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!

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! 

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.

A long-standing credit agreement is not enough to determine Transitional status

The 7^th March 2014 saw a little bit of clarity being brought to one of the PPSA’s notorious grey areas.  

The clarity came in the form of a judgment in the Supreme Court of Victoria and the grey area concerned the applicability of the PPSA’s transitional rules to Retention of Title clauses enshrined in long-standing Terms & Conditions.

The case concerned the May 2013 collapse of the cleaning company, Swan Services Pty Ltd and a claim by one of its creditors, Central Cleaning Supplies (Aust) Pty Ltd, that they should be able to rely on their Retention of Title clause to recover unpaid for equipment.

 

The liquidators argued that, since the introduction of the Personal Property Securities Act (PPSA), any goods subject to an ‘unperfected’ security interest would vest with them and, as Central Cleaning Supplies had not perfected their Retention of Title security interest on the Personal Property Securities Register (PPSR), the equipment they had supplied would be subject to the liquidators’ control.

Central Cleaning Supplies countered with reference to the PPSA’s Transitional Arrangements – a means by which security interests arising from long-standing agreements could be effectively ‘grandfathered’ into being ‘perfected’, without need for formal registration, for up to 2 years.  While the 2 year Transitional Period has now ended it was certainly applicable at the time Central Cleaning Services was challenging the liquidators for return of their equipment.

The case was put before Justice Ferguson to find the correct interpretation.

In her deliberations it was determined that, although Swan Services had entered into a credit agreement with Central Cleaning Services before the PPSA came into effect, the security represented by Central Cleaning Services’ Retention of Title clause was not actually incorporated into either the credit agreement or the standard terms & conditions embraced by that credit agreement.  Rather, the Retention of Title clause appeared in a Conditions of Sale document that formed part of individual invoices issued as and when deliveries were made.

Therefore, the initial credit agreement did not act as an overarching agreement out of which individual security interests were created (as would be necessary for the transitional arrangements to apply) but instead each invoice was held to create its own security agreement and security interest.  In order to perfect its Retention of Title clause, Central Cleaning Services could not, therefore rely on the PPSA’s transitional arrangements and should have registered their security on the PPSR as a non-transitional interest.

While it might often be convenient to refer to the date of a credit application in order to decide if subsequent dealings create transitional or non-transitional interests suppliers must not lose sight of the fact that it is the acceptance date of the actual document that imposes the security condition that will be the determining factor.

Where there is any doubt I would strongly recommend a non-transitional registration.

Central Cleaning Supplies (Aust) Pty Limited v Elkerton and Young as liquidators of Swan Services Pty Limited (in Liquidation) [2014] VSC 61