m for resins supplied Gelpack finance manager submitted credit application in 07 Credit application stated that all future supplies would be subject to ‘general terms and conditions of trade’ AND Primaplas could change terms at any time immediately, but would undertake reasonable efforts to notify customer before change Primaplas reviewed terms for PPSA in 2012 and registered on PPSR Notified Gelpack of new T&Cs and requested signed acknowledgement New T&Cs had ROT and granted ALLPAP, PMSI and charge over real property Acknowledgement signed by Gelpack operations manager 13

14. Re Gelpack New T&Cs said (in bold): ‘The customer and guarantor acknowledge, having read and understood the Primaplas terms and conditions of trade prior to executing this acknowledgment, by executing this acknowledgement the customer and guarantor grants the security interest and warrant the accuracy of the acknowledgement, promises and warranties set out herein.’ Further orders made, delivered and paid for Delivery docket referred to new T&Cs New invoices referred to 2012 T&Cs and also contained ROT clause Operations manager would have had authority to sign for Gelpack-he negotiated contracts (including prices and levels) Even if he didn’t have authority, company adopted and ratified his conduct by continuing to order stock and pay invoices Acknowledgement letter did not create new terms, that was already done under power of 2007 contract Result: Primaplas had a perfected security interest 14

15. Forge Group Forge entered contract with Horizon Power to supply and operate 4 mobile power generators for a temporary period in Jan 13 Forge entered rental agreement with GE for fixed term for the generators in March 13 Generators supplied and installed in Oct/Nov 13 Generators on wheels but operated on concrete slab laid down and with steel cables fixed to ground (against wind) Forge enters VA in Feb 14 and then liquidation Key issues: 1. Was GE regularly engaged in the business of leasing? 2. Were the generators fixtures? 15

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17. Forge Group Issue 1 GE assigned lease and assets to separate co in group in Oct 13 Contract recitals provided that ‘GE is engaged in the business of renting various kinds of power plant equipment’ Court held that: GE international activities were relevant to assessing ‘regularly engaged in the business of leasing’ the test applies at the time the Lease was entered into and not when goods delivered or installed Frequency and repetitiveness are relevant but not determinative ‘Regularly’ means ‘normal, that is, not abnormal in the context of the lessor’s business, but a proper component of it’ (at [49]) GE had leased other turbines in Australia and marketed itself as experienced in the field GE was regularly engaged in the business of leasing goods within Aust 17

18. Forge Group Issue 2 Meaning of ’affixed to land’ is determined by common law ‘The test of whether a chattel which has been to some extent fixed to land is a fixture is whether it has been fixed with the intention that it shall remain in position permanently or for an indefinite or substantial period, or whether it has been fixed with the intent that it shall remain in position only for some temporary purpose’ Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700 at 712 (per Jordan CJ) Lease contract had an end date Forge obliged to return equipment at termination Rental cost was not the full cost of the equipment Contract stated that title retained by GE, and contract was a ‘true lease’ not a finance lease or hire purchase Result: equipment was not a fixture (hence PPSA applied) 18

19. Re Carpenter Carpenter engaged in cattle export business Carpenter entered VA (court allowed stock to be sold) Carpenter purchased stock through agents working for vendor farmers (del credere agents-who paid vendors) Agents then took assignment vendor rights against purchaser If they had taken novation of contract that would be a new contract (new time) Carpenter had ability to reject particular stock, Contract conditional until specific stock selected and passed quarantine Not all sales covered by PPSR registration Some cattle were covered by ‘battle of the forms’ between contracts used by Carpenter and those used by agents Some were covered only by Carpenter contracts Both contracts signed, but battle of forms resolved in favour of agents (as they were complete) Agent contract contained ROT clause 19

20. Re Carpenter Some contracts had no security interest (agent could not recover) Tried to argue that standard industry T&Cs included While some were referred to in negotiations-no incorporation by reference No consistent inclusion to imply by course of dealing Registration on PPSR at 5pm AEST was sufficient to exclude s267, where VA appointed at 4.45pm AWST (6.45pm AEST) Corps Act s588FL (20 b/d after security agreement comes into force or more than 6mth before VA) Timing assessment not when contract became unconditional or when vendors assigned rights to agents (or when SI attached) Timing assessed at time of execution of contract-because that is when the security interest ‘was created, arose or was provided for’ SI vested under s 588FL-not eligible to extension under s 588FM Agent said it did not appreciate when 20 b/d period began, but it only registered well after condition satisfied and when it believed that Carpenter was in distress Agent could have registered prior to having rights in the collateral (i.e before vendor assigned rights) Could have required vendors to register and then transfer into their name 20