PPSR & COVID-19

There is no shortage of articles being published concerning the impacts of the current Coronavirus pandemic but the following extract concerning PPSR registration from the law firm of Cooper Grace Ward serves as a timely reminder:

Are your security interests registered?

There is a heightened risk of insolvency occurring in respect of all businesses over the next six months. If you are lending money, trading on retention-of-title terms, leasing goods or taking security over personal property in any way, it has never been more important to ensure that you have correctly registered security interests on the Personal Property Securities Register.

There may be a small window to act. The Corporations Act provides that a security interest that is registered in respect of a corporation more than 20 days after the security interest is perfected will vest in the company on winding up or administration. Even less time may apply for certain security interests. An out-of-time security interest that is registered today will only be enforceable if the grantor-company survives the next six months.

We recommend that you act quickly to register any unregistered security interests.

You can still enforce security interests and guarantees

Notwithstanding the Federal Government’s amendments to insolvency laws, parties can still enforce security interests and personal guarantees.

Personal guarantees may be more difficult to enforce due to the effect that the pandemic is having on the courts around the country – though, theoretically, nothing is stopping the enforcement of a guarantee. Security interests under the Personal Property Securities Act 2009 (Cth) (PPSA), on the other hand, do not require a judgement before a secured party can take enforcement action. The PPSA provides secured parties with powers of seizure and disposal. Of course there would be significant reputation risk around enforcement of securities under the current environment that would need to be carefully considered.

The full article can be found here.

Is there a deadline for lodging a PPSR registration?

When should I lodge a registration?

Once a liquidator is appointed to a debtor, they are allowed to ignore any security interests registered during the 6 months leading up to their appointment if they hadn’t been lodged within 20 business days of the security agreement being formed. 

In a trade credit context, the security agreement is usually the completed credit application incorporating the supplier's Terms & Conditions (which, in turn, would be expected to include their Retention of Title right).

Thus, if a supplier fails to lodge their registration within 20 business days of receiving a credit limit application, they risk losing their security rights if a liquidator is appointed within the next 6 months.

Separately, the supplier needs to register their Retention of Title right before they deliver their goods to their customer in order to make sure they don't lose any Purchase Money Security Interest (PMSI) rights to which they might be entitled.  Although, where the goods represent a product that will be kept by the buyer for their own use, the PPSA allows an additional 14 days' grace.

When does the Grantor take possession?

I recently had cause to read a helpful summary of a decision by the South Australian Supreme Court in the matter of Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd [2017] SASC 163.  While much of the background to the case is a little fiddly, I’ll give a short ‘broad strokes’ summary in order to help demonstrate why this might be a very useful decision for the hire industry.

For those wanting a more detailed look, I recommend the summary HERE  or, for those that want a real thrill, the full text of the judgment can be found HERE.

The case concerned Bill’s Motorcycles – a dealer, selling and servicing Kawasaki motorcycles.  Bill’s had been financing its floor stock with one financier but then struck an agreement with another (Allied Distribution Finance – ADF).  Bill’s stock of 40 motorcycles (secured by the original financier) was bought out by Kawasaki and, effectively, sold to ADF.  Bill’s maintained possession of the motorcycles and ADF lodged a PMSI registration on the PPSR to perfect its security interest over them.

When Bill’s went into administration a couple of months later, there was a dispute concerning those 40 motorcycles between Samwise, the holder of a General Security Interest (AllPAAP) over all Bill’s assets and ADF as a PMSI holder.

While a PMSI will usually take priority over an AllPAAP, in this case, Samwise argued that because Bill’s was already in possession of the motorcycles at the time ADF lodged their PMSI registration,  ADF had failed to meet the time-scale requirements of section 62 of the PPSA.

Section 62, effectively, states that, in order to achieve PMSI priority over inventory items, a registration must be lodged before the grantor obtains possession of the property.

Samwise argued that, as Bill’s had already been in possession of the motorcycles for some time before ADF lodged their registration, ADF was not entitled to PMSI priority.

In his judgment, Justice Blue determined that, in the overall context, the implication of section 62 should be taken to mean that the registration must be lodged before the grantor obtains the type of possession that would entitle them to grant a PMSI interest in the property.

Thus it is the grantor’s possession in the role of PMSI grantor that matters, rather than their mere physical possession of the property.

