Written byPerfection (of a security interest) is the step that makes a lender's security effective against other creditors, usually by registering it on the PPSR.
Also known as: perfected security interest, perfecting security, PPSR registration
Key points
- Attachment gives a lender rights against you; perfection is what gives it priority against everyone else.
- Most interests are perfected by registering on the PPSR, and some by possession or control of the collateral.
- An unperfected interest can vest in the grantor if the business enters administration or liquidation.
- Registering late, or against the wrong details, can cost a financier its priority and sometimes the asset itself.
How perfection works
A security interest starts life as a contract. Under the Personal Property Securities Act it attaches once the grantor has rights in the collateral and value has been given, which makes it enforceable between the two parties. Perfection is the next step, and it is what makes the interest count against everyone else.
There are three main ways to perfect an interest: registering a financing statement on the PPSR, taking possession of the collateral, or taking control of it, which applies to things like bank accounts and some investment instruments. Registration is the practical route for vehicles, plant and equipment, which is why a chattel mortgage always comes with a PPSR search and a registration.
Why perfection matters
Priority is the first reason. Where two financiers hold interests in the same goods, a perfected interest generally beats an unperfected one, and between two perfected interests the type and timing of registration decide the order. A purchase money security interest, taken by the financier that paid for the goods, can rank ahead of an earlier general registration if it is registered within the time the Act allows.
Insolvency is the second. If the grantor goes into administration or liquidation while the interest is unperfected, the interest can vest in the grantor, and the financier drops back into the queue of unsecured creditors. Buyers matter too, because someone who buys goods with nothing registered against them can take them free of the interest.
What perfection means for borrowers
If you are financing a ute or an excavator, expect the financier to register as soon as the deal settles. It has to use the right identifier for you: an ACN for a company, an ABN for a trust or partnership, and for an individual or sole trader your name exactly as it appears on your driver licence, or on another listed document such as a passport if you do not hold one. It shows on a PPSR search, which is routine and not a black mark. When the finance is paid out, the financier should remove the registration, so it is worth checking that it has.
When you buy second hand equipment, run your own search before you hand over money. If someone else's interest is registered against the goods, it can survive the sale, and you can end up facing repossession of a machine you have already paid for. A search costs very little and takes minutes.
Example
A cafe buys a second hand coffee roaster privately for $18,000. The seller says it is owned outright. A PPSR search before payment would have shown a financier's registration against the roaster from an earlier equipment loan. Because that interest was perfected and the buyer never searched, the financier can recover the machine once the seller stops paying, and the cafe is left chasing the seller for its money. The search would have cost a few minutes and a small fee.
Not to be confused with
- Security (collateral)
- security is the interest itself, while perfection is the step that makes it effective against third parties
- Bill of sale
- an older security document, largely replaced by registration under the Personal Property Securities Act
Frequently asked questions
How do you perfect a security interest?
In most cases by registering a financing statement on the PPSR against the grantor's ACN for a company, ABN for a trust or partnership, or name as it appears on a driver licence for an individual, plus the serial number for motor vehicles and other serial-numbered goods. Perfection can also come from holding the collateral, or from control where the collateral is something like a bank account.
What happens if a security interest is not perfected?
The lender can still enforce against the borrower, but it can lose out to everyone else. A perfected interest generally takes priority, a buyer can take the goods free of an unregistered interest, and on insolvency the unperfected interest can vest in the grantor.
Is a PPSR registration the same as perfection?
Registration is the most common way to perfect an interest, but it is not the only one, and a registration with the wrong grantor details may not perfect anything. Possession and control also perfect an interest, depending on the type of collateral involved.
Does perfection mean the lender owns the asset?
No. Ownership depends on the contract. Under a chattel mortgage you own the asset and the financier holds a perfected interest over it. Perfection only settles where the financier sits against other creditors and buyers if things go wrong.
Why does perfection matter when buying second hand equipment?
Because a perfected interest can follow the goods. If a financier has registered against a machine and the seller still owes money, the financier may be able to recover it from you. Searching the PPSR before you pay is the standard check, and it is inexpensive.
Related terms
Security (collateral)
Security (collateral) is an asset or legal interest a borrower grants a lender, which the lender can take and sell to recover the debt if the borrower defaults.
Read definitionRepossession
Repossession is the enforced recovery of goods that secure a loan, such as a car, ute or machinery, after the borrower has defaulted on the contract.
Read definitionChattel mortgage
A chattel mortgage is a business loan for a vehicle or equipment: you own the asset from settlement and the lender holds a security interest until it is repaid.
Read definitionLien
A lien is a legal right a creditor holds over another person's property, such as goods or land, as security until a debt is paid.
Read definitionLiquidation
Liquidation is the process of winding up a company: a liquidator takes control, sells its assets, pays creditors in a set order of priority and the company is deregistered.
Read definitionAdministration
Administration is a formal insolvency procedure where an independent administrator takes temporary control of a company to rescue it or get creditors a better result than immediate liquidation.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.