1. ©MNoonan2008 Commercial Transactions Module 11 Security over Personal Property (2) Winter Session 2008

2. ©MNoonan2008 This presentation and Copyright therein is the property of Maureen Noonan and is prepared for the benefit of students enrolled in the Commercial Transactions course conducted by the Law Extension Committee and is available for their individual study. Any other use or reproduction, including reproduction by those students for sale without consent is prohibited.

3. ©MNoonan2008 Registration Systems & Priorities Registration Systems We will look at 3 systems which provide for registration of securities on a Public Register so as to put third parties on notice of obligations. Students should know which securities can and should be registered, those which cannot be registered, those which might be required to be registered depending on drafting/effect, formalities required, consequences of registration and non registration.  Corporations Act for eligible charges by Companies  Registration of Interests in Goods Act (for interests in boats and MVs)  Security Interests in Goods Act (charges by non-companies over tangible goods and replacing Bills of Sale Act)-commenced March 2006 Priorities When there is more than one security holder, it is often necessary to work out who has priority as there may not be enough assets to satisfy everyone.  Generally  Competing Interests Under the same Registration System  Competing Interests under different Registration Systems

4. ©MNoonan2008 Registration Systems 1. Corporations Act 2. Registration of Interests in Goods Act 3. Security Interests in Goods Act

5. ©MNoonan2008 Concern with existing State and Federal registration systems  It is not possible to register interests over some classes of property e.g. many intangibles, retention of title clauses.  Coverage varies from jurisdiction to jurisdiction e.g. boats not covered in REVs in all states.  Dual registration may be necessary e.g. Corp +Revs in Tasmania.  Technical compliance may affect validity e.g. agricultural mortgage in particular form.  Interaction of registration systems can deliver complex outcomes e.g. failure to register under Corp law does not affect validity but technical non compliance with state law will.  Mandatory registration can be difficult to manage e.g. security holder must anticipate whether collateral might be moved to another state  May be a need to register in more than one state  May be a need to search in more than one state  Registration may be cumbersome..e.g. paper lodgement rather than electronic  Registers may not be available for searching on line  May be costly for parties not involved to take proper precautions

6. ©MNoonan2008 Charges Required To Be Registered - Corporations Law s. 262 (1) Subject to this section, the provisions of this Chapter relating to the giving of notice in relation to, the registration of, and the priorities of, charges apply in relation to the following charges (whether legal or equitable) on property of a company and do not apply in relation to any other charges: (a) A floating charge on the whole or a part of the property, business or undertaking of the company; (b) A charge on uncalled share capital; (c) A charge on a call on shares made but not paid; (d) A charge on a personal chattel, including a personal chattel that is unascertained or is to be acquired in the future, but not including a ship registered in an official register kept under an Australian law relating to title to ships;

7. ©MNoonan2008 Charges Required To Be Registered - Corporations Law cont. (e) A charge on goodwill, on a patent or licence under a patent, on a trademark or service mark or a licence to use a trade mark or service mark, on a copyright or a licence under a copyright or on a registered design or a licence to use a registered design; (f) A charge on a book debt; (g) A charge on a marketable security, not being; (i) A charge created in whole or in part by the deposit of a document of title to the marketable security; or (ii) A mortgage under which the marketable security is registered in the name of the chargee or a person nominated by the chargee; (h) A lien or charge on a crop, a lien or charge on wool or a stock mortgage; (j) A charge on a negotiable instrument other than a marketable security.

8. ©MNoonan2008 Charges Required To Be Registered - Corporations Law cont. s. 262 (2) The provisions of this Chapter mentioned in subsection (1) do not apply in relation to: (a) a charge, or a lien over property, arising by operation of law; (b) a pledge of a personal chattel or of a marketable security;(c) a charge created in relation to a negotiable instrument or a document of title to goods, being a charge by way of pledge, deposit, letter of hypothecation or trust receipt; (d) a transfer of goods in the ordinary course of the practice of any profession or the carrying on of any trade or business; or (e) a dealing, in the ordinary course of the practice of any profession or the carrying on of any trade or business, in respect of goods outside Australia.

9. ©MNoonan2008 Lien over property arising by operation of law Airservices Australia v. Canadian Airlines International Ltd (1999) HCA 62 Canadian leased a plane to Compass Airlines. When the latter went into receivership, Canadian tried to take back its plane; only to discover that there was a statutory lien under the Civil Aviation Act for $2,888,740.97 for unpaid charges and penalties for landing fees, maintenance, traffic control etc. Airservices would not release the plane until they were paid. CAA had its own Statutory Lien register.

10. ©MNoonan2008 Charges Required To Be Registered - Corporations Law cont. s. 262(3). The reference in paragraph (I)(d) to a charge on a personal chattel is a reference to a charge on any article capable of complete transfer by delivery, whether at the time of the creation of the charge or at some later time, and includes a reference to a charge on a fixture or a growing crop that is charged separately from the land to which it is affixed or on which it is growing, but does not include a reference to a charge on: (a) a document evidencing title to land (b) a chattel interest in land; (c) a marketable security; (d) a document evidencing a thing in action; or (e) stock or produce on a farm or land that by virtue of a covenant or agreement ought not to be removed from the farm or land where the stock or produce is at the time of the creation of the charge.

11. ©MNoonan2008 Definition Of Charge - S.9 Corporations Law “Charge” Means a charge created in any way and includes a mortgage and an agreement to give or execute a charge or mortgage, whether on demand or otherwise.

12. ©MNoonan2008 Sally Anne Horsley v. Phillips Fine Art Auctioneers Pty Ltd - SCNSW 31.07.95 No. 3211/92 Concerns gifts, bills of sale, conversion. Anthony Spies and his brother Carl lived with their parents in The Swifts. Their company Minjar purchased this property in Darling Point from the Catholic Church in 1986. It executed a Mortgage back. In the same year Carl and Anthony as Mortgagor executed an Ordinary Bill of Sale over certain antique furniture and chattels in favour of the Church. Anthony Spies claimed the 1986 BS was discharged in 1987. Court found it more probably than not that it was paid out (32). The evidence was slim but an inference was raised by the fact that there was a later BS granted by Carl alone (the 1990 BS) to secure unpaid interest from the mortgage over... “all furniture and furnishings mow and hereafter situated in the premises known as The Swifts...”... same furniture as in the 1986 BS.

