13
Feb 2017

Perfect possession

What happens when you have a unperfected security interest and the grantor is wound up, appoints administrators or become bankrupt? The issue of perfecting your unregistered security interest by possession arose in the case of Flown Pty Ltd v Goldrange Pty Ltd [2016] WASC 419 in which a landlord was the purported secured party and a tenant was the grantor who had entered into voluntary administration.

Facts

The case related to ownership of fitout for a leased premises. Pursuant to an agreement between the parties, the landlord loaned funds to the tenant to purchase the fitout (the Collateral) from the previous tenant of the premises.  The agreement contained a charging clause, however the landlord did not register its security interest over the Collateral on the Personal Property Securities Register (PPSR) . As a result of the tenant failing to make payments due under the lease, the landlord purported to terminate the lease.  The landlord was prevented from re-entering the leased premises. Shortly thereafter, voluntary administrators were appointed to the tenant.

Positions

The tenant claimed that the landlord did not perfect its security interest by actual possession of the collateral (section 24(1) of the Personal Property Securities Act 2009 (Cth) (PPSA)) and that as a result, the landlord’s unperfected interest vested in the administrators pursuant to section 267 of the PPSA. Further, any actual possession by the landlord prior to the appointment of administrators would have been a seizure and ineffective pursuant to section 21(2)(b) of the PPSA.

The landlord claimed that it would have taken possession of the Collateral by terminating the lease and re-entering possession of the premises if the tenant had not physically prevented the landlord from doing so, without actually ‘seizing’ the fit-out in contravention of section 21(2)(b) of the Act.

Decision

The Court held on the facts that at the time of the appointment of the administrators of the Tenant:

  • the tenant retained possession of the Collateral,
  • the landlord was not in actual possession of the collateral; and
  • the Landlord’s security interest was unperfected.

As such, the unperfected interest vested in the tenant upon the tenant entering administration (section 267 PPSA). The landlord was then only able to prove in the administration for the amount owed to it as an unsecured creditor.

The Landlord obtained actual possession of the collateral after the administrators were appointed, however the Court found this was irrelevant. The Landlord needed to have had actual (not constructive) possession of the Collateral prior to the appointment of the administrators so that its security interest was perfected prior to it vesting.

Lessons

A purported secured party should always register its interest on the PPSR. If it does not, the secured party will need to ensure it has actual possession to entitle it to rely on section 24(1) and (2) of the PPSA to perfect its security interest:

  • 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.
  • A grantor or debtor cannot have possession of personal property if the property is in the actual or apparent possession of the secured party, or another person on behalf of the secured party.

Possession in respect of a PPSA registration differs to the common law, in that for a security interest to be perfected (in the absence of registration) the secured party must have both apparent and actual control of the property (section 24(2) of the PPSA). Importantly in this case if the landlord had taken actual possession of the Collateral as a result of seizure or repossession it would not have been considered possession for the purposes of the PPSA in any event (section 21(2)(b) of the PPSA).