The Purchaser bought two trucks from a motor dealer under a financing agreement from the Bank.

First Truck
Insofar as the first truck is concerned, the Bank registered a financing statement in respect of the security interest it said it held. However the name of the Purchaser was not entered correctly on the financing statement by the Bank. Instead of The Purchaser (Civil) Pty Ltd being entered as the name of the grantor of the security interest, The Purchaser (Commercial) Pty Ltd was entered as the name of the grantor. The VIN was correctly recorded in the financing statement and in all other respects the details on the financing statement were correct.

Second Truck
In registering a financing statement over the Second Truck the Bank failed to describe the Second Truck relevantly as a "truck", despite including reference to its make, model and serial number.

The Purchaser / Grantor subsequently went into receivership.
The Bank filed a claim for the vehicles with the Trustee in the estate of the Purchaser / Grantor.

PPSR Searches
The Trustee conducted a name search of the Personal Property Securities Register (“PPSR”) in respect of the First Truck, which did not reveal the financing statement of the Bank as an exact match for the First Truck.

The Trustee conducted a name search of the PPSR in respect of the Second Truck and noticed that the vehicle was not described as a “truck”, but rather as a motor vehicle.

The Trustee rejected the claim of the Bank in respect of both vehicles.

The Contentions
In respect of both trucks the Trustee contended:
•    The financing statement was seriously misleading (See ss 164 & 165 of the PPSA);
•    The purported registration was invalid; and
•    The interest of the Bank was that of an unperfected security interest.

The Bank contended that its security interest was perfected in respect of both trucks.

Discussion

s.164 of the PPSA
(1)     A registration with respect to a security interest that describes particular collateral is ineffective because of a defect in the register if, and only if, there exists:
    (a)     a seriously misleading defect in any data relating to the registration,
        other than a defect of a kind prescribed by the regulations; or
    (b)     a defect mentioned in section 165.

(2)     In order to establish that a defect is seriously misleading, it is not necessary to prove that any person was actually misled by it.

(3)     A registration that describes particular collateral is not ineffective only because the registration is ineffective with respect to other collateral described in the registration.

s.165 of the PPSA
For the purposes of paragraph 164(1)(b), a defect in a registration that describes particular collateral exists at a particular time if any of the following circumstances exist:
(a)     in a case in which the collateral is required by the regulations to be described by serial number in the register -
    no search of the register by reference to that time,
    and by reference only to the serial number of the collateral,
    is capable of disclosing the registration;

First Truck
•    There is no requirement to conduct both a name and a VIN search for collateral that may or must be described by serial number.

•    “In cases where inclusion of a serial number is mandatory, a wrong name cannot save a right number; and
•    conversely, a wrong number cannot be saved by a right name” [60].

•    The PPSA uses a notice-filing system which is effective only if all of the required information is correctly entered (or at least, not seriously misleading) [27]–[28].

(See Stevenson v GMAC Leaseco Ltd (2003) FPPSR ¶700-120; Other citations: 2003 NBCA 26; 4 PPSAC (3d) 211; 227 DLR (4th) 154; 42 CBR (4th) 43; 257 NBR (2d) 141
per Robertson JA with Turnbull and Deschênes JJA (concurring).

•    The search of the PPSR by the Trustee revealed the incorrect name of the grantor of the security interest claimed by the Bank.
•    The description of the collateral (the First Truck) on the financing statement of the Bank was seriously misleading.
•    The financing statement of the Bank in respect of the First Truck was defective.
•    The purported registration of the security interest of the Bank in relation to the First Truck was ineffective. (See s.164 of the PPSA)
•    The Bank did not hold a perfected security interest at the time of the bankruptcy.
•    The Trustee took priority as against the Bank.

Second Truck
•    The omission of the Bank in failing to describe the collateral (the Second Truck) as a "truck" was not seriously misleading as to make the registration ineffective.
•    Therefore the Bank held a perfected security interest at the time of bankruptcy; and
•    The Bank took priority as against the Trustee.

(See International Harvester Credit Corporation of Canada Limited v Touche Ross Limited, Trustee of the Estate of Bell's Dairy Limited per Hall, Tallis and Cameron JJA.
(1986) FPPSR ¶700-101; (1986) 6 PPSAC 138; 30 DLR (4th) 387; [1986] 6 WWR 161; 34 BLR 76; 61 CBR (NS) 193; 50 Sask R 177)

Ross Bowler LLB

This scenario is based on facts from the following Canadian cases:
•    Chrysler Credit Canada Ltd v the Royal Bank of Canada and Clarkson Gordon Ltd
•    (1986) FPPSR ¶700-102; (1986) 6 PPSAC 153; 30 DLR (4th) 616; 50 Sask R 216; 1 ACWS (3d) 184; [1986] 6 WWR 338; [1986] SJ No 547 per Brownridge, Hall and Cameron JJA.
•    Transamerica Commercial Finance Corporation, Canada v Royal Bank of Canada
•    (1990) FPPSR ¶700-104; (1990) 1 PPSAC (2d) 61; 70 DLR (4th) 627; 84 Sask R 81; 79 CBR (NS) 127; 20 ACWS (3d) 1280; [1990] 4 WWR 673; [1990] SJ No 177

Normal Security Interest
The Car Dealership arranged a line of credit from the First Bank to assist in the running of its business. That financing arrangement was secured by a general security agreement over all of its real and personal property. The First Bank perfected its security interest by registration under the PPSA (See s.21(2) of the PPSA). The financing statement of the First Bank disclosed the normal security interest as covering:
    “all goods now or hereafter owned or acquired by the debtor, including without limitation, all equipment … and vehicles … and … all proceeds, including but not limited to trade-ins”.