13. ©MNoonan2008 Sally Anne Horsley v. Phillips Fine Art Auctioneers Pty Ltd - SCNSW 31.07.95 No. 3211/92 cont (2) This coincided with the principal mortgage being discharged and a refinancing by Minjar with St George. BS transferred to St George in 1992. St George seized the furniture. Anthony claims a half interest and sues in conversion. He had to show that he had title to the furniture, that St George converted it and he suffered quantified loss and damage. St George contends that Anthony failed to establish any of these and that prior to the grant of the BS, the furniture had been gifted to their mother in 1987. Anthony gave evidence of the gift to his mother in 1987 (33). See later paragraphs for discussion of an effective gift … delivery 53-83,84, 85, 86, 87.

14. ©MNoonan2008 The Registration System for MVs & Boats Registration of Interests in Goods Act (NSW) This act provides a system in which security interests relating to prescribed goods (currently only motor vehicles and boats) can be placed on the Public Register. The Register is maintained by the Department of Fair Trading and is known as REVS - The Register of Encumbered Vehicles. It can be accessed online and students are encouraged to look at the material provided by the Department of Fair Trading.

15. ©MNoonan2008 The Registration System for MVs & Boats Registration of Interests in Goods Act (NSW) “Security Interest” in relation to goods means an interest or power: - a) reserved in or over an interest in the goods; or b) created or otherwise arising in or over an interest in the goods under a Bill of Sale, mortgage, charge, trust or power by way of security for the payment of a debt or other pecuniary obligation or the performance of any other obligation but does not include any interest or a power reserved or created or otherwise arising under a lease or hire purchase agreement or an agreement excluded by this definition by the regulations.

16. ©MNoonan2008 The Registration System for MVs & Boats Registration of Interests in Goods Act (NSW) “Registerable Interest” in relation to goods means: a) The interest in the goods of the person to whom is owed the obligation of which the performance is secured by a security interest to which the goods are subject. b) The interest in the goods of the lessor of the goods. c) The interest in the goods of the owner under a hire purchase agreement relating to the goods; or d) Any other prescribed interest in the goods whether arising under the Law of NSW or of a participating State.

17. ©MNoonan2008 Purchase of Cars or Boats that are Subject to A Registerable Interest Students are expected to have a good working knowledge of Sections 9 and 10 of the Act so that they are able to determine issues such as the following: a) Whether a particular interest is a registerable interest and should be registered under the Act. b) How a perspective purchaser of a car or boat can protect their interests and avoid purchasing a car that belongs to, or is encumbered to someone else. c) The position of a purchaser who has purchased-from a dealer- a car or boat that belongs to someone else or is affected by a security interest of someone else. d) The position of a purchaser who has made a private purchase of a car or boat that belongs to someone else or is encumbered. e) The position of a financier who has an interest in a car or boat in both situations of registration and non-registration of a registerable interest.

18. ©MNoonan2008 Register Encumbered Vehicles extract from DFT Statistically, there is a one in five chance that a vehicle offered for private sale will be carrying a debt for which the new owner could become liable. The Register of Encumbered Vehicles (REVS) is a service provided by the Office of Fair Trading that can tell you whether or not a vehicle is recorded as encumbered. Encumbered means that there could be money owing on the car or that the registered operator may not own the vehicle outright. REVS can also check if the vehicle is required for an RTA inspection or whether the vehicle has money owing on it, been reported as stolen, been recorded as de-registered, or been recorded as a repairable or non-repairable write-off Always purchase a REVS search certificate when REVS tells you the vehicle is not encumbered (cost = $10). This will provide confirmation of your inquiry and offer legal protection against the vehicle being repossessed by a creditor due to a previous owners unpaid debt.

19. ©MNoonan2008 Security Interests in Goods Act An attempt to provide registration for security interests not covered by the Corporations Act- given by individuals and partnerships Only partial…IP, intangibles not covered Differs from State to State

20. ©MNoonan2008 Security Interests in Goods-non companies The Old Regime The Security Interests in Goods Act has repealed The Bills of Sale Act 1898 This act distinguished traders bills of sale and ordinary bills of sale. Unregistered traders bills were absolutely void and conferred no security, Unregistered ordinary bills were valid as between grantor and grantee but void as against certain judgement creditors. The aim of registration was to prevent third parties from being misled into believing that the goods to which the bill related were unencumbered. The Liens on Crops and Wool and Stock Mortgages Act 1898 This act enabled the land holder to give a preferable lien over crops, an owner of sheep to grant a preferable lien over wool and an owner of sheep, cattle or horses the ability to grant a stock mortgage. Its aim was to overcome doubts at common law about the efficacy of securities granted over goods that were still in the course of production

21. ©MNoonan2008 Security Interests in Goods-non companies The New Regime The objects of a Security Interests in Goods Act are: a)To modify existing law by removing the outdated distinction between traders bills and ordinary bills. b)Make registration optional rather than mandatory. c)Remove the need for constantly renewing registration. d)Registration will generally confer priority over unregistered interests and subsequently registered interests, but a failure to register will not result in invalidity. e)Registration of agricultural securities will create mortgages over existing and future crops and wool, instead of liens over growing crops. f) Agricultural mortgages are extended beyond sheep, cattle and horses. g) Aquaculture mortgages will be permitted.

22. ©MNoonan2008 Security Interests in Goods-non companies The New Regime The term Security Interest in relation to goods (whether existing or future) is defined to mean interest or power: a) reserved in or over an interest in the goods; or b) created or otherwise arising in or over an interest in the goods under a bill of sale, mortgage, charge, trust or power by way of security for the payment of a debt or other pecuniary obligation or the performance of any other obligation but is defined not to include: - a letting of goods with an option to purchase - an agreement for the purchase of goods by instalment - any other hiring agreement - any other agreement, arrangement, instrument or circumstance prescribed by the regulations.

