I have added a new article to my website reviewing last week’s important High Court decision in the Amerind appeal – Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth  HCA 20 (Amerind). The full article can be accessed here.
I have added a new article to my website reviewing last week’s important High Court decision in the Amerind appeal – Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth  HCA 20 (Amerind). The full article can be accessed here.
As noted in my alert yesterday morning, the Victorian Court of Appeal has handed down it’s decision on appeal from Re Amerind (receivers and managers apptd)(in liq)  VSC 127; (2017) 320 FLR 118. The appeal judgment is now up on Austlii and can be read here: Commonwealth of Australia v Byrnes and Hewitt as receivers and managers of Amerind Pty Ltd (receivers and managers apptd)(in liq)  VSCA 41; (2018) 54 VR 230.
The five member bench comprised their Honours Ferguson CJ, Whelan JA, Kyrou JA, McLeish JA and Dodds-Streeton JA. The judgment was unanimous. At least for Victoria, it resolves the uncertainty of the past few years following Independent Contractors and Re Amerind as to whether receivers and liquidators should apply the statutory priorities under sections 433, 556 and 560 of the Corporations Act when distributing the assets of corporations who have conducted their businesses through trading trusts. They should; the statutory scheme of priority applies. The fact that the funds are the proceeds of trust assets does not displace the priority regime.
The judgment was divided into two parts. The first part, commanding the bulk of the judgment, dealt with the issue of how a corporate trustee’s right of indemnity from trust assets is to be dealt with in insolvency, whether the receivership surplus in that case was properly characterised as trust property or property of the trustee, and whether the statutory scheme of priority applied. It is this first part I propose to address below.
The second part of the judgment dealt with the second ground on which Robson J had held that s 433 did not apply, namely that the right of indemnity was not subject to a ‘circulating security interest’.
To get straight to it, their Honours on the Amerind appeal held that –
Their Honours took the opportunity to state clearly that Re Enhill remains authoritative in Victoria and must be followed by trial judges here.
However, the Court left open the question of how non-trust creditors (if any) are to be treated on the insolvency of a trustee company. That is, whether on an insolvency a trustee’s right of indemnity must be used in payment of trust debts only, or of non-trust debts of the company also, ranking pari passu. I discuss this below.
Similar issues were also considered by the Full Court of the Federal Court in August last year in a hearing before their Honours Allsop CJ, Siopis and Farrell JJ in In the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (WAD181/2016). Their judgment must surely be imminent, and it will be interesting to see how their Honours treat the issues. Given the prevalence of the use of trading trusts in Australia, it would be preferable to have both certainty and a national approach on the receivership or liquidation of corporate trustees.
**This concludes the summary. There now follows a more detailed treatment of the judgment, for those interested in reading on.
Issues then arose as to how that surplus was to be applied. The Commonwealth’s position was that the priority regime provided for in the Corporations Act applied. It followed that by operation of s 560 of the Corporations Act, the Commonwealth had the same rights of priority in respect of the money advanced as do employee claims in a winding up under s 556 of the Act.
The receivers sought directions from the Court.
Submissions and authorities
The receivership surplus was subject to a right of indemnity (supported by a lien) held by the insolvent corporate trustee Amerind. The Commonwealth argued the receivership surplus was therefore the trustee company’s property, not trust property, and it should be applied in accordance with the priority regime provided for under the Corporations Act. The receivers agreed at first instance, and did not take a position on appeal. A creditor Carter Holt Harvey Woodproducts Australia Pty Ltd (CHH) opposed the Commonwealth’s position, contending that the Commonwealth was not entitled to priority because s 433 did not apply. At first instance, Robson J agreed with the creditor CHH. He held that s 433 did not apply to the receivership surplus.
Before addressing the issue the Court went on a journey from , giving detailed consideration to key principles and tracing through the authorities on the difficult questions that arise in resolving this issue. As it may be useful for practitioners to be aware of what was said, I will summarise those remarks here.
Nature of trust liabilities. Ordinarily a trustee is entitled to be indemnified from the trust assets against liabilities properly incurred. The trustee has a charge or lien over the trust assets for the purpose of enforcing that indemnity. In some circumstances creditors of the trustee whose debts were incurred in discharge of the trust may be subrogated to the trustee’s rights (at )
Nature of the trustee’s right of indemnity and creditors subrogation. A trustee’s right of indemnity may take the form of recoupment / reimbursement for trust debts already paid from the trustee’s own money, or of exoneration for trust debts not yet paid (at -).
I pause here to note that unlike the Court in the Re Amerind appeal, in Lane v Deputy Commissioner of Taxation  FCA 953 (discussed below) Derrington J saw this distinction between the two distinct forms of a trustee’s right of indemnity as critical. At  of Lane Derrington J observed –
“[T]he right of a trustee to be indemnified from the assets of the trust falls into two distinct parts. First where a trustee has discharged a trust debt out of their own funds, the trustee is entitled to reimbursement out of the trust funds in an equivalent amount. That occurs by money being transferred by trust funds to the trustee who receives an absolute, beneficial interest in that money. That right in relation to satisfied trust liabilities is often referred to as the right of “recoupment”. Second, the trustee is entitled to meet unsatisfied trust debts directly from the trust assets by utilising the right of “exoneration”. Pursuant to this right, the trustee directly applies trust assets to discharge the indebtedness by paying trust funds directly to the trust creditor…This process of “exoneration” does not involve the trustee obtaining any beneficial interest in the assets which are used to discharge the trust debts.”
At  of Lane, Derrington J goes on –
“The important distinction between these two aspects of the trustee’s right of indemnity is usefully essayed in…[two texts on subrogation]. In the former work the learned author identifies that a trustee is restricted in the use of the right of exoneration to use it for the purpose of discharging his liability to the trust creditors and no other.”
Finally at  Derrington J concludes –
“[S]ome of the authorities concerning the trustee’s right of indemnity from the trust assets do not always maintain this critical distinction between the right of “recoupment” or “reimbursement” on the one hand, and the right of “exoneration” on the other. However the distinction is fundamental. If what comes into the hands of a bankruptcy trustee is a trustee’s right of recoupment, it is a right to take money from the trust funds for the benefit of the insolvent trustee’s estate. It is, in effect, the payment of an amount owing to the trustee for the purposes of reimbursing the trustee’s personal estate. Such a payment is received by the bankruptcy trustee as part of the bankrupt’s personal estate and is available to meet the claims of both trust and non-trust creditors. However, the position is markedly different when what the bankruptcy trustee receives is merely a right or entitlement to have trust assets applied to discharge trust debts. That is a considerably more limited right.”
As will be seen below, this view was not shared by the Court of Appeal.
Returning to the Amerind appeal judgment, from - the Court reviewed English and Australian authorities on this issue handed down between 1802 and 2012. At  their Honours distilled these conclusions from those authorities –
The statutory insolvency regime. The pari passu principle for the equal treatment of creditors’ claims applying what remains of the insolvent’s property is embodied in s 555 of the Corporations Act. Section 556 then provides for certain debts to be paid in priority to all other unsecured debts. Property held by the insolvent on trust is not property of the company and is excluded from distribution to the company’s creditors.
Employee claims have long been accorded priority over the claims of the holder of a floating charge or circulating security. Section 433 provides that a receiver who takes possession or assumes control of property of the company secured by a ‘circulating security interest’ must pay, out of property coming into his her or its hands, specified debts in priority to any claim for principal and interest under the debentures. Those specified debts include those afforded priority under s 556(1)(e),(g) or (h) or s 560 of the Act. These are the provisions which give priority to employee claims, and to those who advance funds to meet them.
