This week’s TGIF considers In the matter of O’Keeffe Heneghan Pty Ltd (in liquidation); Aus Life Pty Ltd (in liquidation); Rocky Neill Construction Pty Ltd (in liquidation) trading as KNF Group (a firm) (No 2) [2018] NSWSC 1958, where the New South Wales Supreme Court protected the priority of an ADI’s unregistered security interest perfected by control, over the registered security interest of a secured creditor.

WHAT HAPPENED?

The proceedings concerned three companies in liquidation: O’Keeffe Heneghan Pty Ltd (in liq), Aus Life Pty Ltd (in liq) and Rocky Neill Construction Pty Ltd (in liq) (RNC), (together known as Companies), trading as KNF Group (Partnership).

Prior to the appointment of voluntary administrators to the Companies, the Partnership operated two bank accounts with Commonwealth Bank of Australia (Bank).

On 13 September 2013, each of the Companies granted a general security interest in favour of the Bank which extended to all of the present and after acquired property of each of the Companies and the Partnership. The Bank failed to register its security interest on the PPSR in respect of the Partnership, however this was not in dispute.

In mid-2016, the Partnership entered into an agreement with IFG Network Australia Pty Ltd (IFG) (Facility Agreement). The Facility Agreement was secured by a General Security Deed (IFG Security Deed) on 30 June 2016, which provided that IFG’s debt was secured over all the present and after acquired property of the Partnership, and IFG held security over all receivables of the Partnership. Importantly, IFG perfected its security by registering that security interest on the PPSR on 25 July 2016.

On 12, 13, and 15 March 2017, the Partnership transferred money out of its bank accounts held with the Bank to an account operated by RNC (also held with the Bank). Part of that money was transferred from the RNC account to an offshore bank account held by OzForex Ltd (OzForex), in order to purchase a property in Ireland (OzForex Transfer).

On 16 March 2017, the directors of the Companies resolved to place each of the Companies into voluntary administration and appointed voluntary administrators to each of the Companies.

The OzForex transfer failed and OzForex repaid $224,409 to the administrators of RNC (OzForex Monies).

On 11 April 2017, IFG appointed receivers over the Partnership assets pursuant to its security.

On 28 April 2017, the Companies went into voluntary liquidation and the administrators became the liquidators.

THE APPLICATION

First, IFG and the receivers sought a declaration that the OzForex Monies received by the liquidators for RNC were a Partnership asset secured by a security in favour of IFG.

Second (and more importantly for the purposes of this article), the receivers sought an order that the liquidators pay the OzForex Monies to the receivers, or alternatively, an order that an amount payable to the liquidators by way of remuneration be set-off against the OzForex Monies. Accordingly, a question of priorities arose.

DECISION

The receivers successfully argued that OzForex held the OzForex Monies under a trust for the Partnership and RNC and the liquidators were bound by that trust when the OzForex Monies were returned.

The trust arose over the OzForex Monies because:

  1. the monies were transferred immediately prior to the Companies being placed into voluntary administration;
  2. the transfers were made by the Companies in breach of equitable duties to the Partnership; and
  3. the transfers were made in breach of the Companies’ directors’ fiduciary duties to the Companies.

Given the Companies were likely to become insolvent at that point in time, Black J found neither the Companies or the directors could consent to such a breach in those circumstances.

However, Black J held that the existence of a trust did not answer the question of whether the Bank or IFG had priority as a creditor under the PPSA regime.

The Bank argued that the account held with the Bank was “collateral” to which its security interest attached.

Importantly, the Bank submitted that a bank that is an ADI is able to take a security interest in an ADI account that is held with it, and perfect that security interest by control under section 21(1) of the PPSA.

Under the PPSA, perfection by control for an ADI is automatic in the sense that a secured party has control of an ADI account if the secured party is the ADI.

It was common ground that under the PPSA regime, if the Bank had an ADI security interest perfected by control, it would have priority over any other security interest in the ADI account.

The receivers argued that because the funds had been transferred out of the ADI account, the Bank could not assert control.

Black J rejected this argument on the basis that the proceeds of a collateral to which a security interest is attached include identifiable or traceable personal property derived from a dealing with the collateral.

In other words, under the PPSA a secured creditor can follow collateral into the hands of a third party.

Therefore, Black J concluded that the Bank, as an ADI, had perfected its security interest by control, and therefore, had priority ahead of IFG as a registered secured creditor.

Black J rationalised the decision on the basis that an ADI’s security would have had priority over IFG’s security had the funds remained in the Partnership’s ADI account. There was no reason why that result should change because those funds were wrongly transferred out.

This decision illustrates the superior position of an ADI against other secured creditors, including secured creditors with an interest perfected by registration on the PPSR.

The decision is an important reminder that registration is not necessarily a guarantee of priority. Under the PPSA regime, the ADI which has perfected its security interest by control, will have super priority in the sense that it will always have priority by virtue of its status as an ADI.

This decision is a reassurance for ADIs in terms of considering the risk of other secured creditors having a higher priority in the event of insolvency.

Non-ADI registered secured creditors should take warning from this decision that their priority will virtually always be secondary when competing against an ADI which has perfected by control, even after registration of their secured interest.