The recent case of Flown Pty Ltd v Goldrange Pty Ltd [2016] WASC 419 provides an interesting discussion point on:

  • the effect of section 21(2)(b) Personal Property Securities Act 2009 (Cth) (the Act) on possession by seizure of collateral,
  • the strict requirement in section 24(1) of the Act for actual possession of collateral to perfect an unregistered security interest, and
  • the relevance (or lack of relevance) of the actions of the grantor in hindering (re)possession by the secured party.

In Flown the dispute related to rights to plant & equipment fit-out in leased premises.[1] Pursuant to a loan agreement with associated charge, the landlord had loaned funds for the tenant to purchase the fit-out, but failed to register its security interest. Prior to the tenant’s appointment of voluntary administrators, the landlord purported to terminate the lease but (alleged it) was physically prevented by the tenant from actually re-taking possession of the premises.

  • The tenant claimed:
    • the landlord’s unperfected security interest had vested in the voluntary administrators pursuant to section 267 of the Act;
    • prior to the administration the landlord did not perfect its security interest by actual possession of the fit-out, as required by section 24(1) of the Act; and
    • if or to the extent there was actual possession by the landlord prior to administration, this was by seizure and thus ineffective pursuant to section 21(2)(b) of the Act.
  • The landlord claimed that by terminating the lease and re-entering possession of the premises it would have incidentally taken possession of the fit-out, without actually ‘seizing’ the fit-out and falling afoul of section 21(2)(b) of the Act.

Further, the landlord asserted the actions of the tenant in improperly hindering the landlord’s possession should prevent the tenant from denying possession of the premises took place.

  • I respectfully suggest the landlord’s first argument was misconceived. Forcibly seizing one item (say, a pencil case) has the effect of forcibly seizing everything within it (say, the pencils). Practically, the former possessor has been denied not only the pencil case but all that within it.
  • To come to a different conclusion would defeat the policy behind section 21(2)(b) of the Act, which is to ensure possession by the secured party is voluntary (on the part of the grantor).

To allow a secured party to take possession without the consent, and against the protest, of the grantor would be inimical to the safe and efficient operation of the Act. Forcibly seizing goods could lead to unsavoury consequences such as physical violence. Further, secured parties who ‘do the right thing’ by registering their security interests could be trumped by an unregistered vigilante who ‘smash grabs’ their way to priority. It can be difficult in seizure situations to identify the timing of possession by the secured party; adding uncertainty to the registration-priority regime encouraged by the Act: Whittakker B, Review of the Personal Property Securities Act 2009 – Final Report (27 February 2015).

  • Ultimately the Court did not need to form a view on this issue. It was enough to determine that actual (not constructive) possession of the collateral was required for the landlord to perfect its security, and the landlord did not have actual possession until after the appointment of the voluntary administrators – when it was too late.
  • Counsel for the landlord alleged the tenant had acted in bad faith, by forcibly denying the landlord’s repossession of the premises when the landlord was contractually entitled to repossession. The landlord in oral submissions sought to rely on section 111(1) of the Act which provides:

…“All rights, duties and obligations that arise under this Chapter must be exercised or discharged:

(a) honestly; and

(b) in a commercially reasonable manner…

and to assert that the landlord’s possession of the premises (and thus the fit-out) could not be denied by the tenant if the tenant had acted in bad faith in the course of the landlord’s attempted repossession.

  • The landlord relied on the Saskatchewan decision of Carson Restaurants International Ltd v A-1 United Restaurant Supply Ltd 1988 CanLII 5019 (SK QB), the British Columbia decision of The Bank of Nova Scotia v. Royal Bank of Canada, 1998 CanLII 1599 (BC SC), and the New Zealand decision of Gibson v StockCo Ltd [2010] NZHC 2398 – each of which dealt with measures in the various jurisdictions’ PPSA legislation to prohibit a person from acting in bad faith or alternatively requiring them to act in good faith in relation to the operation of that particular legislation.

In essence the argument run by the landlord was to the effect that the tenant could not use the PPSA as an instrument to defeat the landlord’s claim and the tenant’s rights pursuant to section 267 of the Act (vesting of the security interest) should be subrogated to prevent an unjust result.

  • However, the Australian legislation in this respect is drafted in different terms to its various Canadian, and New Zealand, counterparts. The statutory requirement to act honestly and in a commercially reasonable manner is confined to Chapter 4 of the Act, which contains the Act’s enforcement provisions. That is, it is directed at the actions of secured parties in relation to their enforcement of security interests.

None of the sections of the Act relied on by the tenant – namely section 267 which causes the unperfected security interest to lapse upon voluntary administration, section 21(2)(b) which does not permit possession by seizure, and section 24(2) which identifies possession as requiring “actual” possession – are contained within Chapter 4 of the Act.

  • The Australian Act requires actual possession by the secured party (to perfect a security interest in the absence of registration), and there is no safety net in the Act to protect a secured party from the effects of having its attempts at perfecting its security interest thwarted.
  • As Master Sanderson concluded in paragraphs [31] and [35] of the Flown decision:

It is not generally the case in Australian jurisprudence that a party benefits from not observing the provisions of a contract. But that does seem to be the effect of the law in this case. The fact is the plaintiff retained possession of the plant and equipment…

It is clear the first defendant was not in actual possession of the fixtures and fittings as at the time of the appointment of the administrator. Accordingly, the unperfected security interest passed to the administrator and does not provide any entitlement to the first defendant to actual possession of the fixtures and fittings.”