How much is your security worth?

There has been much talk regarding the opportunities presented by a PPSR registration to mount a defence against a preference claim from a liquidator.

While I’ve already written on this here, something that I had not previously considered a contentious issue seems to have become one.

First a quick recap…

A trade credit supplier, with a PPSR registration perfecting a retention of title over unpaid-for goods, will be deemed to be a secured creditor to the value of those unpaid-for goods that remain in the possession of the buyer. 

Thus, if I supply $10,000 worth of widgets to my buyer today, my security will be worth $10,000 (presumably a figure equivalent to what I am owed).  However, by next week when my buyer has on-sold $2,000 of those widgets, my available security will only be worth $8,000, regardless as to how much I am actually still owed.  If, by the time I eventually get paid the $10,000 my buyer owes me, he only has, say, $1,000 worth of my stock in his possession then a liquidator, pursuing a preferential payment claim, might argue that, at the time I received the $10,000 payment, I received 90% of that payment as an unsecured creditor. 

Under the Corporations Act, unsecured creditors in receipt of payments made during the 6 months prior to the relevant date of insolvency may be obliged to return that money to the liquidator.  The value of my security at the time I received my payment is therefore of paramount importance.

However, while calculating the value of security at the time a payment was made may not always be easy, I thought it was nevertheless relatively uncontentious that the appropriate time to assess the value of the security was, indeed at the time the alleged preferential payment was made.

Last year, a South Australian District Court, in the case of Matthews v The Tap Inn P/L, was asked to rule upon whether the value of a security should be assessed at the time the security interest was created or at the time winding up commenced.  No obvious consideration appears to have been directed at whether such an assessment should take place at the time disputed payments were actually made!

In July 2015 Justice Chivell handed down his ruling that the appropriate time for determining the value of a security was at the winding up stage – largely on the basis that this would bring about a semblance of parity with the plight of other creditors.

While this may have been good news for liquidators it created a ludicrous scenario for trade credit suppliers and we all looked with some trepidation to the inevitable appeal.

Well, the result of the appeal is now available and some semblance of sanity has been restored.

The appeal court, while overturning Justice Chivell’s ruling, nevertheless did so without actually saying that His Honour was incorrect but rather it determined that, with other facts in the case being disputed by the parties, it was inappropriate for the judge to have ruled on what would therefore have amounted to a hypothetical question. Ruling on hypotheticals is, apparently, a bit of a 'no no'.

So, we are effectively back to where we started before the original court decision, with no legal precedent established as to when an appropriate point in time might be to calculate the value of a security interest supporting an alleged preferential payment.  The only difference being, I suppose, is that liquidators have now had the opportunity to read up on an argument that was sufficient to sway a judge in South Australia – and that argument has yet to be effectively countered.

I’d be surprised if this is the last we hear on this issue.