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

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

In Provident Capital Ltd v Anderson & Anor [2012] NSWSC 525 Adamson J was asked to consider the following legal concepts: Family Law; Interlocutory injunction; priorities; personal property; restrain from dealing; contract; equity; purchaser for value without notice not bona fide; delay; lack of frank disclosure to the Court.

The Facts
By Deed of Loan dated 21 December 2006, Provident (“the Plaintiff") lent the First Defendant (“D1") the sum of $5.7m. On the same day, in order to secure the monies advanced, D1 granted a goods mortgage to Provident (the Goods Mortgage) and a real property mortgage over the property known as "Barry Station".

The effect of the Goods Mortgage was to charge all of the personal property of D1 that was intended to be, or which was in fact, used for his farming business, wherever it was conducted.

On 25 June 2010, by short form of statement of claim for possession against a mortgagor, Provident commenced these proceedings against D1 seeking a judgment for possession of Barry Station (the Possession Proceedings)

On 26 August 2010, D1 and the second Defendant (“D2") filed consent orders in proceedings brought by D1 against D2 in the Family Court (the Family Court Consent Orders)

By application filed on 11 May 2011 in the Possession Proceedings, Provident applied for an order to join D2 as second defendant and also sought orders restraining her from disposing of cattle which have been removed from Barry Station. D2 was joined as second defendant to those proceedings.

On 30 April 2012, it came to the attention of Provident that D2 had advertised four items for sale on an Internet site, one of which was already listed as sold.

By letter dated 2 May 2012, solicitors for the Plaintiff brought this matter to the attention of solicitors for D2 and requested undertakings that no further items be sold and that the proceeds of any sold items be paid into court or into a controlled money account.

On 3 May 2012, solicitors for D2 advised solicitors for Provident that three of the four items had in fact been sold and gave the undertakings sought until 17 May 2012.

By oversight, the solicitors for Provident did not take any further action to obtain either an extension of the undertakings of an order of the Court until 15 May 2012, when the solicitors for Provident realised the imminent expiry of the undertakings.

On 16 May 2012, Provident sought an extension to those undertakings which was not forthcoming.

Accordingly, on 16 May 2012, Provident approached the Court for short service.

On 17 May 2012 the interlocutory application was heard.

The Law
The task to be undertaken in an application such as this is to determine:
•    Has the Applicant established that it has a prima facie case; and
•    Where does the balance of convenience lie.
•    Are there any disentitling matters which may make the grant of relief inappropriate?

Prima Facie Case
 “The plaintiff must show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial."
(See Beecham Group Ltd -v- Bristol Laboratories Pty Ltd [1968] HCA 1; 118 CLR 618 at 622-623 & Australian Broadcasting Corporation -v- O'Neil [2006] HCA 46; 227 CLR 57 per Gummow and Hayne JJ at [65])

In determining the facts relevant to such an application, the Court is not entitled to determine facts on any final basis.
(See Shercliff -v- Engadine Acceptance Corporation Pty Ltd [1978] 1 NSWLR 729 at 724 and 1st Fleet Pty Ltd -v- Australian Cooperative Foods Ltd [2006] NSWSC 881 per White J at [5])

Balance of Convenience
Relegation from secured creditor to unsecured creditor was sufficient prejudice to warrant the interlocutory injunction orders being made in this case.

Disentitling Matters
The Court found there were no disentitling matters, such as delay, which would make the grant of relief inappropriate.

Result
The Court granted the relief sought by The Plaintiff.

Conclusion
Of itself this case may not be particularly remarkable. However it is a useful reminder that the reach of the family law goes well beyond the Family Court and into the commercial law arena.

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"