The recent judgment of the Western Australian Court of Appeal in Hughes v Pluton Resources Ltd 1, concerns the interaction between a deed of company arrangement (‘DOCA’) under Part 5.3A of the Corporations Act 2001 (Cth) (‘CA’) and the Personal Property Securities Act 2009 (Cth) (‘PPSA’).
The Hughes decision illustrates the strength of the position of a secured creditor with a valid PPSR registration in the context of competing claims to funds remaining after the termination of a DOCA.
In April 2013, Pluton and GNR entered into a Security Deed regarding $28.5 million owed by Pluton to GNR pursuant to a loan agreement. GNR subsequently registered the security on the Personal Property Securities Register.
GNR appointed receivers and managers over Pluton in September 2015. GNR also went into voluntary administration and at the second meeting of creditors, the creditors resolved to execute a DOCA. The parties to the DOCA were World Systems Capital (a related entity of GNR), the administrators of GNR and Watpac Ltd (a creditor).
Pursuant to cl 13.1 of the DOCA,World Systems Capital was to pay $1.5 million to the administrators to pay the ‘Admitted claims of the Participating Creditors’ in the order specified by the CA.2 Further, World Systems Capital was to pay $2 million to Pluton, who would then pay $1 million to the ‘Former Receivership Creditors’ and $1 million to Watpac.
The DOCA was terminated in July 2016, with $835,021.94 (the Fund) remaining to be distributed. Pluton had discharged its duty to pay $1 million each to the ‘Former Receivership Creditors’ and Watpac.
The liquidators sought orders from the court via a declaration and determination pursuant to s 511 CA that:3
- The Fund constituted monies of Pluton held by the liquidators in Pluton’s liquidation and therefore were to be paid out in the order specified by CA s 556;
- the Fund monies could be applied to pay the costs of the liquidators in their capacities as the former Deed Administrators; and
- GNR had no security over the Fund and was not entitled to it.
The receivers filed an interlocutory process seeking orders to the contrary effect.4
At first instance, Master Sanderson held that:
- The Fund monies were to be paid out in accordance with CA s 556;5
- The liquidators were not entitled to pay their fees from the Fund monies;6 and
- GNR was not entitled to and had no security over the Fund.7
In reaching this decision, Master Sanderson determined that:
- The Fund’s existence arose from the DOCA, which itself is a statutory creation under Division 10 of Part 5.3A of the CA. Consequently, the Fund was “created, arose or was provided for under a law of the Commonwealth”, thereby enlivening the exclusion of the operation of the PPSA contained in s 8(1)(b) of the PPSA. This meant that the Fund was neither a security interest nor the subject of GNR’s Security Deed.8 The termination of the DOCA did not alter the character of the Fund as a creation of a Commonwealth law;9
- Clause 21.5(b) of the DOCA explicitly prohibited the distribution of Fund monies to satisfy the administrator’s costs, expenses and remuneration;10 and
- the Fund’s existence did not arise from a consensual transaction11 and was therefore not subject to a security interest under section 12 of the PPSA which GNR could enforce.12
The receivers appealed to the Western Australian Court of Appeal on three primary grounds:
- The Master misapplied PPSA s 8(1)(b);
- The Master misapplied PPSA s 12; and
- In the alternative to appeal grounds 1 and 2 above, the Master failed to consider whether the Fund was subject to a fixed charge under the Security Deed.
The liquidators also appealed Master Sanderson’s decision disallowing the liquidators from paying their fees from the Fund monies, alleging the Master erred in his construction of cl 21.5(b) of the DOCA.
The Court of Appeal held:
- GNR possessed a security interest within the meaning of PPSA s 12(1), since this interest arose under a transaction (the Security Deed) and secured the payment of an obligation by reason of cl 2.2(a) of the Security Deed. The interest did not arise under a law of the Commonwealth.13 Part 5.3A of the CA was irrelevant to this finding, as both ss 8(1)(b) and 12(1) of the PPSA direct attention to the source of the interest in personal property, rather than the source of the property itself.14
- The absence of any dispute as to the validity of the registration of GNR’s security interest against “all present and after-acquired property” of Pluton, together with the fact that the Fund was personal property acquired by Pluton after the security interest’s registration, meant that the Fund was “collateral” within the meaning of s 10 of the PPSA.15
- Given the Fund was after-acquired property of Pluton at the time of termination of the DOCA on 21 July 2016, GNR’s security interest attached to the Fund by no later than that date without specific appropriation by Pluton and was enforceable against third parties from that date at the latest.16 These matters, combined with the effectiveness of GNR’s PPSR registration, meant that GNR’s security interest had been perfected by 21 July 2016, which in turn entitled the receivers to take possession of the Fund upon termination of the DOCA in their capacities as receivers and managers of Pluton’s property.17
Accordingly, the Court upheld the first two grounds of the receivers’ appeal, holding that:
- The Master misapplied PPSA s 8(1)(b). That provision had no application on the facts, since GNR’s interest in the Fund was created by the Security Deed, not under a law of the Commonwealth;18
- The Master misapplied PPSA s 12. The Dura case could not be relied upon and provided no practical assistance in the construction of s 12, as Dura did not concern a security interest arising from a consensual transaction, such as GNR’s Security Deed;19 and
- It was unnecessary to consider the third ground, as the first two grounds were upheld.20
The liquidators’ appeal was dismissed for the same reasons.21
Key takeaway points
- The Hughes decision is a timely clarification for liquidators of the significance of PPSA security interests despite the existence and subsequent termination of a DOCA.
- The Western Australian Court of Appeal decisively rejected the notion that Part 5.3A of the CA has any relevance in assessing the source and nature of the secured creditor’s interest in the property comprising the fund created by a DOCA process. In this way, the decision highlights the strength of a validly registered “ALLPAP” security interest in any dispute between receivers and liquidators over any proceeds remaining after the termination of a DOCA.