The recent decision of Carrafa, Gountzos and Lofthouse (as liquidators of Relux Commercial Pty Ltd (in liq)) & Anor v Doka Formwork Pty Ltd [2014] VSC 570 highlights the importance of registering any PPSA security interests in a timely fashion. The decision resulted in the extinguishment of a lessor’s interest in leased property because the security interest was not registered in time under the Personal Property Securities Register.

The liquidators of Relux Commercial Pty Ltd (Relux) made an application seeking that certain leased equipment had vested in Relux pursuant to section 588FL of the Corporations Act 2001 (Cth) (Act).

Background

Relux, prior to its liquidation, ran a construction business specialising in pouring, laying and erecting large concrete slabs and panels. As part of the business, Relux bought and leased formwork equipment.

From about March 2013, Relux leased formwork equipment (worth around $1 million) from Doka Formwork Pty Ltd (Doka). Each lease was made when Relux placed a written order to Doka and Relux took delivery of the equipment on the terms and conditions governed by Doka’s “General Terms and Conditions” printed on the back of each invoice rendered by Doka. The leases were for indefinite periods.

The majority of the formwork equipment was leased and delivered to Relux prior to 1 January 2014. However some of the formwork equipment was leased and delivered on 26 February 2014 and 31 March 2014.

On 20 February 2014, Doka registered three security interests over the formwork equipment held by Relux on the Personal Property Securities Register (PPSR) for each of the leases.

On 7 April 2014 Messrs Carrafa, Gountzos and Lofthouse were appointed administrators of Relux. On 16 May 2014 the creditors of Relux resolved to wind it up. The administrators were appointed as liquidators.

The Court had to decide who had the right to the formwork equipment. Specifically, the Court was asked if section 588FL of the Act meant that the leased equipment vested in Relux.

Section 588FL provides that where certain security interests are not registered within a certain time on the PPSR (pursuant to the Personal Property and Securities Act 2009 (Cth) (PPSA)), they will vest in the company in liquidation or administration. This can give rise to a lessor losing rights to its goods, equipment, or other security interest, notwithstanding registration of the security interest on the PPSR.

A PPSA security interest will vest in a company where, at the time of administration or liquidation of the company, the security interest is:

  • enforceable against a third party
  • perfected by registration
    • the registration time is after the latest of:
    • six months before the administration or liquidation of the company
    • 20 business days after the security interest was created or the day of administration or liquidation (whichever is earliest)
    • a later time as ordered by the Court.

The Court first had to determine if Doka held a security interest and if there were any other provisions of the Act which operated to affect any interest, before considering the application of section 588FL.

PPSA Security Interest

A security interest is an interest in personal property that secures payment of a debt or other obligation, regardless of the form of the transaction. A lease of goods is registrable as a security interest under the PPSA. In particular, section 13 of the PPSA defines a PPS lease as a lease or bailment of goods, including those for an indefinite term but is only applicable to lessors who regularly lease goods.

As Doka regularly leased formwork equipment and the lease was for an indefinite period, it had a PPSA security interest. The Court further determined that there were no other sections of the PPSA which affected Doka’s right to hold a security interest.

Registration of Security Interest

At the time of administration, being 7 April 2014, Relux had possession of the formwork equipment. Therefore pursuant to section 19(5) of the PPSA, Relux had rights in the goods pursuant to the lease.

The Court had to decide if Doka had registered security interests in sufficient time, pursuant to section 588FL of the Act.

Taking into account the requirements for registration under section 588FL, the Court analysed the latest date on which the security interest should have been registered for the different leases:

Lease commencing before 21 January 2014

The security interest had to be registered 20 business days after the security interest was created. The deadline for registration was 19 February 2014.

As actual registration did not occur until 20 February 2014, any leases that commenced before 21 January 2014 vested in Relux. Doka lost its interest in the leased equipment. It was valued at over $1 million.

Leases commencing on 26 February 2014 and 14 March 2014

The security interests under the leases of 26 February 2014 and 14 March 2014 had to be registered 20 business days after the creation of each security interest. Doka registered its leases as security interests within the deadline. The leases did not vest in Relux. Doka retained its interests in the leased equipment.

Lessons to learn

The effect of s588FL, where a company is in administration or liquidation, can be to extinguish the interest of a lessor in property which is not registered under the PPSA in time. Whilst the Court said that this may result in seemingly oppressive outcomes, the provisions were needed, as set out in the Explanatory Memorandum, to “prevent a security interest granted fraudulently with knowledge of an imminent administration, liquidator or deed of company arrangement.”

In order to avoid any risks, companies with security interests should make sure they register any interests without delay once they have been granted. If possible, register the interest before the delivery of the equipment to the borrower or lessee.