1. The PPSA: Lessons from cases that do not reach the courtroom
Nicholas Mirzai
Level 22 Chambers

2. Cases
Forge Group Power Pty Limited (in liquidation)(receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52;
In the matter of Gelpack Enterprises Pty Ltd (in liquidation) [2015] NSWSC 1558;
Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92;
OLDER CASES:
THC Holding Pty Ltd v CMA Recycling Pty Ltd [2014] NSWSC 1136;
Re Arcabi Pty Ltd; Ex parte Theobald [2014] WASC 310;
White v Spiers Earthworks Pty Ltd [2014] WASC 139;
Warehouse Sales Pty Ltd (in liq) v LG Electronics Australia Pty Ltd & Ors [2014] VSC 644;
Dura (Australia) Constructions Pty Ltd (receivers and managers appointed) v Hue Boutique Living Pty Ltd [2014] VSCA 326

3. Forge Group Power Pty Limited (in liquidation)(receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52
29. For the reasons which follow, I have concluded that: (1) in testing whether a person is (or is not) regularly engaged in the business of leasing goods, regard is to be had to activity wherever it occurs, and not only to activity in Australia. (2) the test applies at the time the Lease was entered into; (3) when the Lease was entered into, and at all material times thereafter, GE was regularly engaged in the business of leasing goods within Australia. 52. In my opinion, the correct approach is to recognise that frequency or repetitiveness of transactions is a factor relevant to, and in an appropriate case may be the critical factor in, the assessment of whether the leasing business being engaged in is regular. But it is not to be equated with it, as the New Zealand approach appears to require. 53. The New Zealand approach would not, incorrectly, in my opinion, permit a conclusion of regularity where an initial transaction was intended to be followed by others, but no more transactions of the type concerned actually eventuated, despite the best intentions, advertised willingness over a significant period of time and ability of the lessor to enter into more. In my opinion, in considering frequency or repetitiveness as an element of regularity of business, account may be taken of more than simply actual transactions entered into.

4. In the matter of Gelpack Enterprises Pty Ltd (in liquidation) [2015] NSWSC 1558
21. The liquidators accept that the August 2012 letter and notification had the effect of superseding the 2007 terms and conditions by exercise of Primaplas's unilateral reserved right to do so, but dispute that it had the effect of substituting the new terms and conditions. I am afraid I am unable to see the logic in that submission. If, as appears to be accepted, Primaplas was entitled unilaterally to vary its terms and conditions, then what it did on 1 August 2012 was not just to extinguish the preceding terms and conditions, but also to substitute new ones. Thus, as it seems to me, even in the absence of anything that ensued after 1 August 2012, by varying its terms and conditions on that date, it exercised a power reserved to it under the 2007 contract and Gelpack was thereupon bound by the 2012 terms and conditions. 22. The fact that the covering letter requested signing and return of the terms and conditions did not make such signing and returning a pre-condition to the new terms taking effect. That is made clear enough in the letter itself, emphasising that the new terms apply to any orders accepted after that notification. Nor does the fact that the terms and conditions themselves provide for acceptance have that consequence. The terms and conditions of 2012 are a generic document intended to apply both to new accounts and to existing customers, and if they operated – as they did in this case – by virtue of the authority conferred in the 2007 contract, no further act of acceptance was required.

5. Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92
33. These cases stand in contrast to the facts here. Clause 2 of the Credit Application refers to Central Cleaning’s ‘Standard Terms and Conditions’, but the ROT Clause is a ‘Condition of Sale’ which refers to the retention of title in ‘Goods the subject of this sale’ (emphasis added). The Credit Application must be construed using an objective approach to ascertain the intention of the parties as they have expressed it (not their subjective intention). Using that principle to construe clause 2, it seems to me that the parties must be taken to have intended that the terms to be incorporated were recorded in a separate document existing at the date of the agreement. There is no evidence of what those terms were (if they did exist). Rather, Central Cleaning wishes to rely on a clause on invoices that came after the Credit Application and that clearly treats each sale as a separate contract. In my view, once a sufficient time had passed, the ROT Clause formed part of each separate and individual contract of sale (by dint of the consistent course of conduct). But it was too late for it to be incorporated as a term of the Credit Application agreement by this method, coming as it did, after that contract had been entered into by the parties

