It seems that the seal is well and truly broken through now, in terms of PPSA litigation starting to come through the Courts around Australia. Last month the West Australian Supreme Court considered inter alia the issue of the effect on guarantees of a failure by a creditor to register a security interest on the PPSR in Industrial Progress Corporation Pty Ltd v Wilson [2013] WASC 225. Amongst other things, the first defendants there argued –

• that the plaintiff’s failure to perfect its security interest involved a breach of “its equitable duty to perfect securities“: O’Donovan J and Phillips JC, The Modern Contract of Guarantee (3rd ed, 1996), pages 397-400,

• that the first defendants as guarantors were entitled to be credited, in reduction of their liability, to the extent that that breach diminished the value of the security: Williams v Frayne [1937] HCA 16; (1937) 58 CLR 710 at 738, and

• that clause 2(b) of the guarantee in question did not exclude failure to perfect a security, particularly when the guarantee is construed, as it must be, in accordance with the principles stated in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549, 561.

At [27] Beech J took the view that there may be no breach as it was at least seriously arguable that the rights of the plaintiff were temporarily perfected under the transitional provisions of the PPSA. However his Honour observed that even if there were breaches by the plaintiff of what he referred to, without discussion or examination, as “the equitable duty to perfect its security”, it was by no means clear that such breach would reduce the amount of the debt owed by the first defendants under the guarantee to nil.

It followed, in that case, that the plaintiff’s claim against the first defendants “had or may have substance”, such that the application there to extend the operation of the plaintiff’s caveats over land of the guarantors was successful. It should be noted that the matter did not have to be finally decided in that case.

Where will guarantors stand where there has been a failure by a secured party to register a security interest on the PPSR?

The question moving forward is what will be the position for guarantors, where the creditor or other secured party has failed to protect their security interest in the primary debtor’s collateral by perfecting it pursuant to the provisions of the PPSA, and being unable to recover there, seeks to recover in full against the guarantor?

The answer will depend at least in part, if not largely, upon the terms of the guarantee in question. I note that in this West Australian Industrial Progress Corporation case, clause 2 of the guarantee provided only that: “This Guarantee shall be a continuing Guarantee to the Company for the whole of the Customer’s indebtedness or liability to the Company from time to time howsoever and whenever arising and it will not be affected by:…(b) the Company taking or failing to take or enforcing or failing to enforce or holding any other security for the Customer’s indebtedness or varying or surrendering any such security…”. (See further below.)

Also, even if there is a “duty to perfect securities” and it is found to have been breached, the guarantor’s position would depend upon whether the evidence established any deficiency caused by the breach: see Buckeridge v Mercantile Credits Ltd [1981] HCA 62; (1981) 147 CLR 654, 676.

Returning to the question of whethere there is such a “duty” in the first place, I note at least that well before the PPSA, it was an accepted principle that where a creditor has sacrificed or impaired a security, or by its neglect or default allowed it to be lost or diminished, the surety is entitled in equity to be credited with the deficiency in reduction of his liability: Williams v Frayne [1937] HCA 16; (1937) 58 CLR 710 at 738 per Dixon J. The principle can perhaps be seen, in a sense, as a derivative of a surety’s rights of subrogation, which would also be lost or diminished by a creditor’s failure to protect its security interest.

In theory I see no reason why this principle should not continue to apply in the new PPSA world we now inhabit. However, I am not so sure that it will truly translate or extend to a “duty to perfect a security”. Rather, I suggest that the terms of the guarantee will often be determinative of the issue, whether they either expressly dispose of the issue, or they leave the door open for a condition to be implied.

Perhaps under the PPSA a similar approach will be taken to that of Pincus J in Re Kwan; Ex parte Hastings Deering (Solomon Islands) Ltd [1987] FCA 275; (1987) 15 FCR 264, turning upon what conditions may be implied into a guarantee. I here gratefully draw upon the excellent summary of that case given by her Honour McMurdo P in the Queensland Court of Appeal decision in ING Bank (Australia) Ltd v Leagrove Pty Ltd [2011] QCA 131 at [24]. In Kwan’s case, Kwan successfully applied to set aside a bankruptcy notice arising from his liability under a guarantee, essentially on the ground that the creditor would not have needed to resort to the guarantee if it had not failed to register a security given by the principal debtor. Pincus J referred to and applied the comments of Brennan J in Buckeridge v Mercantile Credits Ltd (supra) and observed at 266:

“In a case where the act of a creditor does not discharge a surety, but the creditor has nonetheless sacrified or impaired a security, or by his neglect or default allowed it to be lost or diminished, the surety is entitled in equity to be credited with the deficiency in reduction of his liability.”