The High Court in Octavo, Buckle and Bruton. The High Court’s decision in Octavo Investments Pty Ltd v Knight  HCA 61; (1979) 144 CLR 360 establishes that an insolvent trustee’s right of indemnity against trust property for trust debts, gives the trustee a proprietary interest in the trust property (at ). On liquidation, the trustee company’s liquidator has access to that proprietary interest for the benefit of the trustee’s creditors.
The Court of Appeal expressed the view that Octavo establishes not only that the right of exoneration is property which passes to the trustee in bankruptcy (vests) or the liquidator (control), but also that the respective statutory regimes must apply to the disposition of that property. The Honours’ view was that Octavo does not, however, provide clear guidance on whether distribution is confined to trust creditors (at ). Indeed the Court noted that Octavo gives conflicting guidance on this question. The plurality in Octavo made conflicting remarks as to whether the proceeds of a trustee’s right of indemnity would, on insolvency, be confined to trust creditors, or whether the trustee’s non-trust creditors (if any) could share in the distribution (see ).
Twenty years later in Chief Commissioner of Stamp Duties (NSW) v Buckle  HCA 4; (1998) 192 CLR 226, the High Court recognised the traditional distinction between rights of exoneration (for trust debts not yet paid) and recoupment (for trust debts already paid by the trustee). However the Court affirmed that the trustee’s right of indemnity, in either manifestation, conferred on the trustee a beneficial proprietary right in the trust assets (at ). The High Court affirmed this in Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation  HCA 32; (2009) 239 CLR 346. The High Court there characterised the trustee’s right of indemnity as a proprietary interest in the trust assets, irrespective of whether it took the form of recoupment or exoneration, by virtue of the lien which survived the loss of office as trustee (at ).
The Court of Appeal concluded that the High Court has made it clear that the trustee’s right of indemnity, both as to recoupment and exoneration, constitutes a proprietary interest in the trust assets which, in the corporate insolvency context, is ‘property of the company’. The statutory provisions governing corporate insolvency have changed over time, but none of those changes have altered or affected this position (at ).
I pause here to note that it is interesting how different courts in Australia can review the same High Court authorities and draw different conclusions from them as to what they establish as authoritative. In contrast with the Re Amerind appeal decision, see Lane at -.
Re Enhill, Re Suco Gold, Independent Contractors. From  their Honours reviewed cases applying the English and High Court authorities on the trustee’s right of indemnity and insolvency, prior to the Amerind decision. The main cases considered were these –
Re Enhill Pty Ltd  VicRp 52;  1 VR 561 is discussed from . There Young CJ observed that the Victorian Full Court had to treat Octavo as authority for the proposition that the right of a trustee to be indemnified out of the assets of the trust, or the proceeds of the exercise of that right, are assets of the trustee in a winding up.
Young CJ took the view that the proceeds of the trustee’s lien on a bankruptcy or liquidation are available for division amongst the company’s creditors generally, not only among trust creditors (at ). Lush J agreed, taking the view that although the case before him in Re Enhill did not concern a competition between trust and non-trust creditors, they should stand on the same footing (at -). He acknowledged however that there can never be exacted from the trust property, by the trustee or by the trust creditors, an amount which is greater than the trust debts (at ).
Shortly after Re Enhill in Victoria, the Full Court of the South Australian Supreme Court handed down Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99. As in Re Enhill, the practical problem exposed in Re Suco was that the winding up could not proceed unless the liquidator could have recourse to trust funds to meet the costs and expenses of liquidation. King CJ rejected the liquidator’s submission, based on Re Enhill, that the right of exoneration entitled the trustee to transfer trust property to himself to meet unpaid trust debts, which property then ceased to be trust property and was, on insolvency, divisible amongst the general body of creditors. King CJ noted this to be ‘in conflict with fundamental principles of the law of trusts’ (at ).
Unlike Young CJ’s application of Octavo in Re Enhill, King CJ in Re Suco stated that in his view Octavo did not lead to the conclusion that the trust assts (to the extent of the trust liabilities) pass to the trustee in bankruptcy or the liquidator for the benefit of the general body of creditors (at ).
King CJ acknowledged that the trustee’s indemnity passes to the trustee in bankruptcy or liquidator, and that the proceeds of that indemnity were therefore part of the estate divisible amongst creditors. However King CJ drew a crucial distinction between the right of recoupment and the right of exoneration. In cases of recoupment, the right of indemnity can produce proceeds for division among the creditors generally. However not so in cases of exoneration. If a trustee takes trust property into his possession to satisfy his right to be indemnified for unpaid trust liabilities, that property retains its character as trust property and may be used only for the purpose of discharging the liabilities incurred in the performance of the trust (at ).
On the case before him, King CJ concluded that the liquidator was bound by s 292 of the Companies Act to pay the debts (which were all trust debts) in the specified order of priority, having recourse to the property of each trust to pay the debts incurred in performing it, and if there was any surplus after the priority payments, paying other trust debts pari passu (at ).
The turning point came in 2016 in Re Independent Contractor Services (Aust) Pty Ltd (in liq)[No 2]  NSWSC 106; (2016) 305 FLR 222, when Brereton J held that the statutory priority scheme in s 556 did not apply to trust assets, and the creditors share pari passu in the trust assets after providing for the costs of administration. His Honour’s view was that s 556 was concerned only with the distribution of assets beneficially owned by a company and available for division between its general creditors, and trust principles provided that trust creditors’ claims rank pari passu (from ).
First instance judgment in Re Amerind. In Re Amerind (receivers and managers apptd)(in liq) VSC 127; (2017) 320 FLR 118 Robson J controversially held that the trustee’s right of indemnity was not ‘property of the company’ within the meaning of s 433(3) of the Corporations Act and was not available to meet other liabilities of the company. Rather, the right of indemnity and lien could only be used to satisfy liabilities incurred on behalf of the trust (at ). His Honour concluded that the corporate trustee’s right of indemnity and lien, of which the receiver’s surplus was the proceeds, was ‘property held in trust’, rather than ‘the corporate trustees own beneficial personal property’. In his view the indemnity was not a personal asset of the trustee; rather it was trust property (at ). Hence he found that the receivers were justified in proceeding on the basis that the receivership surplus was properly characterised as property of the trust (at ).
Robson J acknowledged that Re Enhill and Re Suco Gold had both held that the statutory regime did apply where the assets of a company are held on trust. However his Honour preferred Brereton J’s reasoning in Re Independent that the statutory provisions applied only to ‘property of the company’ and that the trustee’s right of indemnity was not ‘property of the company’ (at ). His Honour took the considered view that the Victorian Full Court’s decision in Re Enhill, which had not been followed in the Federal Court or any other state of Australia, was not binding on him (at ).
Before the Court of Appeal, the Commonwealth submitted that Robson J erred in denying employees their rightful status as priority creditors. His Honour’s reasoning was contrary to the High Court’s recognition in Octavo, Buckle and Bruton that the trustee’s right of indemnity (including for exoneration) was a beneficial interest in trust property amounting to a proprietary interest. That analysis was applied by the Full Courts in Re Enhill and Re Suco Gold so as to conclude that the statutory order of priorities applied to the distribution of the property (at ).
Lane v Deputy Commissioner of Taxation  FCA 953. Five months after Re Amerind, Derrington J held in Lane that contrary to Re Independent and Re Amerind, the trustee’s right of indemnity for exoneration was a proprietary right which vested in an insolvent trustee’s trustee in bankruptcy and, by analogy, would also be ‘property of the company’ in the corporate context. But it was a limited right with a sole purpose to pay trust debts, which did not alter on insolvency (at ).
