North Sydney Commercial Lawyers

Personal Property Securities and the Arcabi case – Watch out for bailments and consignments!Print This Post

Personal Property Securities and the Arcabi case – Watch out for bailments and consignments!

It is the nature of commercial enterprise that business owners continue to come and go as do their co-equity partners. But getting the operation of the PPSA wrong will be devastating on any business owner’s mid-term to long-term goals.

Fortunately, the practical operation of this Act continues to be clarified by the Courts.

Take for example Re Arcabi Pty Ltd; ex parte Theobald [2014] WASC 310, a decision handed down 4 September 2014.

The business of Arcabi included the storage and sale of rare coins and bank notes (Goods). The Goods were stored in Albany WA (the Premises). Many of the Goods were owned by third parties (Investors).

Arcabi defaulted on its loan from Westpac (the Bank) which had a perfected general security interest over all Arcabi’s present and after acquired property. Could the Bank’s receiver take the Investor’s Goods and sell them and apply the proceeds to reduce the indebtedness of Arcabi to the Bank?

The Goods were broadly of two types. Firstly “Mixed Storage Goods”: the arrangement for these was that these Goods were stored only, and the Investors with Mixed Storage Goods were charged a storage fee and issued with an invoice.

The second type was “Consignment only Goods”. These Goods were part of an arrangement between Arcabi and some Investors whereby the Investor in each instance requested Arcabi to sell the Goods on consignment (to either third parties or to Arcabi itself if it chose to buy them). These Goods had not been sold at the time of the appointment of the liquidator and remained at the Premises at that time.

Bailment

The Court accepted that the arrangement in relation to the Mixed Storage Goods was a bailment. [By the way, a bailment is where a bailor delivers goods to a bailee upon a promise, express or implied, that they will be delivered back to the bailor or dealt with in a stipulated way – Hobbs case [1971] HCA 26].

However, the bailment did not secure payment or performance of an obligation, and so it did not give rise to a security interest and the operation of the priority provisions of the Personal Property Securities Act was not enlivened.

Was the bailment a PPS lease under s13? If so, it would be deemed to give rise to a security interest and therefore enliven the operation of the priority provisions of the PPSA.

One of the requirements for a bailment to be a deemed PPS lease is that the bailor must be regularly engaged in the business of bailing goods.

However, the Investors were not regularly engaged in the business of bailing goods. They were in the business of profiting from the exchange of rare coins and bank notes. The issue of the bailment was merely incidental to this main purpose.

Consignment

What about the Consignment Only Goods. [By the way, consignments are to be distinguished from retention of title arrangements which provide for title to pass only when full payment has been received. Retention of title arrangements do secure payment or performance of an obligation. Mere consignments generally do not.]

If the consignment in substance secured payment or performance of an obligation, then s 12(2)(h) of the PPSA provides that the operation of the priority provisions of the PPSA would be enlivened. However, the Court held that s 12(2)(h) did not apply, because the Goods were not held as security for a debt as no moneys were payable by Arcabi unless or until it sold the Goods, but title by that time would have passed to the third party purchaser.

The Investors were lucky. They got their Goods back (subject to paying the receiver the insurance premiums regarding insurance that the receivers took out over the Goods).

The moral is: if you are selling goods on consignment or a bailment otherwise applies, ensure that you have correctly worded terms of trade and if a security interest applies, then ensure that your security interest is registered.