Pincus J found that the creditor neither registered the security in time nor, when that failure was pointed out, did it do anything to effect registration of the security until it was too late. His Honour continued at 267:

“On the evidence the case is one of a kind familiar in commercial life: the directors of a private company were asked to guarantee a company debt to support a substantial security taken over the company’s property, there being no express statement that the efficacy of the guarantee depended upon the creditors troubling to perfect the security. In such a situation, it is (in general) at least implicit that the creditor will take all reasonable steps to perfect the security. It would be contrary to expectation of business people that the creditor, not having perfected the security given by the principal debtor, would be free to have recourse to the guarantors. In my opinion, here, where the guarantee was given on the basis of an express stipulation that there should be a bill of sale, there was such an implied condition as I have mentioned; the guarantee is therefore discharged for breach of that condition. It should be added, perhaps superfluously, that what is held here has nothing to do with instances in which the guarantee is so drawn as to exclude the use of such a defence by the guarantor, nor with a case in which the failure to perfect the security was not the fault of the creditor.”

For a more recent case, which went the other way in terms of outcome, I note the judgment in Commonwealth Bank of Australia v Bobby Sailesh Anand [2011] NSWSC 613. There the Bank brought proceedings against Mr Anand on the basis of a guarantee he had entered into to secure a loan to his company, and for possession of property the subject of a mortgage given in support of the guarantee. The security for the loan was a charge over the whole of the company’s assets, and the guarantee and mortgages given by Mr Anand. Section 263 of the Corporations Act 2001 (Cth) required the charge to be lodged with ASIC within 45 days of its creation. It was not lodged until 3 months later. When the company was placed into liquidation, the Bank was reduced to proving for recovery of the loan as an unsecured creditor as the charge was void, for not having been registered in time. Hence it pursued its rights under the guarantee and supporting mortgages.

In that case, the Bank succeeded in its argument that the effect of the terms of the guarantee and relevant provisions of the Corporations Act was that Mr Anand was not entitled to any discharge or partial release because of the Bank’s failure to register the charge. Hidden J referred to the NSW Court of Appeal’s decision in Credit Lyonnais Australia Ltd v Darling (1991) 5 ACSR 703, where the creditor had expressly undertaken to register the charge but had failed to do so, however the guarantor still failed because of a clause of the guarantee expressly protecting the creditor’s rights or remedies under the guarantee from any omission on its part to complete a collateral security and from any collateral security being void. In CBA v Anand, also, there was a term of the guarantee, clause 10.1, which relevantly provided:

“Our rights and your liabilities under this guarantee are not affected by any act or failure to act by us or by anything else that might otherwise affect our rights or your liabilities under law relating to guarantees, including:…(d) the fact that we do not register any security which could be registered…”.”

As Hidden J put it at [47], the terms of the exemption in clause 10 were unequivocal, and were a complete answer to the guarantor Mr Anand’s defence.

Conclusion

Clearly, regard should be had to the terms of the guarantee in question in each case, as they may bear upon the outcome in a particular instance. Indeed regard ought be had at an earlier stage – to the intended effect of any failure to register a secured interest in the collateral of the principal debtor on the PPSR in drawing post-PPSA guarantees, or before executing one already drawn up.

For instance, there may be an express term that the guarantee will remain unaffected by any failure to perfect or otherwise protect the secured party’s security interest, such as in CBA v Anand, and Credit Lyonnais. By contrast, there may be a term that the guarantee will be given upon condition that a specified security shall be perfected by the secured party under the PPSA, and that any failure in the performance of this condition operates to discharge the surety. Another possibility is that the terms of the guarantee will be such as to exclude the implication of a condition such as outlined by Pincus J in Kwan’s case.