What is the doctrine of marshalling?

In my post dated 12 April 2013 (see: https://melbournepropertylaw.blogspot.com/2013/04/are-there-any-recent-decisions-about_12.html), I discussed the doctrine of marshalling and its potential impact in modern lending law. 

Another example of the relevance of the doctrine of marshalling arose in the May 2019 Court of Appeal decision in Burness (in their capacity as trustees of the bankrupt estate of Love) v Hill [2019] VSCA 94. 

A lawyer, Hill, was engaged by Mr Love to conduct extensive litigation against VicRoads relating to the compulsory acquisition of land owned by Love in Epping, Victoria.

The litigation conducted by Hill on Love’s behalf was lengthy, costly and complex. Although Love was land-rich, it appears that he needed to borrow in order to fund the litigation. Accordingly, Love borrowed about $12 million from the Commonwealth Bank of Australia (‘CBA’) and gave a first mortgage over each of the Epping properties to CBA to secure the loans.

Hill held a second mortgage over Property A, belonging to his client, Love, in respect of unpaid legal fees. Love had become bankrupt, and as a result was not in a position to pay Hill's fees.  

The CBA held a first mortgage over Property A. It also held mortgages over other properties owned by Love, over which Hill did not hold a mortgage. 

The CBA sold Property A, and no proceeds were left to satisfy Hill’s debt. As a result, Hill's second mortgage was discharged automatically at the settlement of the sale (see section 77(4) of the Transfer of Land Act, 1958).

Hill had previously sued Love in the County Court, and obtained judgment for $2.2 million in fees. 

CBA sold Property B. Following payment of all secured indebtedness due to CBA, there were surplus sale proceeds which were paid into Court by CBA. 

Hill then brought proceedings in the Supreme Court to marshal the CBA’s securities to discharge his judgment debt.  

Justice Sifris in the Supreme Court of Victoria confirmed that Hill was entitled to be subrogated to the CBA’s first mortgage over Property B, to the extent of the debt previously secured by Hill’s second mortgage over property A (see (2018) 53 VR 459). The Trial Judge ordered that Hill's claim (and his costs on an indemnity basis in accordance with the terms of Hill's mortgage) be paid from the surplus sale proceeds.

Love’s trustees in bankruptcy appealed against the orders made by Sifris J. 

The Court of Appeal dismissed the trustees' appeal. Justices of Appeal Kaye, McLeish and Hargrave quoted (at paragraph 33 of their judgment) from Lord Neuberger’s speech in National Crime Agency v Szepietowski [2014] AC 338: 

Marshalling [is] allowed to a creditor, in a case where (i) his debt is secured by a second mortgage over property (‘the common property’), (ii) the first mortgagee of the common property is also a creditor of the debtor, (iii) the first mortgagee also has security for his debt in the form of another property (‘the other property’) (iv) the first mortgagee has been repaid from the proceeds of sale of the common property, (v) the second mortgagee’s debt remains unpaid, and (vi) the proceeds of sale of the other property are not needed (at least in full) to repay the first mortgagee’s debt. In such a case, the second mortgagee can look to the other property to satisfy the debt owed to him.

The Court of Appeal also noted that when dealing with the reason for the doctrine later in Szepietowski, Lord Neuberger quoted from a broad statement by Joseph Story in his text, Commentaries on Equity Jurisprudence:

The reason is obvious… [By] compelling [the first creditor with the two securities] to take satisfaction out of one of the funds no injustice is done to him … But it is the only way by which [the second creditor with one security] can receive payment. And natural justice requires, that one man should not be permitted from wantonness, caprice, or rashness, to do injury to another.

At paragraph 49 of their judgment, the Court of Appeal further quoted Lord Neuberger in National Crime Agency v Szepietowski [2014] AC 338, where he stated:    

... The right to marshal is based on a simple principle, and there is no reason to dilute it in the way contended for ... After all, the right to marshal is not based on the proposition that the first mortgagee is under an obligation to sell the other property first ... Further, if [the] contention were accepted, one can readily imagine all sorts of arguments as to whether one property is more difficult to sell than another, and whether the extent or nature of the difficulty is such as qualifies for the purposes of the contention.