6. THC Holding Pty Ltd v CMA Recycling Pty Ltd [2014] NSWSC 1136
Scrap metal wholesaler (THC) purchased scrap from CMA for sale to Vietnam
Under contract title passed on payment of deposit
CMA supplied less than contract amount, THC sourced alternate scrap (under scrap swap with SIMS), CMA later had shortfall amount and invoiced THC for full price
CMA went into administration and THC claimed shortfall amount from CMA yard, but CMA administrator sold it
THC registered financing statement against CMA
Not a security interest as title had already passed to THC
Possession by CMA of THC’s goods was merely as bailee
Not considered, but this was not a long term bailment so s13 not engaged

7. Re Arcabi Pty Ltd; Ex parte Theobald [2014] WASC 310
Application for directions by receivers of Arcabi.
Company involved in storage and sale of rare coins:
Some owned by Arcabi, some on consignment, some just for storage;
Goods stored at property of directors.
Receivers incurred expenses sorting coins and determining ownership (including insurance) - Indemnity given for fee.
See also Re Renovation Boys Pty Ltd [2014] NSWSC 340
Bailment not ‘in substance’ security interest (s12(1));
Nominal fee, no obligation to purchase, not for useful life of goods.
HELD: Not a PPS lease (s12(3)) - customers not regularly engaged in business of bailing coins (hobby only).
HELD: Not a commercial consignment (s12(3)) - Arcabi known to sell goods owned by others (see s 10(e) definition of commercial consignment).

8. White v Spiers Earthworks Pty Ltd [2014] WASC 139
Vehicles subject to hire purchase following sale of business agreement
Agreement was transitional security agreement (2010)
No registration under pre-PPSA law (see PPSA s 322(3); PPS Regs 9.2)
Grantor co went into VA and receivership-vesting of security interest
Hire purchase satisfied s12(1) and s12(3)
Vesting rule is not an acquisition of property on unjust terms
Constitutional issue

9. Warehouse Sales Pty Ltd (in liq) v LG Electronics Australia Pty Ltd & Ors [2014] VSC 644;
The PPSA provides for a priority regime, not a title regime. Under s 273 of the PPSA ownership or title to personal property is not determinative and as a consequence a retention of title (ROT) financier’s ownership interest is replaced by a simple security interest. A ROT supplier must protect that ‘security interest’ by taking possession of the personal property (e.g. a pledge under pre- PPSA law) or by obtaining a signed security agreement that covers (describes the collateral) and perfecting that security interest by registration of a financing statement on the PPSR. The consequences of non-perfection are that the security interest is ineffective against third parties, and on insolvency a security interest (title) vests in an administrator or liquidator. In other words, it is ineffective in the event of insolvency [37].
The PPSA is not a code. There is no reason why sale of goods legislation should not be considered in determining whether a person is a ‘buyer’ of personal property that has been ‘sold’ under PPSA s 46. The PPSA discloses no intention to displace the existing law relating to the sale of property (as opposed to the operation of security interests over property). When the PPSA refers to existing concepts such as the sale of property, and those concepts are not necessarily affected by the PPSA’s reconfiguration of personal property securities law, there is no reason to suppose that the Parliament intended anything other than a reference to the accepted meaning of familiar concepts [47].

10. Warehouse Sales Pty Ltd (in liq) v LG Electronics Australia Pty Ltd & Ors [2014] VSC 644;
Where the Goods have been paid for in full either by cash on pick up or cash before delivery and whether or not in the possession of WHS, the security interest is extinguished under s 32(1)(a)(i) of the PPSA because of the express authority given by the Suppliers. Further, the buyer takes the Goods free of such interest under s 46(1) of PPSA. In these circumstances and for the purposes of s 46(1) there is a sale. This is because there was an unconditional contract for the sale of specific goods in a deliverable state. The intention of the parties was that property in the Goods passed at the time the contract was made. Accordingly, pursuant to ss 6, 22 and 23 (Rule 1) of the Goods Act, there is a sale [59].
What constitutes the "ordinary course of business" is a two-stage process of analysis: first, identify what business was carried on by the seller in the ordinary course; and then, determine whether the sale was made in that ordinary course [93].

