The Personal Property Securities Act (Cth) (PPSA), together with the Personal Report Securities Register (PPSR), deal with the registration, protection and enforcement of security interests in personal property throughout Australia.
Failure to comply with PPSA legislation, and in particular the critical requirement of registration of a security interest on the PPSR, can lead to severe and costly consequences for individuals and businesses, including the loss of the property you (think you) own.
In the context of cattle trading and livestock agents, the recent case of Re Carpenter International Pty Ltd (Carpenter) is a clear example of the havoc PPSA and PPSR non-compliance can cause.
Carpenter was a company involved in the live cattle export business. Carpenter purchased cattle supplied by livestock agents and, after the required permits had been issued, exported the cattle to overseas markets.
The livestock agents were del credere agents; they paid to the vendors of cattle the amount which the agents expected to be paid from Carpenter (less commission), and, in the normal course, paid the vendors before Carpenter paid them.
Carpenter was placed into voluntary administration.
At the time of the appointment of the voluntary administrator, Carpenter was in possession of (relevantly) some 6000 cattle supplied to it by the livestock agents for live export for which Carpenter had not yet paid the livestock agents a cent (but for which the livestock agents had already paid the vendors).
Clearly, the livestock agents were facing significant losses in respect to the cattle held by Carpenter’s voluntary administrator unless they succeeding in having either the cattle returned to them, or proceeds of their sale paid to them.
What Did the Livestock Agents Do?
The livestock agents claimed they held perfected security interests under the PPSA in the cattle. If that was correct, the livestock agents would be entitled to be paid for the cattle by Carpenter’s voluntary administrator (because the Court had given the voluntary administrator leave to sell the cattle, it was only the proceeds of such sale that were in issue).
The claims of a PPSA perfected security interest were based on retention of title clauses in the contracts between the livestock agents and Carpenter, and also on the retention of title clauses contained in the contracts between Carpenter and the cattle vendors, and which contracts had been assigned by the vendors to the livestock agents.
In order to be effective under the PPSA, and provide the livestock agents protection, these contracts containing the “security interest” (that is, the retention of title clause) were required to be registered on the PPSR within 20 days of the contract.
The Supreme Court of Victoria was asked to determine (among a number of other complicated issues which this article does not deal with) whether the contracts had the “security interest” argued for by the livestock agents, and if so, whether the contracts containing those “security interests” were registered within the required timeframe.
What Did the Court Decide?
The Court ruled that, while the livestock agents may indeed have held PPSA security interests in the cattle under the contracts, those security interests vested in Carpenter immediately prior to Carpenter being placed into voluntary administration.
Such a ruling meant that all interests held by the livestock agents in the 6000 cattle in question were extinguished, and all the cattle (and so also all the proceeds of their sale) belonged solely to Carpenter.
Why did the Court make this ruling?
Under section 588FL of the Corporations Act, a creditor (so someone in the position of the livestock agents) must register a “security interest” (relevantly to this case):
- > six months before the appointment of a voluntary administrator; or
- > within 20 days after the security agreement (in this case the contracts) which gives rise to the “security interest” comes into force; or
- > within such later time as the Court may order under section 588FM of the Corporations Act.
If a creditor does not comply with the above requirements, then their “security interest” will be extinguished.
After considering sections 588FL and 588FM, the Court found against the livestock agents because it decided that (among other things):
- > an assignment of a contract which contains a “security interest” (eg a retention of title of clause) does not create a new security interest, but simply transfers an existing security interest already created;
- > that means that the 20 day period within which the contract must be registered to obtain the protection of the PPSA starts on the day the original contract comes into force (so, for example, on the day the contract is signed by the original parties), not on some later date when the contract is assigned to someone else;
- > as neither the livestock agents or the original cattle vendors had registered the assigned contracts within the strict 20 day period required, the livestock agents could not rely on the protection of PPSA.
Importantly, the Court also held that where a “security interest” is registered within the proper time allowed, but on the same day as the appointment of a voluntary administration (or liquidator), as long as the registration by the creditor occurs sometime on that day, but before the actual time of the administrator’s appointment (even, for example, 15 minutes prior), then the “security interest” will be perfected and so provide the PPSA protection to a creditor.
The Court also considered a livestock agent’s request under section 588FM of the Corporations Act for an extension of time, outside the 20 days, to register the assigned contracts which, if granted, would have allowed the “security interests” to be perfected and given the required PPSA protection to the livestock agent.
A Court has a discretion to extend the 20 day registration period to such other time as it sees fit if the Court can be satisfied that the failure to register was due to accident or inadvertence and won’t prejudice other creditors, or it is otherwise just to grant the extension of time.
In this matter, the Court also refused the extension of time request because it found the livestock agent knew of the 20 day registration requirement, but was mistaken as to when it commenced, however because the evidence also showed that the livestock agent had no intention of actually registering the contracts at any time, and instead simply believed Carpenter could and would pay its debts it owed at the time, then accident or inadvertence could not be shown.
As to the possibility of the Court granting an extension of time for registration, the Court also made the following general statements:
- > even if the delay in registration is substantial, so well after the 20 days allowed, this, on its own, will not stop a Court granting an extension of time to a creditor;
- > a delay in a creditor bringing an application before the Court asking for an extension of time will not usually be a major factor in a Court deciding whether to allow the extension or not; and
- > simply because, by allowing the extension of time for registration, other unsecured creditors may receive a lesser dividend, that will not stop the Court from granting an extension of time; some other prejudice to unsecured creditors needs to be shown.
Take Home Points
This case highlights the following points of significant importance to creditors, and, in the context of this case, particularly livestock agents:
- > ensuring your “security interest” is registered on the PPSR immediately after executing the contract (or other security agreement) which contains the “security interest”, such as a retention of title clause;
- > understanding that if you take an assignment of an existing contract (or other security agreement) which contains a “security interest”, you may be at considerable risk; before taking such an assignment it is crucial you check if the “security interest” has already been registered within the required time;
- > an extension of time will not be given to a creditor who has failed to register a “security interest” within the required time in circumstances where the creditor simply thought, mistakenly, they would be paid in the normal course of trade.
Failure to consider the above issues may result in a total extinguishment of your rights in, or ownership of, your property, including cattle, upon a company being placed into voluntary administration or liquidation.
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.