Whisky

The lessons to learn from three significant PPSA matters

John Bennett, ||

PPSA Update for June 2023

Within my first month at Coleman Greig there were three significant cases dealing with issues arising under the Personal Property Securities Act 2009 (PPSA).

The lessons from these cases include:

  • Power of attorney and termination clauses in a contract may create security interests.
  • An entity may regularly engage in the business of leasing goods and have a PPS lease even if it only has one of these leases on its books.
  • In determining whether there is an ‘account’ and therefore a ‘circulating asset’:
    • it is essential to identify whether there really is a monetary obligation; and
    • there is potentially a strict test as to whether the account ‘arises from’ granting a right, or providing services, in the ordinary course of a business of granting rights or providing services of that kind.

AWE Perth Pty Ltd v Clough Projects Australia Pty Ltd
[2023] WASC 203[1] – Security interests pervade a construction contract

AWE Perth Pty Ltd (AWE) entered into a construction contract with Clough Projects Australia Pty Ltd (‘Clough’). Various clauses in the contract potentially conferred security interests in favour of AWE. However, AWE took more than a year to register. Less than six months after AWE registered, Clough entered voluntary administration. For several months AWE cooperated with the administrators. It then applied to the Court to extend the time to register under section 588FM of the Corporations Act 2001 so that it wouldn’t lose any of its securities under section 588FL of that Act.

The Court held that Clough granted security interests in the contract and granted the extension despite the delay.

The remarkable aspect of the decision is that some of the clauses weren’t things that obviously provide for security interests. These clauses included the granting of an irrevocable power of attorney and termination rights enabling AWE to take possession of personal property. The Court also applied precedents in holding that the contract’s step-in right[2] and use of a sole purpose project bank account[3] too granted security interests. Otherwise, the Court rejected that a security interest arose in a clause reserving title in works completed by AWE.

In granting the extension the Court was satisfied that there was no prejudice to the creditors. There were already two registered ALLPAAP (all present and after-acquired property) holders, Clough had recapitalised, and there was no suggestion that it wasn’t solvent. The Court also agreed that it was just and equitable to extend. That was because AWE had kept the contract on foot during the administration, funded the administration and changed its contractual arrangements to accommodate CPA.

De Bourbel Pty Ltd (In Liq) v Distilleria Pty Ltd [2023] SASC 88[4] – Only one business lease required to create a PPS lease

The individuals involved were keen to pursue a whisky distillery business at Hindmarsh Valley. They incorporated two companies. The first, Distilleria De Bourbel (Distilleria), owned land and leased it and plant and equipment to the second, De Bourbel (DB). DB occupied the land and ran the distillery built on it. Various single malt whisky enthusiasts also entrusted their whisky in 100-litre barrels into the possession of DB. Distilleria, DB and the individuals behind them soon fell out and DB went into liquidation. In the liquidation DB claimed the plant, equipment and the barrels on the basis there was no registration on the PPSR.

The PPSA issue was whether the plant and equipment lease and the bailment of the barrels were PPS leases.

The Court held that the lease was a PPS lease to the extent the plant and equipment had not become fixtures. In coming to this decision, the Court was satisfied that Distilleria was regularly engaged in the business of leasing goods. That was even though the plant and equipment lease was the only lease transaction in Distilleria’s business. The Court pointed out that the purpose of Distilleria’s incorporation and the entirety of its business related to the leasing of the plant and equipment to DB. Therefore, the lease was a regular component of Distilleria’s business.

The Court disagreed that the bailments were PPS leases. The barrel holders were not regularly engaged in the business of bailing goods. That was even where one barrel holder bailed 19 barrels to DB. The number of barrels themselves was insufficient to establish that there was a regular business of bailing goods.

Resilient Investment Group Pty Ltd v Barnet and Hodgkinson as Liquidators of Spitfire Corp Ltd (In Liq) [2023] NSWCA 118[5] – Tests as to whether an account is a ‘circulating asset’

Spitfire Corp Ltd (Spitfire) provided financial platform services to the wealth management and private banking industry. As part of its business Spitfire engaged in research and development (R&D) activities. These qualified Spitfire for the R&D tax offset from the Australian Taxation Office (ATO) at the end of each financial year.

Liquidators were appointed to Spitfire in 2020. Following their appointment, the liquidators made R&D tax incentive applications and claimed R&D tax offsets. Spitfire then received about $2 million in R&D refunds.

The PPSA issue was whether the refunds were a circulating asset under section 340 of the PPSA. The basis for that was that the refunds were an account arising from granting a right or providing services, in the ordinary course of a business granting rights or providing services of that kind. If so, the employee creditors would have priority under section 561 of the Corporations Act 2001. If not, a secured creditor instead would prevail.

At first instance, the Court held that the R&D refunds were a circulating asset. The Court treated them as a monetary obligation and therefore an account. The Court also considered that there was a sufficient connection between the account and the provision of services in the ordinary course of a business of providing financial platform services as the R&D ultimately benefitted Spitfire’s customers.

The Court of Appeal overturned the first instance decision and held that the R&D refunds were not an account. That was because on application of the tax legislation they weren’t a monetary obligation when the liquidators were appointed. The obligation of the ATO to pay the R&D refunds arose after issuing the assessment for them. That only occurred after the appointment of the liquidators. Therefore, the R&D refunds were not a circulating asset.

Further, the Court’s view was that even if the R&D refunds were an account, they still weren’t a circulating asset. This was because the R&D refunds didn’t arise from the provision of financial platform services in the ordinary course of providing services of that kind. Instead, the R&D expenditure enabled the provision of, rather than arose from, the financial platform services.

Find out more about the PPSA

Read our Plain English Guide to the PPSA and PPSR for a succinct overview of the legislation and its implications.

If you have queries or challenges relating to the PPSA, please contact Coleman Greig’s experienced Commercial Advice lawyers.

 

[1] AWE Perth Pty Ltd v Clough Projects Australia Pty Ltd [2023] WASC 203.
[2] Bluewaters Power1 Pty Ltd v The Griffin Coal Mining Company Pty Ltd [2019] WASC 438.
[3] Dalian Huarui Heavy Industry International Company Ltd v Clyde & Co Australia (a firm) [2020] WASC 132.
[4] De Bourbel Pty Ltd (In Liq) v Distilleria Pty Ltd [2023] SASC 88.
[5] Resilient Investment Group Pty Ltd v Barnet and Hodgkinson as Liquidators of Spitfire Corp Ltd (In Liq) [2023] NSWCA 118.

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