Category: Commercial

Stopping sham PPSR Registrations – again, and again

The PPSR is Ripe for abuse

One of the weaknesses of the Personal Property Security Register (PPSR) is that anyone can go online and lodge a registration for a few dollars in fees by claiming to hold a “security interest” in respect of the personal property of another, with very few immediate consequences.

The victim of the sham registration can suffer real prejudice:  searches of the register will show apparent security interests over the victim’s personal property.  The impression given can lead to delays in completing other transactions involving the giving of real security over the affected assets or other transactions involving them, whilst time and money is required to remove the registration.

Jurisdiction to Remove and Restrain Sham Registrations

In 2014 as Counsel for the plaintiff I appeared in Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217 where the plaintiff obtained an interlocutory and then final injunction to restrain the repeated registration of a sham “security interest” on the PPSR on the basis that it was an abuse of process.    I published a blog post about the case here.

The case has since attracted some attention, being reported at (2014) 285 FLR 267.

It has now also been followed in Victoria as a precedent establishing the Court’s inherent jurisdiction to grant injunctive relief of the type and on certain other points, in National Australia Bank Ltd v Garrett [2016] FCA 714.

The facts in National are a great illustration of the ease of registration on the PPSR.

Mr Garrett had been a customer of the Bank through various entities he controlled in the wine industry.   It is apparent from reading the judgment that the relationship between bank and customer had deteriorated markedly over time.  It appears again from the judgment that Mr Garrett had been subject of at least one vexatious litigant order and there was a history of applications involving him and the bank.

A financing statement was registered by the “Trustee for The Andrew Garrett Family Trust No. 4” on 24 April 2016 on the PPSR claiming a security interest in respect of the property of NAB and Treasury Wine Estates Vintners Ltd.  The collateral was said to be “All present and after-acquired property – No exceptions”.

The basis of the registration appears to have been a purported charge of which NAB gained notice in these circumstances (at para 12 of the judgment):

The registration of the financing statement followed NAB’s receipt of an email from Mr Garrett on 24 April 2016 in which Mr Garrett stated that he intended to register a charge on the PPSR over NAB’s property. Attached to the 24 April 2016 email was a copy of a Security Deed (titled “Distributor License Purchase Vendor Finance Performance Security Deed”) which purported to be a charge granted by NAB in favour of OenoViva and Mr Garrett as trustee for the Andrew Garrett Family Trust ABN 78 761 760 976. The Security Deed relevantly stated that: “This Charge is registered pursuant to the undertaking as to loss costs and damage given by the Chargee in SCI-2004-127; Andrew Garrett Wines Resorts Pty Ltd & Anor v National Australia Bank Limited”. The Security Deed has not been signed or otherwise executed by NAB. It is a creation of Mr Garrett’s and built upon the misconceived foundation that an undertaking as to damages given in a prior proceeding could somehow give rise to a security interest; I will return to the undertaking later.

[emphasis added]

The Bank made application to remove the registration after Mr Garrett refused to remove it in response to an amendment demand, being the administrative process provided by section 178 of the PPSA.

Beach J followed and confirmed the broad finding of Robson J’s decision in Sandhurst to the effect that a security interest under the PPSA does not include an interest in property that is said to arise by operation of equity, including an equitable remedial  constructive trust or charge.  Accordingly it cannot be registered.  Specifically, Beach J found [see National at paragraphs 27 to 33]:

  1. A “security interest” under the PPSA is one that is provided for by a transaction where one is dealing with consensual arrangements.  A transaction therefore does not include a claim based on obtaining equitable relief from a court of equity, such as a remedial constructive trust or charge.
  2. In identifying the transaction one must look to the substance and not the form.
  3. Further, certain interests in personal property arising at law are specifically carved out of the definition of security interest by section 8(1)(c) of the PPSA.

Beach J also followed Robson J’s finding in relation to the Court’s inherent jurisdiction under s37 of the Supreme Court Act 1986 to restrain registration as an abuse of process. Robson J accepted that the circumstances were similar to those that existed in abuses of the caveat system, where the Court already had exercised its inherent jurisdiction to remove caveats legally placed but in an abusive manner [see Sandhurst paragraphs 108 to 118, National at  paragraph 50].

Procedural Points on Judicial Process under s182 of the PPSA

In Sandhurst it was unnecessary for the Court to consider the procedure under the PPSA for removing contested registrations.  In National Beach J gave some indications of procedural points that ought to be followed.

In order to remove the an erroneous registration an applicant gives an amendment demand to the secured party under s178(1) of the PPSA.  The demand can only be given where authorized under the section.  Making an amendment demand is authorized by the section where either all of the collateral referred to in the registration, or part of it, does not secure the claimed obligation.

Assuming the amendment demand  is refused, a judicial process established under s182 of the PPSA can be invoked  within 5 business days of giving the demand.  The process provides for a hearing to determine if the amendment demand is authorized.

