What is an AllPAAP and how can security agreements protect you from non-payment?

Estimated reading time: 10 minutes Asset protection
Fixed and Floating Charges

In article:

When a business provides finance or goods or services on credit, they need to consider how best to protect themselves from non-payment by their debtor. One important way of doing this is by registering a personal property security. An ‘all present and after-acquired property’ (AllPAAP) security is a particularly strong version of such a security. With certain key exceptions, it provides security over all of the debtor business’s property. In this article we look at:

  • The definition of personal property securities;
  • The definition of AllPAAPs;
  • The relationship between AllPAAPs and ‘fixed and floating charges’;
  • The benefits of AllPAAPs;
  • Whether an AllPAAP or a ‘Purchase Money Security Interest’ (‘PMSI’) takes priority in case of non-payment;
  • General due diligence that should be applied to all security agreements.

What is a Personal Property Security?

‘AllPAAP’ stands for ‘all present and after-acquired property’. It is a type of ‘security’ available to back up credit. So, what is a security? A security is an interest in property that secures payment or the performance of an obligation. Securities can be over land (such as mortgages), or over personal property (such as securities taken over cars or equipment). The AllPAAP is a personal property security. Rather than being a security over a particular thing, or bunch of things, however, an AllPAAP is a security over “everything” – well, almost. As we discuss below, it does not provide security over interests in land.  

There is also a variation, the ‘AllPAAP with exceptions’, where certain property can be specified to be outside the scope of the security.

In order for a personal property security interest to be fully enforceable, or, ‘perfected’, a few steps need to be taken:

  • A loan/credit application/credit agreement needs to be drafted, specifying the terms and conditions under which credit is extended. Read about what needs to be included in a credit or loan agreement here;
  • A security deed needs to be drafted setting out the terms of the proposed security that relates to the extending of credit (called a General Security Agreement);
  • The security needs to be registered on the Personal Property Securities Register (PPSR) and satisfy all the requirements for perfecting an interest under the Personal Property Securities Act 2009 (Cth) (PPSA).

One of the most important ways in which a personal property security is recorded on the PPSR is according to ‘collateral class’ – the type of personal property security that is involved. Collateral classes include:

  • Tangible property. This includes the sub-classes of ‘motor vehicle’, ‘watercraft’, ‘aircraft’, ‘agriculture’ and ‘other goods’;
  • General Property. This includes the AllPAAP without exceptions and AllPAAP with exceptions;
  • Intangible property. This includes the sub-classes ‘account’, ‘intellectual property’, and ‘general intangible’;
  • Financial property. This includes the sub-classes ‘chattel paper’, ‘currency’, ‘document of title’, ‘intermediated security’, ‘investment instrument’ and ‘negotiable instrument’.

Generally, personal property securities will have priority according to when they were registered and ‘perfected’ on the PPSR. Note, however, there is an exception to this. Purchase Money Security Interests (PMSIs) are a type of personal property security that have ‘super-priority’ over other perfected securities. We discuss PMSIs in further detail below. 

What is an AllPAAP?

The AllPAAP is the broadest collateral class of security that is registrable on the PPSR. In its exceptionless form, it can encompass all subclasses of personal property security. Key features of the AllPAAP include:

  • The security covers all personal property over which the grantor has an interest both at the time a registration is made and after. Note, however, that the AllPAAP can be made with explicit exceptions;
  • Both ‘circulating’ and ‘non-circulating’ assets can be secured. More on what this means, below;
  • It is a ‘personal property only’ security. The AllPAAP cannot cover land as land is not covered by the PPSA. To protect a security in land, a registrable mortgage is required.

What is the relationship between AllPAAPs and Floating Charges?

Strictly speaking, AllPAAPs are a creation of the PPSA. However, a version of this security existed long before that Act.  Commonly these securities were (and sometimes still are) referred to as ‘fixed and floating charges’.  In simple terms, a ‘fixed’ charge attaches to particular named piece of property; A ‘floating’ charge ‘floats’ over non-specific property until some event occurs which makes it attach to particular property and become ‘fixed’.

The PPSA doesn’t use the term ‘floating’ charge, other than to state that this is a security interest in a ‘circulating asset’. Circulating assets are, in turn, defined under section 340 of the PPSA. General types of circulating asset include:      

  • An account that arises from providing services in the ordinary course of a business;
  • An account that is the proceeds of inventory;
  • An ADI account (usually, a bank account, other than a term deposit);
  • Currency;
  • Inventory;
  • A negotiable instrument.

As mentioned earlier, an AllPAAP will cover both circulating and non-circulating assets (unless otherwise exempted).

What are the benefits of an AllPAAP?

When a business offers goods or services to another business on credit, it is common to protect that with a mortgage and/or a director’s personal guarantee of the debt. An AllPAAP can be combined with these options to provide extra protection to a creditor. AllPAAPs (and their predecessors ‘fixed and floating charges’) are often applied by banks to get priority over all other creditors. There is a real commercial advantage for banks to recover loans through collateral foreclosure.

