Category: Insolvency

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.

 

 

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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

When is a defect in a PPSR registration fatal? A defect in the ACN of the secured party not misleading

Case Note – Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd [2013] NSWSC 1741

It is often the case that an error is made in the ACN, ABN or even name of a party, or in the serial number of collateral,  when registering on the PPSR.  The online nature of the registration process lends itself to typos or transcription errors.

The Supreme Court of NSW has found that a defect in the ACN of the secured party in a financing statement registered on the PPSR does not render the registration ineffective.

Section 153 of the  Personal Property Securities Act 2010 (“PPSA”) requires that a financing statement include certain details of the secured party.  If the secured party is a Body Corporate, the ACN must be entered – see item 2 in the table under para 1.3(4) in schedule 1 of the PPSR regulations.

In Future Revelations, the secured party’s ABN number was entered instead of its ACN number.

The PPSA codifies which defect in the register make the associated registration is ineffective.  It is important in practice to be aware of them:

  • Section 164 provides that a defect in the register will render the relevant security interest ineffective if it is “seriously misleading”, excepting defects prescribed in the regulations, or it if is defect mentioned in section 165.
  • The defects in section 165 are:
    • defects preventing disclosure of the registration by searching the serial number of the collateral where that detail is required for registration.  An example would be omission of the serial number or an error in it;
    • where the serial number is not required, where a search by reference to the grantor’s details is not capable of disclosing the registration.  An example might be an error in the name of the grantor, such as recording the name of a partnership as that of an individual partner, rather than that of the partnership;
    • where the registration is said to be in respect of a PMSI, but in fact is not;
    • otherwise as specified in the regulations.
  • At present no regulations have been made under sections 164 or 165.

What makes a registration defect “seriously misleading”?  Since the PPSR is a register designed to enable the public to identify security interests in collateral, or security interests given by a grantor, errors are seriously misleading if they  hinder or prevent a search turning up security interests by reference to the identifying details of the collateral or grantor.

In Future Revelations, Brereton J said at [5] to [7]:

  1. The suggested defect in this case is not one of a kind mentioned in s 165. The question then is whether it is “seriously misleading”. That term is not defined in the PPSA, nor is there any guidance in respect of its meaning in the explanatory memorandum or the second reading speech. However, as is well-known, the PPSA is modelled on and derived from similar legislation in Canada and New Zealand and, as was observed in Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd [2013] NSWSC 852, the Commonwealth Parliament in enacting legislation that was modelled on the New Zealand and Canadian legislation should be taken to have intended approaches and interpretations applied by the Courts of those countries to their legislation to apply in Australia. A similar view has been taken in New Zealand.
  1. Canadian case law suggests that the test for whether a defect is “seriously misleading” is whether it will result in the registration not being disclosed on a search [see Re Lambert (1994) 7 PPSAC (2d); GMAC Leaseco Ltd v Moncton Motor Home & Sales (2003) 227 DLR (4th) 154 at [58]]. That makes sense, as the purpose of registration is to enable the existence of the security interest in the collateral to be searched and ascertained. A person searching in the PPSR is likely to be concerned with the identity of the grantor and/or the collateral. In terms of searching the PPSR, while there is facility to search by reference to the identity of the grantor and the collateral, there is no facility to search by reference to the identity of the secured party.
  1. In the present case, a search by reference to the identity of the collateral or the grantor would have disclosed the relevant security interest. Such a search would have identified clearly enough the secured party, namely Suncorp, even though its ABN and not ACN was stated. In my view, it is very clear that this defect was not seriously misleading or indeed for that matter misleading at all. Accordingly, it seems to me by operation of s 164(1) that the registration is not ineffective by reason of the defect that has been identified.

So errors in the details of the secured party will be not be fatal, provided the details in the registration in respect of the serial number of the collateral, or the grantor, as the case may be, is correct.

However, an error in the ACN or name of a grantor, where the serial number of the collateral was not required, may well be fatal – see for example a case where the name of the grantor was recorded as “Grandstand” rather than “Granstrand”.

Practitioners need to be careful in checking transcription of the identifying details of the grantor and the collateral (particularly the serial number) when entering details on the PPSR website.

It is also worth noting that the application in Future Revelations was made urgently and  ex parte, without formally filing process.  The application was urgent since the borrower had just defaulted.  Leave was granted to file process in Court, and an order was made giving liberty to apply to any administrator, liquidator or unsecured creditor to claim their interests could be affected by the order of the Court.

