Legal E: How Safe Are Your Assets?

Most of us take it for granted that if we buy real estate our interest in that property is automatically registered on a central register to protect our interest in it.  Similarly, if we offer real estate as security for borrowings a lender can protect its interest by registering a mortgage.

The Personal Property Securities Register (‘PPSR’) commenced operation nearly three years ago (30 January 2012) to allow a similar level of security over goods that are not attached to land.  An interest in property such as crops, livestock, motor vehicles and financial products can now be noted on the PPSR. 

Many of you will already be familiar with the operation of the PPSR.  The PPSR creates a hierarchy of interests in property and depending on the nature and timing of the registration one party can exercise rights in relation to property in priority to other parties.  Just being the legal owner of the property does not mean you will have priority over others.

A recent decision of the Victorian Supreme Court underscores the fact that the PPSR has forever changed the way in which property rights are now protected.  The decision confirmed that no matter what contractual arrangements you may have entered into, if you:

a) own goods; and

b) the goods are in the possession of another party; and

c) you have not registered your interest in those goods on the PPSR within the set timeframe,

you run the risk of having your right to the goods extinguished. 

The Case

(Carrafa, Gountzos & Lofthouse (as liquidators of Relux Commercial Pty Ltd (in liq)) & Anor v Doka Formwork Pty Ltd [2014] VCS 570)

Doka Formwork Pty Ltd (‘Doka’) leased more than one million dollars worth of equipment to Relux Commercial Pty Ltd (‘Relux’). 

Valid written leases were entered into incorporating Doka’s terms and conditions which purported to protect its right to re-possess the leased equipment in certain circumstances.  Doka also registered their interest in the property on the PPSR.

Relux subsequently went into liquidation.

The court was asked to decide who had the right to ‘possess and deal’ with the leased equipment: the lessor or the now-insolvent-lessee.

The legal question centered on section 588FL of the Corporations Act 2001 (Cth) which provides that goods not registered on the PPSR within set timeframes are to vest in a company that is being wound up or entering administration.  The relevant timeframe in this case was ’20 business days after the security agreement….came into force’. 

Doka registered their security interest on the PPSR on 20 February 2014.  Based on Doka’s lease terms, which defined the commencement of any lease period as ‘the date [on] which the ordered material le[ft] the Doka warehouse’, the first lease of equipment was held to commence on 21 January 2014.  Doka registered their interest on 20 February 2014.   Twenty one business days after the lease was held to commence.

On that fact alone, the court held that the property vested in Relux on the day on which administration began.  In the words of Justice Sifris: “the effect of these provisions is to extinguish the lessor’s interest in the property where it is not registered within time.

How does this affect me?

The bottom line is: If you or your clients are involved in leasing anything that you can’t afford to write off, then effective and timely registration of your interest on the PPSR is absolutely paramount.  It is now as much about the process as it is about the substance of the right.

It is worth remembering that the PPSR does not only affect straightforward leases of goods.  It has the potential to affect any good which is not in your physical possession.  This could include for example, crops grown or livestock held by a lessee on leased land where the lessor has entered into administration [i] or the storage of goods, such as grain, at a storage facility.

The safest and simplest course is simply to register your interest in property on the PPSR as soon as it arises.

If you would like more information about how the PPSR might impact on you or your clients, please call any of the contacts listed below:

Greg Arthur, Partner

Mellor Olsson Lawyers

Phone: 08 8414 3422

Email: garthur@mellorolsson.com.au

 

Philip Page, Partner

Mellor Olsson Lawyers

Phone: 08 8414 3441

Email: ppage@mellorolsson.com.au

 

Andrew Smith, Solicitor

Mellor Olsson Lawyers

Phone: 08 8414 3549

Email: asmith@mellorolsson.com.au

 

Kate McShane, Solicitor

Mellor Olsson Lawyers

Phone: 08 8682 3133

Email: kmcshane@mellorolsson.com.au

Or visit www.mellorolsson.com.au

[i] Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51.

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