PPS and ADI accounts

This note by me was published in Complinet

The Personal Property Securities Act 2009 will have major implications for the way that authorised deposit-taking institutions are able to take security over deposits. Under Section 12(4)(b) of the PPS Act an ADI will be able to take a security interest in an ADI account that is kept with the ADI. Failure to register the security interest may result in loss of priority in the account as against a competing creditor or an obligation to account to a trustee for the depositor in the event of his insolvency.

The exception is a claim under contract or common law for a right of set-off alone, however, which will not be a registrable security interest (Section 8(1)(d) PPS Act).

How is that different from the current situation?
Typically a security deposit agreement provides that a Term Deposit is not repayable to the depositor until all money due to the lender under the Loan Contract or the Guarantee has been paid. It also provides that the Term Deposit Holder agrees that the lender may appropriate the whole or any part of the Term Deposit to repay the whole or part of the loan if the Borrower defaults under the Loan Contract or the Guarantor defaults under the Guarantee.

At present a security deposit agreement is not able to be registered and in the event of an insolvency of a depositor (whether an individual or a company) the ADI’s right to priority over the deposit is limited to circumstances where the borrower and the depositor are the same. A claim by an ADI under such an agreement over a deposit held by a third party who is not the same as the borrower will be extinguished in the event of the insolvency of the third party depositor. See Section 86 of the Bankruptcy Act and Section 553C of the Corporations Act.

The PPS Act will give priority to security agreements granted by depositors (whether they are the borrower or a third-party guarantor) provided the security interest is registered.

How will the new law apply in practice?
The Australian PPS Act draws on the Canadian experience.

A recent Canadian case involved deciding whether a security deposit agreement taken by a credit union was a security interest that attracted Canadian tax liability.

In Caisse populaire Desjardins de l’Est de Drummond v. Canada, 2009 SCC 29, [2009] 2 S.C.R. 94 the Caisse granted Camvrac a line of credit up to $277,000. A week later, Camvrac deposited $200,000 with the Caisse in accordance with a “Term Savings Agreement”. Under the agreement, the deposit was neither negotiable nor transferable. On the same day, the Caisse and Camvrac entered into a “Security Given Through Savings” agreement in which Camvrac agreed to maintain and permit the Caisse to retain the deposit of $200,000 for the duration of its indebtedness to the Caisse. It also agreed that, in the event it defaulted, there would be “compensation” between the credit agreement and the term deposit. Camvrac defaulted on the loan on November 25, 2000, and later became bankrupt.

The court decided that the agreement was a “security interest” using a definition similar to that in the PPS Act.

Next steps for compliance
You need to review your security deposit agreements and any relevant provisions in your account terms and your constitutions. You need to decide whether you will register this type of security interest on the PPS Register. Failure to register may render the deposit open to insolvency claims against the depositor including claims for employee entitlements.

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