To disclaim or not to disclaim, that is the question

To disclaim or not to disclaim, that is the question

In Rohrt (in their capacities as joint and several liquidators of Rose Guerin and Partners Pty Ltd (in liq)) v Princes Square W24NY Pty Ltd (as trustee for the Rose Guerin and Partners Trust) [2021] FCA 483, Justice Anderson in the Federal Court considered the effect of a notice of disclaimer issued in relation to certain property of Rose Guerin and Partners Pty Ltd (Company) that was, unbeknown to the liquidators, the subject of a defective PPSR registration.

On 22 June 2018, the Company as trustee of a trading trust entered into a chattel mortgage agreement with BMW Australia Finance Limited (BMW) for the purchase of a Ferrari.  In about November 2019, the Company defaulted and on 19 December 2019 administrators were appointed by the secured creditor, Fundit Limited trading as Banjo Loans pursuant to section 436C of the Corporations Act 2001 (Cth) (Act).  The administrators became liquidators of the Company at the second meeting of creditors on 5 February 2021.

The liquidators had formed the view that the finance associated with the Ferrari was likely to be significantly in excess of its market value.  Accordingly, on 11 February 2021, the liquidators delivered a notice of disclaimer of onerous property which contained a declaration that for the purpose of section 569A(1) of the Act, the liquidator disclaimed the “property described in the schedule”, namely the Ferrari, being “property of the company … that may give rise to liability to pay money or some other onerous obligation”.

BMW was informed by the director, Ms Guerin that she was attempting to obtain refinancing.  So, BMW put recovery action on hold.

The liquidators claimed that their efforts to obtain the Company’s books and records were frustrated.  Accordingly, on 19 May 2021, the liquidators applied for and obtained an order for the issue of a warrant pursuant to section 530C of the Act which authorised them to “seize all property and books of the Company”.

On 28 May 2021, the warrant was executed at the premises of the Company.  The liquidator caused the Ferrari to be seized.  The liquidators had not informed BMW of their intention to do so.

On 1 June 2021, the liquidators’ solicitors wrote to BMW and stated that they had formed a view that the Ferrari was property of the Company by reason that the registration on the PPSR was defective.  Accordingly, they asked that BMW release the security interest.  The letter went on to say, “there was nothing to disclaim given there was no onerous property or obligation within the meaning of section 568 of the Act”.  A volley of correspondence then ensued, leading it appears inexorably towards proceedings for declaratory relief.

There was no serious contest that BMW’s registration was in fact defective by reason of its failure to register its security interest against the ABN of the trust and not the ACN of the Company.  Pursuant to section 267 of the Personal Property Securities Act 2009 (Cth) (PPSA), BMW’s unperfected interest vested in the Company upon the liquidators’ appointment as joint and several administrators on 19 December 2020.  Accordingly, the Court concluded that the Company held BMW’s interest in the Ferrari as its unencumbered asset free from BMW’s security interest.

The proceeding turned on whether the liquidators’ notice of disclaimer affected that position.

The liquidators submitted that the purported disclaimer was a nullity because the Ferrari was not “property that may give rise to a liability to pay money or some other onerous obligation” in accordance with section 568(1)(d) of the Act.  Rather, the Ferrari became the unencumbered property of the Company and BMW was relegated to an unsecured creditor.  In the alternative, the liquidators sought an order that the disclaimer be set aside.

In the result, the Court found that the notice of disclaimer was void and of no effect and was a nullity.

Justice Anderson found in circumstances where BMW’s security interest had vested, as at the date of the disclaimer the Ferrari was an unencumbered asset of the Company with a value exceeding $300,000.  At that time, there were no obvious burdens attached to the Ferrari that would exceed its value.  There were also no liabilities which could be enforced against it.  His Honour therefore concluded that the power of the liquidators to disclaim property under section 568(1)(d) of the Act had not been enlivened.  It followed that the liquidators purported exercise of the power was ineffective insofar as it sought to disclaim the Ferrari.

Because of this finding, Anderson J did not then consider the liquidators’ alternative claim.

BMW argued that the liquidators should be denied declaratory relief on discretionary grounds.  BMW contended that the disclaimer was not disclosed to the Court in the ex parte application and that they acted inconsistently with the notice of disclaimer without first having taken proper steps to regularise the position or even inform the Court before seizing the Ferrari.  BMW submitted that such conduct should not be condoned by the Court.

Justice Anderson however was satisfied that there were no discretionary considerations which warranted refusing the declaratory relief sought, accepting that the liquidators had provided a satisfactory explanation as to why the existence of the notice of disclaimer was not raised before the original Court.

Take Aways

There is a litany of cases where the seemly simple error of using the wrong identifier has resulted in defective PPSR registrations resulting in the harsh consequence of a secured party losing all interest in the collateral.  Some hard lessons continue to be learned by those who commit errors in their registrations.

Careful attention must be taken to ensure that the PPSA’s strict registration requirements are met.  Later reviewing registrations or performing a “health check” to ensure compliance is a prudent step.  Although, curing defective registrations have their own complications.  However, having an effective registration at least gives a secured party an opportunity to argue their claims in collateral; otherwise they will evaporate in an insolvency event.

Equally, it is incumbent upon insolvency practitioners to carefully check PPSR registrations to ensure they are compliant.  This can be difficult in the early stages on an administration when there is much to do – particularly when the former directors are not providing their full co-operation.  Nonetheless, it is evident that investing time in a review of PPSR registrations may produce some unexpected outcomes.