At paragraph [54], the Court of Appeal noted that the only bases to avoid the marshalling doctrine is a contractually enforceable arrangement, binding estoppel, or a legislative obligation.  

While the Trial Judge and the Court of Appeal dealt with a unique set of facts, the Court of Appeal’s reasons contain a number of relevant principles that will apply generally.

First, the requirements to invoke the doctrine of marshalling are those quoted above in Szepietowski.  The Court of Appeal specifically found that there is no independent requirement that the first mortgagee’s conduct be arbitrary or capricious.  

Secondly, securities can be marshalled to discharge the whole of a fluctuating debt even if the debt increases after the sale of the principal security property.

Thirdly, the County Court consent judgment [relating to the quantum of Mr Hill's legal fees] in this case did not extinguish the secured debt.  A debt merges in a judgment and continues its existence in that merged form – it is not retrospectively extinguished. The debt remained secured, and able to support a marshalling claim.

Solicitors acting for subordinate security holders should keep marshalling in mind. If it is available, it can significantly improve a second (or even later) mortgagee’s prospects of recovery. 

The doctrine is particularly attractive where a debtor is insolvent (as with Mr Love here) as it should give a second mortgagee priority over unsecured creditors. 

WG Stark 
Hayden Starke Chambers

When will the registration of my security interest under the Personal Property Securities Act 2009 expire?

The Personal Property Securities Register ("PPSR") commenced operation on 30 January 2012. 

A large number of securities registered under that Act by financiers were for 7 years. 

As a result, there will be a significant number of registered security interests automatically expiring on 30 January 2019.

Any security holder should be reviewing their registrations regularly and deleting registrations that are no longer applicable. 

However, there is no warning provided by the PPSR that registrations are about to expire. Therefore, security holders who take no action in respect of registrations that are due to expire may find themselves without security from 31 January 2019. 

Readers should note that current registrations can only be re-registered if they remain current. 

Therefore, if a registration expires, a security holder will have to register a new security interest; this may result in a loss of priority if there are subsequent security interests lodged in respect of the secured personal property. 

I urge all security holders to check their registrations on the PPSR regularly. 

In particular, I urge all security holders who lodged seven year registrations in 2012 to check that those registrations are still current, and if so to take steps to reregister them. 

WG Stark 
Hayden Starke Chambers

Have there been any recent updates to the Personal Property Securities Register website?

The Australian Financial Services Authority has updated its 9 minute power point presentation on the Personal Property Securities Act. See: https://bit.ly/2IYWNf8

The AFSA claims that this is a handy resource for PPSR practitioners to use when educating clients or new staff about the PPSR and its implications for businesses selling or hiring on terms. 

There is also a PPSR Industry information section on the website, which includes a space for comments, suggestions and improvements to be left. see: https://bit.ly/2HnmEAd

WG Stark 
Hayden Starke Chambers

New definition of PPS Lease under the PPSA is now law

Further to my post on 12 May 2017 (see: http://bit.ly/2qRldhJ), the new definition of 'PPS Lease' under the Personal Property Securities Act 2009 (PPSA) came into effect on 20 May 2017.

As a result, section 13 of the PPSA now extends the minimum duration of PPS leases from more than one year, to more than two years. 

The Act also now makes it clear that leases of an indefinite term will not be deemed to be PPS leases unless and until they run for a period of more than two years. 

W G Stark 
Hayden Starke Chambers

When will the PPSA be amended to extend the minimum duration of PPS leases to 2 years?

According to the PPSR web site (see: https://www.ppsr.gov.au/blog-speeches/pps-leases-bill-passed-australian-parliament) yesterday the Personal Property Securities Amendment (PPS Leases) Bill 2017 (Cth) was passed by the Australian Parliament.

This Bill amends section 13 of the Personal Property Securities Act 2009 to extend the minimum duration of PPS leases from more than one year, to more than two years. 

This Bill also amends the Act to provide that leases of an indefinite term will not be deemed to be PPS leases unless and until they run for a period of more than two years.

