Insolvency practitioners are aware that they can be liable for conversion if they sell property that belongs to someone other than the company. The problem is that it is often difficult to determine who owns property in the possession of the company and who has a security interest in it.
The Personal Property Securities Act 2009 (PPSA 2009) was intended to deal with some of these problems by establishing a register for security interests in personal property. Unfortunately, the Personal Property Securities Register (PPSR) has not proved to be a reliable source of information about security interests in personal property. It is intended to operate as an electronic notice board to warn of security interests in personal property. The secured parties are expected to respond to requests under section 275 of PPSA 2009 for further information about their security interests within 20 days of receiving the requests from certain interested parties. But there have been logistical difficulties in migrating information from the ASIC Register of Charges to the PPSR.
The inadequacy of the PPSR and the request procedure are starkly illustrated by Carson, Re Hastie Group Ltd (No.3) [2012] FCA 719. In that case administrators were appointed to the 33 companies that comprised the Mechanical, Electrical and Plumbing Division and International Division of the Hastie Group of Companies. The administrators found that there were 995 registrations noted on the PPSR against companies in the Hastie Group. They wrote to all creditors who had a security interest registered on the PPSR. Each creditor was requested to provide information about its security interest on a proforma summary within three days. Just over a fortnight later approximately 80% of the creditors had failed to respond to the administrators’ letters. Furthermore, many of the responses the administrators received were “of little assistance to them in understanding the identity of the property in which a security interest might be claimed”: [2012] FCA 719 at [10].
The PPSR was not a reliable guide to the security interests in the company’s plant and equipment because of the level of generality of the registrations and the existence of many transitional security interests that were not registered.
After further correspondence with secured creditors and newspaper advertisements calling for claims, the administrators identified approximately $2 million of assets belonging to third parties. There were 3684 items of plant and equipment that were unclaimed. This represented 77% of the total number of items of plant and equipment identified by the administrators.
The problem for the administrators was that the cost of storing and maintaining this unclaimed plant and equipment was prohibitive. They formed the view that it would be in the best interests of the companies and their creditors for the unclaimed plant and equipment to be sold as soon as possible.
The administrators applied to the Federal Court under section 447D of the Corporations Act 2001 (Cth) for directions authorising them to advertise unclaimed plant and equipment in the national newspaper for sale in on-line auctions. They proposed to hold the proceeds of sale in escrow for three months and to write to all known creditors advising them of the sales and their rights to claim their share of the proceeds held in escrow. After the three month period, they proposed to apply the proceeds of sale in the ordinary course of the administration of the companies. In effect, this would mean that any unclaimed proceeds would be paid to the security trustee representing the syndicate that comprised the Hastie Group’s major financiers.
The Court granted these directions because of the genuine and substantial difficulties that the administrators faced in identifying the plant and equipment that might be subject to a security interest and other claims and the administrators’ efforts to clarify the position as best they could. The Court also made a confidentiality order in relation to the valuation material presented to the Court in order to maximise the chance of achieving the highest sale price possible for the plant and equipment.
Lavan Legal comment
Given the current difficulties with the PPSR it will often be difficult for administrators, liquidators or receivers to determine who owns plant and equipment in the possession of the company. Carson, Re Hastie Group Ltd (No.3) [2012] FCA 719 shows how receivers can overcome these problems by taking all reasonable steps to identify the true owners or the secured parties and then applying to the court for directions under section 447D. Liquidators and receivers could make a similar application under section 479(3) and section 424 respectively. Not only will the court look kindly upon such applications, it may be persuaded to make a confidentiality order to prevent disclosure of sensitive valuation material.
