Warning: When s267 of the PPSA bites….588FM of the Corporations Act cannot save you!

A recent decision of the Supreme Court of Western Australia has provided further confirmation in relation to perfection, priority and vesting rules under the Personal Property Securities Act 2009 (Cth) (PPSA). Importantly, the decision also clarifies the interaction between section 267 of the PPSA and section 558FM of the Corporations Act 2001 (Cth) (Act).

The case in question is that of NFT Specialized Tower Cranes LLC v Machforce Pty Ltd (In Liquidation) & ors [2017] WASC 95.  HWL Ebsworth Lawyers acted for the successful company and its liquidators in the matter.

Significance of the decision 

The Court confirmed that an order under section 588FM of the Act will not protect an unperfected security interest from vesting under section 267(2) of the PPSA. Rather, the power of that provision is limited to protecting a perfected security interest from vesting under section 588FL(4) of the Act. That finding is, of course, consistent with the recent decision of the Supreme Court of New South Wales in the matter of OneSteel Manufacturing Pty Ltd (Administrators Appointed) [2017] NSWSC 21.

Background

The case in question concerned the decision made on 6 April 2016 by the then administrators (who were subsequently appointed as liquidators) of Machforce Pty Ltd (Company) to characterise six cranes, the subject of six rental agreements between NFT Specialized Tower Cranes LLC (NFT) (as lessor) and the Company (as lessee), as having vested in the Company on the appointment of the administrators on 29 March 2016 (Appointment Date). The then administrators later accepted that one of the six rental agreements did not vest in the Company, although they maintained their claims in relation to the remaining five rental agreements. That position was adopted and maintained by the administrators on the basis that:

• The rental agreements in question gave rise to security interests, for the purposes of the PPSA, in favour of NFT (Security Interests) in the cranes the subject of those rental agreements (Cranes); and
• As at the Appointment Date, NFT had failed to perfect its Security Interests by way of registration of a financing statement on the PPSR, or by any other means. NFT had subsequently registered financing statements on the PPSR on 11 May 2016, that being after the Company’s transition from administration to liquidation.

NFT’s position 

NFT commenced proceedings against the Company and the liquidators and sought, amongst other things:

• A declaration that the rental agreements had in fact terminated on 16 January 2016 (that is, several months prior to the Appointment Date) or at some time prior to the Appointment Date. This contention was central to NFT’s claims that the rental agreements were not on foot as at the Appointment Date and that NFT did not therefore have any Security Interests that were in need of perfection as at that time;
• Orders requiring the Company to deliver up the Cranes to NFT; and
• In the alternative, and if the Court formed the view that the rental agreements did give rise to Security Interests that were unperfected as at the Appointment Date, an order pursuant to section 588FM of the Act fixing 11 May 2016 as the time by which NFT was required to register its financing statements.

The position of the Company and the liquidators 

The Company and the liquidators maintained that:

• The rental agreements remained on foot as at the Appointment Date;
• The rental agreements gave rise to Security Interests in favour of NFT on the basis that the rental agreements were PPS leases within the meaning of either or both of section 13(1)(c) and 13(1)(d) of the PPSA;
• The Security Interests were unperfected as at the Appointment Date;
• The Security Interests vested in the Company pursuant to section 267 of the PPSA immediately prior to the appointment of the administrators; and
• Section 588FM of the Act was inapplicable in the circumstances by virtue of the fact that, by its terms, it seeks to protect a perfected security interest from vesting under section 588FL(4) of the Act — it does not afford protection to an unperfected security interest from the consequences of vesting under section 267(2) of the PPSA.

The issues considered by the Court

The decision of Acting Master Strk addressed the following four key issues:

• Whether the rental agreements gave rise to security interests pursuant to the PPSA (First Issue);
• The status of NFT’s Security Interests (if any) as at the Appointment Date (Second Issue);
• Whether NFT’s Security Interests in the Cranes vested pursuant to section 267 of the PPSA (Third Issue); and
• Whether an extension of time should or could be made pursuant to section 588FM of the Act (Fourth Issue).

The Court’s findings

Acting Master Strk found in favour of the Company and its liquidators.

