Personal Property Securities Act (PPSA 2009) does not rely solely on the general definition of a security interest in s12(1) as an interest in relation to personal property that, in substance, secures payment or performance of an obligation.

Section 12(2) provides examples of interests in personal property that are security interests if the transaction, in substance, secures payment or performance of an obligation.  The listed examples include:

• a fixed charge;
  
  
• a floating charge;
  
  
• a chattel mortgage;
  
  
• a conditional sale agreement (including an agreement to sell subject to retention of title);
  
  
• a hire purchase agreement;
  
  
• a pledge;
  
  
• a trust receipt;
  
  
• a consignment (whether or not a commercial consignment);
  
  
• a lease of goods (whether or not a PPS lease);
  
  
• an assignment;
  
  
• a transfer of title; or
  
  
• a flawed asset arrangement.

Some of the items in this list are well known; others require a brief explanation.

Fixed and floating charges

Fixed and floating charges are clearly security interests.  These charges are commonly created by mortgage debentures granted by companies to their lenders.  A fixed charge is a security that is attached to the charged assets.  This means that the chargor company cannot dispose of those assets without the consent of the chargee.  In effect, they are earmarked for the chargee.  A floating charge does not attach to the charged assets until it crystallises, usually upon the appointment of a receiver and manager after a default by the chargor company.  Before crystallisation, the floating charge confers a mere dormant contractual equity which would entitle the chargee to equitable relief, such as an injunction, if the terms of the floating charge were breached.  The essential difference between a fixed charge and a floating charge is that, before crystallisation of a floating charge, the chargor company could dispose of the charged assets in the ordinary course of its business without the prior consent of the chargee.

Under PPSA 2009 this difference between a fixed charge and a floating charge will become irrelevant.  The parties may continue to use the terms fixed charge and floating charge but gradually they will fall into disuse.  Security interests under PPSA 2009 are essentially fixed charges with a statutory licence to dispose of the charged assets in the ordinary course of business.  Generally, the security interest will attach when the security agreement that creates the security interest is signed by the parties, although attachment can be deferred by an express agreement between the parties.

PPSA 2009 will change our terminology.  A fixed charge will be referred to as a security interest in non‑circulating assets.  A floating charge will be referred to as a security interest in circulating assets, such as book debts or trading stock.  The term ‘mortgage debenture’ will probably be replaced with the term ‘general security agreement’.

PPSA 2009 offers secured creditors all the advantages of a fixed and floating charge without the uncertainty arising from the concept of crystallisation and re‑floatation of crystallised charges.

Chattel mortgages

A chattel mortgage is simply a mortgage of goods whereby property in the goods is transferred to the mortgagee, as in the case of a bill of sale.

Conditional sale agreements

A conditional sale agreement is an agreement to sell personal property subject to certain conditions, usually retention of title terms.

Hire purchase agreements

A hire purchase agreement is an agreement under which an owner of goods hires them to a hirer (purchaser) on terms that the purchase price will be paid by instalments.  In essence, it is an instalment sale.

Pledges

A pledge is essentially a contractual security which results in a bailment of the subject matter to the creditor who it is entitled to retain it until the debt is paid.  It requires actual or constructive delivery of the goods to the pledgee.  Constructive delivery can occur when the pledgee is handed a key to the premises where the goods are stored.  A pledge does not involve any transfer of title to the pledgee.  The pledge  has merely a right to possession but acquires a right of sale upon default by the pledgor. 

Trust receipts

A trust receipt is a document under which a lender advances money to a borrower to purchase something and the borrower promises to hold the item upon trust for the benefit of the lender until the debt is repaid.

Consignments

A consignment is a delivery of goods for custody or sale.  The term ‘commercial consignment’ is defined in s10 of PPSA 2009 to mean a consignment if:

• the consignor (the sender) retains an interest in goods that the consignor delivers to the consignee;
  
  
• the consignor delivers the goods to the consignee for the purposes of sale, lease or other disposal; and
  
  
• the consignor and the consignee both deal in goods of that kind in the ordinary course of business.

A classic example of a commercial consignment is a floor plan arrangement between a financier and a motor vehicle dealer.

But a commercial consignment does not include an agreement under which tangible property, such as goods, is delivered to an auctioneer for the purpose of sale.  Nor does it include a delivery of tangible property to a consignee for sale, lease or disposal if the consignee is generally known to the creditors of the consignee to be selling or leasing goods of others.  There is a lot of Canadian case law on this exclusion from the definition of ‘commercial consignment’.  It reminds us that commercial consignments require registration because they could mislead creditors into thinking that the goods belong to the consignee.  Where the creditors know that the goods belong to the consignor there is no risk of deception and registration is not necessary.

Leases, including PPS leases

A lease of tangible property is essentially an agreement to let property such as goods to a lessee in return for rental payments.  A PPS lease, as we have seen, is essentially a lease of serial‑numbered goods (motor vehicles, watercraft, aircraft) for 90 days or more, or a lease of other personal property (eg office equipment or schaffolding) for more than one year.

Assignment

An assignment can be an absolute assignment in the sense of a transfer of ownership or it can be an assignment by way of charge.  A transfer of ownership through an absolute assignment does not generally create a security interest but it does so where the property transferred is an account (ie an account receivable) or chattel paper.  The term 'chattel paper' was explained in an earlier bulletin.

Transfers of title

A transfer of title is simply a transfer of the title to personal property.  This will only be a security interest if it is effected to secure payment or performance of an obligation.  Clearly, an outright sale of personal property is not a security interest.

Flawed asset arrangements

A flawed asset arrangement is a contractual arrangement whereby a right of one party is subject to a condition precedent relating to that party’s own performance, such as a bank deposit that cannot be withdrawn until another specified debt is repaid.  While a flawed asset arrangement is included in the list of interests that could possibly be a security interest, it is unlikely that a simple flawed asset arrangement would constitute a security interest.  However, if something extra was added to the arrangement, such as a contractual right of set‑off, and the combination of the two was intended to secure payment or performance of an obligation, then the transaction could create a security interest.

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