This whitepaper was presented in Sydney, NSW for the College of Law. As a PPSA lawyer dealing with sales of business on a regular basis, this topic is of particular interest to our firm Leigh Adams Lawyers.
Case Law Generally:
The Personal Property Securities Act 2009 (Cth) (the ‘PPSA’) began operation on 30 January 2012. It totally changed the law in Australia in relation to taking security over goods and almost everything else other than land. In addition, it established a new registration system for security transactions.
There are over 40 reported cases where the Courts have made some kind of comment on the PPSA, though frequently these comments are brief. The most common circumstances has been plaintiffs seeking an extension of time to make registrations where the 20 day time limit has been missed, exposing the secured party to the risk of having their security interest vest in the grantor if the company goes under external control within the next six months.
A unique result was found in SFS Project Australia Pty Ltd v Registrar of Personal Property Securities, where a company mistakenly removed a registration and then wanted the Registrar to reinstate it with its original priority time, as if never removed. The Court found that s 186 of the PPSA allowed the Registrar to do this and ordered it to be done.
A clearly anticipated result was Pozzebon v Australian Gaming and Entertainment Ltd, where the plaintiff argued that a security interest had not been ‘perfected by registration, and by no other means’ as required by s 588FL of the Corporations Act. The plaintiff’s argument was that its security interest had been perfected by a combination of attachment, enforceability and effective registration. The court said the argument was ‘obviously misconceived’.
Nevertheless, the outcomes generally reflect how lawyers have expected the PPSA to operate. Examples include the fact that lessors who don’t register their security interests over equipment they own will lose their security interest to others who do register: Re Maiden Civil . In addition, suppliers who sell on retention of title terms without a registration being made, willlose their security interest if the customer goes into liquidation: Central Cleaning Supplies. Moreover, registrations against company grantors must be made within the 20 day time limit stipulated by s 588FL of the Corporations Act, or the security interest will vest in the grantor if the company goes into liquidation within 6 months: Pozzebon case.
Recent Case Law
In THC Holdings Pty Ltd v CMA Recycling Pty Ltd  NSWSC 1136, THC purchased scrap metal from CMA. Payment had been made and title had passed.
But the scrap metal remained on the property of CMA. This scrap was accumulated in one pile at the CMA site, separate from other scrap. Before the scrap was sent to THC, administrators were appointed to CMA. CMA explained the situation to the administrators, and claimed the scrap from the administrators, but to no avail. The administrators without providing notice to CMA, sold all of CMA’s plant equipment and stock including the scrap in question.
THC applied to the court for orders that the administrator had breached s 442C of the Corporations Act when they sold the scrap. The court made the orders sought and awarded THC damages under s 1324(10) of the Corporations Act.
The court said: “While CMA retained possession of the scrap metal, it cannot be said that THC’s interest in the scrap as owner, ‘in substance’ secured payment or performance of any obligation of CMA. The only ‘obligation’ that CMA had, was that of a bailee to deliver the goods to THC, or at its direction. I accept THC’s submission that it cannot be said that the interest of an owner/bailor in the owner’s bailed goods is an interest that ‘in substance’ secures the bailee’s obligation to deliver the goods to the owner or make them available for collection”.
There were some interesting observations in Re Arcabi Pty Ltd; ex parte Theobald  WASC 310. The business of Arcabi included the storage and sale of rare coins and bank notes (Goods) owned by third parties (Investors). Arcabi defaulted on its loan from Wespac (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. As to the first type, “Mixed Storage Goods”, the arrangement for these was that these Goods were stored only, and the Investors were charged a storage fee and issued with an invoice. The second type was “Consignment only Goods”. I will talk about the Consignment Only Goods in a minute.
The Court accepted that the arrangement in relation to the Mixed Storage Goods was a bailment. However, the bailment did not secure payment or performance of an obligation, and so it did not give rise to a security interest. But: was the bailment a PPS lease under s 13?
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.
What about the Consignment Only Goods? 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 Goods were not held as security for a debt because (typically for many consignments) title passed to the third party purchaser before moneys were payable.
