What will become of the fixed and floating charge under PPSA?

Implementation of the national regime under the Personal Property Securities Act 2009 (PPSA) continues to approach at a rate of knots. In May 2011 the PPSA and its new register (PPSR) will become operational.

The PPSA scheme

PPSA has been conceived to operate as a "one-stop shop". It will completely overhaul how all kinds of security interests over (essentially) everything except land, fixtures, water rights and certain statutory licences) will be created, perfected and enforced.

An account of the PPSA as a whole is beyond the scope of this article. However it is useful to set down some basics of the new regime.

A PPSA "security interest" is defined as an interest in personal property provided for by a transaction that secures payment or performance of an obligation. But PPSA reaches much further than traditional security forms. It will also affect any financier or other business that consigns, bails, supplies or leases goods and relies on its ownership of the goods to protect its position. These arrangements can also be deemed as "security interests".

The taking of good security under PPSA will require financiers to observe and implement the 3-stage PPSA process to ensure that their security interests:

  • attach to the collateral? which makes the security interest enforceable against the entity which granted it;

  • are enforceable against third parties? which usually will require an agreement in writing; and

  • are perfected? perfection is the key step under PPSA. It is needed to provide the intended priority, to provide protection from wrongful sale by the grantor, and to ensure that the security interest will survive the grantor's insolvency. For most security interests, perfection will be effected by registration on the PPSR. Alternate perfection methods (possession or control) exist but will be inappropriate for most security interests.

For financiers, a significant impact under PPSA will be on the fixed and floating charge (FFC). This powerful and common security over a company's assets will cease to be taken, at least in the form we currently know it. In this article we look in overview at this aspect of PPSA and what the FFC will become in the PPSA world.

The FFC before PPSA

Under pre-PPSA law, an FFC includes a charge fixed over the assets of a company that cannot be dealt with without the chargee's consent. However, the charge "floats" over the assets (typically stock, cash and book debts) that the chargee allows the company to deal with in the ordinary course of business. When the chargee withdraws its consent for the company to deal with those assets the charge is said to "crystallise" and become fixed. The law's invention of a floating charge allowing security over assets that "come and go" has long been recognised as one of the major advances in the law of company finance.

Under pre-PPSA law, whether a charge is fixed or floating over a given asset can have significant priority implications and also affects the distribution of the company's assets on winding up. A full account of those issues is beyond the scope of this article but financiers have grown to appreciate particularly that assets which are only the subject of a floating charge are generally available to pay employees and certain other claimants in priority to the chargee. Financiers can also generally expect to follow only fixed charge assets into the hands of purchasers where there is a sale by the chargor. Over decades, legal drafters have turned their attention to means to ensure that as far as possible their financier clients have fixed rather than floating security.

PPSA and the FFC

PPSA adopts a whole new terminology and conceptual framework when providing for security interests. This will affect the FFC (and its PPSA successor) as follows:

Before PPSA

Under PPSA




secured party

charged property


charge (document)

security agreement

fixed and floating charge

ceases to exist as such ? equivalent will be commercially known as a 'general security agreement' or 'GSA'? see below

PPSA does not expressly provide for the fixed and floating charge beyond making it clear that an FFC is a PPSA security interest. More significantly, under PPSA there will no longer be a concept of a fixed versus floating charge. Instead a charge will simply be a PPSA security interest attaching to the grantor's property. An "all assets" FFC in the common form we know it now will be simply described as "a security interest over a company's all present and after-acquired property".

Attachment of a security interest to collateral under PPSA will be the same whether or not the relevant asset of the grantor is regularly or routinely traded or disposed of. And because PPSA does not distinguish between fixed and floating security interests, the concept of crystallisation will not have any real meaning under PPSA.

Secured parties and grantors will still need to agree to the extent of the grantor's ability to deal with the collateral without the secured party's consent. However, so far as the outside world is concerned:

  • whether third parties take free of the security interest is governed by the PPSA extinguishment rules; and

  • the priority of the charge as against other security interests is governed by the PPSA priority rules.

The detailed PPSA extinguishment and priority rules will, with a few exceptions, work as a comprehensive code to the exclusion of general law rules.

