Are there any cases decided under the PPSA 2012 - part 2?

Re Barclays Bank PLC [2012] NSWSC 1095 (24 August 2012) has become the second case (after Hastie - see my post of 12 September 2012) to consider the Personal Property Securities Act (PPSA) in some detail (although the case is quite short - 19 paragraphs, and relates only to an application to extend time for registration of a financing arrangement, in order to perfect the security interest under the PPSA).

Barclays Bank PLC provided a loan facility for 8 million pounds to Sportingbet PLC. As part of that facility, an Australian subsidiary of Sportingbet, Centrebet, was required to provide security to Barclays. As a part of that security arrangement, Centrebet executed a General Security Deed on 24 April 2012.

Under the Corporations Act, a financing statement under the PPSA (which the General Security Deed would be) was to be registered within 20 business days of the relevant deed coming into force.

Despite specific advice from its Australian lawyers, the UK counsel for Barclays overlooked the registration requirement and failed to take steps to register the deed until 9 August 2012, around two months after the last day on which it should have been registered to avoid 'vesting' under section 588FL(2).

Section 588FL(2) provides that a security interest will 'vest' unless it is registered before the latest of several events, the relevant ones of which were:

• 20 business days after the security agreement came into force; or
• a later time ordered by the court under section 588FM.

As a result of this oversight, Barclays applied (unopposed) to the NSW Supreme Court for an order under section 588FM extending the time for registration of the relevant deed to 9 August 2012.

Section 588FM(2) provides that the court may make an order fixing a later registration time where it is satisfied:

• that the failure to register the collateral by the required time was accidental, inadvertent or not of a nature to prejudice creditors or shareholders; or
• that it is just and equitable to fix such a later time.

Sections 588FL and 588FM were introduced into the Corporations Act by the Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth) (Amending Act). At the same time, section 266 (relating to the registration of charges with ASIC) was repealed.

Justice Black noted (at paragraph 4) that:

The terms of s 588FM are broadly similar to the circumstances in which the court could previously extend the time for lodgement of notice of a charge under s 266(4) of the Corporations Act, and the authorities as to that section will assist in guiding the exercise of the court’s discretion under s 588FM. 

Justice Black was satisfied that Barclay’s failure to register their security interest was ‘accidental or inadvertent’ within the previously understood meaning of those terms. 

Justice Black took notice of the fact that Barclay’s UK counsel had:

- had limited experience in finance transactions, 

- received limited training in the PPSA regime, and 

- only become aware of the timeframe for registration in July 2012, some 2 months after the registration window had actually expired. 

Although noting that the UK counsel could have acted more promptly (paragraph 10) after becoming aware of the registration timeframe, Black J was satisfied that Barclay’s counsel did not then appreciate the potentially serious consequences of late registration. In this regard, Black J expressly acknowledged that such errors are unsurprising during the transition to the PPSA regime.

In considering whether it was appropriate to exercise the court’s discretion, Black J noted, applying principles referred to above under the old section 266, that it was relevant that Sportingbet and Centrebet did not oppose the application, Centrebet was in a strong financial position, there had been no material change in Centrebet’s financial position during the delay period, no security had been granted to third parties during the delay period and no material debt had been incurred during the delay period.

Accordingly, Black J was satisfied that late registration would not prejudice the position of Centrebet’s creditors or disturb or affect any accrued or accruing rights.

WG Stark
Hayden Starke Chambers

How does a court determine whether the negotiations for a lease have ceased and agreement has been reached?

In BBB Constructions Pty Ltd v Aldi Foods Pty Ltd [2012] NSW 224, the New South Wales Court of Appeal considered the situation of parties that had been involved in lengthy negotiations relating to an agreement for lease. Ultimately, the potential tenant walked away from the negotiations, and the potential landlord/ developer sued.

The Court had to decide whether negotiating parties can assume they are bound to an agreement prior to the final signing and exchange of documents.

If parties engage in lengthy negotiations, both in writing and orally, it can be very difficult to know whether they have actually reached an agreement. The courts have concluded that once the negotiations reach agreement on all primary terms (for example, in a lease that would mean the parties, the property, the price and the period of the lease), there is a binding agreement.

