Q&As

'Personal Property Securities and a Receiver’s lien'

Tuesday October 28, 2014

The below article from 21 October 2014 has been provided by Leigh Adams Lawyers.

 

The recent case of  Re Arcabi Pty Ltd; ex parte Theobald [2014] WASC 310, a decision handed down 4 September 2014, is an interesting insight as to how the Courts will interpret the interaction between the rights of secured creditors under the Personal Property Securities Act 2009 (PPSA) and the rights of an external controller to a lien over property (whether or not the subject of such a security). It also clarifies the application of the PPSA to bailments and consignments.

Facts

The business of Arcabi included the storage and sale of rare coins and bank notes (Goods). The Goods were stored in Albany WA (the Premises). Many of the Goods were owned by third parties (Investors).

Arcabi defaulted on its loan from Westpac (the Bank) which had a perfected general security interest over all Arcabi’s present and after acquired property. Could the Bank’s receiver take the Investor’s Goods and sell them and apply the proceeds to reduce the indebtedness of Arcabi to the Bank? To answer this question, the Receivers applied to the Court for directions under s 424 of the Corporations Act.

The Goods were broadly of two types. Firstly “Mixed Storage Goods”:  the arrangement here was that these Goods were stored only, and the Investors owning the Mixed Storage Goods were charged a storage fee and issued with an invoice.

The second type were “Consignment only Goods”. These Goods were part of an arrangement between Arcabi and some Investors whereby the Investor in each instance requested Arcabi to sell the Goods on consignment (to either third parties or Arcabi itself if it chose to buy them). These Goods had not been sold at the time of the appointment of the liquidators and remained at the Premises at that time.

 

Bailment

The Court noted that the arrangement in relation to the Mixed Storage Goods was arguably a bailment.  If the bailment secured payment or performance of an obligation, then it gave rise to a security interest under s 12 of the PPSA and enlivened the operation of its priority provisions.

The Court accepted that over the years, overseas courts have accepted four factors as being indicative of a bailment arrangement securing payment or performance of an obligation, those factors being:

(i) Where the bailment provides that the ownership of Goods would vest in the bailee on the expiry of the bailment;

(ii) Where the bailee would have an option or obligation (at any time) to purchase the Goods;

(iii) Where the term of the arrangement was likely to be for the major part of the economic life of the Goods;

(iv) Where the minimum payments under the bailment amount substantially to the cost of the Goods.

None of these indicia applied in this case.

But was the bailment a PPS lease under s13? If so, it would be deemed to give rise to a security interest and therefore enliven the operation of the priority provisions of the PPSA.

One of the requirements for a bailment to be a deemed a PPS lease is that the bailor must be regularly engaged in the business of bailing goods.

The Court found that there was no evidence that the Investors were regularly engaged in the business of bailing goods. They were in the business of profiting from the exchange of rare coins and bank notes. The issue of the bailment was merely incidental to this main purpose.

 

 

Consignment

The Court then turned to the Consignment Only Goods.

Generally, as the reader would be aware, consignments are to be distinguished from retention of title (RoT) arrangements. RoT arrangements provide for title to pass only when full payment has been received. RoT arrangements do secure payment or performance of an obligation.

Nevertheless, if the consignment in substance secured the payment or performance of an obligation, then s 12(2)(h) of the PPSA provides that the operation of the priority provisions of the PPSA would be enlivened.

The cases in Canada indicate that there are fifteen indicators relevant to determining whether a consignment exists under the Canadian equivalent to our PPSA.  His Honour considered all of them in this  case.

They are:

(a)        the merchant is the agent of the supplier;

(b)        title to the goods remains in the supplier;

(c)        title passes directly from the supplier to the ultimate purchaser and does not pass   through the merchant;

(d)       the merchant has no obligation to pay for the goods until they are sold to a third    party;

(e)        the supplier has the right to demand the return of the goods at any time;

(f)        the merchant has the right to return unsold goods to the supplier;

(g)        the merchant is required to segregate the supplier’s goods from his own;

(h)        the merchant is required to maintain separate records;

(i)         the merchant is required to hold sale proceeds on trust for the supplier;

(j)         the goods are shown as an asset in the books and records of the supplier and are not          shown in the books and records of the merchant as an asset; and

(k)        the supplier has the right to stipulate a fixed or floor price.

 

Whilst not all of the criteria were met in this instance, the Court was generally satisfied that the facts gave rise to a consignment. But the Court held that the consignment did not in substance secure payment or performance of an obligation because:

(i)         the Goods were not held as security for a debt as no moneys were payable by        Arcabi unless or until it sold the Goods, but title by that time would have passed to             the third party purchaser;

(ii)        if an item was not sold then title would remain with the Investor and there was no            obligation on the part of Arcabi to pay the Investor;

(iii)       the Investor remained entitled to take back its consigned Goods – even in circumstances where all that was involved was a change of mind on behalf of the            Investor.

Furthermore, the Court applied the doctrine of ‘mutual advantage’ - developed in Canada -  and noted that the arrangement provided that Arcabi had the advantage of more stock to promote and sell without the need to buy it and the Investor had the advantage of realising their investment through Arcabi with its client base and knowledge of the market base for a certain sum.

