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PPSA: The Basics
Substantive Law| What area(s) of law does this episode consider? | Nicholas talks about the operation of the Personal Properties and Securities Act 2009 (PPSA) and Jason provides practical guidance on PPS considerations in an external administration. |
| Why is this topic relevant? | While the Personal Properties and Securities Register (PPSR) does not operate as a system of title by registration, instead working more like a ‘noticeboard’ for security interests, there are very real priority consequences for companies and individuals who fail to register or inaccurately register their interests. While the PPSA has been in place since 2012, it is an area that still hasn’t been explored in great detail by case law. |
| What legislation is considered in this episode?
| The main provisions of the PPSA that Nicholas talks about are:
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| What cases are considered in this episode? | 1. Auburn Shopping Village Pty Ltd v Nelmeer Hoteliers Pty Ltd [2017] NSWSC 1230 (14 September 2017) (Ward CJ In Eq). In this case Nelmeer agreed to sell poker machine permits to Auburn with Auburn claiming that the agreement was that Nelmeer had to sell the permits without any encumbrances. Nelmeer’s permits had PPSR registrations against them and as such Auburn repudiated the contract. However, the court upheld that PPSR registrations are not encumbrances. 2. Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd [2017] SASC 163. The court in this case considered the principle in s62(2)(b)(i) of the PPSA of when a grantor ‘obtains possession of the inventory’ in order to determine out of Allied and Samwise who had priority over the motorcycles. The dispute arose from previous transactions whereby Commercial Distribution Finance Pty Ltd provided finance to Bill’s Motorcycles, retaining ownership of the motorcycles and registering a PMSI. Bill Motorcycle’s then granted an all assets security interest to Samwise. Allied later entered into a finance agreement with Bill’s Motorcycle’s and registered a PMSI and Commercial Distribution Finance Pty Ltd transferred the motorcycles to Allied. Ultimately the South Australia Supreme Court held that the possession referred to Allied taking possession in capacity as a grantor of the PSMI. 3. Project Blue Sky v Australian Broadcasting Authority [1998] HCA 28 (28 April 1998) (Brennan CJ, McHugh, Gummow, Kirby and Hayne JJ). In this case the High Court established principles of statutory analysis in interpreting s 160(d) of the Broadcasting Services Act 1992 (Cth) (‘the Act’) requiring the Australian Broadcasting Authority (ABA) to operate consistent with Australia’s international obligations. Clause 9 of the ABA’s standards stated that 55% of Australian programs had to broadcast 6am-12am. An existing trade agreement between Australia and New Zealand provided that both Australia and New Zealand would offer equal access, treatments to persons, and services of the other country, thereby constituting an international obligation for the purposes of s 160(d) of the Act. The High Court held that the ABA’s standard was unlawful but not invalid. 4. Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27. This is yet another case on statutory interpretation where the court appeared to favour a more literal approach by considering the words of the legislation itself. It reaffirmed that it is important to consider the mischief that the statute is designed to address in order to make a proper interpretation. The case concerned calculation of tax for Alcan according to s 41 of the Taxation (Administration) Act (NT) which defined what a lease is and expressly excludes ‘an option to renew a lease.’ The High Court held that the Court of Appeal of the Northern Territory erred in their calculation of tax as including the option to renew in the value of the leases. 5. Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92 (Maxwell P, Tate and Beach JJA). Central Cleaning supplied cleaning equipment on retention of title terms to Swan Services. Central Cleaning and Swan Services had entered into a master agreement in the form of a credit application before the commencement of the PPSA. Goods were supplied after the commencement of the PPSA under separate purchase orders, and when delivered were accompanied by invoices containing the retention of title terms. Central Cleaning had not made a PPSA registration and therefore had to rely on the transitional provisions of the Personal Property Securities Act 2009 (Cth) (PPSA). Swan Services went into liquidation (with Elkerton appointed as liquidator). The Court of Appeal reversed the decision at first instance and held that although there had been no PPSA registration, Central Cleaning would be able to enforce its ROT terms as a security interest as they established the existence of a ‘transitional security interest’ under s 308 of the PPSA – that is, that it was provided for by a security agreement made before the commencement of the PPSA. 6. In the matter of Gelpack Enterprises Pty Ltd (in liquidation) [2015] NSWSC 1558 (03 September 2015) (Brereton J). Primaplas supplied resin to Gelpack for the production of plastic products. This was supplied on credit terms where retention of title applied. Upon liquidation of Gelpack, Primaplas, through its PMSI, sought an accounting of its stock on hand with the liquidators as well as proceeds of sale of its resin and products. Gelpacks’ finance manager submitted a credit application in 2007, stating that all future supplies would be subject to general terms and conditions of trade and Primaplas could change terms at any time, but would undertake reasonable efforts to notify the customer of the change. In August 2012, the plaintiff sent a generic letter to their customers, including the Company, attaching new T&Cs which included a ROT clause and the grant of security interest under the PPSA. The Court held that:
7. Trenfield v HAG Import Corporation (Australia) Pty Ltd [2018] QDC 107 (McGill SC, DCJ). In 2011, prior to the PPSA commencement, Lineville signed a credit application with HAG stating that goods would be supplied on ROT terms. HAG registered its interest on the PPSR as ‘transitional’ according to s 308 of the PPSA. Lineville paid HAG for the goods then went into liquidation. Lineville’s liquidator sought to recover those payments to HAG as preferential payments in respect of an unsecured debt. The Queensland District Court found that the credit application was not a contract for providing security interests and that the transitional registration was ineffective to perfect the security interest made after the goods were supplied (after PPSA commencement). However, the court also found that the payments were not preferential as they were not made for an unsecured debt. |
| What are the main points? |
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| What are the practical takeaways? |
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| Show notes | PPSR Search Demonstration Video |
| David Turner:
1:00 | Hello and welcome to Hearsay, a podcast about Australian laws and lawyers for the Australian legal profession, my name is David Turner. As always, this podcast is proudly supported by Assured Legal Solutions, a boutique commercial law firm, making complex simple. Just a quick note before we begin; the episode of Hearsay you’re about to listen to was recorded in the midst of the coronavirus crisis and as a result of social distancing measures, we had to conduct this interview over remote technology, such as Zoom or Google Meet. The audio quality might be a little different than what you’re expecting. Still, we think it’s pretty good in the circumstances and we hope you enjoy the episode. Although the Personal Property Securities Act 2009 has been in force for over 8 years, many of its features are still misunderstood by creditors and their lawyers, with potentially disastrous consequences for the priority of those creditors’ security interests. Widespread understanding of the operation of the PPSA is not assisted by the sometimes jargonistic language that describes its operation – from PMSIs, to ALLPAPs, super priorities to circulating security interests, the terminology of the Act can be impenetrable to a novice. Now I’ll be joined later today by Jason Porter from SV Partners to talk about some of the practical aspects of the PPSA and the PPSR, but right now, here to help us understand the PPSA a bit better is the man who quite literally wrote the book on it, Nicholas Mirzai, barrister at Level 22 Chambers, thank you for joining us on Hearsay. |
| Nicholas Mirzai: | It’s a pleasure to be here. |
| DT: 2:00 | Now for someone who is completely uninitiated in the law in this area, someone who knows nothing about the Personal Property Securities Act or indeed any of the legislation that came before it, what is the PPSA, what does it do? |
| NM:
