Unperfected security interest – Lessee’s administrator successfully resists landlord’s PPSA claims over plant and equipment

In the judgment of Flown Pty Ltd (Administrators Appointed) v Goldrange Pty Ltd & Another, a lessee’s administrator successfully resisted a landlord’s claim to possession of plant and equipment located at the leased trading premises as security for a loan. In coming to this decision, the Supreme Court of Western Australia provided guidance as to what constitutes “possession” for the purposes of perfecting a security interest under the Personal Property Securities Act 2009 (Cth) (PPSA).

Key takeaways

This decision provides further clarity that:

• if a secured party fails to validly perfect their security interest before the appointment of an administrator or liquidator, property in the goods will effectively pass to the insolvent company
• a notice of taking possession of land does not, on its own, constitute possession of personal property for the purposes of section 24 of the PPSA and
• the perfection of a security interest by possession requires actual and apparent physical possession of the collateral by the secured party.

Background

The landlord of a property, Goldrange Pty Ltd (Landlord), loaned $460,000 to a new tenant, Flown Pty Ltd (Lessee), to purchase plant and equipment of two previous tenants used at the leased premises. The parties signed a lease and a separate loan agreement. While the loan agreement included a charge in favour of the Landlord over the plant and equipment, the Landlord chose not to register its security interest on the PPSR.

The Lessee ran into financial difficulty and appointed voluntary administrators. The administrators claimed the plant and equipment on the basis that the Landlord’s security interest was not perfected. The Landlord argued that it had perfected its security interest by way of possession, rather than by registration under the PPSA.

The all-important detail

The critical question, in this case, was: who was in possession of the plant and equipment at the time that the administrator was appointed by the Lessee?

The relevant chronology of events was:

• On 14 July 2016, the Landlord handed the Lessee a notice terminating the lease (although, service of the notice did not accord with the terms of the lease).
• At approximately 11.30 am on 15 July 2016, the Landlord attempted to re-enter the property to change the locks. The tenant successfully obstructed the doors and did not allow the Landlord to enter, despite the fact that the Landlord appeared to have a contractual right to do so.
• At approximately 1:00 pm on 15 July 2016, the Landlord attached a ‘notice of re-entry’ to the premises (pursuant to the lease) stating that the Landlord had re-entered the premises and retaken possession from the Lessee.
• At approximately 1:00 pm on 15 July 2016, the Lessee was placed into voluntary administration.
• At approximately 7:15 am on 16 July 2016, the Landlord cut the locks, entered the premises and purported to take actual possession of the premises and the plant and equipment within it.

Key issues

The administrator argued that, pursuant to section 267 of the PPSA, where a security interest is unperfected and the grantor enters into administration, the unperfected security interest vests in the grantor and passes to the administrator. The secured party (in this case the Landlord) is then only able to prove in the administration for the amount owed as an unsecured creditor.¹

The Landlord had a different view and reasoned that, in order to have a perfected security interest under section 21 of the PPSA, a secured party must, either:

• register their security interest on the PPSR or
• have possession of the relevant assets.²

The Landlord claimed that it had perfected its security interest by taking constructive possession of the plant and equipment at approximately 11.30 am on 15 July 2016, before the appointment of the administrator. Further, the Landlord argued that it did not “seize or repossess” the plant and equipment as it exercised a lawful right of re-entry under the lease.  As such, the Landlord contended that it was not disqualified by the provisions of s 21(2)(b) of the PPSA.³

The administrator contended that:

• the Landlord did not actually take possession of the plant and equipment until approximately 7:15 am on 16 July 2016. As a result the Landlord was not actually in possession of the plant and equipment at the time that the administrator was appointed on 15 July 2016 and
• pursuant to section 24(2) of the PPSA a grantor cannot have possession of personal property if the property is in the actual or apparent possession of the secured party, or another person on behalf of the secured party.

The decision

The Court held that possession of the plant and equipment means both apparent and actual physical possession by the secured party.

The Court found that a stranger walking past the premises after 11:30 am on 15 July 2015 would have seen nothing out of the ordinary and would have said that the Lessee was apparently in possession of the premises.  This was true regardless of the fact that the Landlord was as a matter of law entitled to be in possession of the premises and, as a consequence, of the plant and equipment.  Hence, at this time the Landlord had neither apparent nor actual physical possession of the plant and equipment.

While the Landlord attached a ‘notice of re-entry’ to the premises at 1:00 pm on 15 July 2016, the Court held that the Landlord did not gain actual physical possession of the plant and equipment until 7:15 am on the following day.  As a result, the Court found that it was clear that the Landlord was not in actual possession of the plant and equipment at the time of the appointment of the administrator at or around 1:00 pm on 15 July 2016.⁴

For anyone who holds a security interest in assets that are in the physical possession of others (as is commonly the case under conditional sale agreements and asset finance agreements containing retention of title clauses), the message is simple: do not delay in registering your security interest on the PPSR, or risk losing your assets.

¹Flown Pty Ltd (Administrators Appointed) v Goldrange Pty Ltd & Another [2016] WASC 419, 26.
²Personal Property Securities Act 2009 (Cth), s 21.
³Flown Pty Ltd (Administrators Appointed) v Goldrange Pty Ltd & Another [2016] WASC 419, 27.
⁴Flown Pty Ltd (Administrators Appointed) v Goldrange Pty Ltd & Another [2016] WASC 419, 33.