Does your business involve sales on credit, deferred payments,
lay-by, hire-purchase, consignment or storage? If so, other people
or entities will have physical possession of assets that belong to
you or your company. What if that other person or entity becomes
bankrupt on insolvent whilst in possession of your assets? In that
case, the assets that you own may be seized and sold to pay out
debts owed to other creditors simply because those assets were in
the possession of the bankrupt/insolvent entity at the time of
their bankruptcy/insolvency. This is the effect of the Personal
Property Securities Act 2009 ("PPSA") where owners of
goods placed in the hands of others in the course of trade do not
protect their rights over those goods by registering security
interests on the Personal Property Securities Register
This makes the idea of possession so important under PPSA that
the WA Supreme Court was asked to determine what
"possession" means for PPSA purposes in Flown Pty Ltd v
Goldrange Pty Ltd  WASC 419.
The Court started by considering what the law, outside of the
PPSA, generally regards as constituting possession of goods:
having the goods in your physical possession (actual
having control over the goods in the sense of being legally
entitled to decide what is to be done to or with the goods,
together with the intention to exercise that control;
being legally entitled to take physical possession of the goods
The Court then found that under the PPSA, nothing short of
actual possession by the owner would suffice to prevent a
liquidator or trustee in bankruptcy from seizing goods not
protected on the PPSR, selling them and distributing the proceeds
in favour of priority creditors, which may not include their legal
owner. In Flown, the collateral was held by the owner's
insolvent tenant. In these circumstances, the owner lost its goods
to the tenant's liquidators even though the tenant had acted
unlawfully in preventing the owner from taking physical possession
of the goods prior to the tenant's insolvency. In other words,
it did not even matter that the owner would have had possession of
its own property prior to the tenant's insolvency if the tenant
had not broken the law. All that mattered was that, as a matter of
fact, the owner did not physically possess the goods when the
tenant (which did possess the goods) became insolvent.
The lesson is: if you enter into any transaction where someone
else comes into physical possession of your property, even if it is
only to hold it in storage, register your security interest in that
property as soon as possible. Do not rely on other theoretical
grounds under the PPSA to try and keep your property out of the
hands of the other party's liquidator or trustee in bankruptcy
should that other party become insolvent. So far, the Courts have
interpreted these other "escape routes" very narrowly.
Consequently, if you rely on grounds other than a security
interest, registered properly and early, you are very unlikely to
defeat the claims of a liquidator in actual possession of
collateral. This means that your goods are likely to be taken by
the liquidator and sold to pay out other creditors of the insolvent
party that possesses your goods, even though you own them.
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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