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PROBLEMS RAISED BY UNCOLLECTED GOODS UNDER THE PPSA ARITA VIC/TAS CONFERENCE 13 July 2021RACV City Club Tasman Logistics Services Pty Ltd v Seaco Global Aust Pty Ltd?[2020] VSC 100 (Tasman)Jayfield Pty Ltd v Cussen [2020] VSC 380 (Jayfield)Scandi International Pty Ltd v Larkfield Industrial Estate Pty Ltd (No 2) [2018] VCC 628 (Scandi)……….Presented by Mark McKillopBarrister of Castan Chambers Level 14.Foley’s List Victorian BarTelephone 9225 7592Email mark.mckillop@.auMobile 0402 891 370Introduction When landlords or bailees take possession of uncollected goods, they may be exposed to loss of priority due to the application of the PPSA.? The risk can be mitigated by registration on the PPSR, by contractual drafting to avoid the creation of a security interest or by the application of uncollected?goods legislation. But in what circumstances will such measures be effective against a liquidator or third-party claimant to the goods??? In this seminar we will look at several practical situations, some from reported cases and others from situations on which I have given advice but have not reached the courts. We will start by briefly revisiting the concept of a security interest under the PPSA, and then apply it to our posed situations.The situations we will consider:A commercial landlord with goods left at the termination of a tenancy;A commercial storage operator with bailed goods left in custody; A service provider working on goods, still in possession pending payment.We will look at the decisions in Tasman, Jayfield and Scandi to answer these questions. The concept of a Security InterestThe PPSA regulates any consensual interest in goods which in substance gives rise to security rights, irrespective of the legal form which the interest takes. The PPSA defines a security interest in?section 12(1) as follows:A security interest?means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).NB. Personal property is any property other than land.Note the bracketed words:“without regard to the form of the transaction or the identity of the person who has title to the property”What is required:a consensual arrangement (ie a transaction)which gives rise to an interest in personal propertywhich secures payment or performance of some other mercial landlord with goods left at the termination of a tenancyIn this case possession of the goods remains with the tenant until such time as the tenancy is terminated. Disputes usually arise when the landlord takes possession of the goods pursuant to a term of the lease, where usually the landlord has not registered the lease on the PPSR. The dispute is usually over whether the clause in the lease giving rise to the landlord’s claim to the goods is a security interest or not. Leases of commercial property commonly feature provisions that deal with the sale or disposal of goods at the end of the occupation of the premises. The following are examples taken from commercially available precedents.From a general lease of commercial premises:16??Removal of the lessee’s property(a)If the lessor cancels the?lease?it may:(i)remove the lessee's property; and(ii) register a security interest against the lessee’s property in the Personal Property Securities Register; and(iii)store lessee’s property at the lessee's expense; and(iv)after storing the property for 30 days, dispose of it and apply any proceeds towards:(A)any unpaid rent or other money; or(B)any loss or damage; or(C)the payment of storage and other expenses,without being liable to the lessee for interference with the lessee’s property whether by way of breach of bailment, trespass, detinue, conversion or negligence or otherwise. (b)The tenant waives its right to receive notice of any registration on the Personal Property Securities Register.From a retail lease intended for shopping centre premises:Rights upon default(a)[re-entry clause](b)Upon re-entry to the premises, the lessor may remove any items at the premises and store them at the cost of the lessee (those costs are payable by the lessee to the lessor on demand) without being guilty of conversion?or liable for any loss or damage to these items. If the lessee fails to claim the items within 14 days of removal, those items are deemed abandoned by the lessee and will become the property of the lessor.Under the first clause, the landlord undoubtedly (and expressly) holds a security interest which must be registered. If the tenant is under insolvent administration, then the interest of the landlord will vest unless the interest is perfected. This was the position in Tasman but the liquidator had disclaimed any interest in the lease before the hearing, and the contest was between Tasman and a third party claimant to the goods. The same position applied in Scandi. Under the second clause, if the goods are not claimed by the tenant within 14 days of termination they are deemed abandoned on the leased premises. The clause avoids creating a security interest