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.

GE vs Forge Group (aka APR Energy vs KordaMentha)

The 11^th February saw a decision handed down in the NSW Supreme Court in the battle between the receivers of the Forge Group (KordaMentha) and the US-based, General Electric International Inc over KordaMentha’s claim to gas turbines totalling $50 million.

I've already written here concerning the outcry from US business and politics regarding the matter, now we get to hear the court's view.

In case you haven’t already read elsewhere, I won’t keep you on tenterhooks, the decision represented a victory for KordaMentha. 

Justice Hammerschlag ruled that the absence of a PPSA registration in respect of turbines leased by GE to Forge Group under an agreement in March 2013 meant that title to those turbines vested in Forge Group upon their insolvency the following March. Put simply, a win for the receivers, who get an extra $50 million in assets to play with, and a loss for the American company that actual holds (held) title to the property.

While there will no doubt be more than a few headlines hailing this as a ‘victory for the PPSA’, the legal argument was a little more nuanced.

The issue before the court concerned some technicalities of the PPSA, and the right provided by the Act for PPSA security interests to be vested in the insolvent company was never actually in dispute.

GE instead chose a two-pronged argument:

• That the goods represented fixtures (the PPSA explicitly does not apply to fixtures); and
• That GE, while having leased the turbines, was a company not regularly engaged in the business of leasing goods (the PPSA also does not apply to leases in such circumstances).

On the matter of fixtures, J Hammerschlag found that the weight of evidence made it clear that, not only was there no intention that the turbines become fixtures but, their very nature (designed to be demobilised and moved to another site, quickly and in a short time, there was an obligation for the turbines to be returned at the end of the lease period, that the turbines could be removed at a relatively low cost without damage to either the land or the turbines themselves etc) meant that they should not be deemed fixtures for the purposes of the Act.

As to whether GE was regularly engaged in the business of leasing, this was relatively easily confirmed by a simple review of GE’s leasing history.  This confirmed that from 2003 to the present time GE had been no stranger to leasing its equipment, that it was a “proper component” of their business and conducted with sufficient repetitiveness to satisfy the court that their leasing arrangement with Forge fell under the auspices of the PPSA.

Therefore, not so much a victory for the PPSA as much as it is a victory for the PPSA’s definitions.

Those wanting to read up on the case in detail can find the full judgement at this link.

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.