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7:00 | Oh well that’s sort of the million-dollar question. A lot of the difficulties with the Act can be better understood by understanding the scope of what the Act’s designed to achieve as opposed to what it’s designed not to touch. So, people can deal with personal property in any way that they like. They can transfer it, they can own it, they can possess it. There are various rights that people can have in respect of things that the law describes as personal property. Now when you think about personal property that phrase is perhaps an unfortunate one because it implies some personality or something which a consumer can hold. That’s not quite the case, at least not in the context of this statute. It’s designed to distinguish it from real property, or land or things that aren’t property at all. For example, in certain circumstances, contractual rights; the right to have somebody perform a contract may be something that you can transfer, but it’s not necessarily a property right. There are these legal distinctions which arise, there are rights that are created by statute which may or may not be property, for example gaming rights, rights to operate poker machines, rights to sell alcohol, for example and various statutory constructs. This act has to be quite careful because it has to navigate the way that it deals with the transfer of those rights and you’ll hear this quite often when talking about the PPS, but security interests created in those rights. And one has to be careful about what a security interest is of course because people understand it generally in the context of real property as something which secures repayment of a loan, for example, if you think about a real property mortgage. Very common, that people will at least grant one security interest in their lifetime and that is a mortgage to a bank, in favour of the bank, which secures payment or performance of the obligation in that case, typically a loan. They will have that for quite some time. So, the PPSA is concerned with the creation of similar encumbrances in favour of, not necessarily a lending party, but sometimes a party who actually supplies the underlying goods for example. There are certain transactions on the peripheries or transactions which one might not ordinarily think of as creating security, for example a long-term lease or bailment, which do fall within the scope of the Act, but which don’t look anything like a mortgage for example. So, the Act I’d like to say that there’s a simple definition and it’s an act which is designed to regulate security interests taken over personal property. TIP: Let’s take a break here and refresh our memories about the Personal Properties and Securities Act, or the PPSA as it is more commonly known. Now the PPSA only came into effect in 2012. So, for many of us, our first and last memory of the PPSA might be from Law School, and for the rest of us, the PPSA might not have been in existence when we were in law school! A security interest is defined under section 12 of the PPSA. Which states: A security interest is an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation. The PPSA affects all security interests in personal property. Personal property covers almost all tangible and intangible property, other than real estate. Accordingly, if you are granting a mortgage over your real property, the PPSA will not apply. PPSA security interests can be recorded on the Personal Properties and Securities Register – or the PPSR. Generally, the process of granting and registering a security interest is a little something like this: the grantor, who is usually the borrower, mortgagor, lessee or guarantor, grants a security interest in personal property (like a car, or a bank account or some shares) to a secured party. This party might be a supplier, manufacturer, lessor, lender or some other kind of creditor. The security interest will usually be contained in a document which creates obligations for both parties and secures payment or the performance of some other kind of obligation to the secured party. Then the security interest will ‘attach’, an important concept we’ll discuss later, to the personal property once the grantor is able to grant rights in the secured property to the secured party. That’s usually when the grantor has possession of the secured property. Once attachment has occurred, then the security interest must be ‘perfected’ to gain priority. Usually by registration, but perfection can also be gained by control, for example, if the property is in the possession of the secured party. We’ll talk a bit more about priority rules under the PPSA a bit later. Of course, that definition assumes that the solicitor understands ‘personal property’ as that term is described by the Act, and the term ‘security interest’ as that term is defined by the Act and those two questions puzzle even the most sophisticated PPS lawyers sometimes. So, it’s important to be careful about it. In the most general sense, anybody who deals with goods should be concerned about the Act or at least understand where it does or does not apply and if that’s all that they understand about it’s probably a very good start. |
| DT: | That’s an interesting distinction you made earlier there between personal property and real property. The idea that that term although it encompasses intangibles and accounts and things like that, is used to distinguish personal property from real property, because a lot of lawyers who perhaps haven’t dealt with the PPSR before will first deal with it as a register that they search or perhaps that they make a registration on and in that sense they might think it’s similar to the Torrens Title register, which is the register that we use throughout Australia to record real property interests, but it works in a very different way to the Torrens Title register doesn’t it? |
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11:00 | Yeah that’s right and there’s some difficulty with equating the two concepts. If I’m going to make the parallel between the PPS register, the PPSR, and the Torrens system of registration, I would say that a registration on the Personal Property Securities Register is more akin to a caveat in the real property sense. What is a caveat? Well, to any property lawyer who has a dealing in real property they will know the caveat it is not a registrable interest in and of itself. It’s merely the lodgement or the notification that an interest may exist, then you go into the caveat and it gives you some more particularity about what that interest actually is. But it is not itself a registrable instrument, it’s not itself a mark which creates indefeasibility or anything to do with title which is what the Torrens System centres around. All it is, is it’s notice that an interest may exist, it may be that a charge holder isn’t lodging a charge, but they just wish to flag to everybody who’s going to deal with title that they have some encumbrance over that title, some interest and further enquiries need to be made. But that’s very similar to what the PPSR is designed to do. One does not obtain indefeasibility because they register a financing statement on the PPSR. There’s another important distinction to be made between the two registers and that is under Torrens, one registers the certificate of title and everything that happens on the register concerns that title. Under the PPSR, title is not what we’re speaking about. We’re speaking about the creation of encumbrance. We’re speaking about somebody who has, not necessarily ownership, but first right to the collateral, being the underlying property, if and when certain circumstances arise. But you’re not lodging the title certificate or the charge or the mortgage or whatever it is on the PPSR. In fact, even if you tried to do that you wouldn’t be able to, and that’s because the PPSR has a template form it’s an electronic form called the financing statement. TIP: The financing statement contains the particulars of the transaction, including a description of the parties and the collateral, as well as the kind of security interest. Upon the registration of a financing statement the PPS Registrar, who manages the PPS Register, issues a verification statement to the secured party. The verification statement can then be relied upon by the secured party to prove their registration. The financing statement is what is registered. So, you’ll hear, sometimes fairly sophisticated insolvency and PPS lawyers talk about registering the security interest – the need to register, ‘we need to get it onto the PPSR.’ You hear that phrase being thrown around a lot and it’s technically incorrect and it leads to some confusion sometimes because what you are registering is indeed a separate instrument called the financing statement. And the importance of that is that if you get something wrong in the financing statement, that doesn’t necessarily impact the contract or agreement between the parties. What you’ve got is a security agreement, which is the document between the parties. Sometimes you’ll see that phrased a certain way like a general security agreement or a GSA, or it may just be part of the terms of trade between the parties. That document isn’t lodged on the PPSR. It is not a charge-based system and the old regime that ASIC dealt with in Australia was one would lodge the company charge, and all you would need to do is go on to the ASIC company charge register and you could download the charge. Under the PPSA you’re not able to do that. All you are able to do is get the financing statement. They all look the same, depending on which third party platform you used to search the PPSR, but you get the same particulars for every registration and all that does, is it provides you notice that somebody is purporting to hold a security interest and you can go off and make further enquiries. |
| DT: 12:00 | When I was first learning about this area, the metaphor that I was given the PPSR isn’t a system of title by registration, it’s really a notice board. It’s to give the public notice of what people claim is the case, that it being on there doesn’t make it so. |
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15:00 | That’s right and there was a case that I ran a couple of years ago now, I think it was in 2017, between an occupier of a hotel, a pub owner, and the person who owned the pub. There were poker machines on site and as part of the lease there were some rights that the lessee who had the poker machine entitlements, was obliged to sell to the lessor. The lessor exercised those rights and wished to purchase those poker machine gaming entitlements, and of course the question is what are those gaming entitlements? They’re statutory rights created by a gaming piece of legislation in New South Wales and it’s the right to run a poker machine for profit. Alright, you say okay that sounds like it may be personal property, does this regime apply? The answer is yes. Yes, it does. The PPSA does apply to gaming rights if you seek to create some form of encumbrance over it. The difficulty in that case was that the lessor, the person who owned the pub, said to the lessee who was my client, ‘you’ve got all these registrations made against you which may impact upon the gaming entitlement. We’re not going to buy these entitlements off you subject to any encumbrance we want to buy free from any security interests.’ And of course the fact that the PPSR was riddled with registrations didn’t mean that any of those registrations affected the gaming entitlements. So they didn’t complete, this has real consequences because the lessor did not complete the sale and said that we were in fact repudiatory in our conduct by not removing these registrations and there was a term in the lease which said that on the sale of these gaming entitlements, we would have to pay additional rent because we would not only be renting premises, but would also be renting these entitlements to use them so the rate went up by $1000 day or something like that. So, they sued us. They sued the lessee and said you owe us $1000 a day until this matter is resolved. And we put on a cross summons to say not only is our conduct not repudiatory but yours is by not completing the sale. Thank you very much, this agreement’s now at an end we’ll keep our gaming entitlements because in the background these entitlements are worth a hell of a lot more than we agreed to sell to the lessor. So, we prevailed, and there’s a very useful part of Her Honour, Justice Ward, the chief judge in equity’s judgement TIP: Nicholas is referring here to the case of Auburn Shopping Village Pty Ltd v Nelmeer Hoteliers Pty Ltd [2017] NSWSC 1230 (14 September 2017) (Ward CJ In Eq), a 2017 decision of the NSW Supreme Court. In that case, Justice Ward, Chief Judge in Equity reaffirmed the principle that the PPSR is a noticeboard and that registration on the PPSR is not, in and of itself, a valid security interest. We’ll include a link to this case in the show notes. The matter went on appeal on the question of whether or not there was relief against forfeiture from the lessor’s perspective, so it didn’t have anything to do with the PPSA and I won’t deal with it for that reason. But the Court of Appeal upheld Her Honour’s judgement. |
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16:00 | Yeah well it, as we said before, isn’t a system of title by registration, but on the other hand registration is often, not always, but often critical to preserving the priority of that interest. And there’s really two steps to ensuring that that priority is obtained and that’s attachment and perfection. TIP: Nicholas is about to explain what attachment is, which I mentioned earlier. The concept of ‘attachment’ and ‘perfection’ are unique to the PPSA and its equivalents overseas, so the terminology can be quite foreign if you’re unfamiliar with the area. To put it simply – attachment is a step in the process towards perfecting a security interest and occurs when the grantor is able to grant rights to the secured party in the secured property, usually once the grantor has possession of the secured property. Attachment is covered in section 20 of the PPSA. Perfection which takes place after attachment, is essential because it enables a secured party to achieve priority against any competing security interests registered afterwards. Perfection is usually obtained by registration, but it can also occur if the secured party has possession of the collateral, for example, if you give a cash deposit to a bank. Most of the rules of perfection are covered by section 21 of the PPSA. The combination of the attachment rules under s 20 and the perfection rules under s 21 determine that a security interest is ‘perfected’ when: 1. The security interest ‘attaches’ to the collateral and is enforceable against third parties; AND 2. The secured party has either:
Maybe we’ll start with attachment, for someone who is unfamiliar with that term what is attachment? |
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21:00 | Attachment is a fancy term which can be summarised as, when does the grantor have sufficient rights in the underlying personal property to grant a security interest? If they don’t have the relevant rights then it doesn’t matter what they put in a contract, it will make no difference. So, I’ll give you a simple example. If I purported to borrow $20,000,000 from any financial institution and give them a first ranking encumbrance over the Coca Cola trademark, well that’s utterly fascinating, but I have absolutely no proprietary interest in the Coca Cola trademark. So, they would be able to write down a pretty document and they’d be able to make me sign it, but the prospect of the financier ever having sufficient comfort that the rights would attach is nonsense. Attachment is working out when the grantor has sufficient rights and note how I use the term rights in a broad sense. I’m not talking about ownership. Ownership is certainly rights that are capable of having a security interest attached to. If I own a vehicle because I’ve bought it from a car dealer and I can establish that I’ve paid for part of that vehicle, I’m the registered owner of that vehicle, well my ownership certainly gives me the rights to create a subsequent encumbrance. I can use the equity in that vehicle to go off and borrow further funds if somebody would be silly enough to lend money to me on the back of depreciating assets, well that’s a matter for them. So, attachment is the analysis of working out what property a particular grantor, the person granting the security interest, is able to confer such rights in. The relevant section is section 19 and what you’ll find if you look at section 19 and you read subsections (2) and (5) together, you will see that ownership whilst the quintessential type of proprietary right capable of creating an encumbrance. TIP: Now, our previous tip summarised the attachment rule in sub-section 2. Further, subsection 5 states that: for the purposes of paragraph 2, being the attachment rule that we discussed earlier, 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 (including an agreement to sell subject to retention of title) when the grantor obtains possession of the goods. This subsection effectively means that possessory rights are sufficient to grant a security interest over personal property, which means that a lessee of property can create a security interest in that property in exactly the same way that the owner, the lessor, can encumber it. Again, take it back to the real property mortgage, I buy a house. In order to fund that house, I grant a mortgage to the bank; there’s no issue with me being the owner of the house. The bank is not reporting to own the house, I am the owner and therefore because I have sufficient proprietary rights in the house, I can grant subsequent rights to a financier. So that’s a very common example and that’s an example which has led to quite a bit of strife, not only in Australia where this regime has taken force for the last eight years as you outlined, but also overseas. You’ve got competing interests, or competing secured claims, against the same property. Under the securities legislation, the lease arrangement or bailment arrangement doesn’t even have to be as formal as a lease, it could just be a straight common law bailment without any terms and conditions whatsoever. If that is capable of being characterised as a PPS lease, which is a security interest for the purpose of the securities legislation, then what you find is at the undesirable time down the track two years, three years, five years later when the lessee defaults on its obligations, that a financial institution may swoop in and say we’ve got better claim to the underlying asset than you. And that really, I mean that’s the scare story. That’s what all the PPS lawyers who went out to the market when this Act first started told everyone. And yes, it was intimidating, and it did its job in terms of making sure suppliers of goods and potential lessors cottoned onto this and got ahead of it, but I’m still dealing with cases today where this occurs and we are in 2020 now. It’s interesting, although not surprising, that there are certain lessors who still would never consider that the transaction that they’ve entered would fall within the scope of this regime. |
| DT: | And so, in those situations they’re not registering and that’s why they ended up with a lower priority? |
| NM: | Yeah, they’re not taking appropriate steps and when we say registering of course if you’ve got a lease scenario you can’t perfect by possession or control, the very definition of a lease is to confer possession on someone else, so you’re forced to perfect by registration. |
| DT: 22:00
| Well that’s certainly the case that you would want to be careful about losing priority now more than ever before because I imagine so many distressed companies now have so many more unsecured creditors. Whether, that’s a Commonwealth guaranteed unsecured working capital facility, or unpaid superannuation to employees who are on stand down, or anything like that, that’s actually an employee entitlement so that’s a priority, but certainly the working capital facilities that are available from major banks, there’d be a lot more unsecured debt on company balance sheets. I wanted to ask you about the way the Act or the interpretation of the Act has changed in the past eight years. You mentioned that it’s 2020, 8 years on now since the Act commenced, but there is still quite a lot of misunderstanding about how the Act works, particularly as regards leasing. I imagine when you first wrote the 1st edition of your book and there have been a number of editions of it now, haven’t there? |
| NM: | Yes, I’m actually, it’s funny that you raise that. I think what’s happened is, there has been some thinking or some guesstimates about how the Act would be applied based on foreign experience. |
| DT: 23:00 | Yes, and particularly in Canada and New Zealand is that right? |
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32:00 | Yeah that’s right, and also to a more limited extent some of the United States cases concerning article nine of the regime in the US which is where all of this spawns from in origin, but without trying to be too protective of my first edition of this, Professor Harris and I analysed the cases and gleaned from what had gone on abroad the way that it would be interpreted in Australia. TIP: The Professor Harris Nicholas Mirzai is referring to here is Jason Harris and you can hear from him in another episode of Hearsay. But the Australian provisions are a lot more detailed and there’s a lot more overlap. There are different statutory considerations which may come into play, so it’s not that the initial thinking is necessarily wrong, but it has required, at least in my experience and I suspect my readers will see this when the next edition comes out, there’s a need to be a little bit more precise and refined about certain propositions, and I already mentioned one of them. And one of them is that references to registering a security interest are juxtaposed against the correct analysis which is you register a financing statement, or you lodge a financing statement and the security interest is rooted in some other agreement called a security agreement. If you just get those concepts right or precise in your mind, you can limit the scope of argument. You can say okay we’re not talking about the registration, so we’re not talking about the underlying interest, we’re talking about the registrations and then you focus your mind on the notice-based requirements. And what I find, and it seems to be perhaps obvious, is that there’s so much fluff that you can concern yourself with in a litigation scenario or in a dispute. That part of the job of a good litigator, and part of the job of indeed a good draftsperson when you’re first constructing the deal, is to limit the fluff. To avoid provisions which overlap with each other, to avoid ambiguity, to keep the agreement without sacrificing one’s rights of course, but to be very great clear and precise about those rights. Because if unfortunately, one out of 100 scenarios you’re going to have to sue on these rights, the last thing you want is for reasonable minds to be able to differ at all about certain aspects. And one provision fell into that category and that is section 62 and the concept of purchase money security interest or PMSI priority. And there were the decisions of Samwise. TIP: Now here Nicholas is referring to the 2018 case of Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd.[1] A case heard in the Supreme Court of South Australia concerning the refinancing of credit secured by a PMSI – Nicholas will now explain that case and we’ll include a link to that case in the show notes. In that case there was consideration of a circumstance which was oxymoronic under the PPS. But you have a party who initially wants to lease some goods, call them yellow goods. We are talking about bobcats, sort of high value, low quantity machinery. And I don’t know if that was what the factual circumstance in Samwise was, but just bear with me for the purposes of the example. So, you take a scenario where you have 3 bob-cats, let’s say they’re worth maybe $2m, so the only reason why I’m saying that is because we’re talking about something material here. The lessor and the lessee initially agree on a deal whereby the bob-cats would be leased. It was always envisaged that this would be a three to six months arrangement. Maybe they formalise that in a document, maybe they don’t, they have an undefined period, but in any event, it was always intended to be a very short-term arrangement. Ok? That arrangement commences. The bob-cats flow from lessor to lessee. The goods are paid for. Month one passes, month two passes no difficulties. At month 3 the lessee realises this is actually quite a profitable enterprise whatever it is that they’re up to. And they say look we actually want to buy the bob-cats, why don’t we renegotiate our lease and instead of having a lease, we’ll have a hire-purchase arrangement and we’ll pay you a higher instalment, but effectively over the course of three years we’ll pay these things off and they’ll be ours. Well in theory there’s nothing wrong with that; you are substituting one contract for another. To any contract lawyer you say well the parties are going to agree on whatever they like, it doesn’t make any difference. But the difficulty is this: the initial arrangement that I’ve just described would not be caught by the PPS at all. It’s a short-term lease arrangement, it’s a straight up hire arrangement, there’s no securing payment or performance of an obligation, the lessee is simply paying for possession of the goods. If they don’t pay for the goods, the goods get retrieved by the lessor. This subsequent arrangement, the hire purchase arrangement, is a vendor finance arrangement. Why do I say that? Well instead of the lessee saying, ‘can we adjust this contract then I’ll pay it off overtime’ and having the vendor say, ‘yeah sure that’s fine here are the new payment arrangements.’ In theory that lessee could have gone off to a financial institution and said I want $2,000,000 to buy these machines, payout the vendor, get rid of the vendor and then continue to owe these obligations to the financier. When we don’t think of things that way, when we think of retention of title suppliers or suppliers, we don’t think of them as financiers, but in fact that is strictly what they are. People think that people who provide credit need to wear fancy suits and have fancy documents, that’s not the case. We are looking at the substance of the dealing and the vendor is effectively providing finance, which is why when you think of things that way, and characterise them properly, you can see why this Act applies. Because you’re taking a security interest over personal properties, they don’t pay, you want to go and collect your bob-cats back. Well under that arrangement, normally what you’ll find is that where a vendor supplies the capital or supplies the goods themselves, they take what’s called the purchase money security interest. What does that mean? Well one would look at section 14 of the PPSA and find that if you provide the goods themselves to the grantor, you should in theory, have first ranking rights to those goods. TIP: Section 14 of the PPSA defines the purchase money security interest, or the PMSI. Now PMSIs are a special type of security interest under the PPSA. They’re special because they’re afforded a kind of ‘super priority’, they actually take priority over prior registered security interests in most circumstances and must be registered within 15 days of possession passing to the grantor, that is when attachment takes place. As their name suggests, PMSIs have to secure the payment of purchase money to obtain their super priority. PMSIs are the modern version of an older concept that some of our older listeners might have heard of, which is retention of title property. An arrangement where suppliers would withhold the transfer of title to goods until payment had been made in full. In practice PMSIs give the same kind of protection to suppliers. You have a purchase money security interest because you are providing