A recent decision has shed light on when bailments and consignments will be deemed to be “security interests” (and when they will not). This closes potential loopholes in the PPSA.

 

Summary

With regard to the deeming of “bailments for value” by people “regularly engaged in the business of bailing goods”, the Western Australian Supreme Court has:

• suggested that the “value” has to be value provided in return for the right to retain the asset, and that it is not enough that the bailee “provided value” by, for instance, assuming an obligation to keep the asset safe and dry; and
• found that the expression “regularly engaged in the business of bailing goods” requires that bailing goods is the core business of the bailor, not “merely an incident” of the bailor’s business.

The court also provided guidance on when something will be a “commercial consignment”.

 

Introduction – deeming provisions

The PPS lease provisions (along with their much-despised relative, the retention of title provisions), are the most notorious aspect of the Act. They have gained infamy because, in the right circumstances, they permit liquidators to sell other people’s stuff.

This is able to occur because “PPS leases” (as defined in the Act) and retention of title supplies are automatically deemed to be “security interests”. Consequently, the owner’s interest has to be registered, failing which it is extinguished on the appointment of a liquidator or administrator (section 267).

The danger zone for asset owners is where:

• the owner gives possession of the asset to a company,
• the arrangement constitutes a “PPS lease” or a retention of title supply,
• the owner fails to register ownership of the asset on the PPSR, and
• the company becomes insolvent and appoints an administrator or liquidator.

If all those things happen, the liquidator will ordinarily be entitled to retain the asset. In return, the asset’s owner gets a complimentary lesson on how the PPSA works, and an lasting resentment of liquidators.

 

Bailments

As noted above, certain types of “bailments” can be deemed to be PPS leases. Bailment is a simple concept and involves giving temporary possession of an asset to someone else:

• Putting furniture into a storage unit.
• Leaving your car in a parking building.
• Asking a mate to hold your beer while you attempt an impromptu acrobatic feat.

Under section 13 of the PPSA, bailments can be deemed to be PPS leases. This is to prevent people from avoiding the PPS lease provisions by saying “I wasn’t leasing my equipment to this person, I was just bailing it to him”.

However, Parliament did not intend that, when a storage provider (for instance a Kennards or a Storage King) went broke, all the customers’ property would go to the liquidator. Accordingly, Parliament imposed two limitations on the bailment deeming provisions:

• the person providing the item must be “regularly engaged in the business of bailing goods” (section 13(2)(b)); and
• the person receiving the item must “provide value” in return (section 13(3)).

There has always been some doubt about what these restrictions actually meant. The term “value” is defined in the PPSA as anything capable of being consideration under a contract– a concept so broad that even putting furniture into storage would trigger it (because the storage provider would assume contractual obligations to keep the furniture secure, safe and dry).

As for “regularly engaged in the business”, that was not much better. It was not clear whether this box would be ticked where someone regularly bailed goods in the course of their business (for instance a retailer who outsourced warehousing), or whether the process of bailing goods needed to be a profit-making part of the business.

Bailments were not the only source of confusion in the deeming provisions. Confusion also surrounded the consignment provisions.

 

Consignments

Like bailments, “commercial consignments” are also deemed to be security interests for the purposes of the PPSA.

Helpfully, the PPSA sets out the criteria for a “consignment” to be a “commercial consignment”. Unhelpfully, however, the PPSA does not actually say what a “consignment” is, so before you even get as far as the criteria for a “commercial consignment” you need to work out whether what you have is even a “consignment” in the first place.

 

Western Australia to the rescue!

Earlier this month, in Re Arcabi Pty Limited (Receivers & Managers Appointed) (in liquidation) [2014] WASC 310, the Supreme Court of Western Australia provided clarification of all three of these issues:

• what the “for value” requirement means in the bailment deeming provisions;
• what the “regularly engaged in the business of bailing goods” requirement means, ditto; and
• what is needed for there to be a “consignment”.

