One of the major benefits of Personal Property Securties Act (PPSA 2009) for secured parties is that it recognises that a security interest confers a fixed charge over the collateral with a licence to deal with it in the ordinary course of business.  It is relatively easy to grasp this concept in relation to existing property.  However, it is more difficult to accept that a fixed charge can be created in respect of future property.  This difficulty can be traced to the history of floating charges.

Floating charges were first recognised by the Courts of Chancery in the 1870s, at the height of the Industrial Revolution.  English Common Law did not recognise a mortgage of future property because a mortgage involved a transfer of ownership to the mortgagee, subject to the mortgagor’s equity of redemption.  However, the Courts of Chancery came to recognise that a floating charge could be taken over after-acquired property in much the same way as a contract to create a trust could be formed in relation to future property.  When the property was acquired, it became subject to the charge or trust, as the case may be.

Under pre-PPSA 2009 law Australian courts recognised that a mortgage debenture could create a fixed and floating charge over all the assets and undertaking of a company.  When the future property was acquired it became subject to the floating charge.  Crystallisation of the floating charge occurred upon the appointment of a receiver and manager or upon the happening of an event that would cause a cessation of the business, such as winding up.  Prior to crystallisation, the chargor company could dispose of its assets in the ordinary course of business.  The chargee had a mere dormant contractual equity which could be enforced by an injunction if the chargor attempted to dispose of the charged assets outside the ordinary course of business.

PPSA 2009 represents a radical departure from these concepts.  The security interests that are recognised by PPSA 2009 are fixed charges over present and future assets.  This may seem heretical because of the general principle nemo dat quod non habet (‘a person cannot give what he does not have’).  In other words, a person cannot create a charge over property he does not presently own.  But this principle has been modified in various ways by PPSA 2009.  See eg Graham v Portacom New Zealand Ltd [2004] NZLR 528.  This view that a PPSA security interest confers a fixed charge over after-acquired property is merely another example of how the nemo dat principle has been adapted to meet the commercial objectives of PPSA 2009.

Is there any support for this radical concept of a fixed charge over property before it has been acquired? PPSA 2009 itself contains some clues.  Section 18(2) states that a security agreement may provide for security interests in after-acquired property.  Section 18(3) provides that a security interest in after-acquired property attaches without any specific appropriation by the grantor.  But when does it attach?  Section 19(2) provides that a security interest attaches to collateral when:

• the grantor has rights in the collateral, or the power to transfer rights in the collateral to the secured party; and
  
  
• either:
  
  
  • value is given for the security interest; or
    
    
  • the grantor does an act by which the security interest arises.

Certainly, the parties can agree to defer the time of attachment but the mere use of the term ‘floating charge’ in the security agreement does not constitute such an agreement.

To support the argument that a security interest in after-acquired property is a fixed security we need to establish that the grantor ‘has rights in’ the after-acquired property or the ‘power to transfer rights in the collateral’ to the secured party even before the grantor acquires the property.  Traditional property and security lawyers may be reluctant to embrace this concept but the Canadian Courts are not so inhibited. 

The early Canadian cases and commentary on PPSA took a conservative approach.  On this view, a proprietary interest in after-acquired property could only ‘attach’ to the property when the debtor acquired it.  Before that time, there was no collateral upon which it could attach: Rogerson Lumber Co v Four Seasons Chalet Ltd (1980) 113 DLR (3d) 671; Bank of Montreal v Hall [1990] 1 SCR 121 at 134; Abraham v Canadian Admiral Corp (Receiver of) (1998) 158 DLR (4th) 65, at [19]-[20] and RCC Cuming and RJ Wood, ‘Compatibility of Federal and Provincial Personal Property Security Law’ (1986) 65 Can Bar Rev 267 at 276.

However, in Royal Bank v Sparrow Electric Corp [1997] 1 SCR 411 the Supreme Court of Canada concluded that a security interest granted to the bank under the Canadian Bank Act 1991 (c46) was in the nature of a fixed charge over both the present and future assets of the debtor, taking effect from the time when the security agreement was entered into.  Gonthier J (who dissented but not on this point) conceded that the concept of a fixed charge over property that did not yet exist was a novel one.  However, his Honour explained:

… a fixed charge over all present and future inventory represents a proprietary interest over a dynamic collective of present and future assets … this form of security interest challenges our traditional conception of a fixed charge; to the same extent, in my opinion; our conception of this form of charge must change to meet the modern realities of commercial law, and in particular the legislative provisions which have been brought to bear in this appeal. (emphasis added)

Although these comments were made in relation to the Bank Act 1991, they apply equally to PPSA 2009.  While the security interest in after-acquired property is necessarily inchoate in nature until the debtor acquires rights in the property, that does not change the fact that, as of the date of execution of the security agreement, the secured party acquires an interest in after‑acquired property that derogates from the debtor’s title: Radius Credit Union Ltd v Royal Bank 2010 Carswell Sask 725 at [31]; 325 DLR (4th) 635; [2011] 2 WWR 608.  See also Goode on Legal Problems of Credit and Security (4th edn, 2008) by Louise Gullifer, p.74.

Under PPSA 2009 the distinction between a fixed charge and a floating charge will become irrelevant.  There will also be new terminology: a security interest in non-circulating assets (for a fixed charge) and a security interest in circulating assets (for a floating charge).  The security interests that are recognised by PPSA 2009 are essentially fixed securities with a licence to dispose of the collateral in the ordinary course of business.  If Australian courts abandon their traditional reliance upon equitable principles and any preconceptions arising from their knowledge of equitable principles, they will come to recognise that a security interest under PPSA 2009 can be a fixed security in relation to both present and after-acquired property from the date the security agreement is signed.

For further information, please contact: