The impact of the Personal Property Securities Act 2009 (Cth) on unfair preference claims Natalie Medina & Daniel Turk | April 2012 | Corporate & Commercial
From 30 January 2012, under Personal Property Securities Act 2009 (Cth) (PPSA) the Personal Property Securities Register (PPSR) became the national register for security interests in personal property. Consequently, amendments have been made to the Corporations Act which effects liquidator’s unfair preference claims.
Who does this impact? Trade creditors, financiers and liquidators
What does it mean?
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Secure against unfair preferences?
Trade creditors who have retention of title (ROT) clauses in their terms of trade may have an arguable defence to an unfair preference claim brought by a liquidator of a customer company providing they comply with the PPSA.
Background Payments received by unsecured trade creditors from insolvent debtors in the final months before a liquidator is appointed are susceptible to preference claims by the liquidator. A new defence has arisen by virtue of the PPSA.
Corporations Act 20011 Section 588FA of the Corporations Act 2001 (“the Corporations Act”) sets out the elements to be satisfied if a transaction is to constitute an unfair preference. Such a transaction occurs when a company in liquidation (Company) and a creditor are parties to a transaction which results in the creditor receiving from the Company, in respect of an unsecured debt, more than the creditor would receive from the Company for that debt if the transaction were set aside and the creditor were to prove for the debt in the winding up of the Company. Therefore, unfair preferences are only made against creditors in respect of unsecured debt. Under section 588FE of the Corporations Act unfair preferences which are insolvent transactions are voidable against the liquidator.
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The meaning of security and unsecured debt
In summary, the amendments to the Corporations Act widen the scope of what is considered a secured creditor.
The PPSA came into effect on 30 January 20122. Materially, the PPSA affects the rights of trade creditors who have security interests over their customers.
How does the PPSA impact unfair preference claims?
The Corporations Act has been amended as a result of the PPSA and in particular with respect to ‘new concepts’3 brought about by the PPSA. In order to harmonise the Corporations Act with the PPSA the Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth) was introduced to effect such amendments. Notable amendments relate to the concepts of “security” and “secured debt”. Under the amendments, section 51E of the Corporations Act now defines ‘secured creditor’ of a corporation as, a creditor of the corporation, if the debt owing to the creditor is secured by a security interest4. The Corporations Act now also provides that a ‘security interest’ is a PPSA security interest; or a charge, lien or pledge5. In relation to “PPSA security interest”6 section 127 of the PPSA states that a ‘security interest’ means: an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).
Section 12 goes on to provide, by way of example: a security interest includes an interest in personal property provided by any of the following transactions, if the transaction, in substance, secures payment or performance of an obligation… a conditional sale agreement (including an agreement to sell subject to retention of title)8
Accordingly, in relation to suppliers who trade on retention of title terms, their interest in goods supplied to their customers will be a considered a PPSA security interest under the PPS Act.
Pursuant to the PPSA and consequently the recent amendments to the Corporations Act a trade creditor who enters into terms of trade (that is, subject to ROT), which in substance, secure payment or performance of an obligation may raise its ‘security interest’ status as a defence to an unfair preference claim. The basis of such an argument is that the trade creditor is considered a ‘secured creditor’ under the new provisions of the Corporations Act, and is therefore not caught within the scope of section 588FA, which applies to unsecured creditors only.
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Secure against unfair preferences? Natalie Medina & Daniel Turk | April 2012
The creditor would need to have transitional protection under the PPSA or have its interest registered including as a purchase money security interest (“PMSI”); otherwise it would risk being unsecured as other secured parties may have priority over the goods. To have transitional protection the creditor must have agreed terms of trade on foot with its customer as at 30 January 2012 which apply to ongoing supply.
What does this mean for trade creditors? From 30 January 2012 a trade creditor (“Supplier”) who has a ‘security interest’ may defend an unfair preference claim on that basis. An important qualification is that such defence would be limited to the amount of the security. In the case of an ROT Supplier the security would most likely be the amount of its ROT goods held by the purchaser at the time the purported preference payment was received. The Supplier would need to identify the goods and their value in the possession of the Company. This may pose some evidentiary problems.
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If there was no ROT stock held by the Company at the time of the payment then the Supplier would be unsecured and not be able to rely on the defence. It is early days since the introduction of the PPSA and the effect of this defence has not been tested by the Courts. Suppliers should look to ensuring they have all monies ROT clauses in their terms of trade and ensure that they have registered their interest as a PMSI against the customer with the PPSR. If possible suppliers should try as best possible to have an understanding of ROT stock held by their customers or ensure customers keep regular stock records.
What does this mean for liquidators? Liquidators will need to: 1. Recognise that in addition to the defences afforded by section 588FE(6A) of the Corporations Act that a party may defend an unfair preference claim on the basis that their interests are ‘secured’ within the amendments to the Corporations Act. 2. (a) Conduct a search the PPSR for any registered interests in personal property of the Company when considering whether to commence action for unfair preference claims; and
(b) Consider the amount of ROT stock in relation to the creditor at the time of the payment.
End notes 1. Corporations Act 2001 (Cth) 2. Personal Property Securities (Migration Time and Registration Commencement Time) Determination 3. Personal Property Securities (Corporations and Other Amendments) Act 2010 Schedule 1, Part 1 4. Corporations Act 2001 (Cth) section 51E 5. Corporations Act 2001 (Cth) section 51A 6. Personal Property Securities (Corporations and Other Amendments) Act 2010 , Schedule 1 states that a PPSA security interest means a security interest within the meaning of the Personal Property Securities Act 2009 (Cth) and to which that Act applies, other than a transitional security interest within the meaning of that Act
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Secure against unfair preferences? Natalie Medina & Daniel Turk | April 2012
7. Personal Property Securities Act 2009 (Cth) section 12 (1) 8. Personal Property Securities Act 2009 (Cth) section 12(2)
For more information, please contact: Natalie Medina Lawyer T: 02 8257 5754 M: 0449 135 776 natalie.medina@turkslegal.com.au
Daniel Turk Partner T: 02 8257 5727 M: 0408 667 220 daniel.turk@turkslegal.com.au
www.turkslegal.com.au Syd | Lvl 29 Angel Place, 123 Pitt St, NSW 2000 T: 02 8257 5700 | F: 02 9239 0922 Melb | Lvl 10 North Tower, 459 Collins St, VIC 3000 T: 03 8600 5000 | F: 03 8600 5099
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