Perfection of Security: What Happens If a Lender Misses It

Under the personal property securities laws of New Zealand and Australia, security works in two stages. First the interest attaches: the borrower has signed a security agreement, value has been given and the borrower has rights in the asset. From then on the lender can enforce against the borrower. Perfection is the second stage, and for most collateral it means registering a financing statement on the PPSR. For some collateral the lender can perfect by taking possession instead, and in Australia also by control, as when a bank takes security over an account the borrower holds with that bank.

Perfection decides contests. New Zealand's Act says plainly that a perfected interest has priority over an unperfected one, and a buyer who pays value for an asset generally takes it free of an unperfected interest. In Australia the Act goes further: an interest unperfected when the grantor goes into liquidation or administration vests in the grantor, so the lender loses the security altogether. In the UK there is no PPSR. A charge created by a company is registered by delivering it to Companies House within 21 days beginning with the day after its creation; one not delivered in that period is void against a liquidator, an administrator and the company's creditors, and the money it secured becomes immediately payable.

Most failures are not a missing registration but a defective or late one. Four recur.

Wrong details. Both Acts treat a registration with a seriously misleading defect as ineffective, and courts in both countries have tested it by asking whether a properly formatted search would find the registration. An Australian lessor that registered against a company's business number instead of its company number lost its security that way, and a New Zealand financier lost a leased bulldozer to a buyer because it had not registered its interest in the machine as a motor vehicle.

Lateness. Australia's Corporations Act adds a timing rule: an interest registered more than 20 business days after the security agreement took effect vests in the company if administration or liquidation begins within six months of the registration. A court can fix a later time on application, but relief is discretionary.

Lapse. A PPSR registration carries an end date, and one that expires without renewal leaves the interest unperfected from then on. And the wrong grantor: a group that moves its business into a new company, or buys assets through one, has given nothing to the lender until that company signs and the lender registers against it. For a purchase money security interest, both countries add shorter deadlines that decide whether its special priority applies.

A commercial bakery in Australia, constructed for this page like every figure in it, borrows from a non-bank lender against a general security agreement. The lender's first registration uses the wrong company number and is ineffective. The error is found and corrected, and the new registration is made on business day 26 after the agreement took effect. Five months later the bakery's directors appoint administrators. The lender is owed US$2.1m; after the administrators' costs and the employee claims the law pays first, the secured assets yield US$1.8m. Trade and other unsecured creditors are owed US$3.9m.

Six business days cost the lender US$1.17m, and the money did not disappear: it went to the bakery's other creditors, who had no security and are now paid out of assets the lender thought were its own. The administrators' further costs would make the dividend smaller still, and the example holds the employees' share constant between the two versions, which an unperfected security may not do. The same facts play out differently elsewhere. In New Zealand there is no equivalent vesting rule, so the lender would still rank behind every perfected interest but not lose the security outright. In the UK, a charge not delivered within the 21 days, and not saved by a court order extending the period, would be void against the administrators.

Perfection gets a lender into the queue; priority decides its place in it. Between two perfected interests in New Zealand and Australia, the general rule looks at when each was registered, or perfected by possession or control if that came first, not at when it attached, which is why lenders often register before the money is advanced. That order then yields in several ways: a purchase money interest registered in time can jump ahead of an earlier general security over the asset it financed, the lenders can rearrange their ranking by agreement, and on insolvency some statutory claims, such as employee entitlements, rank ahead of a general security over certain assets in all three markets.

So a lender reads two things: whether the security is perfected, and has been continuously since it was taken; and where it ranks once statutory claims and purchase money interests have taken their share.

DEFINED IN ONE PARAGRAPH → · GENERAL SECURITY AGREEMENT → · WHAT YOUR BANK HOLDS AS SECURITY →

Perfection is checked at drawdown and forgotten afterwards, which is where files go wrong. At drawdown, the condition precedent is not that the security was signed but that a search of the register, run against the grantor's details as the register indexes them, shows the lender's registration. Through the life of the loan, the lender tracks renewal dates and watches for new companies in the group, acquisitions of assets and changes to the business that need fresh security and fresh registration.

It matters again at the end. When a business is in trouble, the first thing an administrator or receiver tests is whether each security was perfected in time, because an unperfected one releases assets to the unsecured creditors. A lender that cannot show a clean, timely registration finds that out at the worst moment, when no correction is possible.

WHEN A LOAN GOES BAD → · VOLUNTARY ADMINISTRATION → · PURCHASE MONEY SECURITY INTEREST →