To Have or Not to have Possession' – The key to PPSA perfection

Kirkalocka Gold SPV Pty Ltd (Receivers and Managers Appointed) v Zenith Pacific (KLK) Pty Ltd, in the matter of Kirkalocka Gold SPV Pty Ltd [2024] FCA 428 For security interests in personal property, perfection is key. ' It can be achieved by possession.'  What does it mean to have possession?'  In Kirkalocka, the Court considered the question of 'actual possession' and 'apparent possession' '€“ both necessary to achieve perfection by possession. Kirkalocka Gold SPV Pty Ltd ('Kirkalocka') operated a mine in Western Australia. On 11 February 2019 Kirkalocka contracted with Zenith Pacific (KLK) Pty Ltd ('Zenith') for it to build and operate an 11MW power plant at the mine pursuant to a Power Purchase Agreement ('PP Agreement'). On 1 May 2021, after Zenith had built and ran the power plant for some time, Kirkalocka was placed into administration.'  On 11 January 2022, Zenith registered its security interest in the power plant. Kirkalocka's administrators brought proceedings against Zenith for a declaration that Kirkalocka is the legal and beneficial owner of the power plant. Zenith by cross-claim sought a declaration that it is the legal and beneficial owner of the power plant and an order for the Administrators deliver up possession of it. The proceeding came before Justice Besanko in the Federal Court.

Issues for determination

There were two main issues for determination:

1. Whether Zenith had a security interest in the power plant within the meaning of ss 12(1) or 12(3) of the PPSA.
2. Whether Zenith's security interest had been perfected at the time of the PP Agreement's commencement on 11 February 2019 or at the time of registration on 11 January 2022. ' If it was the latter, given Kirkalocka had entered administration on 1 May 2021, any security interest Zenith had in the power plant would have vested in Kirkalocka pursuant to s 267(2) of the PPSA.

Germane to these issues was the question of who had possession of the power plant. The PP Agreement including the following salient terms:

1. Zenith would build, install and operate the power plant on Kirkalocka's mining site for a term of 10 years for the supply of electricity to Kirkalocka.
2. Kirkalocka would pay Zenith monthly fees including for the supply of electricity throughout the 10 year term and importantly would have an option to purchase the power plant outright from Zenith, with the price decreasing over time to $0 after 10 years.
3. Subject to the purchase right, Zenith would not transfer ownership to Kirkalocka in the power plant.
4. Zenith was granted a licence to occupy the power plant site and the roadways to the site (which was located deep within the 2,000 acre Kirkalocka mining site).
5. Kirkalocka was granted permission to enter into the power plant to respond to emergencies and to access circuit breakers. In circumstances of Zenith's default, Kirkalocka could take possession of and operate and maintain the power plant.
6. If Kirkalocka did not elect to purchase the power plant, Zenith was to demobilise and remove it from the site.
7. There were termination and demobilisation payments payable to Zenith in circumstances of Kirkalocka's insolvency.

Was there a security interest?

The Administrators claimed the PP Agreement provided for a security interest within s 12(1) '€“ as a conditional sale agreement or hire purchase agreement, or under s' 12(3)(c) as a deemed security interest, a 'PPS Lease'.

PPS Lease

In considering whether there was a bailment for the purposes of determining whether there was a PPS Lease, His Honour turned to the question of who had possession of the power plant. The Administrators contended that possession is a ductile and intuitive concept where exclusive possession is not necessary for a bailment to arise provided the bailee enjoys both the means and mentality of some immediate control. The Administrators argued that Kirkalocka had the means of some immediate control of the power plant as it had control of the mining site where the power plant was installed and was entitled to reasonable access to and effective control of the same. ' The Administrators claimed the locked doors throughout the power plant were for safety reasons and did not evince an intention on Zenith to exclude Kirkalocka from the power plant. ' On this point, the Administrators submitted that possession of a key does not inevitably amount to possession of the goods themselves if there is no intention to exercise control over and exclude others from the goods. Zenith contended that the Administrators' argument essentially meant that as Kirkalocka controlled the mining site access generally, it was in possession and bailee of everything anyone brought onto the site '€“ which could not be right. His Honour held that Zenith had been in possession of the power plant.'  As such, a PPS Lease did not arise.'  Even if possession had transferred to Kirkalocka, His Honour said that the bailment was precluded from being properly characterised as a PPS Lease given that Zenith was not regularly engaged in the business of bailing goods as excluded by s 13(2)(b).

