GrowthOps’ fall from cloud nine


GrowthOps’ fall from cloud nine

A recent decision of the Federal Court of Australia provides clarification of the application of the Personal Property Securities Act 2001 (Cth) (PPSA) to the sale of intellectual property by externally administered companies.

The Sargon Group advertised itself as offering “next-generation trustee cloud infrastructure”. The sky fell in on 29 January 2020, when receivers and managers were appointed to Sargon Capital Pty Ltd (Sargon Capital), the holding company of the Sargon Group. Sargon Capital was placed into Voluntary Administration on 8 March 2020. Following the subsequent external administration of other Sargon Group entities, administrators sought to sell the business assets of the companies, including intellectual property.

GrowthOps Services Pty Ltd (GrowthOps) claimed ownership of intellectual property sold under the sale of business and an entitlement to part of the sale proceeds. GrowthOps provided services to Sargon Capital under a Master Service Agreement (MSA), which stated:

all Intellectual Property Rights in the Services and Deliverables (Developed IP)… vests in Sargon [Capital] immediately upon payment to GrowthOps for same…” (clause 7.1).

In McCallum, in the Matter of Re Holdco Pty Ltd (Administrators Appointed) (No 2) [2021] FCA 377, the Federal Court of Australia was required to decide whether GrowthOps owned the intellectual property at the date of the sale of business.

Opposing creditors submitted that the MSA gave rise to a security interest under section 12(2)(d) of the PPSA, being a conditional sale agreement (that is, an agreement subject to a retention of title clause (clause 7.1)). GrowthOps denied this and relied on the following grounds (among others).

First, the intellectual property was provided to Sargon Capital pursuant to an implied licence which was excluded from the operation of the PPSA pursuant to section 12(5)(a). The first ground was dismissed as irrelevant because it was not the alleged licence to use the intellectual property that was sold, rather, it was the intellectual property itself.

Second, that section 12(2)(d) of the PPSA (relating to retention of title security interests) applied only to the supply of ‘Goods’ (that is, tangible property), but not intangible intellectual property. The second ground was dismissed as there was “no contextual or purposive reason to exclude intangible property from the reach of [ section 12(2)(d) ]” and to do so would undermine the purposes of the PPSA.

Third, the MSA was not a “conditional sale agreement” as no “sale” occurred. Rather, GrowthOps submitted, there was a provision of services by GrowthOps for a fee. This ground was also rejected as an artificial characterisation of the MSA.

The Court found that clause 7.1 was a “textbook example of a retention of title clause”, which gave rise to a security interest in favour of GrowthOps under the PPSA. It was not in dispute that GrowthOps had not perfected the security interest. Accordingly, pursuant to section 267 of the PPSA, the interest vested in Sargon Capital immediately prior to the appointment of voluntary administrators. As this preceded the sale of business, Sargon Capital was the owner of the intellectual property and GrowthOps was found not to be entitled to the sale proceeds.

Take away

GrowthOps’ interest could have been protected with a simple registration on the Personal Property Securities Register.  This case serves as a reminder for businesses to carefully consider their commercial arrangements to determine whether any security interests arise and to register any interest promptly.

 

 


~ with Marcus Fogarty, Associate