The impact of the Personal Property Securities Act on assignments of accounts.

• Jurisdiction: Australia
• Author: Stumbles, John G.H.
• Date: 01 August 2013

This article explores the regulation of 'deemed' security interests over personal property by the Personal Property Securities Act 2009 (Cth). A deemed security interest arises 'whether or not the transaction concerned, in substance, secures payment or the performance of an obligation. The transfer of an 'account' is one type of deemed security interest. In this article, the author examines the impact of the PPSA on absolute transfers of accounts. Whilst the PPSA has by and large replaced the technical complexities of common law priority rules with rules which accord more with the commercial expectations of the parties, the common law rules are still important in some situations. This is especially so where the priority rule dispute is between a prior unperfected legal transfer of an account and a subsequent perfected transfer of the account. The examples of potential priority disputes discussed in this paper emphasise the importance of perfecting security interests and the impact that giving notice to the account debtors can have in preventing the value of the account from being diluted through set off and other claims arising between the transferor and the account debtor after the transfer.

CONTENTS I Introduction II Transfers of Accounts under pre-PPSA Law III Transfers of Accounts under the PPSA A Subject Matter: Section 12(3) of the PPSA Only Applies to Transfers of Debts and Choses in Action Which Are 'Accounts' B The 'Transfer' of the Account: PPSA Applies to Legal and Equitable Transfers and Agreements to Transfer 1 Transfer and Assignment 2 Absolute and Not by Way of Charge 3 Equitable Interests in Accounts and Equitable Transfers of Accounts C Writing D Notice: the PPSA's Additional Requirements 1 The Content of the Notice 2 The Notice and Existing 'Equities' between Transferor and Account Debtor 3 Modification of Contract after Notice 4 Ongoing Significance of Notice to the Account Debtor: Enforcement IV The New Priority Rules A Are the Taking Free Rules Relevant Where There Are Successive Absolute Transfers of Accounts? B Transfers of Accounts and the Pre-PPSA Priority Rules C Replacement of the Rule in Dearie v Hall V Qualifications to the New Priority Rules 1 Prior In Substance Perfected Security Interest Over All Present and After-Acquired Property 2 The Purchase Money Security Interests and Accounts Being Proceeds of Inventory 3 Chattel Paper 4 Execution Creditors 5 Declared Statutory Interests 6 Employee Entitlements 7 Proceeds and ADI Accounts VI Application of the PPSA's New Priority Rules to Accounts A Prior Unperfected Equitable Transfer with No Notice to Account Debtor/Subsequent Unperfected Equitable Transfer with No Notice to Account Debtor B Prior Unperfected Equitable Transfer with Notice to Account Debtor/Subsequent Unperfected Legal Transfer with Notice to Account Debtor C Prior Unperfected Equitable Transfer with Notice to Account Debtor/Subsequent Perfected Equitable Transfer with No Notice to Account Debtor D Prior Perfected Equitable Transfer with No Notice to Account Debtor/Subsequent Unperfected Equitable Transfer with Notice to Account Debtor VII The New Priority Rules and the Nemo Dat Rule: Prior Unperfected 'Legal' Transfer/Subsequent Perfected Transfer under the PPSA A The Canadian Experience B The United States Experience C The Australian Position under the PPSA VIII The Double Grantor Problem IX Concluding Observations I INTRODUCTION

The Personal Property Securities Act 2009 (Cth) ('PPSA') regulates both 'in substance' security interests and what have become known as 'deemed' security interests over personal property. An in substance security interest is 'an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).' (1) Section 12(2) of the PPSA lists 12 transactions as examples of in substance security interests, including the fixed charge and floating charge as well as an assignment and a transfer of title. The PPSA security interest also extends to other arrangements designed to secure the performance of an obligation but which, prior to the introduction of the PPSA, had not been traditionally regarded as security interests. Included in this category of security interest are conditional sale agreements and agreements to sell subject to retention of title arrangements. (2)

In contrast, the deemed security interest arises 'whether or not the transaction concerned, in substance, secures payment or the performance of an obligation. (3) The transfer of an 'account' is one species of deemed security interest. (4) The drafters of the equivalent provisions in Article 9 of the original United States Uniform Commercial Code ('UCC'), from which s 12 of the PPSA is ultimately derived, intended that both security interests over accounts and absolute transfers of accounts be treated as security interests regulated by a common statute. In their view, a third party investigating dealings with accounts would be unable to determine, without further inquiry, whether those dealings were by way of security or by way of an absolute disposition. (5) A common treatment for each type of transaction eliminated the need for such a detailed investigation.

