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Restructuring & Insolvency

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Focus: Creditors' property sold despite PPS registration

11 September 2012

In brief: A recent Federal Court decision has permitted administrators of a large business group to dispose of certain unclaimed plant and equipment, even though it was registered on the Personal Property Securities Register. Partner Michael Quinlan and Lawyer Shae Roberts report on what can happen when parties fail to adequately identify their secured property.

How does it affect you?

  • The court may give directions to administrators allowing the sale of property owned by secured parties where the secured parties fail to respond to requests by the administrators and the existence of all claimants cannot be established.
  • Registration on the Personal Property Securities Register (PPSR) will not prevent such a sale.
  • Secured creditors (such as equipment lessors) should monitor the status of their customers and ensure that registrations on the PPSR are sufficiently detailed.

The facts

Administrators were appointed to the 44 companies that comprise the Hastie Group on 28 May 2012 (the administrators). The administrators were in sole control of 33 companies that comprise the MEP Division of the International Division of the group (the companies) and receivers and managers were appointed to the 11 companies that comprise the service division of the group. Immediately following their appointments, the administrators suspended trading in respect of the companies.

The administrators' investigations revealed that the Hastie Group, at the time of their appointment, held a large number of individual items of plant and equipment at 36 different locations. The total value of the plant and equipment was estimated at $6.4 million. The administrators continued to exercise rights in relation to 19 sites by reason of the existence of plant and equipment held at those sites. The total weekly rental payable with respect to the sites was $61,134 and the costs associated with moving the plant and equipment would likely exceed its commercial value.

The books and records reviewed by the administrators inadequately described the nature and location of all the plant and equipment. In addition, some plant and equipment had been moved between companies and different building sites without records being kept of particular movements. The ability of the administrators to verify the information available to them was further impaired by the reduction in staff from 2550 to just 20 employees. Consequently, there was a real likelihood that property located at various building sites would not be accounted for by the administrators.

The PPSR showed 995 registrations noted against the companies. On 28 May 2012, the administrators wrote to all creditors who had an interest recorded against the companies in the PPSR. Each creditor was provided with a pro forma security interest summary and requested to provide notification of its interest. By 19 June 2012, approximately 80 per cent of those secured creditors had failed to respond and many of the responses received were of little assistance to the administrators.

The administrators subsequently wrote to 12 financiers who appeared to have a secured claim in respect of the plant and equipment and placed advertisements in newspapers across Australia. Additionally, an email was sent to 3000 creditors requesting that they advise of any claims. As a result, the administrators were able to identify approximately $2 million worth of assets. However, approximately 77 per cent of the total number of items of plant and equipment remained unclaimed.

Accordingly, given the ongoing cost to store and maintain the plant and equipment, and the efforts undertaken to establish the existence of all claimants, the administrators sought directions1 that they would be justified in:

  • selling the unclaimed plant and equipment by public auction (after publishing an advertisement in The Australian and issuing notices by email to creditors of the company); and
  • holding the proceeds of sale in a separate account and applying the proceeds towards:
  • payment of the administrators' costs incurred in connection with realising the unclaimed plant and equipment;
  • any claim in respect of the unclaimed plant and equipment which, in the opinion of the administrators, is a valid claim; and
  • after a period of three months, distributing the balance of the proceeds of sale in the ordinary course of the administration of the companies.

The decision

Justice Yates was satisfied that there had been genuine and substantial difficulties in identifying the items of plant and equipment that might be subject to a security interest and other claims. His Honour was also satisfied that the administrators had taken a number of steps to attempt to clarify the position to the best of their ability. In addition, the proposed directions involved another attempt to identify any remaining undisclosed claims prior to the commencement of the auctions. Accordingly, his Honour considered it was appropriate to grant the relief and make the directions sought by the administrators.

Conclusion

This case is a timely reminder for secured creditors in the new PPSR environment that where administrators face genuine and substantial difficulties in identifying items of plant and equipment that might be subject to a security interest and other claims, and the administrators have taken a number of steps to establish the existence of all claimants, the court may make directions for the sale of the assets.

The case is a reminder of the importance of creditors properly identifying securities registered on the PPSR.

Footnotes
  1. Carson, in the matter of Hastie Group Limited (No 3) [2012] FCA 719.

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