The Court held that where this doctrine applies, it is indicative of the non-existence of an in-substance security interest and suggests that the arrangement between the parties was intended for a purpose other than to secure payment or the performance of an obligation.

Again, the Investors’ interests prevailed on this point.

 

Commercial Consignment

Was there a “Commercial Consignment?” If the consignor and the consignee both deal in goods of that kind in the ordinary course of business, then there is a commercial consignment (see the definition in s 10 of the PPSA). The Court was of the view that this qualification is designed to confine the automatic application of the PPSA to situations in which consignment is used as a means of acquisition of trading stock.

However the evidence supported the fact that the majority of Investors did not regularly deal with rare coins and bank notes in the ordinary course of their business. Many in fact had dealt with rare coins and bank notes as a hobby only.

In any event, Arcabi was generally known to its creditors to be selling the goods of others and the Court held that the definition of commercial consignment in s 10 was not met on this ground as well.

Therefore the PPSA did not apply to the Investor’s Goods. Even if there was a commercial consignment, it would still have to secure the payment or performance of an obligation to capture the operation of the Act.

 

Conclusion for bailments and consignments

So the Investors were not sunk by the provisions of the PPSA and were allowed to keep their Goods in this instance, subject to some riders explained in more detail below.

On this point the case confirms what many legal advisors have expected – that businesses like those offering storage services including businesses storing, for example, furniture for travellers, old & completed files for professionals, and other similar businesses like those running bus depots, will likely not be caught by the provisions of the PPSA. It is interesting to note that the Court did not consider the meaning of “value” in s 13(3) and decided this issue on other grounds. Section 13(3) provides that a bailment is only a PPS lease (and therefore, a deemed security interest) if the bailee provides “value” and value is defined in s 10 to include any consideration sufficient to support a contract. To be consistent with the Arcabi conclusion, that should just mean ‘money’. In the Arcabi case, it was the bailor who provided the money. The bailee provided the services. However, this issue is still unresolved for the time being.

 

Receiver’s  indemnity

The Court then considered whether the Receivers were entitled to an indemnity in the form of a lien over the Goods for the work undertaken by them in relation to the Goods.

The Court considered Thackray v Gunns Plantations Ltd [2011] 85 ASCR 144, authority for the proposition that whenever a receiver, receiver and manager, provisional liquidator or liquidator is appointed, he or she has a right of indemnity out of the company’s property for his or her remuneration and costs and expenses. Coad v Wellness Pursuit Pty Ltd (in liq) (2009) 40 WAR 53 confirmed that these principles extend to an out of court receiver.

The Court also noted the dicta of Dixon J in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 who established the  equitable principle that a liquidator can expend a material part of his time and energy in recovering assets enuring for priority creditors. Dixon J argued that the liquidator’s duties must be performed before a surplus might arise to which the unsecured creditors may participate.  His classic dicta concludes that equity mandates that the cost of the work should be thrown upon the proceeds of the assets. Even if no benefit to unsecured creditors eventuates, a lien is not denied.

The issue in this case was whether the Receivers were entitled to an indemnity in the form of a lien over the Goods for their work despite the fact that a substantial amount of that work related to Goods which were eventually held not to be part of Arcabi’s assets.

Having regard to the above principles, the Court concluded that the work of the Receivers in identifying and returning stock which was at the Premises at the time of the plaintiff’s appointment was work properly forming part of the care and preservation of the property of Arcabi. As such, the Receivers were entitled to be indemnified for such work and were entitled to assert a lien to secure such indemnity.

The Receivers had taken possession of a wide range of Goods, and in order to identify the assets of Arcabi, they had to conduct extensive investigations in order to determine which Goods belonged to which Investors and which Goods were unclaimed or otherwise entitled to be treated as part of Arcabi’s assets.

The Court held that the Receivers were entitled to an indemnity in respect to their costs and expenses in arranging insurance in relation to all Goods including those owned by the Investors. Insurance premiums are recognised (as per Thackray (supra) at [87] and [92]) as a proper expense in preserving assets, and obtaining insurance was a reasonable and prudent course of action in this case to protect the company from claims against it should Goods have been lost or destroyed.

As for any unclaimed Goods, the Court considered that the Receivers were justified in treating them as property of the Company to which their lien would attach if after appropriate advertising of the intended sale and writing to the relevant Investors, no relevant response has been received.

Finally, the Court held that the Receivers costs of the proceedings be paid out of the assets of Arcabi as an expense of the realisation of the assets of Arcabi.

Conclusion for receivers lien

It is interesting that whilst the Court clearly accepted the principle that the Receivers were entitled to exercise a lien over the Goods of the Investors in respect to (i)  their costs of and incidental to identifying those Goods and (ii) their costs and expenses referrable to insuring the Investors’ Goods, the orders only fully implemented this principle in respect to ‘(ii)’ but not ‘(i)’, in that the Receivers’ lien for ‘(i)’ was applied to the company’s assets (including Investors’ Goods which were unclaimed), but not to the Investor’s Goods which were claimed.

One can only presume from this result that there were enough funds available to pay the Receivers without having to further white-ant the equity in the Investor’s Goods.

 

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