More specifically, the benefits of an AllPAAP include:

  • Priority in the case of liquidation. Under section 556 of the Corporation Act 2001 (Cth), a secured creditor has priority over unsecured creditors. There is one complication, however. Security in circulating assets loses priority to certain unsecured creditors, including employees (for wages and benefits) (see section 433 of that Act);  
  • An AllPAAP allows for the appointment of a receiver. While this power has been limited in the United Kingdom in recent years, it is still available to a creditor in Australia. Through receivership, the creditor (via their receiver) gains actual control of the assets of the debtor company.  Arguably, this is the ultimate protection against fraud risk and diminution of value by poor managers upon insolvency. Before exercising a power to appoint a receiver, creditors must be aware of the receiver’s obligation to sell assets for market value, as well as the high hourly charges of receivers which will reduce the eventual returns for the creditor;  
  • Power to appoint a voluntary administrator.  Under section 436C of the Corporations Act 2001 (Cth), any creditor with an interest in the whole, or substantially the whole, of a company’s property has the power to appoint an administrator. This includes the holder of an AllPAAP;
  • Inventory. AllPAAPs can be particularly useful in cases where the security-holder would benefit from possessing inventory. This may be the case, for example, where the debtor runs a similar sort of business to the creditor (note, however, the discussion below about the impact that any PMSI taken over that inventory would have on the AllPAAP).

Does an AllPAAP or a PMSI take priority?

A business can grant multiple securities over its business assets. This then raises the question: where there are multiple securities over the same collateral, who gets priority? Under section 55 of the PPSA, general priority rules provide that a perfected security interest has priority over one that is unperfected. And where there is more than one perfected security, the one that was perfected first has priority.

This would mean, in theory, that an AllPAAP that is first perfected over property would have priority.  This is especially true given that the AllPAAP purports to apply to all after acquired property, i.e., an AllPAAP explicitly foresees and seeks to apply to property in the future.   However as mentioned above, there is a special type of personal property security that has priority over an AllPAAP: the PMSI.

Under section 14(1) of the PPSA, a PMSI covers the following four cases:

  • A security interest taken in collateral, securing all or part of the purchase price;
    • A security interest taken in collateral by a person who gives value to enable the grantor to acquire rights in the collateral, to the extent that:
      • The value is used to acquire those rights;
      • The interest of a lessor or bailor of goods under a Personal Property Securities (PPS) lease; or
      • The interest of a consignor who delivers goods to a consignee under a commercial consignment.

PMSIs are also applied where suppliers provide inventory on ‘retention of title’ terms (sometimes known as ‘Romalpa Clauses’).

In order to achieve ‘super-priority’ over other personal property securities, the requirements of section 62 of the PPSA must be complied with:

  • The registration must state that the security interest is a PMSI; and
  • Registration must occur within the applicable time period.

For more information on PMSIs read our article: What is a PMSI – new security for the PPSA.

Various cases, including the South Australian Supreme Court case Samwise Holdings Pty Ltd v Allied Distribution Finance Pty Ltd & Ors [2018] SASCFC 95, have confirmed the priority that a perfected PMSI has over a prior perfected AllPAAP.

What is the rationale behind a PMSI having priority over an AllPAAP? While various rationales have been given, one of the more persuasive analyses is offered by Anthony Duggan in “Romalpa Agreements Post-PPSA” (2011) 33 Syd L Rev 645 (see p 652). There, Professor Duggan looks at two key justifications:

  • Firstly, the PMSI contributes to the debtor’s profitability or potential profitability. Without this security, it would often be uncommercial for the supplier of inventory, for example, to supply the goods. Therefore, ultimately, the PMSI may benefit the AllPAAP-holder through supporting the business as a going concern;
  • Secondly, as the PMSI applies to goods that would not otherwise be acquired by the business, there is no real disadvantage for the first security-holder.

Overall, businesses will need to establish for themselves, given the risk to their interests, whether there is any point in gaining a second ranking AllPAAP: Prior registered securities and PMSIs may end up extracting all value from the business in the case of financial difficulties or insolvency.   

What due diligence should you carry out before deciding on the appropriate security?

While personal property securities are an excellent way of protecting the position of creditors – they do not provide an iron-clad guarantee. Where the “emperor has no clothes”, i.e. there is no collateral to claim, secured creditors will still end up with nada. Some important matters to consider before securing credit through a personal property security and registering it on the PPSR include:  

  • Searching the PPSR for prior securities that have been registered against the business. It is also worth checking the Australian Securities & Investments Commission (ASIC) website to determine whether any winding up applications are in play against the business;
  • Creditors should obtain extensive disclosure from the prospective debtor on the balance sheet and creditors. This is essential as the PPSR is only a ‘noticeboard’ for securities. Information on the actual financial performance and position of the company is also essential;
  • Compare the prospective value of the AllPAAP with other possible securities (such as a mortgage);
  • Obtain legal advice. This is important for working out the details of the loan agreement, the possibility of personal guarantees, the framing of the security deed, and ensuring that the security is correctly registered on the PPSR;
  • The fact that COVID-19 reforms have had a major impact on the ability of a business to enforce a security.  There is effectively a ‘stay’ on enforcing debts, as businesses have six months to respond to a statutory demand for payment of debt.  

AllPAAP – Key Takeaways

  • AllPAAPs are a type of security under the Personal Property Security Act 2009 (Cth). They provide security for credit over “all present and after-acquired property” of the grantor;
  • They can be held over ‘circulating assets’ (e.g., inventory or bank accounts) and ‘non-circulating assets’ (such as particular plant and equipment);
  • AllPAAPs are the modern form of what were once known as ‘floating and fixed charges’;
  • While an AllPAAP is a powerful form of security, it loses priority to prior perfected securities and PMSIs. In addition, employees have priority over part of the property that may be covered by an AllPAAP (the circulating assets);
  • When working out how to use a security interest to protect your business from non-payment, you should check the PPSR, carry out due diligence on the debtor’s financials, and seek professional legal advice.

Download Ben Sewell’s article from May 2010 on ‘Fixed and Floating Charges’ (PDF)


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