Assignment of security interests and vesting under the Corporations Act and PPSA

In commercial transactions, sometimes a person is required to take over the contractual rights of another person, in the form of debts or other choses in action.  This occurs in loan acquisition transactions where buyers acquire loan portfolios from sellers, debt factoring facilities where buyers acquire the book debts of merchants and in business acquisition transactions where buyers take over the contractual rights and obligations of the sellers, to name a few.

Sometimes the contractual agreements between the original parties give rise to security interests under the Personal Property Securities Act 2009 (Cth) (PPSA) which are registrable in favour of a party.  It is all well and good if that party registers such security interest within the timeframe set out in section 588FL of the Corporations Act 2000 (Cth) (Corporations Act) and before the time for vesting of the security interest in the grantor set out in section 267 of the PPSA.

But what happens if that party fails to register the security interest in time and that party’s rights under the contract are transferred to another party?  Does the transferee get a second chance to register the security interest after the transfer of such rights or does the transferee ‘inherit’ all the transferor’s defects in registration?  

Re Donnelly and Others (in their capacities as joint and several administrators of Carpenter International Pty Ltd (ACN 165 690 657) (admins apptd) – (2016) 111 ACSR 477 considers this point.  The case also clarifies the application of some parts of section 588FL of the Corporations Act.

Facts

Carpenter International Pty Ltd (Carpenter) carried on a live cattle export business. Its business involved exporting cattle which were purchased through del credere agents.  Generally, a del credere agent is an agent which acts not only as a salesperson, but also as a guarantor of credit extended to the buyer so that if the buyer is unable to pay, the del credere agent may become liable to the vendor.

Administrators were appointed to Carpenter.  The administrators were the plaintiffs in this matter.  The defendants were creditors of Carpenter, and acted as del credere agents for the vendor farmers.  The del credere agents paid the purchase price to the vendors and took assignment of the vendor’s rights under the sale contracts.  The sale contracts contained retention of title clauses, a form of security interest under the PPSA, which had not been registered by the vendors.

One of the defendants, DLS registered the security interest arising from the retention of title clauses on the Personal Property Securities Register (PPSR) after it had paid the vendors and claimed that the registration was made within 20 business days for the purposes of section 588FL of the Corporations Act, treating the security agreement as the act of payment to the vendor, rather than the sale contract.

Another defendant, CS registered the security interest created under the retention of title clauses on the same day that the administrators were appointed, but before the time the administrators were appointed.  A question then arose as to whether the time in section 267(1)(b)(ii) of the PPSA refers to the date of appointment of the administrators or the particular time of appointment.  That is, whether the secured party must register the day before appointment or simply before the time of appointment in order to avoid the vesting provisions under section 267.

Unlike DLS, CS did not dispute that the sale contracts were the security agreements for purposes of the PPSA but argued that because the sale contracts were conditional on blood tests and Chinese protocols, and Carpenter had the right to reject the cattle, the contract was not binding until all the conditions were satisfied.  On that basis, CS argued that Carpenter’s rights in the collateral only came into existence after the final rejection lists were sent and only at that point the security interest attached to the collateral and become enforceable against Carpenter.  Consequently, the obligation to perfect the security interest only arose then.

Decision

DLS’s arguments

The Court held that an assignment is a transfer of security interest and does not in itself give rise to new security interest.  Paying the vendor was the act by which the security interest under the sale contract was transferred to the defendant and not the act by which the security interest was created, arose or was provided for.  Accordingly, the 20 business days referred to in section 588FL(2)(b)(ii) starts to run when the sale contract comes into force and not when the security interest is transferred to the defendant.

On this basis, as the security interest arising under the DLS sale contract was not registered within 20 business days of the sale contracts coming into force, the security interest in the sale contracts vested in Carpenter pursuant to Section 588FL of the Corporations Act 2001 (Cth).

CS’ arguments

The Court also held that so long as the security interest is registered before the time of appointment of the administrators, section 267(2) will not operate to vest the security interest in the grantor.  It is not necessary for the security interest to be registered the day before the appointment of the administrators to avoid the application of section 267(2).  The Court held that the focus of Section 267 (1)(b) is on the ‘event’ and only security interests that remain unperfected at the time the ‘event’ occurs will vest in the grantor under section 267(2).

Even though the security interest did not vest in Carpenter under section 267(2) of the PPSA, the Court held that the security interest nevertheless vested in Carpenter pursuant to section 588FL of the Corporations Act.  The Court held that the 20 business day period in section 588FL(2)(b)(ii) began to run when the security agreement that gives rise to the security interest comes into force, not when the security interest attaches and not when it becomes enforceable.  The conditions as to blood tests and Chinese protocols in the CS sale contracts were conditions as to performance of contracts and not as to its formation.  On that basis, the Court held that CS’ registration was made out of time.   

Lavan Legal Comment

For those who are taking over debts, securities or contractual rights of another person, this case highlights the importance of the transferee’s due diligence, in checking and ensuring that any security interest arising under the documents or contracts in favour of the transferor has been duly registered under the PPSA.  Otherwise, the transferee may risk losing the security or priority which they ought to have, in that the transferee inherits the transferor’s defects in perfecting a security interest.