There’s more to perfection than meets the eye

Security interests should be perfected to safeguard the secured party’s rights in the personal property subject to the security interest.  The PPSA provides for three different perfection steps:  registration, possession and control.

The step that will apply to most security interests is registration.  One common misconception is that the act of registration itself has the legal effect of perfecting a security interest.  In actual fact, registering is merely a necessary component of “perfecting” a security interest.  More is required. 

Section 21 tells us that a security interest in particular collateral is perfected if all of the following apply:

  1. the security interest is attached to collateral;
  2. the security interest is enforceable against a third party; and
  3. a registration is effective with respect to the collateral (unless the security interest could be perfected by possession or control).

In general terms, attachment requires that the grantor of the security interest has an interest in the property and the secured party has given value for the security interest.  Attachment can, therefore, occur even if the security agreement is an oral security agreement.  Attachment means the security interest is enforceable against the grantor.

But, to achieve a perfected security interest, the security interest must also be enforceable against a third party.  This requires the security agreement to be evidenced in writing.  Therefore, a secured party with an oral security agreement cannot perfect its security interest even if the secured party registers.   

In addition to being in writing, a security agreement must “cover the collateral” before it becomes enforceable against third parties and capable of being perfected.  The security agreement must:

  1. be either signed by the grantor, or otherwise “adopted or accepted” by the grantor; and
  2. contain a “description of the particular collateral” or a statement that a security interest is taken in all of the grantor’s present and after-acquired property or a statement that a security interest is taken in all of the grantor’s present and after-acquired property except specified items or classes of personal property.

Care must be taken in drafting collateral descriptions in security agreements.  Issues are likely to arise as to whether or not a security agreement contains an adequate “description of the particular collateral” such that it is enforceable against third parties and, therefore, capable of being perfected.