In Lane the question was whether trust funds were distributable to all creditors, or only to trust creditors. His Honour held that the right to be indemnified out of trust property (right of exoneration) was personal property of the trustee, “being a right to exercise power with respect to property within the meaning of s 116(1)(b) [of the Bankruptcy Act]…” (at ).
As touched on above, in Lane Derrington J analysed the nature of the indemnity, emphasising the distinction between rights of exoneration and recoupment, and concluded that the trustee is restricted in the use of the right of exoneration to using it for the purpose of discharging his liability to the trust creditors and no other (at ). The entitlement of trust creditors to be subrogated to the trustee’s right of indemnity was an important factor in Derrington J’s analysis. It gave them in his view a favoured position, and while it did not make them secured creditors, in Derrington J’s view they were akin to secured creditors in some respects (at ). His Honour also doubted whether, in the corporate context, ss 555 and 556 could apply to property comprising a trustee’s right of exoneration (at ).
Both Re Enhill and Re Suco Gold had characterised the trustee’s right of indemnity as property of the company divisible among creditors according to the statutory order of priorities (at ).
From  the Court of Appeal compared the reasoning in Re Enhill with that in Re Suco Gold, on the question of whether the trustees’ right of indemnity for exoneration in insolvency could only be used for the satisfaction of trust creditors’ claims, to the exclusion of general creditors. They noted that this question had less practical significance than perhaps anticipated. Many of the decided cases concerned trustee companies with trust liabilities only. Typically the only claims arguably not trust-related were the liquidator’s claims for costs, fees and expenses. It has been held that where it is established the liquidator’s work and costs were essential or beneficial to the trust, the related claims may be satisfied on the basis of Re Suco Gold, alternatively under the principles of Universal Distributing (at ).
Their Honours noted that prior to Lane, it seemed that no court had found it necessary to determine the controversy generated by the different holdings in Re Enhill and Re Suco Gold over whether the proceeds of the right of indemnity for exoneration are divisible amongst all creditors or trust creditors only. That was also the position in the instant case, as Amerind had only trust creditors. (at ).
At  the Court of Appeal noted that Young CJ in Re Enhill took the view that when insolvency intervened, the antecedent obligation to exercise the right of indemnity to meet the claims of trust creditors only was overriden by the prescribed statutory order of priorities. They noted that this approach had the advantage of consistency, but also drawbacks. It renders the trust creditors’ right of subrogation of little or no substance in the very circumstance which would trigger it. It creates a position where, on one view, there is an unauthorised application of trust assets.
However their Honours did not attempt to resolve the issue of whether the right of exoneration can be applied to pay trust creditors only, or trust and general creditors of the trustee, and seemed to doubt that it could be resolved at all:
“It seems to us to be unlikely that any analysis can comprehensively reconcile the competing considerations at play, all of which are supported to some degree in the diverse relevant authorities.” (at )
1. Is the right of indemnity property of the trustee company?
The answer given was yes, the right of indemnity by way of exoneration is property of the insolvent trustee company. They categorically overturned Robson J’s holding on this, stating that:
“The primary judge’s conclusion that the corporate trustee’s right of indemnity by way of exoneration was not ‘property of the company’ cannot be sustained in the light of relevant High Court authority.” (at )
They discussed and disagreed with his Honour’s reasoning, and observed that as Derrington J had cogently explained, in the light of the High Court decisions in Savage, Octavo, Bruton, Buckle and CPT, it cannot be seriously doubted that the right of indemnity by way of exoneration is property of the insolvent trustee company (at ).
2. Is the distribution of the relevant property governed by the Corporations Act?
The answer given was yes.
In Lane, Derrington J held that the right of exoneration was property of the insolvent trustee, but that the provisions of the Bankruptcy Act governing distribution of the insolvent’s property did not apply. He declined to follow Re Suco Gold and Re Enhill on this point (at ).
However the Court of Appeal held that in their view Re Suco Gold and Re Enhill are correct on this issue, repeating twice that:
Their Honours conceded that whilst it might be accepted that, at least where beneficiaries have an interest in the discharge of trust debts, the right of exoneration must only be used for that purpose, the imposition of a requirement of ‘directness’ was not, in their view, a requirement found in the existing authorities (at ). In any event, the existence of an inherent limitation on what use the right of indemnity could be put (ie to pay only trust creditors), given that it is ‘property’ in the relevant sense, would not justify a conclusion that the statutory regime did not apply (at ).
3. Is the distribution confined to trust creditors?
The Court of Appeal returned to this issue, but concluded it was unnecessary to decide this question on the application before them. The right of indemnity is property of the company, and the statutory regime applies to its distribution.
“Whether that property has an inherent characteristic which confines its distribution to trust creditors is not one that we need to decide, as all of Amerind’s creditors are trust creditors.” (at )
Their Honours recognised that principles of trust law favoured the approach in Re Suco Gold trust giving cogency to the view confining the use of the right of exoneration to the payment of trust debts only (at ). However at  their Honours then listed four considerations in favour of the Re Enhill approach that trust creditors and general creditors rank equally on a distribution of property constituted by the right of exoneration.
The Court of Appeal concluded that the receivership surplus was not trust property but was trustee property, and that the priority regime in ss 433(3), 556 and 560 applied to that surplus insofar as those assets were circulating assets at the relevant time (at ). They then clearly laid down the following guidance –
“[W]hilst the discussion above discloses that there must be some doubt about which of Re Enhill or Re Suco Gold is correct, it suffices to say that unless and until a subsequent appellate decision decides otherwise, the law as it stands in Victoria as articulated in Re Enhill should continue to be followed by trial judges in this State.” (at )
As noted above, their Honours concluded that the receivership surplus subject to the trustee’s right of indemnity was not trust property (but rather property of the trustee company), and the priority regime in ss 433(3), 556 and 560 of the Corporations Act applied to that surplus insofar as those assets were circulating assets at the relevant time.
Two final points. First, I would suggest that in bankruptcy cases (as opposed to corporate insolvency) Derrington J’s judgment in Lane is likely to trump the Court of Appeal’s decision on the Amerind appeal as authoritative in the bankruptcy context.
Secondly, Re Amerind had been having a disturbing ripple effect in other insolvent trading trust cases handed down in the intervening months before the appeal decision, which should now ease. For instance, in a case I appeared in for which judgment was delivered by Robson J last week, Re Mamounia Pty Ltd (in liq) (No 2)  VSC 65, a question arose as to whether the liquidators of a trustee company had power to direct payment of a sum held by a firm of solicitors under a solicitors’ general possessory common law lien to be applied in payment of the solicitors’ fees. (Due to the nature of the common law lien, the solicitors’ right was only a passive right to retain the sum, without a power to pay themselves the fees owing by the insolvent client on multiple files.) The doubt arose in light of the then principle in Re Amerind that a trustee’s right of exoneration itself was a trust asset and not an asset of the trustee, from which it followed that the power the liquidators would otherwise have under s 477 of the Corporations Act in dealing with property of the trustee company may be lacking. The liquidators of Mamounia, a bare trustee, sought power to be conferred upon them or the company under s 63 of the Trustee Act, if otherwise justified in directing the payment to be made. His Honour agreed to make orders conferring the requisite power under s 63 of the Trustee Act, also noting that Universal Distributing may assist the liquidators, at least for the portion of fees owing that related to work performed in producing the sum held.
At least in Victoria, then, calm has largely been restored and life as it was for insolvency practitioners administering insolvent trustees of trading trusts pre-Amerind may resume. However it remains to be seen what the future holds.
No doubt much virtual ink will be spilt in discussing the Court of Appeal’s judgment in the coming days and weeks. We wait with interest to see how the Full Court of the Federal Court treats these issues in its decision which is surely imminent in In the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (WAD181/2016). Given the prevalence of the use of trading trusts in Australia, it would be preferable to have both certainty and a national approach on the receivership or liquidation of corporate trustees.
