Personal Property Securities and Debt Recovery
Personal Property Securities and debt recovery are closely related. This article explores that relationship.
Failure to comply with the Personal Property Securities Act 2009 (PPSA) can hinder debt recovery for those who are involved in financing and asset securities. If it hinders the security holder (the ‘grantee’), then it will usually assist the borrower’s (‘grantor’s’) liquidator and could give the liquidator a gift of such massive proportions that they may not need to think about undertaking any other recovery for the company’s creditors.
The case of Carrafa, Goutzos and Lofthouse (as liquidators of Relux Commercial Pty Ltd (in liq)) & Anor v Doka Formwork Pty Ltd  VSC 570 highlights that timing is everything with the PPSA and ownership means nothing. As a result of the decision, Doka lost over $1m of formwork equipment. Everyone agreed that Doka owned the equipment. Everyone agreed that it had registered its security interest on the PPSR. So what went wrong?
Relux operated a formwork construction business and had rented formwork equipment from Doka. Relux appointed administrators on 7 April 2014. The formwork equipment was in the possession of Relux at the time. The administrators were appointed liquidators on 16 May 2014.
From March 2013, Doka had leased the formwork equipment to Relux for “indefinite periods”. However, Doka only registered its security interest on 20 February 2014.
Doka had various formwork equipment leases in operation at the time the administrators were appointed. Some had begun in 2013 and others had only begun in February – March 2014.
The question for the Court
Who was entitled to the formwork? Relux or the liquidators of Doka?
Section 13 of the PPSA provides that leases for indefinite periods are “PPS leases” and therefore they are deemed security interests under s 12. Moreover, Doka was regularly engaged in the business of leasing formwork, thereby satisfying s 13(2)(b).
Section 588FL of the Corporations Act sets out the circumstances where a security interest granted by a company will vest in the grantor upon it being wound up or having an administrator appointed, or entering into a deed of company arrangement.
The section covers a PPSA security interest if it:
(a) is perfected by registration; and
(b) is enforceable against third parties; and
(c) the security registration time is after the latest of
(i) six months before the “critical time”
(ii) 20 business days after the security interest was created or the “critical time” (whichever is the earlier).
The critical time was 7 April 2014, which was the date of the appointment of the administrators. Six months before the critical time was therefore 7 October 2013. Twenty business days after the security interest was created was 19 February 2014.
Given that Doka had registered its security interest on the PPSR on 20 February 2014, the court held that the security interest of Doka in respect to all equipment supplied under that lease vested in Reflux. That meant that Doka became an unsecured creditor for not only the value of the equipment supplied under that lease but also all moneys owing to it under that lease.
Moreover, it also lost its ownership rights to all equipment supplied under leases entered into prior to 21 January 2014, as none of the security interests created by them had been registered.
That is, even though Doka was the lawful owner of the formwork, it lost its formwork equipment the subject of leases which had been entered into between 7 October 2013 and 21 January 2014.
Take home message:
The message is clear: ensure that security interests are registered within 20 business days of their creation, or risk losing them.
As a postscript, it is important to be aware that there are exceptions to the draconian s 588FL. Section 588FN of the Corporations Act provides them. It says that the s 588FL vesting provisions do not apply to a PPSA security interest provided for by any of the following transactions, if the interest does not secure the payment or performance of an obligation:
- a transfer of an account
- a transfer of a chattel paper
- a PPS lease if s 13(1)(c) applies to it and none of paragraphs (a) to (d) of s 13(1) apply to it
- a commercial consignment.
And if you comply with the Personal Property Securities Act?
Compliance with the Personal Property Securities Act can make debt recovery a lot easier for those involved in finance and asset securities.
Take John for example (not his real name). John worked in the software development industry and had done so for many years. He knew many key executives in the market he was involved in. His friend (we will call him “Harry”) also worked in the same large organisation. Harry was a wiz software developer.
One Friday afternoon, they had a light-bulb moment. Their employer was not targeting a niche software development area. Why don’t John and Harry create a new start-up? Harry, with his expertise, could develop the niche software and John could use his extensive contacts to market it.
Their lawyer prepared a business succession agreement and just before Harry was to sign it, Harry said, “Why don’t I go to Canada and continue the start-up operations over there? It means we will have a much larger market than just Australia. I can sign the business succession agreement when I get there”, to which John answered “Good idea.”
So Harry took the next available flight to Ottawa but without John’s knowledge, he also took a USB containing all of John’s known worldwide contacts. Moreover, the night before he left, Harry deleted the past 12 months of upgrades of the niche software.
John was infuriated. He came to see us. What can he do? Fortunately for John, Harry had made a fundamental mistake. He had failed to resign as a director of the Australian company so the Australian company was able to sue Harry for all the profits he was to make in Canada, because as a continuing director of the Australian company, Harry owed a duty to it to ensure he did not make personal profits at the expense of the Australian company.
But whilst this gave comfort to John and his Australian company, the uncomfortable truth remained that he and we as his lawyers, had to begin a fact finding mission:
- Where was Harry living?
- What companies or trusts was he using?
- Where were the profits being made?
- Where were they being kept?
- What web sites was he using?
- What other information had he taken from the Australian company?
- What information and software was he developing?
- Where was it?
These sorts of questions are difficult enough to answer when your opponent is in Australia. With your opponent many thousands of miles away in another jurisdiction, with the ability to open and close and amend websites and companies at whim, the prospects of successfully pursuing your opponent are considerably reduced, and the costs of doing so can frequently make the exercise uncommercial.
Nevertheless, our client persevered and eventually the law caught up with Harry. Judgment against him and his companies was entered in Australia. In negotiating a settlement, we were also able to effect the registration of security interests over Harry’s Canadian companies and also over Harry himself, under the Canadian equivalent of our Personal Property Securities Act. This meant that the Australian company was a secured creditor in Harry’s subsequent bankruptcy and also in the subsequent winding up of his Canadian companies.
The licence fees are flowing in and our client is now very much happier than before. A debt recovery story that had a happy ending.
Contact our Debt Recovery Lawyers Sydney for further advice