© hall & wilcox - shaw...

© Hall & Wilcox © Hall & Wilcox

Presentation to:

Presented by:

2

PPSA Shaw Gidley

Guests of Shaw Gidley

Graeme Scott, Special Counsel

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To have a valid security interest

The security interest must attach to the collateral (s19)

• The grantor must have rights in the collateral, or power to transfer

rights, and value given or act done

• Grantor deemed to have rights in goods that are leased or bailed

under PPS Lease

Must be a security agreement (s20)

• In writing

• Grants or provides for a security interest

• Signed or adopted by grantor

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Perfection

The creditor’s rights must be perfected (s20)

• Registration on PPSR

• Possession

o Not repossession/seizure

• Control

o limited application to some financial instruments, including bank

accounts

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Proceeds

Proceeds of collateral means (s31)

• Property that is derived directly or indirectly from a dealing with the

collateral

• A right to an insurance payment for loss or damage to collateral

• If collateral in intellectual property, payments under a licence agreement

• Specific examples

o Harvested produce of crops

o Products of livestock

If a dealing with collateral gives rise to proceeds, the security interest (s32)

• Continues in the collateral unless the secured party authorised the disposal

or agreed would extinguish the security interest

• Attaches to the proceeds

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PMSIs

Purchase money security interest (s14)

• Secures all or part of purchase price or value give to acquire rights in

collateral

o Asset finance

o ROT

• Interest in a PPS Lease

o Certain leases and bailments

• Interest under a commercial consignment

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Priority of Security Interests

The PPSA resolves the priority of competing claims of secured parties in

collateral (ss55 - 77)

Generally:-

• earliest registered security interest takes priority

o but, PMSI’s have “super priority”

• security interest perfected by control and possession have priority over

perfected security interests

• unperfected security interest is defeated by perfected interests

• competing unperfected interests – first in time prevails

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Priority of Security Interests

Security interest created by Commonwealth, State or Territory law or by

operation of law has priority over other security interests in the same collateral

(s73)

• eg, Warehouseman’s Liens Act 1935 (NSW).

Security interest must be continuously perfected to retain priority (s56)

Factoring debts

• Factor giving new value in an account (as original collateral) has priority

over holder of PMSI in same collateral (eg, supplier under ROT) if

o registered first in time, or

o notice within prescribed time (s62)

Subordination agreements are effective according to their terms (s61)

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Vesting of security interest

If a creditor does not ‘perfect’ its security interest:

• may vest in grantor upon appointment of administrator / liquidator /

bankruptcy trustee (s267)

• results in loss of collateral

• become unsecured creditor

• valid against receiver, but low priority ranking

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Vesting of security interest

Certain interests do not vest (s268)

• Interests that do not secure payment or performance of an obligation and are:

o PPS lease of serial numbered goods (unless 1+ years or indefinite term)

o commercial consignment

o Transfer of account / chattel paper

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Vesting of security interest – s588FL

A security interest may vest in a company upon an insolvency event if

registered

• Within 6 months of the insolvency event

• Unless registered within 20 days of the security agreement “coming

into force”.

o ie, a “green” security interest “hardens” after 6 months.

• s588FL Corporations Act

Does not apply to deemed security interests

• Short term PPS lease of serial numbered goods

• Commercial consignment

• Transfer of collateral paper

Can apply for extension of time to register

• Must be accident or inadvertence, no prejudice to creditors

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Timing of Registration

Effect of failure to comply:-

• PMSI may lose high ranking priority

• Security interest may vest (subject to exceptions)

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PPSR

PPSR is ‘notice board’ rather than document register

7 year registration = $8; 7 – 25 year registration = $40; ‘no end time’ (indefinite)

= $140

Secured party must have reasonable belief that have right to register, that will

become secured party in relation to collateral (s151)

Financing statement or financing change statement (s153)

Verification Statement given by Registrar (s156)

24/7 operation

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Searching the PPSR

Anyone can search

Exact match searching system

• Grantor

• Serial number

Linking to prior registrations

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Registration

• A financing statement consists of:-

• Secured party

• Grantor

• Collateral details

o Consumer/commercial

o May or must be described by serial number

o Collateral class - one per registration, eg ALLPAP, ALLPAP except,

other goods, motor vehicle etc

o Description of proceeds, eg all present and after acquired property

• End time for registration

• Subordination

• PMSI

• Other matter, eg Transitional

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Collateral Class

Agriculture

Aircraft

All present and after-acquired property

All present and after acquired property, except

Financial property

Intangible property

Motor vehicles

• include equipment capable of being towed

Other goods

Water craft

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PPSR Registration Certificate

Part 1 – search criteria

Part 2 – registration

details

Registration

number

Transitional?

Start & end

dates

Grantor

details

Collateral

details

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Collateral type

Collateral class

Secured party

details

Proceeds

description

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Part 3 – attachment

certificate

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Examples of Registrations

• Registration against multiple classes

• Security interest over motor vehicle (serial numbered goods), parts (other

goods), related contract rights under a lease (intangible)

• When to register by serial number

• Mandatory for consumer goods

• Legal and practical benefits

• Protect against some taking free rules

• Protect high value goods

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Seriously misleading defect

Registration ineffective if seriously misleading (s164)

• Can a searching party ascertain the existence of a security interest over the

collateral?