Beach J made the following comments about that process:

  1. The Court should treat an application made to sustain a contested registration in a similar manner to the defence of a Caveat application;
  2. The onus is on the putative secured party (in this case Garrett) to satisfy the Court that its registration ought remain;
  3. Some caution needs to be exercised in comparing the procedures, since s182(4) of the Act requires the applicant (in this case the National) to discharge a legal onus to establish that the amendment demand that initiates the process is itself authorized under s178(1) by prima facie evidence.  So the applicant would need to satisfy the Court by prima facie evidence that part or some of the collateral did not secure the obligation claimed.  That requirement was met in this case.

Conclusions

Looking forward, I expect these sorts of applications to become quite common, owing to the ease of abuse.  it is probably unlikely that the process for lodging a registration on the PPSR will be changed much as it is intended to be an easy system to use.  It is a question of competing policy imperatives which will not be resolved without some thought by regulators and stakeholders.

 

 

PPS Leases explained, what is Regularly Engaged in the Leasing of Goods and what is a PPSA Fixture?

The courts continue to hammer out the meaning of various basic provisions of the PPSA.

The decision in Forge Group Power Pty Limited (in liquidation)(receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52 looked at two issues dealing with the reach of the PPSA to leases:

  •  What constitutes “regularly engaged in the business of leasing goods”
  • What is a fixture for these purposes?

Background

 The Personal Property and Securities Act 2009 (Cth) (PPSA) introduced a new national code for determining the priorities of security interests in personal property., where primacy is given to registered interests.

Prior to the introduction of the PPSA, a owner of personal property, as a lessor, had all the common law rights of an ownership against the world, including to recover that property.  Those rights were largely subject only to the terms of any transactions the owner entered with third parties affecting those rights: for example, by leasing, charging, pledging, bailing or selling the goods.

However, under the PPSA, the rights of ownership under a goods lease are affected when they are registrable security interests.  A security interest arises where, in substance, an interest in personal property provided for by a transaction secures payment or performance of an obligation: section 12(1) of the PPSA.

Ownership interests under a Lease – the PPS Lease

Difficulties arise in relation to leases under registration schemes, because it is necessary for legislators to distinguish between leases that are in substance a financing arrangement which secure a payment or obligation (finance leases), and leases that are pure leases exacting payment only for use of the property before it is returned (operating leases). Examples of the former might include a long-term car lease, over a period of 3 years, with no residual or an agreed balloon payment. An example of the latter might include a 7 day car-hire for a daily fee, with the vehicle returned at the end of the hire.

There is a grey area between the two concepts, and room to argue whether a security interest arises or not, depending upon the term and financial structure of a lease.

Under the PPSA, the interest of a lessor under a lease will be registrable in several circumstances:

  •  First, where in substance, the lease is a finance lease that creates an interest in the property that secures payment or performance of an obligation, and so falls within the general definition of a security interest. For example, a finance lease: see section 12(2)(i) of the PPSA;
  • Second, where the lease is a “PPS Lease”, irrespective of whether the lease is a finance or operating lease, but falls within the definition of PPS Lease: see section 13 of the PPSA.

The principal effects of failing to register are:

  •  Where the lessee is bankrupted or enters into insolvent administration, an unregistered registrable security interest vests in the liquidator or trustee; and
  • priority is lost to holders of security interests in the property who are registered, for example a financing bank.

Generally speaking, a PPS Lease is a lease of goods that endures for a period of more than 12 months or is in respect of goods registrable by serial number:

  • It does not matter whether the lease is a finance or operating lease. Both are caught;
  • It includes leases where, by renewal or extension, the lease may or does continue for more than 12 months;
  • It includes a lease of goods that may or must be described by serial number (eg cars, aircraft and aircraft engines, watercraft, boats, certain intellectual property: section 13(1)).
  • If the lessor is not “regularly engaged in the business of leasing goods”, the lease is not a PPS Lease.
  • Further, if the property is a fixture, rather than personalty, the PPSA does not apply – see PPSA section 8(1)(j).

So why is it necessary to have PPS leases in the legislation? Why not just rely on the substance of the lease to determine whether it falls within section 12? There appear to be several reasons:

  • First, to eliminate the grey area between operating and finance leases, but to preserve from registration short term leases that are likely to be operating leases;
  • Second, to bring property identifiable by serial number completely within the registration scheme;
  • Third, the interest of a lessor under a PPS Lease is purchase money security interest for the purposes of the priority rules, and so takes priority over other secured creditors who are registered – see section 14(1)(c). It is notable that the interest of a lessor under a short term finance lease of less than 12 months is not a PMSI.

