The final part of the PPS Serial Numbered Collateral Series concerns the situation where a prospective buyer or lessee conducts a search on the Personal Property Securities Register (PPSR) over the serial number for the personal property and the secured party’s security interest is not disclosed due to an error in the serial number or failure to include a serial number in the registration description.
The rule, pursuant to section 44(1) of the Personal Property Securities Act 2009 (Cth.) (PPSA), is that a buyer or lessee of personal property takes the personal property free of a security interest in the property if:
- the property may or must be described by a serial number in accordance with the Personal Property Securities Regulations 2010 (Cth) (PPS Regulations); and
- by searching the PPSR, immediately before the time of the sale or lease, by reference only to the serial number of the property, would not disclose a registration that perfected the security interest.
The effect of section 44 is that the buyer or lessee takes the underlying personal property free from the secured party’s security interest if an incorrect serial number is used or, more importantly, one is not included in the registration irrespective of whether the description of a security interest by serial number is permitted, but not required, in accordance with the PPS Regulations.
At face value section 44 seems to be at odds with the PPSA regime of mandated vs. optional registrations by serial numbers but the section is intended to benefit the buyer / consumer in the acquisition of personal property where the grantor of the security interest may not be known to the buyer or lessee.
It is important to note that failing to register by serial number (where the serial number is permitted but not required by the PPS Regulations) does not affect the validity of the registration or other perfected status of a security interest for the purposes of any priority dispute with other secured parties or an event of insolvency. To that end, where the serial number is permitted but not required in the registration:
- a secured party that did not register by serial number will not lose priority over the collateral to a secured party who does register by serial number; and
- the registration is still perfected. If the grantor becomes insolvent, the security interest will not vest pursuant to section 267 of the PPSA.
Where the serial number is required to be recorded in the registration in accordance with the PPS Regulations, a failure to register in that manner will result in a defective and ineffective registration for the purposes of section 164 and 165(1)(a) of the PPSA. See Parts 1 – 4 of our PPS Serial Numbered Collateral Series.
- the buyer or lessee holds (in their own right or on behalf of another person) the property as inventory; or
- the security interest which the buyer or lessee intents to take free of was created or provided for by a transaction to which the buyer or lessee is a party.
A secured party is put in a difficult position by section 44. On the one hand, where the serial number is permitted but not required in a registration, it only needs to register, for example an ‘other goods’ or ‘motor vehicle’ registration, against the correct grantor details for it to be effective. On the other hand, if it does not register against the serial number, a buyer or lessee may take the underlying personal property free from the secured party’s security interest.
Irrespective of whether the property is commercial or consumer property, where property may be described by the serial number but it is not required, secured parties should consider making two separate registrations:
- a general type of registration which provides for all supplies – for example an “Other Goods” or “Motor Vehicle” registration with a collateral description which broadly describes the relevant interest (General Registration). It is imperative that the General Registration is made against the correct Grantor identifier details to be a valid registration; and
- a separate registration noting the serial number (Serial Numbered Registration).
The basis of the Serial Numbered Registration is to prevent a buyer / lessee from taking the property free of a security interest. The basis of the General Registration is to satisfy the PPS Regulations insofar as registering against the correct Grantor details and if there are any errors in the Serial Numbered Registration, such as a typographical error in the serial number, then the General Registration may still provide protection to the Secured Party.
The above registrations would be in addition to a secured party’s registration over “all the present and after acquired property” of the grantor, if applicable.
This is the final instalment in our PPS Serial Numbered Collateral Series. Should you wish to know more about the intricacies of the PPS serial numbered collateral regime, please contact us.