The First Bank was given a verification statement when it did so. The First Bank then gave the Car Dealership notice of that verification statement “in the approved form” (see ss.155-157 of the PPSA).

Purchase Money Security Interest
The Second Bank held a perfected purchase money security interest (PMSI) over the purchase by the Car Dealership of new cars from the Supplier. One of the conditions of the supply arrangement was that the Car Dealership would hold monies realised for the sale of inventory on trust for the Supplier. The financing statement was registered five (5) days after the registration by the First Bank and disclosed a PMSI covering:
    “all inventory whether now owned or … hereafter acquired by the dealer supplied by the Supplier to the dealer, including but not limited to … new and used motor vehicles”, and in “all proceeds … including but not limited to trade-[ins]”.

The security agreement of the Second Bank stated that the PMSI security interest was taken in collateral to secure all obligations and indebtedness between itself and the Car Dealership. The Second Bank was invoiced for cars ordered by the Car Dealership from the Supplier and after paying the invoice, took an assignment of the conditional sales contract from the Supplier covering each vehicle. The Second Bank gave notice to the First Bank of its PMSI.

Commingled Funds
Contrary to the terms of the supply agreement, the Car Dealership did not hold the sale funds in trust and the monies were commingled with other monies in the general account held with the Second Bank.  The Car Dealership suffered financial difficulties and was placed into receivership by the First Bank.

The Receiver transferred the new vehicles in the possession of the Car Dealership to the Second Bank, but refused to transfer 44 used vehicles. The value of the vehicles was not sufficient to pay out both secured parties. The vehicles were identified as being either:

1     First trade-ins for new vehicles over vehicles that the Car Dealership had not repaid the Second Bank.

2     Trade-ins for new vehicles that the Car Dealership had repaid the Second Bank.

3     Vehicles that could not be linked to the sale of new cars.

All of the vehicles were sold with the agreement of the parties and the funds held on trust pending the decision of the court.

The Second Bank claimed priority over the normal security interest of the First Bank.

Applying the PPSA to These Facts

Category 1
•    The PMSI priority of the Second Bank continued in the proceeds generated by the sale of new vehicles covered by its PMSI. (See s. 33 of the PPSA)
•    This meant that the Second Bank had priority over cars in Category (1). (See 62(2) of the PPSA)

Category 2
•    Vehicles in Category (2) involved credit that had been repaid; and
•    while the Second Bank maintained a security interest in the vehicles as proceeds,
•    The nature of that security interest should not have been that of a PMSI,
•    Rather it was a normal security interest and was registered five (5) days after the registration of the normal security interest by the First Bank.
•    Which meant the First Bank should have had priority. (See s.55(4) of the PPSA)

•    However, the security agreement (which is effective according to its terms) provided that all of the inventory held by the Car Dealership was subject to the PMSI of the Second Bank; and
•    the funding provided by the Second Bank enabled all of the inventory to be acquired.
•    Accordingly the PMSI of the Second Bank had priority over the normal security of the First Bank. (See s.62(2) of the PPSA)

Category 3
•    Vehicles in Category (3) could not be linked to the purchase of new vehicles.
•    The PSMI of the Second Bank was extinguished by the sale and became a normal security interest.
•    Accordingly the normal security interest of First Bank had priority over the normal security interest of the Second Bank. (See s.55(4) of the PPSA)

Commingled Funds
•    There was no evidence to suggest that the money deposited in the Second Bank account was “received” by the Second Bank in payment of a debt owing to it.
•    The money from the sale of the inventory subject to the PMSI comprised traceable proceeds.
•    The underlying collateral in dispute was the “cash proceeds” and not the account in which they were held.
•    There was no evidence that the monies were deposited outside the ordinary course of business of the Second Bank; and
•    There was no new value extending from the First Bank. (See s.10 of the PPSA)
•    The PMSI of the Second Bank prevailed as against the normal security interest of the First Bank (See s.62(2) of the PPSA)

Ross Bowler LLB

The doctor was a cosmetic surgeon who also had a financial interest in a Farm.

Security Interest Loan
The Farm sought a loan from the Bank so it could do some redevelopment work.  A condition of the loan was for the Farm to grant a security interest to the Bank over all “present and future assets” and undertakings of the Farm.

The Bank registered that security interest on the Personal Property Securities Register (PPSR) and was given a verification statement when it did so. The Bank then gave the Farm notice of that verification statement “in the approved form” (see ss.155-157 of the PPSA).

Horse - Lease - Not Registered
In April 2012, the Farm entered into a three (3) year lease to purchase agreement with the Vendor to acquire a Horse. On 31 April 2012 the Farm took possession of the Horse.
The lease agreement provided that:
•    Title to the Horse would at all times remain with the Vendor; and
•    in the case of default by the Farm, the Vendor would be entitled to possession of the Horse.
As owner of the Horse, the Vendor did not register the lease under the PPSA.

Termination and Default
On 6 July 2012 the Vendor terminated the lease agreement with the Farm.
On 7 July 2012 the Vendor wanted to take possession of the Horse.

Sale of The Horse
The Doctor made arrangements with the Farm for the Farm to sell him the Horse. There was little paperwork and the consideration was modest, well below market price. The Vendor did not know of the sale and would not have granted permission for the sale if it was given an opportunity to do so.

On 23 July 2012 the Farm defaulted under its loan to the Bank.
The Bank appointed Receivers to the Farm.

After making enquiries as to the state of the estate of the Farm, the Receivers on behalf of the Bank claimed an interest in the Horse and notified the Doctor of that claim.

A priority dispute the arose between the Bank / Receivers and the Doctor over the Horse.

Discussion
The following are issues that may arise under the PPSA
•    Was the sale of the Horse from the Farm to the Doctor in the ordinary course of business as required by s.46(1) of the PPSA?
•    Can the Doctor take the Horse free of the registered security interest of the Bank?

The Ordinary Course of Business
In Gibson v Stockco Limited (2010) FPPSR ¶700-003; [2010] NZHC 2398 White J set out some criteria to consider as to whether a transaction was in the ordinary course of business.
Similar issues were considered in Rabobank New Zealand Ltd v McAnulty (2011) FPPSR ¶700-005; [2011] NZCA 212; [2011] 3 NZLR 192; (2011) 10 NZCLC 264,850 by O’Regan P, Chambers and Harrison JJ.

•    The assessment is objective.
    •    Determine the business of the seller
    •    Was the sale made in the ordinary course of that business?

Some criteria for determining whether the sale transaction was made in the ordinary course of that business:
•    How was the transaction:
    •    Negotiated;
    •    Agreed to; and
    •    Implemented;
•    What was the purpose of the transaction?
•    Was the transaction in accordance with the lending arrangements of the seller?
•    Was the transaction properly documented?
•    Was it an unusual transaction?
•    What benefit did the seller receive from the transaction?
•    Did the transaction involve a related party?

Some criteria for considering whether the secured party authorised the transaction:
•    Was the secured party aware of the specific dealing; or
•    Was the secured party aware of previous similar dealings; and
•    Did the secured party previously give express permission; or
•    Did the secured party give implied acquiescence to the previous dealings.

•    Where the secured party does not authorise the sale transaction, their priority position over the security interest of the transferee is maintained.
•    Under the PPSA in relation to property you seize, you cannot dispose of an interest greater than the interest you possess (See s. 133)

Conclusion
•    The interest of the Bank was a security interest under the PPSA (See s.18-19 of the PPSA)
•    The Farm was not regularly engaged in the business of selling horses
•    The Farm did not intend to profit from the sale of the Horse to the Doctor
•    The Doctor has a financial interest in the Farm
•    The transaction between the Doctor and the Farm was not an arms length transaction
•    The sale would not be classed as being in the ordinary course of business of the Farm, so any transfer of the Horse to the Doctor would be subject to the registered security interest of the Bank
•    The Vendor has a lower priority to the Bank because it is second in time and not registered (See s.55(3) of the PPSA)
•    The Bank would be able to seize the Horse from the Doctor (See s.123 of the PPSA)

Ross Bowler LLB

This scenario is based on the facts in New Zealand Bloodstock Limited v Waller and Agnew
(2005) FPPSR ¶700-002; [2005] NZCA 254; [2006] 3 NZLR 629; (2005) 9 NZCLC 263,944

The doctor was a cosmetic surgeon who also had a financial interest in a Farm.

Security Interest Loan
The Farm sought a loan from the Bank so it could do some redevelopment work.  A condition of the loan was for the Farm to grant a security interest to the Bank over all “present and future assets” and undertakings of the Farm.

The Bank registered that security interest on the Personal Property Securities Register (PPSR) and was given a verification statement when it did so. The Bank then gave the Farm notice of that verification statement “in the approved form” (see ss.155-157 of the PPSA).

Horse - Lease - Not Registered
In April 2012, the Farm entered into a three (3) year lease to purchase agreement with the Vendor to acquire a Horse. On 31 April 2012 the Farm took possession of the Horse.
The lease agreement provided that:
•    Title to the Horse would at all times remain with the Vendor; and
•    in the case of default by the Farm, the Vendor would be entitled to possession of the Horse.
As owner of the Horse, the Vendor did not register the lease under the PPSA.

Termination and Default
On 6 July 2012 the Vendor terminated the lease agreement with the Farm.
On 7 July 2012 the Vendor took possession of the Horse.
On 23 July 2012 the Farm defaulted under its loan to the Bank.

The Bank appointed Receivers to the Farm.

Breast Implants
Whilst that was all going on the doctor also continued in his practice as a cosmetic surgeon.

After much discussion over many months the husband and the wife decided they would pay for breast augmentation surgery for the wife. The arrangement with the doctor was that the husband and wife would secure the fee of $10,000 for the surgery against all real and personal property of the husband and wife. The doctor also registered his security interest on the PPSR and was given a verification statement when he did so. The doctor then gave the husband and wife notice of that verification statement “in the approved form” (see ss.155-157 of the PPSA).

After the surgery was completed, but before the debt to the doctor was repaid, the wife was declared bankrupt.

The doctor was aware of his difficult financial circumstances as a result of his dealings with the Farm.  He was keen to enforce his security interest in the estate of the wife because it would make him a secured creditor and he would get priority over the unsecured creditors.

If the estate of the wife is not able to satisfy the debt owing to the surgeon, the doctor knew he could pursue the husband in respect of his liability under the agreement to pay for the surgery.

That gave him some comfort as he watched matters unfold rather differently with the Farm and the Horse.

The Court
•    The loan was a security interest (ss 12 (1) & (2)); and
•    The Bank had given value to The Farm by giving the loan (s 10);

•    The Bank had perfected its security interest under s 21(1); and
•    The security interest of the Bank took priority to the unperfected security interest of The Vendor s.55(3)

•    The Farm had rights in the collateral (The Horse) (s 10); and
•    The security agreement between The Bank and The Farm was enforceable against The Vendor (s 20(1c)).
•    The Receivers and the Bank had priority to The Horse.

