Personal Property Securities cases update

The latest cases involving the Personal Property Securities Act are commercial insolvency cases which involve a dispute as to:

  • whether a commercial creditor has a security interest which is required to be registered,
  • when there are 2 or more registered security interests, which one has priority,
  • when there is a registered security whether that interest has been extinguished by sales by the grantor in the ordinary course of business,and
  • whether money paid into a joint bank account as a condition of a court order was subject to the PPSA.

Whether a commercial creditor has a security interest which is required to be registered?
In Carrafa, Gountzos & Lofthouse (as liquidators of Relux Commercial Pty Ltd (in liq)) & Anor v Doka Formwork Pty Ltd [2014] VSC 570 Relux was able to retain possession of certain formwork it leased from Doka as Doka had not registered all its security interests.

When there are 2 or more registered security interests, which one has priority?
In Citadel Financial Corporation Pty Limited v Elite Highrise Services Pty Limited (No 3) [2014] NSWSC 1926 there was a contest between three parties over scaffolding equipment in the possession of Elite: suppliers Citadel, Skyline Apartments Pty Limited and Pacific Hoardings Pty Limited and a secured creditor, CML Payroll Pty Limited. CML appointed receivers and managers over Elite and wanted to sell the equipment. Citadel and Skyline and Pacific wanted an injunction to restrain the sale.

All three had registered security interests on the Personal Property Securities Register.

Judge Brereton did not accept that Citadel could prove there was a security agreement in writing which had been adopted or accepted by Elite as required by section 20(2) of the PPSA.

Accordingly he did not accept that Citadel has a security interest entitled to priority over that of CML.

However Judge Brereton accepted that it was very seriously arguable that Skyline and Pacific had a security interest enforceable against third parties effected by registration and entitled to priority over CML’s security interest.

He then had to consider whether to grant an injunction preventing a sale by CML. In agreeing to the injunction he said:

24.That then requires consideration of the balance of convenience. If an injunction is wrongly declined, Skyline and Pacific’s security interest in the scaffolding will be effectively destroyed. While they will retain a right against the proceeds of sale, there is evidence to support the view that the sale may not be at the value such scaffolding would ordinarily demand in the market, but at a lower value. Accordingly, wrongly refusing an injunction would risk significant financial harm to the interests of Skyline and Pacific.

25.Against that, the receivers would lose the sale they have negotiated. But given the apparent demand for scaffolding and interest in acquiring it that emerges from the evidence, it seems unlikely that it would not be possible to find another purchaser. So far as the risk that the receivers might be exposed to personal liability for damages for breach of contract with the purchaser, that is a risk that receivers assume by entering into a sale at a time when higher security interests were notified on the PPSR and, indeed, at a time when the receivers had apparently given Citadel an assurance that they would not sell the property before 4 December. It is true that holding costs will be incurred, but that will be covered by the plaintiff’s undertaking as to damages.

26.Accordingly, it seems to me that on the balance of convenience there is less risk of prejudice in wrongly granting an injunction than in wrongly refusing one. Accordingly, I propose to restrain the sale or completion of the sale by the receivers or Elite of the 900 tonnes of scaffolding sold by Skyline and/or Pacific to Elite. That means that the receivers will be at liberty to deal with scaffolding other than that received from Pacific and/or Skyline. The evidence suggests that the scaffolding supplied by Pacific and Skyline is identifiable by its colour and the marks it bears of its manufacturer, Turbo. The receivers will assume significant risk if they deal with scaffolding which is capable of identification as the scaffolding supplied by Pacific and/or Skyline.

When there is a registered security is that interest extinguished by sales by the grantor in the ordinary course of business?
In Warehouse Sales Pty Ltd (in liq) & Lewis and Templeton v LG Electronics Australia Pty Ltd & Ors [2014] VSC 644 the critical issue was whether various suppliers (LG and others) retained a security interest in goods sold, subject to the usual retention of title clauses, to Warehouse Sales Pty Ltd (“WHS”), now in liquidation, in circumstances where some of the goods were on-sold or transferred to a subsidiary of WHS, WHS2 Pty Ltd (“WHS2”), also in liquidation. WHS2 has sold some of the goods to its retail
customers and the unsold goods and goods sold on lay-by remained in its possession. WHS also remained in possession of some of the goods.

The liquidators sought advice from the court as to whether the supplier had a security interest in any of the goods under the Personal Property Securities Act 2009 (Cth) (the PPSA).

The court determined that in those cases where the retention of title did not apply to goods sold in the ordinary course of business the goods sold to consumers who paid cash (whether they took delivery or not) and sold to the related retailer were free of the security interest. But where the goods were purchased on layby (and therefore either partly paid for or not paid for at all) the position is different. Under the Goods Act there is no sale because property in the Goods is not transferred until payment is made in full.

When money is paid into a joint bank account as a condition of a court order is it subject to the PPSA?
In Dura (Australia) Constructions Pty Ltd (In Liquidation) (Receivers and Managers Appointed) v Hue Boutique Living Pty Ltd & Ors [2014] VSCA 326 the Victorian Court of Appeal dealt with a dispute over $1,000,000 paid by a judgment debtor into an interest bearing account in the joint names of its solicitors and those of the judgment creditor in order to secure a stay on the execution of a judgment debt pending the hearing and determination of its appeal.

When the judgment debtor went into liquidation the liquidators argued that the creditor had lost its rights in the account as it had not registered its security interest in the money.

The Court of Appeal decided that upon the payment of the moneys into the joint account, the judgment creditor acquired a charge over them. Critically because the interest of the creditor in the moneys paid into Court did not arise out of a consensual transaction between it and the debtor, its interest in the funds was not a ‘security interest’ within section 12 of the PPSA. The liquidator did not succeed.

Background: Watch our video on the Personal Property Securities Act for Lenders

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