In Short
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Perfection of a security interest involves both attachment (establishing a security agreement) and an additional step, such as registering the interest on the Personal Property Securities Register or taking possession of the collateral.
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A perfected security interest generally has priority over unperfected interests and unsecured creditors’ claims.
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The Personal Property Securities Act 1999 outlines the methods for achieving perfection, with registration on the PPSR being the most common approach.
Tips for Businesses
To safeguard your interests when providing credit or securing obligations, ensure you perfect your security interests by registering them on the PPSR or taking possession of the collateral. This action establishes your legal priority over other claims and enhances your protection in case of debtor insolvency. Consult legal professionals to navigate the complexities of the PPSA and ensure compliance.
When you lend someone money or provide credit, you will usually want some form of security to ensure you will be repaid. This security is usually in the form of property owned by the borrower. To have the best security over the property possible, you want to make sure you reach security ‘perfection’. This article explains what security perfection is and how you can perfect a security interest.
What is Perfection?
In the context of personal property securities, perfection refers to the process where you, as a lender, establish the best possible legal position against competing claims to the property. A perfected security interest generally has priority over unperfected security interests and the claims of unsecured creditors. The Personal Property Securities Act 1999 (PPSA) provides several methods for achieving perfection, with registration on the Personal Property Securities Register (PPSR) being the most common and versatile.
Methods of Perfection
To perfect a security interest, two main things need to happen:
- Attachment: This means the security agreement is made between yourself and the borrower, giving you rights over the property if the borrower does not repay you; and
- One additional step: You could either register your security interest in an official government database or take physical possession of the property yourself.
Perfecting a security interest is important because it makes your claim to the property official. It establishes your priority over other creditors who might also have claims on the same property. Additionally, a perfect security interest helps to protect your rights if the borrower goes bankrupt before you have been repaid.
Registration
The primary method of perfecting a security interest under the PPSA is by registering a financing statement on the PPSR. This online register, maintained by the NZ Companies Office, allows you as a creditor to publicly notify your interest in a specific property. Registration is relatively straightforward and can be done electronically, making it an efficient and cost-effective means of perfection.
Possession
Taking possession of certain types of property can perfect a security interest. This method is particularly relevant for tangible assets such as goods. However, possession is not always practical or desirable, especially for property that the borrower needs to use in their business operations.
Temporary Perfection
In certain circumstances, the PPSA provides for temporary perfection without registration or possession. This can occur, for example, when property is moved across jurisdictions or when proceeds are generated from the sale of original property.
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The Importance of Perfection
Perfecting a security interest is important for several reasons, outlined below.
Priority
Perfection generally determines the priority of competing security interests in the same property. A perfected security interest will usually have priority over an unperfected one, even if the unperfected interest was created earlier. Additionally, perfecting your security means you will likely be first in line to get paid should the borrower go bankrupt.
Protection Against Third Parties
Perfection protects your interest against subsequent purchasers, lessees, or other creditors who might claim an interest in the same property you have an interest in.
Insolvency Protection
In the event of the debtor’s insolvency, a perfected security interest provides stronger protection against the claims of unsecured creditors and the official assignee in bankruptcy.
Enforcement
While perfection is not always necessary for enforcement between the immediate parties to a security agreement, it significantly enhances your ability to enforce your rights against third parties.
Continuous Perfection and Lapse
Once perfected, it is important to maintain the perfected status of a security interest. For registration, this means ensuring that the registration does not lapse. Under the PPSA, registrations have a maximum duration of five years unless a shorter period is specified. You must renew your registrations before they expire to maintain continuous perfection.
Special Cases and Considerations
Purchase Money Security Interests (PMSIs)
The PPSA provides special priority rules for PMSIs, which are security interests taken by sellers or lenders to secure the property’s purchase price. Proper and timely perfection is essential to take advantage of the super-priority status afforded to PMSIs.
Fixtures and Accessions
Special rules apply to the perfection of security interests in goods that become fixtures (attached to land) or accessions (installed in or affixed to other goods). These situations often require specific details on the financing statement.
Serial-Numbered Goods
For certain types of valuable goods commonly financed and have serial numbers, such as motor vehicles and aircraft, perfection by registration requires including the serial number in the financing statement for maximum protection.
Key Takeaways
Personal property security perfection is a cornerstone of NZ’s secured transactions. The PPSA provides a flexible framework for perfecting security interests, with registration on the PPSR being the most versatile method. Understanding the nuances of perfection is essential for effectively protecting your security interests and navigating priority disputes. Therefore, as the commercial landscape evolves, staying informed about legal developments remains crucial for all stakeholders in secured transactions.
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Frequently Asked Questions
Perfection is the process of securing your legal claim over a borrower’s property, giving your interest priority over others. Generally, you can do this by registering your interest on the Personal Property Securities Register (PPSR). Otherwise, you could do so by taking possession of the property.
Perfecting a security interest ensures that your claim has priority over others in the event of the borrower’s insolvency. Overall, this will protect your rights against third parties and unsecured creditors.
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