Last week we considered the impact of the PPSA on certain leases
which do not secure the payment or performance of an obligation.
This week we consider some of the issues that might arise where
numerous PMSI interests have competing claims to a fund created by
the sale of co-mingled goods.
Willy Wonka Pty Ltd is a vendor of premium sugary treats
including the world famous "Marshmallow and Nuts Super Crazy
Combo" ice-cream. Whilst the recipe for this summery treat is
closely guarded, it is known to contain only milk, cream, nuts and
Each ingredient is supplied by a different supplier under
retention of title arrangements. Each of these suppliers perfect
their interest by registering it on the PPS Register as a PMSI.
With summer just around the corner, things are looking up for
Willy Wonka. The ice-cream has been manufactured (with each of the
ingredients becoming co-mingled), but due to mismanagement, the
directors appoint an administrator to the company a few hours after
the electricity supplier turns off supply. The administrator
hastily arranges the reconnection of power, and agrees to become
personally liable for electricity charges so that she can preserve
the ice-cream for sale.
The ice-cream is sold over a number of months and a sale fund of
$200,000 is created. The administrator proposes to pay the various
suppliers on a proportional basis (they are owed $50k, $60k, $75k
and $100k respectively), but disputes between the suppliers become
intractable. Moreover, they each contend that the administrator
should not be able to deduct the cost of electricity and other
reasonable costs associated with the sale of the ice-cream from the
What should the administrator do and what is she entitled to
deduct from the fund?
There is no obligation upon the administrator to adjudicate the
dispute between the suppliers. She should apply to pay the moneys
into court, notify the suppliers of such a payment in, and leave
them to "battle it out" before a judge. Furthermore, the
administrator is entitled to deduct the costs of the electricity
and associated expenses with selling the ice-cream, corresponding
with the suppliers and paying money into court. Reading the
Corporations Act and PPSA together, it is clear that the
administrator's lien has priority over any claims of the
suppliers (or any other unsecured creditors). The administrator is
therefore entitled to pay that amount as a priority from the
The Lesson: The PPSA makes it explicit that security interests
can be traced to a fund created following the sale of the relevant
property. Where there are numerous claimants with registered
PMSI's, each is entitled to share in the fund according to the
ratio that the amount secured bears to the total obligations
secured by the various perfected security interests. For example,
in this case, the marshmallow supplier would be entitled to 35% of
the net proceeds. However, where an administrator (or, indeed, any
external administrator) is required to preserve assets or a fund
for the benefit of others, they will be entitled to deduct their
reasonable expenses referable to the fund prior to payment out.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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