In this second instalment of their article reviewing the key PPSA decisions of 2014, Partner, Tom Griffith and Associate, Stefano Calabretta discuss the implications of three decisions that provide guidance on the Court’s approach to the new regime.

Discretion to Extend Time for Registration under s 588FM: A Powerful Remedy

In the context of an acrimonious split between former business partners in a wholesale liquor business, the Court in Re Quality Blended Liquor Pty Ltd [2014] QSC 234 considered an application under s 588FM Corporations Act for orders extending the time for registration of a security interest.

The application was opposed on the basis that the discretion under s 588 FM only arose in connection with s 588 FL (where there has been a winding up order or an administrator had been appointed) and that neither had occurred in that case. The Court rejected that contention and held that the discretion under s 588 FM operated independently of the operation of s 588 FL and so the application was not refused on that threshold issue.

The Court noted that the discretion may be exercised if the Court was satisfied that the failure to register the security was accidental, or due to inadvertence, or some other sufficient cause. In this particular case, there was evidence that the interest was not registered because of human error, oversight or inadvertence on the part of the lawyers previously acting for the party seeking registration.

The Court considered that circumstance in light of the alleged existence of a security interest for a large sum, the short delay in registration (11 days in this case and a lesser number of business days) and ultimately registration. There was also no evidence that any unsecured creditor extended credit or advanced monies (on the strength of the absence of the registration) and no other evidence suggesting any hardship to any particular creditor if the registration was extended. In the circumstances, the Court granted the application.

The decision serves as a useful reminder of an avenue that may be followed if there is a failure to register for a valid reason, and no creditor is unduly prejudiced by the exercise of the discretion.

Hands-on Judicial Guidance for a Hands-on Administration: The Renovation Boys Case

Renovation Boys Pty Ltd was a retailer of kitchen and bathroom products that went into administration in circumstances where there were a large number of competing claims for the remaining stock on hand at the time of the appointment. There were over 1200 outstanding open orders with a total order in excess of $1.5m many of which had been paid in full by customers, for stock that had not yet been delivered, and over which there were multiple competing claims.

On the Administrators’ evidence, the Company’s only asset of value was its stock and it had substantial liabilities including trade creditors, inter-company loan liabilities and customer deposits.

The parties who were potentially affected by the Court’s orders included 1291 customers, 4 suppliers, 3 lessors, 298 general trade creditors and 41 employees. In the circumstances the Court was prepared to modify the manner in which notification was required to be given and the specific orders allowed notification to be made by text message in certain instances.

The Court also approved the charging of a 31% levy on the value of stock in which title was with a third party, on the basis of an equitable lien by reason of the Administrators’ substantial costs involved in identifying, allocating and distributing stock.

Competing priorities in connection with transitional security interests

Finally, we consider the decision of NCO Finance Australia Pty Ltd v Australia Pacific Airports (Melbourne) Pty Ltd [2013] FCCA 2274. Technically, it shouldn’t make our cut for 2014, but given it was delivered in late December 2013, we think that’s close enough. The case involved a classic priority dispute in which the Court was required to consider and determine who had priority over a vehicle. One could be forgiven for thinking the vehicle must be a Lamborghini Huracan or even a McLaren 650S, but that would be wrong. The vehicle which was the subject of the dispute was a humble 2007 black Holden Astra Hatchback.

Fighting for the right to the Astra were: -

  • The Applicant, NCO Finance Australia Pty Ltd (NCO). NCO’s claim to the Astra arose in circumstances where it had been assigned a debt (owing by Ms Susan Ann Bessalem) from St George. Also assigned was St George’s security interest in the Astra which was registered on the Queensland Register of Encumbered Vehicles on 12 August 2011. This is considered a “transitional register” under the PPSA and the security interest a “migrated security interest” under the PPSA; and
  • The Respondent, Australian Pacific Airports (Melbourne) Pty Ltd (APA). APA’s association with the Astra arose in circumstances where the vehicle entered APA’s car park on or about 27 September 2011. Perhaps not to Ms Bessalem’s liking, the unwanted and abandoned Astra remained at the car park until 14 December 2011, by which time car parking fees had accrued to the tune of nearly $6,500. APA claimed a security interest in the Astra by reason of a clause in the terms and conditions which applied to all users of the car park which gave APA a right to retain possession of the Astra until parking fees and other expenses had been paid.

The Court accepted that both NCO and APA had valid security interests over the Astra. Insofar as APA was concerned, the Court accepted that the parking of the Astra in the car park for a fee was a “transaction” for the purposes of the PPSA, that APA had a possessory lien over the Astra and that it had perfected its interest by taking possession of the Astra in September 2011. Although APA had not registered its interest, it relied on the transitional provisions of the PPSA which absolved it of the need to register its interest (without risk of loss of priority) until 1 February 2014.

Generally speaking, under the PPSA a person who first perfects a security interest has priority ahead of others security interest holders. Although NCO had perfected its interest in August 2011 (a month before APA took possession of the Astra), both security interests arose under pre-existing legislative regimes. Section 323 of the PPSA provides that to the extent the priority between transitional security interests cannot be determined under the Act, they have the priority they would have had under the law that applied immediately before the registration commencement time (as if the PPSA had not been enacted).

Although the NCO’s interest was indeed registered before APA took possession, APA relied on section 10(4) of the Chattel Securities Act 1987 which provides that a lien under that Act, whether or not registered, ranks in priority to any other registered security interest irrespective of the date and time of registration of other security interests. The Court accepted that the APA had a superior security interest over NCO, notwithstanding NCO’s earlier registration.

No doubt to its delight, APA therefore won the right to take the Astra out on carefree Sunday afternoon joyrides. On a serious note, however, the decision demonstrates the benefits of the current single, unified registration system which is ultimately based upon time of registration/perfection. Under that framework, the outcome of this decision would have been completely different.