*Postscript #1 – the Full Court of the Federal Court handed down its decision in Killarnee on 21 March 2018. My post giving a snapshot analysis of the decision may be read here, and my article reviewing the decision in Killarnee more closely may be read here.
*Postscript #2 – this decision was appealed to the High Court, which handed down judgment on 19 June 2019 unanimously dismissing the appeal. My summary posted the morning of the decision is here.
This morning a 5-member bench of the Victorian Court of Appeal handed down judgment in the appeal from the decision of Robson J in Re Amerind (receivers and managers apptd) (in liq)  VSC 127; (2017) 320 FLR 118. The bench comprised Ferguson CJ, Whelan JA, Kyrou JA, McLeish JA and Dodds-Streeton JA.
In a unanimous judgment overturning the decision of Robson J, the plurality held that Amerind’s right of indemnity as trustee over trust assets for liabilities it incurred on behalf of the trust was property of the company (not, as his Honour had held at first instance, property of the trust) and that the priority regime in the Corporations Act therefore applied.
The Court held that the Commonwealth (following its advance under FEGS) was entitled to be paid by the Receivers before other creditors from particular assets.
Their Honours did however uphold Robson J’s decision that certain property in issue was subject to a circulating security interest, including cash in Amerind’s trade account, funds advanced to Amerind under a factoring arrangement, and miscellaneous receipts.
I note that there is also a judgment which addresses similar issues pending since it was heard on 10-11 August 2017 by the Full Court of the Federal Court in In the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (WAD181/2016). I will keep an eye on that also.
More to follow re Amerind, with links to the judgment, once it is up on Austlii.
If anyone cannot wait that long, I recommend that you read the bankruptcy judgment from August last year of Derrington J in Lane v Deputy Commissioner of Taxation  FCA 953. In it, Derrington J took a different view to some of the conclusions of Robson J in Re Amerind. On the question of whether the trustee’s right of indemnity and lien was property of the trust or of the trustee, Derrington J queried whether a conclusion that the right of exoneration was property of the trustee necessarily meant that it was available to the trustee’s general creditors. His Honour took the view that whether the right of exoneration was a trust asset or a trustee asset, there was only one method by which the right could be exercised and that was by the application of trust funds to paying the claims of trust creditors (whether by the trustee or by the trust creditors exercising their right of subrogation to the right of exoneration and lien). Even if the right of exoneration is an asset of the trustee, any property received by a bankruptcy trustee is subject to all of the liabilities and equitable interests existing prior to the bankruptcy. Accordingly the trustee, and subsequently its bankruptcy trustee or its liquidator, could only ever apply trust funds in discharge of trust debts (at -). Derrington J concluded in that case that a trustee’s right of exoneration from trust property was an asset of the trustee.
Watch this space.
Last Wednesday 19 March 2014, a bill was introduced into Parliament to amend section 13 of the Personal Property Securities Act 2009 (Cth) to remove the provision that deems leases of serial-numbered goods of more than 90 days to be a ‘PPS lease’. The bill, called the Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 (Cth), and Explanatory Memorandum may be accessed on the Federal Parliament’s website here.
The provision to be removed is s 13(1)(e). Those who are familiar with it will be aware of the questions and uncertainties to which that provision has already given rise. It should be noted however that the change, when enacted, will apply only in respect of transactions entered into after the amendment has been enacted (per ss 2 and 7 of the Bill and the insertions to Schedule 1).
The EM notes that this should simplify the deeming provisions in the PPS Act and minimise the need for small and medium hire businesses to make registrations in respect of leases of a term of less than 12 months. This should reduce the number of transactions gtiving rise to PPS leases and reduce the compliance cost born by small and medium hire businesses.
The EM also notes that the change will bring the Australian PPS Act into alignment with PPS regimes in New Zealand and Canada on this point. Thus to the extent that the activities of Australian enterprises cross over into these jurisdictions, this alignment may have benefits for Australian financiers, businesses and legal practitioners.
For those who wish to read the EM for themselves, the direct link to it is here.
References: (1) Parliament of Australia’s webpage for the Personal Property Securities Amendment (Deregulatory Measures) Billl 2014 (link); (2) Client update of Allens Linklaters entitled “PPSA Amendments for ‘Serial Numbered goods'”, wirtten by Andrew Boxall and Daniel MacPherson (link)
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  WASC 225. Amongst other things, the first defendants there argued –
At  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  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  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  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  QCA 131 at . 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  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 , the terms of the exemption in clause 10 were unequivocal, and were a complete answer to the guarantor Mr Anand’s defence.
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.
In an ex tempore judgment two weeks ago, Hammerschlag J granted an extension of time for registration of a circulating security interest under the Personal Property Securities Act 2009 (Cth) (PPSA) – In the matter of Apex Gold Pty Ltd  NSWSC 881.
The plaintiff (RF Capital Pty Ltd as trustee for the RF Capital Trust) brought the application for extension of time under s 588FM(1) of the Corporations Act 2001 (Cth). Subsection 588FM(2) empowers the Court to make the order sought if it is satisfied inter alia that the failure to register it earlier was accidental, due to inadvertence or due to some other sufficient cause. His Honour, applying the reasoning of Black J earlier this year in In the matter of Cardinia Nominees Pty Ltd  NSWSC 32, was satisfied by the affidavit evidence that the failure to register the security interest earlier was accidental or due to inadvertence on the part of the deponent or those acting under her supervision, and that the orders sought should be made (see -). It is notable that his Honour Black J in Cardinia, had reviewed key authorities dealing with the former s 266 of the Corporations Act, as well as UK judgments as to failures to register a security interest (see -), and their discussion of the concept of “inadvertence”.
In 2012, the plaintiff gave financial accommodation to Apex Gold’s parent company Apex Minerals NL. There was an event of default. In January 2012 the plaintiff agreed to forbear from taking action to enforce its security against Apex Minerals in consideration for, amongst other things, Apex Gold providing security.
Thus on 2 January 2013, Apex Gold entered into the Apex Gold General Security Agreement with the plaintiff, under which it granted a circulating security interest to the plaintiff in its collateral, being all of its present and after-acquired property.
On 26 March 2013 the plaintiff registered its circulating security. As events transpired, this was too late, and this application was filed, heard and decided on 25 June 2013.
There was evidence before the Court that Apex Gold (and Apex Minerals) may be or may be about to become insolvent, and that the plaintiff intended to exercise powers under its securities to appoint both a voluntary administrator and receivers to both companies.
Broadly, if an insolvency-related event of this nature occurs in relation to a company, s 588FL(2)(b) fixes a time by which a PPSA security interest granted by the company must have been registered under the PPSA failing which, under s 588FL(4), the security interest may vest in the company.
Here, the circulating security interest granted by Apex Gold to the plaintiff was not entered on the PPS Register until 26 March 2013. The last date for registration under s 588FL(2)(b)(ii) (being 20 business days after the security agreement was entered into) was 31 January 2013. The registration was, thus, out of time for the purposes of that section.
His Honour gave consideration to what other security interests had been granted by Apex Gold since 2 January 2013. There had been a number of purchase money security interests granted, but between 2 January 2013 and 26 March 2013 there was just one other (non PMSI) security interest granted to a company named Dyno Nobel Asia Pacific Pty Ltd. The orders his Honour made provided for the priority of the Dyno security to be unaffected by his grant of extension of time (at -).
