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Using emissions units as security

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15 September 2015


Australian carbon credit units and eligible emissions units are personal property for the purposes of the Personal Property Securities Act 2009 (PPS Act), the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act 2011), and the Australian National Registry of Emissions Units Regulations 2011 (ANREU Regulations 2011).

A person who holds emissions units in their ANREU account may use the units as security for a loan or other obligation. By doing this, the person grants another party a security interest in their units.

Secured parties such as financiers and other lenders that have accepted emissions units as collateral need to follow the rules established by the PPS Act regarding the creation of effective security interests–specifically ensuring that the security interest has attached to the units.

The security interest is enforceable against third parties when the security interest has been perfected.

ANREU does not record the existence of security interests in emissions units.

Perfection of security interests under the PPS Act

In some situations, two or more people may have a competing security interest in the same personal property. For example, one financier may take a security interest in all of a company's present and after-acquired property, while a second financier may take a security interest in specific property of the same company. To resolve conflicts between competing holders of security interests, the PPS Act provides a number of priority rules. Security interests need to be perfected to enjoy maximum priority.

Security interests in an emissions unit can be perfected by registration on the personal property securities register (PPS Register) or by control.

Perfection by control occurs when a creditor takes all steps necessary to be in a position to transfer the collateral without further action by the grantor of the security. Control is sufficient to perfect a security interest in the case of investment instruments. Importantly, a security interest perfected by control takes priority over a security interest perfected by another means, including an earlier registered security interest.

Note: a later registered security interest in an investment instrument cannot take priority over an earlier registered security interest. This is because a security interest in an investment instrument cannot be a purchase money security interest (PMSI), and therefore the special 'super-priority' enjoyed by PMSIs does not apply.

For more information see section 57 of the PPS Act.

Perfecting a security interest in emissions units by control

A person can perfect their security interest in emissions units by control in two ways. The first way involves becoming an authorised representative of the ANREU account in which the secured units are held. The second way involves becoming the registered holder of the secured units.

A person seeking to perfect an interest in emissions units should seek legal advice on specific provisions in the underlying contract to accommodate the characteristics of emissions units and the operation of ANREU and requirements of liable entities under the carbon pricing mechanism.

Control and authorised representatives

A secured party can take control of emissions units by becoming an authorised representative to the grantor's ANREU account.

A secured party can perfect a security interest in an uncertificated investment instrument by control by way of an agreement in force between the secured party and the grantor that has the effect of enabling the secured party to initiate or control sending instructions transferring the instrument or otherwise dealing with it. See subsection 27(4) of the PPS Act.

Such an agreement could exist between an ANREU account holder and their authorised representative.

Authorised representatives do not have exclusive control of the ANREU account: instructions in relation to the transfer of emissions units in a particular ANREU account may be issued by either the account holder or any of the account holder's authorised representatives. ANREU account holders, or their authorised representatives, may also request the Clean Energy Regulator to remove an authorised representative at any time.

Under the PPS Act, it is immaterial whether the secured party has exclusive control over the secured emissions units. See subsection 27(6) of the PPS Act.

Control by transfer

A secured party would perfect their security interest in emissions units if the units were registered in their ANREU account.

A secured party has control of emissions units while they are held in the secured party's ANREU account. This is because the PPS Act provides that a person has control of an investment instrument while that person is registered by the issuer as the registered owner of the instrument. See subsection 27(2) of the PPS Act.

Under legislation, an ANREU account holder who holds an ACCU in their ANREU account is the registered holder and legal owner of the unit. Ownership of emissions units is subject to the requirements of the ANREU Act. Regulations may also provide for indefeasibility of title in relation to Kyoto units. A person's ANREU account therefore constitutes the single authoritative record of ownership of those units.

As the legal owner of the units, the secured party could transfer or otherwise deal with the units including, if the grantor defaulted on its arrangement, by selling the units for value. The grantor would not have access to the secured units while they were registered in the secured party's account.

A person seeking to perfect a security interest in emissions units in this way would apply to the Clean Energy Regulator to open an ANREU account. Subject to agreement, a grantor would then transfer the secured emissions units to the secured party's account.

For more information see the Australian National Registry of Emissions Units Act 2011.

Attachment and perfection: proceeds and transfer

Generally, under the PPS Act, where a grantor disposes of collateral and the disposal creates financial gain, unless otherwise agreed, the secured interest attached to the collateral will continue in both the collateral and the proceeds generated through disposal. However, a security interest in an investment instrument, including an emissions unit, does not continue in that property when a purchaser, as defined in the PPS Act, gives value for, and takes control of the instrument, or the instrument is sold in the ordinary course of trading on a prescribed financial market. See sections 49 and 50 of the PPS Act.

When an emissions unit is cancelled the unit ceases to exist and no proceeds arise from its disposal.

Enforcement and vesting of security interests

The enforcement provisions set out in chapter four of the PPS Act do not generally apply to the enforcement of security interests in investment instruments that have been perfected by control. It is important to note that security interests in emissions units that are unperfected at the time of the grantor's winding up or bankruptcy would vest in the grantor and would be available to a liquidator or trustee in bankruptcy. See section 267 of the PPS Act. Section 588L of the Corporations Act 2001 also vests a security interest in a grantor company that was perfected by registration when the registration time was the later of six months before the company's winding up or 20 business days after the security agreement giving rise to the security interest came into force.

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