In the decision of Re Arcabi Pty Ltd (Receivers & Managers Appointed) (in liq) [2014] WASC 310 the court considered:

  • the application of the Personal Property Securities Act 2009 (Cth) (PPSA) to goods being held on a bailment or consignment basis by a company in receivership and liquidation; and
  • the receivers’ rights to be indemnified for costs and expenses related to investigating and protecting the property of third parties.

What is the significance?

The case confirms the position on receivers’ rights of indemnity and liens in relation to costs and expenses incurred in relation to identifying and preserving goods owned by third parties.

However, more importantly, this case provides some clarification for when bailment and consignment arrangements will be considered to be PPSA security interests and the type of evidence which a Court would consider in making such a determination (such as questionnaire evidence). It also indicates the continued willingness of Australian courts to look to case law in other jurisdictions such as New Zealand and Canada for guidance on how to interpret the PPSA.

The case also highlights the extreme complexity of applying the PPSA in practice. The Receivers were faced with dealing with a large number of individual Investors. The exact PPSA outcome depended on the specific personal circumstances of each individual Investor, and the specific terms of the contract it had with Arcabi (whose terms changed over time). In the end, the Receivers and the court had to rely on general evidence and questionnaires sent to Investors, rather than a proper analysis of each specific bailment or consignment. If the Bank had chosen to pursue its priority claim, and each Investor was assessed individually, then this would have been an extremely complex exercise.

The facts

Arcabi Pty Ltd (Arcabi) was in the business of selling and storing rare coins and bank notes. Westpac Banking Corporation (the Bank) appointed receivers to Arcabi. The Receivers continued to operate the business in order to preserve it and undertook extensive investigations to ascertain what coins and bank notes were owned by Arcabi and what were owned by third party investors (Investors). The Receivers formed the view that while some of the goods were owned by the Investors under bailment or consignment arrangements, these arrangements did not amount to PPSA security interests, and so the items should be returned to the Investors.

The Receivers’ application

The Receivers sought directions from the Court under section 424 of the Corporations Act 2001 (Cth) on a number of matters, including:

  1. that goods subject to storage arrangements between Arcabi and Investors (Mixed Storage Goods) could be returned to the relevant Investors; and
  2. that goods subject to consignment arrangements between Arcabi and Investors (Consignment Only Goods) could be returned to the relevant Investors.

The key issue in the case was whether the arrangements between the Investors and Arcabi comprised a security interest/s under the PPSA. If they did, the failure of the Investors to perfect those security interests would mean the security interests had vested in Arcabi on its liquidation.

If this vesting had occurred, the Bank would have priority over the relevant goods because it had a perfected security interest over Arcabi’s assets. However, and importantly for the litigation, the Bank consented to the return of the goods to Investors without pressing its claim. The Receivers were seeking directions for the general purpose of confirming that they were complying with their own obligations.

Should the Mixed Storage Goods be returned?

The storage arrangements in respect of the Mixed Storage Goods gave rise to a bailment. In broad terms, a bailment will arise when a ‘bailor’ delivers certain goods to a ‘bailee’ upon a promise that they will be delivered to the bailor or dealt with in a specific way. A bailment:

  1. will be an “in substance” security interest the PPSA if it secures payment or performance of an obligation: section 12(1); or
  2. will be deemed to be a security interest under the PPSA if it is a “PPS lease”: section 12(3)(c).

The Court set out the indicia of when a bailment secures payment or performance of an obligation. In this case, it was held that the bailments were not in substance security interests under the PPSA because:

  1. there was no evidence that the Goods would vest in Arcabi at the expiry of the bailments;
  2. Arcabi was under no obligation to purchase the Goods;
  3. the term of the bailment was not likely to be for the major part of the economic life of the Goods as the Goods had an indefinite life;
  4. payments under the bailment did not equate to the capital cost of the goods.

The Court then considered whether the bailments constituted PPS leases as defined in section 13 of the PPSA. One of the requirements for a bailment to be a PPS lease is that the bailor is “regularly engaged in the business of bailing goods”: section 12(2)(b). The Court decided that the bailments were not PPS leases as there was no evidence that the Investors regularly engaged in the business of bailing goods . The Court further held that even if the Investors did operate a business, they were in the business of profiting from the trade of rare coins and notes, not from the bailment itself and that in many instances this activity was a hobby, not a business, of the Investors. This finding was based on an analogy with the New Zealand case of Rabobank New Zealand Ltd v McAnulty [2011] NZCA 212. The Court’s position then seems to be that a bailor will not be in the “business of bailing goods” unless it generally earns income from the bailment of goods itself, taken as a stand alone activity. This in turn means that a bailment that is incidental to the performance of a contract will not be a PPS lease, unless it is also profitable in its own right.

