Tag: Personal Property Securities Act 2009

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

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