Interestingly, his Honour noted at  that he was informed from the Bar table that the company that was the object of the orders sought, Apex Gold itself, had not been given notice of these proceedings. He proceeded to make the orders sought nonetheless, and included an order reserving liberty for Apex Gold (or any liquidator, administrator, deed administrator or unsecured creditor of Apex Gold) to apply to vary his orders within set periods of time.
Quite simply, delay in registering PPS security interests at your peril.
As the Explanatory Memorandum to the 2010 amending Bill explains, section 588FL was intended to vary section 266 of the Corporations Act. Section 266 had required that a security interest be registered within 45 days of being created, or before 6 months of the commencement of an administration, liquidation, or DOCA. Section 588FL(2) instead provides (broadly) that if such an insolvency event occurs, a security interest must have been registered within 20 business days of being created, or before 6 months of such an insolvency event (or such later time as ordered by the Court).
I leave you with the examples set out in the Explanatory Memorandum, illustrating how s 588FL was intended to operate. However in reading these examples, note this caveat: at the time of the EM, the proposal was “20 days”, not the “20 business days” that appears in the Corporations Act –
Example: CompanyA grants FinanceA a security interest in its all present and after acquired property. FinanceA registers its security interest 15 days after the creation of the security interest. CompanyA becomes insolvent 30 days after the security interest is granted. FinanceA would retain their security interest, because FinanceA registered the security interest within the required 20 day period. Example: CompanyA grants FinanceA a security interest in its all present and after acquired property. FinanceA registers its security interest 25 days after the creation of the security interest. CompanyA becomes insolvent 30 days after the security interest is granted. The security interest would vest in CompanyA because FinanceA did not register the security interest within the required 20 day period or within the six month period prior to the critical time. Example: CompanyA grants FinanceA a security interest in its all present and after acquired property. FinanceA registers its security interest 25 days after the creation of the security interest. CompanyA becomes insolvent eight months after the security interest is granted. FinanceA would retain its security interest because it registered its security interests prior to the six month period before the critical time. Example: CompanyA grants FinanceA a security interest in its all present and after acquired property. FinanceA registers its security interest 15 days after the creation of the security interest. CompanyA becomes insolvent 5 months and 25 days after the security interest is granted. The security interest would not vest in CompanyA because FinanceA registered the security interest within the required 20 day period (despite the fact that the registration was also made within 6 months before the insolvency).
And it is not good news for owners. It may seem counter-intuitive for lawyers and insolvency practitioners who were taught long-standing rules of property law, and have until now advised and operated in that context. However when it comes to personal property it is clear now that in Australia, to put it simply, ownership is no longer king.
Just over a week ago, on 27 June 2013, the first major PPSA decision in Australia was handed down by Brereton J in the New South Wales Supreme Court: In the matter of Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd  NSWSC 852.
The case involved three civil construction vehicles located in the Northern Territory, identified by their VINs; a caterpillar wheel loader (the 930), a 30 tonne caterpillar excavator (the 330), and a 20 tonne caterpillar excavator (the 320).
A company Maiden Civil (P&E) Pty Ltd (Maiden) had been engaged between 2010 and May 2012 to undertake civil construction work in the Northern Territory. It had acquired possession of the Caterpillars with the assistance of Queensland Excavation Services Pty Ltd (QES), under a hire-purchase type of facility used in many industries. Broadly, QES purchased the Caterpillars chosen by Maiden and then leased them to Maiden at a premium. Pre-PPSA, by gaining title to the Caterpillars pending the paying out of the lease term, this arrangement was considered to give the finance-provider the best security possible. However post-PPSA, as we are learning, ownership is no longer king. Without registering what is deemed under the Act to be a “security interest”, priority in the particular personal property can be lost, even for the owner of the personal property.
To break the financing arrangement employed here down into its elements –
In about March 2012, Maiden sought short-term finance from a third party, Fast Financial Solutions Pty Ltd (Fast). Fast’s solicitors prepared the documentation, including a Loan Agreement for a three-month loan of $250,000 and a General Security Deed. The Deed attached schedules listing Maiden’s property, including the Caterpillars, and sent these to Maiden’s lawyer on 2 May 2012.The General Security Deed purported to grant to Fast a “security interest” in, inter alia, the Caterpillars. The documents were executed by Maiden and by Fast on 31 May 2012. Fast transferred funds into an account as directed by Maiden.
Already by July 2012 there were a number of events of default under clause 11.1 of the General Security Deed, and on 27 July 2012 Fast appointed receivers and managers.
Following their appointment, the receivers claimed possession of the Caterpillars. Maiden entered into voluntary administration on 27 August 2012 and then liquidation on 24 September 2012.
The contest as to the superior interest in the Caterpillars was between –
1. QES, who claimed to be the owner of the 330 and 930 Caterpillars, and of the 320,
2. The financier and secured creditor, Fast, and
3. The parties claiming a lien over the 320 (it was unclear if this was a company called Central Plant Hire (NT) Pty Ltd or a Mr Cullenane).
His Honour Brereton J addressed the key issues in turn.
1. Who was the “true owner”?
QES claimed to be what his Honour referred to as the “true owner” of the Caterpillars, having purchased them and hired them to Maiden. This was disputed.
His Honour held that the arrangements between QES and Maiden included that upon payout of the relevant financier from whom QES had obtained funding for a particular Caterpillar, title to the Caterpillar would be transferred to Maiden. The arrangement was not a mere lease, but included an agreement to transfer title upon discharge of the finance (see ). In the meantime, QES was the legal owner of the Caterpillars, having acquired title from the vendor and being the sole recourse for Esanda and Westpac.
His Honour concluded (at ) that Maiden was the “true owner” of the 320, having paid out its finance. However QES was the “true owner” of the 330 and 930, and thus had a claim in competition with Fast as to the 330 and 930. His Honour observed that while the case ultimately fell to be resolved according to the system of priorities established by the PPSA, “the notion of title – or ‘true ownership’ – is not irrelevant”.
Brereton J does not explain this last remark further. I suggest that, as the rest of the judgment demonstrates, its relevance is not to the resolution of the competing claims, but is confined to determining whether an asserted “true owner” retains an interest in the asset in question at all. In this case, his Honour held that this issue resolved the question as to QES’ claim to an interest in the 320 in the negative, such that as to that Caterpillar, there was no competition at all. As to the the other two Caterpillars, the 330 and 930, QES’ claim to ownership held good. For those Caterpillars, then, the analysis proceeded to the next stage – the competition between claimed interests in those Caterpillars.
2. The security interests in the Caterpillars
(a) Meaning of “security interest”
Section 12(1) of the PPSA defines “security “interest in this way –
“A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).”
Section 12(2) lists examples of such transactions which may provide a security interests in personal property.
Importantly, section 12(3) then provides –
“A security interest also includes the following interests, whether or not the transaction concerned, in substance, secures payment or performance of an obligation:
(a) the interest of a transferee under a transfer of an account or chattel paper,
(b) the interest of a consignor who delivers goods to a consignee under a commercial consignment,
(c) the interest of a lessor or bailor of goods under a PPS lease.”
I pause there to note that section 12(3) is the provision which makes it clear that ownership or title to goods is deemed a “security interest” under the PPSA, and is subject to its provisions.
A “PPS lease” is defined in section 13 to mean a lease or bailment of goods –
(a) for a term of more than one year,
(b) for an indefinite term (even if determinable by either party within a year),
(c) for a term of up to a year that is automatically renewable if the total of all the terms might exceed one year,
(d) a term of up to a year, where the lessee or bailee consensually retains substantially uninterrupted possession of the property for at least a year from the day they took possession, or
(e) for goods that may or must be described by serial number, for a term of more than 90 days in certain circumstances, or less than 90 days in certain circumstances.