in that the landlord has no rights in respect of the goods until they are deemed abandoned by the tenant. At that point, after abandonment, the goods are no longer the property of the tenant. The landlord only acquires rights in the goods from that point. The downside with a deemed abandonment clause is that it may be subject to another security holder’s claim (such as a bank’s all present and after-acquired property) as a priority, and may also give rise to relief against forfeiture claims.What happens if the landlord under the first clause has not perfected its security interest? The landlord may also be entitled to assert non-consensual rights over the goods, arising at law other than by contract. Since such rights do not arise by consensual arrangement, they are not security interests and are not regulated by the PPSA in the same way. Examples include common law, equitable or statutory liens. An equitable lien is a right against property that is implied by the laws of equity and is implied to secure the discharge of an actual or potential indebtedness. It is not consensual and accordingly is not a security interest. It is effectively a form of equitable charge over subject property in that it does not depend upon the possession of the property. There is no requirement that there be a contractual entitlement.An equitable lien will generally be able to be enforced via the sale of the subject property, usually pursuant to a court order. It effectively confers on the lienee the power to obtain an order for sale in the event of the debtors default.Where an equitable lien is found to exist, it will effectively confer a priority in favour of the lienee in the insolvency of the debtor. Situations where an equitable lien can relevantly arise in insolvency cases include, most commonly, a preservation lien. A preservation lien was found in Scandi (of a type) and in Jayfield. In this situation no common law lien arises, since a “warehouseman” is not at common law entitled to be detain goods stored with them before releasing goods subject to storage. Further, a statutory lien may arise under the Australian Consumer Law and Fair Trading Act 2012 (Vic) (ACLFTA) to dispose of the uncollected goods, or similar legislation in the other states and territories. In order to obtain a statutory lien under the ACLFTA, the applicant must demonstrate that it holds the goods as a bailee, and that it is entitled to some lawful right to payment before the goods are taken away by the bailor. In each of Scandi and Jayfield, the lawful right relied on by the applicant included (among other things) their equitable liens. In Tasman the applicant relied on its contractual lien. Commercial storage operator with bailed goods left in custody In this case, at law a bailment arises for reward. Usually the bailment is contractual and includes security in favour of the storage operator for storage and related costs by agreement. An example, from the general conditions of a logistics business including storage and carriage of goods:The Company shall have a lien on the Goods and any documents relating thereto and on any other Goods of the Consignor in the possession of the Company or any documents relating thereto for all sums payable by the Consignor to the Company and for that purpose, the Company shall have the right to sell any such Goods by public auction or private treaty without notice to the Consignor. In addition, the Consignor grants the Company as security for the performance of its obligations under any contract, a chattel mortgage in the Company’s favour against the Goods and any documents relating thereto to secure all amounts payable by the Consignor to the Company under any and all contracts.From a lease of a self-contained storage shed:Special Condition 10 DefaultIf rent remains unpaid for 60 days the Landlord?reserves the right to repossess the Premises and dispose of all stored materials?at the Tenant’s cost. The Landlord will pursue recovery of all debts including?legal fees through the legal system.Under this type of clause there is a security interest. The clause creates, by agreement, a contractual lien on the goods and chattel mortgage. It is a consensual arrangement giving rise to a security interest by way of lien to secure payment of all sums payable by the consignor and a chattel mortgage to secure performance of obligations under the contract and payment.How can a storage providor secure its storage charges? If it is to rely on its contract, it must maintain priority over other security interest holders and avoid vesting on insolvency of its client. To maintain priority, the interest must be perfected. Usually, the security interest would be perfected by registration on the PPSR. Alternatively, in some arrangements perfection will be possible by control. That will only be the case if the storage providor takes possession of the goods to the exclusion of its client, and asserts its security by maintaining possession until paid for the storage