The issues arose after a dealer in rare coins and banknotes went broke and was found to be in the possession of numerous coins and banknotes deposited with it by customers, for storage and/or sale.

Wanting to make sure they did the right thing, the conscientious insolvency practitioners approached the court for advice as to whether they should give the customers back their notes and coins, or seize and sell them.

 

Key points

The decision is 40 pages long and is full of insightful analysis of PPS legislation and case law in other jurisdictions, and much thoughtful commentary. It would be impossible to sum it all up in a bulletin. As it is, this bulletin is already longer than usual.

Readers are encouraged to read and consider the whole decision, however, as a surrogate, it may be noted that the following interesting points emerged:

 

General points

1. In enacting legislation modelled on New Zealand and Canadian legislation, the Australian Parliament “should be taken to have intended a similar approach”. The court will be accordingly guided by relevant NZ and Canadian decisions (paragraph 14, citing Maiden Civil).
2. Bailments will be deemed to be security interests in either of two situations (paragraph 19):
   1. if they are deemed to be security interests (under the PPS lease provisions), or
   2. if, in substance, they secure payment or performance of an obligation.

3. Consignments will be deemed to be security interests in either of two situations (paragraph 29):
   1. if they are commercial consignments, within the definition in the Act, or
   2. if, in substance, they secure payment or performance of an obligation.

4. When considering whether a bailment or consignment “in substance, secures payment or performance of an obligation”, as the wording suggests, you look at the substance of the transaction, not its form (paragraph 46).

 

On the “for value” bailment deeming requirement

5. The requirement that a bailment be “for value” is capable of being interpreted as a requirement for “specific consideration to be given by the bailee for the bailment” (rather than a broader requirement that the bailee give something of value as part of the whole arrangement) (paragraph 26).

Although this issue was not resolved conclusively, the court observed that the more restrictive (and sensible) interpretation is possible (i.e. it was not ruled out). It is likely that the narrower construction will be preferred.

 

On the “regularly engaged in the business” bailment deeming requirement

6. There are three points to consider about the requirement that the owner of the asset be “regularly engaged in the business of bailing goods” (all made in paragraphs 24 and 25, citing Rabobank v McAnulty – a NZ decision):
   1. It is necessary that “the owner actually be intending to profit from the bailment”.
   2. You need to look at the business of the bailor (owner), not the business of the bailee (recipient).
   3. The “regularly engaged” requirement is only satisfied where the act of bailment is a profit-making part of the bailor’s business, not where it is merely incidental to the business.

 

On the question whether something is a “consignment” at all

7. Whether or not a particular arrangement is a “consignment” may be determined having regard to fifteen indicia (paragraph 32, citing an Ontario case). Not all of the indicia need to be present – you may still have a consignment even if some of the indicia are not present (paragraph 45).

 

On the question whether a “consignment” is a “commercial consignment”

8. The purpose of requiring commercial consignments to be registered on the PPSR is to protect creditors who might otherwise be misled into thinking that the company seeking credit owned a whole lot of stuff (i.e. was asset rich), whereas in reality all the stuff was merely being held by the company on consignment (paragraph 55).
9. This is unlikely to be a serious risk if everyone knows that the company holds stuff on consignment.
10. Accordingly, if it is widely known (to creditors) that a company holds stuff on consignment, it is unlikely that the arrangement will be found to be a commercial consignment.

 

Outcome

Because (on the evidence) Arcabi was “generally known to its creditors as being in the business of selling the goods of others”, the arrangements it had with those who had deposited rare notes and coins were not considered to be “commercial consignments” (paragraph 59).

Nor was there enough evidence to conclude that the depositors were “persons regularly engaged in the business of bailing goods”. Accordingly, the bailment deeming provisions did not apply (paragraphs 26-28).

Because the owners’ interests in their notes and coins were not deemed to be security interests, the court said it was appropriate for the notes and coins to be returned to the relevant owners (paragraph 28).