The Personal Property Securities Act: Is "possession" still nine-tenths of the law?

By Orla McCoy and Jillian Robertson

The application of the PPSA continues to evolve. You might think that the concept of "possession" is not controversial. A review of recent case law suggests otherwise.

Although we have been operating under the Personal Property Securities Act 2009 (Cth) (PPSA) for a number of years, this area of law continues to generate disputes because of the complexity of the legislative regime and the ramifications of being an unsecured creditor of an insolvent entity.

Even the seemingly uncontroversial concept of "possession" has been a source of dispute between contractual counterparties of an insolvent grantor. As one of the three ways in which a security interest in certain property can be perfected for the purposes of the PPSA, and where the timing of possession is critical for the super priority of a purchase money security interest (PMSI), "possession" assumes fundamental importance in the personal property regime. It is for this reason that recent guidance from the courts is particularly welcome.

Possession: What does "perfection by possession" actually mean?

The first judicial guidance on the concept of "perfection by possession" was given in Knauf Plasterboard Pty Ltd v Plasterboard West Pty Ltd (In Liquidation)(Receivers and Managers Appointed) [2017] FCA 866.

The issue in that case was whether the appointment of receivers and managers (Receivers) by a secured party had the effect of perfecting the relevant security interest in accordance with section 21 of the PPSA.

The Court held that section 24 of the PPSA modifies the common law meaning of "possession" so that in order to perfect a security interest by possession, a secured party must have actual or apparent possession of the relevant property. It is not enough that a secured party has merely a contractual right (under the terms of its security agreement) to possess that property after a default.

The facts in Knauf

  • From about May 2012, Knauf Plasterboard Pty Ltd provided plasterboard products to Plasterboard West Pty Ltd t/as Retroflex.
  • Retroflex granted a security interest to Knauf in 2012 and 2014, to secure its indebtedness to Knauf from time to time.
  • Knauf did not register its security interest on the Personal Property Securities Register (PPSR) until 3 February 2016.
  • Retroflex defaulted under its arrangements with Knauf and on 10 February 2016, Knauf appointed the Receivers to Retroflex.
  • On 12 February 2016, the members of Retroflex resolved to wind up the company and appoint a liquidator.

Retroflex and its liquidator claimed that Knauf had failed to perfect its security interest and that it had therefore vested in Retroflex pursuant to section 588FL of the Corporations Act 2001 (Cth) upon the appointment of the liquidator. Knauf argued that its security interest had been perfected by possession of Retroflex's assets within the meaning of the PPSA, either because:

  • the existence of the right to appoint a receiver together with the exercise of that right, meant that Knauf had the power to deal exclusively with the collateral (ie, the assets of Retroflex); or
  • the existence of the right to appoint a receiver, the exercise of that right and the consequential control asserted by the Receivers over the assets.

The Court held that a valid resolution for the voluntary winding up of Retroflex was not passed, and so section 588FL did not apply. Despite this, Justice Markovic considered the application of Part 2.3 of the PPSA (concerning "possession" and "control") and whether the appointment of the Receivers perfected Knauf's security interest.

The Court ultimately held that Knauf's security interest was unperfected because, although Knauf took possession of the assets through the appointment of the Receivers, the steps taken by the Receivers constituted "seizure" which, for the purposes of section 21(2)(b) of the PPSA, is not a means of possession by which a party can perfect its security interest.


PMSI priority: When does a grantor actually obtain "possession"?

Possession is also critical in other PPSA contexts, in particular as one of the prerequisites for PMSI "super priority".

In Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd [2017] SASC 163, Allied claimed that it had a super-priority PMSI over specific inventory under the priority rules in section 62 of the PPSA. With respect to goods, section 62(2)(b)(i) provides (broadly) that a PMSI has priority if it is perfected by registration at the time the grantor obtains possession of the inventory. The Allied decision turned upon whether the words "grantor obtains possession of the inventory" were a reference to:

  • the grantor obtaining possession as grantor of the PMSI; or
  • the grantor obtaining possession simpliciter.

The Court ultimately held that the former construction should be adopted.

The facts in Allied Distribution

  • In 2012, Commercial Distribution Finance Pty Ltd (CDF) entered into an arrangement with an entity trading as Bill's Motorcycles, pursuant to which CDF agreed to provide floorplan finance to Bill's Motorcycles (CDF Arrangement). At that time, CDF registered its security interest against Bill's on the PPSR.
  • In 2014, Bill's Motorcycles granted a security interest in all of its present and after acquired property to Samwise Holdings Pty Ltd, which Samwise registered against Bill's Motorcycles on the PPSR.
  • On 12 April 2016, Allied and Bill's Motorcycles entered into a bailment agreement for Allied to provide floorplan finance to Bill's Motorcycles.
  • On 14 April 2016, Allied registered its PMSI against Bill's Motorcycles on the PPSR.
  • On 15 April 2016, Allied acquired ownership of 40 motorcycles (the Inventory) from CDF. At the time of the acquisition, the Inventory was in Bill's Motorcycles' possession under the CDF Arrangement and it remained in Bill's Motorcycles' possession post-acquisition.
  • On 18 April 2016, Allied issued 40 bailed goods notices to Bill's Motorcycles in respect of the Inventory.

In a dispute between Allied and Samwise as to which security interest had priority, Allied argued that its security interest was a valid PMSI, and therefore enjoyed super priority over Samwise's non-PMSI security interest.

In support of its claim Allied argued that:

  • Bill's Motorcycles did not have possession of the Inventory as grantor of the PMSI before 14 April 2016 because, prior to that time, the nature of Bill's Motorcycles' possession was as bailee from CDF; and
  • Allied's PMSI was perfected by registration at the time that Bill's Motorcycles (as grantor of the PMSI) obtained possession of the Inventory (on 15 April 2016). Accordingly, the timing condition in section 62(2)(b)(i) of the PPSA was satisfied.

Samwise argued that its non-PMSI security interest enjoyed (first in time) priority over Allied's security interest because:

  • Bill's Motorcycles had possession of the Inventory before Allied's security interest was created (in other words, by virtue of the CDF Arrangement, the Inventory was already in the possession of Bill's Motorcycles); and
  • consequently, the condition in section 62(2)(b)(i) of the PPSA for the creation of PMSI super priority was not satisfied by Allied (ie, Allied's PMSI was not perfected by registration at the time that Bill's Motorcycles obtained possession of the Inventory).

 

The Court held that on the proper construction of section 62(2)(b)(i), the PMSI was perfected by registration at the time the grantor obtained possession of the Inventory because:

  • registration is only required at the time the security interest is granted to protect persons subsequently advancing money (or providing other value) to a grantor in consideration for the grant of a subsequent security interest; and
  • the mere fact that a person who becomes the grantor of a security interest to a PMSI holder may have had possession of the subject property in some other capacity is irrelevant.

The Knauf and Allied decisions demonstrate the uncertainty, and hence scope for dispute, flowing from the PPSA's wholesale legislative reform of property rights. Under the PPSA, the substance (rather than the form) of financing arrangements is fundamental. Financing transactions can no longer necessarily be structured to preserve a financier's ownership of property. Ownership is no longer conclusive. Rather, the issue is whether the party claiming an interest has a perfected security interest ‒ if the nature of the party's interest is one to which the PPSA applies.

Notwithstanding the developing judicial authority in this area, given the ambiguity of the legislation and its complete overhaul of previous legal concepts such as ownership and possession, disputes regarding the application of the PPSA, particularly against a backdrop of grantor insolvency, will no doubt continue for the foreseeable future.

 

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