costs. The same comments in relation to non-consensual rights made in respect of landlords apply in this case as well. One important difference is that no common law lien arises in favour of a storer. However, an equitable lien may arise and a statutory lien under the ACLFTA may arise. That was the case in Tasman. Bailments for Reward: adding valueA Bailee Under a Contractual BailmentIn many cases a bailee for reward will be in possession of goods for the purpose of doing some work to them for the bailor in return for a fee. Examples include a mechanic, a contract assembler, a cobbler and a contract wine maker.These cases can cause confusion to insolvency administrators appointed to a bailee for reward, because they look like a situation where a security interest might lurk. Surely if the company in liquidation holds someone else’s stock, there must be a vesting issue? Usually, however, no security interest will arise. That is because the because the bailor of the goods will usually owe money to the insolvent bailee for the work done to the goods, rather than be owed money by the insolvent bailee. Conflicts between non-consensual rights in property and security interests: section 8 and 73 of the PPSA. Whilst non-consensual interests in property are not “security interests”, the PPSA nevertheless does regulate how those interests interact with security interests.Section 8 of the PPSA provides:Interests to which this Act does not apply(1)? This Act does not apply to any of the following interests (except as provided by?subsection?(2) or (3)): ……?(b)? a lien, charge, or any other interest in personal property, that is created, arises or is provided for under a law of the Commonwealth (other than this Act), a State or a Territory, unless the person who owns the property in which the interest is granted agrees to the interest; (Emphasis Added)Subsection (2) provides that certain provisions of the PPSA still apply to interests within the carve out. In particular, sections 73, 140(2)(a), 148(c) continue to apply. Those sections deal with priorities between the carved-out interests and those interests that are subject to the Act. Subsection (3) allows regulations to make the PPSA apply to further interests, despite the carve out in section 8(1). No such regulation has been made that is relevant to this situation.Section 73 of the PPSA deals with the priority position between an interest arising under a law, such as under part 4.2 of the ACLFTA, and a registered security interest:Priority between security interests and declared statutory interestsInterests arising under a law etc. in the ordinary course of business(1) An interest (the priority interest) in collateral has priority over a security interest in the collateral if:(a) the priority interest arises (by being created, arising or being provided for):(i) under a law of the Commonwealth, a State or a Territory, unless the person who owns the collateral in which the priority interest is granted agrees to the interest; or (ii) by operation of the general law; and(b) the priority interest arises in relation to providing goods or services in the ordinary course of business; and(c) the person who holds the priority interest provided those goods or services; and(d) no law of the Commonwealth, a State or a Territory provides for the priority between the priority interest and the security interest; andExample: A law of the Commonwealth, a State or a Territory to which subsection (2) applies is a law that provides for the priority between the priority interest and the security interest.(e) the person who holds the priority interest acquired the interest without actual knowledge that the acquisition constitutes a breach of the security agreement that provides for the security interest.Note: The priority interest might be an interest to which this Act would otherwise not apply (see subsection 8(2)).There is no Victorian or Commonwealth law which provides for priority in accordance with section 50(1)(d) in relation to the ACLFTA. Some other states have so provided by law with respect to their uncollected goods legislation, but not Victoria. Section 140(2)(a) in effect gives priority to the carved-out interest, over a secured party under the PPSA. It mandates the application of that priority in the distribution of property or its proceeds by a secured party under the PPSA. Section 148(c) permits regulations to be made requiring the PPSR to record data about certain types of property, which might include property otherwise subject of the carve out. ConclusionThe key questions to ask whether as an insolvency appointee or as a party in possession of goods:Is there a security interestIs it registered or perfected by possessionIs there an alternate non-consensual interest in the property to which the PPSA does not apply? Does the non-consensual property have priority under s73 of the PPSR?Mark McKillopCastan Chambers13 July 2021 ................
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