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In Brief

 

• It is becoming increasingly common for parties to use Personal Property Securities Register (PPSR) registrations strategically to cause inconvenience, cost and delay to the property owner or secured party.
• Strategic registrations constitute a breach of s 151 of the Personal Property Securities Act 2009 (Cth) (PPSA), however, to date, there does not appear to have been any prosecutions under s 151, nor is there any authority as to when a registration will result in a breach of the section.
• The recent Sandhurst decision was an opportunity for a court to provide some guidance in relation to this issue, but disappointingly, it chose not to do so.

 

Overview

 

Unfortunately, it is becoming increasingly common for parties to use PPSR registrations strategically. That is, if a party is asserting an interest in an asset, or is in a dispute with a financier, that party may effect a PPSR registration against the legal owner of the asset, putting the onus on the owner (or secured creditor who is seeking to enforce against the asset) to remove the registration, thereby causing inconvenience, cost and delay to the owner or secured party.

 

Prima facie, such strategic registrations constitute a breach of s 151 of the PPSA, which provides that it is unlawful for a person to register a financing statement in respect of collateral unless they reasonably believe they have a valid security interest in that collateral. However, to date, there does not appear to have been any prosecutions under that section, nor is there any authority as to when a registration results in a breach of the section.

 

The recent decision of Sandhurst Golf Estates Pty Ltd & Ors v Coppersmith Pty Ltd & Ors [2014] VSC 217 (Sandhurst), was an opportunity for a Court to address this issue, but disappointingly, it chose not to do so. In Sandhurst, the Supreme Court of Victoria was required to consider such a ‘strategic’ registration, where the defendant was asserting a security interest in property, but in reality, the defendant was simply claiming ownership of part of the asset. The issues for the Court manifested themselves in the following 2 questions:

 

1. whether an (asserted) equitable interest in property is a ‘security interest’ for the purposes of the PPSA, and
2. whether the Court has jurisdiction to restrain a person from registering a financing statement on the PPSR.

 

The Court found that the asserted equitable interest in property was not a security interest, and granted the order restraining future registrations. Unfortunately, in considering this second question, the Court found it unnecessary to determine whether the party who had lodged the registration on the PPSR had breached section 151 of the PPSA. The failure of the Court to provide guidance in relation to this issue appears to be a missed opportunity to provide authority on the circumstances in which a person will be in breach of section 151, and might be penalised for that breach.

 

What Is A ‘Security Interest’?

 

In Sandhurst, the defendants’ claim in respect of the plaintiffs’ property was based in equity, and did not arise from a consensual transaction between the parties. In such circumstances, the Court found that the defendants’ claim did not constitute a security interest. The Court’s decision in this regard was quite orthodox, and relied upon both overseas and Australian authorities to find that:

 

1. a security interest must arise from a consensual transaction, and
2. that consensual transaction must secure a payment or the performance of an obligation, unless the security interest falls within one of the categories of ‘deemed’ security interests set out in section 12(3) of the PPSA.

 

Section 151 Of The PPSA

 

In Sandhurst the defendants refused to provide an unconditional undertaking not to register any further financing statements if the existing registrations were removed and implied that they would continue to lodge financing statements until they obtained certain documents from the plaintiffs. The documents sought by the defendants were relevant to proving the defendants’ alleged equitable claim in respect of the plaintiffs’ property, and the defendants conceded that gaining access to these documents was a motivating factor in their decision to lodge the financing statements.

 

In such circumstances, it is arguable that the defendants were simply using the PPSR registrations strategically, in an attempt to gain access to the documents, and had (or would have, once the decision that there was no security interest had been made) no reasonable grounds to believe that they had a security interest.

 

In these circumstances, the further question before the Court was whether it had jurisdiction to grant an injunction enjoining the defendants from registering further financing statements. One route to granting such an injunction would have been to find that such ‘strategic’ registrations were a breach of section 151 of the PPSA.

 

Section 151 provides that:

 

‘a person must not apply to register a financing statement… that describes collateral, unless the person believes on reasonable grounds that the person described in the statement as the secured party is, or will become, a secured party in relation to the collateral…’

 

A breach of this section exposes a person to civil penalty.

 

However, the Court neatly sidestepped the issue of whether there had been, or would be, a breach of section 151, by concluding that even if the defendants were not in breach of section 151, the Court had jurisdiction to restrain them from otherwise lawful conduct (i.e. registering any further financing statements) and concluded (by analogy with ‘removal of caveat’ cases) that it was appropriate to grant an injunction, as such an injunction was necessary and appropriate to protect the plaintiffs’ rights.

 

A Missed Opportunity?

 

Although the plaintiffs obtained their desired outcome, being the removal of the PPSR registration against their property and comfort that there would be no future registrations, it was only achieved after a two day hearing, and therefore at significant cost to them, both in terms of time and money.

 

There are two options available to a party who seeks to remove a registered financing statement, the administrative process set out in sections 179-181 of the PPSR and the judicial process set out in section 182.

 

In Sandhurst, the plaintiffs initially sought to invoke the administrative process. However, it appears from the decision that it took approximately 3 months between the time that the plaintiffs applied to the Register for removal of the registrations under section 180 and the time that they received notification of the Registrar’s decision. Additionally, the defendants informed the plaintiffs that if the Registrar decided to remove the registrations, the defendants would simply lodge fresh financing statements.

 

In the authors’ experience, the administrative process for removing registrations under sections 179 to 181 of the PPSR is now much more efficient than in 2013 when the Sandhurst plaintiffs made application, and can be successfully pursued over a period of about 5 weeks, if the registering party simply does nothing in response to the Amendment Demand and Amendment Notice. However, even the current, more streamlined process may not be effective, if a substantive response is received to the Amendment Notice (in which case the Registrar may not administratively remove the registration), and does not prevent a party from re-registering a new financing statement, in a slightly amended format, if their registration is removed.

 

In these circumstances, the costs of applying to court to obtain orders for the removal of the registration, and/or an injunction against a purported secured party will be significant. Therefore, the issue of such judicial proceedings will usually be a last resort.

 

However, if the Court in Sandhurst had provided some guidance as to the circumstances in which a party will be found to have breached section 151 (and where such a breach may result in a penalty), an owner of collateral may have had additional basis to attempt to persuade a party to remove a registration, namely reliance on judicial authority to the effect that there may be serious consequences of failing to remove a registration, being penalties as a consequence of a breach of section 151 of the PPSA.

 

 

For further information, please contact:

 

David John, Partner, Herbert Smith Freehills

[email protected]

 

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