It is not uncommon for a lender, when completing it’s due diligence process, to come across situations where a proposed borrower has registered a security interest on the Personal Property Securities Register (PPSR) over itself. Often leaving the lender perplexed, it must decide how to deal with the security interest (i.e. does it need to ensure the security interest is discharged so that the lender will rank ahead? or is this not necessary in circumstances where the registration is over itself?).
In the matter of Macquarie Leasing Pty Ltd v DEQMO Pty Ltd  NSWSC 1466, Rein J provided some insight into this issue. This matter dealt with a situation where DEQMO Pty Ltd (DEQMO) claimed to grant a security interest to itself.
At  Rein J states:
There are a number of reasons why DEQMO’s claimed interest can be seen not to be a valid claim:
(1) The claimed interest is one given by DEQMO to DEQMO. A person or company cannot give a security interest to itself: s 12 [of the Personal Property Securities Act 2009] which defines “security interest” as:
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).
Rein J relevantly states that neither this requirement (nor the further requirements set out in subsection 12(3)) can be satisfied by an interest given by DEQMO to itself.
This case provides some comfort to lenders who come across situations where a borrower has registered a security interest on the PPSR over itself. However, best practice will always be to ensure that any prior ranking security interests, questionable or not, are discharged in circumstances where the lender requires a prior ranking position.
For more information, contact ERA Legal.