The Federal Court holds that intangibles are capable of being subject to a security interest
McCallum, in the Matter of Re Holdco Pty Ltd (Administrators Appointed) (No 2)  FCA 377 – https://jade.io/article/803015
In this case the Federal Court confirmed, perhaps unsurprisingly, that intellectual property, as an intangible, is “personal property” for the purposes of the PPSA and capable of being subject of a security interest by means of retention of title.
The defendant, GrowthOps, argued that a “conditional sale agreement” capable of giving rise to a security interest by reason of section 12(2)(d) of the PPSA is limited to tangible goods and excludes intellectual property rights.
The essential point defeating GrowthOps was that, in substance, its contract withheld title to the subject intellectual property until payment for the same was made by its debtor and accordingly amounted to a security interest within the broad meaning of section 12(1) of the PPSA, which does not mention or require that the subject personal property be tangible.
The case involved the sale of various business and assets of the failed Sargon Group. Sargon Group promoted itself as a “tech-driven trustee services, fund operations and custodial services” business with more than $55 billion in assets under trusteeship or supervision.
The group consisted of some 39 companies, which were the subject of a range of secured claims by different secured creditors.
The administrators of some of the companies in the group negotiated a sale of businesses and associated assets in April 2020. The administrators sought and obtained leave of the court to dispose of encumbered property subject of the sales pursuant to section 442C(2)(c) of the Corporations Act 2001 (Cth) (CA).
After completing the sale, the administrators paid the proceeds into Court where various competing secured creditors, as defendants, laid claim to the proceeds in a subsequent trial.
GrowthOps claimed to have developed and supplied software systems that were sold by the administrators in the sale of business. GrowthOps claimed that it had retained title to the relevant IP (called the “Developed IP” in the contract and the judgment) in clause 7.1(a) of its contract with Sargon Capital, the relevant Sargon entity. The clause stated:
All Intellectual Property Rights in the Services and Deliverables (Developed IP), except any GrowthOps Background IP or its service methodology and knowledge, vests in Sargon immediately upon payment to GrowthOps for same, and GrowthOps hereby assigns, and must procure that its personnel assign, all Intellectual Property Rights in the Developed IP To [sic] Sargon. GrowthOps agrees to do all things which may be necessary for these ownership rights to pass to Sargon. At Sargon’s request, GrowthOps must provide, and ensure that its personnel or sub-contractors provide consents to or waivers of any moral rights in specific Developed IP. This clause does not in any way derogate from the ability for GrowthOps to utilise the same service methodology for other clients.
Sadly for GrowthOps, it had failed to register its rights under the contract on the PPSR before the appointment of the administrators. At trial GrowthOps sought to escape vesting of its interest pursuant to section 267 of the PPSA.
The substantive defences pressed at trial were:
- On creation of the Developed IP, there was an implied licence to Sargon to enable Sargon to use it pending transfer of title on payment, and the PPSA does not apply to rights under a licence: see s12(5)(a) of the PPSA.
- A “conditional sale agreement” in s 12(2)(d) of the PPSA is implicitly confined to goods. The implicit limitation to goods was said to arise from the fact that s 12(2) contains a list of expressions which can only relate to goods. It further argued that the expression “conditional sale agreement” is familiar in the context of a sale of goods and, in s 6 of the Goods Act 1958 (Vic), there is a reference to a sale of goods being conditional or unconditional. Further, s 19(5) of the PPSA refers to a conditional sale agreement of goods.
- There was in fact no sale of anything, and therefore no conditional sale agreement. Rather, there was a provision of services for a fee, incidental to which there was creation of intellectual property which was transferred upon payment of the fee.
- As a logical extension of 3, the transaction did not, in substance, secure payment or performance of an obligation. Clause 7.1(a) merely spelled out the time at which title in the “incidental” Developed IP would pass to Sargon Capital. Clause 7.1(a) did not secure payment since even if the fees remained unpaid, Sargon Capital continued to enjoy the use of the Developed IP through the implied licence.
Sargon Capital itself advanced an alternative argument that, on its proper construction, clause 7.1(a) effected an immediate assignment of copyright (upon its creation) to Sargon Capital (allowing it to use those rights as an assignee), whilst stipulating that the copyright would not vest in Sargon Capital until payment had been made (at which time the copyright would permanently vest in Sargon Capital). Sargon Capital argued that s 197 of the Copyright Act distinguishes between the “vesting” and “assignment” of copyright. It argued that the vesting of property carries with it a notion of permanency whereas an assignment may be limited or conditioned and is capable of being revoked or ended by the assignor.
The Court (O’Bryan J) disposed of the arguments as follows.
First, the implied licence was not relevant. The subject of the sale was not that licence, but the underlying Developed IP.
Second, that the Developed IP is an intangible was also irrelevant:
- The transaction was within the scope of the definition of security interest within section 12(1).
- That definition which extends “to an interest in personal property” is not restricted to tangible goods: there are many instances of transactions caught by the PPSA that apply only to intangibles.
- The list of transactions in section 12(2) are examples, are not exhaustive and are not a code. The fact that some can only apply to tangible goods does imply that the act applies only to tangibles.
- GrowthOps could offer no reason why the purposes of the PPSA would be served by such a narrow construction. The stated purpose (from the explanatory memorandum) of introducing the PPSA was to achieve “more certain, consistent, simpler and cheaper arrangements for personal property securities.” Excluding intangibles would undermine that purpose.
Third, the transaction was not a fee for service. The contract contemplated the creation and vesting of the Developed IP in Sargon Capital upon payment of the fee owing to GrowthOps. It was accordingly an exchange of money for both services and the transfer of IP.
Fourth, the transaction did secure payment by withholding title to the Developed IP, despite the existence of the implied licence, because that licence would cease on termination of the agreement, whereas title would be permanent. There was accordingly an incentive to pay the outstanding amounts due, to secure title.
The Court also rejected the distinction between vesting and assignment of copyright advanced by Sargon Capital. Assignment of copyright was the means by which title was to be transferred, and vesting was the consequence of the assignment. In other words, the terms are related and “assignment” results in “vesting”. They are not separate or distinct forms of rights transfer.
This case is another striking example of the need to register security interests on the PPSA. In my view the result was not surprising, certainly in my experience practitioners have rightly assumed that intangible property is caught by the PPSA. In addition to the reasons given by the court, the term “conditional sale agreement” is not defined in the PPSA nor is it expressly limited to goods on its face nor is there any apparent reason to imply such a limitation.
The defences run by GrowthOps were nevertheless creative and perhaps may have been better left untested by a judicious compromise with the administrators before trial.