23. ©MNoonan2008 Security Interests in Goods-non companies The New Regime The location of the Register for Security Interests in Goods. This will be located with the Registrar General in the same way that the Bills of Sale Register was kept with the Registrar General. For more information, see the website.

24. ©MNoonan2008 What “goods”are covered? goods" means any chattels personal, fixtures or other things capable of complete transfer by delivery (whether immediately or at any future time), but does not include any of the following: (a) title deeds, negotiable instruments, choses in action or chattel interests in real estate, (b) shares or interests in the stock, funds or securities of any of the following: (i) a Government (whether of this State or otherwise), (ii) the Crown or a body representing the Crown (whether in right of this State or otherwise), (c) shares or interests in the capital or property of a body corporate (wherever constituted), (d) access licences in respect of water granted under the Water Management Act 2000, (e) any other thing prescribed by the regulations for the purposes of this definition.

25. ©MNoonan2008 "registrable security instrument" For the purposes of this Act, a security instrument is a "registrable security instrument" if: (a) the instrument states the name and address of each grantor and the name of the holder of the security interest concerned, and (b) the instrument includes a description of the goods to which the security interest relates to the extent to which the goods are ascertainable at the time of the execution of the instrument, and (c) the instrument has been duly executed by each grantor, and (d) in the case of an agricultural goods mortgage--the instrument otherwise complies with the requirements of Part 2.

26. ©MNoonan2008 Agriculture ( 1) In this Act:"agricultural goods" means any of the following: (a) crops, (b) fish, (c) stock, (d) wool. "agricultural goods mortgage" means any of the following: (a) an aquaculture fish mortgage, (b) a crop mortgage, (c) a stock mortgage (including a wool mortgage). "aquaculture" has the same meaning as in section 142 of the Fisheries Management Act 1994."crop" includes the following: (a) wheat, maize, canola, sorghum, barley, oats, lucerne, grass (whether for hay or grain), cotton, tobacco, rice, sugar-cane and any other kind of agricultural produce, (b) oranges, grapes (whether as fruit or for wine or spirit) and any other kind of fruit or horticultural produce. "crop mortgage" means a mortgage over crops that is granted as provided by section 7 "stock" includes any sheep, goats, cattle, horses, swine, poultry, alpacas, llamas, ostriches or other animals (except fish)."

27. ©MNoonan2008 Crop Mortgages 7. Creation of crop mortgages (1) A person may grant a mortgage as provided by this section (a "crop mortgage") over any crops that grow or are grown on land by way of security for payment of a debt or other pecuniary obligation in circumstances where the person: (a) owns the land, or (b) has exclusive possession of the land and a right to harvest crops that grow or are grown on the land, or (c) holds a lease over the land granted under the Western Lands Act 1901 (whether or not the lease confers exclusive possession of the land) and has a right to harvest crops that grow or are grown on the land, or (d) is entitled under a sharefarming agreement with the owner or lessee of the land to crops (or a share of the crops) that grow or are grown on the land and has obtained the written consent of the owner or lessee to grant the mortgage.

28. ©MNoonan2008 Crop Mortgages cont (2). (2) A crop mortgage may extend to any or all of the following: (a) crops that are growing on the land concerned during the period of the mortgage, (b) crops to be sown or planted on the land concerned by the mortgagor during the period of the mortgage, (c) crops that grow on the land concerned in the ordinary course of nature during the period of the mortgage. (3) A crop mortgage must: (a) be in the prescribed form, and (b) be duly executed by the mortgagor, and (c) describe or otherwise identify the crops to which the mortgage is to apply, and (d) describe or otherwise identify the land on which the crops concerned are growing or will grow, and (e) specify a period for its duration in accordance with subsection (5), and (f) be registered within the period of 45 days after its execution.

29. ©MNoonan2008 Crop Mortgage I, [name of mortgagor] of [address of mortgagor], (the "Mortgagor") grant a mortgage as provided by the Security Interests in Goods Act 2005 in respect of the crops described in the Schedule in favour of [name of mortgagee] of [address of mortgagee] (the "Mortgagee"). This mortgage is granted as security for the payment by the Mortgagor of the following: 1 [state debt or other pecuniary obligations for which mortgage granted] 2 *The provisions set out in the memorandum of covenants, registered in the General Register of Deeds as number [specify number of memorandum], are included as part of this mortgage subject to the following:(a) *[specify any alterations to or omissions from provisions] (b) This mortgage has effect for the period specified in the Schedule commencing from the date of its registration. Dated: [state date of execution] Signed by or on behalf of the Mortgagor: [Mortgagor's or attorney's signature] in the presence of: [witness's name] [witness's address] [witness's signature] 1 Crop to which mortgage relates [describe crops to which mortgage relates or will relate] 2 Land to which mortgage relates [describe land on which the crops are growing or are to grow] 3 Duration of the mortgage [specify period for duration of the mortgage, including any renewal rights]

30. ©MNoonan2008 Stock mortgage/*Wool mortgage I, [name of mortgagor] of [address of mortgagor], (the "Mortgagor") grant a mortgage as provided by the Security Interests in Goods Act 2005 in respect of the *stock/*wool/*stock and wool described in the Schedule in favour of [name of mortgagee] of [address of mortgagee] (the "Mortgagee"). This mortgage is granted as security for the payment by the Mortgagor of the following:1 [state debt or other pecuniary obligations for which mortgage granted]2 *The provisions set out in the memorandum of covenants, registered in the General Register of Deeds as number [specify number of memorandum], are included as part of this mortgage subject to the following:(a) *[specify any alterations to or omissions from provisions](b) This mortgage has effect for the period specified in the Schedule commencing from the date of its registration.*This mortgage *extends/*does not extend to [state any limitations on or extensions on the provisions of section 12 (5) or (6) of the Security Interests in Goods Act 2005]. Dated: [state date of execution] Signed by or on behalf of the Mortgagor: [Mortgagor's or attorney's signature] in the presence of: [witness's name] [witness's address] [witness's signature] 1 *Stock and wool/*stock/*wool to which mortgage relates [describe stock and/or wool to which mortgage relates or will relate] 2 Land on which stock concerned to be kept [describe land on which stock concerned are being kept or are to be kept] 3 Duration of the mortgage [specify duration of mortgage, including renewal rights]

