Who will win in a PPSA dispute over an unperfected security interest? Part one

There have now been a number of cases decided about some of the finer points arising under the Personal Property Securities Act, 2009 ("the PPSA"). 

In a recent decision of the Supreme Court of Western Australia,  Flown Pty Ltd v Goldrange Pty Ltd [2016] WASC 419, Master Sanderson was called on to determine a dispute between a lessor of plant and equipment valued at $460,000 and the administrator of the tenant. 

Background

The landlord of premises loaned $460,000 to the tenant to enable the tenant to purchase the plant and equipment to be used in the tenant's business (which was to be conducted at premises that were leased from the landlord). 

The loan agreement included a charge in favour of the landlord over the plant and equipment. 

As readers will know, a charge over personal property is a security interest under the provisions of the PPSA. 

However, the landlord failed to register its security interest in the plant and equipment on the Personal Property Securities Register (PPSR).

The tenant found itself in financial difficulties, and was placed into administration on 15 July 2016.

Immediately before the appointment of an administrator over the tenant, and with the landlord apparently being aware of the imminent collapse of the tenant's business, the following occurred:

• The landlord purported to give the tenant a notice terminating the lease. However, the notice of termination was not validly served and was insufficient to terminate the lease of the premises.
• Relying on a clause in the lease (where rent is in arrears or unpaid for seven days), the landlord purported to re-enter the leased premises, causing the lease to end.
• At about 11:30 am on 15 July 2016, the landlord and its builder attended the premises to change the locks. However, they were denied access by the tenant and the locks were not changed. 
• At about 1.00 pm on 15 July 2016, the landlord attached a 'notice of re-entry' to the premises (which stated that the landlord has re-entered the premises and retaken possession from the tenant).
• At approximately 1.00 pm on the same day, the tenant was put in administration.
• The next day the landlord cut the locks and entered the premises.

The landlord argued that it had a perfected security interest under section 21 of the PPSA because it had possession of the plant and equipment, having taken possession of the leased premises. As a result, it sought to resist the administrator's claim. 

The administrator claimed that the landlord's security interest in the plant and equipment was unperfected.

Under section 267 of the PPSA, where a security interest is unperfected and the grantor (here, the tenant) enters into administration, the unperfected security interest vests in the grantor and passes to the administrator. The secured party (here the landlord) is then only able to prove in the administration for the amount owed as an unsecured creditor.

Under section 21(2)(b) of the PPSA, possession of the assets cannot be as a result of seizure or repossession. 

The landlord argued that it was not in contravention of section 21(2)(b) because it:

• was in constructive possession of the plant and equipment from 11.30 am on 15 July when it attempted to re-enter the premises with the builder to change the locks; and 
• did not seize or repossess the plant and equipment; rather, it exercised a lawful right to re-enter the premises and as a consequence came into possession of the plant and equipment.

The Court held that possession of the plant and equipment means both apparent and actual physical possession by the secured party.

By placing the 'notice of re-entry' on the premises the landlord did not take physical possession of the premises. The notice did not equate to the landlord having actual physical possession of the premises. 

At paragraph 35 of the judgment, Master Sanderson held: 

35 It is clear the [landlord] was not in actual possession of the fixtures and fittings as at the time of the appointment of the administrator. Accordingly, the unperfected interest passed to the administrator and does not provide any entitlement to the [landlord] to actual possession of the fixtures and fittings.

Commentary 
This case serves as a reminder to anyone who has a security interest in fit-out or plant and equipment, or any other personal property: 

• The security interest being claimed must be documented appropriately in accordance with the PPSA, and 
• The security interest must be registered on the PPSR to be perfected.

Taking these two simple steps will avoid costly (and in this case ultimately unsuccessful) legal disputes.

WG Stark 
Hayden Starke Chambers