While this is unlikely to be of any assistance to trade credit suppliers forgetting to perfect their Retention of Title rights in time, it may have implications for the long-term hire industry.

Last year, the Government made changes to the manner in which hires and leases were caught up by the PPSA.  In short, the changes involved leases for less than 2 years no longer needing to be registered on the PPSR.  Where a lease was established for an indefinite period that may or may not extend beyond 2 years, the new legislation only required a registration to be put in place once that 2-year limit was breached.

When I posted about the new legislation, I wrote:

In order to be eligible for PMSI super priority where the collateral being used is designated as a non-inventory item, the perfecting registration must be lodged within 15 business days of the lessee taking possession of the property.

 However, where an indefinite lease is concerned and the lessor doesn’t lodge their registration until it becomes clear the lease may extend beyond the new 2 year qualifying period, that 15 business days period may long since have passed leaving the lessor’s claim to their equipment to fall behind those of other general security holders with registrations already in place.

Justice Blue’s decision in the Bill’s Motorcycles case suggests that, while a lessee may have been in physical possession of property for 729 days, it will only be at the 2 year mark they have possession in the capacity of a grantor of a PMSI right and it should, therefore, be at that 2 year point when the PPSA’s 15 business days countdown for a PMSI eligible registration should commence.

Whether this interpretation is sufficient to also satisfy the Corporations Act’s dreaded section 588FL is another matter! 

Dangers for the Unwary when Trading with an Administrator

While this post might be of passing interest to those wanting to refresh their knowledge regarding the Corporations Act’s intersection with the PPSA, it’s main import is for those who may be invited to trade with a company under administration.

I wrote on the subject of late registrations being vulnerable to vesting by insolvency practitioners in The PPSA vs The Corporations Act, but a new spin on the issue has arisen following a judgement in Re Ten Network Holdings Ltd (Administrators Appointed)(Receivers & Managers Appointed) [2017] FCA 1144 that highlights a further problem with this aspect of the Corporations Act.

By way of a very brief recap, if you fail to register your security interest within 20 business days of your security agreement being entered into AND your buyer goes into external administration within the following 6 months, Section 588FL of the Corporations Act allows the insolvency practitioner to ignore your security interest.

However, 588FL also provides for vesting of a supplier’s security interest where it arises (and is subject to a registration) AFTER the appointment of an insolvency practitioner.

While it might be understandable for clearly late registrations to be ignored, what about those situations where a supplier is invited to supply goods to the buyer after it has been placed into administration?

Not all companies that go into administration end up being liquidated, many, given some temporary relief by the appointment of an administrator, are able to trade out of their problems, perhaps subject to a Deed of Company Arrangement (DOCA).  However, under the provisions of s588FL any supplier entering into an agreement to supply won’t be able to lodge an effective PPSR registration to perfect their Retention of Title (ROT) rights because such rights (and registration) arose after the appointment of the insolvency practitioner.  Thus, if the company turns out to be unable to trade out of its problems, and the administrator becomes a liquidator, the supplier’s ROT rights will end up being vested with the insolvent estate.

Not exactly a ‘fair’ outcome for the supplier.

However, all is not lost as the Corporations Act (section 588FM) allows the Courts to extend the date beyond the ‘critical date’ for a valid PPSR registration provided it would be “just and equitable” to do so.

The recent Ten Network judgement suggests that the Courts will be prepared to grant such an extension provided they can be reassured that to do so would be in the best interests of both the other creditors and the company in administration. 

It has also been suggested that the timing of the application for the order will be relevant, in that the time to apply for the extension (and lodge the registration) should be a great deal closer to the commencement of trading than to any eventual liquidation.

Accidental Discharges from the PPSR

Even with the best will in the world, every now and again a mistake will get made, and, in addition to the plethora of opportunities for making mistakes in lodging a registration on the PPSR, it is also quite easy to mistakenly discharge one of your registrations.  Unfortunately, unlike the program I’m using to write this post, the PPSR doesn’t have a convenient ‘undo’ button and although the PPSR does allow for such errors to be corrected, the word ‘convenient’ really does not apply.

The PPSR’s primary concern in such matters is not with assigning blame or getting you to eat humble pie over making your mistake in the first place, but to ensure that no-one could be misled should they reinstate the registration that had been discharged in error.