Regards

Mark

 

What a difference a day makes – When does the relation back period start?

Re Weston Application; Employers Mutual Indemnity (Workers Compensation) Ltd v Omni Corporation Pty Ltd [2009] NSWSC 264

In insolvency law the calculation of precise periods of time is important.  Insolvency practitioners need to know exactly when limitation periods end in order to preserve potential claims.  The “relation back period” is one of the more important time periods relevant to calculating limitations, and yet there is surprisingly little authority on exactly when the relation back period starts.

The Relation Back period

Most practitioners are familiar with what is the last day of a relation back period. It is the “relation-back day” in corporate law, and in bankruptcy it is the date of the presentation of the petition against the bankrupt.

But what is the first day of the relation-back period?  If the relation back day is 12 December, is a 6 month relation-back period taken to begin on the 12 June?  Or 13 June?  The answer has obvious practical significance because it is not uncommon for a significant payment to fall on the 12th day.

The issue is whether one includes the relation back day or not in the 6 month period. Surprisingly, there is no appellate decision which makes the answer clear, however single judge authorities indicate one does count the relation-back day. So in the example, 12 June would not be included.

In Scott v The Commissioner of Taxation [2003] VSC 50 (link),  Justice Dodds-Streeton reached the same conclusion (at paragraphs 32 and 33).  However the decision does include reasoning on that point.

In Re Weston Application; Employers Mutual Indemnity (Workers Compensation) Ltd v Omni Corporation Pty Ltd[2009] NSWSC 264 (link), calculation of time going forward from the relation-back day was discussed in an application to strike out a voidable transaction claim on the basis it was out of time.  The time for making the application expires 3 years after the relation back day, or 12 months after the appointment of the liquidator, whichever is the later: s588FF(3)(a).

In Re Weston the liquidator commenced the application for relief under s588FF(1) exactly 3 years to the date after the relation back day:  the respective dates were 16 January 2009 and 16 January 2006.

Justice Barrett considered the issue relying on two statutory provisions (at paragraphs 6 to 16):

1.Section 105 of the Corporations Act. It provides:

Calculation of time

Without limiting subsection 36(1) of the Acts Interpretation Act 1901 , in calculating how many days a particular day, act or event is before or after another day, act or event, the first-mentioned day, or the day of the first-mentioned act or event, is to be counted but not the other day, or the day of the other act or event.

2.Section 36(1) of the Acts Interpretation Act 1901 (link).  It contains a useful table for calculating when a day should and should not be included in a time calculation.  The section states that:

A period of time referred to in an Act that is of a kind mentioned in [the table] is to be calculated according to the rule mentioned in [the table].

Based on those provisions, His Honour concluded:

  1. when a time period is expressed to end at, on or within a specified day, the period of time includes that day (item 4 of the table);
  2. when a time period is expressed to begin from a specified day, the period of time does not include that day (item 5 of the table).

The Start Date and the End Date

In Re Weston the result was that the liquidator had made his application in time, since the 16th of January 2006 was not included in calculating the 3 year limitation period after the relation-back day (applying item 5 from the table).

In calculating the start of the relation-back period, using the example above, 12 June would not be included, because 12 December would be included in the 6 month relation-back period (applying item 4 from the table).

Significance for Practitioners

The application of these principles is important:

  • for practitioners in diarising limitation periods;
  • identifying transactions at the extremes of the relation back periods under the voidable transaction provisions;
  • for third parties considering limitation defences;

for calculating the application of time periods generally where limits are strict. For an example, applied to determining whether an application was within time to set aside a statutory demand, see Autumn Solar Installations Pty Ltd v Solar Magic Australia Pty Ltd [2010] NSWSC 463.

Regards

Mark

Acknowledgement:  this post originally appeared on the Commercial Bar Association of Victoria blog, Commbar matters, at http://commbarmatters.com/2014/04/08/what-a-difference-a-day-makes-when-does-the-relation-back-period-start/

Setting aside a statutory demand – Another useful summary of the law

Last year I added a post (see http://wp.me/p1UOHK-5y) referring to a clear, brief summary of the requirements for setting aside a demand, set out in the decision in Elite Catering Equipment Pty Ltd v Seroshtan [2012] VSC 241(link).