11. Dura (Australia) Constructions Pty Ltd (receivers and managers appointed) v Hue Boutique Living Pty Ltd [2014] VSCA 326
There are four elements to satisfying section 12(1) of the PPSA:  
There must be an outstanding existing monetary or non-monetary obligation;
There must be an "in substance security" to support the performance of that obligation;
The security must amount to an "interest" in personal property;
The interest must arise out of a transaction [107].
The interest of Hue in the moneys paid into Court did not arise out of a consensual transaction between it and Dura, its interest in the funds was not a "security interest" within s 12 of the PPSA [126].
In so far as Hue acquired an equitable charge over the moneys paid into Court, the PPSA did not apply as that charge answered the description of "a lien, charge, or any other interest in personal property, that is created, arises or is provided for by operation of the general law", within the meaning of s 8(1)(c) of the PPSA. There was no contractual or any other transaction or arrangement between the parties [127].

12. Common issues which form the subject of a PPSA dispute
1. Characterisation of the underlying transaction/interest
Does the PPSA apply at all?
Is the PPSA excluded?
Are the rights in question proprietary?
2. The identity of the grantor
Corporate groups
Trustees
Business partnerships
Who has the relevant rights in the underlying collateral capable of granting a security interest?

13. Common issues which form the subject of a PPSA dispute
3. Registration defects
No registration at all.
Ticking the “transitional” box for non-transitional security interests
Ticking (or not ticking) the PMSI box and the impact of s 165
Timing restrictions and ineffective registrations – s 62, s 588FL
Getting the critical identifier incorrect (VIN, ACN, ABN)
4. Deemed security interests
Failure to recognise that the PPSA might apply – indefinite lease and bailment arrangements
Not specifying an end time
Incomplete drafting

14. The PMSI and misdescription under Pt 5.3
Section 14 of the PPSA provides that certain security interests constitute “purchase money security interests” or PMSIs.
Provided one complies with the PPSA requirements, a PMSI perfected later in time prevails over a general security interest perfected earlier in time pursuant to s 62 of the PPSA.
That said, it is a defect pursuant to s 165(c) of the PPSA to register something as a PMSI if it is not (see also, s 164(1)(b) of the PPSA).
Thus, whilst most ROT arrangements will generally constitute PMSIs, careful consideration and proper characterisation of the underlying interest should occur on a case-by-case basis, informed by the relevant commercial context, to avoid misdescription and potential defect rendering any registration ineffective.

15. The “transitional box” misdescription
Section 337A of the PPSA:
Registration defective if collateral is not covered by transitional security agreement
Without limiting section 164 (defects in registration), a registration that discloses that collateral is covered by a transitional security agreement is ineffective to the extent that it describes collateral that is not covered by a transitional security agreement.
Thus, ticking the transitional box for security interests created and perfected since 30 January 2014 is arguably a fatal defect.

16. The Creditor vs the External Administrator
Ambiguity in the operation of the provisions favours the external administrator almost invariably:-
Not their underlying collateral
Even if wrong as a matter of law can often force other side to settle and make some gain for creditors as a collective class
Vesting provisions
Section 267 of the PPSA
Section 588FL of the Corporations Act 2001 (Cth)
Query: Can a creditor seek a s 588FM order to extend the time for registration after the appointment of an external administrator (proper reading of the term “vesting” as opposed to “void against” – change from the former Ch 2K provisions of the Corporations Act 2001 (Cth)).
Who is entitled to the “reasonable realisation costs” of dealing with an asset the subject of a valid PPSA security interest?
Section 18(5) of the PPSA vs s 556 of the Corporations Act 2001 (Cth) – amongst other provisions

17. “Vest” as opposed to “void against”
See, “Vesting in the Insolvency Practitioner” (2013) 25(3) Australian Insolvency Journal 26.
Section 267:
Security interest vested in grantor
(2) The security interest held by the secured party vests in the grantor immediately before the event mentioned in paragraph (1)(a) occurs.
Where paragraph (1)(a) refers to an appointment of an external administrator under Ch 5 of the Corporations Act 2001 (Cth) or a trustee in bankruptcy under the Bankruptcy Act 1969 (Cth).