This means that your very first action upon realising that the registration shouldn’t have been discharged should be to lodge a replacement registration.  

The longer your registration is ‘missing’ the more opportunity there is for a third party to be potentially misled into thinking there was less security in place than there would have been had your registration not been discharged in the first place.

Unfortunately, the Corporations Act and the PPSA’s own PMSI designation requirements mean that, in some cases, a replacement registration won’t suffice on its own – the original registration needs to be reinstated.

In order to convince the PPSR to restore your discharged registration you will need to obtain a “Request to remove, restore or correct data” form from the PPSR.  They haven’t made this the easiest of forms to find but, at time of writing, it was available from a link at the bottom of the page here.  

For restoring a registration, there are essentially only three sections of the form that need to be completed:

• Firstly, you need to identify yourself (applicant details) in the same manner as you were identified when you first set up your Secured Party Group.

• Secondly, you need to enter the unique number of the registration to be restored and ‘tick the box’ making it clear that you want the registration to be restored rather than removed or corrected.

• Thirdly, after skipping a couple of sections relating to having a registration removed, you need to enter some free-form text to explain the circumstances surrounding the mistaken discharge.  Remember, the PPSR is not interested in assigning blame and it is usually sufficient just to enter something to the effect that removal of the registration was simply down to human error.

After that, the form just needs to be signed and submitted to forms@ppsr.gov.au.

Once the PPSR has had the opportunity to consider the form you’ve submitted, they will look to ensure that no-one is likely to be significantly misled by restoring the registration in question.

To this end they will check their search records to see if anyone had conducted a search during the period the registration was ‘missing’ and not replaced by you with another.  If there were no searches and your replacement registration was submitted sufficiently promptly, all will be good, otherwise you may need to write to the potentially misled parties to clarify the position.

You may also be asked to obtain the Grantor’s approval to restore the registration.

I’ve not had the opportunity to test an instance where the Grantor in question has refused to confirm that they have no objection to the restoration of the registration but would assume that confirmation that the circumstances that led to the original registration were still in place should be sufficient.

That should then be it!

The original registration should be restored to the register in a manner virtually indistinguishable (as far as legislative requirements are concerned) from it ever having been removed in the first place.

The PPSR has its own guidance notes on the process here for those who want to make doubly sure.

Perfection by Possession or Control

For ease of communication and in service of providing the degree of emphasis required, it’s quite common for me to say that

“If you don’t register your security interest on the PPSR, you might as well not have one”.

However, it’s easy to forget that there are other means by which a security interest might be perfected.  In addition to Perfection by Registration, there is also Perfection by Control and Perfection by Possession.

Perfection by Control is the sort of thing usually only available to Banks, where they are able to treat a Grantor’s bank account with them as collateral under a security agreement – although the Grantor may own the contents of that account, the Bank will have day to day control. 

Another variation might possibly involve a Grantor’s Stockbroker who is able to exercise controlling rights over their client’s portfolio.  If the client had granted their stockbroker a security interest over their securities account, then, by virtue of their day to day control of those securities, the stockbroker would not need to register that security interest in order for it to be effective.

It is also been adjudged possible for those exercising control over satellites or other space objects from a ground station to be able to use that control to perfect a relevant security interest.

While this form of perfection is not likely to be available to a trade credit supplier, they would nevertheless do well to note that Perfection by Control trumps any other form of perfection.

Thus, if you supply a space satellite subject to a Retention of Title clause, your PMSI super-priority, perfected by registration, will be outranked by any general security interest that might be held over that satellite by whichever third party happens to be flicking the switches and pressing the buttons controlling that satellite.

Satellites aside, Perfection by Control primarily applies to intangible forms of collateral – ones where it is not possible to perfect over them by possession and the ability to exercise control is used as the functional equivalent of possession.

The issue of Perfection by Possession is fairly topical given a recent court judgement in the case of Knauf Plasterboard versus the liquidators of Plasterboard West P/L trading as Retroflex.

Retroflex had granted Knauf a general security interest in all their present and future property via a security deed.  Unfortunately, Knauf omitted to register that deed on the PPSR and it was only some 20 months later, when it became obvious that Retroflex may have been struggling, that Knauf finally got around to lodging their registration.  Barely a week then passed before Retroflex defaulted under the deed and Knauf appointed Receivers to protect their interests. This was followed a couple of days later by Retroflex appointing liquidators.

