Possession remains only 9/10ths of the law post PPSA

Since the commencement of the Personal Property Securities Act in January 2012 (PPS Act) there appears to have developed a single minded attitude amongst Insolvency Practitioners that if :-

1. they have an asset in their possession; and
2. it is not subject to a registered security interest under the PPSA;

then they are entitled to possession of that asset and to convert it for the benefit of the Company’s creditors generally.

This attitude has been bolstered by the high profile (and costly for the parties that failed to register their interest!) judgments in :

• One Steel Manufacturing –  where Liquidators were successful in establishing that the financing statement registered on the PPSR was erroneous as it failed to include the grantor’s ACN (an ABN had been used instead), resulting in machinery and equipment worth many millions of dollars being deemed unsecured assets; and
• Power Rental v Forge – where turbines worth many millions of dollars were found to be chattels, not fixtures, and therefore required to be registered by the Lessor in order to assert a security interest and thus be able to recover them from the Liquidator.

In both instances, the possessor (the Liquidator) was entitled to unencumbered ownership, which meant the unsecured creditors of the insolvent company had a clear windfall gain.

However, the cases of re Arcabi and the recent case of Bredenkamp in Western Australia show that Insolvency Practitioners should still proceed with caution in relation to those assets in its possession, even if not subject to a properly registered security interest on the PPSR.

The “Possession Presumption”

Insolvency Practitioners are quick to assume that all equipment in its possession pursuant to a contractual arrangement must be the Companies if those items are not registered as a security interest on the PPSA. “Surely”, they argue “that the assets must be subject to a PPS Lease or some form of contractual arrangement that requires registration, to create a valid security interest, and if not, it’s mine.”! 

However, it is not that simple. In addition to short term (now less than 2 year) PPS Leases, other specific exceptions, and the obvious requirement to register a normal type of security interest, there are also exemptions for certain types of bailments or consignments, which therefore may or may not be a security interest requiring or even capable of registration.

To be found to be a bailment or consignment that is required to be registered under the PPSA can have real and harsh implications for owners of goods which are in the possession of a counterparty when that counterparty enters external administration.

The potential harshness was exposed in the matter of Re Arcabi,, a 2014 WA case. Fortunately, the Court determined, rightfully in the writers submission, that a bailment may, in substance, not secure payment or performance of an obligation such as to make it a security interest pursuant to S12(1) of the PPSA, nor does that bailment or consignment automatically fall under the definition of a PPS Lease such as to make it a deemed security interest under S12(3((c) and S13) of the PPSA.

In Re Arcabi, owners of rare coins and bank notes provided Arcabi with the coins or notes for secure storage and in some instances for subsequent sale by consignment. Naturally, on the appointment of Receivers, the owners sought the return of their stored or consigned goods. However, if the arrangements were “security interests” under the PPSA, and not registered, then the owner’s interests in the coins and notes would vest in Arcabi under s.267 of the PPSA. Fortunately for the owners, the Court accepted that the bailment arrangements did not secure the payment or performance of an obligation, as was required to establish the bailment as a PPSA security interest.

In Bredenkamp, the question arose of whether a bailment existed in such a form as to create a security interest over equipment and tools stored by an Australian subsidiary of a US parent company. The Australian subsidiary entered voluntary administration, and Receivers and Managers were subsequently appointed. The Court found that the arrangement was a form of  bailment, for an indefinite term. So far so good for the Receivers who sought to establish that an (unregistered) security interest by way of bailment existed.

However the Court then concluded that although the US parent company provided the equipment to its Australian subsidiary for what was described as “potentially positive financial outcomes” the arrangements principle purpose was to assist the Australian Subsidiary in the provision of the services that both entities provided, rather than being part of a bailment business of the US parent company.

Further Example

Another (un-litigated) example of a security interest not existing could be where a vehicle manufacturer provides a piece of machinery to a Sub-contractor for the purposes of that Sub-contractor manufacturing components (“widgets”) for the vehicle manufacturer, who ultimately constructs the car. This was, prior to the demise of the car manufacturing business in Australia, a not uncommon phenomena. On the liquidation of the Sub-contractor, the Liquidator would, prima facie, presume that as the piece of machinery was in its possession and being utilised in the manufacturing process run by the sub-contractor, and was not subject to any registration on the PPSR, that he therefore was entitled to claim ownership due to his possession of the unregistered (for PPSA purposes) piece of machinery.

However, applying both Re Arcabi and Brendenkamp, if there is no lease arrangement in place (sufficient to establish a PPS Lease), and the purpose for which the piece of machinery was in the sub-contractors (now Liquidators) possession was incidental to any contractual arrangement, i.e. for the sub-contractor to produce the widgets, then as no bailment or consignment or other direct contractual arrangement for direct financial return (such as a lease payment) was in existence, then ownership, and the right to recover possession of its piece of machinery remained with the Manufacturer.

Of course, practical issues such as transporting the machinery to another Sub-contractor, or back to the Manufacturer itself may present practical difficulties, just as they did in One Steel Manufacturing where, despite establishing in that instance, a right to the machinery, the Liquidator subsequently did a deal (on better terms than the existing lease) with the Lessor in order to enable the pending Appeal to be settled and the Arrium business to be sold in the interests of the best return to creditors.

Further, as in Power Rental, referred to above, it may be that over time the piece of machinery could become by degree of annexure and “fixing” to the land, a fixture under common law such that the piece of machinery becomes part of the land and therefore in the possession of the Owner of the Land. In Power Rental, the turbines in question were found not to be fixtures, and as there was a Lease in place that was deemed to be a PPS Lease, the security interest was held to have vested in Forge.

Conclusion/Takeaway

The above highlights the variety of issues that must be explored before an Insolvency Practitioner can comfortably claim uncontested possession and right to assets in his possession and control at the commencement of the administration

Relevant Caselaw :-

• In the matter of One Steel Manufacturing (Administrators Appointed) [2017] NSWSC 21
• Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) [2017] NSWCA 8 (6 February 2017)
• Re Arcabi Pty Ltd (Receivers and managers appointed) (in liq) [2014] WASC 210
• Bredenkamp v Gas Sensing Technology Corporation, in the matter of Welldog Pty Ltd (In Liq) (Receivers and Managers Appointed) [2017] FCA 1065
• Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc. [2016] NSWSC52 (11 February 2016)

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Authored by:
Rob Hinton, Partner