Tag Archives: Security interest

Case Note: Re Holdco and Intangible Property under the PPSA

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) [2021] FCA 377https://jade.io/article/803015

Short Summary

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 Facts

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.

Mesopotamian King Sargon ponders the meaning of “security interest”

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.

(emphasis added)

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.

Arguments

The substantive defences pressed at trial were:

  1. 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.
  2. 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. 
  3. 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. 
  4. 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 Decision

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.

Takeout

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. 

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

 

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

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