whether in cash or by providing credit, the underlying purchase monies, but for you giving the grantor the purchase monies, they would not be able to acquire the rights in the underlying goods. That’s why it’s called a PMSI, a purchase money security interest. You say okay what’s the difficulty with that? It’s not enough to just hold a PMSI and then once you’ve got a PMSI you have first rank against everyone else. Nothing in section 14 about how a purchase money security interest is defined says anything about priority. It doesn’t say anything at all. In fact, the priority provisions are contained far later in the Act and you have to look at the interaction between sections 55, which is the default priority rule which generally says the first to register or the first to perfect prevails. You compare that provision with section 62 which says if section 62 is complied with, well the PMSI takes priority over the registered security interests. Just as a general rule that’s how it works. TIP: Section 55 of the PPSA deals with the default priority rules for competing security interests. Perfection is crucial here because a security interest must be perfected to enjoy the priority described in section 55. Section 55 states that perfected security interests take priority over unperfected ones and earlier registered security interests take precedence over later registered security interests. Section 62 comes into play when we’re dealing with the PMSI’s super priority. The important point to make in that respect is that it’s the compliance with section 62 which grants the first ranking priority, not necessarily the fact that the underlying instrument is a PMSI. Section 62 compliance which gives rise to first ranking entitlement, but it doesn’t sound as sexy to say, ‘Oh well it’s a section 62 priority,’ it sounds a lot better to say PMSI priority. |
| DT: | It’s a super priority! |
| NM:
33:00 | A super priority, right. Notwithstanding the fact that all PMSIs are subject to interest perfected by control and a myriad of other rules which would require far longer and be far more boring talk to work through methodically, but the point there is, one of the requirements under section 62 is that the secured party, the PMSI holder, perfect their interest within 15 business days of the grantor obtaining possession of the underlying collateral. And you say well what’s wrong with that? Well in this scenario that I’ve just posited, notwithstanding that the owner of the goods is just trying to do everything right, they are taking the appropriate advice, they are doing everything they can do to try and properly perfect their interest. It is impossible for them three months after the grantor has taken possession, to comply with section 62. It’s actually impossible. |
| DT: | Yeah because they’ve already obtained those rights three months earlier under the short-term lease. |
| NM: | That’s right and the Act’s express language is the grantor takes possession. I mean those terms really don’t invite a huge amount of ambiguity. See but that seems to be counterintuitive; a literal reading doesn’t seem to be consistent with the purpose of what that section is designed to achieve. |
| DT: | Yeah. |
| NM:
34:00
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| How do you then deal with that? So, Justice Blue at first instance in South Australia said right, well, the process of statutory construction, relying on cases such as Project Blue Sky,[2] a famous High Court authority about how to construe a statute, says that the starting and end point of any proper statutory analysis is with the terms of the statute itself. You can’t invent terms, you can’t read in terms. If the terms are clear, then there is no scope for any jurists to come in purport to exercise some different definition. So here the question was, just to complete the picture, subsequently another financier had come along and taken an interest in these assets and there was a fight, a priority dispute between the initial owner and this subsequent financier, this is how it came before the court in the first place. So, the financier said ‘well the section reads as it says. We don’t care how prudent the lessor was, they haven’t complied with the statute. Their priority is subsequent to ours because they registered late and they don’t get the benefit of section 62 that’s the end of it. The lessor said, ‘but this is ridiculous. I have done everything in my power to properly perfect what I should have perfected and I’m being punished because of a quirk in the legislation.’ And His Honour at first instance, Justice Blue, said ‘well one needs to look very carefully at what the terms when the grantor takes possession actually means. Does it mean taking position in the actual literal sense? The first moment in time when they take possession, or does it mean taking possession in their capacity as a grantor for the purposes of the Act?’ And the purist legal practitioners, like myself, would say, well that second limb is acute, I mean the literal interpretation appears to be fairly plain, there’s no distinction in the statute for possession in any other capacity or possession in capacity as a grantor as being a distinct type of possession. And one would look at section 24 perfecting by possession to see how the Act treats possession generally. But His Honour was minded to prefer the purposive construction to say, well it cannot be the case that a commercial statue is designed to punish a prudent party from taking every step they could possibly take. So, the lessor prevailed, and if you think about it in terms of what the outcome should be, that is the ‘should be’ outcome. It shouldn’t be the case that a party that’s taken every step is suddenly punished because of that quirk in the legislation. And it’s important to have a grasp I find, or at least it’s assisted me, and it hasn’t done me and clients too much of a disservice in cases that I have seen to trial, to have a really solid understanding about what these principles are. Because if you understand what the Act is designed to address and how to give effect to that, 9 times out of 10 that’s how the provisions will be interpreted. You’ll have to find a fairly creative jurist to go outside the scope of what the regime is designed to do and in my experience in both the Federal and Supreme Courts where a lot of this litigation takes place, and this is across Australia. you’ve got very good jurists who will not invent things if they don’t have to and they’ll do the bare minimum based on the facts before them like any good judge to resolve the controversy. |
| DT: 37:00
| Yeah. Well let’s talk about suppliers for the time being. We mentioned PMSIs before and I think this is how most small businesses or most suppliers of small businesses will engage with the PPSA and the PPSR through what would once have been called retention of title arrangements within the inventory. And there can be some tricky issues around attachment with inventory as I understand it. Tell me a bit about those. |
| NM: | Well some of the tricks come from the supplier themselves. It’s the creation of their own incident. And it really goes back to the pre-existing law and this idea that having to register was a bad thing. Back in the day, lawyers would do fabulous theatrics to try and avoid creating a charge or any encumbrance. They’d have these ROTs, retention of title arrangements, hire purchase arrangements, convoluted arrangements and agreements put in place… |
| DT: | Which prevented the title from passing so that you wouldn’t have to… |
| NM: 38:00
39:00
40:00
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43:00
| Correct. And the principle in that was that they leaned quite heavily on was nemo dat quod non habet, ‘one cannot give what one does not have.’ In a system of priority by title, as the Torrens regime is and what personal property was prior to the PPSA, well title is king. If I reserve title until I’m paid in full, then I create quasi security. But this is exactly what the Act’s designed to have a look at, I mean, it’s nonsense to think about retention of title under the PPS, you simply have a security interest, or you don’t. And yet every contract that I read, bar some notable exceptions which I could probably count on both my hands after eight years in practise, and it sounds quite scary to put it that way actually I still consider myself quite a young face at the bar. But after seven or eight years, I still see ROT terms. And I still see parties seeking to rely on… there’s no mentions of the PPS at all, there’s no mention of whether or not the enforcement rights apply, whether or not there are provisions which protect against prohibitions on registrations for example, which sometimes creep into documents. So, the first point of call for suppliers and the reason why attachment and problems about how security interest arise, exists in the first place, is because there will be multiple documents from which the security interests might arise. But some credit application which probably predates the PPS, it doesn’t have any other terms of the PPS because the PPS didn’t exist. It’s a document from 2005, or from some other point in time. Then you’ve got entities changing names, and transfers going on, and you decide it’s a good idea to put all your terms and conditions on the