The Limits of Regularly Leasing and Fixtures

In Forge, General Electric International Inc (GE) had by an operating lease dated 5 March 2013 provided four gas turbine electrical generators to the plaintiff (Forge). On 11 February 2014, Forge went into liquidation. Prior to 22 October 2013, GE had operated a business in Australia of renting gas turbine power generation units. From that date, it sold the rental business and had assigned the benefit of the lease and the turbines. It also continued to supply replacement turbines on a temporary basis and free of charge, to its customers who required maintenance on turbines that GE had supplied.

GE argued that at the time of the liquidation it was no longer regularly in the business of leasing turbines. The submission was rejected, since:

  • the relevant date to assess that issue was at the date of lease, not the date of liquidation (at[136]) and a the date of the lease it had not sold its business;
  • in any event, after the sale, GE continued to provide turbines on a replacement basis in the market, albeit where maintenance required it (at[134]).

GE also argued the turbines were fixtures. Under section 10 of the PPSA a “fixture” means goods, other than crops, that are affixed to land. GE argued that the definition was a “bespoke” definition that differed from the common law.   That submission was also rejected and the court found that the concept of fixture in the PPSA was the same as at common law (at [77]).

The turbines were found not to be fixtures on the facts. The key points included that (at [134]):

  • The turbines were truly portable, in that they were designed to be quickly demobilized and moved to another site, and were on wheeled trailer beds for that purpose;
  • They could be removed without damage to the land;
  • The cost of removal was modest compared to the cost of the turbines;
  • The turbines were rented for a short period, being two years, with limited renewals and were clearly intended to be removed in the future;
  • GE retained ownership and the lease specified that the turbines were personal property;
  • Forge was obliged to return them at the end of the term;
  • Forge did not own the site where they were installed.

 

 

 

Court Injuncts Sham PPSR Registrations

Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217

 

Initial registration of a financing statement on the PPSR is very easy.  You simply go to the Personal Property Securities Register (PPSR) website and follow the links, enter the prescribed data, pay a small fee and hit a button or two.

The ease of registration, compared to a paper based registry such as land titles or the former company charges register, makes the PPSR more open to abuse.

In Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217 three companies had financing statements registered in respect of their personal property without basis.  The registrations were maintained, in the face of demands to remove them, as leverage to pursue a claim one of the defendants had against Sandhurst and others.  The claim was not to a security interest in respect of personal property, but rather a claim to some equitable interest in certain land.  Accordingly, the claim was not registrable:  see paragraphs  [87] to [107] of the judgment of Robson J.

The financing statements following the administrative “show cause” process under the Personal Property Securities Act 2009 (Cth).

That was not the end of the matter – in this case the defendants threatened to, and did, make more registrations to pursue their claim.  Each time a new financing  statement, or financing change statement, is registered, then the administrative process has to be repeated.  The administrative process is time consuming and expensive.  In the meantime, before it resolves, the existence of a record of sham financing statements can adversely affect the innocent party, especially with its own financiers and may amount to an event of default.

In Sandhurst the plaintiff companies successfully sought injunctions restraining further financing statements, or financing change statements, from being registered by the defendants.  The injunctions were obtained by the exercise of the Court’s inherent injunctive jurisdiction, rather than under any express power given to the Court by the PPSA:  see paragraphs [108] to [119].   The application is the first of its kind in Australia.

An application had also been made by the plaintiffs relying on s182 of the PPSA, but the Court did not need to deal with it.  However it is notable,and perhaps an unintended omission from the PPSA,  that the section does not contain an express power to enjoin registration of a financing statement, but does contain an express power to restrain the making of an amendment demand.

Further,  having established the absence of any security interest in the plaintiff companies’ personal property, the Court found that the substance of the defendants’ claims to an equitable interest to be irrelevant.  This meant that discovery in respect of those claims was not warranted, and that evidence and argument about those claims, except insofar as it was necessary to demonstrate the absence of a security interest, was not permitted.   The finding prevented the disocvery process in the application itself from being used in an abusive manner.   See paragraphs [120] to [121].

The author appeared as Counsel in the proceeding for the plaintiffs, instructed by Minter Ellison.  Nick Anson, Partner and Jane Salveson, Special Counsel have prepared an interesting alert regarding this case and particularly the problems arising out of Sham registrations, which can be found here.

Regards

Mark

As expected: Court finds against unregistered lessor in PPSA fight

The Supreme Court of NSW has decided a PPSA priority contest against the owner of leased Caterpillar equipment, in a fight with the receivers and managers of the equipment’s insolvent lessee.

The case is a warning to those used to ownership and title retention based forms of security.  The fact is that an owner/ lessor of equipment can lose its property to a secured creditor of a lessee upon VA or liquidation.

It also shows why it pays to get important agreements documented by a competent lawyer.

The case is Albarran and anor v Queensland Excavation Services Pty Limited & Ors [2013] NSWSC 852 (link).