In this particular case, Aldi Foods P/L, entered into negotiations with BBB Constructions Pty Ltd, which owned a parcel of land that had been approved for a residential and commercial development. Aldi proposed that it would lease a part of a building on the site that was not in fact part of the original design for the site.As a part of its proposal, Aldi wrote: 'this offer is subject to Aldi board approval'.Aldi and BBB then negotiated extensively to try and finalise an agreement for lease.

While the parties were still negotiating, BBB actually commenced construction works on the site and spent significant amounts of money accommodating Aldi's requirements. Throughout the negotiations, Aldi's negotiator stated a number of times to BBB that the agreement for lease would be signed imminently. 

Despite final copies of the agreement for lease being sent by BBB's lawyers to Aldi in May 2007, a number of issues remained outstanding. 

Possibly due to frustration with the progress of the negotiations, in May 2007, after months of negotiations, BBB entered into preliminary discussions with Aldi's competitor IGA. However, the discussions went nowhere.

In July 2007, BBB's lawyers once again sent final documents to Aldi. Aldi's board did not approve the proposal and informed BBB that it would not be proceeding with the agreement for lease. 

BBB sued Aldi alleging it mislead or deceived BBB or its conduct was unconscionable.

In dismissing BBB's appeal from the dismissal of its claim by the NSW Supreme Court, the Court of Appeal (Basten and Barrett JJA and Sackville AJA) unanimously held that:

• BBB was not misled or deceived because the purpose of the ongoing negotiations was to produce an agreement for lease that was acceptable to both parties and that BBB knew that Aldi's board's approval was a pre-condition to Aldi's commitment. Further, BBB's conduct in relation to its dealings with IGA were not consistent with BBB's argument that it had relied on Aldi's alleged misleading and deceptive conduct;
• BBB had not been induced into believing that an agreement for lease would be executed, as both parties displayed a mutual assumption that the negotiations would continue until a final agreement was produced, and that each party would then make a final decision as to whether they would preceded; and
• as the parties were commercially sophisticated businesses who had employed lawyers to safeguard their own interests, any expense incurred by BBB in constructing the basement (which was to be occupied by Aldi) was for BBB's own commercial advantage. Accordingly, Aldi's conduct was not unconscionable.

Conclusion 

When engaging in negotiations of any kind, it is important to recognise that you may become legally bound to the deal if you are not extremely careful in addressing the issue of when you have reached an agreement.

It is always a good idea to state in writing early for example "We will not be bound by any agreement until formal documents are signed and exchanged".

W G Stark 
Hayden Starke Chambers

PPSR data migration issues update September 2012

This  is a note from the PPSR announcements page.

 

ASIC ARBN/ACN fix

Implementation of the ASIC ACN/ABN data fix (known as CR089) was completed in June. This resulted in changes to 885, 238 registrations migrated from the Register of Company Charges, to replace grantors identified on the PPSR by an ABN with the same grantors identified by an Australian Company Number (ACN), where the grantors had both an ABN and an ACN. As noted on the Announcements page at www.ppsr.gov.au, among the registrations affected were 484 registrations that should have had grantors identified by ARBN (not ACN). The majority of the affected grantors are foreign companies, but included is a small set of Australian non-companies (for example, cooperatives) which should be identified by ARBN. A programmatic solution to substitute ARBN for ACN for the affected entities (known as CR093) was successfully completed on 14 September 2012.

It is still recommended that anyone who had a charge registered at ASIC should check that it is now properly registered on the PPSR. 

W G Stark 
Hayden Starke Chambers 

Can the Commissioner of Taxation receive the proceeds of sale of land in priority to a registered mortgagee?

The recent Full Federal Court decision in Commissioner of Taxation v Park [2012] FCAFC 122 related to an attempt (successful as it turned out) by the ATO to extract a tax payment from a taxpayer from the sale of property in priority to the registered second mortgagee. Although it seems that the decision may be confined to the peculiar circumstances of the case, alarm bells will surely be ringing throughout the lending community about the case.