The liquidators took the view that because Knauf’s security deed had been lodged within 6 months of their appointment and not within 20 days of the security deed being entered into, section 588FL of the Corporations Act allowed the collateral subject to that deed to vest with Retroflex.

I’ve written previously on the subject of the dreaded section 588FL and its implications at PPSA vs The Corporations Act (which also includes a brightly coloured chart!).

While on the face of it the liquidators were correct, Knauf argued that in addition to the registration, they had also achieved perfection of their security interest by possession – such possession taking place with their appointment of the Receivers.

While there were other issues at play, not least the dubious process Retroflex used to appoint liquidators, the court determined that:

• Merely appointing receivers is not sufficient to constitute ‘possession’ if the property in question appears to remain in the possession of the grantor/debtor; and
  
• When the receivers took steps to exercise their rights under the security deed, their actions would be taken as equivalent to a seizure of the property.

Under section 21 of the PPSA, possession as a result of seizure (or repossession) is explicitly excluded as a form of possession sufficient to achieve perfection under the Act.

PPSR & Preference Claims

I hadn’t realised until recently how long it’s been since I’d posted on the subject of (Unfair) Preference Claims.

However, there have been some developments since that time, including a particularly interesting legal judgement recently, and an update is appropriate.

For a refresh on the basics, you can find my earlier post here.

In this post, I’m going to be looking at:

• The standing of a Retention of Title clause when it comes to determining whether a payment was secured or not; and
• The Corporations Act’s problem with Transitional security interests.

New light was potentially shed on the options for mounting a defence against a liquidators’ preference claim in Justice Edelman’s ruling in Hussain v CSR Building Products Limited regarding the payments made by FPJ Group Pty Ltd.

The ruling runs to some 248 numbered paragraphs and covers many aspects of the standard preference claim defence available to suppliers – running account, good faith and the test for insolvency – but what concerns us here is the Judge’s conclusions regarding the role an unregistered Retention of Title clause played in determining whether the supplier, CSR, received payments in respect of an “unsecured debt”.

Justice Edelman found that there were sufficient references in the Corporations Act to a Retention of Title right being, in substance, a form of security that, while in the circumstances CSR may not satisfy the definition of a ‘secured creditor’, their Retention of Title right was sufficient to render the debt they were owed ‘not unsecured’.

It will be interesting to see to what extent this view is allowed to stand unchallenged because it certainly seems to run counter to a line liquidators have been taking with the, apparent, support of section 51 of the Corporations Act.

Section 51 is one of the relatively recent additions to the Corporations Act brought in to harmonise with the introduction of the PPSA. It’s a very short section and states:

“ In this Act:"PPSA security interest " (short for Personal Property Securities Act security interest) means a security interest within the meaning of the Personal Property Securities Act 2009 and to which that Act applies, other than a transitional security interest within the meaning of that Act.”

Effectively, the Corporations Act is acknowledging that the holder of a security interest that is recognised as such under the PPSA will be deemed to be a secured creditor.  But it also goes on to say ‘except for transitional security interests’.

While this aspect of the Corporations Act does not impact upon a creditor’s status when pursuing outstandings upon the appointment of a liquidator, it has been used to impact upon a supplier’s rights to retain alleged preferential payments.

When a supplier seeks to defend themselves against a liquidator’s preference claim by asserting they were a secured creditor, the liquidator will, invariably, reject the defence on the basis that their PPSR registration was lodged as ‘Transitional’.

This has given rise to a widespread call from intermediaries, brokers, and other assorted advisors, that suppliers should lodge fresh non-transitional registrations to secure their interests.

While this may not hurt (and may improve a supplier’s chances of a successful outcome) there is an element of confusing the wrapping for the gift. 

The Corporations Act does not exclude security interests registered as transitional; it excludes security interests that are transitional.  Registering an interest as non-transitional does not suddenly make that underlying interest non-transitional just as attempting to perfect a non-transitional security interest with a transitional registration will not meet with success.

So, while transitional registrations are to liquidators as red rags are to bulls, putting non-transitional registrations in place will certainly be a good idea, for liquidators who take the trouble to look closely, they may not be sufficient.