There are certain exclusions from the definition of a “PPS lease” in sub-sections 13(2) and (3). Relevantly, sub-section 13(2)(a) excludes a lease by a lessor who is not regularly engaged in the business of leasing goods.
(b) QES’s interest
It was common ground that if QES was the owner of any of the Caterpillars, this was a “security interest” within the meaning of the PPSA. Although the lease of the Caterpillars from QES to Maiden was not in writing, and there was no evidence of any agreed term, his Honour found that the hire was continuous, was for a period of more than a year, and that Maiden retained uninterrupted possession of the Caterpillars for more than a year. On this basis, his Honour held (at ) that sub-sections 13(1)(b) and/or 13(1)(d) of the PPSA were satisfied, such that the agreement between QES and Maiden was a PPS lease. His Honour also held that sub-section 13(1)(e)(ii) and/or (iii) was also satisfied, as the Caterpillars were goods that may or must be described by serial numbers and were in Maiden’s possession for more than 90 days.
The exclusions from the definition of “PPS lease” in sub-section 13(2) did not apply. His Honour accepted that the income from hiring the three machines was QES’s only income, and that it was Mr Rutherford’s intention to continue to let the Caterpillars for hire on short-term rentals. His Honour held that on that basis it was not established that QES was not regularly engaged in the business of leasing goods (at ).
I pause here to note respectfully that I harbour some doubt as to the correctness of that conclusion. Whether what would appear to have been a one-off transaction coupled with an intention to continue to hire those vehicles is sufficient to denote a regular engagement in the business of leasing goods may be, I suggest, open to question.
In any event, Brereton J held that as the leases of the Caterpillars by QES to Maiden were PPS leases within the meaning of s 13 of the PPSA, it followed that QES’ interest in the Caterpillars, as lessor, was a “security interest” within PPSA s 12(3)(c).
(c) Enforceability of security interests against grantors – “attachment”
(In this case, the relevant “grantor” as that term is used by the PPSA was Maiden, the lessee of the Caterpillars.)
Section 19 is the key provision here. Subsection 19(1) provides that attachment is required before a security interest is enforceable. Subsection 19(2) provides that a security interest attaches to the relevant personal property (“collateral”), relevantly, where the grantor has rights in the collateral, or power to transfer rights in it to the secured party (at (a)).
Subsection 19(5) provides –
“For the purposes of paragraph 2(a), a grantor has rights in goods that are leased or bailed to the grantor under a PPS lease, consigned to the grantor, or sold to the grantor under a conditional sale agreement (inlcuding an agreement to sell subject to retention of title) when the grantor obtains possession of the goods.”
Brereton J observed that here, pursuant to s 19(5), Maiden – as PPS lessee in possession of the Caterpillars – had rights in them to which a security interest could attach. His Honour noted that these rights are not limited to possessory rights, but can also be proprietary rights. He noted there are equivalent provisions in the New Zealand and Canadian PPS legislation, and at  quoted the following remark of Iacobucci J of the Supreme Court of Canada in Re Giffen  1 SCR 91; (1998) 155 DLR (4th) 332:
“Thus, upon delivery of the car to the bankrupt, the lessor had a valid security interest in the car that could be asserted against the lessee and against a third party claiming a right in the car. However, the lessor’s security interest remained vulnerable to the claims of third parties who obtain an interest in the car through the lessee including trustees in bankruptcy. In order to protect its secuirty interest from such claims, the lessor must therefore perfect its interest through registration of its interest…, or repossession of the collateral… The lessor did not have possession of the car, and it did not register its security interest. Thus, prior to the bankruptcy, the lessor held an unperfected security interest in the car.”
At -, his Honour considers key provisions of the New Zealand PPSA and certain New Zealand judgments, discussing conceptually how the rights of a lessee in leased goods are not merely possessory but are also proprietary, such as to permit a secured creditor to acquire rights in priority to those of the lessor (or, as Brereton J puts it, the “true owner”).
At  of Brereton J’s judgment, there is a quote from a Canadian article by Bridge, Macdonald, Simmonds and Walsh, “Formalism, Functionalism and Understanding the law of Secured Transactions” (1999) 44 McGill LJ 567 at pp 602-603, where the authors suggest that under the US Uniform Commercial Code and the Canadian legislation:
“The internal logic of the Article 9 and PPSA priority regime is premised on a rejection of derivative title theory in favour of registration as the principal mechanism for ranking priority both among secured creditors and as between the secured creditor and the debtor’s general creditors including the trustee in bankruptcy….On this interpretation, ostensible ownership – in the radical sense of bare possession or control of the collateral – has effectively replaced derivative title for the purposes of determining the scope of the secured debtor’s estate at the priority level.”
At - Brereton J refers to a 2005 decision of the New Zealand Court of Appeal which, as the enactment of the PPSA in Australia subsequently approached, was the case which certainly caught the attention of those of us in Australia coming to grips with the concepts and potential effects of the new regime. The case was that of Waller v New Zealand Bloodstock Ltd  NZCA 254;  3 NZLR 629.
In brief summary, in 1999 a financier took a debenture over the assets of a farming company which it registered on 1 May 2002, the day the PPSA commenced in New Zealand. In 2001, the farming company had leased a stallion named Generous from the stallion’s owner for a term of more than one year. The owner did not register its interest as owner/lessor. In 2004, the owner/lessor terminated the lease and repossessed Generous. Shortly thereafter, the financier appointed receivers to the farming company, under its debenture. The receivers sued the stallion’s owner for possession, claiming that the financier was entitled to priority under the PPSA. The New Zealand Court of Appeal held that the lease ammounted to a “PPS lease”, that the owner/lessor’s interest amounted to a “security interest” under the PPSA, that the financier had given value for its security interest under the debenture, that the farming company had rights in the stallion under the PPS lease, and that the financier’s security was enforceable against the stallion’s owner/lessor. As the financier’s security interest had been perfected by registration, it took priority over the competing security interest of the stallion’s owner/lessor, as with respect to priority of competing security interest, the principle nemo dat quod non habet was ousted by the PPSA.
Robertson and Baragwanath JJ of the NZ Court of Appeal observed (at ) that because the lease was for a term of more than one year, then for the limited purpose of priority of securities, the contracutal language of the agreement to lease (which provided that title to Generous would remain with the owner/lessor) was overridden by statute, and instead of its previously inviolable title to the stallion, the owner/lessor was deemed to have a statutory “security interest”, which was liable to be overridden by a competing security interest. A salient lesson indeed.
(d) Fast’s Interest
Here Fast, the financier, under its General Security Deed with Maiden, was granted a “security interest” in the “personal property” to secure the due payment of the “secured moneys”. Clause 1.1 of the Deed defined “personal property” to mean all of Maiden’s assets, including all personal property in which Maiden had rights, whether then or in the future, including the serial numbered “collaterals” listed in schedules, which included the Caterpillars.
His Honour held that the General Security Deed was a “security agreement”, and the interest created in Fast’s favour was a “security interest” within the meaning of the PPSA (at ). Pursuant to s 19(2), Fast’s security interest had attached to the Caterpillars when it gave value for its security interest by advancing the funds referred to in the Loan Agreement and General Security Deed. Once it had attached, it was enforceable by Fast against Maiden the grantor, pursuant to s 19(1).
(e) Priority between competing security interests – the key provisions
Both QES and Fast held “security interests” in Caterpillars 330 and 930. The competition between the two interests was to be resolved not by title, but by priority under the rules laid down in the PPSA.
Section 55 sets out the default priority rules. Broadly –
Section 21 sets out the main rule for perfection. In broad terms and all other things being equal, registration will in many cases achieve perfection. However, it is more complicated than that.