Ross Bowler LLB

The facts in this scenario are based on those in Crosstown Music Company 1, LL C v Rive Droite Music Limited, Mark Taylor & Paul Barry [2010] EWCA Civ 1222.

A music publishing company entered into several agreements with songwriters between 1994 and 1998 and acquired ownership of the copyright to their songs. The agreements are described in [12]:

    “The Writers assigned to [the Publisher] the copyright in the relevant songs "throughout the universe" for an initial 2 year period, followed by a 25 year "Retention Period", after which the rights reverted to the respective writer "without further formality" (clause 4(b)).”

Relevantly the songwriting agreements contained the following clause:

    “In the event that the Publisher ... shall be in material breach of the terms of this Agreement and shall fail to take all reasonable action to remedy such breach within [x] days of written notification in reasonable detail of such breach from the Writer, all rights assigned to the Publisher hereunder shall forthwith revert to the Writer.”

The automatic reverter clause was a partial assignment of the interests of the songwriters (see [39]). It secured the obligation of the publisher to pay royalties to the songwriters. Accordingly under the PPSA it would be a security interest in relation to the copyright (see s 12(1) of the PPSA)).

In 2006, the purchaser took an assignment of the subject copyright from the publisher. The songwriting agreements were not novated to the purchaser. They remained in place between the songwriters and the publisher, notwithstanding the assignment of copyright by the publisher to the purchaser.

In April 2007, the songwriters served “cure notices” on the publisher. Various breaches were identified and the publisher was required to take reasonable action to remedy the breaches. Should the publisher fail to do so, the writers claimed there was an automatic reversion of the copyright to them. The publisher did not pay.

The purchaser commenced proceedings against the publisher and the writers.

The court found that:
•    The reverter clause operated as an automatic reverter.
•    The re-vesting of ownership took place forthwith on the fulfilment of the conditions.
•    A re-assignment or other transfer to the writers was not necessary (see [34]).
•    The title of the publisher was always subject to the automatic reverter.


Therefore, the purchaser was an unsecured creditor in the estate of the publisher.

Applying the PPSA to These Facts
In order to protect their interests under the PPSA the writers would need to:
•    Perfect that security interest by filing a financing statement on the  Personal Property Securities Register (PPSR), (as a purchaser for value of the copyright via the automatic reverter)  ; and
•    Give the publisher notice of their registered security interest in the prescribed form. (s 157(1 ) of the PPSA)

If the writers failed to do so, the purchaser would take the copyright free of the unperfected security interest of the writers (s 43 of the PPSA).

Ross Bowler LLB

This scenario came from an enquiry from a colleague. Not all of the facts are available. That is not unusual in practice and it can complicate the response of the lawyer and the advice that the client is given.

The Facts
Person A owns a motor vehicle and grants a security interest over it to a Lender. The security interest is registered on the Personal Property Securities Register (PPSR). Person A subsequently sells the car to Person B, who fails to check the PPSR and misses the security interest of the Lender encumbering the vehicle.

Person B arranges and pays for insurance on the motor vehicle with the Insurer. The car is involved in an incident and is written off. The Insurer agrees to pay out the claim in respect of the written off motor vehicle.

Person A is a rogue and still owes money to the Lender. Person B and the Lender both assert claims to the insurance payout.

At first glance, the interest of the Lender appears to have priority over the interest of Person B.

Discussion
•    The Lender can enforce the security interest against Person A, if it gave Person A notice of its registered security interest. (S.157(1) of the Personal Property Securities Act (“PPSA”))
•    That would extend to the proceeds of sale (s.31(1)(a) and s.32 of the PPSA.)
•    The Lender has no contractual relationship with Person B.
•    The secured asset cannot be redeemed by the Lender because it has been written off.
•    Only the proceeds of sale and insurance policy proceeds are available to the Lender to pursue.
•    The PPSA explicitly incorporates “insurance payments” as “proceeds” pursuant to s31(1)(b).
•    s.31(2) and s.32 enables the proceeds of a transaction to be traced

Person B may be able to take the motor vehicle free of the security interest of the Lender:
•    Claiming it is a bona fide purchaser for value without notice in the ordinary course of business (See s.46(1) of the PPSA),
•    If the Lender cannot prove that it gave Person A notice of its security interest (s.157(1)).
•    If Person B can establish that situation, they take free (s 45) and none of the priority provisions have any relevance

Person B must take their interest subject to the encumbrance of Person A if:
•    Person B cannot prove that the Lender:
    •    Registered their interest erroneously; or
    •    Misdescribed the collateral.
•    The Lender can prove that it gave Person A notice of its security interest (s.157(1)).

However The Lender does not automatically prevail. The Lender would:
•    Need to establish their ability to trace the proceeds; and
•    Be subject to “bona fide purchase for value without notice”

The contest would be over the without notice component because the particulars of the security interest were entered on the PPSR.

The following questions arise:
•    Whether a purchaser of a motor vehicle has an obligation to search the PPSR; and
•    Whether a failure to search defeats the claim of bona fide purchaser because the security interest was registered.

Person B has the insurance policy over the motor vehicle. The Lender seeks to rely upon that insurance policy.  S.20 of the PPSA seems to prohibit the Lender enforcing the security interest against Person B directly. There seems to be no basis under the PPSA for the Insurer to pay the proceeds of the insurance policy over the motor vehicle directly to the Lender.

If the Insurer will not pay the proceeds of the insurance policy to Person B, proceedings may have to be commenced to enforce that payment.