31. ©MNoonan2008 Aquaculture fish mortgage I, [name of mortgagor] of [address of mortgagor], (the "Mortgagor") grant a mortgage as provided by the Security Interests in Goods Act 2005 in respect of the fish described in the Schedule in favour of [name of mortgagee] of [address of mortgagee] (the "Mortgagee").This mortgage is granted as security for the payment by the Mortgagor of the following:1 [state debt or other pecuniary obligations for which mortgage granted]2 *The provisions set out in the memorandum of covenants, registered in the General Register of Deeds as number [specify number of memorandum], are included as part of this mortgage subject to the following:(a) *[specify any alterations to or omissions from provisions](b) This mortgage has effect for the period specified in the Schedule commencing from the date of its registration. Dated: [state date of execution] Signed by or on behalf of the Mortgagor: [Mortgagor's or attorney's signature] in the presence of: [witness's name] [witness's address] [witness's signature] 1 Fish to which mortgage relates [describe fish to which mortgage relates or will relate] 2 Land or water source to which mortgage relates [describe land or water source on or in which fish are being cultivated or are to be cultivated] 3 Duration of the mortgage [specify period for duration of the mortgage, including any renewal rights]

32. ©MNoonan2008 Priorities 1. Generally 2. Within systems 3. Between systems and non-registerable securities.

33. ©MNoonan2008 Priorities 1. Equities being equal, first in time of creation prevail. 2. Equities being equal, preference given to legal over equitable. Subject to special rules, etc., for:  Purchasers without notice.  Fraud, estoppel and gross negligence.  Dearle v. Hall.  Statutory registration rules.  Bankruptcy and Liquidation Statutes.  Provisions re “tacking”.  Marshalling of assets.

34. ©MNoonan2008 Factors affecting priorities  Whether in or out of bankruptcy or liquidation  Type of grantor of security. If Co, subject to Corporations Act. Otherwise, State law.  Form of security-possessory or non-possessory and in case latter, whether grant or title reservation.  Type of property-tangible, intangible-statutory scheme applicable?  Where secured property is situated-law may differ from State to State.

35. ©MNoonan2008 Security Interests in Goods-non companies The New Regime Effect of registration under the Security Interests in Goods Act on priority of security interests. Clause 31 sets out rules governing the determination of priority unless the holders have agreed otherwise. A registered security interest will generally rank in priority over an unregistered security interest. However, an unregistered security interest will rank in priority if the holder of the unregistered interest takes possession of the goods before the registered interest is registered. An earlier registered security interest ranks in priority over a later registered security interest.

36. ©MNoonan2008 s.31 Priority of security interests (1) A registered security interest in goods ranks in priority over any unregistered security interest in the same goods with respect to all debts and other pecuniary obligations (including contingent obligations) and all other obligations secured under the registered security interest. (2) Registered security interests in the same goods rank in priority in the order in which they are registered with respect to all debts and other pecuniary obligations (including contingent obligations) and all other obligations respectively secured under them whenever arising. (3) However, an unregistered security interest in goods ranks in priority over a registered security interest in the same goods if the holder of the unregistered security interest takes possession of goods before the registered security interest is registered. (4) The order of priority of security interests established by this section is subject to any agreement between the holders of the security interests concerned. (5) This section has effect subject to section 11 (Effect of crop mortgages on sharefarming agreements).

37. ©MNoonan2008 Companies-priorities The usual order in case of insolvency--- 1.Fixed charges, mortgages 2. Preferential creditors (including employees) 3. Floating charges 4. Unsecured creditors 5. Subordinated (unsecured) creditors 6. Equity claimants-preference shareholders 7. Equity claimants-ordinary shareholders 8. Equity claimants-deferred shareholders

38. ©MNoonan2008 Order Of Priority Of Charges - Corporations Law General rules in relation to registered charges:  A registered charge has priority over subsequent registered charge s.280(1)(a).  A registered charge has priority over a prior unregistered charge s. 280(1)(b).  A registered charge has priority over an unregistered charge created after the creation of the registered charge s. 280(1)(c). Exceptions to general rule: If subsequent charge created before the prior registered charge, and chargee of subsequent charge can prove that the prior registered chargee had notice of the subsequent registered charge at the time the prior registered charge was created s. 280(1)(a) and 280(2).

39. ©MNoonan2008 Order Of Priority Of Charges - Corporations Law Exceptions to general rule cont.: The holder of a floating charge will be deemed to have conceded priority to a subsequently registered fixed charge created before the crystallisation of the floating charge, unless ASIC has been notified of any term of the floating charge that prohibits or restricts the company from creating subsequent fixed charges s. 279(3). A registered charge loses its priority over a prior unregistered charge if the prior unregistered chargee can prove that the registered chargee had notice of the earlier unregistered charge when he/she took the registered charge s. 280(1)(b) and 280(2). s. 278(2) provides that having notice includes constructive notice. A person has constructive notice of a prior interest if the existence of that interest would have come to that person's attention upon making the inquiries and investigations that a reasonable person, acting prudently in their own interests would have made. Aust. Central Credit Union v. Commonwealth Bank of Aust. (1991) 9 ACLC 396,402.

40. ©MNoonan2008 Priorities example - Company Charges A) Chargor Ltd borrowed $50,000 from Chargee Bank, secured by a floating charge over all its assets. The charge was registered with ASIC under s. 262. There was no negative pledge prohibiting the creation of future charges. B) Chargor Ltd then borrowed $25,000 from Absolute Finance secured by a registered fixed charge over Asset #1. C) Chargor Ltd then borrowed another $10,000 from Simpson Finance secured by a registered fixed charge over Assets #1,2,&3. Chargor Ltd then goes into liquidation.

41. ©MNoonan2008 Priorities example - Company Charges (2) The order of payment is as follows:  The floating charge in A takes priority except over a later registered fixed charge: see s. 279.  The registered fixed charge in Loan B will take priority over the prior floating charge with respect to Asset #1.  Loan B takes priority over Loan C as it is first in time. See s. 280.  The fixed charge in Loan C will not defeat the prior registered fixed charge under Loan B over Asset #1.  The fixed charge in Loan C will take priority over the registered floating charge in Loan A.