The facts are available at the link in paras 1 to 10, which include at para 10 a useful statement of the issues and Brereton J’s conclusions on each of them.

Some of the more interesting facts are these:

  • the owner and lessor companies had a common shareholder, who appears to have informally financed the Caterpillar equipment and other vehicles from mainstream lenders;
  • the leases between the owner and lessor were not in writing, but were for more than one year.  There seems to have been an arrangement whereby the owner purchased the equipment on finance, and then passed possession on to the lessor in return for payment of the finance costs plus 10%;
  • the leases predated the transition to the PPSA;
  • that probably explains why the owner did not register its interest in the Caterpillars and why no written lease existed to make provision for the PPSA.

The decision is not unexpected given the circumstances:

  • the owner’s interest was a security interest in the Caterpillars – see s12(2)(i) and s12(3)(c) since the leases were PPS leases;
  • the equipment owner had failed to register its security interest, as owner;
  • lessor had executed a General Security Deed with its secured creditor which expressly gave security over the Caterpillars;
  • under s19(5) of the PPSA, leased equipment forms part of the lessor’s collateral capable of being subject of a security interest;
  • the secured creditor had registered the General Security Deed ;
  • the secured creditor prevailed because it had registered and the owner had not – s55(3).

See generally paragraphs 20 to 34 for the discussion of the nature of the security interests held by the owner and the secured creditor respectively in the Caterpillars. See generally paragraph 35 to 41 for the discussion of the priority contest.

The decision referred to many of the cases from other jurisdictions regarding priority at paragraphs 26 to 31.  The case that this reminds me of the most is Waller v New Zealand Bloodstock Ltd [2006] 3 NZLR 629, discussed and approved at paragraph 30:  just switch the horse for an excavator.

There are some other interesting points in the decision:

  • An attempt to argue that the transitional provisions applied failed, because the Caterpillar equipment was registrable in the Northern Territoty (where the vehicles were used) on a local motor vehicles register – this triggered an exception to the transitional provisions which would otherwise have protected the position of the lessor as an owner with rights under the lease predating the registration date – see paras 47 to 56 in particular;
  • The rights to possession of the owner under the lease on default by the lessee company are lost once the VA or liquidation commences, so the owner cannot repossess – see s267.  In other words, no residual rights of true ownership survive because they vest in the company – see paragraph 72 ff.

There are some useful articles discussing the decision that I have seen so far, see:

  • Carrie Rome-Sievers at this link
  • Allens at this link

Regards

Mark

Tired of Christmas shopping? Queues may soon be a ghost of christmas past …

All

I have previously linked to the excellent series of monthly blog posts by James Stewart on issues in retail, usually focussing on insolvency articles.

After battling the crowds at Southland shopping centre on the weekend, James’ article on developments in the payments system gave me some hope things might improve for next year at least.  It seems your smart phone may soon replace the cash register.  Simply scan items as you collect them, put them in a bag in your trolley, pay at a smart terminal at the store exit and you are out of there.  No registers!

The article is at the following link.

Cheers

Mark

 

Tips for drafting longer, wider and more effective restraint of trade clauses – Pearson v HRX Holdings Pty Ltd (Full Court, FCA)

There is a well-known principle that a restraint of trade is prima facie void as contrary to public policy because it discourages competition and the restrained party from earning a living.  In considering whether a restraint of trade is void at common law, a Court will consider if as a threshold matter the restraint is no more extent than is reasonably necessary to protect the interests of the employer.  Usually the permitted period of restraint is fairly short and is of limited geographic extent.

Contrasting the usual situation, the Full Court of the Federal Court has recently upheld a 2 year restraint of trade clause against an executive and the co-founder of a consultancy business:  see Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111.  The decision of the Court [link] demonstrates that if a restraint is carefully tailored by negotiation to the specific circumstances of the employer and employee, the parties bargain over the restraint’s key features and the reasoning for the duration and geographic reach is documented, and the employee receives independent advice, then restraints in excess of what might be considered the usual “rule of thumb” can be upheld.

The Facts

The appellant, Brett Pearson, was a “co-founder” of a human resources consultancy called HRX Holdings. He had established the business with Katrina Leslie in 2005.  Leslie was the effective controller of the company through shares held by her family trust.  Pearson had been a director and an employees of the business until his resignation in July 2011.  He left to join a competitor.

Pearson was the key employee of HRX:  it built the whole business around him.  He was at first the only employee.  By the time of his resignation, he was one of 130.  Pearson was a rainmaker.  The industry saw him as a leading innovator in the HR consulting field, was the primary presenter to clients and had an ability to establish and renew contacts with the senior executives of clients.  He also had full access to all of HRX’s confidential information, particularly its techniques for establishing and developing client relationships.

