C. Collateral Collateral refers to personal property as well as land or interest in land (Real Property) to which a security interest is attached. In this section we focus on personal property rather than real property. The latter has been covered in detail in the CIV program (Financial Services - Commercial and Asset Finance).

Collateral is often secured through the creation of a General Security Agreement (GSA). It is a common form of security often used to secure commercial loans or credit arrangements. It can be an effective way to obtain security over the assets owned by a person or company. GSAs replaced Fixed and Floating Charges or Debentures when the Personal Property Securities Act 2009 ('PPSA') came into force. When entering into a GSA the customer will often be asked to provide security over all of present and after-acquired property, meaning the bank will have security over everything it owns now and everything they will own in the future. A bank could, for example, require a GSA from the customer to secure loan monies advanced by the bank.

When entering into a security agreement with one of the customer's suppliers or for equipment purchases, they will typically provide security over just some of the customer's assets (Specific Security Agreement, often classified as a 'PMSI'), usually the assets that they supply to you together with the sale proceeds of such assets.

A GSA will usually secure all moneys owed to the secured party now and in the future (called 'secured moneys'). This will include collateral liability and the costs of enforcement. All security agreements need to be registered on the PPSR (Personal Property Securities Register), a central register operated by the government. In terms of commercial credit, both forms are used to secure such an interest to protect the loan or financial commitment

There are a number of categories of personal property to which a security interest can be taken. The security is secured on the Personal Property Security Register. This register is formed under the Personal Property Securities Act 2009 (PPS) and contains rights and remedies of enforcement of security interests on any default under a security agreement.

Security agreements do not need to include these remedies and the lender taking such a security can instead rely on the PPS Act. Under this legislation the lender taking the security is able to seize and dispose of the personal property with the proviso that the person giving the security (grantor) such as a customer giving security over a motor vehicle or a photocopier that is being financed by the lender is given an opportunity to repay or come to an arrangement with the lender prior to the appropriate notice of disposal has lapsed.

Personal Property is registered by the lender under specific categories, called a collateral class, so that when taking security the invoice or contract that supports the taking of security must be specific about the category. This also describes the purpose of the property whether for consumer or commercial purposes. If wholly used by a person with an ABN and for business purposes would fall under the commercial purposes category. These include: Tangible property 1. Motor vehicle This includes trailers and caravans as well as vehicles under a PPS lease. These will have a unique serial number. The collateral class should describe the vehicle as car, truck, motor bike, tractor, caravan or other. The unique serial number is also known as the VIN (vehicle Identification number), chassis or manufacturer's number.

2. Water Craft This includes boat, ship, or other vessel. The unique serial number is also known as the HIN (Hull Identification number), chassis or manufacturer's number