42. ©MNoonan2008 Companies-priorities Back again to the usual order in case of insolvency- 1.Fixed charges, mortgages 2. Preferential creditors (including employees) 3. Floating charges 4. Unsecured creditors 5. Subordinated (unsecured) creditors 6. Equity claimants-preference shareholders 7. Equity claimants-ordinary shareholders 8. Equity claimants-deferred shareholders

43. ©MNoonan2008 What is the difference between fixed and floating charges? When a charge is taken, no transfer of ownership. A particular asset is set aside so if chargor fails to pay, chargee is entitled to receive and apply proceeds of sale against the liability. Fixed charge given over a specific piece or pieces of property. A floating charge “floats” over the assets until it crystallises and becomes fixed in accordance with terms of charge. A fundamental difference is right of the chargor to deal with the asset during the charge. Under a floating charge, chargor can deal with it in ordinary course of business until crystallisation. Where a fixed charge given, no right to deal with it without consent chargee.

44. ©MNoonan2008 Companies-priorities It can be seen from previous list that creditors will make a considerable effort to be a secured creditor in order to get to top of list. However, there is some pressure to leave a company debtor free to use secured property in the ordinary course of business-- to generate cash flow to service the debt. A problem can sometimes arise with characterisation of charges.-e.g. book debts-is a charge over book debts fixed or floating?

45. ©MNoonan2008 Assignment of book debts-factoring Distinguish an assignment from a charge A Legal assignment must comply with s. 12 of the Conveyancing Act. Assignee is then the “owner” of the debt and questions of priority do not arise. An equitable assignment for value need not satisfy notice to debtor requirement, but may lose priority to an assignment where notice has been given. It can be by way of security, but may lose priority to a registered charge.

46. ©MNoonan2008 Legal Assignment Must be absolute assignment..outright transfer, not by way of security or conditional. Must be in writing under hand of assignor Must be express notice in writing to the debtor, stating the fat of the assignment, the name of the assignee, date of assignment and amount of the debt. Advantages No consideration is required, Assignee can sue in their own name Debtor can safely pay assignee, Legal interest obtained for value and without notice of earlier equitable interests will have priority ahead of them. Disadvantages Identity assignee known, stamp duty payable, must be whole debt (not part) and not by way of security.

47. ©MNoonan2008 Equitable assignments of book debts Clear expression of intention to assign required Subject matter must be identified with certainty Where consideration, effective from time it is paid Assignor continues to be “owner”, so assignee is trustee. Advantages No notice required (may be defeated by person who takes later interest but gives notice first if they have no notice of earlier interest-can protect by taking charge over legal interest retained and register with ASIC), may be conditional, by way of security, part only, writing is not required if supported by consideration, and if done correctly stamp duty not payable Disadvantages Assignor must be a party to any enforcement action, assignee takes interest subject to equities arising before notice (including rights of set off or counterclaim by debtor) and can lose priority to another assignee who gives notice before them.

48. ©MNoonan2008 The trouble with book debts Effectiveness of fixed charge over book debts upheld in 1979 decision of Siebe Gorman & Co Ltd. v. Barclays Bank Ltd (1979) 2 Lloyd’s Rep 142 and later in 1986 Supreme Court Ireland Re Keenan Bros Ltd (1986) BCLC 242 PC in Agnew disagreed with Siebe decision and found charge in Agnew only a floating charge because debtor could use proceeds in ordinary course of business. The Hof L in National Westminster Bank plc v. Spectrum Plus Limited (2005) UKHL confirmed lower decision of High Court of England-if a charge permits the chargor to deal with any proceeds of realisation of book debts in ordinary course of business until some further step is taken, charge is floating, irrespective of how parties classified it. Although these decisions are persuasive and not binding in Australia, if applied, for a charge over book debts to be fixed, chargee must have control over book debts and proceeds.

49. ©MNoonan2008 Agnew v. Commissioner of Inland Revenue & 0rs. Re Brumark Investments Limited (2001) UKPC 28-see text extract NOTE--persuasive but not binding in Australia. Was a charge over uncollected book debts, which left company free to collect them and use the proceeds in the ordinary course of business a fixed charge or a floating charge? The debenture deed sought to create a fixed charge on book debts outstanding when Receivers appointed, and proceeds of debts they collected. Prior to their appointment, the company was free to collect them and use proceeds in ordinary course. However, it could not assign or factor them. The question was whether the right to collect debts and deal with proceeds free from security meant that charge on uncollected debts, while being described as fixed was nevertheless floating until it crystallised by appointment Receivers

50. ©MNoonan2008 Agnew cont. The Privy Council traced history floating charge paying particular attention to book debts.Useful for students as it should enable them to get good understanding of both. The extract in text is suitable for study. Their Lordships concluded that the freedom to deal with charged assets without the consent of the holder of the charge made it a floating charge. They found it was clear from description attached that they intended to create a fixed charge over uncollected debts and floating charge over the proceeds. They had to deal with the question of whether a receivable could be separated from its proceeds-a single security interest or 2? And, whether a charge on book debts necessarily takes effect as a single and indivisible charge on the debts and proceeds, or 2 different charges. They concluded property and its proceeds are 2 different assets.

51. ©MNoonan2008 Agnew cont Fixed charges over book debts-various possibilities =Lender taking assignment of each debt and perfecting the security by giving notice to third parties entitling the lender to collect the debts itself or = The Lender taking assignment of debts but refraining from giving notice until Debtor in default. First usually commercially impractical. Second usually effective in creating fixed charge because company not collecting debts for its own benefit but for the account of the Lender. Hence, proceeds not available to debtor free of the security. = Where a bank is involved, a blocked collection account with a bank can be used.

