$1 Million – the Cost of Delay

The decision of His Honour Justice Sifris of the Supreme Court of Victoria handed down on 14 November 2014 in  Carrafa, Gountzos & Lofthouse (as liquidators of Relux Commercial Pty Ltd (in liq)) & Anor v Doka Formwork Pty Ltd [2014] VSC 570 (14 November 2014) continues to remind us of the potential for ‘seemingly draconian outcomes’ in circumstances where a security interest holder fails to register their interests on the Personal Property Securities Register within the prescribed time frame.

In this latest PPSA instalment, rented equipment valued at over $1 million was effectively lost to an insolvent customer.

Relux Commercial Pty Ltd (in liquidation) operated a construction business specialising in pouring, laying and erecting large concrete slabs and panels. It rented formwork and associated equipment from Doka Formwork Pty Ltd from time to time from at least March 2013. There were two lease agreements dated 26 February and 14 March 2014.

Each lease was initiated by an order in writing containing a description of the required equipment signed by Relux, commencing on the date the equipment left the Doka warehouse or when Relux took delivery of it, was for an indefinite term and incorporated the Doka General Terms & Conditions printed on the back of each invoice.

On 20 February 2014, a security interest claimed by Doka in commercial property held by Relux was registered on the PPSR.

On 7 April 2014, Administrators were appointed to Relux and the company was put into liquidation on 16 May 2014.

Declaratory relief was sought by the liquidators as to which of Relux or Doka had the superior right and interest in, and was entitled to possess or deal with, the equipment.

Discussion

In order to determine which party had the right to the equipment, the Court had to consider whether section 588FL of the Corporations Act 2001 (Cth) (Act) applied.

Section 588FL provides that certain interests covered by the Personal Property and Securities Act 2009 (Cth) (PPSA) that are not registered on the PPSR within a prescribed timeframe vest in the company being wound up or put into administration.

Doka was found to have a PPSA security interest, as it had a lease with Relux which was also a PPS lease pursuant to section 13 of the PPSA.

At the ‘critical time’, namely the date of the appointment of the Administrators, the security interest was:

• enforceable against third parties, since it attached to the collateral before the critical time (s 19(5) PPSA) and was evidenced in writing by the respective lease agreements containing a description of the collateral: s 20(1)(b)(iii) PPSA; and
• perfected by registration.

Accordingly, the ‘registration time’ for the collateral had to be the later of:

• 6 months before the critical time; or
• the earlier of 20 business days after the security agreement that gave rise to the security interest came into force, or the critical time.

Decision

Sifris J held that by reason of section 588FL(4)(a) of the Act, Doka’s PPSA security interests in the equipment supplied under leases commencing before 21 January 2014 vested in Relux because they were not perfected by registration within 20 business days, namely 19 February 2014, of the relevant agreement. The registration was, of course, lodged on 20 February 2014.

However, the security interests in the equipment supplied under the leases commencing 26 February 2014 and 14 March 2014 did not vest in Relux. This is because the registration on 20 February 2014 was made prior to the expiration of 20 days from each lease agreement.

His Honour observed, ‘As noted by courts who have previously considered these and similar provisions of the Act, the effect of these provisions is to extinguish the lessor’s interest in the property where it is not registered within time’.

This case is yet another warning that businesses who lease or hire goods must ensure that they register their security interests in a timely fashion.  Otherwise, their goods may effectively be lost to an insolvent customer.