back of your invoices, and then something goes into liquidation. And you haven’t had to think about any of these issues for years. This is the quintessential PPS problem. So, you have these wonderful cases like Central Cleaning,[3] and Gelpack,[4] and Trenfield where the source of the underlying security interest,[5] which seems like such a fundamental question and the contract, what is the contract, it has a fat question mark over it. TIP: Let’s talk a little bit about some of these cases Nicholas is talking about, starting with Central Cleaning and Gelpack. Both of these cases consider the PPSA and its interaction with retention of title, or ROT clauses. Central Cleaning supplied cleaning equipment on retention of title terms to Swan Services. Central Cleaning and Swan Services had entered into an agreement in the form of a credit application before the PPSA had actually commenced. Goods were supplied after the commencement of the PPSA under separate purchase orders, and when they were delivered, they were accompanied by invoices containing the retention of title terms, which was all pretty common. Central Cleaning had never registered on the PPSA and therefore had to rely on the transitional provisions of the PPSA. Thereafter, Swan Services went into liquidation. The Court of Appeal held that although there had been no PPSA registration, Central Cleaning would still be able to enforce its ROT terms as a security interest as they established the existence of a ‘transitional security interest’. In the case of Gelpack a company called Primaplas supplied resin to Gelpack for the production of plastic products. This was supplied on ROT terms. When Gelpack went into liquidation, Primaplas, relying on a PMSI security interest that it had registered on the PPSR, sought an accounting of all of its stock on hand, held by Gelpack from the liquidators and also sought the proceeds of sale of its resin and its products. Back in 2007 Gelpack’s finance manager had submitted a credit application to Primaplas stating that all future supplies would be subject to the general terms and conditions of trade and that Primaplas could change terms at any time, but that they would undertake reasonable efforts to notify the customer of the change. In 2012, Primaplas sent a generic letter to their customers, including the Company, attaching their new T&Cs which included a ROT clause and the grant of security interest under the PPSA. The Court held that:
The parties will spend, you know, they’ll gear up and have to run a case which would become more expensive because you have to posit multiple permutations of what the contract could be. If it’s not this, well then this analysis applies. But if it’s this, then this analysis applies. And a lawyer will have a cascading set of declarations further in the alternative, further in the alternative and on it goes. And it just could be avoided. And suppliers often learn this lesson the hard way. They will have a disaster scenario where this occurs where they’ll discover a problem either in the way that they are constructing their agreements, or a problem in the way which they are seeking to perfect those rights on the PPSR. And it’s only when the catastrophe hits and they get a letter from a liquidator saying ‘thanks very much that’s now our asset,’ that they turn around and get legal advice from someone like yourself or someone like myself or both, and we look at it and go we think you’ve got some real problems here I mean we’re going to do the best that we can to try and get you out of this, but you need have a look at this going forward. And that’s an awful scenario to be in because if you’ve messed something up and this has developed a systemic practise within your organisation, it’s going to cost infinitely more to fix up those issues after the event than it would have been to put in the right protocols in the first place. |
| DT: 44:00 | Absolutely. And, but you can also have problems can’t you where you’re supplying inventory under perfectly modern terms and conditions that adopt the language of the PPSA, but it’s not clear that the inventory that you’ve actually supplied, is inventory to which the security interests attach. For example, you might have your security interest granted under a credit application that makes reference to the PPSA, but there’s no way to determine that the inventory in the hands of the company that’s now in voluntary administration, or that’s now in liquidation, is inventory that’s actually been supplied under that security arrangement. |
| NM:
45:00 | Yes and this is a similar problem to that which I mentioned earlier about the sublease scenario and it’s the information asymmetry between the transparency of what the supplier seeks to obtain from the purchaser, and what the purchaser actually provides. And the way that they try and deal with that is to under the old regime where retention of title became quite popular, they’d seek to impose fiduciary obligations and say, ‘you hold all the proceeds on trust for me, blah blah blah,’ but how many of those suppliers actually went in to their purchaser’s bank accounts and made sure that there was a separate account collecting proceeds? Any business that tried to do things that way, it’d just go broke. |
| DT: | No. It’s not realistic. |
| NM:
| The method of commerce in Australia is to be very debt leveraged. Now leaving aside the pandemic and everything that’s going to result as a consequence of that, it’s not profitable for a business to use its own money to advance. It has to use borrowed money because there are tax incentives. Everything is geared towards leverage, right? This is what the difficulty with the insolvency scenario is. It’s not so much that the rights are not capable of being preserved, it’s that they’re worthless. The company isn’t worth anything by the time we try and enforce. |
| DT: | Even if you see the writing on the wall and seek to register shortly before an insolvency scenario of course the greening provisions mean that you can lose that security interest shortly before the company goes into an insolvency process. |
| NM: 46:00
47:00 | That’s right. I mean my advice to people who are at an undesirable point and are starting to see that this is a real problem, we’ve tried to negotiate trade terms for these people and it’s starting to fall apart. Either you’ve got some payment arrangement and it’s falling over, or you aren’t able to do that and it’s a problem, you go to see a lawyer. At that point in time it’s important to at least put something on the register, but if something’s there prior to an insolvency event, I could try and machine something to deal with it. People always think about, ‘Oh we’ve supplied all of these assets and we haven’t been paid and we need to get our stuff back.’ That’s surely concerning and you’re right to be concerned about that, but what about if your security interest is ineffective insofar as it is either unperfected, or it’s made up by a scramble of documents which don’t make sense and they fail. Well the preference provisions under the Corporations Act would allow a liquidator to go in and claim back the last six months’ worth of payments. Especially if you had these payment arrangements and especially if you knew what was going on, or you suspected it. So, it’s not just, ‘were not getting paid for the stuff that we’ve supplied’, it’s potentially that we’re going to have to pay back a bunch of money.’ |
| DT: | Yeah, well I suppose you do end up in that situation where you are an unsecured creditor for the purposes of the unfair preference regime and as you say you’ll have that paper trail to show that you can’t rely on the good faith defence that you very much had every reason to suspect that the company was unable to pay its debts. |
| NM:
| That’s right and if you really get into this, and a liquidator wants to be quite strong about this, it forces the parties to think very carefully about their interests. And they often get very concerned about it because they’re in a capacity where it’s not even up to them anymore, they throw good money after bad, they have to defend this. They have to put up the shields and pay lawyers to deal with this. |
| DT:
48:00 | Well no one really wants to deal with their litigator if they can avoid it. We’ve talked for a fair bit now about the fraught position that suppliers are in trying to ensure that their processes meet the requirements of the PPSA. I’m sure there are a thousand things that suppliers need to look out for and of course the best advice to any of them is to seek legal advice from an appropriately qualified professional. But if there were one thing that a supplier seeking to ensure that they had a valid PMSI security interest in the inventory they supply were to do, or if there was one thing that their lawyer could advise them to do to ensure that their PMSI security interests were valid, what would that one thing be? |
| NM:
49:00
50:00
