In 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, the NSW Supreme Court strongly reminded us of the superior priority that an authorised deposit-taking institute’s unregistered security interest (perfected by control) has over the interests of secured creditors perfected under the personal property securities regime. The proceedings involved three companies in liquidation (together known as KNF Group).

The Important Facts

In mid-2016 the KNF Group entered into a loan arrangement with IFG Network Australia Pty Ltd (IFG) that was secured by a General Security Deed which extended IFG’s interest over all present and future acquired property of the KNF Group. On 25 July 2016, IFG registered and perfected this security interest on the PPSR.

KNF Group also held two bank accounts with the Commonwealth Bank of Australia (the Bank). KNF Group’s obligations to the Bank were secured by a general security interest over KNF property but the Bank failed to register its security interest. On the 12, 13 and 15 March 2017 KNF transferred money out of one of their accounts with the Bank to an offshore bank account held by OzForex Ltd for the purpose of acquiring property in Ireland.

On 16 March 2017, KNF Group directors resolved to place each of the three companies into voluntary administration. The OzForex transfer failed and the administrators of the KNF Group were paid $224,409.

The Bank and IFG then started a battle over which party had better security over (and therefore priority to) the $224,409.

The Priority Battle

The Court upheld that under section 21(1) of the Personal Property Securities Act 2009 (Cth) (the PPSA), a bank with an ADI security interest perfected by control, has automatic priority over any other security interest.

The NSW Supreme Court made the following important findings regarding the priority of creditors under the PPSA regime:

  • The Bank successfully argued that the account held with the Bank was “collateral” to which its security interest attached;
  • The transfer of money out of the ADI account in the lead up to the voluntary administration did not prevent the Bank from asserting control over that money. Importantly, the Court held that the PPSA allowed for a secured creditor to follow collateral into the hands of a third party. As such, the proceeds of collateral were identified as traceable property; and
  • The Court held that it would be irrational to prioritise IFG’s security over an ADI’s security simply because the money was wrongly transferred out of the account.

The Court concluded that the Bank (as an ADI), successfully perfected its security interest by control under the PPSA. Therefore, the Bank had priority ahead of IFG’s perfected registered secured interest.

This case is a reminder to registered secured creditors that perfecting your interest under the PPSA regime may not protect their interests against ADI’s.