Introduction
The recent decision of the Administrative Appeals Tribunal in Re: 0 Love 0 Pty Ltd (in liquidation) ATF Cooley Trust 1, Cooley Trust 2 & Cooley Trust 3 illustrates the importance of identifying the capacity of a contracting party when registering a security interest on the Personal Property Securities Register (PPSR). Equally, it is an example of a secured party escaping the dire consequences of a defect in registration.
Background
In this case, the liquidators of 0 Love 0 Pty Ltd (in liquidation) (Company) made an application to the Tribunal for the review of a decision made by the Registrar of Personal Property Securities.
The case related to three vehicles purchased by the Company using money borrowed from Volkswagen Financial Services Australia Pty Ltd (VFSA). VFSA registered its security interest in the vehicles, arising through three chattel mortgage loans with the Company, on the PPSR.
The Personal Property Securities Act 2009 (Cth) (PPSA) prescribes details of the grantor which must be included in a financing statement for a registration to be effective.
The consequences of a defective registration can be fatal for creditors. The 2017 Supreme Court of NSW case Re: Production Printing (Aust) Pty Ltd (in liquidation) demonstrates this. In that case, a defective registration meant that the creditor’s security interest vested in the grantor once the grantor went into liquidation, resulting in the creditor losing the benefit of the security and reverting to the unsavoury position of an unsecured creditor.
The fatal error was that the security interest was registered against the grantor’s Australian Business Number (ABN) when it was required to be registered instead against the grantor’s Australian Company Number (ACN). This is a common error and occurs because secured parties are often unaware of the prescriptive registration requirements under the PPSA.
The dispute
VFSA registered the security interest against the Company’s ACN as the grantor in its own capacity, not against the ABN of the trust of which the Company was trustee. When the liquidators were appointed, in the course of realising the Company’s assets, they requested the Registrar to remove VFSA’s security interests from the PPSR, arguing that the registration was defective as it did not properly identify the grantor. When the Registrar refused, the liquidators brought the matter to the Tribunal for review.
The liquidators argued that, as the Company is a trustee of a trust that has an ABN, in order to be compliant with the PPSA and the PPS Regulations, the registration by VFSA had to include the ABN of the trust. VFSA’s registration identified the ACN of the Company. On this basis, the liquidators argued the Registrar should have, in accordance with section 178 of the PPSA, removed the registration permitting the liquidators to realise the three vehicles.
Section 178 of the PPSA allows the Registrar to remove a registration in instances where “no collateral described in the registration secures any obligation owed by a debtor to the secured party”, ostensibly because a registration is defective.
The issue for the Tribunal to resolve, derived from section 181(1) of the PPSA, was whether the Tribunal suspected on reasonable grounds that the removal of the registration as requested by the liquidators was not permitted under section 178 – if it was permitted, it should have been removed by the Registrar. To determine this question, the Tribunal had to consider whether there was evidence providing reasonable grounds for the belief that VFSA had a security interest in the three vehicles owned by the Company. If the Tribunal determined that such reasonable grounds existed, it would have to affirm the Registrar’s decision not to remove VFSA’s registration.
The decision
Firstly, the Tribunal considered clause 1.5 of Schedule 1 of the PPS Regulations. This clause requires that, if the grantor is a corporate trustee of a trust that has an ABN, to be effective, the registration of the security interest granted must specify the trust’s ABN. The Tribunal resolved that this is only the case if the security interest granted by the grantor is done so in the grantor’s capacity as a trustee, rather than in its own capacity. As such, the task for the Tribunal was to determine the capacity in which the Company granted the security interest.
In determining this issue, the Tribunal reviewed the sales contracts and chattel mortgages. In the sales contracts, the Company was identified as the purchaser in its own capacity. A space in the sales contracts for the insertion of trust details in the event that the purchaser was acting as a trustee was left blank. Similarly, the chattel mortgages named the Company as the borrower in its own capacity. As with the sales contracts, a space to provide details of a trust was left blank.
On the basis of this documentation, the Tribunal found that the Registrar had acted reasonably in rejecting the contention of the liquidators that, because the Company was a corporate trustee, it acted in its capacity as trustee when granting the security interest. The documents made clear that the Company acted in its own capacity.
The Tribunal resolved on the basis of the evidence available to it that it had reasonable grounds to conclude that the removal of the registration as requested by the liquidators was not permitted under the PPSA. The Tribunal therefore affirmed the Registrar’s decision not to remove the registration of VFSA’s security interest in the three vehicles.
Key takeaways
This case serves as a reminder to secured parties of the importance of ensuring that they have entered accurate details in their financing statement to create a valid registration. In particular, secured parties must ensure they have determined the capacity in which the grantor has granted a security interest in the collateral. Mistakes can be fatal.
Whilst the outcome of this case provides some comfort to putative secured parties, it is important to appreciate that the Tribunal has simply ruled on the merits of a decision made by a government authority. It has not made a declaration that VFSA’s registration was valid. That may be a fight for another day.
Nonetheless, in our view, the Tribunal’s reasoning is sound and stands in stark contrast to the perverse consequences a secured party would suffer if it was found to have failed (through no fault of its own) to meet the strict rules regarding registration.
Sensibly, the secured party in this case was not a victim of the strict, prescriptive requirements of the PPSA. Unfortunately for many, the earlier case reports reveal a proverbial graveyard for secured parties who failed to act diligently.
~ with Michael Timlin, Graduate at Law