| Register quickly, register early, if you mess it up register again, really scrutinise the register. So, what I’ve advised institutions or if they used lawyers all the better to do is to have a two-stage process. And it’s not an expensive process, it’ll take slightly longer but it’ll mean that there will be far less mistakes. The first point is to be very clear about the fact that it’s very easy to mess up the register. It’s incredibly easy to get a number wrong. And there’s not a lot of self-help in the register to alert you to this. So, what I would like to say is get a graduate or a paralegal to enter the registration and become very good at that cause it’s quite a data entry heavy process, it’s not incredibly sophisticated and indeed they’ll probably be younger and better with the technology anyway. So, get them to have a look at that part of the job and then have an associate or a senior associate review the register. Do a search, see if you can find it, see what the holes are, maybe get some advice for somebody even more qualified for one example and then once you’ve got that one example, provided that all of the rest of your arrangements fall within that same type of interest, well then you’ve got the code to do it correctly and yeah, there may be some exposure, but it’s going to be a huge amount less than being ignorant toward these things. There’s no point in taking good security if you can’t perfect your interests. It really defeats the purpose. But the second point would be to look at the terms of trade and just to make sure that the systems that have been put in place now, are reflective of the rubric now and not what the ROT system used to be 20 years ago. And it doesn’t require a revolution, we are not trying to reinvent the wheel, we’re just trying to make sure the wheel is still a wheel and there isn’t a flat tyre on it, to fit the analogy. A lot of the time I don’t know what solicitors prior to, I’m going to exclude myself as a young face from this category, but I think solicitors have been taking the mickey because people are just so scared to have a lawyer look at anything until it’s all too late. And it’s unfortunate because, you know, advice is infinitely cheaper and quicker and better when you are looking at something prospectively than it is to try and fix up the mess after the event. |
| DT: | Absolutely. Nicholas Mirzai, thanks so much for joining us on Hearsay. |
Part 2: Jason Porter
| DT: | Joining me to talk about some of the practical issues that the Personal Property Security Act can raise in insolvent appointments is Jason Porter from SV Partners. Jason, thanks so much for joining us again on Hearsay. |
| Jason Porter: | Thanks for having me David. |
| DT: 51:00 | Now Jason, you deal with both corporate and individual insolvency appointments. When you’re appointed perhaps to a company, day one of your appointment, you obtain a PPS search for that company to identify secured creditors. What are you looking for in that PPS search? |
| JP:
52:00 | In the search, it’s important to look on the three different identifiers, so, looking at the ACN, you’re looking at the ABN, and you’re looking at the company name, and quite often if you’ve got inexperienced staff, they might only look at one particular identifier so it doesn’t always pick all the registrations up that may be there. They might be sitting in a company name without having the ACN attached to it or something like that. So, it’s important that you go through and make sure that you get the proper search done to begin with, then probably one of the most important things you’re looking at then is when was it registered? If it was registered within the six months before an appointment, is it VA or a liquidator, is that security affectual or not, looking at the description of the goods, looking at whether it’s a PMSI or not, is the security properly perfected? They’re all the kinds of things you’re trying to pull out of that search. Serial numbers are a really good one that bring people undone quite frequently, where they’ve put one number out on lodging the serial number and throw it all out the window. Lucky liquidator then gets to keep the asset without having to account back to the security holder sometimes. TIP: Now, if this is sounding a bit overwhelming… have no fear. We have put together a really useful video for you, where I run you through an actual PPSR search, de-identified of course, and point out some of the key things Jason has mentioned. You can find this on our website, and a link to this will be in the show notes. |
| DT:
53:00 | Do you sometimes find that by searching the PPS and finding registrations in relation to specific assets that you’re actually identifying assets that you didn’t know you had before? I can think of an example in relation to a company in receivership where we identified that there was a motor vehicle that the company owned that we weren’t aware it owned because the registration was made against the company. |
| JP:
54:00 | That happens quite frequently. I was looking at a tax office winding up earlier this year. It was a company out at Broken Hill, so miles away, we’re not anywhere near it. It had a lot of industrial equipment, big cranes, and all sorts of things there. The director had given us a list of assets that didn’t match the PPSR search. So we knew there was a very big crane that he sold prior to our appointment, and hadn’t been accounted back to the secured creditor. All of a sudden because we’ve come across it on the search that we’ve sent our standard letters out on day one, suddenly we’re getting calls from this secured creditor; “Well, we’ve got security, where’s our asset?”. So, then we’ve got our valuers out there and they’ve gone to look for it and it’s not to be seen, but we know from early evaluations what the director had done because we finally got the books and records. And yes, there it was. It’s taken a bit of investigation and getting information from the director, ‘What did you actually do with it?’ and he had actually sold it overseas to the Middle East somewhere, from Broken Hill of all places. |
| DT: | That’s a long distance for a crane to travel. |
| JP:
55:00
56:00 | It is, and it was a big asset, it was worth a lot of money. And a very unhappy secured creditor who didn’t consent to that and didn’t know about it. So, the searches bring up those things. If we hadn’t of had the search, we wouldn’t have contacted that secured creditor and wouldn’t have known any better. So, it’s really important. PPSR is very, very important, and still a lot of people don’t understand it, they don’t know it very well, a lot of creditors don’t use it. I had a matter last year where it was an IT company and there was a whole lot of laptops which had been funded by one of the big banks. They didn’t take any security. No registration on the PPSR and the directors had provided personal guarantees for the debt. Of course, we got appointed, did all our searches, went and got the assets, no PPSR registration. Ineffectual security even though the bank had written to us, ‘Hey, we’ve provided this security, here’s all the documents and everything else.’ They hadn’t registered it, and they didn’t have valid security over these assets, so then they were for us to sell. And we reported all this to creditors, and we sold it and applied the money in the liquidation. Then three or four weeks ago, an email from the director, ‘oh, the banks are calling on my guarantee’. Because the bank didn’t get any money from the sale of the property because the security wasn’t there. So, it’s not just affected the bank, it’s also affected the director and his guarantee because it’s now being called upon. He didn’t know that. He knew nothing about it except that he’d signed a guarantee and thought it had all been secured and couldn’t understand, didn’t understand the PPSR and why he’s suddenly now being called upon for his guarantee. So, it’s really, really important. |
| DT:
57:00 | You could imagine how, what seems to be a small error there, could really have echoing repercussions because in another kind of appointment, if that’s a voluntary administration, for example, that secured creditor becoming an unsecured creditor and that director becoming personally liable for a debt that he thought was pretty well secured by security property might really affect the capacity of that director to put up a DOCA, for example, so that can have a real effect. You’re also using the search not just to identify property that the company might hold, or the creditors the company might have, but also whether those secured creditors are actually secured creditors at all. You mentioned earlier one possible situation where a creditor might lose their security, we’re talking about the ‘greening’ provisions there where a registration is made within six months of the date of appointment. TIP: Under s 588FL of the Corporations Act, a security interest (which is perfected only by registration), so not by control or any other means must be registered on the PPSR either within 20 business days after the security agreement giving rise to the security interest comes into force, or otherwise earlier than 6 months of the grantor entering liquidation or administration. Otherwise, the security interest is ‘green’ and the creditor loses their secured position when the company goes into administration or liquidation. What are some of the other situations in which someone who has a PPS registration might actually lose priority, or even their security altogether? |