However, for those liquidators, there is always the ruling of Justice Edelman to fall back on!

Clive Palmer vs the PPSA

I’ve just read an 'excited' article by The Australian, entitled “Clive Palmer firms jump queue of creditors for Queensland Nickel” which you can read here (although you may get caught out by The Australian’s paywall).

The meat of the article concerns the ‘last minute’ registration on the PPSR of security interests against Queensland Nickel by companies in which Clive Palmer has an interest.

“Four days before Clive Palmer’s Queensland Nickel Industries collapsed into voluntary administration, two of his companies staked a claim on all of the refinery’s assets in an apparent attempt to squeeze out redundant workers and other creditors.”

The article goes on to say that,

“Legal experts said the manoeuvre could disadvantage sacked workers, already furious at being denied access to their redundancy entitlements.”

Apparently, The Australian and its ‘legal experts’ are not especially familiar with the workings of the PPSA or the Corporations Act once insolvency practitioners become involved.

Firstly, any creditor who had lodged a security interest on the PPSR prior to Palmer’s recent registrations will benefit from greater priority under the PPSA (at least a dozen of which were registered under the facilities that I personally oversee).

But, perhaps more importantly, in the context of The Australian’s article, are the implications of the Corporations Act for security interests registered within 6 months of a company failure.

While I’ve previously explored this at some length in my post ‘The PPSA vs The Corporations Act’, the short version is that 588FL of the Corporations Act provides a very clear deadline by which a registration needs to be lodged in order to be effective against a liquidator.

If a registration was not lodged within 20 business days of the security interest coming into force or was lodged during the 6 months leading up to the liquidator’s appointment, then “The PPSA security interest vests in the company” and the creditor’s security rights are effectively lost.

So, while opportunistic, last minute registrations may make for a relatively entertaining news story, they don’t make for very effective security.

The PPSA vs The Corporations Act

September’s court judgement in Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq) has brought to the fore a butting of heads between the Personal Property Securities Act and the Corporations Act.

Much of our concern with the PPSA has been to do with interpreting it in such a way as to ensure that our security interests are as effective as possible.  The issue can be seen as twofold:

• Ensuring our security interests benefit from as high a ranking as possible when compared with those interests of other creditors; and
• Protecting ourselves against the risk that an unperfected security interest will vest in our debtor’s insolvent estate.

Part 2.6 of the PPSA (sections 54 to 77) concerns itself with addressing the various scenarios that might rank one creditor’s interest above another’s while section 267 provides liquidators with the incentive to try to invalidate your registration by allowing them to take ‘ownership’ of any security interests that have not been properly perfected.

For now, we’re going to look a little more closely at section 267.

Section 267 effectively states that, when an ‘external administration event’ takes place, any security interest that has not been perfected at that point will vest in the grantor.  In other words, if an insolvency practitioner is appointed to your debtor before you’ve had the opportunity to register your security interest on the PPSR, you will lose your rights to whatever collateral you had under that interest.  In fact, the PPSA appears, almost, to be supporting a ‘nick of time’ registration approach.  Providing you get your registration lodged before the administrator is appointed (or the application for winding up submitted, or the sequestration order given etc) your interest should be perfected and thus protected from the nasty section 267.

Unfortunately, buried within s267 is a little bit of small print as follows:

Note 2:   See also Division 2A of Part 5.7B of the Corporations Act 2001.

Surely that’s not going to be too important?  After all, Note 1 was pretty innocuous (Note 1: For the meaning of company, see section 10).  How bad could Division 2A of Part 5.7B of the Corporations Act be?

Well, it turns out that Division 2A can be pretty bad!

The meat of Division 2A is in section 588FL, entitled “Vesting of PPSA security interests if collateral not registered within time”.  It turns out that, contrary to the apparent ‘nick of time’ support of the PPSA, there is, in fact, a much more tangible deadline by which a registration needs to be lodged in order to keep your collateral out of the hands of a liquidator.

If your registration was not lodged within 20 business days of your security interest coming into force and was lodged during the 6 months leading up to the liquidator’s appointment, then “The PPSA security interest vests in the company” and you lose your collateral to the liquidator!