52. ©MNoonan2008 Spectrum Spectrum opened an account with NatWest and obtained an overdraft of £250,000 for working capital. By debenture 30.9.1997, Spectrum created a charge “by way of specific charge” in favour of NatWest over book debts to secure moneys due by it to NatWest. Obligations of Spectrum were  to pay the proceeds of any book debt into Spectrum’s account with NatWest  not to sell, factor, discount or otherwise charge or assign the book debt in favour of any other person or purport to do so without the consent of the NatWest; and  if called on to do so, to execute legal assignments of such book debts.  NatWest advanced £200,000 by debit to account. Proceeds of book debts were collected and paid into account reducing overdraft an Spectrum drew on account as and when it needed to, thereby increasing overdraft.

53. ©MNoonan2008 Spectrum cont(2) Spectrum went into voluntary liquidation owing NatWest £156,554. Liquiators collected and realised book debts £113,484, but refused to account for them to NatWest. Natwest sought declaration it was fixed charge and order for Liquidator to account. Court considered three part test in Agnew  Nature of rights and obligations parties intended-ordinary account with no restrictions  Whether it was intention of parties that charged assets should be under the control of company or charge holder-book debts under control of and available for use by Spectrum in ordinary course  Whether such an intention was consistent with nature of transaction as describe by label parties had put on it-no specific charge not consistent with freedom to use Therefore floating and not fixed charge

54. ©MNoonan2008 Creation of fixed charges over book debts -the practicalities. Successful strategies include:  A prohibition in the charge against the company realising debts itself whether by assignment or collection without consent of chargeholder.  More realistically commercially, the chargeholder appoint the company its agent to collect the debts for its account and on its behalf.  Pay into blocked account so money not available as a source of cashflow. However, blocked account must operate in substance as well as in name to be effective-chargor must be denied right of access for withdrawals, any payment out of the account must be at chargee’s discretion and to be safe a separate decision by the bank on a case by case basis whether or not to release monies.

55. ©MNoonan2008 Sample problem-Orbis Communications Orbis Communications Limited (Orbis) provides internet services to businesses. Nibelheim Industrial Bank (Nibelheim) holds a floating charge over all business assets. Principal assets comprise telecommunications and computer equipment, accounts receivable and cash in an NAB account. The floating charge contains a restrictive covenant prohibiting Orbis from creating subsequent security interests ranking equally, or ahead, without consent Nibelheim. An automatic crystallisation clause in the event of any breach. Menard Finance Limited has agreed to advance funds to Orbis and take a fixed charge over receivables and floating charge over bank account-requires Orbis to deal with receivables in accordance with instructions of Menard. In absence instructions, Orbis must collect them in ordinary course business and pay them into their bank account but is otherwise prohibited from dealing with them. Orbis may deal freely with proceeds in the ordinary course of business prior to the crystallisation of the Menard floating charge over the bank account. Orbis is experiencing difficulties. Menard has requested your advice on legal status of its security interest and its priority vis a vis Nibelheim.

56. ©MNoonan2008 Australian Central Credit Union V. Commonwealth Bank Of Australia No 566 of 1989 (1991) SASC 2724 2 people claimed a vehicle owned by KP Randall P/L (KPR P/L) Mr. R living with Miss L, who was member of Credit Union and eligible to borrow. Miss L agreed to obtain a loan for Mr. R who authorised her to use vehicle as security. Miss L disclosed all this to the Credit Union and obtained a loan of $12,000, paid it to Mr. R who used it for the company. Miss L signed a Bill of Sale dated 18 th September 1987 over vehicle as security. It named Miss L as grantor and made no reference to company. Vehicle remained in possession of KPR P/L. A charge within CCode 1987 s.203 required to be registered. Notice of a charge required by s. 201(1). KPR P/L did not give notice of Bill of Sale; nor did credit union pursuant to s. 208 (interested person can give notice). It did register 22.9.87 on Vehicles Securities Register pursuant to Goods Securities Act 1986. On 24.11.87 KPR P/L executed Deed of Equitable Mortgage giving Bank floating charge. Registered as charge under Co Code. On 10.2.89, company defaulted. Bank took possession.

57. ©MNoonan2008 Securities over IP Is registration of a security interest granted by a company over IP under Corporations Act sufficient to create a valid security interest? Compare and contrast: Copyright Trademarks Patents

58. ©MNoonan2008 Security interest in a Patent If a company is granting a charge over a Patent, the Corporations Act requires it to be registered on the Australian Register of Company Charges and the Patents Act allows it to be registered. Should it be registered on both? Yes, because in many cases the Patents Act provisions will determine priority.e.g. if there is a priority dispute between an assignment of a patent and a security interest over the patent, then the Patents Act would apply because the priority sections of the Corporations Act only apply to disputes between security interests. If Ptents Act silent (e.g. in relation to priority disputes not involving a patentee or between 2 interests not registered anywhere, the priority rules of the Corporations Act will apply.

59. ©MNoonan2008 Notice Is registration on one system (incorrectly) notice to a chargor who registers on another (the correct register)?

60. ©MNoonan2008 A Patent example X grants a charge over a Patent to A, and the charge is registered under the Corporations Act but not in the Patent Office in accordance with the Patents Act. Later, X assigns the Patent to B who searches the Patent Register, but not the Corporations Register. Would A’s security interest take priority over B? Probably not. Under s. 189 of the Patents Act, X is the patentee and can deal with the patent as absolute owner and give good title to B provided that B is ”a purchaser in good faith for value and without notice of any fraud on the part of the patentee”. B had no actual notice because he did not search the Corporations Register. The Parliament intended that the Patents Register be the one and only place to look to determine ownership of and whether security interests exist in Patents, so registration on the Corporations Register would not be constructive notice. Prudent course for a person taking security or purchasing a Patent, is of course, to search both.

61. ©MNoonan2008 Copyright In Australia, the Copyright Act applies. No formalities are required to obtain copyright and there is no copyright register. This creates certain problems in being sure who is the owner and capable of transferring title or granting a licence. An assignment has no effect unless in writing and signed by the assignor s. 196 CA. If X transfers a copyright to A and then grants a security interest in the same copyright to B, B gets nothing because the prior legal interest of A prevails over the subsequent legal or equitable interest to B. If X grants a license to A and then a security interest to B, B takes subject to A’s license.