Potential defects

• Incorrect collateral description or collateral class

• PMSI not described as PMSI

• Collateral not described as ‘inventory’ if sold/leased as inventory

• Overreaching registrations

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Statutory defects

Registration ineffective if statutory defect (s165)

• No or incorrect serial number for

o consumer property - aircraft, intangible property, motor vehicles and

water craft

o commercial property - aircraft

• Grantor’s details incorrect

o ABN (eg, corporate trustee), ACN (company), grantor’s name

(individual)

• Non-PMSI described as PMSI

• Non-Transitional security interest claimed as Transitional security interest

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Enforcement

To enforce security interest, must have effective registration which covers the

collateral (s163)

Parties rights in PPSA in additional to those in security agreement

Must be exercised honestly and in a commercially reasonable manner

Does not apply to receivers and controllers

Rights to seize, retain goods, garnishee accounts

Obligations to higher security interests

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What to do in a priority dispute

Search PPSR

Request copy of secured agreement

• Does security agreement create or provide for security interest and cover

the collateral?

• Battle of the forms

Check registration carefully

• Does registration cover collateral?

• Defects?

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Taking Free

A third party takes collateral subject to security interests unless ‘taking free’

provisions apply

Taking free rules

• Unperfected interests (s43)

• Serial numbered defects (s44)

• Motor vehicles (s45)

• Ordinary course of business (s46)

• Personal, domestic and household goods (s47)

If ‘taking free’ provisions apply, secured party may retain interest in proceeds

and rights as against grantor (s32)

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Taking Free

Motor Vehicles (s45)

• A buyer or lessee, for new value takes a motor vehicle free of a security

interest if a search of the PPSR (during the period between the start of the

previous day and the date of the sale or lease) would not disclose the

registration

Ordinary Course of Business (s46)

• A buyer or lessee takes personal property free of a security interest if sold

or leased in the ordinary course of business

Rules do not apply if motor vehicle/personal property is held by buyer or lessee

as inventory

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Lessons learned

• When in doubt, “register and register often”

• Eg, does the supply of equipment for the purpose of providing a service

create a bailment (which is a PPS Lease)?

• Avoid the argument with liquidator

One properly worded registration can perfect multiple security interests in the

same collateral class

Update trading terms (including invoice / statements)

• Include obligation for customer to register their own security interests

Document inter-company arrangements

• Risk vesting of asset-holding company interests or loss of priority

If taking a guarantee, correct registration of primary security crucial

• May invalidate guarantee if supplier agreed to take security interest

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Lessons learned

Search the register regularly to confirm that interests recorded against the

client are accurate

• $4 search fee

• Process of removal of incorrect registrations

Appoint PPSA compliance officer

• Maintain a register

o diarise registration end dates, change in collateral etc

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Lessons learned

Most common issue – Retention of title claims

• ‘Simple’ or ‘all moneys’

• Consider ‘battle of the forms’

• PMSI for unpaid goods

o When were goods/equipment supplied?

o Still need to identify unpaid goods

• Non-PMSI for goods which have been paid for

o May be lower ranking priority

• Can claim proceeds, even if not covered by security agreement

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Lessons learned

In a voluntary administration or liquidation, there are

• commercial imperatives

• time constraints

• mixed with:

o uncertainty of PPSA

o little jurisprudence

= negotiate commercial outcomes

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Defence to unfair preference

Retention of title security interest provides potential defence to recovery of

voidable preference by liquidator (s588FA and s51 Corporations Act)

• Payment of unsecured debt in 6 months prior to winding up may be void

against liquidator

• What is amount of secured debt?

o Unsecured to extent not reflected in value of security

• Running account

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PPSA Cases

1. Failure to register PPS lease resulted equipment vesting in company.

Receiver had superior claim to “owner”: Maiden Civil, NSW Sup Crt (June

2013)

2. Before the Courts: Forge Group v APR Energy, $50m turbines leased to Forge

Group, PPS Lease but not registered. Outcome?

3. Extensions of time to register security interests – inadvertence, no prejudice to

creditors: Barclays Bank; Cardinia, Black Opal

4. Storage of rare coins. No PPS Lease because no bailment or commercial

consignment. Depositors not in business of bailing goods: Re Arcabi Pty Ltd,

WA Sup Crt (2014)

5. Registration of security interest 20+ days after security agreement, vesting of

security interest: Carrafa & Anor v Doka Formwork, Vic Sup Ct (Nov 2014)

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PPSA Cases

6. Transitional security agreement did not contain ROT giving rise to security

interest. No security interest. Central Cleaning Supplies v Elkerton, Vic Sup

Crt (2014)

7. Payment into court under order not a security interest: Dura (Australia)

Constructions Pty Ltd v Hue Boutique Living, VSCA (2014)

o Obiter – payment held as security deposit may give rise to security

interest

o eg, tenant’s security deposit?