So, even though you have a properly perfected security interest, registered correctly, within the deadlines set under the PPSA, the liquidator may still be able to ignore that registration and take your goods anyway by virtue of the Corporations Act.

And if, for a moment, you are thinking that this must just be a theoretical argument that wouldn’t apply in real life, then let me remind you that this piece started with reference to Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq).

• In December 2013 the Pozzebons loaned Australian Gaming and Entertainment Ltd (AGEL) $250,000 with the loan secured against AGEL’s personal property.
• On 19 May 2014 the Pozzebons registered their security interest on the PPSR.
• On 26 May 2014 Administrators were appointed to AGEL with liquidators following some 2 weeks later.

While the Pozzebons may have beaten the clock in terms of the PPSA they fell foul of the Corporations Act and breached the 20 business days’ time limit under 588FL as well as the registration being within 6 months of the external administration ‘event’.  Such was the judgement of Justice Collier towards the end of September in rejecting the Pozzebon claim that their security interest be honoured.

By way of summary, I've drawn up the following flow chart to show how important the timing of a PPSR registration will be under the Corporations Act:

PPSA & Accessions

To start with, let’s just clarify the applicable definition. 

Where a supplier supplies goods that are installed as part of a building, they become fixtures and, just as would have been the case in pre-PPSA days, the supplier’s retention of title security interest over those goods is, effectively, lost.  However, where a supplier supplies goods that are installed in, or fitted to, a non-real estate piece of property they become accessions. 

In pre-PPSA days, as soon as goods were incorporated into another product they were deemed to have lost their individual identity and the supplier’s security interest over those goods was lost; however, since PPSA the supplier’s security interest can continue in the finished product (section 88 of the PPSA refers).

Moreover, the PPSA’s default priority rules state that the security interest a supplier maintains over their accession takes priority over any claim any other security holder might have to the finished product (section 89).

Now, while section 123 of the PPSA states that a secured party may seize collateral by any lawful method if the debtor is in default under their security agreement, in the case of accessions, the secured party is required to give at least 10 business days’ notice of their intention to remove their product (section 95) and then must ensure that the goods are removed in such a manner as to not cause additional damage to the product in which it is installed (section 92). 

The grantor may apply to the courts for an order postponing the removal of the accession or determining a value to be paid by the grantor to the secured party to allow them to keep the accession in place (section 97).

However, the PPSA is not the only Act that necessarily applies!  In the event an administrator is appointed then the Corporations Act (2001) comes into play.  Once an administrator has been appointed, suppliers/creditors are unable to make claims for property held by their buyer unless they have the administrator’s consent or permission from the court (s440B of the Corporations Act).

Regardless of the super-priority a properly perfected PMSI might give to a supplier of retention of title secured goods, the provisions of the Corporations Act will prevent them from recovering any of their goods without the consent of the administrator.

Although the supplier may not be able to claim back their property immediately, neither is the administrator generally able to sell or dispose of it (s442C of the Corporations Act).  Because the goods are the subject of a perfected PPSA security interest, the administrator must act in the interests of the secured party and not sell or dispose of the goods without either the permission of the secured party or of the courts.

Unfortunately, there is one rather significant exception to this restriction on the administrator on-selling ROT secured property – that is where such an on-sale is in the ‘ordinary course of the company’s business’.

Thus, if you have supplied shafts to an assembler and wholesaler of hammers then the administrator would be perfectly within their rights to sell the completed hammers even though you may have demanded the return of your goods under your perfected PMSI (s442C(2) and (8) of the Corporations Act refer).

The administrator is, however, required to act ‘reasonably’ in exercising their power of sale (s442B) and has some fairly strict rules to follow regarding the manner in which they must deal with the proceeds from such sale (s442CC(2) of the Corporations Act refers).  These boil down to ensuring that the proceeds are applied proportionately to those creditors that hold a priority security interest in those goods.

For example, if you have supplied $10,000 worth of hammer shafts and I have supplied $20,000 of hammer heads and the administrator disposes of the finished product for, say, $24,000 then you will benefit from $8,000 of the proceeds and I will benefit from $16,000 – ie, proportionate to the value of our contribution to the finished product comprising our respective accessions.

To the extent that we are still owed money (your outstanding $2,000 and my outstanding $4,000) we will have to deal with the administrator as unsecured creditors.