Perfecting a security interest is when a lender (or a person with the benefit of a security interest) takes specific legal steps to strengthen their claim to the property secured under a security interest. Basically, this strengthens the lender’s security interest and makes it superior to that of other creditors who have not taken these steps. If the borrower defaults under the loan and the lender decides to enforce its security (i.e. take the property and sell it to get its money back), the lender will have priority to the proceeds of sale over the other creditors (meaning it gets paid first).
There are multiple ways to perfect a security interest, but the specific method to use depends on the type of property involved:
Registration – this involves registering the details of the security interest on the appropriate public register. For interests in personal property, registration must be made on the Personal Property Securities Register (or PPSR). For real property, registration must be made on the land register managed by the land titles office of the state/territory where the real property is located. The rationale for this, is that it enables any member of the public to search the register and discover if a security interest exists in that property, so they can make an informed decision about transacting with that property beforehand.
Possession – for some types of tangible personal property, taking physical possession of it will amount to perfection. The rationale for this, is that when a person takes a security interest in personal property, it is prudent for them to physically inspect the property as part of their due diligence process, prior to transacting. If someone else has possession of the property when they go to inspect it, this should be sufficient to alert them to the existence of a security interest in the property (thereby enabling them to make an informed decision about transacting with the property).
Control – for certain types of intangible personal property (i.e. investment securities or bank accounts), taking control will amount to perfection. This differs to possession because the assets themselves (being intangible) can’t be physically held, and ownership is generally evidenced by the ability to control them. For example, a lender can take control of investment securities (such as shares in a company) by holding onto the title certificates, or take control of a bank account by entering into an agreement with the bank (called an account control deed) where the bank agrees to take the lender’s instructions over the account holder.