Under subsection 21(1), a security interest in a particular collateral is perfected if either –
(a) it is perfected or temporarily perfected by force of the PPSA; or
(b) all of the following three things apply –
(i) the security interest is attached to the collateral,
(ii) it is enforceable against a third party, and
(iii) sub-section (2) applies.
Subsection 21(2) applies if –
(a) the security interest has been registered and its registration remains in effect, or
(b) the secured party has possession of the collateral (not by seizure or repossession), or
(c) the secured party has control of the collateral, for certain specified kinds of collateral (These are not relevant here. They include certain types of credit instruments, but curiously, (vi) is “satellites and other space objects”).
(a) is attached to the collateral, and
(b) either –
(i) the secured party has possession,
(ii) the secured party has perfected the security interest by control, or
(iii) a security agreement that provides for the security interest covers the collateral in accordance with subsection (2).
Section 20(2) provides, relevantly, that a “security agreement” must be evidenced in writing with certain details addressed, and either signed or adopted by the grantor.
(f) Competition between the security interests of QES and Fast
For Fast, in terms of enforceability against third parties, Brereton J concluded that s 20(1)(a) was satisfied, as Fast’s security interest had attached to the Caterpillars. The General Security Deed was a security agreement evidenced in writing signed by Maiden as grantor within s 20(2)(a)(i), contained a description of the particular collateral (s 20(2)(b)(i)), and contained a statement that a security interest was taken in all of the grantor’s present and after-acquired prorperty (s 20(2)(b)(ii)). Accordingly, the security agreement “covered the collateral” for the purposes of s 20(1)(b)(iii), and Fast’s security interest in the Caterpillars was therefore enforceable against a third party, including QES.
In terms of the perfection of Fast’s security interest, his Honour noted that as it had attached to the Caterpillars, this meant that s 21(1)(b)(i) was also satisfied. As it was enforceable against a third party s 21(1)(b)(ii) was satisfied. And as it had been registered and the registration remained effective within the meaning of s 21(2)(a), s 21(1)(b)(iii) was satisfied. It followed that Fast’s security interest in the Caterpillars was perfected under the PPSA. That was all common ground. (See -)
However, his Honour observed at  that for QES – it had not registered its security interest in respect of any of the Caterpillars, and they were therefore not perfected (subject to what appears below). Section 55(3) therefore applied, so that Fast’s perfected security interest in the Caterpillars had priority over QES’s unperfected security interest in them. His Honour also observed that QES’s security interest was vulnerable on the grounds that it was not enforceable against third parties under s 20, because there was no security agreement that covered the collateral for the purposes of s 20(1)(b)(iii). While the PPS leases were “security agreements”, they were not evidenced in writing as required by s 20(2), thus s 20(1)(b) was not satisfied (see ).
(g) Transitional security interests – deemed perfection?
QES contended that its security interest in the Caterpillars had priority as “transitional security interests” which were, it argued, perfected by force of the Act immediately before the registration commencement time (see ).
Chapter 9 of the PPSA sets out the transitional rules.
Section 308 defines “transitional security interest” to mean –
“a security interest provided for by a transitional security agreement, if –
(a) in the case of a security interest arising before the registration commencement time – this Act would have applied in relation to the security interest immediately before the registration commencement time, but for section 310 [which provides the Act only starts to apply to security interests at the registration commencement time]; or
(b) in the case of a security interest arising at or after the registration commencement time:
(i) the the transitional security agreement is in force immediately before the registration commencement time provides for the granting of the security interest; and
(ii) this Act applies in relation to the security interest.”
Section 311 provides for the enforceability of transitional security interests against third parties, by applying the law that applied immediately before the registration commencement of the PPSA (which was 1 February 2012):
“Despite section 20, a transitional security interest is enforceable against a third party in respect of particular personal property if it would have been so enforceable under the law that applied to the enforceability of security interests immediately before the registration commencement time, and as if this Act had not been enacted (whether the secuity interest arises before, at or after the registration commencement time).”
Section 320 provides a guide to priority rules for transitional security interests, relevantly –
Section 322 provides for the deemed perfection of transitional security interests. I note that this provision is likely to be crucial for many transitional security interest holders, although not for the unfortunate QES.
The main rule as to the perfection of transitional security interests, set out at s 322(1) is this –
“A transitional secuity interest in collateral is perfected from immediately before the registration commencement time, whether the security interest arises before, at or after the registration time (including a transitional security interest that arises after the end of the month that is 24 months after the registration commencement time).
Note 1: As a result of this subsection, the priority time for a transitional security interest under subsection 55(4) will be immediately before the registration commencement time, as long as the security interest remains continuously perfected.”
(a) when the security interest is perfected by registration under Division 6 (by migration),
(b) when the security interest is perfected by preparatory registration under Divison 7,
(c) when a registration under Division 6 or 7 is amended so that the registration perfects the security interest,
(d) when the security interest is otherwise perfected by registration, or is perfected by possession or control,
(e) when the security interest is otherwise perfected (but not temporarily perfected) by this Act, other than under this section,
(f) the end of the month that is 24 months after the registration commencement time [so after 31 January 2014].
Subsection 322(3) then provides for an exception – that subsections 322(1) and (2) do not apply to a transitional security interest in collateral if the interest is of a class prescribed by regulations made for the purposes of this subsection.
Brereton J explains at  that s 322 interacts with s 55 through s 21(1)(a), which provides that a security interest in particular collateral is perfected if the security interest is temporarily perfected, or otherwise perfected, by force of the Act.
Here, Fast and the receivers of Maiden accepted that any security interest of QES in the Caterpillars was a “transitional security interest” within s 308 and that, but for s 322(3), the effect of ss 322(1) and (2) would be to give QES’s security interest priority over Fast’s security interest, even though it was not registered on the PPS register. However, Fast and the receivers contended that s 322(3) applied so as to exclude QES’s interest from protection under s 322.
Regulation 9.2 of the Personal Property Securities Regulations 2010 provides that a transitional security interest is prescribed for the purposes of s 322(3) where it is registrable on a transitional register and where it was not registered on the relevant register prior to the registration commencement time.
Section 330 provides as follows –
“This Division applies if, at or after the migration time, and before the registration commencement time:
(a) an officer or agency of the Commonwealth, a State or a Territory gives the Registrar data, in relation to personal property, that is held by the officer or agency in a register (a transitional register) maintained under a law of the Commonwealth, a State or Territory; and
(b) the data is given in the approved form; and
(c) the Registrar accepts the data.”
The Northern Territory Register of Interests in Motor Vehicles and Other Goods was a register existing prior to the PPSA, data from which was migrated to the PPS Register within the meaning of s 330. Accordingly, it was a “transitional register” within the meaning of the PPSA.
The Caterpillars, being wholly propelled by a volatile spirit and not used on a railway or tramway, had qualified as “motor vehicles” and thus also of “prescribed goods”, for the purposes of the relevant NT Register Act. A “registrable interest” under the NT Act included a lessor of the prescribed goods, and QES’s interest in the Caterpillars was a registrable interest.
Accordingly, QES’s interest in the Caterpillars as lessor was registrable on a transitional register within the meaning of the PPSA (being the NT Register), but they had not been so registered prior to the registration commencement time. His Honour held at  that in those circumstances, the exception in s 322(3) of the PPSA applied, and the protection otherwise afforded to transitional security interests by subsections 322(1) and (2) did not avail QES.
(h) Further arguments by QES
QES ran another argument, to the effect that perfection of its security interest pre-PPSA fell to be determined according to the law of Queensland, not the Northern Territory, and that if the Caterpillars were not registrable on a transitional register in Queensland, then the exception in s 322(3) was not attracted. His Honour at - discussed this argument and the provisions of the PPSA dealing with governing laws for goods, noteably ss 233-238, in particular s 238, and rejected it.
