The Spiers operated an earthmoving business. In 2010, the Spiers sold their business to BEM Equipment Ltd (BEM). The sale included both a business sale and hire agreement, under which the Spiers leased various vehicles they owned valued at 1.4M (Vehicles) to BEM under a hire-purchase arrangement (Hire Agreement). At the end of the Hire Agreement and the payment of all outstanding amounts owed on the Vehicles, BEM would own them.
Between 2010 and 2013, BEM used the Vehicles as part of its business and paid sums of money to the Spiers under the Hire Agreement. In 2011, BEM obtained finance from the National Australia Bank (the Bank) and granted a fixed and floating charge over all its assets, including the Vehicles, as security. In January 2012, the Personal Property Securities Act came into effect, commencing its 2-year “transitional period”.
Although not explicitly arising in the facts of the judgment, the Bank appears to have perfected its security interest arising from the charge on the PPSR, as required under the PPSA. The Spiers, potentially without knowledge of the PPSA’s introduction, never registered their interest on the PPSR. They similarly failed to perfect their interest on the register maintained by the Chattel Securities Act, which was the broadly comparable Western Australian register of interests the PPSR was designed to, and eventually did, replace.
In July 2013, BEM entered voluntary administration, before the end of the Hire Agreement. The Bank appointed Receivers and Managers to BEM’s assets. With BEM in default, the Spiers terminated the Hire Agreement and sought to repossess the Vehicles. As the Hire Agreement had terminated early, the Spiers technically still owned them. This gave rise to litigation between the Spiers and the Receivers appointed by the Bank.
The Legal Issue
As is commonly the issue in many PPSA cases, the question was whether the Spiers, as the technical “owner” of the Vehicles, or the Bank, as a “secured party” under the PPSA, were entitled to the possession and proceeds of sale of the Vehicles. Without this, all either creditor had was a right to prove in BEM’s insolvency. In many cases, this right would be of extremely limited value.
Section 267(2) of the PPSA provides that any unperfected interests under the PPSA vest immediately in the grantor (BEM) upon insolvency. This would have essentially made the assets available to the Bank, as the Spiers had never perfected their interest on the PPSR before BEM entered voluntary administration.
As there was limited scope for disputing whether this section applied, the main argument centred around whether the Hire Arrangement itself gave rise to a “security interest” that the Spiers were required to perfect. If it didn’t, then the PPSA would not apply and the assets would not vest in BEM. They would instead be available to the Spiers under the Hire Agreement.
After a comprehensive review of the PPSA, the Court determined that:
1. The Spiers’ interest was “in substance” a security interest under the PPSA. It was a transaction of personal property securing payment or performance of an obligation;
2. Even if this had not been the case, it was also a “deemed interest” as it met the requirements of a PPS Lease under the PPSA;
3. The Spiers’ interest had attached to the assets, but had not been perfected. It was therefore an unperfected interest under the PPSA;
4. Because it was unperfected, the Court held that s 267(2) applied, meaning the assets vested in BEM on voluntary administration and were available to the Bank.
This case highlights the necessity of obtaining comprehensive advice on the effect of the PPSA in any sale of a going concern and being diligent in ensuring that any and all security interests in personal property have been validly perfected.
Whilst the reasons for the Spiers’ interest not being perfected do not emerge from the judgment, it is hard not to feel sympathy for creditors finding themselves in their position. For small to medium enterprises, these effects are often far more pronounced and potentially crippling. Depriving a business of a substantial capital or income-producing asset without receiving anything in return may render the business inoperable or, if that business itself is reliant on credit, insolvent.
As this case demonstrates, the winners in any contest will continue to be the creditors most diligent in protecting their rights under the PPSA. For further information on this article or to discuss the measures your business can adopt to comply with the PPSA, contact Robert Ross, director of Composite Law for advice.[/vc_column_text][/vc_column][/vc_row]