The second reading speech claims that the Bill will significantly reduce the regulatory impact which the Act is having on short term hire and rental businesses, the majority of which are small to medium enterprise. 

The hire and rental sector almost exclusively uses indefinite term leases which usually run for less than a week and rarely exceed a period of two years. 

Very few hire and rental industry related transactions would be caught by the amended provision due to the increased minimum duration. 

Section 13 of the Act as amended will continue to capture longer term high value hire and rental industry leases appropriately. 

In the next few days, it will go to the Governor-General of the Commonwealth of Australia to receive Royal Assent.

The Bill will commence operation the day after it receives Royal Assent; this will be notified via further announcements on the PPSR website and PPS Register. 

WG Stark 

Hayden Starke Chambers

Can I rely on the transitional provisions of the Personal Property Securities Act 2009 to enforce an unregistered security interest?

The transitional provisions of the Personal Property Securities Act 2009 (Cth) (PPSA) and their application to retention of title clauses were considered by the Victorian Court of Appeal in Central Cleaning Supplies (Aust) Pty Ltd v Elkerton (in His Capacity as Joint and Several Liquidator of Swan Services Pty Ltd (in Liq)) [2015] VSCA 92. 

Background
Central Cleaning Supplies (Aust) Pty Ltd ("Central") supplied cleaning equipment to Swan Services Pty Ltd ("Swan") from around 2009. Each supply of equipment included a retention of title clause ("ROT") in the invoice. 

Swan went into liquidation owing Central a sum of money for unpaid invoices for the period from November 2012 to May 2013. 

Central sought to enforce the ROT clause and reclaim its equipment. 

As readers will know, the PPSA covers a wide range of security interests, including rights under a ROT clause. The legislation makes it clear that a security interest will only be enforceable against a liquidator if that security interest is perfected. That would normally require the security interest holder to register its interest on the Personal Property Securities Register ("PPSR"). 

Central did not register its security interest on the PPSR. Instead it sought to rely on the transitional provisions of the PPSA, which were designed to protect security interests which had been created, or provided for, before 30 January 2012. 

The issue in the appeal was whether Central’s security interest in the equipment supplied after 30 January 2012 was ‘provided for’ by an arrangement entered into between Central and Swan in September 2009 for the supply of equipment on 30 day credit. 

Central claim could only succeed if it could show that this credit arrangement was a ‘security agreement [which] provided for the granting of’ a security interest in equipment supplied in the future.

Justice Ferguson at first instance rejected Central’s claim, holding that the credit arrangement did not ‘provide for’ the granting of the security interests in the future. 

The Court of Appeal decided that the terms on which Central agreed to provide credit to Swan included provision for the ROT clause as a standard term of each future supply of equipment. 

Accordingly, they allowed the appeal. 

In analysing the transitional arrangements, the Court of Appeal noted at paragraph 20: 

Plainly enough, what this provision contemplates is:

• a security agreement in force before the commencement time (although continuing thereafter);

• a security interest arising after the commencement time; and

• the qualifying relationship between the agreement and the interest being that the agreement ‘provides for the granting of the security interest’.

Thus understood, a security agreement — in this case, a transitional security agreement — will ‘provide for’ a security interest if it ‘provides for the granting of’ the security interest at some time in the future.

The Court went on to note that on this analysis, the relevant definitions will be satisfied if the agreement or act said to constitute the transitional security agreement makes provision for the grant of future security interests in goods supplied. It is of critical importance, therefore, to determine when and how the agreement between Swan and Central was made, in order to determine whether or not it made such provision. 

In a relatively short judgment, Maxwell P and Tate and Beach JA unanimously concluded at paragraph 39: 

It is clear that, in its terms, each ROT clause had application only to the invoiced goods the subject of the particular supply. The result of the contractual analysis, however, is that:

• Swan’s application for credit included an undertaking to be bound, in respect of every supply of equipment, by Central’s standard terms of supply;

• the ROT clause was in existence, as a standard term of supply, at the date on which the credit agreement became binding on Swan, being the date on which Swan received the first invoice for equipment supplied; and

• under that agreement, Swan accepted that all future supplies of equipment would be governed by that standard term (which would be expressed in each case to relate to the particular equipment supplied).