62. ©MNoonan2008 Copyright and notice If an Australian work is registered in the US Copyright Office, are the details on the US Register (which notes assignments and security interests) notice to Australian lenders? e.g.An Australian Co,D, creates a computer game.It registeres this work in the US Copyright Register and obtains a loan from a US bank, securityed against all copyright owned by D. USBank regsiters its security interest in the US Copyright Register but not in the Australian Register of Company Charges. Later, D grans a similar security interest to OZbank, who searches the Australian Register of Company Charges, finds nothing and registers its security interest. Is OXbanks security interest subject to USBanks security interest? Possible answers: OZbank taken to have constructive notice of the security interest recorded in the US and so USBank’s charge has priority. Alternatively OZbank taken to have constructive notice only of security inteests recorded in Australia. Or, because copyright is territorial, USBank has priority over US copyright and OZbank has priority over Australian copyright. Result uncertain. A prudent Australian lender would search the US register and the local company register. If they were clear, they would require D to register any significant works with the US Copyright Office and then record the security agreement with the US Copyright Office against each work, require future works to have the same treatment.

63. ©MNoonan2008 Trademarks See s. 22…The registered owner of a TM may, subject only to the register, deal with the TM as absolute owner. One should register/search in both Company Register and TM Register because registration in the former may provide no protection against a person with a prior right to the TM as recorded in the TM register….unless it can act as notice, or fraud exists.

64. ©MNoonan2008 Australian Central Credit Union V. Commonwealth Bank Of Australia No 566 of 1989 (1991) SASC 2724 cont (2) Who is entitled to proceeds of sale of vehicle?  Valid Bill of Sale and effective to transfer title? No lack of formality…miss L agent for KPR P/L….Bill of Sale purported to transfer legal title subject to right to possession and equity redemption…consumer mortgage (Consumer Credit Act). Nothing to prevent passing of title.  Is Bill of Sale a charge within Companies Code? Was it a charge on a personal chattel..i.e. article capable of complete transfer by delivery? Yes, neither Motor Vehicles Act (scheme for registration ownership) nor other statute deprive a MV capacity of being transferred by delivery.  Therefore a charge and should have been registered under Co Code.  A registered charge has priority over unregistered charge created before it, unless chargee of unregistered charge proves chargee of registered charge had notice of unregistered charge at time registered charge created. Was registration under Goods Securities Act notice?Would reasonable person, acting prudently in own interests have searched the register? No said majority. Yes, said dissenting Judge.

65. ©MNoonan2008 BLUECORP PTY LTD (IN LIQUIDATION) V. ANZ (1995) QCA 487 (3.11.95) This case concerns a fight between Trustee in Bankruptcy of Bluecorp ( formerly Lloyds Ships, a maker of luxury boats) and ANZ, Trustee of Mirage resorts-for proceeds of sale of Mirage III ($5.3m) Bluecorp sued ANZ in conversion Mirage III was a vessel built for Mirage resorts and Qintex. The Contract for construction between Hover (part of Qintex) and Lloyds 21.6.85. At that stage they were independent companies. While under construction Qintex bought around 45% interest in Lloyds 31.7.86 ANZ acquired all but one in the issued units in Port Douglas Resort Trust and Gold Coast Resort Trust 21.10.86 Lloyds had applied to register Hover as owner but registration did not proceed 25.5.87 boat completed and handed over to Hover. Normally title would pass under Sale of Goods Act at this point, but because it was a ship, needed to be registered under the Shipping Registration Act. After boat handed over, no attempt to register because of sales tax worries

66. ©MNoonan2008 BLUECORP PTY LTD (IN LIQUIDATION) V. ANZ (1995) QCA 487 (3.11.95) Cont. 3.8.87 charges executed by Hover in favour of Operations and by Operations in favour of ANZ. Charges registered May/June 88 “rescission”of sale of ship. 31.8.88 Lloyds issued credit advice and notified Registrar of Ships it had no interest Boat registered in name of Lloyds.Lloyds never repaid Hover 13.9.88 boat registered in name of Lloyds Lloyds mortgaged boat to Partnership Pacific 16.9.88 Bill of sale in blank 20.6.89 to ANZ-filled it in post insolvency. Decision Boat being held by Lloyds on trust for whatever entity in the Qintex group it was decided on. Equitable title to ANZ via the registered charges. Legal title during 1989 on the facts. Voidable title because of the preference provisions relating to insolvency, but before avoidance, transfer to ANZ.

67. ©MNoonan2008 Trade Finance and Securities The import scenario Bankers Lien Pledge Unpaid seller’s lien Unpaid seller’s right of stoppage in transit Carriers lien for unpaid freight Bankers right of set off Fixed and floating charges over importers assets

68. ©MNoonan2008 Company?262 charge?Registered? Yes No Goods? MV or boat? RIGA? Yes No Yes SIGA Book debts? Yes Assignment or security? IP Yes Relevant IP law? OtherLiens Pledges No Lien, pledge etc Ships/Aircraft

69. ©MNoonan2008 Past Exam Questions- QB3 March 2005 (g) P purchased a second hand car from UsedCarsRus Pty Ltd. 3 weeks after the purchase the car was repossessed by a finance company because the previous owner still owed $4,000. Does P have a remedy? (k) In what circumstances will a solicitor have a general lien over a client’s papers?

70. ©MNoonan2008 Past Exam Questions-short QB3 September 2003 (h) Is it possible to give security over Intellectual Property? What types are possible? What are the dangers for lenders who accept such security? (j) What is REVS? Who uses it? For what? Under what legislation? Why? 2005 Describe 2 types of security that are not required to be registered as a “charge” under the Corporations Act.

71. ©MNoonan2008 Past Exam Questions QB3 September 2006  Describe four ways in which the regime created by the Security Interests in Goods Act NSW 2005 is different to that existing prior to the commencement of that Act in March 2006.  Why might it be difficult to enforce a chattel mortgage over a continuous miner (i.e. a very large mining machine used in underground coal mining)?  What is a statutory lien? Ensure that you provide an example.  What is a "consumer mortgage"?

