Is a PPSR registration still necessary to defend against Preference claims?

In June 2016, I posted an article discussing, among other things, Justice Edelman’s ruling in Hussain v CSR Building products Limited concerning alleged preference payments made by FPJ Group Pty Ltd. 

The Corporations Act allows liquidators to claim back payments made by the insolvent company during the 6 months prior to their appointment – provided that those payments were in respect of an unsecured debt.

In Hussein v CSR,  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’.  This, against the background of CSR not having registered their ROT on the PPSR!

This was a pretty controversial decision at the time but, two years later, we’ve finally got ourselves another judgment effectively reinforcing the idea that a Retention of Title right (whether registered on the PPSR or not) represents sufficient security to ensure that payments made against that security right are not treated as unsecured for the purposes of the Corporations Act.

Trenfield v HAG Import Corporation (Australia) Pty Ltd [2018] QDC 107 wasn’t an entire success for the supplier, however, because even though their ROT was sufficient to make payments eligible for consideration as being ‘not unsecured’, the question as to how much value in payments those ROT rights actually supported needed to be addressed. 

If a supplier sends goods worth $10,000 and invoices accordingly, at ‘day 1’ the supplier (assuming an ROT) will be secured for the full amount owed, however, if, by the time payment falls due $8,000 of those goods have been on-sold, then the supplier will only be a secured creditor for $2,000 of the money owed and an unsecured creditor for the balance. (Note: there's an earlier post looking at the 'value' of security here.)

Using this approach, the Court found that $473,291 of the $696,298.72 of payments received were paid in relation to an unsecured debt and thus were recoverable by the liquidators as the fruits of an unfair preference.

With both legal precedents involving ROTs that were not perfected under the PPSA’s rules, there is a lifeline for suppliers who either haven’t registered on the PPSR or lodged too late or with serious errors – at least as far as defending against preference claims is concerned. 

When it comes to attempting to recover unpaid for goods or their equivalent value from administrators and liquidators, suppliers had best make sure they have a valid PPSR registration in place (lodged in good time) because claiming that their ROT makes them ‘not unsecured’ will not cut it!

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.

Potential PPSA Loophole Firmly Closed

We have already discussed the case of Alleasing v OneSteel Manufacturing where Alleasing’s registration on the PPSR was deemed ineffective because it was lodged against OneSteel’s ABN instead of its ACN.  You can read more about this here.

Well, last month we heard of a similar case where HP Financial Services fronted up to the NSW Supreme Court to argue that their registration against Production Printing (Aust) P/L’s ABN instead of its ACN should be deemed effective.  Although HPFS trotted out most of the same arguments that were raised in the Alleasing/OneSteel case, they did present an additional argument that I understand has been raised a few times with Insolvency Practitioners but had not previously made it to court. 

The new argument revolved around section 166 of the PPSA where, in a fairly convoluted manner, it effectively says that:

If there is a defect in a registration, the registration will be temporarily unaffected by the defect if the defect did not arise only because of an irregularity, omission or error in a registration.

“Temporarily” in this context could mean as long as 5 years after the defect occurred or as little as 5 business days after the defect was drawn to the secured party’s attention.

In short, HPFS’s argument was pretty much, yes, there was a defect but, because of s166, it doesn’t matter.

While s166 was intended to provide some protection to secured parties who had an initially effective registration rendered ineffective by events beyond their control, its application in HPFS’s context would end up creating the ludicrous situation where there might be no repercussions arising from serious mistakes in registrations and the transparency the PPSR was intended to provide would be lost.

The key in this case relied upon HPFS being able to convince the court that the defect at hand did not only arise because of an error in registration. 

HPFS argued that, in addition to the ABN/ACN error in registration, the defect was also the result of the registration not being visible in the results of a properly conducted search of the PPSR.  Thus not only was the registration defective because of s153 of the PPSA but also because of s165.

Personally, this sounds a little like trying to argue that it wasn’t just the bullet through a murder victim’s head that killed them but also the fact that their heart then stopped beating!

Fortunately, Justice Black in his decision on 2^nd May was not swayed by HPFS’s central argument and supported the intended interpretation of s166.  The rest of HPFS’s case, which was largely dependent on achieving the ‘temporarily unaffected’ status s166 might have afforded, collapsed like a row of dominoes.

In summary, this is another court judgement to remind us that, yes, the PPSA does operate as we thought it did and, no, there isn’t any easy remedy when you don’t get your registrations right.

Details of the judgement (that I've probably simplified out of all recognition) can be found here:

https://www.caselaw.nsw.gov.au/decision/5906e0eee4b0e71e17f592cc