Accordingly, the Court found that the Investors did not hold a security interest which was required to be registered under the PPSA. The Investors owned the Mixed Storage Goods and it was appropriate that the Receivers returned these goods to the Investors.

Given its finding that the Investors were not regularly engaged in the business of bailing Goods, the Court determined that it was not then required to decide the proper interpretation of “value” for the purposes of section 13(3) of the PPSA. To be a PPS lease, the bailee must provide “value”. It is not clear whether this means that specific consideration must be given by the bailee for the bailment (such as rent under a lease) or whether it is sufficient if the bailment is under an overall contract for which the bailee provides consideration (including a promise to provide particular services). The Court did not comment on these two approaches.

The judgement on this point is a good result in the circumstances, and would probably be regarded as correct by the commercial community generally. However, from a legal perspective, the judgement does not really resolve the confusion around PPS Leases. The problem is that the “business of bailing goods” and “value” are two distinct and separate requirements under the PPSA. The Court appears to have conflated the two by assessing the “business of bailing goods” requirement on the basis of whether the bailment gave rise to profit (i.e. value). Under this approach, it is hard to see what separate role the “value” requirement plays. Accordingly, bailments in a business context will continue to cause problems until a Court clearly articulates the roles of these two requirements.

Should the Consignment Only Goods be returned?

A consignment:

  1. will be an “in substance” security interest under the PPSA if it secures payment or performance of an obligation: section 12(1) and 12(2)(h); or
  2. will be deemed to be a security interest if it is a “commercial consignment”: section 12(3)(b).

The Court set out the indicia of a consignment and held that a consignment will arise when the owner of goods sends the goods to another person on the understanding that the other party will sell them to a third party and return any money to the owner (less compensation for themselves for effecting the sale). There were various different forms and terms which Arcabi used for its consignment arrangements over time. On the facts of the case not all of the indicia of a consignment were present. Despite this, the Court held that it was a reasonable interpretation that the arrangement was a consignment as Arcabi never had title to the Consignment Only Goods because the terms expressly provided that the Goods would remain the property of the Investor until they were sold and Arcabi had no obligation to pay for the Goods until they were sold to a third party. 

The Court held that Arcabi’s consignment did not constitute a security interest under the PPSA because the consignment was not intended to secure a debt due by Arcabi and was for the mutual advantage of both Arcabi and the Investors.

The Court also held that the consignment was not a commercial consignment as defined in section 10 of the PPSA because Arcabi and the Investors did not deal in rare coins and notes “in the ordinary course of business” . The Court reached this conclusion for the following reasons:

  • the majority of the Investors of Consignment Only Goods responded to a questionnaire issued by the Receivers that they did not regularly deal with rare coins and notes in their business;
  • the Receivers gave evidence that for the majority of Investors the rare coins and notes were a hobby, not a business; and
  • it was generally known to Arcabi’s creditors that Arcabi was selling goods owned by other parties as this was stated in the advertising material of Arcabi and 84% of Arcabi’s consignment creditors confirmed in a questionnaire issued by the Receivers that they believed that Arcabi sold coins and notes on behalf of others.

Other directions – Receivers’ indemnity and abandoned goods

The Court outlined the established case law on receivers’ rights of indemnity and equitable liens, including Thackray v Gunns Plantations Ltd [2011] 85 ACSR 144 and held that the Receivers were entitled to be indemnified for their work in identifying and delivery of the Goods to Investors and also for insurance costs from the assets of Arcabi. Where Investors had requested that insurance be continued, those investors were to pay their proportion of the insurance premium.

The Court also considered that the Receivers had taken sufficient steps to locate the owners of unclaimed goods and provided directions under section 424 of the Corporations Act 2001 (Cth) permitting the Receivers to sell those items at auction (the Court considered that the process in the Disposal of Uncollected Goods Act 1971 (WA) did not need to be followed as it was unnecessarily burdensome.)