Failing to register personal property securities: Are you prejudicing other securities?

22nd January, 2014

The recent case of Industrial Progress Corporation Pty Ltd v Wilson highlights a potential problem for creditors who have personal property securities in credit application agreements as well as charging clauses in personal guarantees connected with those agreements.

Facts of the case

1. A supplier entered a credit application agreement with its customer in October 1998 containing a retention of title clause (“ROT security interest”). Upon the commencement of the Personal Properties Securities Act 2009 (“Act”) this became a ‘personal property security interest’ but the supplier never registered it on the register under the Act.

2. At about the same time as the credit application agreement, the supplier obtained personal guarantees from the Wilsons who appear to have been directors of the customer. Those guarantees had charging clauses which entitled the supplier to caveat the Wilsons’ real property.

3. The customer later entered liquidation and the supplier lodged caveats over the Wilsons’ two properties.

4. Court proceedings were then commenced to determine the correctness of the supplier’s caveats. The Wilsons argued they should be released under their personal guarantees, and the caveats should be removed, because:

(a) the supplier breached its equitable duty to register the ROT security interest on the Register;

(b) by doing so, the supplier was unable to enforce the ROT security interest against the liquidator of the customer due to the operation of the Act and this prejudiced the Wilsons.

5. Ultimately, the court rejected the Wilsons’ arguments and upheld the caveats. The court found that there was no breach of duty because the Act protected unregistered personal property security interests created prior to 1 February 2012 until 31 January 2014. It did this under its transitional provisions. In any event, there was still time prior to 31 January 2014 for the supplier to register these interests.  

6. Importantly, the court did not decide whether the outcome might have been different if the situation had occurred after 31 January 2014, being the end of the transitional period under the Act.

Critical issue

This case highlights that a supplier who fails by 31 January 2014 to perfect a personal property security interest (usually by registering that interest on the Register) potentially jeopardises its ability to pursue rights against guarantors.

At its simplest, the reason is that there is an equitable duty to perfect securities against principal debtors. If that is breached, then any secondary securities (e.g. personal guarantees and equitable charges created by clauses in the personal guarantees) may be discharged either wholly or to the extent that the secondary debtor is prejudiced by the breach of duty.

What you should be aware of

Clients in the business of supplying goods on credit terms should review their credit application terms and conditions to determine if they contain personal property security interests.

If those interests exist you should immediatley seek legal advice or take steps to register the security interest in order to protect your position as best as possible remembering that the transitional period under the Act ends on 31 January 2014.

If you are a supplier of goods with charging clauses, retention of title clauses or other securities in your credit application, or want to know more about your potential exposure under the Act, please contact Tony Scoglio of Scoglio Law on (07) 3833 2100 or email tony@scogliolaw.com.au.

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