Another recent case following the same line of reasoning is worth noting.  The decision is Welldog Pty Ltd v World Oil Tools Inc [2013] QSC 180 (link), approving a summary of the law by Robson J in Rhagodia Pty Ltd v National Australia Bank Ltd (2008) 67 ACSR 367 at [91]–[94] (link).

Robson J’s summary has also been approved recently in a decision of Associate Justice Gardiner, in Troutfarms Australia Pty Ltd v Perpetual Nominees Ltd [2013] VSC 228 (link) and by the Victorian Court of Appeal, on appeal from Gardiner AsJ, in Troutfarms Australia Pty Limited v Perpetual Nominees Limited [2013] VSCA 176 (link).

The cited passage from Rhagodia reads as follows (emphasis added):

[91] In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd Dodds-Streeton JA (with whom Neave and Kellam JJA concurred) said:

‘[56] The court, in the context of an application to set aside a statutory demand, must determine whether there is a genuine dispute about the existence or amount of the debt or whether the company has a genuine off-setting claim.

[57] No in-depth examination or determination of the merits of the alleged dispute is necessary, or indeed appropriate, as the application is akin to one for an interlocutory injunction. Moreover, the determination of the “ultimate question” of the existence of the debt should not be compromised.’

[92] Dodds-Streeton JA further said:

‘[71] As the terms of s 459H of the Corporations Act 2001 and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. As counsel for the appellant conceded however, it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something “between mere assertion and the proof that would be necessary in a court of law” may suffice. A selective focus on a part of the formulation in South Australia v Wall, divorced from its overall context, may obscure the flexibility of judicial approach appropriate in the present context if it suggests that the company must formally or comprehensively evidence the basis of its dispute or off-setting claim. The legislation requires something less.’

[93] In Eyota, McClelland CJ of the Supreme Court of New South Wales said:

‘It is, however, necessary to consider the meaning of the expression “genuine dispute” where it occurs in s 450H. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the “serious question to be tried” criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit “however equivocal, lacking precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be” not having “sufficient prima facie plausibility to merit further investigation as to [its] truth” (cf Eng Mee Yong v Letchumanan), or “a patently feeble legal argument or an assertion of facts unsupported by evidence”: cf South Australia v Wall.’

But if it does mean that, except in such an extreme case, a court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute. In Mibor Investments Hayne J said, after referring to the state of the law prior to the enactment of Div 3 of Pt 5.4 of the Corporations Law, and to the terms of Div 3:

‘These matters, taken in combination, suggest that at least in most cases, it is not expected that the court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weight the merits of that dispute. All that the legislation requires is that the court conclude that there is a dispute and that it is a genuine dispute.’

In Re Morris Catering (Aust) Pty Ltd Thomas J said:

‘There is little doubt that Div 3 … prescribes a formula that requires the court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the court will examine the merits or settle the dispute. The specified limits of the court’s examination are the ascertainment of whether there is a “genuine dispute” and whether there is a “genuine claim”.

It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it), the court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another.

The essential task is relatively simple — to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).’

I respectfully agree with those statements.

[94] In TR Administration, Dodds-Streeton JA (with whom Neave and Kellam JJA concurred) cited this passage with apparent approval and noted it was also cited by the Full Federal Court in Spencer Constructions Pty Ltd v GAM Aldridge Pty Ltd.

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

Clear, brief statement of Court’s approach to applications to set aside a demand

A recent decision of Justice Ferguson of the Supreme Court of Victoria is worth reading by practitioners defending or making applications to set aside statutory demands under s459G of the Corporations Act 2001.  The decision is Elite Catering Equipment Pty Ltd v Seroshtan [2012] VSC 241(link), an appeal against a decision by Associate Justice Gardiner.  The decision at first instance, at [2012] VSC 194 (link),is also worth reading.

Very briefly, the creditor was a company director who was seeking to recover a loan to the company.  The other two directors claimed the loan was in fact equity.  There was most probably a genuine dispute about the issue, since there were no clear records at the time the advance of the money to the company to determine its nature,  save for two matters:  one of the other directors had signed a letter acknowledging the debt, and the Company accountant had prepared the accounts showing the amount to be a director’s loan.  In both decisions the Court relied on these last two matters in deciding there was no genuine dispute.