18. Time restrictions Section 588FL of the Corporations Act 2001 (Cth):
Vesting of security interest in company
(4) The PPSA security interest vests in the company at the following time, unless the security interest is unaffected by this section because of section 588FN:
(a) if the security interest first becomes enforceable against third parties at or before the critical time--immediately before the event mentioned in paragraph (1)(a);
(b) if the security interest first becomes enforceable against third parties after the critical time--at the time it first becomes so enforceable.
(2)(b) the registration time for the collateral is after the latest of the following times:
(i) 6 months before the critical time;
(ii) the time that is the end of 20 business days after the security agreement that gave rise to the security interest came into force, or the time that is the critical time, whichever time is earlier;

19. Priority extensions – PMSIs and section 293
In the matter of Accolade Wines Australia Limited and other companies [2016] NSWSC 1023
PPSA, Section Timing--applications for extension of time             
(1) On application, a court may make an order extending the number of business days in a period specified in the following provisions if the court is satisfied that it is just and equitable to do so:
(a)  paragraphs 62(3)(b) (perfection of purchase money security interests);
PPSA, Section 62(3)(b) - Personal property other than inventory
(3) The purchase money security interest has priority if:
(a) the interest is in personal property, or its proceeds, other than inventory; and
(b) the purchase money security interest is perfected by registration before the end of 15 business days after whichever of the following days applies:
(i) for goods--the day the grantor, or another person at the request of the grantor, obtains possession of the property;
(ii) for any other property--the day the interest attaches to the property; and
(c) the registration that perfects the purchase money security interest states, in accordance with item 7 of the table in section 153, that the interest is a purchase money security interest.
Note: The period mentioned in paragraph (b) may be extended by a court under section 293.

20. Does 588FM apply notwithstanding the appointment of an external administrator?
See discussion in Re Carpenter International Pty Limited [2016] VSC 118 at [217]:
Re Enviro Pallets (NSW) Pty Ltd [2013] QSC an application for extension filed after a liquidator had been appointed to the company.
Re Southern Engineering Services Pty Ltd [2014] NSWSC an administrator had already been appointed.
Re Quality Blend Liquor Pty Ltd [2015] 2 Qd R a provisional liquidator had been appointed by the time Wilson J granted an extension.
Re Apex Gold Pty Ltd [2013] NSWSC an extension was granted even though the plaintiff intended to appoint a voluntary administrator and receivers to the grantor company.
Re Appleyard Capital Pty Ltd (2014) 101 ACSR an extension was granted despite the high degree of likelihood that the grantor was insolvent and would go into liquidation or administration within six months.

21. Unfair preferences and the PPSA?
Section 588FA – Corporations Act 2001 (Cth) (1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if: (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and (b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; Section 588FL(4) – Corporations Act 2001 (Cth) (4) The PPSA security interest vests in the company at the following time, unless the security interest is unaffected by this section because of section 588FN: (a) if the security interest first becomes enforceable against third parties at or before the critical time - immediately before the event mentioned in paragraph (1)(a); (b) if the security interest first becomes enforceable against third parties after the critical time - at the time it first becomes so enforceable.

22. General commercial sentiment to litigating to final hearing
Little incentive to do so (costs of litigation are a barrier as is delay and uncertainty of the outcome);
Creditors with enough resources (i.e. banks) are often on both sides of the relevant argument depending on the grantor (sometimes their registration is good, sometimes their registration is ineffective) – want to avoid setting any precedent which removes room to negotiate otherwise available;
PPSA consequences are almost invariably “all or nothing” – exposure is often substantial and difficult to mitigate without commercial settlement;
Question for the Court is almost always one of contractual construction combined with statutory interpretation – reasonable minds may differ no matter how well the argument is put.

23. Addressing exposure
Get advice as early as possible – exposure generally increases the longer the matter is left undetected.
Consider the interests, and potentially any competing interests, in play and what their likely position will be if a priority contest was to result.
If an application to extend time is available and would alleviate the underlying exposure consider the commercial merits of such an application: See s 588FM of the Corporations Act; s 293 of the PPSA (in certain discrete circumstances)
If steps can be taken before an external administrator is formally appointed under Ch 5 of the Corporations Act, this is most likely to be better for the secured party (see s 588FN of the Corporations Act).
Proactive steps are better than reactive steps, reviewing compliance documentation and internal client procedures once one issue arises could assist in quarantining further issues.

24. Further resources
Harris and Mirzai, Annotated Personal Property Securities Act (2nd ed, , CCH)
Harris and Mirzai, Australian Personal Property Securities Reporter (online, CCH)
Cseti and Wardell, Understanding the PPSA (2nd ed, 2013, CCH)
Duggan and Brown, Australian Personal Property Securities Law (2012, LexisNexis AU)
Widdup, PPSA: A Conceptual Approach (3rd ed, 2012, LexisNexis NZ)

25. Questions?

26. The PPSA: Lessons from cases that do not reach the courtroom
Nicholas Mirzai
Level 22 Chambers