Vesting of unperfected security interests on liquidation – register or perish!

Under section 267(2) of the Personal Property Securities Act 2009 (Cth) (PPSA), a security interest granted by a company or individual (Grantor) in favour of another (Secured Party), may, if it is not previously perfected, upon insolvency or bankruptcy of the Grantor (as the case requires), vest with the Grantor and not the Secured Party.  In other words you may lose the property which is subject of the unperfected security interest!

In White v Spiers Earthworks Pty Ltd [2014] WASC 139 (Spiers Earthworks) the Defendant’s title to leased equipment was held to have vested in the lessee on liquidation, by virtue of section 267 of the PPSA.

Spiers Earthworks explained

Spiers Earthworks Pty Ltd (Defendant) was the legal owner of vehicles and other equipment (Hire Assets) used for its earth working businesses. The Defendant entered into a hire agreement (Hire Agreement) with BEM Equipment Pty Ltd (Company), under which the Defendant granted the Company possession of the Hired Equipment, in exchange for the Company making regular payments to the Defendant.

On 24 July 2013 the Company entered into voluntary administration and White (Plaintiff) was appointed as receiver. The Plaintiff claimed that, pursuant to section 267 of the Personal Properties Securities Act 2009 (Cth) (PPSA), the Defendant’s interest in the Hire Assets vested with the Company.

• pursuant to the Hire Agreement, the Defendant’s had a security interest, within the meaning of the PPSA, in the Hire Assets; and
• that security interest was not perfected when they were appointed as receivers of the Company.

Le Miere J ruled in favour of the Plaintiffs, after assessing whether:

• the Hire Agreement created a security interest; and
• the security interest covered by section 267 of the PPSA.

Was there a security interest?

Le Miere J found that the Hire Agreement did create a security interest.  Under the PPSA, there are two (2) types of security interests, “in substance” security interests, and “deemed security interests”.^[1] As per section 12(1) of the PPSA, an “in substance” security interest will exist where there is:

“an interest in personal property provided for by a transaction, that in substance, secures payment or performance of an obligation.”

It was further found that the Hire Assets are personal property, and the Hire Agreement is a transaction and that, despite the fact that the Defendant owned the Hire Assets prior to the Hire Agreement, they do in fact have an interest provided by the transaction.^[2]

In assessing where or not, in substance, the Defendants security interest secures the payment or performance of an obligation, Le Miere J stated it was necessary to consider the rights and obligations of the parties under the Hire Agreement.^[3] It was found that, based on the existence of a number of rights for the Company to purchase the Hire Assets, the Hire Agreement was in substance a sale of the Hire Assets, under which the defendant retained title until the Company had discharged its payment obligations and consequently, the Hire Agreement secured the payment of the purchase price.^[4]

In short, it was held that the Defendant’s interest under the Hire Agreement was a security interest for the purposes of the PPSA.

Was the security interest covered by section 267 of the PPSA?

Section 267 of the PPSA was paraphrased by Le Miere J as:

“PPSA s 267(1) provides that the section applies if two conditions are met. The first is that one of the specified events occurs. One specified event is that an administrator of a company is appointed….The second conditions is that a security interest granted by the Company is unperfected at the relevant time… in this case the relevant time for determining whether the security interest is perfected is 24 July 2013 when the administration commenced.”^[1] (emphasis added)

From the above, the first condition for the application of section 267 was met in this case, as the Company appointed receivers on 24 July 2013. Consequently, if the second condition was satisfied, section 267 would apply. The second condition being that the security interest was not perfected prior to the appointment of the receivers.

Without delving into the detail of the exact words of Le Miere J, perfection of a security interests requires either registration on the PPSR or possession of the secured goods by the secured party. In this instance it was found that the Defendant had neither:

• registered their security interest on the PPSR; or
• possession of the Hire assets,

and consequently, section 267 of the PPSA applied, vesting the Defendant’s interest in the Hire Assets in the Company on 24 July 2013.

The other specified event

As mentioned above, Le Miere J stated that section 267 of the PPSA will apply subject to two (2) conditions being satisfied, the first of which involves the happening of a specified event. In Spiers Earthworks the specified event was that appointment of a receiver to the Company leasing goods, the Grantor.

The alternative “specified event” is largely similar, but applies where the Grantor is a natural person who is the subject of a sequestration order or becomes a bankrupt pursuant to the Bankruptcy Act 1966 (Cth), rather than a corporation or other body corporate.

Time-frames for registering security interests

In addition to section 267 of the PPSA, it is important to be are aware of section 588FL of the Corporations Act 2001 (Cth).  This section effectively extends the operation of section 267 of the PPSR where the Grantor is a company that has had a liquidator appointed.  By virtue of this section, a security interest that:

• is created pursuant to a transaction that occurred earlier than six (6) months prior  to the appointment of a liquidators (Trigger Date), must be registered at a date earlier than the Trigger Date; and
• is created pursuant to a transaction that occurred after the Trigger Date, within twenty (20) business days of that transaction coming into force.

Any security interest that is not registered within these time frames is deemed to vest with the Grantor immediately prior to the appointment of liquidators.  Therefore it is recommended to register security interests on the PPSR well before the expiry of twenty (20) business days after a security interest arises.

Lessons from Spiers Earthworks

The decision Spiers Earthworks is demonstrative of the importance of:

• identifying transactions that may result in the creation of a security interest;
• registering security interests on the Personal Property Securities Register (PPSR) as soon as possible after the security interest arises; and
• at the very latest, you should register all security interests no later than twenty (20) business days after their creation.

In order to avoid such a situation, business should ensure that they register any security interest capable of being registered as soon as practical after the security interest arises – Register or perish!

Links and further references

Legislation

Corporations Act 2001 (Cth)
Personal Property Securities Act 2009 (Cth)

Cases

Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217

Further information about unperfected security interests and the PPSR

If you need advice on protecting your assets by registering a security interest on the PPSR, contact us for a confidential and obligation-free discussion: 

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] id at [12]-[14].

[1] see White v Spiers Earthworks Pty Ltd [2014] WASC 139 at [15].

[2] id at [18].

[3] id at [19].

[4] id at [23].

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