Australia: Clash of the titans: PPSA vs insolvency

From Red to Black
Last Updated: 17 November 2016

The bread and butter of administrators and liquidators is dealing with security interests in the course of their appointment. The legal terrain is not always smooth, particularly within the framework of the Personal Property Securities Act 2009 (PPSA).

On 24 March 2016, the Supreme Court of Victoria handed down judgment in Carpenter International Pty Limited (administrators appointed) [2016] VSC 118, providing some guidance on the challenging interaction between insolvency and personal property securities law, particularly retention of title security interests. Clayton Utz acted for the plaintiff voluntary administrators.

Administrators are appointed to Carpenter

Carpenter's main business was exporting cattle to China. In March 2015, Carpenter was placed into voluntary administration. Immediately prior to the administrators' appointment, an expected export of 6,000 head of cattle had failed.

The status of the cattle

The administrators' first task was to establish the ownership of the 6,000 head of cattle the subject of the failed export. It was an involved task; the cattle had been sourced from numerous vendor farmers and livestock agents around Victoria and New South Wales under many different contracts, and Carpenter had not paid the purchase price under any of the contracts.

Carpenter had entered into tripartite contracts to purchase the cattle, in each case between Carpenter, a vendor farmer and the vendor farmer's livestock agent:

Point A: the contract(s) were signed and delivery of the cattle was made to Carpenter. No payment yet.

Point B: Carpenter would inspect the cattle, reject any unsuitable and confirm to the vendor and livestock agent which cattle it would purchase. At this point, the livestock agent would pay the purchase price to the vendor and take an assignment of the vendor's rights under the contract. The vendor was no longer involved.

Point C: Carpenter would pay the livestock agent in accordance with the payment terms.

  • Carpenter's terms purported to exclude the livestock agent's terms and provided that title passed at Point B.
  • The livestock agent's terms contained a retention of title clause which provided that title would not pass to Carpenter until Point C.

The legal issues that the administrators faced

In order to establish who owned the cattle, the administrators needed to answer the following questions:

  1. Was a retention of title clause created for the purposes of the PPSA?
  2. Did a security interest that was perfected on the day that administrators were appointed vest in Carpenter under section 267 of the PPSA?
  3. Did a perfected security interest vest in Carpenter under section 588FL of the Corporations Act 2001 (Cth)?
  4. When will an extension of time be granted under section 588FM of the Corporations Act?

CARPENTER - CONTRACTS

In view of the legal uncertainty as to the answers to these questions, the administrators made an application for judicial directions under section 447D of the Corporations Act.

Three livestock agents - Dairy Livestock Services (DLS) and Charles Stewart and Charles Stewart Nash McVilly (CSNM) - made applications as to ownership of the cattle in which they claimed an interest.

DLS had registered security interests on the basis of retention of title clauses within the tripartite contracts on the Personal Properties Securities Register before the day the administrators were appointed.

Charles Stewart and CSNM had registered security interests on the Register on the same day as, but prior in time to, the appointment of the administrators.

Each registration was made in the six months prior to the appointment of the administrators and more than 20 business days after the original tripartite contracts had been entered into.

Issue 1: was there a retention of title clause within the contracts?

The answer to this question depended on the governing contractual terms.

The Court heard evidence as to the circumstances in which the DLS and Charles Stewart contracts had been signed, and found that the DLS and Charles Stewart contracts included retention of title clauses. However, it found that the CSNM contracts did not include any retention of title clause, nor had a retention of title clause been incorporated by reference. CSNM was knocked out of the ownership race at this stage.

Issue 2: Will a security interest that is perfected on the day that administrators are appointed vest pursuant to section 267 of the PPSA?

Section 267 of the PPSA will result in the extinguishment of a security interest which is unperfected when the administrators are appointed. A question of construction arose as to the meaning of "when, on a day, the event occur[ed] by virtue of which the day is the section 513C day for the company".

The Court found that section 267 of the PPSA refers to the time when the administrators are appointed, rather than the day. As a result, a security interest will vest under section 267(2) if it is unperfected at the time the administrators are appointed (rather than at the start of the day on which the administrators are appointed).

This was relevant to Charles Stewart only, which registered a security interest on the Register a few hours prior to the appointment of the administrators.

Issue 3: did the security interest vest pursuant to section 588FL of the Corporations Act?

Section 588FL of the Corporations Act provides that if the security interest is enforceable against third parties and perfected solely by registration, and the registration occurred after the latest of:

  • six months before administrators were appointed; or
  • the time that is the end of 20 business days after thesecurity agreement came into force, or the time that administrators were appointed, whichever time is earlier,

then the security interest vests in the company immediately before the appointment of administrators.

This section was relevant to both DLS and Charles Stewart, which had each registered security interests within six months of the administrators' appointment and more than 20 business days after entry into the relevant tripartite contracts.

The Court rejected arguments that:

  • the security interest arose only on the livestock agenttaking an assignment (Point B). It found Point A was when the only "security interest" came into force;
  • before a security agreement giving rise to a security interest could come into force, it first had to be enforceable between the parties. That is, it rejected an equation of "coming into force" with "enforceability". It found it was not necessary for attachment to have occurred under the PPSA in order for the security agreement to "come into force".

The result: DLS and Charles Stewart's security interests vested in Carpenter on the appointment of the administrators, subject to the final question of an extension of time regarding Charles Stewart.

Issue 4: when will an extension of time be granted under section 588FM?

Charles Stewart applied under section 588FM of the Corporations Act for an extension of time to register its security interest.

The court may grant an extension under section 588FM(1) in three circumstances: the failure to register was caused by accident or inadvertence, the failure to register is not of such a nature as to prejudice creditors or shareholders, or on another just or equitable ground.

The ground Charles Stewart relied on was inadvertence. The Court found that inadvertence "includes failure to advert to or understand the requirement for registration within the specified period, and innocent error in the sense of failure to register through ignorance of the legal requirement to do so, or of the consequence of not doing so."

In this instance, the Court found that the real reason the agent failed to register in time was a mistaken belief that Carpenter could and would pay on time, and this did not amount to inadvertence within the meaning of section 588FM.

Charles Stewart's failure to register in time did not amount to a sufficient cause within the meaning of section 588FM(2)(i). The security interest was registered out of time, and it vested in Carpenter pursuant to section 588FL.

Key lessons

Register ASAP: Security interests created by retention of title clauses should be registered as soon as the contract is formed, and at least within 20 business days of entering into the contract. There will be no penalty for registering before the security interest exists as long as the person registering believes on reasonable grounds that they will become a secured party (section 151(1) of the PPSA).

Time starts from agreement: The time begins to run under section 588FM from the time that the agreement came into force, not from the time the security interest attaches or otherwise becomes enforceable.

Days count: A security interest that is perfected on the day that administrators are appointed, but before the time that administrators are appointed, will not be extinguished pursuant to section 267 of the PPSA (but may vest under section 588FL of the Corporations Act).

Mistake: A mistaken belief that the grantor could and would pay on time does not constitute inadvertence within the meaning of section 588FM, and cannot be relied on to extend the time to register under section 588FM.

Delay: Mere delay in registering a security interest and delay in applying for relief under section 588FM will not preclude the court from exercising its discretion to extend the time to register a security interest under section 588FM, even after the appointment of administrators.

DOES THE ROT SET IN? ROT IN INSOLVENCY

A quick guide to the interaction between sections 267, 588FL and 588FM

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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