Ross Bowler LLB

The following hypothetical scenario is based loosely on a Queensland Law Society Symposium Property Law Stream Case Study. It is also based on the REIQ Contract for Houses and Residential Land (9th Edition) (REIQ Contract) and while that contract is peculiar to Queensland, its structure and the process of applying the PPSA to it is relevant to all of Australia.

Case Study – Facts
The landlord owns a number of dwellings, which it rents out to residential tenants. The dwellings are let with washing machines, refrigerators, pool equipment (where required), stoves, air-conditioners and other household items.

Prior to the commencement of the Personal Property Securities Act 2009 (Cth) (“PPSA”) The Bank had a fixed and floating charge over all assets and undertakings of the Landlord.

The landlord has contracted to sell a dwelling with a number of “included chattels” to the purchaser (who intends to use the property as a residence). The parties used the REIQ Contract.

The charge is registered as a security interest under the PPSA in favour of the bank. The bank also holds a registered mortgage over the land.

Disclosure
Section 275 of the PPSA requires the bank as the secured party to provide certain information relating to the subject security interest to the landlord as the grantor.

Information Regarding The Property
The solicitor for the purchaser wrote to the landlord’s solicitor in accordance with clause 8.4(3) of the REIQ Contract, requesting to be provided with the following:
    (a)     copies of all security interests of the vendor landlord, and

    [Where the vendor is an individual:
    (b)     the birth date of the vendor landlord so the purchaser’s solicitor could undertake a Personal Property Securities Register(PPSR) search in respect of the vendor landlord.]

[Upon the date of birth of the vendor landlord being provided to the purchaser, relevant PPSR searches were undertaken.]

The information from the landlord confirmed for the purchaser that all chattels being sold under the contract were subject to the security interest in favour of the bank.

Pre-settlement correspondence from the vendor landlord proposed that at settlement the purchaser would be given a release of mortgage over the freehold. The purchaser was told “that should cover it”.

The purchaser is concerned that the release of the mortgage would not release the chattels included in the sale from the security interest in favour of the bank.

Issue 1: Under the contract, can the purchaser require a release of the security interest in relation to the chattels sold?

The following clauses of the REIQ Contract are relevant here:

    “5.3(1)     In exchange for payment of the Balance Purchase Price, the Seller must deliver to the Buyer at settlement: …
            (c)     any instrument necessary to release any Encumbrance over the Property in compliance with the Seller’s obligation in clause 7.2

…

    7.2     The Property is sold free of all Encumbrances other than the Title Encumbrances and Tenancies

…

    5.5     On the Settlement Date, in exchange for the Balance Purchase Price, the Seller must give the Buyer vacant possession of the Land and the Improvements except for the Tenancies. Title to the Included Chattels passes at settlement.

…

    9.1(1)     … if the Seller or Buyer, as the case may be, fails to comply with an Essential Term … the Seller (in the case of the Buyer’s default) or the Buyer (in the case of the Seller’s default) may affirm or terminate this contract.”

Clause 1.1(2)(k) of the REIQ Contract defines “Essential Term”, in the case of breach by the Seller, as including 5.3(1)(a)-(d) and therefore 5.3(1)(c).

Clause 9.3 provides that if the Buyer affirms the contract, it may sue the Seller for damages
and/or specific performance.

Decision For The Purchaser
You cannot dispose of an interest greater than the interest you possess (see s 133 of the PPSA), so unless the security interest is removed from the included chattels prior to settlement, the purchaser would take the included chattels subject to the security interest of the secured party bank.

Conclusion
The purchaser is entitled to write to the vendor requesting the security interest be removed from the included chattels in order to give clear title to the included chattels to the purchaser at settlement. If this does not occur, the purchaser will be entitled to terminate or affirm the contract as per clause 9.1.

This would seem to require some refinancing of the security interest goods by the vendor landlord with the bank before settlement could proceed.


Issue 2: Should the release be registered?

The bank has a registered security interest over the included chattels. It is enforceable and grants priority to the bank over others claiming an interest. That security interest directly affects the vendor. For its own purposes the vendor wants to rely upon the release of the security interest over the included chattels the bank granted. The vendor would be motivated to register a financing change statement on the PPSR based on the release of the security interest provided by the bank.

The vendor is then in a better position to provide clear title to the included chattels to the purchaser.


Issue 3: What if the purchaser was unaware of the security interest at the time of the sale, because it was not on the register?

Section 43
The purchaser had given value to the landlord by giving the purchase price for the property )s 10 of the PPSA(. Section 43 of the PPSA enables the purchaser for value to take the included chattels free of any unperfected security interest the bank might seek to claim.

Section 46
A bona fide purchaser of goods takes them free of any security interest, if the personal property was sold in the ordinary course of the business of the seller, which was selling personal property of that kind (s 46 of the PPSA).

These facts suggest that the bank has not given the landlord notice of any security interest it holds over the property as s 157(1) of the PPSA requires. There is also no evidence to suggest that the bank has given the purchaser notice of any security interest it may claim to hold over the property. Nor is there any evidence to suggest that the landlord has given the purchaser any notice of any security interest the bank may claim to hold over the property.  Constructive knowledge is defined in s 297 of the PPSA. Registration of data does not constitute constructive notice of the existence of the subject security interest (see s 300). On these facts, there appears to be no reason to impose constructive knowledge of the security interest upon the purchaser. Further, even if an obligation to search the register can be imposed on the purchaser, that search will reveal no security interest on the modified facts posed in Issue 3.