Air Craft This includes aircraft engine, airframe, helicopter and small aircraft. Aircraft engines, airframes and helicopters must be described by the manufacturer's number, name and generic model designator. A small aircraft is described by the nationality and registration marks assigned to it under the Chicago Convention (for example VH-ABC). Security interests in aircraft may also be registered under the 'Cape Town Convention'. Two registrations, one on the PPSR and one on the International Registry of Mobile Assets, will often be appropriate. 4. Agriculture 'Agriculture' contains two sub-classes: 'crops' and 'livestock'. The registration is made under these two classes but can include subclasses such as cattle, wheat crop etc. 5. Other Goods Other goods' is a collateral class to describe all other tangible property that cannot be described by the above collateral classes or as part of all present and after acquired property. This may include art, machinery, or jewellery. A registration describing the collateral class as 'other goods' may further describe the collateral in the free text field.LM_FNS51815_Complex Issues in Commercial Lending - Module 2_(1.7) Page 23 General property 1. All Present and After-Acquired Property - No Exceptions This collateral class is used to describe a security interest in all personal property that the grantor has an interest in at the time of registration as well as property that may be acquired by the grantor after the registration is made. 2. All Present and After-Acquired Property - With Exceptions This collateral class is used to describe a security interest in all personal property that the grantor has an interest in at the time of registration as well as property that may be acquired by the grantor after the registration is made, with the exception of any property described in free text field. A description of the property that is not subject to the security interest is mandatory. Intangible property Intangible property is any property that is not tangible or financial property. It is made up of the sub-classes 'account', 'intellectual property', and 'general intangible'. Account 'Account' describes property that is a monetary obligation that arises from the sale, lease or other disposal of property or from the granting of a right or the provision of services in the ordinary course of business. Example: book debts. General intangible General intangible is a sub-class intended to be used to describe all other intangible property that is not an account or intellectual property. This sub-class may used to describe property such as contractual rights licences and ADI (authorised deposit-taking institution accounts).LM_FNS51815_Complex Issues in Commercial Lending - Module 2_(1.7) Page 24 Intellectual property 'Intellectual property' under the PPSA only covers certain specific types of intellectual property" 'copyright', 'design', 'patent', 'plant breeder's right', 'trade mark' and 'circuit layouts'. It also covers licences over these types of IP. All of the further sub-classes, with the exception of copyright and circuit layouts, must be described by serial number when they are held by consumers. The relevant serial number for each type of intellectual property will generally be the number issued by IP Australia, or, where one has not been issued, the application number issued by IP Australia. The inclusion of serial numbers is optional when the intellectual property is commercial property. For any intellectual property that is personal property but does not fall under the definition in the PPSA, i.e. under one of the specific types mentioned above, it can be registered as 'intangible property'. Financial property The collateral class 'financial property' is made up of the sub-classes 'chattel paper', 'currency', 'document of title', 'intermediated security', 'investment instrument' and 'negotiable instrument'. 1. Chattel paper 'Chattel paper' describes a document or documents, including in electronic form, which evidences both a monetary obligation and a security interest in, or lease of, specific goods. Examples include hire-purchase agreements, rental agreements, or conditional sales agreements. This describes a document or documents, including in electronic form, which evidences both a monetary obligation and a security interest in, or lease of, specific goods. Examples include hire-purchase agreements, rental agreements, or conditional sales agreements where a security interest is granted in the agreements themselves.LM_FNS51815_Complex Issues in Commercial Lending - Module 2_(1.7) Page 25 2. Currency This collateral sub-class describes collateral that is the money of Australia or any other country. 3. Document of title A description of 'document of title' is intended to cover a document issued by or addressed to a bailee (holder of the security) that covers goods in the bailee's possession and states that the goods identified will be delivered to a person specified or to the bearer. 4. Intermediated security This sub-class is intended to describe the rights of a person in whose name an intermediary maintains an account to which interests in financial products are credited or debited or an account that is a record of holdings and transfers of interests in financial products. An example of a 'intermediated security' is a Clearing House Electronic Subregister System (CHESS) security. 5. Investment instrument An 'investment instrument' may describe the following financial products or a combination of these products: a share or a debenture a derivative a foreign exchange contract that is not a derivative an interest in, or a unit in an interest in, a managed investment scheme a financial product traded on the financial marketLM_FNS51815_Complex Issues in Commercial Lending - Module 2_(1.7) Page 26 Default priority rules Registration on the PPS Register is a form of perfection under the PPS Act. The most common form of perfection under the PPS Act will be by registration. Perfection by registration has two main benefits for a secured party. Firstly it defines the priority status the security interest has relative to other security interests in the collateral. Secondly it ensures their security interest survives the bankruptcy or insolvency of the grantor, the person has the priority to acquire the collateral. The effect of registration on the priority of security interests is demonstrated through the default priority rules under the PPS Act. These rules provide that: a perfected security interest takes priority over an unperfected security interest priority between two or more perfected security interests is determined in favour of an earlier perfected security interest over a later one, and priority between two or more unperfected security interests is determined in favour of an earlier attached security interest over a later one. Making a registration On receiving an application in the approved form, the PPS Registrar will enter a security interest onto the PPS Register. The application must consist of a financing statement. The financing statement contains the particulars of parties to the transaction, the collateral and the security interest. For certain collateral the grantor's details will not be entered for privacy reasons. Searching the PPS Register A person may search the PPS Register for details of a registration or security interests registered against a particular grantor.LM_FNS51815_Complex Issues in Commercial Lending - Module 2_(1.7) Page 27 If the grantor being searched against is an individual rather than a company the search must be for a purpose defined under the PPS Act to protect privacy. The search certificate will contain details of the parties and the class of collateral the security interest has been registered against. Floating Charges A floating charge secures a non-specific interest over the assets of a company. Typically it secures the total assets of a company or generic categories of assets such as inventory or accounts receivable. Property subject to a floating charge can be dealt with by the company without having to seek the consent of the financier. The floating charge 'floats' over the secured property until the occurrence of certain events that trigger the crystallisation of the charge and converts it into a fixed charge. For commercial lending the advantage of the floating charge lies in the ability of the borrower to obtain finance and deal with the property whilst the financer has security for the finance advanced. The Personal Property Securities Act 2009 rules about the creation and nature of security interests does not include concepts analogous to either the 'floating' nature of a floating charge or 'crystallisation'. The following rules apply: It's an agreement that gives rise to a security interest and is effective according to the terms that the parties are free to negotiate To be enforceable the security interest must be attached to the collateral The security interest may attach at a later date as agreed to by the parties, and A reference to a floating charge in a security agreement is not taken to be an agreement that the security interest will attach at a later date A security interest has either 'attached' or has not. There is no flexibility within these statutory definitions to accommodate concepts of 'floating' or 'crystallisation'LM_FNS51815_Complex Issues in Commercial Lending - Module 2_(1.7) Page 28 Circulating Assets A circulating asset will typically be either an account or inventory, among other particular types of property, over which the grantor of the security interest retains control of the property. In other cases collateral would be a circulating asset where the secured party had given the grantor authority for the transfer of the collateral in the ordinary course of the business free of the security interest. Under this definition of circulating asset the grantor is able to deal with and sell the circulating asset subject to the security interest in the same way a borrower under a floating charge transaction can deal with and sell with the charged property. Purchase Money Security Interests This is always a commercial transaction in which the supplier or goods to the grantor of security in exchange for the registration of the security interest over those goods. So a manufacturer that buys raw materials on credit may take out such a security so that in the event of failure of the credit and receivership/bankruptcy the goods or raw materials are secured from other creditors. Case Example: Acme Enterprises has provided ANY Bank Ltd with an All-Assets Floating charge that it has registered on the PPSR as a security interest. Zippy Incorporated has provided goods on a retention of title basis (PMSI) which it has also registered on the PPSR. Acme is now in receivership and ANY Bank finds that Zippy ranks higher in the right to retain the goods or claim the proceeds of sale due to the priority rule that exists in this type of security ranking.LM_FNS51815_Complex Issues in Commercial Lending - Module 2_(1.7) Page 29 However, if Acme had provided ANY Bank with a secured interest in the inventory such as invoice financing, the bank would have the priority of claim Activity

2.3 Applying the Concepts All Finance Ltd is providing a line of credit $500,000 to Solar Traders Pty Ltd and is looking to register an appropriate security interest. Solar has Cash at Bank ($123,450), Trading Stock ($392,100) and owns the premises from which it operates ($1,250,000). Solar has mortgaged this property with another bank (on which $450,000 is owed to the other bank). It is also owed a sum of funds from Debtors during the course of trading of which 80% is owed within 60 days or less of invoicing. Discuss the types of security interest that All Finance would seek to register to secure the advance of funds.