Extinguishment rules under PPSA

PPSA extinguishment rules work to allow a buyer or lessee of personal property, for value, to take the property free of security interest in the property in given circumstances. The rules are quite complex and a full account of them is beyond the scope of this article.

The main extinguishment rule is that a buyer or lessee takes free of an unperfected security interest. Hence a financier that fails to register its security interest on the PPSR (or otherwise perfect it) will lose the benefit of its security interest to a buyer or lessee of the collateral.

Importantly, other extinguishment rules can apply even if the security interest has been perfected. Detailed rules are needed because the PPSA provides that security interests take effect according to their terms.

For example, the extinguishment rules will allow a buyer or lessee to take free of a perfected security interest if there is:

  • a sale or lease by the grantor in the ordinary course of business ? this effectively enacts the pre-PPSA general law in respect of the sales of an asset by a chargor under an FFC; or

  • sales or leases of serial number registrable property where the secured party has not registered under PPSA using the serial number.

In the PPSA world it does not matter whether the security interest purports to be fixed or floating or whether it is legal or equitable. What matters is the application of these detailed "black letter" extinguishment rules to the purchase or lease by a third party.

Windfall gains?

PPSA will change the ground rules between secured and unsecured creditors and we expect it will catch the unwary. Well-advised "all assets" (GSA) security interest holders may be significant beneficiaries.

Priority battle ? owner versus GSA holder

In the pre-PPSA world if a debtor business didn't own an asset (because it was owned by a lessor, bailor or retention of title supplier, consignor or floor plan financier) that asset could never be available to the financier with an FFC.

All that changes under PPSA. In the PPSA world, priority is determined by the legislation. It will not matter whether the competing security interests are legal or equitable, fixed or floating, and it will not even matter if an interest is ownership. One of the most significant features of PPSA is that ownership interests are treated as security interests. Security interests grounded in ownership will have to compete in priority terms with security interests such as charges and other "mere" hypothecations.

While FFC holders are generally used to the idea that registration is essential to preserve the validity of the charge under current law, we can expect, during the early days of PPSA, to see many owners fall foul of the new regime, as happened in New Zealand in priority contests that occurred after a PPSA-style regime was introduced there.

In Waller v New Zealand Bloodstock Limited [2006] 3 NZLR 629 Glenmorgan Farm had given security over "all its present and future assets" to Lock, a financier. Glenmorgan entered into a lease to purchase agreement for a thoroughbred racehorse, Generous, with New Zealand Bloodstock. Lock perfected its security interest by registering a financing statement on the PPS register.

Glenmorgan defaulted under the lease agreement with NZ Bloodstock and the lease was terminated. NZ Bloodstock repossessed Generous, however, Lock claimed that it was entitled to Generous.

The High Court found that:

  • relying on the particular statutory wording and a broad reading of the expression "assets", Lock's security interest encompassed Glenmorgan's interest in Generous.

  • NZ Bloodstock had a security interest in the lease under the general provisions of the NZ legislation, but because this was not perfected Lock's security interest had priority.

Allan J referred to the Canadian Supreme Court (Canada also has a PPSA-style regime) decision in Re Griffin [1998]:

"A person with an interest rooted in title to property in the possession of another, once perfected, can, in the event of default by the debtor, look to the property ahead of all others to satisfy his claim. However, if that interest is not perfected, it is vulnerable, even though it is rooted in title to the goods."

The case was not therefore determined on traditional concepts of title and ownership but by applying PPSA-style priority rules. Lock's security over Glenmorgan gave it a priority claim to the horse even though the horse was at no point owned by Glenmorgan.

Vesting in the grantor

The Australian rule that unperfected security interests "vest in the grantor" will, we expect, also entrap unwary owners. An example illustrates how this could occur:

Dealer sells widgets to Dodgy Brothers Limited, retaining title to the widgets until Dodgy Brothers pays for them. This retention of title is a deemed security interest under PPSA.

After the widgets are delivered to them, Dodgy Brothers goes into liquidation.

Dealer has not perfected its security interest by PPSR registration.