Pearson had negotiated an employment contract with HRX that was signed in December 2005, but was effective from February 2005.  The contract had been negotiated over a period of some months.  The restraint clause was a particularly heavily negotiated point:  both Pearson and Leslie had recognised that Pearson was the face of the business and the key person whom it was being built around.  Leslie gave evidence that the restraint of Pearson post termination was one of the biggest risks for the business to be managed.  Eventually they agreed that the restraint period would extend to two years (not 6 months as Pearson had first proposed).  Pearson obtained advice on all aspects of the contract from his own lawyers and accountants before he signed it.

The restraint clause is set out at paragraph [19] of the first instance judgment (HRX Holdings Pty Ltd v Pearson [2012] FCA 161) [link].  It included the following features relevant to the Full Court’s judgment:

  • a two-year restraint period;
  • no express geographic limit;
  • Pearson was to be restrained from (broadly speaking) participating in any way in what was defined as the “Restrained Business”, which meant “a business or operation similar to or competitive with the business of [HRX] …..at the time of leaving the company.”
  • Pearson was to be paid for the two-year period of the restraint (on conditions).

The Outcome

At first instance, the restraint clause was upheld.  Pearson appealed.  There were several issues of interest in the appeal.

First, whether the breadth of the restraint was such that it was contrary to public policy.  The Court upheld the decision at first instance that:

  1. The lack of a geographic restraint did not render the clause as a blanket restraint with worldwide operation.  Rather, it had to be read consistently with the purpose of the restraint, which was to  protect HRX’s business which was limited to Australia, New Zealand and other minor potential opportunities outside those markets, but was by no means global.
  2. The words “similar to or competitive with” had to be read together and construed consistently with the purpose of the restrain.  They did not prohibit activity in a “similar” but not “competing” business.  If the clause had been construed that way it would have been too wide.
  3. The limitation of the definition to businesses in which HRX was operating at the time of departure made the clause self-limiting, and less vulnerable to offending the rule against public policy.

Second, in applying the principle that the restraint would be permitted if it were reasonable, the Court took relied on the following matters:

  1. The restraint clause expressly acknowledged that Pearson was the key employee of the business and set out the reasons for that in some detail.
  2. Pearson had agreed to the definition of a Restrained Business without any negotiation.
  3. The extent of the negotiations of some months of the contract and over the period of restraint indicated a deliberate character to the execution of the contract including the restraint.
  4. The duration of the restraint was specifically negotiated.
  5. Pearson was to be paid during the restraint period.
  6. Pearson had sought and obtained independent legal and accounting advice.
  7. The parties expressly agreed that the restraints were reasonable.
  8. Pearson had been granted a free carry 8% shareholding, to be progressively released over the contract, as compensation for entry into the contract, and separately from his pay.
  9. Pearson and Leslie in combination had negotiated the contracts of various other HRX executives with similar (although shorter) restraints in them.

Pearson also argued that the restraint was unnecessary since confidentiality and non solicitation clauses operated post termination and that clause would protect HRX from exploitation of its confidential information by a new employer.  The Court quickly demised that argument.  Those clauses do not prevent the natural gravitation of clients, without solicitation, toward a key rain maker such as Pearson when he settles into a new role.

Conclusion

Although the case dealt with a very senior executive, it does have wider application.  It emphasises the benefit of an employer carefully reasoning the extent of the restraint so that it meets the employer’s needs and doesn’t exceed them, bargaining the clause with the employee, ensuring independent advice is taken or at least an opportunity to get it is available, using a fair a degree of documentation of that process and even recording the reasoning and bargaining process within the contract itself.  It also demonstrates that the external circumstances of the parties are very important, because the task of the Court is not limited to construction.  The Court’s role is also assessment of whether the restraint is reasonable having regard to public policy and to the purpose of protecting the employer’s interest that is key, which is an issue of fact.

Finally, the case has application beyond employment, to sale of business and other commercial agreements containing restraint clauses where similar issues arise.

Affordable Mediation in the Magistrates Court – the SLEM scheme

One of the enduring problems with litigation in the Magistrates Court is that costs are high compared to the value of the case.  As a consequence the cost of private mediation can be prohibitive.

However, a major step to address the problem is a scheme instituted by the Court, known as the “SLEM” scheme, that can reduce the costs of a private mediator and venue to as little as $1,450.

Last week,  I attended a mediation under the “SLEM” scheme for the first time.

“SLEM” stands for Single List of External Mediators.  It is a list of mediators for civil matters in the Magistrates Court who are regarded as suitable as external mediators, in the alternative to a registrar or deputy registrar.  Each mediator on the SLEM has agreed to limit their fee to the fixed rate of $1,100, for at least three mediations a year, to encourage access to mediation in the Magistrates Court.

In addition, where the mediator is a member of the bar, the Victorian Bar mediation centre will provide rooms for a SLEM mediation at a cost of $350, as part of the scheme.

