North Sydney Commercial Lawyers

Contracting out of the PPSA and releasesPrint This Post

A SUMMARY OF A

PAPER ON

Contracting out of the PPSA

Prepared and presented by

Leigh Adams at

Level 2, Grace Hotel Sydney,

Corner of York and Kings Street,

SYDNEY NSW 2000

On Wednesday 14 August 2013

Contracting out of PPSA security provisions

Much has been said about the PPSA since its inception on 30 January 2012. But very little has been said about the application of Chapter 4 which deals with the enforcement of security interests and in particular section 115 which provides that the parties to a security agreement that provides for a security interest in collateral that is not used predominantly for personal, domestic or household purposes, may contract out of various provisions in relation to the collateral.

Under section 109, deemed security interests (PPS leases, transfers of accounts, chattel paper and commercial consignments) are not enforced through Chapter 4 at all. Moreover, chapter 4 does not apply to the enforcement of security interests in goods located outside Australia – section 109(2).

The parties cannot contract out the general honesty and commercially reasonable standards under section 111. But what is needed in a contract to effectively waive rights under the PPSA (to the extent permitted)? The Saskatchewan Court of Appeal in Andrews-v-Mack Financial (Can) Ltd (1987) 8 PPSAC 110; 46 DLR (4th) 731 considered the question and the Court said: “To the extent that the contractual right ….. does not coincide with the statutory right ….., the former must be weighed and treated as a varying the statutory right…”

The provisions that section 115 refer to are numerous and some of the more important ones are as follows:

Section 95

Section 95 provides that a secured party with an interest in an accession must provide notice to interested parties as to the intention to remove the relevant accession from the whole. The idea under section 95 is to grant the secured party with an interest over the whole, time to invoke section 96.

Nevertheless, there are no prizes for guessing why a secured party might want to contract out of the notice provisions here: if you give the grantor 10 business days’ notice before seizing the accession, it is likely to not be there after that time, is it?

Section 96

Section 96 provides that a secured party with an interest in the whole may retain an accession to the whole where the obligation owing to the secured party with an interest in the accession is met in full. In general terms, this means that the secured party with a security interest in the accession can be bought out. Alternatively, the section also contemplates the circumstances where the value of the accession is paid at the time the removal of the accession is sought.

Clearly, the section contemplates circumstances where the value of the whole (comprising the original collateral as well as the accession) is worth more than the value of the accession. In such circumstances, then the secured party with an interest in the whole can move to pay the value to the secured party who has an interest in the accession.

Section 117

Section 117 allows a secured party with a security interest covering both real property and personal property securing the same obligation to elect to use either land law or the PPSA enforcement provisions against the personal property. Under the law as it was pre-PPSA, security interests that covered both real estate and personal property had to be enforced under different legal regimes. The concept behind section 117 is to reduce the time and cost of enforcement by treating the land law enforcement processes as if they were part of the PPSA.

However, where the secured party is not the highest ranking secured party in relation to the personal property, the options of the secured party are limited as the secured party needs to obtain the permission of higher ranking secured parties before they take action.

Section 118

Section 118 describes the mechanics of how a secured party can take a security interest covering both personal property and land as security for the same obligation.

The key provision is section 118(3) which provides that the secured party, after giving notice to the grantor and any person claiming an interest in the personal property, may enforce the security interest in the personal property in the same way “with any necessary modification” as the interest in the land may be enforced under the land law. Section 118 (6) provides that enforcement under land law by a secured party will render the rest of Chapter 4 inoperative to the enforcement of the security interest.

The effect of section 118 is that the secured party has the same rights and duties in relation to the enforcement of the security interest in the personal property, as the secured party has in relation to the enforcement of the interest in the land. The effect of this section is not to adopt the land law as such, but to apply law to the same effect as the land law (with any necessary modification).

An example of where section 117 and section 118 may be of use is the rights of the mortgagee in relation to a bus company that owns the land on which its bus terminal is located.

The end.