The dispute was about the priority between the second mortgagee and the Commissioner, who had served the purchasers with a garnishee notice relating to tax debts owing by the vendor. 

The relevant facts of the case were as follows:

• Mrs Bassili, an individual, owned a property at Fig Tree Pocket in Queensland;
• On 19 January 2010 Mrs Bassili and two purchasers entered into a 30 day contract for the sale of the property for $1,675,000;
• The property was mortgaged to National Australia Bank by registered first mortgage, which, at the time of sale, secured approximately $1,289,000;
• Mrs Bassili had also granted a second mortgage to Instyle Developments P/L which, at the time of sale, secured approximately $430,200, meaning there would be a shortfall at settlement of the sale;
• Mrs Bassili was also indebted to the Commissioner for $75,508.64 for a tax debt. The Commissioner had commenced proceedings in the District Court in Queensland, and claimed the balance owing to him was this sum; 
• After the execution of the sale contract but before settlement, on 11 February 2010, the Commissioner issued a s260-5 notice to the purchasers referring to the price payable under the contract of sale, and demanding that the amount owing to the Commissioner ($75,508.64) be paid from funds owing by the purchasers to Mrs Bassili; and
• On 5 February 2010, prior to Mrs Bassili's Bankruptcy, a trustee (Mr Park) had been appointed to take control of Mrs Bassili's property pursuant to section 50 of the Bankruptcy Act 1966 (Cth).  She was eventually bankrupted on 23 April 2010. 

Therefore the dispute was about which claim to the balance of the purchase price took priority. On its face, a registered mortgagee, as a secured creditor, should have priority over the ATO, which is an unsecured creditor. 

However, the settlement of the sale of the property was delayed due to the dispute. To solve the impasse, the second registered mortgagee released its mortgage in exchange for an undertaking that the balance of proceeds of sale would be paid into its solicitors' trust account pending resolution of the dispute.

The Federal Magistrates' Court found in favour of the second registered mortgagee. 

The Commissioner appealed to the Full Court of the Federal Court.

Full Court decision 

The majority of the Full Federal Court (Jessup and Katzmann JJ) found that the Instyle mortgage granted security over the freehold interest in land and did not extend to the right to receive the sale proceeds of the property owing to the registered proprietor.  

Accordingly,  Instyle did not have a beneficial interest in the money owing under the contract of sale.  

As the Commissioner's s260-5 notice required the purchasers to pay their debt to Mrs Bassili by payment to the Commissioner, the Commissioner was able to jump the queue ahead of Instyle.  

The problem for the mortgagee was that the purchasers did not actually owe anything to Instyle as mortgagee.  Mrs Bassili owed money to the mortgagee and the purchasers owed money to Mrs Bassili.  

According to the majority, there was never a point in time when the amount payable by the purchasers became owing to the mortgagee.  

The court recognised that the position would have been different if Instyle had been enforcing its security against the property. 

Siopis J dissented agreeing with the original judgment of the Federal Magistrates Court.

Conclusion

Many mortgages in Victoria include a clause allowing the mortgagee to appoint a receiver to collect money on its behalf, and a clause charging the proceeds of sale in favour of the mortgagee. In those circumstances, the same situation should not arise here. 

If there is a priority dispute arising with the Commissioner of Taxation, the advice to the lender must be: Never release a registered mortgage without actually receiving payment of the amount secured by the mortgage; a payment into the lender's trust account pending the resolution of the dispute will not be enough. 

In an insolvency situation, if the borrower owes money to the Commissioner, and there will be a shortfall to the mortgagee on the settlement of the sale, the lender should not release the mortgage unless it receives the whole of the balance of the proceeds of sale. 

If an impasse results, the mortgagee could take over the sale (assuming the mortgage is in default and appropriate notices have been served), and complete the sale as mortgagee in possession. In those circumstances, no money will be payable by the purchasers to the vendor, and so compliance with the garnishee notice will not be required.

W G Stark

Hayden Starke Chambers