If the purchaser of the real property and included chattels could be said to be a bona fide purchaser of the goods, and the landlord was selling the included chattels in its ordinary course of business )of selling its real estate(, the purchaser would take them free of any security interest.

Where the bank has not registered the relevant security interest on the PPSR it suffers the relevant diminution in the priority of the interest it seeks to claim. The purchaser has no need or entitlement to register anything on the PPSR as it enjoys no registrable interest.


The Bank and The Vendor
As for the bank and the vendor, the bank will still have a contractual remedy against the vendor, however the failure on the part of the bank to register the security interest means that the bank will not have priority as a secured creditor under the PPSA. The bank then becomes an unsecured creditor in relation to the vendor.

Ross Bowler LLB

The facts in this scenario are very loosely based on some of the facts in Carson, in the matter of Hastie Group Limited (No 3) (2012) APPSR 701-001; [2012] FCA 719 (Hastie).

The Tenant Business had a loan from the Bank to assist in establishing its restaurant business. The Bank secured that loan against all the real and personal property of the Tenant Business and registered that interest on the Personal Property Securities Register (PPSR). After registration of the security interest was effected by the Bank, it provided notice of that registration to the Tenant Business, as per s 157(1 ) of the PPSA.

Under the security agreement between the Bank and the Tenant Business, it would be a breach for the Tenant Business to move the secured items without giving notice to, and obtaining permission, from the Bank. It would also be an event of default under the agreement which would enable the Bank to call in the outstanding portion of the loan.

The Tenant Business stored some of its goods in premises owned by a third party, a self-storage company. The Self-Storage Company had a contractual right of entry to the premises when money was owing on the storage.

The Self-Storage Company secured its interest under the contract with the Tenant Business against all personal and real property of the Tenant Business. In so contracting with the Tenant Business, it was aware of the earlier security interest granted by the Tenant Business to the Bank. After the security interest was registered by the Self-Storage Company, it provided notice of that registration to the Tenant Business, as per s 157 (1) of the PPSA.
 
The Self-Storage Company privately acknowledged that the security interest of the Bank had higher priority than that of the Self-Storage Company, as it was created earlier in time and was perfected by registration.

Hard times hit the Tenant Business and its restaurant business folded. In breach of the agreement with the Bank, the Tenant Business moved some of the property from the restaurant business premises to the self-storage premises. Subsequently, as a result of an application made to the court by the Bank, the Administrators were appointed to take control of the affairs of the Tenant Business.

The Administrators were responsible for identifying property that was subject to third party security interests. The PPSR proved extremely difficult for the Administrators to rely upon for that purpose:
•    where the registration in the PPSR was general, rather than specific, and
•    because many transitional security interests were not registered.

Once they commenced their task proper in respect of the Tenant Business, the Administrators discovered there were many registrations noted against the Tenant Business in the PPSR.

On 28 May 2012, the Administrators wrote to all creditors who had an interest recorded against the Tenant Business in the PPSR . Enclosed with each letter was a Pro Forma Security Interest Summary that each creditor was requested to complete in respect of each security interest the creditor held. Each creditor was requested to provide notification of its interest as a matter of urgency and, in any event, by no later than 31 May 2012. Those secured creditors who failed to respond to that correspondence would be taken as waiving any interest in the subject property.

In order for the Administrators to understand the identity of the property in which a security interest was claimed, the response from the creditors should have adequately particularised:
•    the property, or
•    the security agreement under which the security interest was said to arise.

On 26 June 2012, the Administrators wrote to several financiers who appeared from the books and records of the Tenant Business to have a secured claim in respect of plant and equipment. The financiers were asked to consent to the sale of the plant and equipment referable to their interests or give notice that they did not consent to such sale before 2 July 2012. They were also asked to advise, on or before 2 July 2012, whether, to the best of their knowledge, any of the listed items of plant and equipment formed a key component of another piece of plant or equipment and whether that plant and equipment was recorded on the lists that had been provided to them. In each case the letter stated that if no response was received on or before 2 July 2012, the Administrators would assume that the rights of the relevant financier (with respect to the Tenant Business) did not include any interest in any of the items in the listed plant and equipment; or, alternatively, that the financier waived that interest.

On 28 June 2012, the Administrators caused an advertisement to appear in The Australian newspaper. The advertisement requested that creditors notify the Administrators of claims concerning assets, plant and equipment, stock, inventory, leased assets or other items in the possession of the Tenant Business by 4 July 2012. The advertisement contained the following statement:

    “If you do not contact the Administrators within this time frame, the Administrators will assume that:
    •    any rights you may have regarding the Tenant Business do not include any interest or claims in any of the items currently in the possession of the Tenant Business; or alternatively
    •    you waive and do not pursue that interest which may result in their sale.” (cf Hastie, [12])

Seizure of Collateral
As a result of this property identification exercise by the Administrators on behalf of the Bank, the Self-Storage Company became aware of the situation in which the Tenant Business found itself. The Self-Storage Company also noticed that money was owing to it by the Tenant Business under their agreement.

The Self-Storage Business exercised its rights under its agreement with the Tenant Business and gained access to the subject premises. Once it did so it took an inventory of all the contents of the premises and subsequently conducted a search of the PPSR in respect of any of the property that looked like it may have been the subject of a security interest.

Both the Bank and the Self-Storage Company sought to seize the property of the Tenant Business as collateral under their respective security agreements (see s 123 of the PPSA). Section 127 of the PPSA requires the Self-Storage Company to give notice to the Bank of the collateral it has seized from the Tenant Business, because the Bank has a higher priority security interest under the PPSA and the Self-Storage Company was aware of that higher priority at the time it contracted with the Tenant Business.

