Is that a security interest or just a mirage?

Some people are tempted to see security interests as part of a transaction even when key requirements are clearly missing. Close attention must be given to whether the transaction provides for an interest in property that, in substance, secures payment or performance of an obligation.

A recent case makes clear that:

• a person who grants a security interest (i.e. the grantor) must have rights in, or the power to transfer rights in, the property claimed to be the subject of that security interest; and
• if a person has neither title to, nor a proprietary (including possessory) right to, the particular property, it is very unlikely to have “granted” a security interest in that property to another person (i.e. the secured party).

In Kirkalocka Gold SPV Pty Ltd (Receivers and Manager Appointed) v Zenith Pacific (KLK) Pty Ltd [2024] FCA 428, the receivers of Kirkalocka claimed that a power purchase agreement (PPA) between Kirkalocka, as the buyer, and Zenith, as the supplier, provided for a security interest in power plant equipment in favour of Zenith pursuant to section 12(1) or 12(3) of the Personal Property Securities Act 2009 (Cth) (PPSA). Zenith had not registered on the Personal Property Securities Register (PPSR) prior to the appointment of administrators to Kirkalocka so the receivers claimed the power plant equipment had vested in Kirkalocka under s 267 of the PPSA. 

The term of the PPA was 10 years. Zenith was to install, operate and maintain the power plant, which was on land owned or legally occupied by Kirkalocka, and supply electricity to Kirkalocka. The PPA granted Zenith and its personnel a non-exclusive and non-assignable licence to occupy the site to install, operate and maintain the power plant. Nothing in the PPA transferred title to, or granted any interest in, the power plant to Kirkalocka but Kirkalocka was given a purchase option in respect of the power plant. The PPA also gave Kirkalocka step-in rights to enter into possession of, operate and maintain the power plant if Zenith defaulted under the PPA.

The court at first instance found:

• there was no bailment of the power plant by Zenith to Kirkalocka and therefore no PPS lease for the purposes of sections 13 and 12(3) of the PPSA; and
• Zenith held an “in substance” security interest in the power plant for the purposes of section 12(1) of the PPSA even though it held title to the power plant and, at all times, it had actual and apparent possession of it. However, because Zenith had actual and apparent possession of the power plant at all relevant times, its security interest was perfected by possession so that registration on the PPSR was unnecessary.

The receivers of Kirkalocka appealed the decision of the primary judge to the Full Court of the Federal Court (Kirkalocka Gold SPV Pty Ltd (Receivers and Managers Appointed) v Zenith Pacific (KLK) Pty Ltd [2025] FCAFC 62) with the Full Court dismissing the appeal and holding that Zenith was in actual and apparent possession of the power plant so any security interest held by Zenith would have been perfected by possession. 

Having dismissed the receiver’s appeal in relation to the perfection by possession point, it was unnecessary for the Full Court to determine whether Zenith had a security interest in the power plant. Nevertheless, the Full Court was of the view the primary judge erred in concluding that Zenith held such an interest.

The Full Court observed:

• the power plant was not leased or hired to Kirkalocka and Kirkalocka had no operational control or possession of it. The PPA recognised that Zenith retained full operational control and possession because Zenith was required to generate electricity using the power plant and supply the electricity to Kirkalocka;
• the fact that a supplier of electricity recovered part or all of its fixed costs through a capacity charge, or that the buyer of the electricity was granted an option to purchase the power plant in certain circumstances, did not support a characterisation of the PPA as a deferred sale of the power plant or a hire purchase agreement;
• if Kirkalocka did not exercise the option to purchase the power plant, Zenith was required to remove the plant from the site at the end of the arrangement; and
• there was no separation of the title to and the possession of the power plant, so the PPA did not give rise to any reversionary or retention of title interest in favour of Zenith.

As Zenith had title to, and possession of, the power plant, it is also doubtful that Kirkalocka, as “grantor”, had any rights in the power plant for the purpose of attachment under s 19(2) of the PPSA. 

In relation to the issue of perfection by possession, section 24(1) and (2) of the PPSA provide: 

1. A secured party cannot have possession of personal property if the property is in the actual or apparent possession of the grantor or debtor, or another person on behalf of the grantor or debtor.
2. A grantor or debtor cannot have possession of personal property if the property is in the actual or apparent possession of the secured party, or another person on behalf of the secured party.

The Full Court noted that:

“The appearance of circularity in ss 24(1) and (2) is resolved by understanding that each subsection operates independently of each other. Section 24(1) operates when the relevant statutory question is whether the secured party has possession of the personal property, such as under s 21(2)(b). Section 24(2) is not intended to be “read into” or otherwise affect s 24(1). In other words, when considering whether the personal property is in the actual or apparent possession of the grantor or debtor for the purpose of s 24(1), s 24(2) has no application. To conclude otherwise would render ss 24(1) and (2) circular and meaningless.”

The Full Court went on to observe that apparent possession must be evaluated having regard to “the situation of the relevant personal property, to the minds of those who have an interest in the subject, and having regard to all facts and matters which are capable of being generally known to those who choose to make inquiry on the subject. In other words, the relevant inquiry is directed to an interested creditor seeking to inform themselves about the personal property in question.” This case, involving a power plant located at a remote mine site, meant that “the relevant inquiry must place the hypothetical observer within viewing distance of the relevant personal property.”

Unfortunately, even at an appropriate viewing distance, some will still see things that are simply not there.