In those circumstances, the Court of Appeal allowed the appeal and decided that an agreement came into force — at the time of the first supply of equipment — which did ‘provide for the grant of’ a security interest in relation to all future supplies of equipment. That agreement was a ‘transitional security agreement’, and each of the security interests granted in respect of equipment supplied subsequently was a ‘transitional security interest’. 

Central was therefore able to enforce the ROT clauses notwithstanding the absence of registration.

Conclusion 
Although this decision allowed Central to enforce its ROT, it still highlights the importance of registering security interests arising from retention of title clauses on the PPSR to perfect that security interest.

Without the transitional provisions of the PPSA, Central would not have been able to enforce its ROT clause.

It should also be noted that the transitional provisions under the PPSA have now expired, so it is now unlikely that there will be further successful claims under those provisions.

WG Stark 
Hayden Starke Chambers

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

I recently posted about a case dealing with an unperfected security interest under the Personal Property Securities Act, 2009 ("the PPSA"). 

In Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd, in the matter of Australian Gaming and Entertainment Ltd (in liq) [2014] FCA 1034, the Federal Court of Australia delivered another decision confirming that a failure to perfect a security interest properly in the shadow of insolvency, will result in the vesting of the personal property in the insolvent estate. 

Regular readers will recall that the PPSA introduced concepts of 'attachment' and 'perfection'. 

The interest of a creditor in personal property 'attaches' to the property when the relevant financing transaction occurs. 

However, the security interest remains 'unperfected' until the person claiming the security interest takes further steps to perfect their interest. 

Background

Mr and Mrs Pozzebon are the joint trustees of the Pozzebon Family Superannuation Fund. They loaned $250,000 to Australian Gaming and Entertainment Ltd (AGE) on 24 December 2013. 

The money was paid over and a security agreement was executed that day. 

As a result, the security interest 'attached' to the relevant personal property on that day. 

However, the security interest was not registered on the Personal Property Securities Register ("PPSR") until 19 May 2014. 

Seven days later, on 26 May 2014 (five months after attachment of the security interest) AGE was placed into voluntary administration. It was placed into liquidation on 1 July 2014.

At the time of liquidation, AGE had $860,000 standing to its credit in a bank account. Nearly $350,000 (including accrued interest and costs) of this fund was the personal property over which the parties were fighting. 

Section 588FL of the Corporations Act 2001 (Cth) (Corporations Act) relevantly provides that if a company is placed into administration or liquidation (insolvency event) and a security interest may be perfected by registration (and by no other means), then if registration did not occur within twenty business days of attachment and an insolvency event occurs within six months thereof, the interest in the personal property vests in the company in administration or liquidation. 

Similarly to the case about which I posted yesterday, unless the lender in this case could demonstrate 'perfection' of its security interest by means other than registration, the personal property sought to be secured would vest in the liquidator because it was not 'perfected' in time.

The security interest holder was unable to show that it had possession or control of the relevant collateral. It was also unable to prove temporary perfection of its security interest. 

Collier J noted at paragraph 35 that: 

The substance of the applicant’s case is that because the relevant security interest was perfected by attachment and enforceability and effective registration, the circumstances have taken the method of perfection outside the parameters of s 588FL(2)(a)(ii). They support this contention by submitting that attachment and enforceability are not always necessary for perfection, and that an example of this is in respect of temporary perfection of which attachment and enforceability are not necessarily elements.

Therefore, it argued that its security interest prevailed over the interest of the liquidator. 

The Federal Court rejected the security interest holder's statutory construction, and decided that although the applicant's security interest attached, it was not perfected within twenty business days of that attachment. 

As it was created within six months prior to the administration of AGE, the security interest was unenforceable against the liquidator and the personal property vested in the insolvent estate.

Conclusion 

The decision confirms how important it is for holders of security interests to take all steps necessary to ensure that they perfect that security interest within the limited time frames provided for in the legislation. 

W G Stark 
Hayden Starke Chambers 

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