In the process of their negotiations, the Bank agreed with the Self-Storage Company that the goods would be stored at the premises of the Self-Storage Company until the matter was resolved.

Disposing of the Seized Collateral
When disposing of the seized collateral both the Bank and the Self-Storage Company have a duty to obtain market value (see s 131 of the PPSA). The question arises as to whether that entitles the Bank to entertain a fire sale of the seized collateral.

It is submitted that a fire sale would not be entertained because of:
•    the obligation on a secured party to act honestly and in a commercially reasonable manner: s 111 of the PPSA; and
•    the obligation to obtain market value: s 131 of the PPSA.

Section 131 is very similar to s 420A (Controller’s duty of care in exercising power of sale) of the Corporations Act, which has been interpreted as requiring a controller to take reasonable steps to obtain market value, including appropriate advertising, engaging an experienced agent, undertaking an adequate marketing campaign and obtaining a valuation.

Conclusion
Registration of security interests is a significant step in the process of dealing with personal property in the commercial world. The introduction of the PPSA has made that commercial world significantly larger, in the author’s view. Enforcing rights under the PPSA involves a process. The extent to which one complies with that process can affect the outcome of the matter.

This scenario speaks of the self-storage industry, but much of the process is applicable to other industries and can be a useful reminder of the prudence required in commercial dealings with personal property now that the PPSA is a part of our lives.

Ross Bowler LLB

Consumers can not only be affected by the Personal Property Securities Act 2009 (Cth) ("PPSA"), they may have rights that warrant enforcing. This hypothetical factual scenario hopes to shed some light on that world.

The Student Share-House
Four university students live in rented accommodation whilst they undertake their full-time studies. With their combined resources they are also able to afford to furnish that accommodation with some relevant necessities by undertaking a chattel lease of some personal property. In so doing they may find that they come within the reach of the PPSA.

Homeware Rentals is a business that rents out such personal property in the ordinary course of its business and its customers sign contracts of lease recording the terms and conditions of that rental. For the purpose of this exercise I will assume that lease is simple and not controversial. The students would undertake to make the lease payments in accordance with the contractual terms and Homeware Rentals agree to provide the relevant subject personal property to them for the duration of the lease.

It should be noted that the transaction with the students is considered to be a consumer transaction under the PPSA. This gives it special status, as we will see. (See ss.42, 46-47 PPSA)

Register Security Interest
In order to protect its interests Homeware Rentals registered the security interest that arose in respect of that property and obligation on the Personal Property Securities Register (PPSR). As the students do not have a security interest in the relevant property, they had nothing to register in respect of the property.

Importantly also, Homeware Rentals has borrowed money from Worstpac Bank. To secure its obligations, Worstpac Bank registers a security interest over all of the goods of Homeware Rentals. These goods include the ones leased by the students. Therefore the goods of the students are subject to the following security interests:
1     In favour of Homeware Rentals (first security interest); and
2     In favour of Worstpac Bank (second security interest).

Receivers Appointed
Hard times fell upon Homeware Rentals and Hardball Receivers were appointed to it as a result of an application to the Court by a major secured creditor, Worstpac Bank. On behalf of Worstpac Bank, Hardball Receivers would seek to recover as much of the money owing to Worstpac Bank by Homeware Rentals as possible, if not all of it. One of the ways open to it to do this is by seizing the goods of Homeware Rentals and selling them. (Ss.123, 125, 128) It seems though that Worstpac Bank cannot take possession of the subject goods because the students are protected by s47(1) PPSA. Under this section, the students take free from any security interest, because the goods are consumer goods.

The effect of this is that the students will only need to deal with Homeware Rentals; they will not face the prospect of Worstpac Bank showing up and resuming or repossessing the subject goods. In a way this retains the contractual nexus between Homeware Rentals and the students.

Power To Seize Collateral
Homeware Rentals is a secured party in respect of the goods by virtue of the first security interest. S123 (1) of the PPSA gives it the power to seize collateral or the goods the subject of the lease, by any method permitted by law, if the students are in default under the first security interest.

While Worstpac Bank is not entitled to exercise its rights to seize the goods under the second security interest (s47(1) PPSA), s53 PPSA allows Homeware Rentals to stand in the shoes of Worstpac Bank to recover the chattels.
   
Position of The Students
There are two relevant considerations for the students:

1     They are not in default under their lease with Homeware Rentals - so Homeware Rentals has no right to seize the goods on its own account (under the first security interest).

2     But what about the interest of Worstpac Bank under the second security interest? While Worstpac Bank itself seems to have no rights directly over the goods (they are exempt - s47(1)), Homeware Rentals may stand in its place to recover money owing. The way in which this provision will operate is perhaps a little unclear. However, it is likely that so long as the students are not in breach of their agreement with Homeware Rentals, they can continue to keep the goods free from threat.

How Do Consumers Go About Enforcing Their Rights?
There is plenty of assistance available for consumers, such as our students, to enforce their rights. Community legal centres, consumer law advice services and even student service centres in universities are equipped to provide advice and education on consumer rights. See for example http://www.caxton.org.au/consumer_law.html

Conclusion
What is your view of the operation of these provisions? They seem to point towards protection of the consumer: is it feasible that the students would lose their goods to Worstpac Bank?

Ross Bowler LLB

Family Law practitioners may have thought that the introduction of the Personal Property Securities Act 2009 (Cth) ('PPSA') would not have any significant impact upon them. This article seeks to show the inaccuracy of that assessment.The scenario is adapted from facts outlined in this blog article  and this previous blog post. I have massaged those facts to suit my purpose.