QES ran a further, quite interesting argument that Fast and the receivers had no enforceable right to possession, as Maiden no longer had a right to possession of the Caterpillars (QES having terminated the leases), the receivers’ rights to deal with the Caterpillars deriving from, and being no greater than, those of Maiden. As His Honour observed at , the first limb of this submission was, in substance, that the grantor Maiden had a mere right to possession under the leases, that Maiden (and its receivers) have repudiated the lease by denying QES’s title and failing to pay rent, that QES has accepted the repudiation, terminated the lease and re-assumed possession; and accordingly, that neither Maiden nor its receivers nor Fast could have any further right to possession under the lease. The second limb invoked s 112(1) of the PPSA, which provides that in exercising rights and remedies provided by PPSA Chapter 4, a secured party may deal with collateral only to the same extent as the grantor would be entitled to so deal with the collateral.
In rejecting the first limb of this argument, his Honour noted the following –
Moreover, his Honour noted that Maiden did not have a mere right to possession under the QES leases, but also proprietary rights to the extent that it could grant security interests to third parties. The PPSA sees such a transaction as, in substance, a security transaction, even though in form it is a lease. Thus it treats the lessee under a PPS lease as the grantor of a security interest with rights in the collateral (the personal property), and the lessor as a security party. His Honour noted that as the Canadian and New Zealand cases show, the PPSA recognises that a lessee may validly and effectively grant security interests in the collateral to third parties, that can take priority over the lessor’s unperfected interest, because the lessee is regarded for that purpose as having rights in the collateral (see ). Maiden acquired possessory and proprietary rights in the Caterpillars upon taking possession of them, and granted a security interest in them to Fast under the General Security Deed.
As to the second limb of QES’ argument, invoking s 112 of the PPSA and effectively arguing the nemo dat rule, his Honour dismissed this also and concluded that Fast’s priority entitled it to possession of the Caterpillars, either under the General Security Deed or pusuant to Chapter 4 of the PPSA. He also noted that s 116 of the PPSA provides that Chapter 4 does not apply in relation to property while a person is a controller of the property as a receiver or receiver and manager. His Honour also expressed the view that this was not affected by s 51F of the Corporations Act 2001 (Cth). (See -.)
(i) The lien claim of Central or Mr Cullenane
It seemed that one of either Central or Mr Cullenane was in possession of the 320 Caterpillar and claimed a lien, arising from an oral agreement with a Maiden director that Central/Mr Cullenane would have security over unspecified equipment of Maiden for work done by him “said to be” to the value of $60,000. His Honour mildly observed that Mr Cullenane had exercised this purported right to take the 320 as it was the only machine left on the job site that was not locked.
His Honour noted there was no admissible evidence of these matters, and there was nothing to suggest any such interest could prevail against Fast. In particular, s 21(2) did not apply as there was nothing to suggest the interest had been registered, and his seizure of the 320 had not amounted to perfection. Moreover any such security interest being unperfected, it too would have vested in Maiden upon the commencement of its administration and/or winding up, pursuant to s 267 of the PPSA. (See -.)
His Honour concluded at - that –
1. Maiden was the true owner of the 320, although QES was the true owner of the 330 and 930.
2. Fast had a security interst in all three Caterpillars pursuant to the General Security Deed, which attached to the Caterpillars, was enforceable against third parties, and perfected by registration.
3. QES had a security interest in the 330 and the 930 as a lessor under a PPS lease. QES had not registered is security interest on the PPS Register. While it was a transitional security interest, it had been registrable on a transitional security register (the NT motor vehicle Register). QES had failed to so register at the relevant time, thus the exception in s 322(3) applied and the protection (of “deemed perfection”) otherwise afforded to transitional security interests in ss 322(1) and (2) did not avail QES.
4. Accordingly, QES’s security intertest was unperfected. In those circumstances s 55(3) applied, such that Fast’s perfected security interest in the Caterpillars had priority over QES’s unperfected security interest in the 330 and 930.
5. Moreover, upon Maiden going into administration and/or liquidaiton, Maiden became entitled to the Caterpillars – subject to the perfected security interest of Fast – because QES’s (and Central’s or Mr Cullenane’s, if any) unperfected secuity interest thereupon vested in Maiden.
6. The Receivers and Fast had enforceable rights of possession of the Caterpillars against those defendants who presently possessed them, flowing from events of default under the General Security Deed having occurred, s 112 not affecting Fast’s entitlements and Chapter 4 not applying.
It will be interesting to see if this decision is appealed. In the meantime, aside from my query mentioned above as to his Honour’s finding that the QES-Maiden lease was a “PPS lease”, as it did not fall within the exclusion in s 13(2)(a), I would anticipate that this judgment by his Honour Brereton J will be relied upon and applied as authoritative. It ought be closely considered by any practitioner advising upon the operation of the PPSA in such circumstances.
This case serves as a stark illustration for any who were not already aware, that the PPSA has changed the playing field significantly when it comes to personal property; particurly as to long-held notions of the primacy of the rights of the owner of personal property leased or bailed to a third party. Where that third party subsequently fails, the rules have been changed fundamentally, when it comes to a competition between a prior, unregistered owner/lessor, and a subsequent registered secured creditor. As I observed at the outset: to put it simply, ownership is no longer king.
This is a brief, useful alert regarding PPSR search results. It notes the importance of checking whether a PPSR registration is linked to an earlier registration number, which may indicate the exercise of a right of subrogation by a guarantor. The alert was written by Nicola Young of B2B Lawyers.
In a highly commendable move, last Friday the five international law firms of Allens, Ashurst, Herbert Smith Freehills, King & Wood Mallesons and Norton Rose jointly released “the PPSA model clauses” for a General Security Agreement (GSA), which they had been working on together to prepare. The clauses may be found on the websites of all of those firms. Here is the link to the announcement on Allens’ site (link), and to the model clauses themselves (link).
They note that where different firms take different approaches to some essential elements of GSAs, those differences are not necessarily a matter of right/wrong, better/worse, but can cause confusion and unnecessary negotiation as parties seek to impose their preferred position on others, often based on an imperfect understanding of another firm’s approach. Without guidance, they observe, it may take a long time before the market settles.Their stated objective in jointly publishing the clauses, is to assist the functioning of the market post-PPSA, with a view to helping the market to develop a settled practice. They also believe this is in clients’ interests.
Their joint announcement reads in part as follows –
“A document that was heavily affected by the Personal Property Securities Act 2009 (Cth) (the PPSA) was the traditional fixed and floating charge….The replacement for the fixed and floating charge is now usually called a General Security Agreement (or Deed) (the GSA)…
The PPSA model clauses…represent a distillation of the [five] firms’ thinking on several important issues and are consensus positions. They are not biased towards either grantors’ or secured parties’ interests…The footnotes that accompany the clauses explain the PPSA thinking behind the decisions made in settling the [clauses]. They help understand the intended operation of these provisions. However, they do not constitute advice to any person.
These clauses have been adopted into the firms’ precedent GSAs. The firms have no objection to them being used by any other person in the market if they consider them appropriate for their precedents or a particular transaction….”
Due to technical “issues”, just over 6,000 charges were not migrated to the PPS Register from ASIC’s Australian Register of Company Charges during the data migration of 28-29 January 2012. Because those charges missed the migration deadline, ASIC cannot now migrate them and they must be registered on the PPS Register by or on behalf of each chargee/secured party. ASIC says it is notifying the affected parties.
To find out which charges failed to be migrated, check the list that ASIC has published here.
There were other problems experienced in the migration of ASIC charges –