White v Spiers
In White v Spiers Earthworks Pty Limited  WASC 139, Spiers agreed to sell a business and equipment to BEM Equipment Pty Limited and as part of the deal, entered into a hire agreement with BEM in relation to certain vehicles and trailers.
BEM had given a charge over all its assets to NAB in February 2011. BEM became insolvent and appointment administrators in 2013. Shortly after that, NAB appointed receivers. Spiers had not registered its interest under the predecessor to the PPSA in Australia, (in this case the applicable legislation was the Chattel Securities Act 1987) and therefore no transitional protection was available.
Spiers attempted to invoke s.51(xxxi) of the Constitution and argued that the vesting was not on ‘just terms’ because Spiers would receive nothing in return. The Court said that the applicable PPSA statutory provisions are not one for the ‘acquisition of property’ within s.51(xxxi) of the Constitution, but rather they are part of a general regulatory scheme aimed at the ‘adjustment of competing rights and liabilities’. Spiers failed.
Sandhurst Gold Estates
The recent decision of Sandhurst Gold Estates Pty Ltd & Ors v Coppersmith Pty Ltd & Ors  VCS 217 was one where the Supreme Court of Victoria was required to consider circumstances where the defendant was asserting a security interest in property, but in reality, the defendant was simply claiming ownership of part of the asset.
The Court found that the asserted equitable interest in property was not a security interest, and granted an order restraining future registrations. The Court said the PPSA only applies to consensual transactions, not asserted equitable interests in property. In addition, the Court said that consensual transaction must secure a payment or performance of an obligation, unless the security interest falls within one of the categories of ‘deemed’ security interests set out in section 12(3) of the PPSA.
In Sandhurst the defendants refused to provide an unconditional undertaking not to register any further financing statements if the existing registrations were removed, and implied that they would continue to lodge financing statements until they obtained certain documents from the plaintiffs, relevant to proving the defendants’ alleged equitable claim in respect of the plaintiff’s property. Were the ‘strategic’ registrations a breach of section 151 of the PPSA?
Section 151 provides that:
‘a person must not apply to register a financing statement…that describes collateral, unless the person believes on reasonable grounds that the person described in the statement as the secured party is, or will become, a secured party in relation to the collateral..’
The Court refused to properly consider s 151 by concluding that regardless of whether the defendants were or were not in breach of section 151, the Court had inherent jurisdiction to restrain them from conduct (i.e. registering any further financing statements) which was prima facie lawful. The Court concluded that it was appropriate to grant an injunction to protect the plaintiffs’ rights by using the analogy with cases regarding the removal of caveats.
SES Projects Australia
In SES Projects Australia Pty Ltd v Registrar of Personal Property Securities as I mentioned before, the Court held that the Registrar has the power to restore data to the Register where data was incorrectly removed because an application to remove it was submitted in error or contained a mistake. The power to restore data is not confined to circumstances where the error was caused by the Registrar.
So, the Registrar has the power to amend the Register to correct your error if you discover an error in an application to register a financing change statement after it has been lodged.
The decision of Macquarie Leasing Pty Ltd v DEQMO Pty Ltd  NSWSC 1466 confirms that ownership interests are not registrable on the PPSR.
Macquarie entered into a chattel mortgage agreement with Elite for the purchase of a truck. Elite defaulted, Macquariedemanded return of the truck, Elite refused, so Macquarie commenced and was successful in proceedings against Elite and Rodney Culleton, the sole shareholder and director of Elite. The truck was sold at public auction and simultaneously Deqmo Pty Limited, of whom Culleton was the sole director and shareholder, registered a security interest in the truck on the PPSR, with the effect that Macquarie could not pass clear title to the purchaser. Macquarie then served an amendment demand on Deqmo. No response was received. Macquarie then initiated proceedings.
The evidence put forward by Deqmo failed to establish the basis of the security interest. The Court concluded that Culleton was more concerned with the manner in which the truck was repossessed, and the conduct of its sale, that he was concerned about the legal status of the purported security interest. The claimed interest was one given by Deqmo to Deqmo and a person or company cannot give a security interest to itself, as per section 12 of the PPSA.
The case of Carrafa, Goutzos and Lofthouse 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?
From March 2013, Doka had leased formwork equipment to Relux for “indefinite periods”. However, Doka only registered its security interest on 20 February 2014.
