The slightest whiff of a security interest under the Personal Property Securities Act (PPSA) always brings the risk of opportunistic claims. Courts dealt with a number of these claims during 2024. The lesson for claimants is to ensure that you have a security agreement supporting your claim. The lesson for owners of personal property is to always consider registering before leaving your property with others.
Lifestyle Property Partners Pty Ltd v O’Reilly
Six purebred Arabian mares were leased by their owner for 12-months to a horse breeder under a verbal arrangement. Under the lease, the breeder wasn’t required to make upfront payment but was responsible for all other costs of the mares. The breeder took the mares but then sought in writing payment for the agistment fees and five-year lease terms. The owner rejected these written proposals, terminated the verbal lease arrangement and unsuccessfully attempted to recover the mares. The breeder then registered on the Personal Property Securities Register (PPSR) relying on her agistment claim.
The Court held that the breeder didn’t have a security interest under section 12(1) of the PPSA. The evidence established that the owner never entered the written proposals – they had refused to do so and never executed them. Therefore, the agreements claimed by the breeder never came into existence and the written proposals were incapable of giving the breeder a security interest in the mares.
Re Qenos Pty Ltd (administrators appointed)
The case involved a contest between two manufacturers over about 2,800 metric tonnes of ethylene held in a storage tank in Port Botany.
The first manufacturer, Qenos, used the storage tank to store ethylene and process it within its plant known as Olefines. Qenos also operated a hydrocarbon terminal for the storage of hydrocarbons including ethylene. Hydrocarbons are taken from and sent to ships which berth at this terminal using underground pipelines which are linked to the ethylene storage tank.
Formal contractual arrangements from 1998 to 2019 enabled Qenos to supply ethylene to the second manufacturer, Indorama. This included a 2011 variation under which during a period of a shutdown of the Olefines plant, the parties would use reasonable endeavours to agree on terms for the supply of imported ethylene to Indorama.
On 28 February 2023, there was a major incident which resulted in the shutdown of the Olefines plant and an inability for Qenos to produce ethylene. Indorama was forced to purchase ethylene from other sources and convey them to the ethylene storage tank. Under an exchange of emails between Qenos and Indorama in March 2023, Qenos would allow Indorama to use the hydrocarbon terminal, pipelines and ethylene storage tank to unload, store and use ethylene.
After the shutdown, Indorama imported five shipments of ethylene ranging between 2,900 and 3,400 metric tonnes and costing between $4.3 million and $7 million. Each imported shipment took around eight to 13 weeks to be used in Indorama’s manufacturing process. On 7 April 2024, a shipment of approximately 3,400 metric tonnes of ethylene valued at about $6.81 million was transferred to the ethylene storage tank.
On 17 April 2024, administrators were appointed to Qenos. Indorama hadn’t registered on the PPSR and the Administrators claimed the remaining ethylene.
The Administrators contended that there was a PPS lease and therefore a deemed security interest because there was a bailment for an indefinite term when the variation came into effect in 2011. Indorama submitted that by 7 April 2024 there was a bailment of the ethylene to Qenos under an ad hoc arrangement. The terms of this arrangement were contained in the March 2023 emails. However, Indorama reasoned that this was not a PPS lease because the term was for less than two years, Indorama was not regularly engaged in the business of bailing goods, and Qenos did not provide value for the bailment.
The Court held that there was no PPS lease and therefore no security interest under the PPSA. The Court found that the bailment arose on the delivery of each importation of ethylene to the storage tank. This included the April 2024 shipment. The supply agreement also said nothing about a bailment of ethylene by Indorama to Qenos.
The Court also considered that there was no PPS lease because the circumstances in which Indorama found itself importing ethylene to be stored in the storage tank were highly abnormal and a result of the shutdown. There was no evidence that Indorama had done this before or planned to make the bailment a regular part of its business.
The Court also took the view that there was no PPS lease because Qenos did not provide value for the bailment. That is, Qenos never made payment for the bailment and there was no sufficient connected financial benefit made by Qenos to constitute consideration to support a contract.
Kirkalocka Gold SPV Pty ltd (recs and mgrs apptd) Zenith Pacific (KLK) Pty Ltd
A miner entered into a Power Purchase Agreement with an electrical power operator. Under the agreement the operator was to construct and operate a power plant within the miner’s site. In return, the miner would pay charges to the operator. This included a fixed amount capacity charge payable throughout the 10-year agreement term, even when the power plant became disconnected from the miner’s infrastructure. It also included energy charges calculated by the amount of electricity the operator supplied to the miner but which did not continue after disconnection. By the end of that term the miner could effectively ‘purchase’ the power plant for nothing. The agreement also provided the operator a non-exclusive and non-assignable licence to occupy the site, kept title in the power plant with the operator, and gave the miner a step-in right if the operator defaulted. The evidence also disclosed that the power plant doors were locked, visitors had to sign in to enter it, and the power plant was staffed by someone wearing the operator’s uniform.
On 1 May 2021 the miner went into administration. The operator didn’t register on the PPSR until 10 January 2022. The Administrators instituted proceedings claiming that the miner owned the power plant because the operator had failed to perfect its security interest.
The Court ruled out a security interest from a PPS lease because there was no bailment. Based on the terms of the agreement and evidence, the operator had possession of the power plant. Therefore, the miner couldn’t claim that possession had been transferred to it as is the essence of a bailment.
However, the Court held that the operator had a security interest under section 12(1) of the PPSA. The fixed nature of the charges indicated that they were intended to cover the capital cost of the power plant. Properly analysed, the agreement gave rise to a title retention device that secured the miner’s obligation to pay the charges.
The Court nonetheless dismissed the Administrators’ application. While the operator hadn’t perfected its security interest by registration, the Court held that the it had perfected the security interest by possession under sections 21(2)(b), 24(1) and 24(2) of the PPSA.
Read our Plain English Guide to the PPSA and PPSR for an overview of the legislation and its implications.
For more information, please contact Coleman Greig’s PPSA and PPSR experts.