They also desired to create a mechanism for the public recording of dealings with accounts so that third parties could readily determine the existence of any prior interests over them. In the absence of any public recording of the transaction, a transferor could still represent that they owned the accounts, notwithstanding a prior dealing with that property. (6) These same rationales continued to inform the drafting of Revised Article 9 published in 1999 by the National Conference of Commissioners on Uniform State Law and the American Law Institute ('Revised Article 9'). (7)

In this article, the author explores the impact of the PPSA on absolute transfers of accounts (as distinct from transfers of accounts by way of security). (8) The PPSA does not operate in a legal vacuum; its provisions are only engaged if there is an applicable transaction at general law, in this instance a 'transfer'. Thus, in order to provide a reference point for the discussion, Part II summarises the pre-PPSA law regulating transfers of legal choses in action of which an account is but one species. Because a transfer of an account is also a security interest for PPSA purposes, Part III considers the PPSA's formal requirements relating to transfers of accounts in order to render them, in addition, fully effective security interests for PPSA purposes. Parts IV to VIII then consider the impact of the PPSA's new priority rules in so far as they relate to successive transfers of accounts. Part IX contains some final observations.

The commercial relevance of these changes should not be underestimated. In a service economy, accounts constitute significant assets in the balance sheets of many large corporations. Dealings with accounts, or book debts or receivables as they are known by some market participants, are important financing tools for firms and companies, whether the dealings are by way of the factoring of debts, securitisation of mortgaged debts, or the trading in the distressed debt of entities in financial difficulties. In varying ways, each of the participants in these commercial arrangements needs to consider whether it will be necessary to alter their traditional practices because of the PPSA.

II TRANSFERS OF ACCOUNTS UNDER PRE-PPSA LAW

Prior to the Supreme Court of Judicature Act 1873 ('Judicature Act'), (9) it was not possible to transfer a legal chose in action at law, (10) even though long before that time, an assignment of a legal chose in action was recognised in equity. (11) In theory, this impediment was significant because the equitable owner was unable to sue on the chose in action at law. In practice, however, this difficulty was overcome by the equitable transferee obtaining from the transferor a power of attorney permitting the transferee to use the transferor's name in any enforcement proceedings. Even in the absence of a power of attorney, the transferee was still able to enforce the chose in action by joining the transferor in the action and seeking orders compelling the transferor to permit its name to be used therein, subject to the transferee indemnifying the transferor in respect of any associated costs or liabilities. (12)

Section 25(6) of the Judicature Act and its counterparts in the Australian states and territories (13) recognise that a transfer of a debt or other legal chose in action complying with the statutory provisions is effective at law. (14) Although not identical, the current Australian manifestations of this provision enable the transferee to sue upon a debt or other legal chose in action in its own name provided the following conditions in the subsection are satisfied:

1. the subject matter of the transfer is a debt or other legal chose in action;

2. the transfer is absolute and not by way of charge only;

3. the transfer is in writing under the hand of the assignor; and

4. the account debtor is given express written notice of the transfer. (15)

III TRANSFERS OF ACCOUNTS UNDER THE PPSA

This Part considers whether the relevant transaction by way of transfer of an account engages the PPSA and if so, what additional steps, if any, are required under the PPSA in order to ensure that the transfer is also an effective PPSA security interest if the transferee wishes to enforce its security interest against competing third parties claiming a competing interest over the account. It will be seen that in most cases the PPSA replicates many of the formal requirements of the pre-PPSA law. To that extent, the PPSA should not significantly alter many of the traditional practices used in relation to dealings with accounts. However, in a few cases, the...