| JP: 58:00 | Well often people might think they’ve got a perfected security, or a PMSI, it might not be. You need to identify it from the search, then you need to get all the information from those creditors to tick the boxes that they’ve got everything that they say they’ve got. Often you might find that what they say is the asset that’s secured is not the asset that’s secured. I’ve seen cases of cafes and things where people have supplied chip fryers and all that sort of thing and the search says, “chip fryer at this address”, and you go there and it’s not there. It’s been moved by the director somewhere else, into another business. And so, things can disappear that way. |
| DT: | Because then, of course, the goods aren’t being described in an accurate way. |
| JP: | Yeah, that’s right. And sometimes, as I said before, the serial number being wrong, or the description is not right, or motor vehicle VIN numbers, all sorts of things. |
| DT: | Or particularly with serial numbers, using the right one is a big issue. I mean, you’re talking about VIN numbers, but sometimes registrations can be made with the wrong number, with a chassis number for example. |
| JP: 59:00 | Simple mistakes to make and often it’s because people outsource the lodging of the documentation with the PPSR. So, it might be their accountant, or you know, hopefully the big banks have their internal teams and it’s pretty easy. But something else that probably comes up a lot in PPSR searches still is related parties lodging security, the old ‘fixed and floating’ as they used to be. Trying to secure everything and claim some sort of security. So, you really need to look behind that registration and the documentation with it. |
| DT:
| It’s definitely not uncommon to see the most recent registration being an all present and after acquired property registration by the director or a related company just a week before the appointment or something like that. |
| JP: | Oh, that happens often. |
| DT:
1:00:00
1:01:00 | TIP: Now, earlier in the episode, you’ll have heard Nicholas Mirzai describing what a PMSI is, but let’s just recap quickly. Section 14 of the PPSA defines what the purchase money security interest, or PMSI is. PMSIs are a special type of security interest under the PPSA because they’re afforded a kind of ‘super priority’, where they actually take priority over other prior registered security interests in most circumstances, provided that they’re registered within 15 days of possession passing to the grantor: that is when attachment takes place, a concept you’ll have also heard Nicholas Mirzai talk about earlier. As their name suggests, PMSIs have to secure the payment of purchase money to obtain their super priority. PMSIs are the modern version of the much older concept that some of our listeners might be familiar with, which is retention of title. That was an arrangement where suppliers would withhold the transfer of title to goods until payment had been made in full. That prevention of transfer of title afforded its own kind of ‘super priority’, by preventing the goods becoming part of the property of the grantor until they had paid. In practice PMSIs give the same kind of protection to suppliers. You mentioned PMSIs before. Now of course the dilemma with a PMSI is that if you claim it and it’s not one, then your registration is ineffective, you might lose your security. If it is one, and you don’t claim that it is one, then your registration is effective, but its subject to the ordinary priorities of being first in time, and that’s why many securities lawyers and insolvency lawyers recommend two registrations; one that claims a PMSI and one that doesn’t. But as an appointee, tell me about some of the practical issues that PMSIs raise for you. I guess, talking about a trade-on context, what do you have to be alive to when you see a PMSI on that registration in terms of continuing to trade a business? |
| JP:
1:02:00
| Continuing to trade, there’s always the old retention of title claims that you’re trying to trade on in the ordinary course, and people wanting to collect their goods and identify them, and not having proper security. And you want to go off and use those goods in the ordinary course and people wanting to take them and pull them out from under you and that makes it very difficult to trade on sometimes from that point of view. |
| DT: | Sometimes you can reach an arrangement where you’ll sell that inventory but quarantine the… |
| JP: | Quarantine the funds and then account back to them at the end of it. That’s the most commercial, sensible way to do it. Most of the big suppliers and things are very sensible in that regard. |
| DT: | Is it sometimes possible to achieve a margin on the sale of that inventory for the benefit of the other creditors, or are you usually selling that at a retail price that’s really just for the benefit of that secured creditor? |
| JP:
1:03:00 | No, you’ve got to look after all the creditors you know if you can. If it’s an ordinary trade on, you would think the margins are already built into it and you’re still operating the business as normal, then you certainly want to quarantine funds for that secured creditor. But your obligations are to all the creditors not just to one. You’re not appointed by them. |
| DT: | There’s definitely some trade on situations where there might be pretty heavy discounting of inventory, particularly if part of the problem with the company was its inability to sell its inventory in the first place. But of course, you have to be very careful doing that with inventory that’s subject to a PMSI, don’t you? |
| JP: | Yes. It’s always good to be on the front foot with those suppliers and talk to them. If you can get their consent to do it, it makes it an awful lot easier. Not always possible. |
| DT:
| Yeah absolutely. I suppose you can lead a horse to water, but you can’t make it drink. Sometimes you can’t force a security holder to engage with you. Being at the front lines of these sorts of issues you’ve probably seen a lot of mistakes in this area. If there was one thing for our listeners to look out for when registering security or reading a PPS search, what do you think that would be? |
| JP: 1:04:00
| Triple check it. Look very closely at the numbers, look closely at the registration, look at the timing. Has a liquidator been appointed? You want to see the paperwork behind it, make sure it all stacks up to what the registration actually is as well. Do they really have that security? For a lawyer acting for a supplier, for example, if you’re the one up-front lodging the registration for your client, make sure you’ve got everything right. Tick the boxes. If you’re coming in later once the liquidation has started, making sure that, if you’re the supplier’s lawyer, making sure you’re engaging with the liquidator. They’ve got all the facts, getting it right, they’re not giving up their security when they’re lodging proofs of debt, all sorts of things. It’s the fine detail. |
| DT:
1:05:00 | And you raise such a good point there about making sure that security interest actually exists, because of course, the PPSR isn’t a system of title by registration, it’s only a notice board, it shows what people claim, but it definitely does not disclose the full truth. |
| JP: | Absolutely. |
| DT: | Jason, thanks so much for joining us to talk about the PPSR. |
| JP: | Thanks, David. |
| DT:
1:06:00 | You’ve been listening to Hearsay The Legal Podcast. I’d like to thank our guests, Nicholas Mirzai from Level 22 Chambers and Jason Porter from SV Partners for coming on the show. Now if you liked this show about the Personal Property Securities Act, try our episode about solvent winding ups and court-appointed receiverships, where Jason also makes an appearance. Or for something different, try my interview with Justice Lucy McCallum to hear some advocacy tips from the bench. If you’re an Australian legal practitioner, you can claim one continuing professional development point for listening to this episode. Now whether an activity entitles you to claim a CPD unit is self-assessed, but we suggest that this episode constitutes an activity in the substantive law field. If you’ve claimed 5 CPD points for audio content already this CPD year, you might need to access our multimedia content to claim further points from listening to Hearsay. Visit htlp.com.au for more information on claiming and tracking your points on our platform. Also, if you’d like some more PPSR-related content in your life, you can watch a video on our website that explains how to interpret the main features of a PPSR search. The Hearsay team is Tim Edmeades, our sound engineer, Kirti Kumar, our researcher, Araceli Robledo, our business development advisor, and me, David Turner. Nicola Cosgrove is our executive producer and director and brings all of it together. Hearsay The Legal Podcast is proudly supported by Assured Legal Solutions – making complex simple. You can find all of our episode summaries, transcripts, quizzes and more at htlp.com.au. That’s HTLP for Hearsay The Legal Podcast.com.au. Thanks for listening. |
[1] Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd [2017] SASC 163.
[2] Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 355.
[3] Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92.
[4] In the matter of Gelpack Enterprises Pty Ltd (in liquidation) [2015] NSWSC 1558.
[5] Trenfield v HAG Import Corporation (Australia) Pty Ltd [2018] QDC 107.
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