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Restructuring & Insolvency

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Focus: PPSA update: Transitional security interests may be no protection

9 July 2013

In brief: The NSW Supreme Court has held that although the ownership interest of a lessor in certain motor vehicles leased to a company were 'transitional security interests', they were not temporarily 'perfected' and did not take priority over a subsequently-registered financier's general security interest. The decision also supports the proposition that when, under section 267 of the Personal Property Securities Act, an unperfected ownership security interest in goods vests in a company upon its entry into voluntary administration, the company holds those goods subject to any perfected security interest it has granted over those goods, such as under a lender's general security agreement. Partners John Warde and Karla Fraser (view CV) , and Law Graduate Riley Downie report.

How does it affect you?

  • If you are a financier or supplier of goods or other personal property and hold a 'transitional security interest' that you seek to rely on without taking active steps to perfect it, this case confirms that your interest will be unperfected (and you will be at risk of losing priority and, in a voluntary administration or liquidation, losing your security interest) if your interest was registerable but not registered on a transitional register – such as a motor vehicle register – immediately before 30 January 2012.
  • If you are a secured creditor (such as a bank) with a perfected security interest (such as a general security agreement) granted by a company that goes into voluntary administration or liquidation, you may be entitled to receive the proceeds of the realisation of goods that were owned by lessors or suppliers to the company who failed to perfect their interests, and that have vested in the company under section 267 of the Personal Property Securities Act 2009 (Cth) (the PPSA).

Background

A company called QES, acquired and became the owner of three Caterpillar civil construction vehicles, by paying an initial deposit and financing the balance. The vehicles were acquired by QES at the request of, and hired to, another company called Maiden, under an informal arrangement. This hiring arrangement was entered into in 2010, before the PPSA came into force on 30 January 2012.

In March 2012, Maiden sought short-term finance from Fast Financial Solutions Pty Ltd. In return for a $250,000 loan, Maiden gave security over its assets to Fast under a general security deed. The secured property was defined widely enough in that deed to include Maiden's interest in the Caterpillar vehicles (which at this stage was only a lessee's interest).

In July 2012, Fast appointed receivers to Maiden. On 27 August 2012, Maiden went into voluntary administration and receivers claimed possession of the vehicles. QES argued that its interest as owner and lessor of the Caterpillar vehicles took priority over Fast's interest as chargee, and that the receivers had no enforceable right to possession.

The decision

Fast's interest under its general security deed had been registered on the PPSR. QES's interest was a PPS lease within the meaning of the PPSA and had not been registered on the PPSR.

QES claimed priority on the basis that its interest was a 'transitional security interest' under the PPSA and therefore was protected for a two-year period to 30 January 2014, under the transitional provisions of the PPSA, even though it had not been registered.

However, prior to the commencement of the PPSA, QES's interest could have been registered on a Northern Territory motor vehicle register under Northern Territory legislation that had been repealed when the PPSA came into force, but had not been. The court found that the operation of s322(2) of the PPSA, together with reg 9.2 of the Personal Property Securities Regulations 2010 (Cth) had the effect that the two-year transitional period to register interests not migrated from a 'transitional register' does not apply if the security interest could have been registered on that transitional register but was not. This meant that even though QES as the lessor was the 'true owner' of the vehicles and had a transitional security interest, it did not have priority over Fast's registered general security agreement.

Importantly, the decision1 also appears to recognise that where a security interest (such as a lessor's interest or a retention of title interest) vests in a company in administration or liquidation under s267 of the PPSA, the company's right to that property (and accordingly unsecured creditors' rights to receive a distribution of that property from a liquidator) may be subject to any general security agreement that the company has granted.

This is significant for banks and other secured creditors, as the effect of a failure by a retention of title supplier or lessor of goods to register their security interest on the PPSR can, depending on the terms of the secured creditor's charge, result in the secured creditor being entitled to realise and keep the net proceeds of the realisation of those goods if the company goes into voluntary administration or is wound up.

Comment

Had the security interest of QES been under a lease of equipment other than motor vehicles (or watercraft) that was not registerable on a previous 'transitional register', QES's security interest would have been protected under the transitional provisions of the PPSA.

It is essential that financiers, suppliers and others who have a 'transitional security interest' ensure that their interests are properly perfected under the PPSA. The two-year transitional period to register interests not migrated from a 'transitional register' does not apply if the original security interest could have been registered on a transitional register but was not.

If a company goes into voluntary administration or liquidation, a failure by suppliers or lessors to register an 'ownership' security interest over goods they have supplied or made available to that company, may benefit a chargee with a registered security interest regarding those goods, ahead of unsecured creditors. This potentially far-reaching result under the PPSA in the case of trading companies, is another factor that, in particular cases, should be taken into account by secured creditors when considering whether to enforce their security by appointing receivers or administrators or both.

Footnotes
  1. Albarran and anor v Queensland Excavation Services Pty Limited & Ors [2013] NSWSC 852 per Justice Brereton.

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