Leases for indefinite periods are “PPS leases” and therefore they are deemed security interests under s 12. Section 588FL of the Corporations Act provides that a security interest granted by a company will vest in the grantor if it is perfected by registration and the security registration time is after the latest of six months before the “critical time” or 20 business days after the security interest was created.
Six months before the critical time was 7 October 2013. Twenty business days after the security interest was created was 19 February 2014. Doka had registered its security interest on the PPSR on 20 February 2014, so all equipment supplied under the lease vested in Reflux.
Sale of Business – Vendor’s Perspective
From a vendor’s perspective, there are two sides to the PPSA question:
- What security interests has the vendor granted?
- What security interests need to be discharged?
As secured party:
- What security interests does (or should) the vendor hold?
- What security interests need to be assigned? For example leasing contracts.
The PPSA has led to many more security interests being registered and vendors often do not realise they exist or appreciate the implications.
Identifying security interests granted by vendor
Many security interests will be registered as a result of the migration of ASIC charges. However, others will have arisen as a result of new security interests being registered. It is very possible that the vendor will not have expected or anticipated them – or even understood why they are there.
Despite the fact that a security holder is (usually) required to give a “verification statement” to the grantor of a security interest, many vendors do not realise the relevance of the certificate. They do not understand them. They do not keep them.
Also consider: who has possession of the vendor’s assets? Where are they? Why are they there? Who has control of the vendor’s assets? Where are the share certificates of X Pty Ltd? And if X is a public company, where is the tripartite agreement between the broker, grantor and grantee, by which control is asserted und s 27?
Vendor securities to be discharged
As to vendor securities to be discharged, vendors should ensure that all registered security interests are correct and that on settlement, no discharged securities will appear on the Register. This is frequently done by way of an exchange of common law deeds of undertaking and release and the new PPSA clause (inter alia) provides for this.
If the vendor discovers security interests on the Register which it was not aware of or which it disputes, the vendor can and should request a copy of the relevant security agreement from the security holder under s 275. If it is incorrect, the vendor should request a correction of the security details under s 186 or s 178.
Moreover, the PPSA contains provisions enabling a grantor to pursue their rights through administrative and Court proceedings if necessary – see sections 177 – 182.
Security interests held by vendor as secured party
Part of a vendor’s due diligence should include identifying security interests granted to them as a secured party, both registered and unregistered.
The identification process can be assisted by asking what does the vendor supply: graders, computers?
Any discharged security interests held by the vendor which are still registered, should be removed. This is done by lodging a Financing Change Statement.
The vendor will need to identify any security interests it holds which have not been registered or which have not been perfected by the other means available. They may need to adopt new terms and conditions for their customer contracts so that their supplies to customers will all be on terms which include appropriate PPSA provisions enabling registration of their security interests.
It is appropriate to identify security interests which have not been perfected as soon as possible and generally well in advance of a sale. This will give the vendor an opportunity to perfect their security interests prior to the sale discussions commencing.
Now look at the purchaser’s perspective.
The purchaser will need to start by identifying the assets being acquired by the purchaser and the liabilities being assumed by the purchaser. To assist this, the purchaser’s lawyer needs to consider the nature of the business being acquired. The purchaser’s lawyer will also need to consider the types of assets and transactions which might give rise to security interests under the PPSA.
Sale of Business – Purchaser’s perspective
Discharging security interests on or by completion – A trap for young players.
Section 46 rules that a lessee or buyer of personal property takes it free of security interests in the ‘ordinary course of business’. However, this will not generally apply to a sale of business.
Where transfer of collateral occurs, s34 applies, and the grantee’s security interest is temporarily perfected for the shorter of either 24 months from the transfer and 5 business days after the vendor gets action or constructive knowledge of the transfer.
However, s52 provides for the taking of personal property free of temporarily perfected security interests unless the buyer (or lessee) has actual knowledge that the sale or lease is a breach of the security agreement: the buyer (or lessee) must be a bona fide purchaser for value without notice.
Also compare s46(2)(b).
The status of some assets are easy enough to come to terms with – others however, may involve the unexpected creation of security interests.
