Under the Personal Properties Securities Act 2009 (Cth.) (PPSA) when a default occurs under a security agreement, the secured party will ordinarily enforce its rights under the terms of the security agreement and the PPSA. Specifically, a secured party will ordinarily seek to enforce their security interest pursuant to Chapter 4 of the PPSA which deals generally with the steps to be taken before a security interest can be enforced, and the subsequent seizure, disposal, retention of collateral and then the steps to be taken after a security interest has been enforced (including the order of distribution of the proceeds of any sale).

Chapter 4 of the PPSA has been pivotal in making enforcement efficient. An exception to the application of Chapter 4 of the PPSA is, however, where a receiver has been appointed to the collateral under the security agreement in order to enforce the security interest.

Under section 116 of the PPSA, the enforcement provisions set out in Chapter 4 of the PPSA do not apply where a receiver or controller is appointed under Part 5.2 of the Corporations Act 2001 (Cth.) (Corporations Act) to a company. The rationale for this is that a receiver’s appointment is regulated by Part 5.2 of the Corporations Act and the terms of the security agreement in which he or she was appointed under. The effect of section 116 of the PPSA, amongst other things, is that section 140 of the PPSA does not apply to receivers trying to enforce security interests.

Section 140 of the PPSA sets out distribution rules for proceeds held by a secured party as a result of enforcing a security interest in collateral. Of particular importance for the purposes of this circular is subsection 140(2)(a) which provides that:

‘The amount, personal property or proceeds must be applied in the following order:

2(a) obligations to persons holding interests (other than security interests) in the collateral that have a higher priority (whether under this Act or otherwise) than the interest of the secured…’.

In the context of receivership, if section 140 of the PPSA is not applicable, a receiver is not able to sell property that is subject to a security interest ranking in priority to the secured creditor who appointed the receiver unless an agreement is reached with the prior ranking secured party or an application is made under section 420B of the Corporations Act. Section 420B of the Corporations Act allows a receiver and manager of property to make an application to the Court to seek authority to sell specific property of a company even though that property is subject to a prior ranking security interest. This can obviously be an expensive exercise.

Take Away

If you are a receiver, the full provisions of the PPSA in respect of enforcement are not available to you. You need to rely on the Part 5.2 of the Corporations Act and the security agreement in which you are appointed under. If there is a prior ranking security interest over the property you are appointed over, you should take note that the property cannot be dealt with pursuant to Chapter 4 of the PPSA.

Please contact us for further information.