72. ©MNoonan2008 Past Exam Questions-short QB3 March 2007 (a) Is it possible for a financier who wishes to lend money to Sylvia and Gino Berutti, Hawkesbury River oyster farmers, to take security over their oysters? If so, how? If not, why not? (c) If S has supplied goods to B under a Retention of Title clause, does the clause have to be registered under the corporations Act in order to be valid? (f) When considering priority issues between competing securities, is registration on an incorrect Register nevertheless sufficient notice to prevent a later security holder from gaining priority over an earlier security?

73. ©MNoonan2008 Past Exam Questions-short QB3 March 2004 (a) What is a bankers lien? (k) What is a linked credit provider? QB3 September 2007 (e) Describe three ways in which liens may arise by operation of law in a typical manufacturing operation. (g) A large bank has asked you to recommend how would you structure an enforceable fixed charge over book debts for their clients. Please do so.

74. ©MNoonan2008 Past Exam Questions-problem Q2, September 1999 (Use current law; not law of 1999) A, a Sydney financier, is the outright owner of 3 racehorses, Zanadu, Yeller and Zebra. The horses are trained and stabled in Newcastle. On 1/7/1999, A borrows $10,000 from Cyril and gives him a bill of sale over Xanadu as secutiy. On 8/7/99, A borrows $10,000 from Don and gives him a bill of sale over the same animal. Don registers his bill on 9/7/1999. Cyril registers his Bill on the following day. On 1/9/1999 A is declared bankrupt. Who has the best claim to Xanadu?

75. ©MNoonan2008 Past Exam Questions-problem Q2, September 1999 cont. On 11/7/1999 A borrows $20,000 from Eric and gives him a bill of sale over Yeller. The bill is not registered. On 1/8/1999, A is in breach of the terms of his contract with Eric who takes possession of Yeller. On 1/9/1999 A is declared bankrupt. Who has the best claim to Yeller?

76. ©MNoonan2008 Past Exam Questions-problem Q2, September 1999 cont. On 3/8/1999, A loans Zebra to his friend, Minska. The latter, at a party on 5/8/1999 pretends to be the owner of the horse and gives a bill of sale on it to another party guest, Sasha in return for a loan. Sasha registers the bill of sale on 19/8/1999. On 1/9/1999 A is declared bankrupt. Who has the best claim to Zebra?

77. ©MNoonan2008 Exam Q 2A Sept 2005 Sam is in partnership with is father Fred (S&F) in breeding and selling low- line cattle. Because of the drought, they are hand feeding. To guarantee supply, they have entered into a contract with Sunshine Grains Ltd (Sunshine). Under the terms of the contract, they have purchased sufficient feed for the next 2 years, paid $24,000 and agreed on monthly deliveries. In the 5 th month they are contacted by MM accountants who advise that they have been appointed Receivers and Liquidators to Sunshine. There is an amount of feed that had been set aside by Sunshine to supply S&F for a 12 month period. Feed for the 2 nd year would have come from the next harvest, which has not yet occurred. Farmers are, however contracted to supply grain after the next harvest. Sunshine was in debt to a machinery provider MP who had a floating charge over the assets of Sunshine. IT crystallised just prior to the appointment of MM. S&F claim the feed set aside for the next 12 months. MP claims it as theirs. MM have said neither is entitled; that it belongs to them. MM refuses to refund any of the $24,000. Advise S&F.

78. ©MNoonan2008 Sept 2005QA2 cont Question concerned title and securities. Title..ss.21.21A22 and 23 dealing separately with Feed Lots 1 and 2…GoldCorp and Carlos Federspiel…remedies of the buyer. Securities-floating charge, equitable charge over contract re 2 nd feed lot, the realities of receivership and priorities. Remedies: Conversion, bailment, specific performance re feed lot 1.

79. ©MNoonan2008 March 2005 QA3 Motorparts Limited Mp makes condensers; for local car industry and for export to China. In order to finance the purchase of raw materials, the manufacturing operation and the export trade Mp must borrow money and secure trade finance. Mp approaches your client, a financier and tells them the following are available for use in this Any interest it may have in raw materials A registered patent for its condenser with 12 years to run Contracts with Ford Australia for large orders for 5 yrs Receivables from Ford and other customers. Explain to your client the alternatives for how one could finance Mp while protecting their interests.

80. ©MNoonan2008 Sept 2004 QA3 MS Limited builds boats and entered into a contract on 18/6/02 with OM Limited for construction of a tug boat. Payment by instalments; aligned with progress in construction. MS placed an order in Nov 02 for a special propulsion unit with a specialist engine manufacturer in Canada EE. Payment to be by irrevocable letter of credit. MS customer of Bilge Bank (BB) and had granted a fixed and floating charge to it in 99, which had been duly registered. BB received a copy of the construction contract between MS and EE which contained a clause purporting to retain title until payment and an interest in any boat in which the unit was incorporated. BB duly issued a letter of credit in return for shipping documents. The propulsion unit was loaded onto a ship in Vancouver on 21/6/2003. Unfortunately on 5/7/2003 while propulsion unit was still on the water BB notified MS that the floating charge had become fixed. The propulsion unit arrived in Australia on 6/7/2003. MS installed it in the tug boat. OM paid the second last instalment. Only 1/12 equal payments remained outstanding and was to be paid after launch of the boat. On 12/7/2003 a Receiver and liquidator was appointed to MS. EE claims the propulsion unit under the ROT clause. BB claims it under their Charge or under the Bankers Lien. OM says it is theirs because it is now part of the boat. Advise the Liquidator on who is entitled to the propulsion unit.

81. ©MNoonan2008 Sept 2004 QA3 Question concerned Title, securities (charge and lien) accessio Most efficient approach was to analyse via a time line, who had title and when it passed. LC=payment and therefore ROT clause ceased operation at this point. Most student answers missed this. Possession of Bill of Lading=constructive possession of the unit…lien. BB did not need to rely on lien because of the fixed charge and because they released it and it became part of the boat. Some students were confused between passing of risk and passing of title. E.g. Vienna Convention deals with former only and latter would need to be determined by SOGA if not clear from contract. Likely that OM had not obtained title because something remained to be done to put the boat in a deliverable state (Launch) supported by instalment structure of payment. See Rule 1 and Wallace v. Safeway Caravan Mart. Merely an unsecured creditor. Would have lost out to BB and fixed charge.