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Case Study – Dozer’s R Us Pty Ltd

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6 month hire agreement

“All moneys” ROT

$100,000 loan

$20,000 loan

Dynamic Rentals Pty Ltd

All Steel Supplies Pty Ltd

Bank Limited

Last Resort Pty Ltd

Dozer’s R Us Pty Ltd

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Case Study - Scenario 1

Last Resort Pty Ltd

• GSA dated 31 March 2015 expressed to secures all advances

• Registered ALLPAP security interest on 1 April 2015

Bank Limited

• GSA dated 1 March 2015

• Junior lawyer left GSA in To Do tray, found it after a month and registered

ALLPAP immediately on 2 April 2015

Dynamic Rentals Pty Ltd

• Registered on PPSR against Dozer’s R Us within 10 days after enter

security agreement/possession, but not serial number

All Steel Supplies Pty Ltd

• Registered PMSI before delivered stock, but no separate non-PMSI

• Proceeds

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Case Study – Scenario 1

Dozer’s R Us Pty Ltd

• Manufactured 10 bulldozers and sold 5 to Jims Farming Pty Ltd

• Paid All Steel Supplies for half of steel delivered

• Borrowed additional $20,000 from Last Resort Pty Ltd on 1 May 2015

• Bank Limited appoints Receiver and Manager on 1 June 2015

• Members resolve to wind up on 1 July 2015

• Holds forklift as P&E, not inventory

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Dynamic Rentals

• Written hire agreement

• Bulldozer is ‘motor vehicle’, serial numbered good

• Deemed security interest - PPS lease s13(1)(e)

• Must register within 15 days of taking possession for PMSI

All Steel Supplies

• Credit application dated 1 January 2011 with T&C’s

• Term that title does not pass until “all moneys” paid in full

• ROT is in conditional sale agreement (s12(2)(d))

• Must register security interest before delivered stock

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Dynamic Rentals

• Registered within time frame, so PMSI ‘super priority’

• Higher (super) priority over Last Resort Pty Ltd

• Right to retake possession of forklift

All Steel Supplies

• Must be recorded as transitional

• Registered before delivery, so PMSI

o Priority for steel not paid for and traceable proceeds of sale of

bulldozers

o Steel commingled with other goods to make bulldozers

- Rights in bulldozers in possession of Dozer’s R Us Pty Ltd

• No security interest in steel paid for

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Bank Limited

• GSA not registered within 20 day of security agreement and registered later

than 6 months before liquidator appointed

• Security interest vests: s588FL

• Bank has no security. Too late to apply for extension

• Hand control of company to Liquidator

Last Resort Pty Ltd

• GSA registered within prescribed timeframes

• Valid security interest over all personal property for all advances

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Dynamic Rentals Pty Ltd entered into an open-ended hire agreement with

Dozers R Us Pty Ltd and did not register security interest

On 15 May 2015, Dozer’s R Us sold the forklift to Scott’s Tyre Factory Pty Ltd

Held by Scott’s Tyre Factory Pty Ltd as equipment

Scott’s performed PPSR search on forklift with “nil” result

Scott’s Tyre Factory Pty Ltd has granted a GSA to its own bankers

Dynamic Rentals Pty Ltd found out about the sale of its forklift and recorded a

security interest against Scott’s Tyre Factory Pty Ltd as grantor.

On 1 May 2015, Dozer’s R Us Pty Ltd enters factoring agreement with Indebted

2U Pty Ltd

Indebted 2U Pty Ltd registers a security interest and gives the prescribed

notice (s64) to All Steel Supplies Pty Ltd and Last Resort Pty Ltd

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• Scott’s Tyre Factory

o Transfer of collateral without consent of Dynamic Rentals Pty Ltd

o Security interest continues in collateral, subject to ‘taking free’ rules

o Purchased for new value. Takes the forklift free of the security interest held

by Dynamic Rentals

o Would not have otherwise satisfied “ordinary course of business” rule

o Can issue an Amendment Demand on Dynamic Rentals for removal of

security interest

• Dynamic Rentals Pty Ltd

o PPS Lease, indefinite term

o Security interest vests upon liquidation

o Not saved by s268, because not short term PPS Lease of serial numbered

goods under s13(1)(e)-(g)

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• Dynamic Rentals Pty Ltd (cont’d)

o Loses forklift and right to proceeds of sale

o What if Dynamic Rentals had registered a security interest by the serial

number of the forklift?

- Scott’s Tyre Factory would not take free

- Dynamic Rentals would have 5 business days to re-perfect

- Otherwise, becomes unperfected; loses priority to secured creditor of

Scott’s Tyre Factory holding GSA

• Indebted 2U Pty Ltd

o Has priority over All Steel Supplies and Last Resort Pty Ltd for accounts

after 16 May 2015

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• All Steel Supplies Pty Ltd

o Priority over other security interests for

- steel which is identifiable and which is not paid for

- any traceable proceeds not subject to security of Indebted 2U Pty Ltd

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Contact us

Graeme Scott, Special Counsel

Commercial Dispute Resolution

Phone +61 3 9603 3475

[email protected]

mailto:[email protected]

Thank you.

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