With the introduction of the unfair preference regime in the Corporations Act 2001, a short provision was included which stated:
“… a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security.”(section 588FA(2))
The provision has been rarely considered. There has been little case law providing any judicial interpretation of the subsection.
That is, until the Personal Property Securities Act 2009 (PPSA) commenced.
In recasting what constitutes a ‘security’ in a winding up and the rules associated with maintaining that security, pre-PPSA provisions also gained renewed attention. Retention of title claims became a question of security, rather than of asset ownership.
These changes revived two key questions: If a creditor supplies goods on a retention of title basis, and as at the date of the appointment there are no goods on hand, can that creditor be said to be a secured creditor? If not, is that creditor now exposed under the unfair preference regime?
Of course these questions apply beyond suppliers under retention of title terms. Although the nature of security arrangements can be significantly different, all secured creditors are exposed if the value of their security is less than the debt claimed.
The key issue is how to determine the ‘value’ of the creditors’ security. For the first time, this has been considered by an Australian Court.
In Matthews v The Tap Inn Pty Ltd  SADC 108, His Honour Justice Chivell of the District Court of South Australia considered the application of section 588FA(2) as an issue to be determined prior to trial. Matthews had sold the hotel business, the Tap Inn. A portion of the purchase price was to be made by periodic payments by the purchaser to Matthews. After 24 such payments, the purchaser entered administration, followed by liquidation. Of the payments, $76,678.46 were made within the 6 months prior to the winding up. (Further allegations were made concerning uncommercial transactions in the 2 year period.)
The value of Matthews’ security as at the winding up was nil. On this basis, the liquidator asserted that Matthews was deemed to be unsecured and was exposed to an unfair preference claim. Predictably, while the liquidator argued that the value of the security should be assessed as at the date of the winding up (when the security value was nil), Matthews argued that the value should be assessed as at the date that the security was given (when the security was of a higher value). The Court also considered whether value should be assessed as at the date of the payments.
His Honour Justice Chivell noted that there were no previous cases on point. While analogous cases were considered, such as regarding the assessment of whether a ‘preference’ was received, the Court returned to the core principles of statutory interpretation: “the text, context and purpose of the applicable provisions of (the) Act”.
On balance, the Court agreed with the liquidator. It held that the proper time to determine the value of the security in question was the date of the winding up. The Court considered that this was consistent with the intention behind the unfair preference regime.
The Court also regarded subsection 588FA(2) as a deeming provision, which deems as unsecured a creditor who might otherwise be secured, to the value of the shortfall of the security. The question of full or partial security was held to be irrelevant, as was whether the impugned payments came from the secured property.
While submissions concerning the remaining elements of the unfair preference claim were to follow in a final hearing, it is clear that as a result of this judgment Matthews became exposed to an unfair preference claim, despite his apparent security.
Many questions still exist regarding the application of 588FA(2), especially in the event of a partially secured debt. However, the South Australian District Court has endeavoured to make the first steps towards clarification. If followed, these first steps should make many ‘secured’ creditors wary of the true value of their security.