Perfection (law)

In law, perfection relates to the additional steps required to be taken in relation to a security interest in order to make it effective against third parties or to retain its effectiveness in the event of default by the grantor of the security interest. Generally speaking, once a security interest is effectively created, it gives certain rights to the holder of the security and imposes duties on the party who grants that security. However, in many legal systems, additional steps --- perfection of the security interest --- are required to enforce the security against third parties such as a liquidator.

As a legal concept, perfection must be distinguished from:

The same rule --- the common law rule in Dearle v Hall, for instance --- may govern both perfection against third parties (e.g., subsequent security holders) and prioritization of competing security interests.

In most legal systems, the need for perfection arises only in relation to security interests that are proprietary in nature (such as a mortgage or equitable charge). Other arrangements which constitute security in the loose sense of the word --- for instance, title retention arrangements, hire purchase, and leasing transactions --- need not in general be perfected in the legal sense.

In India, Section 125 of the Companies Act, 1956 provides that certain charges shall be void against liquidator or creditors unless registered. Thus,if a charge is not registered with Registrar of Companies, and company happens to go for liquidation, even secured creditor shall be treated as unsecured.

There are three principal modes by which a security interest may be perfected (which method of perfection is applicable depends upon the nature of the security interest and the laws of the relevant country).

Some security interests can be perfected only by the actual possession of the asset. For example, under a common-law pledge (or pawn), the right to enforce the sale of the asset is contingent upon the possession of that asset: an agreement that leaves the debtor in possession of the pledged collateral does not give rise to an enforceable security interest.

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