Agreeing to grant a security interest by conduct: Why all security agreements are not made the same
The ways in which registering a security interest on the PPSR may protect your interests are well known and documented, however the ways in which parties may consent to such interests being registered against them remain lesser known.
Having to obtain customers’ written acceptance of agreements and terms and conditions in order to register a security interest against them is becoming an increasingly tiring task for business owners to undertake. However, under the Personal Properties Securities Act 2009 (Cth) (PPSA), this may be unnecessary in select circumstances. Indeed, while the PPSA requires security agreements to be in writing, it does not require the entirety of the agreement, such as its acceptance, to be evidenced in writing.
Pursuant to section 20(2) of the PPSA, a security agreement will cover collateral, such as equipment or vehicles, if the security agreement is evidenced in writing which the grantor adopts or accepts by an act that reasonably appears to be done with the intention of adopting or accepting the security agreement.
In the example of a customer leasing equipment from a business, provided that the agreement between the parties contains:
1. a clause to the effect that the security interest created by the written agreement for lease over the equipment may be registered; and
2. terms and conditions to the effect that the lessee agrees that their acceptance of the terms may be by conduct, such as by accepting delivery of the equipment;
the lessor may register an interest over the equipment pursuant to the written agreement, subject to same satisfying the totality of requirements listed under section 20(2) of the PPSA.
An example of a clause befitting of the current instance which may allow acceptance by conduct is the below:
“The Lessee agrees that pursuant to section 20(2)(a)(ii) of the Personal Properties Securities Act 2009 (Cth), the Lessee is deemed to have adopted and accepted, and is immediately bound by, the terms and conditions herein when the Lessee accepts delivery of the Equipment.”
The importance of registering such interests was highlighted in the cautionary tale of APR Energy, who failed to register an interest in four gas turbines that it leased to Forge Group Power. The turbines were worth a combined amount of approximately $50 million. Forge Group subsequently went into liquidation, and APR Energy was treated as an unsecured creditor in the liquidation, with ownership of the turbines vesting in the receivers.
Should you wish for Rostron Carlyle Rojas Lawyers to review your current written agreements to confirm whether they comply with the conduct provisions of the PPSA discussed herein, please do not hesitate to contact our office on (07) 3009 8444.