We’ve discussed the Cancer Care Institute case: How will that be applied if you have a cool-room in a restaurant which contains a heavy large leased refrigerator the security agreement in respect to which creates a security interest which is unregistered? Hopefully there would be no problem.
Of course, the financing of business inventory will often give rise to a registrable security interest.
What about the real estate lessor’s security interest in goods which remain on site after termination? The real estate lease provides words to the effect : ”All goods remaining on site must be removed or they will be sold and the lessor can keep the proceeds and apply them to outstanding rent and/or the cost of removal.”. A clause to that effect will frequently give rise to a security interest requiring registration on the PPSR.
A company distributing goods using their own registered trademark might grant an “allpap” security interest which affects both the goods and also a trade mark which is licenced by the vendor as licensee. If the trademark itself is then sold by the trademark licensor to another party (the fourth party), then the security interest binds the trademark transferee (new licensor) – s 106 found in Part 3.5 PPSA. The implications of Part 3.5 must be considered when buying and selling a business.
Intellectual property falls into the category of “serially numbered goods” and you must use the serial number for registration if it is consumer property. But if there is no serial number (because it is unregistered), then I recommend a registration as “other goods” and then fully describe it in the descriptor box in the registration process.
Unperfected security interests: these need to be identified.
Security interests held by the vendor
From a purchaser’s perspective, the purchaser’s lawyer should ask if the purchaser is acquiring the debtors of the business or is taking an assignment of continuing contracts which include retention of title or other finance arrangements.
The purchaser should:
- Identify the specific contracts which could give rise to security interests.
- Review the documents to ensure that they give rise to a security interest which they are entitled to perfect by registration.
- Require evidence that the security interests have been perfected by registration.
- AND IMPORTANTLY, satisfy themselves that the vendor has the necessary systems in place to manage registrations and discharges and corrections.
Size of due diligence
How much is enough? This needs to be discussed with your client of course.
For a particularly large transaction you might:
- Conduct sample checks.
- Have warranties in relation to possible defective securities.
- Search only transactions over a certain threshold value.
- Negotiate for an independent audit of registrations at the vendor’s cost.
- If there are widespread defects in the perfection of security interests then require the vendor to remedy them.
Defects in registration
Section 164 of the PPSA states that a registration will be ineffective if there is a “seriously misleading defect” or a defect mentioned in s 165. Section 165 provides that a registration is defective if, where registration by serial number is required (for example motor vehicles), the serial number has been incorrectly entered.
Examples of seriously misleading defects in Canada and New Zealand include where there was a misspelling the grantor’s name by only one letter and also in the case of a partnership, listing as the grantor only one of the partners, instead of the partnership’s firm name.
Risk of insolvency
Serious consequences follow in the event that the grantor of the security interest becomes bankrupt or liquidated and there has been a failure to register or correctly register a security interest .
In the Hastie Group case, the administrators sought directions in the Federal Court pursuant to s 447D of the Corporations Act that they would be justified in selling unclaimed plant and equipment in the possession of the Hastie Group.
They had plant and equipment worth $6.4m at 36 different locations throughout Australia which were causing the administrators to incur significant rental costs which they could ill afford.
The administrators sought to identify which items of plant and equipment were owned by the Hastie Group and then to sell them. They wrote to all 995 registered security holders and placed ads in the press but only 23% responded to confirming the nature of their security interests. Many responses were not sufficient to adequately particularise the equipment or the security agreement under which the security interest arose or was claimed.
Yates J directed:
- That the administrators would be justified in treating the unclaimed plant and equipment as the property of the Hastie Group; and
- Selling it by online auction and thereafter (broadly) distributing the proceeds in the ordinary course of the administration.
The orders were made as directions – not as a final judgment – and this left it open (for a time) for any interested party to apply to set aside the orders. But no such application was made and the effect of the case is that if you do not actively pursue or defend your rights under the PPSA, you risk losing them.
The New PPSA clause in the contract for sale of business
It is not yet published but is anticipated to come out in late 2015. It deals with many of the issues I have raised and also refers to s 275 (1)(b) and s 275 (1)(c).
If you want further information in relation to this topic, then please call our PPSA lawyer or our sale of business lawyer on 02 99640022 or email firstname.lastname@example.org