Beach J’s decision outlines the reasons why a mere contractual indemnity does not amount to a registerable security interest.
Vexatious litigant and undischarged bankrupt, Andrew Garrett, registered two financing statements on the PPSR, claiming a security interest in respect of the property of the plaintiffs.
The first and second plaintiffs wrote to Mr Garrett making an amendment demand under s 178(1) of the PPSA seeking removal of the registration.1
The demand was not complied with and on 1 May 2016, Mr Garrett purported to appoint himself as the managing controller of each of the plaintiffs.
Registering a security interest under the PPSA
To be capable of registration under the PPSA, a security interest must:
- be an interest in personal property provided for by a transaction; and
- secure payment or performance of an obligation.
The transaction that gives rise to the security interest must be consensual.
A right or interest that is created, arises or is provided for by operation of the general law is not capable of being registered.
A security interest will only exist where there is a current and active obligation extending from the grantor to the secured party.
Was there a security interest?
The defendants submitted that the foundation for the asserted security interest was a Settlement Deed between Mildara Blass Ltd. (MBL), Mr Garrett, his wife and related entities and trustees (AMG Entities).
More particularly, Mr Garrett argued that clause 17.3 of the Deed gave rise to a security interest.
The relevant clause provided for a contractual indemnity, as follows:
MBL indemnifies the AMG Entities against all actions proceedings claims demands or prosecutions of any kind or nature and howsoever arising by whomsoever and whenever brought or commenced against or incurred by the AMG Entities (or their agents and employees) and also against all costs and damages and expenses which the AMG Entities may pay or be made liable to pay in defending or settling the same arising directly or indirectly out of the registration or use by MBL of the Andrew Garrett Trade Mark, the Garrett Trade Mark, the Garrett Family Trade Mark or the Stylised Script Trade Mark in the MBL Territory or arising directly or indirectly from any act or omission of MBL or any of its agents, representatives, employees or servants in relation thereto.
Beach J held that the defendants did not have any security interest over any of the assets of the plaintiffs let alone one that was capable of registration.
In his judgment, Beach J made the following remarks:
- An indemnity is not a security interest for the purposes of the PPSA;
- An indemnity is contractual. It is a promise by one party that it will keep the other harmless against loss that may arise as a result of entering into a transaction;
- The fact that some of the plaintiffs are or once were parent companies of others is insufficient to create a security interest.
- Security interests that arise ‘as a matter of equity and law’ cannot be registered;
- As none of the plaintiffs were indebted to Mr Garrett there was no payment or obligation of the plaintiffs to be secured; and
- If Mr Garrett had a security interest it would have vested in his trustee in bankruptcy.
Appointment as Managing Controller
Beach J held that Mr Garrett’s purported appointment as Managing Controller of the plaintiff companies was invalid for two reasons. Firstly, there was no valid contractual or legislative foundation for the appointment. Secondly, an undischarged bankrupt cannot validly act as a Managing Controller.
The decision is part of the evolving body of PPSA case law.
This article was written by Courtney Johanson, Solicitor and David Colovic, Partner.
1Pursuant to that section, a person with an interest in collateral described in a registration with respect to a security interest may give a demand, in writing, to the secured party for a financing change statement to be registered to amend the registration, including an amendment to remove the registration.