Dealer's security interest "vests in" the grantor, i.e. in Dodgy Brothers. It appears that in effect Dealer will lose its ownership of the widgets. The creditors of Dodgy Brothers will enjoy their proceeds.

Note: If Dodgy Brothers had given a perfected GSA to Bank, it appears that the widgets would be sold for the benefit of Bank (subject to statutory Corporations Act priority issues on any winding-up - see further below).

It is interesting to speculate on the way in which PPSA will affect the fortunes of the insolvency profession. Debtor appointees who rely on stock, cash and book debts to fund their administrations may do better initially, at the expense of inventory suppliers and others who fail to appreciate that their ownership is liable to attack under PPSA, especially once the 24 month transitional protection period expires. Many such appointees will no doubt find themselves administering property in effect expropriated by the legislation from hapless lessors, bailors and other (former) owners.

What will the FFC become under PPSA?

Current style FFC documents could in theory still be used as they would have some effect under PPSA. As noted above a floating charge is obviously a "security interest". However, because PPSA does not recognise a relevant dichotomy, the term "fixed and floating charge" will disappear. Current FFC documents will not align well with the comprehensive new law. They could create risks for financiers and we expect they will cease to be used.

In countries, such as New Zealand, that have adopted a PPSA-style regime, the type of security document formerly known as an FFC is now (as noted above) a "GSA".

The key differences between a GSA and a pre-PPSA FFC include:

  • a GSA security interest is simply granted over "all the company's present and after-acquired personal property". The word "charge" is normally not used and there is no allocation of the type of security interest ? fixed versus floating ? amongst various asset classes;

  • a conventional fixed charge is given over any property that is not "personal property" under PPSA ? primarily this will affect land. Because PPSA does not govern any security interest in land or a fixture, and possibly certain other very specific kinds of personal property, the GSA needs to retain pre-PPSA provisions to deal with those aspects of the security;

  • there is usually an ability to specify serial numbers for any serial number registrable personal property so that the extra benefits of serial number registration under PPSA are available. The main advantage for the financier is the avoidance of the extinguishment rule for transactions involving serial number registrable property; and

  • drafters of GSAs will also seek to exclude as far as possible the rights that the PPSA gives to grantors to receive notices, and in respect of enforcement.

Recognising and preserving the fixed v floating dichotomy in other places

Although PPSA itself doesn't generally recognise the fixed v floating charge dichotomy, the PPSA acknowledges that, although the law has been rewritten, there needs to be a way to deal with security agreements and other legislation where there are still references to fixed and/or floating charges. The introduction to the relevant provisions in the PPSA contemplates that, over time, these references will gradually disappear as participants in transactions and legal drafters align with PPSA terminology.

For the purposes of legislation such as the Corporations Act provisions dealing with priorities on distribution of proceeds of a company's assets on liquidation, the dichotomy still needs to be recognised. As briefly noted above, the Corporations Act allocates assets on a liquidation based on the fixed versus floating dichotomy. If this dichotomy is not carried forward, the law of company liquidation would need to change substantially. Such a reform has not been proposed under PPSA.

Part 9.5 of the PPSA therefore introduces a concept of "circulating asset", similar in essence to a floating charge asset. Part 9.5 of the PPSA defines the term "circulating asset" as follows:

  • an account that arises from granting a right or providing services in the ordinary course of business;

  • an account that is the proceeds of inventory;

  • an ADI account (other than a term deposit); and/or

  • currency, inventory or a negotiable instrument.

An asset is also a "circulating asset" where the secured party has given express or implied authority to the grantor for any transfer of the personal property to be made in the ordinary course of business, free of the security interest.

Part 9.5 provides that in any Commonwealth law or security agreement, references to charges to which PPSA applies are to be interpreted as follows:

  • charge includes a charge over a circulating or non-circulating asset;

  • fixed charge is a charge over an asset that is not a circulating asset; and

  • floating charge is a charge over a circulating asset.

Under Corporations Act changes enacted as part of the PPSA package, the asset distribution rules have been changed to refer to a dichotomy of circulating versus non-circulating assets. So for example the priority afforded to employees over assets subject to a "floating charge" will now be granted in respect of assets subject to a "circulating security interest".

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.

Author: Oliver Shtein