Do transitional security interests found an arguable case for a caveat? We shall 138C!

Background and salient facts

The decision of Industrial Progress Corporation Pty Ltd v Wilson [2013] WASC 225 which was delivered on 6 June 2013, is the first reported case on the application of the Personal Property Securities Act 2009 (Cth) (PPSA) to the caveat regime under the Transfer of Land Act 1893 (WA) (TLA)¹.

The facts of the case were as follows:

In October 1998, the plaintiff signed a credit account application with Lowrie Constructions (WA) Pty Ltd (Customer) (Agreement) and the first defendants signed a guarantee in favour of the plaintiff, in fairly standard terms (Guarantee).

By the Guarantee, the first defendants also charged in favour of the plaintiff as security for their obligations to the plaintiff, all right, title and interest in any land held by them.

After receiving various goods pursuant to the Agreement, and having failed to pay all invoices associated with the supply of those goods, the Customer went into external administration on 15 October 2012.

Subsequently, on 3 December 2012, the plaintiff lodged the two caveats the subject of the proceedings over land owned by the first defendants, in reliance on the charging clause under the Guarantee, to preserve its position.

Following various correspondence between the parties aimed at resolving the dispute over the outstanding invoices and the caveats, the first defendants applied to Landgate for the issue of notices under section 138B of the TLA.

The proceedings

The proceedings were commenced by the plaintiff pursuant to section 138C of the TLA, seeking to extend the operation of the caveats.

The legal principles applying to such an application were not in dispute. It was agreed that the plaintiff was required to demonstrate (among other things) that there was a serious question to be tried as to whether the interest claimed in its caveats had substance, so as to justify the extension of the caveats’ operation.

The plaintiff’s contention in respect of the application was relatively straightforward, namely that the Guarantee contained a charging clause in respect of the property concerned, which gave rise to a caveatable interest.  In circumstances where the Customer was provided with goods which remained unpaid by either the Customer (now in external administration) or the first defendants (as guarantors), it was entitled to lodge its caveats to protect its position. 

Moreover, the plaintiff argued that the charging clause under the Guarantee was a transitional security interest for the purpose of the PPSA, and attracted the benefit of the temporary protection provisions.  In other words, it was not required to be registered to be valid and enforceable. 

Despite the apparent strength of the plaintiff’s claim, the first defendants contended that the plaintiff had failed to discharge its onus of demonstrating that its claim had or may have substance.  Their submissions (unsupported by any evidence) ran as follows:

• the plaintiff's right to seize goods under the terms of the Agreement was a security interest as defined in s12 of the PPSA;
  
  
• the Agreement did not in fact “provide for” a security interest, but merely was a “platform” setting out terms and conditions that a future agreement or agreements would be based on, as and when goods were supplied.  As such, it was not a transitional security agreement for the purpose of the PPSA and was required to be registered;
  
  
• that interest has not been registered on the PPSA;
  
  
• because that interest has not been registered, the right of the plaintiff to seize goods was not enforceable against the external administrator, by reason of s267 and s267A of the PPSA²;
  
  
• in failing to register its interest, the plaintiff failed to perfect its security interest: s21 of the PPSA;
  
  
• the plaintiff's failure to perfect its security interest involved a breach of its duty to perfect securities;
  
  
• the first defendants as guarantors were entitled to be credited, in reduction of their liability, to the extent that the breach diminished the value of the security; and
  
  
• the Guarantee did not exclude failure to perfect a security.

Counsel for the first defendants conceded that if each sale the subject of the relevant invoices was a transitional security interest, then their argument would fail. 

The Court formed the view that it was at least arguable that the Agreement was a valid transitional security agreement, such that the security was in fact a transitional security interest which was not required to be registered to be valid and enforceable.

In those circumstances it was also arguable that, the plaintiff had not breached any equitable duty to perfect its securities.

Moreover, even if this were not the case, the first defendants had not established (which they bore the onus of doing) that the plaintiff had caused any loss or diminution in the value of the security it held, such that they no longer had any residual liability under the Guarantee.

After forming the view that the plaintiff’s claim had substance, and that the balance of convenience favoured the extension³, the Court ultimately agreed that the operation of the caveats ought be extended on the basis that the plaintiff commence substantive proceedings in relation to the underlying claim for recovery of its debt, within 21 days.

Lavan Legal comment

While this case does not tell us anything new about the principles governing caveats under the TLA it does hint at the many and varied ways in which parties are trying to avoid the consequences of the PPSA.

More importantly, for parties purporting to rely on a transitional security interest (such as this plaintiff), it is critical to remember that non-migrated transitional security interests only enjoy a period of temporary perfection for 24 months after the registration commencement time under the PPSA – being 1 February 2012.

The clock is rapidly ticking towards the point where interests must be perfected by one of the methods outlined in the PPSA.

Had this case been determined in February 2014, the plaintiff would not have been entitled to rely on having a transitional security interest to found a claim under section 138C of the TLA.