The decisions are worth reading because, first, the Court refused the application:  perhaps a rare occurrence in itself.

Second, the reasoning in the decisions illustrates that whilst the threshold for establishing a genuine dispute is low and the Court ought not try the case on its merits, nevertheless it is permitted to investigate the matter.   In this case the factual basis of the application appeared at first glance to be plausible given the lack of clear evidence about the nature of the advance when first made, but required some investigation by the Court, which it was willing to do, to determine that given the later in time evidence there was no real dispute.

Third, there is a short but pithy summary about the task of the Court in determining these applications.

On appeal, Justice Ferguson stated:

7 In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd,[7] DoddsStreeton JA said:[8]

The court, in the context of an application to set aside a statutory demand, must determine whether there is a genuine dispute about the existence or amount of the debt or whether the company has a genuine off-setting claim. No in-depth examination or determination of the merits of the alleged dispute is necessary, or indeed appropriate, as the application is akin to one for an interlocutory injunction. Moreover, the determination of the “ultimate question” of the existence of the debt should not be compromised. (Citations omitted).

8 Her Honour also said:[9]

“As the terms of s 459H of the Corporations Act and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. As counsel for the appellant conceded however, it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something “between mere assertion and the proof that would be necessary in a court of law” may suffice.”

At paragraph 42 and 43 of the first instance decision, Gardiner AsJ  states;

42 The principles to be applied in assessing applications under s 459G of the Corporations Act are the subject of many authorities. The Court need only find that the plaintiff has a genuine dispute about the existence or amount of the debt. It has been said that this does not impose a particularly high standard. The grounds for alleging a dispute or an offsetting claim must not be spurious, hypothetical, illusory or misconceived. To quote from the Full Court of the Federal Court in Spencer Constructions v Aldridge,[2] it must be “real”.   In the well-known passage of McCelland CJ in Equity in Eyota v Hanave, his Honour said:

A genuine dispute connotes a plausible contention requiring investigation and raises much the same sort of considerations as a serious question to be tried arising on an application for the interlocutory injunction or extension or removal of a caveat. This does not mean that the court must accept uncritically as giving rise to a genuine dispute every statement in an affidavit, however equivocal, lacking in precision, inconsistent with the undisputed contemporary documents or other statements by the same deponent, or inherently and improbable in itself” it may not be – it may not having sufficient prima facie plausibility to merit further investigation as to its truth or a patently feeble legal argument or assertion of the facts unsupported by evidence.

43 In Powerhouse Australasia Pty Ltd v Viarc Pty Ltd,[3] DoddsStreeton J stated:

While it is not a very exacting standard, on the one hand mere, assertion of a dispute or offsetting claim, mere bluster or advancing grounds which are illusory or spurious or insufficiently particularised will not suffice. The court must not enter into the merits of the dispute, but it is not crossing the line in regard to its legitimate role on these applications to consider evidence which “bears on whether or not the asserted dispute or offsetting claim is genuine”. Indeed that is its necessary function.

Regards

Mark

Unit Trusts can expose personal assets in bankruptcy

Most business people know that they should shelter their assets by keeping them out of their own name, so that if they go bankrupt, those assets are not available to the trustee in bankruptcy.

But it’s also important to make sure that the entities that control those assets are still under the individual’s direct or indirect control in the event of personal bankruptcy.

Recently a client* learned a hard lesson that was fortunately only a near miss.

He set up his interest in a business so a trustee company held it.  The company was trustee of a unit trust.  The only unit holders of the trustee company were he and his wife.  The only shareholders of the trustee company were he and his wife.  They were also the only directors.

The trustee company owned one third of a development site.

In the course of the business he and his wife had given personal guarantees over a business loan.  Eventually the lender made a call on the guarantee for an amount of over $10 million.  The guarantee had a very nasty clause in it (which he and his wife had not read) by which they agreed to give a mortgage over all of their real property to secure the loan.

When it became apparent that the loan may go bad, the lender placed caveats over all of the real property in the name of he and his wife which included 2 investment properties and a family home.

The client could not service the first mortgages on the family home and the investment properties, or service the business loan of which he was guarantor.

After a period the client and his wife each declared bankruptcy.

After they had declared bankruptcy, an opportunity arose to restructure the business and settle with the lender on favorable terms.   The restructure required the transfer of the trustee company’s interest in the development site to a Newco.