The mediation I attended was conducted very effectively by Carey Nichols, a barrister mediator who is a member of the SLEM list.  The matter settled.

For information on the scheme see the Magistrates Court website link.

Regards

Mark

Mediation part II – best and worst case scenarios if there is no deal

In my last post, space prevented an expansive discussion of the concepts of BATNA and WATNA (also known as BATNO and WATNO). These are concepts used in mediation to persuade parties to think of the financial consequences of not settling on the day. Literally, BATNA means “best alternative to not agreeing”, whilst WATNA means “worst alternative to not agreeing”. The idea is to work out the best and worst case scenarios for the client in financial terms if they don’t make a deal.

Of course the best case scenario should serve as a base line for an offer at settlement: rationally, a client should accept any offer meeting that figure since they cannot do any better by not agreeing and, say, continuing to litigate. They should also probably accept a deal that is worse than the BATNA since there is a risk that the outcome could be the WATNA, or something in between, if there is no agreement.

Paul Duggan has written an enlightening post on the issue (pun intended – you will see what I mean!) that I recommend to all readers.

Regards

Mark

Paul Duggan

Mediation approaching? Care for a back-to-basics checklist beforehand? Then look at Mark McKillop’s recent blog “Ten Tips about Mediation” (link below).

But first let me top up Mark’s top ten with two extras – the twin concepts of ‘BATNO’ and ‘WATNO’.

In approximately 36 A.D. a notorious persecutor of Christians was travelling from Jerusalem to Damascus. Out of the blue (literally) he was knocked to the ground, blinded by a brilliant light and asked by a booming voice “Why do you persecute me so?” The traveller repented, recovered his sight and went on to a brief but spectacular career as St Paul, arguably the most famous convert, evangelist and martyr Christianity has ever produced.

How is this relevant to preparing for a mediation?

It absolutely isn’t. Damascus Road conversions never happen in mediations.

And yet it seems a rare mediation indeed that does not involve at least one party apparently banking…

View original post 369 more words

Ten Tips about Mediation

I have recently appeared at about half a dozen mediations for a liquidator regarding very similar preference claims over a period of two months.  It was interesting to see how some strategies employed by us and the other parties worked.  Some tips coming out of the process:

  1. When booking the mediation, be dubious when the other side wants a half day mediation.  It is extremely rare for a mediation to be done before lunch where the case has any significant value.
  2. Prepare a mediation position paper with the client’s input, even if one is not required or exchanged, for use as speaking notes for the open session.  Focus on just a few key issues that make a real difference to the outcome of the case and try to put the arguments about those issues in plain language that can be understood by the decision-making clients on the other side of the table.  There is nothing less effective than a dry recitation of the pleaded issues in legal language.
  3. If an opponent suggests that an open session can be skipped to save time, resist:  you will find that you have to tell the mediator about your position anyway and some of your message will be lost in the retelling.
  4. In the open session, without completely ignoring your opponent lawyer, you should mainly address the clients on the other side of the table.
  5. It is not unusual for round table discussions to become expansive.  Clients can feel the urge to say perhaps more than they ought to, particularly about issues of fact or their (mis)understanding of some legal point.  You can use these situations to your advantage by dealing with the point in issue when addressing those clients in the open session.
  6. Introducing new issues at a mediation can be a very effective way of putting a party off-balance.  But be prepared for the other side to discount the new issue on the grounds they have had no notice of it.
  7. Know the financial stakes if you don’t settle.  It surprised me that in a number of cases the defendant attended without calculating their exposure to costs and interest at the mediation date, or their potential liability at trial if they lost.
  8. Try not to let parties get away with claiming they do not have authority to go over a certain figure to settle:  it is usually nothing more than a brazen negotiating tactic.  You will usually hear this line at about 4:45 pm when the parties are losing steam.  It is easy to give ground, in order to achieve a deal on the day.  Don’t do it!
  9. Even if the attendees do not have proper authority as a matter of fact, the party is usually in breach of the terms of the mediation agreement by reason of it, and if the matter cannot settle the other party is well within their rights to threaten to abandon the mediation and seek indemnity costs of attending.  The appropriate response is to point those matters out, and tell the other side to get on the phone to get the necessary authority.
  10. Have terms of settlement drawn up in advance of the mediation and have a laptop handy on which they can be edited.  Time saving at least one hour, which could make the difference between getting out at a reasonable hour or not.

Regards

Mark

High Court decision gives broad reading of officeholders’ statutory duty of care and diligence

The High Court delivered judgment today in ASIC’s regarding the directors of James Hardie Industries Ltd (JHIL) (link).  The Court also delivered judgment in a related appeal by the “General Counsel and Company Secretary” of JHIL at the time,  Peter Shafron, against ASIC (link).