Conditional Sale or Hire Purchase

His Honour then turned to the question of whether Zenith had a security interest in the power plant pursuant to s 12(1) and, if so, whether it was a conditional sale or hire purchase agreement. The Court was confronted with the question - if Zenith at all times retained possession of the power plant, does this mean that it could not have given rise to a security interest within s 12(1)? His Honour found that it could, stating that "possession or not, s 12(1) is wide enough to cover a situation such as the present, particularly where Kirkalocka by the end of the term, and assuming no early termination, would have paid off a substantial proportion of the'€¦power plant". His Honour did not find that the PP Agreement gave rise to a security interest pursuant to s 12(2)(d) as a conditional sale agreement given that Kirkalocka did not agree to purchase the power plant, only having an option to purchase. ' His Honour also found against a hire purchase agreement under s 12(2)(e) given that it was not the case that Kirkalocka was using the power plant for the term of the PP Agreement. His Honour held that Zenith had a security interest in the power plant within s 12(1) with a retention of title clause which, should Kirkalocka fail to perform its PP Agreement obligations, can be engaged.

Perfection by Possession

Zenith argued that its security interest:

• had attached upon the execution of the PP Agreement or waiver or satisfaction of the conditions precedent in clause 2.2 when, in exchange for its promises to pay, Kirkalocka obtained purchase rights (section 19(2) PPSA);
• was enforceable against third parties as it had attached to the power plant and Zenith had possession of it (section 20(1) PPSA); and
• had been perfected by possession as at the date of the Administrators' appointment on 1 May 2021 (section 21(1) and (2)(b)).

The Administrators argued Zenith's security interest had not attached to the power plant in circumstances where Kirkalocka had apparent possession of it. Sections 24(1) and (2) provide that a secured party cannot have possession of personal property if the property is in the actual or apparent possession of the grantor or debtor, or another person on behalf of the grantor or debtor. Had Zenith not been in actual and apparent possession of the power plant, its security interest would not have attached to the collateral and would have remained unperfected. The Administrators claimed a hypothetical observer walking by the perimeter of the mine site before Kirkalocka went into administration would have thought that Kirkalocka had apparent possession of the power plant. Zenith contended that "apparent possession" is possession in fact and appearances of possession to a hypothetical observer with some unknown degree of knowledge are irrelevant.'  Nonetheless, Zenith claimed that an observer on the site would see a large sign with "Zenith Pacific" in the switchroom, personnel wearing Zenith uniforms, a "No Unauthorised Personnel" sign in the engine hall, and be required to sign in on entry '€“ and that what is visible at the mine's entrance is not relevant. His Honour determined it was necessary to place the hypothetical observer where they could see the personal property.'  In this case, they would see a large Zenith Power Plant sign from a considerable distance and would conclude that Zenith was at least in apparent possession of the complex.'  This position, His Honour noted, was stronger still when the observer was inside one of the buildings. His Honour concluded that Zenith was in both actual possession and apparent possession of the power plant before Kirkalocka entered into administration and, so, had perfected its security interest before that time. ' Accordingly, the Administrators' application was dismissed.

Take Aways

For asset owners, the PPSA provides a regime for secured parties to secure obligations owed to them and to safeguard their property.'  This safeguard only operates if the security interests are properly perfected.'  The simplest way to do this is by registration on the PPSR. ' It may avoid unnecessary and costly litigation to substantiate a party's legitimate claims. Nonetheless, a secured party can perfect by possession.'  Possession may be important, for example, where collateral has been pledged by a grantor debtor as security for payment of a debt or performance of some other obligation. Kirkalocka provides some useful guidance on how a court will construe a party to be in actual or apparent possession of the personal property.