With respect to the First Issue, the Court held that the rental agreements gave rise to Security Interests as PPS leases within the meaning of section 13(1)(d) of the PPSA. That finding was made on the basis that the rental agreements constituted leases of goods for terms of up to 1 year in circumstances where the Company had, with the consent of NFT, retained uninterrupted (or substantially uninterrupted) possession of the claims for a period of more than 1 year after the day on which the Company first acquired possession of the Cranes. Central to this finding was:

• The Court’s determination that the rental agreements had not, despite NFT’s contentions to the contrary, been terminated on 16 January 2016, or at any time prior to the Appointment Date. The evidence before the Court did not sustain NFT’s claims that the rental agreements had been terminated at a meeting between the parties’ representatives in Singapore on 16 January 2016; and
• The Court’s rejection of additional arguments that had been made by NFT regarding termination of the rental agreements, those arguments having been made with a view to avoiding a finding that the rental agreements constituted PPS leases.

The first of those arguments was to the effect that the rental agreements commenced at the date of delivery of the Cranes by NFT to the Company, rather than the earlier date of the rental agreements). The second argument was to the effect that the termination of the rental agreements had occurred contractually, and potentially automatically, by reason of the Company’s default pursuant to the rental agreements. The final argument was that the rental agreements had terminated ‘as a matter of law’.  Those arguments failed by reason of the specific terms of the rental agreements and, in addition, NFT’s failure to engage in any formal or unequivocal conduct or action that was suggestive of NFT having made an election to terminate the rental agreements prior to the Appointment Date.

In relation to the Second Issue, the Court held that, at all material times up to and including the Appointment Date, NFT had not been in possession of the Cranes and that it had not taken any active steps to retake possession of the Cranes. The Court further held that, as at the Appointment Date, NFT had failed to perfect its Security Interests by way of registration of financing statements on the PPSR. On that basis, NFT’s Security Interests in the Cranes remained unperfected immediately prior to and as at the Appointment Date.

The Court’s finding in relation to the Third Issue followed from the findings described above, the Court holding that NFT’s unperfected Security Interests in the Cranes vested in the Company immediately prior to the appointment of the administrators on the Appointment Date.

With respect to the Fourth Issue:

• The Court held that NFT’s application for an extension of the date for registration under section 558FM of the Act failed as that provision had no application in circumstances where, immediately prior to and as at the Appointment Date, NFT’s Security Interests existed and remained unperfected;
• The Court confirmed that an order under section 588FM of the Act effects the date by which a financing statement must be entered to avoid the vesting of a security interest under section 588FL of the Act;
• The Court accepted the liquidators’ submission that section 588FM of the Act was inapplicable in the circumstances by virtue of the fact that section 588FM of the Act, by its terms, seeks to protect a perfected security interest from vesting under section 588FL(4) of the Act — it does not afford protection to an unperfected security interest from the consequences of vesting under section 267(2) of the PPSA;
• The Court held that, notwithstanding NFT’s submissions to the contrary, the decision in Mentha, in the matter of Arrium Limited [2016] FCA 972 was not relevant or applicable in the circumstances. That was so on the basis that the security interest considered in that case had been created after the “critical time” for the purposes of section 558FM(2)(a) of the Act. In the case of NFT, its Security Interests had been created prior to the critical time; and
• Finally, the Court held that, in any event, even if it were the case that an order under section 588FM of the Act could be made with respect to NFT’s Security Interests, such an order could not be justified on the basis of inadvertence. That finding rested upon the Court’s determination that, on the evidence before the Court, NFT knew or ought to have made itself aware of the requirements of registration on the PPSR and the implications of late registration.

Key takeaways 

The decision in NFT Specialized Tower Cranes LLC v Machforce Pty Ltd (In Liquidation) & ors [2017] WASC 95 provides yet another reminder of the consequences that may flow from the failure by a secured party to perfect its security interests.  It affirms that section 267 of the PPSA cannot be softened, ameliorated or rendered inoperative by the grant of relief under section 588FM of the Act.  Put simply, when s267 of the PPSA bites…588FM of the  Act cannot save you!

This article was written by Richard Johnson, Partner.