These appeals involve the infamous separation by JHIL of certain asbestos making subsidiaries that had significant exposure to asbestos related diseases.  Readers may recall that JHIL represented at the time of the separation occurring that the subsidiaries had sufficient funding to cover future claims against them.  It turned out they did not, by a long shot.

ASIC pursued the directors and officers of JHIL for breaches of various statutory duties arising out of the transaction.  He was subject to various penalties as a result.

The decision regarding Peter Shafron is interesting because it illustrates the breadth of the statutory duties imposed on an “officer” as defined in section 9 of the Corporations Act (link).  The Court has made clear that it is the actual responsibilities of the office holder and their skill set in that field that define the area within which duties of care and diligence apply.

In brief terms, Shafron was found at trial and affirmed on appeal to have breached his duties under s180(1) (link) to JHIL as its “joint General Counsel and Company Secretary”.  Two breaches were the subject of the appeal.    The first breach was that he failed to give the board of JHIL advice that certain information in a deed involved in implementing the separation should have been disclosed to the ASX.  Second, he failed to advise the board that cash flow modelling used to estimate JHIL’s exposure did not take into account superimposed inflation of the cost of meeting medical claims (being medical costs inflation over and above the general level of price inflation), and accordingly was not an adequate guide to the required level of provisions.

Shafron argued that his alleged contraventions could not give rise to a breach of s180(1) because they arose from work he did in his capacity as General Counsel, and not in his capacity as a statutory officer.  He argued that he could only be liable for a breach of his statutory responsibilities as company secretary, which he argued were generally administrative and did not involve providing legal advice.  He argued that whatever duties he had as in the role of General Counsel were not within the statutory responsibilities of a company secretary.

The High Court disposed of this argument swiftly by means of the construction of s180(1).  The Court held that on any reading of s180(1)(b), the duties of care and diligence on the office holder are in respect not only of the statutory responsibilities of the office, but also in respect of whatever responsibilities that particular office holder has been given or has assumed within the corporation.   The High Court’s analysis is at paragraphs [18] to [20] of the judgment.  In particular at para [19] the Court held:

…..The effect of par (b) of s 180(1) is to require analysis of what a “reasonable person” in the same position as the officer in question would do. His or her position is not adequately described unless regard is had both to the office held and to the responsibilities that the person has. Further, Mr Shafron’s submissions ignored the evident difficulty in defining, for the purposes of limiting the conduct considered, the content of “the office held” where a person is an officer by virtue of par (b)(i), (ii) or (iii) of the definition of “officer” in s 9. A construction which avoids that difficulty, and avoids a more limited operation of s 180(1) in relation to some officers than in relation to others, is to be preferred.

In this case, Mr Shafron’s responsibilities were found by both the primary judge and the Court of Appeal to have included the tendering of relevant advice (including legal advice) about disclosure requirements. As the Court of Appeal rightly said:

“A company secretary with legal background would be expected to raise issues such as potential misleading statements (in relation to the draft ASX announcement) and disclosure obligations (in relation to the DOCI) with the board. Ordinarily it might not be the same with respect to a matter such as the JHIL cash flow modelling, which required particular expertise. But Mr Shafron had a quite close involvement with the cash flow modelling, and raising the limitations of the cash flow model [based on the material Mr Shafron had obtained from Trowbridge] is by no means a legal matter for the attention of general counsel; the involvement, and raising the limitations, in our view fell within Mr Shafron’s responsibilities as company secretary.” (emphasis added)

That is, Mr Shafron’s “responsibilities within the corporation” extended to the several subjects identified. Once it was found that his responsibilities extended to those subjects, the question became whether Mr Shafron undertook those responsibilities with the requisite degree of care and diligence.

Regards

Mark

More online troubles for traditional retail: landlords beware

I wrote a post a month or so ago about the effect of online sales on the retail property sector (link).

One of the sources for the post was James Stewart’s Retail Postcard column.

James has just released another very interesting post (link), arising partly out of his recent appointment as receiver of the WOW SIght and Sound chain in Queensland (similar to JB Hi Fi but not as successful).  The current post is not up yet but you can subscribe at that page and get it now by email.

It deals with the trouble electronics retailers are having here and in the US.

The most interesting part of the post to me was this:

Best Buy, the undisputed market leader in the USA (FY11 sales USD50b, 180,000 staff worldwide), is now the subject of considerable speculation about its future despite remaining a profitable business (FY11 net earnings USD1.1b). In fact since January 2011, Best Buy’s share price has lost over 31% of its value and the business now trades at a meagre 2.8 times earnings, making it one of the five worst-performing retail stocks in Standard & Poor’s 500 Index last year.

And recently, I was appointed Receiver and Manager over WOW Sight and Sound, the $260m Queensland-based consumer electronics retailer which just found the going too tough.

So what is the problem?