There are many ways I could have approached this topic. I have chosen to observe a property adjustment as it might unfold with the PPSA now in play. It seemed to communicate the impact more clearly than a case note.

The Boat and Some Less Than Smooth Sailing
The Husband and the Wife had ended their fifteen year marriage. They were now in dispute over what arrangements ought be made in respect of the property from that relationship.  Proceedings had been commenced in the Federal Magistrates Court, but no trial date had been set for the matter.  As a result of interlocutory proceedings the Court had made orders for the sale of a business owned by the parties.  The proceeds of the sale of that business were to be paid into the trust account of the solicitor for the Husband. The Wife did not have a solicitor, she was conducting her case by herself.

Not long after those orders were made the parties signed a contract to sell the business to The Purchaser. Prudently the solicitors for the Purchaser did a search of the Personal Property Securities Register ('PPSR') to ensure the Vendors were able to sell all of the business items without any relevant charge over them.

The search revealed that a Finance Company had registered a Security Interest on the PPSR over "all present and after acquired property" of the Vendors. That registration included the boat of the Vendors. That boat was the subject of a fixed charge by a Finance Company and had been in place prior to the PPSR commencing on Monday 30 January 2012. Significantly the debt the subject of the charge had been settled with the Finance Company prior to the PPSR commencing on Monday 30 January 2012.

At the relevant time that fixed charge was registered with ASIC and at REVS. When the PPSR started some errors occurred in the migration of fixed charges from ASIC and REVS registrations. The registration of the fixed charge in respect of the boat of the parties was one such error. The PPSR showed that charge as being a current security interest held by The Finance Company in respect of the boat.

Even though the boat was not included in the sale of the business, the PPSR registration affected the sale.  Without a release of the security interest relating to the boat, the Purchaser would not get a clear title to the business it wished to purchase. The Vendors necessarily became affected by this development, in addition to the Purchaser.  The "add on" that the Finance Company had included for "all present and after acquired property" meant that the Vendors could not sell their other items unencumbered or free from any mortgage or charge.

The Finance Company had no authority to maintain the registration of the Security Interest in the boat as it appeared on the PPSR.

The solicitor for the Purchaser wrote to the Wife requesting that she and the Husband take appropriate steps to correct the position in relation to the incorrect registration of the security interest registered in respect of the boat.  The Wife did not respond to that correspondence from the solicitor for the Purchaser.

The solicitor for the Purchaser the wrote separately to the Husband and the Wife formally requesting that they give The Finance Company an Amendment Demand (See S.178) to correct the boat security registration situation.  That correspondence pointed out that any Seriously Misleading Defect in data relating to the registration of a security interest will cause a registration to be ineffective (See s.164 & s.165).

That correspondence from The Purchaser to the Husband also said if no appropriate action was taken within seven (7) days The Purchaser would make an application under s.182 to the Federal Magistrates Court for Orders correcting the situation and would seek its costs of so doing from the Husband and the Wife.

The Wife told the Husband privately that she would do nothing to correct the situation in relation to the boat, that the Husband would have to do it all himself.

The solicitor for the Purchaser also wrote to The Finance Company similarly requesting that the boat security registration situation be corrected.  That correspondence also said The Finance Company may be liable to the Purchaser for any damages the Purchaser suffered as a result of the delay in the sale of the business due to the incorrect registration of the Security Interest.  The Finance Company did not respond to the correspondence of the solicitor for the Purchaser.

The solicitor for the Husband then formally wrote to the Finance Company giving it an Amendment Demand (See S.178) to correct the boat security registration situation. That correspondence further stated:
•    The Finance Company would be required to register a Financing Change Statement on the PPSR;
•    That The Registrar may give the Secured Party an Amendment Notice of the amendment demanded (See s.180 (1) & (5)); and
•    That it was expected the Financing Change Statement will be registered after five (5) days of the Amendment Notice being given (See s.181)

Whilst the Finance Company eventually changed the registration, the sale was delayed by over a week. At settlement of the business transfer transaction the purchase/sale price was adjusted to compensate the Purchaser for the loss suffered by the Purchaser as a result of the incorrect registration of the security interest in relation to the boat.

The Husband took the view that the amount of compensation he had to pay to the Purchaser for the incorrect registration of the security interest in respect of the boat and its impact on the transfer of the business transaction did not warrant him commencing proceedings to recover that compensation from The Finance Company. However he took a different view with respect to the Wife. He had his solicitor write to the Wife informing her that he would be seeking an appropriate adjustment at their property settlement trial in due course, commensurate with her lack of cooperation in relation to correcting the registered security interest position with respect to the boat.

Ultimately the Federal Magistrate hearing the property adjustment trial agreed with the Husband on that point and adjusted the property of the Husband and Wife accordingly.

Conclusion
Whilst this might not be the way you would conduct such a matter, it may be an approach that finds favour with your opponent. Knowing how to respond to the challenges raised above is an important aspect of the job of a litigation lawyer. Being caught short or not knowing is a mistake your client may not forgive.

Ross Bowler LLB

Footnote
This article has been published by CCH Australia in its Tracker Series

Ross Bowler, CCH, Australian Family Law Tracker, Issue 5, May 2012 "The Business, The Boat, The PPSA and The Family Law Property Arrangement"

Ross Bowler, CCH, Australian Corporate, Company and Securities Law Tracker, Issue 5, May 2012 "The Business, The Boat, The PPSA and The Family Law Property Arrangement"