Failing to make PPSA registration costs landlord $460,000!

The decision of Flown Pty Ltd v Goldrange Pty Ltd [2016] WASC 419, handed down just prior to Christmas last year, provides a powerful lesson to businesses that take security over goods which are held by a customer and do not perfect that security interest by registering on the Personal Property Securities Register (PPSR).

Upon the appointment of an administrator or liquidator, a secured party’s security interest (e.g. mortgage or charge) in goods that remain in the insolvent company’s possession can vest in the company, pursuant to section 267 of the  Personal Property Securities Act 2009 (PPS Act) if the secured party failed to validly perfect the security interest. This means that the goods can become an asset in the administration or liquidation of the company.

Background

  • The landlord of the property (Goldrange Pty Ltd) loaned $460,000 to the tenant (Flown Pty Ltd) to enable the tenant to purchase plant and equipment for use in the tenant’s business.
  • The landlord took security for the loan in the form of a charge over the newly acquired plant and equipment (the collateral). The landlord did not perfect its security interest by registering on the PPSR.
  • The tenant, in financial difficulty, appointed an administrator. The landlord attempted to terminate the lease.
  • Once appointed, the administrator claimed that the collateral (plant and equipment) had become the property of the administrator because the landlord’s security interest was unperfected.
  • The landlord tried to argue that he had perfected his security interest by “possession” rather than registration.

The Detail

Who was in possession of the property (and the plant and equipment) at the time of the appointment of the administrators was all important in this case.

Set out below is the timeline of events:

  • Learning of the tenant’s financial difficulty, the landlord attempted to exercise his right to terminate the lease on the ground of insolvency and served a “Notice of Termination” on the lessee.
  • The next day on 15 July 2016 at 11.30am, believing the lease to be validly terminated, the landlord attempted to re-enter the property to change the locks. However, the tenant barricaded the doors and refused to allow the landlord to enter.
  • At approximately 1.00pm, the landlord affixed a “Notice of Re-Entry” to the outside of the property which read: “TAKE NOTICE that Goldrange Pty Ltd has re-entered this premises and retaken possession from Flown Pty Ltd”. Under the terms of the lease, re-entry by the landlord would cause the lease to cease.
  • Unbeknownst to the landlord, at approximately the same time (1.00pm), the tenant had put its business into administration.
  • The following day at 7.15am the landlord cut the locks, entered the premises and took actual possession of the property.

Why is it all important?

Broadly speaking, perfection of a security interest serves as a publication of the secured party’s interest.

In order to perfect a security interest (and make it enforceable against the world) a secured party must either:

  1. register the security interest on the PPSR; or
  2. take possession of the collateral; or
  3. have control over the collateral.

The landlord had a security interest over the plant and equipment and was entitled to perfect that interest by registering on the PPSR. The landlord did not register.

The landlord tried to argue that he had perfected his security interest by taking possession of the plant and equipment before the appointment of the administrators. The landlord’s argument was that he was in “constructive possession” of the property from 11.30am on 15 July 2016 when he attempted to enter the property. However, the tenant retained actual possession of the plant and equipment.

The Court emphasised that a stranger walking past the property on 15 July 2016 would have observed that the tenant was apparently in possession of the property and they would not have known that the landlord was as a matter of law entitled to be in possession of property (constructive possession).

The Court found that the landlord was not in actual possession of the plant and equipment at the time of the appointment of the administrator. Accordingly, the landlord’s security interest was unperfected.

Pursuant to section 267 of the PPS Act, as the security interest was unperfected and an administrator was appointed, the plant and equipment passed to the administrator, leaving the landlord seriously out of pocket.

This situation could have been avoided for a PPSR registration costing less than $10.

If you have any questions or concerns about your security arrangements or the enforceability of a creditor’s security against a company in administration or liquidation, please contact James Devonish or Courtney McDonald on 08 8223 7600.