The answer is simple: Best Buy has become Amazon’s showroom.

(emphasis added)

Last week I heard the same complaint by a Chapel Street small retailer selling fashion footwear:  people are coming in to try his stock for size, and then buying on the net.

To make matters worse, the manufacturers led by Apple are opening their own direct to market chains:

On top of this, the days of brand manufacturers needing retailers as their only channel to market are coming to an end.

Ten years ago, Apple did not have a retail store at all. Now it is the best specialist retailer in the world. Google, Sony, Samsung are all heading down a similar path.

While brands are increasingly becoming successful vertically integrated retailers, traditional retailers are struggling to remain great brands, particularly when they sell other people’s products.

There is no better example than Apple.

While independent consumer electronics retailers may say that Apple is great for business (because it drives foot traffic), they know that the margins they achieve on Apple products can be terrible (as low as 5%) and ultimately you cannot build a sustainable old school retail business on Apple products alone. The short answer is that Apple doesn’t need traditional retailers the way they need Apple!

So what does this mean for retailers and retail landlords?  My guess is not happy days:

  1. Retail electronics will continue to struggle and the retail space taken by them will come under price pressure;
  2. Any product that can be sold over the internet and shipped is going to suffer the same sort of pressures.  As an example, the well known bike store CBD Cycles in Melbourne has said it is being hammered by internet bike sales (including whole bikes!) from overseas.
  3. Direct to market branded stores will become more common – but will most probably require less space.

Regards

Mark

Liquidator’s or Receiver’s lien may be at risk under PPSA in some circumstances

Most commentators, relying on s73 (link) of the Personal Property Securities Act 2009, state that liens are not affected under the PPSA.  Section 73 provides priority to liens and other security interests arising under general law or under statute (called “priority interests”) in some circumstances.

But there are some serious traps for creditors relying on liens under the new regime.

First, if a creditor is relying on a contractual lien to get paid,  that creditor is going to lose out in a priority battle with a secured party holding a security agreement in respect of all assets.  Section 73(1)(a) only provides for protection to an interest arising under general law or under statute, but not a lien arising by agreement.  A lien created by a contract is a security agreement that under the PPSA will require perfection (by registration or otherwise).

So where a logistical services company claimed a lien under its terms of trade over goods in its possession belonging to a customer, they lost out to a receiver appointed over the customer by a bank with a prior registered all assets security agreement:  see McKay v Toll Logistics (NZ) Limited (HC) [2010] 3 NZLR 700 (link); Toll Logistics (NZ) Limited v McKay (CA) [2011] NZCA 188 (link).  There is a good summary of McKay by Leigh Adams at (link).

Second, even if a creditor has a lien under statute or general law, it should be careful before taking a concurrent contractual lien.  It might be argued by a secured party holding a prior registered security agreement that section 73(1) doesn’t apply, because the contractual lien supplants the general law or statutory lien that would otherwise have arisen.  A solution for the lienee would be to ensure that the contractual lien on its terms specifically preserves any general law or statutory liens that may arise, and be created in addition to those liens.

Third, a liquidator or receiver who relies on a “salvage lien” arising under the principles in Re Universal Distributing Co Limited (in Liquidation) (1933) 48 CLR 171 should be careful to check that their lien is protected under s73(1).  It is possible that the terms of a prior registered security agreement could purport to prohibit the grantor “creating” a salvage lien.

A salvage lien does arise under general law, however it could be expected that a receiver or liquidator may well have actual knowledge of the terms of a prior registered security agreement held by a financier.

By s73(1)(e) a lien holder who has actual knowledge that creation of a subsequent priority interest will breach the terms of a secuity agreement does not receive protection of the section.   Further, the section only governs liens arising “in the ordinary course of business” – see s73(1)(b).

Now for many possessory liens arising in the ordinary course of business, the lien holder will be unaffected.  Think classically of a repairer.  A motor vehicle repairer engaged to fix a company vehicle might expect it to be under finance, but would not be likely to check the PPSR and obtain a copy of any prior security interests.

But for a salvage lien, the situation is more difficult.  A liquidator or receiver may well know the terms of a prior ranking secuirty agreement.  There could also be a tricky argument about whether a salvage lien arises “in relation to providing goods and services in the ordinary course of business”.  In my view it probably does not, given that it will arise only once the grantor is insolvent and continuing to trade under the control of an insolvency practitioner.  Until we know the answer by a decided case, the risk remains.

I note the same risk may confront solicitors and accountants holding a lien over a file for unpaid fees, for the same reasons.

These are potentially troubling results.   If one is in a position of having actual knowledge of prior security interests, then before relying on a lien of any complexion, care must be taken to avoid loss of priority to a registered security agreement.

Thanks to Nick Anson of Minter Ellison for comments on this post (link to Nick’s profile).

Regards

Mark