Problem?  The units in the unit trust vested in the trustee in bankruptcy of the client and his wife.  They had ceased to be directors of the trustee company because they were bankrupt.  And the shares in the trustee company vested in the trustee in bankruptcy.  Further, the trust deed reserved the power to change trustee to the unit holders alone. (Frequently, the appointor of the trust, usually a family member, has that power, but that was not so in this case)

So the client and his wife could not cause the trustee to execute a transfer or change trustee to a new entity who could. And the trustee (ITSA) would not assist.

In the end, the client had a near miss, more through luck than anything else.  It turned out that the units in the unit trust were held by he and his wife as trustees for another trust, their family trust, which fortunately was a discretionary trust.  The trustee of that trust was a different company with different directors.  The trustee of that trust was able to direct the trustee in bankruptcy to transfer the units to it.  Then it was able to change the trustee under the provisions of the trust deed, and the new trustee could execute the transfer.  Phew that was close!

So what are the lessons of this near miss?

  1. Unit trusts are not very good at sheltering personal assets because the units will vest in the trustee in bankruptcy.  It is possible to use a hybrid unit trust/discretionary trust structure in their place.
  2. If for tax reasons unit trusts structures are necessary, the unit themselves should not be held by the individual seeking to shelter assets beneficially.  They should be held by another entity that is sheltered.  The same goes for the shares in the trustee company.
  3. Be careful to have directors of the trustee who are not likely to go bankrupt if the sheltered individual also goes bankrupt.  Preferably appoint another family member not involved in the business, or an accountant or lawyer (if one is willing).
  4. Reserve a power to change the trustee to the appointor or to a family member in the trust deed.

Regards

Mark

*The facts have been changed slightly to protect the client

Warning: a statutory demand for part of a debt will be set aside

Imagine this very common scenario.  Before attempting to recover a debt, a creditor learns of circumstances which give rise to a genuine dispute about part of it, but there is still some undisputed part left over.

The creditor quite logically makes a demand for the undisputed part, knowing it cannot swear in a supporting affidavit that the whole of the debt is due and payable and that there is no genuine dispute as to the existence of all of the debt.

Two recent cases have ruled that a statutory demand made in these circumstances does not comply with s459E of the Corporations Act 2001 and is liable to be set aside.

The decisions cause practical difficulties for creditors attempting to recover the undisputed balance of a debt.

The cases are Garuda Aviation Pty Ltd v Commonwealth Bank Of Australia [2012] WASC 115 (link) and Candetti Constructions Pty Ltd v M & I Samaras (No 1) Pty Ltd  [2011] SASC 165 (link).

In Candetti, a creditor was owed $1,457,935 for crane services nett of amounts already paid.  In correspondence, the debtor had disputed liability for the nett amount but had admitted that only $308,151 was payable.

Section 459E (link) governs the content of a statutory demand and among other things requires that the demand relate to a single or one or more debts that are due and payable.  The existence of the debt, that it is due and undisputed must be verified by affidavit.

Justice Blue of the South Australian Supreme Court construed s459E (see paras 47 to 53 of the judgment) to require that the whole of the debt demanded must be undisputed, since the wording of s459E(1) was silent as to whether a part of a debt could be demanded.  The purposive basis of the decision was that a debtor seeking to set aside the demand would not know which “part” of the debt to dispute, and would in effect have to raise a dispute as to the whole of the debt.

In the Garuda case, the Commonwealth Bank was owed USD16,650,000 by Garuda under a facility agreement, secured by a chattel mortgage over a Gulf stream aircraft and a director’s guarantee.  The facility was in default.

At the time the demand was to be issued, CBA believed it had a debt claim against Garuda for USD6,896,535.05.

In related proceedings that had gone to trial between CBA and the guarantor in which judgment was pending, issues had been raised which clearly gave rise to a genuine dispute as to all but USD2,099,047.13 of that amount.

Accordingly, CBA served a demand only for USD2,099,047.13 in anticipation of a genuine dispute being raised as to the balance.

Master Sanderson of the WA Supreme Court took the view that a demand for part of a debt was valid as a matter of statutory construction.  His analysis was:

[21] It is worth bearing in mind the nature of the statutory demand procedure. The party who claims a company is indebted to it and who says there is no genuine dispute about the debt can issue the demand. A company served with a demand has three options. It can pay the amount demanded. It can seek to have the demand set aside on the basis there is a genuine dispute between the parties, or the company has an offsetting claim greater than the amount demanded, or the company can do nothing. If the application to set aside the demand is unsuccessful or if the company does nothing a presumption of insolvency arises. The party making the demand then has a choice — it can apply to wind up the company or it can do nothing. If an application to wind up is made and the presumption of insolvency is not rebutted by the company then it would be wound up. All this is nothing more than the practical manifestation of the principle that a company which cannot pay its debts as and when they fall due is insolvent. Insolvent companies should be wound up. That is a basic principle of the law of corporate insolvency.

[22] Looked at in this way it does not really matter whether the demand has been made for the whole of an outstanding debt or part of it. If a company cannot pay part of a debt, that part not being disputed, it is presumed to be insolvent. So long as the amount demanded is more than $2,000 (the statutory minimum) a presumption arises. In my view, it is to unnecessarily complicate what is a simple procedure not to allow a party to claim anything other than the full amount of the debt.

[23] There are also practical difficulties about that approach. In this case for instance, it is difficult to see how the supporting affidavit could possibly have attested to there being no dispute as to the entire debt. Perhaps it could have been done — after all the respondent has argued [in the related proceeding] before Le Miere J it is entitled to judgment for the full amount. But any affidavit would have to in some way acknowledge the existence of a dispute. So a party in the position of the respondent would never be able to serve a statutory demand despite the fact a portion of the debt was not in dispute and despite the fact the inability of the applicant to pay that debt may mean it was insolvent and liable to be wound up.

….

[25] In my view, it is open to construe s 459E(1)(a) as allowing a party to serve a statutory demand for part of a single debt. This section refers to “a demand relating to a single debt”. That would be sufficiently wide to allow a demand for part of a single debt. It would do no violence to the wording of the section and would allow for a practical outcome in a case such as the present.

However, Sanderson M accepted a submission that given the national scheme of the Corporations Act, despite his own analysis, he ought to follow the earlier decision of Blue J in Candetti until overturned by a higher court.

The effect of these decisions are very troubling because a creditor who is aware of a dispute as to part of a debt seems to be unable to issue a demand for any of the debt or the undisputed part of it.

One would expect an appeal court or single judge to favour the analysis of Sanderson M in future decisions.

Regards

Mark

Warning to lawyers and creditors serving Bankruptcy Notices: No direct evidence of posting? No effective service.

This is a warning to creditors (and lawyers acting for them) who don’t have direct evidence that their bankruptcy notice was taken to the post office or post box and mailed. You will probably not have effectively served your bankruptcy notice.

Where direct evidence is lacking, the Court will not infer a bankruptcy notice was actually posted just because you had a system where mail placed in an out tray was usually or even always taken to the post office or post box.  There has to be direct evidence of posting.

That is the effect of a decision of Justice Collier of the Federal Court delivered last week in Mbuzi v Favell (No 2) [2012] FCA 311 (link).

Readers will be familiar with reg 16.01(e) of the Bankruptcy Regulations (link) from my earlier post on service by email (link).  That regulation allows a creditor to serve a bankruptcy notice by post.

Justice Collier’s decision is based on three simple points:

  1. Although personal service is no longer required, strict proof of compliance with reg 16.01(e) is necessary;
  2. The onus is on the creditor;
  3. The Court will not infer that a mail item was posted just because it reached an in-tray:  given the penal nature of the bankruptcy system, there must be direct evidence of posting.

In Mbuzi the only evidence that the bankruptcy notice had been posted was oral evidence of the creditor as to his recollection of leaving the envelope containing the bankruptcy notice to be put in the mail by an unnamed secretary/receptionist in the ordinary course of business of his practice.

So what is sufficient direct evidence?

Notably, her Honour remarked that:

  • there was no evidence of a record of the notice being sent by post, as might be expected if there was a system of postage pursuant to which the bankruptcy notice was posted;
  • no evidence was tendered supporting the existence of any register of outgoing mail;
  • no evidence, either oral or in affidavit form, was given by any third party who might have physically posted the bankruptcy notice that the notice had been posted.

These remarks suggest that a system for registering outgoing mail, evidence that the notice was on the register and affidavit evidence from the person who posted the mail on the day in question, may be sufficient.

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