Administrators: Fighting Landlord's PPSA Claims Over Plant And Equipment
3rd February, 2017
Administrators (and liquidators) of companies which are tenants of leased premises may find themselves having to deal with landlords who claim a security interest in the company’s goods.
Most often, the landlords will have registered their security interest on the PPSR, in which case the administrators’ claims to the goods will be subject to the rights of the landlord as secured creditor.
But what of the situation where the landlord has overlooked registration, and seeks to rely on ‘possession’ (or perhaps less likely, ‘control’) as the basis for perfection of its security interest?
If it cannot do so, then the landlord’s security interest will vest and transfer to the company immediately before the administrator is appointed[1]. But how does an administrator evaluate whether perfection through possession has occurred?
The recent case of Flown Pty Ltd v. Goldrange Pty Ltd [2016] WASC 419 explored this very issue and raises some interesting considerations for administrators dealing with landlords.
Facts of the case
A landlord (Goldrange Pty Ltd) loaned money to a new tenant (Flown Pty Ltd) to take over plant and equipment of the business of two tenants at the leased premises which had failed. Those two tenants were now in liquidation.
The parties signed a lease and a separate loan agreement. Perhaps despite the parties’ intentions, the loan agreement reflected a simple lender / borrower relationship between the landlord and tenant for the purchase by the tenant of the plant and equipment, rather than a retention of title arrangement in favour of the landlord. It included a charge in favour of the landlord over the plant and equipment, which the landlord failed to register on the PPSR.
A year later, the tenant defaulted in paying rent and the landlord tried to terminate the lease by various means - serving notices of termination on directors, affixing the notice to the front door and two separate attempts at re-entry.
The court found that attempts at terminating the lease by personal service of the notices on the directors of the company and by affixing the notice to the front door of the leased premises were either invalid under the lease or of no effect.
The timing of the two attempts at re-entry therefore became critical:
1. The first attempted re-entry of the premises occurred at 11.30am on 15 July 2016 – which was met with physical resistance (wrongfully) from the tenant’s staff and a stand down order by the police; and
2. The second attempted re-entry of the premises occurred at 7.15am on 16 July 2016 which was successful and, during which, the locks were changed.
Typical of the speed with which these types of matters unfold, the tenant appointed voluntary administrators at about 1.00pm on 15 July 2016.
Matters for the landlord to prove
Because the landlord had failed to register its security interest on the PPSR, in order to preserve its security interest it had to establish that the plant and equipment at the leased premises was in the landlord’s ‘possession’ under the PPSA.
The difficulties for the landlord were that it could not have ‘possession’ under the PPSA if the property was in the “actual or apparent possession” of the tenant[2], and the possession cannot result from seizure or repossession[3].
Given the landlord’s other attempts at termination of the lease had failed, in practical terms this meant that:
1. Since administrators were appointed at 1.00pm on 15 July 2016, the purported re-entry at 11.30am earlier that day needed to be valid;
2. The plant and equipment needed to be fixtures which, under the terms of the lease, came into the landlord’s possession upon termination of the lease.
The landlord failed to establish either of these things.
Firstly, the only re-entry which was valid and effective (by the changing of locks) occurred the day after the administrators’ appointment. The first attempted re-entry was not a legally effective entry and did not give rise to constructive possession of the plant and equipment by the landlord.
Secondly, the court found that the plant and equipment (e.g. motor vehicles, trolleys, benches) had such little degree of affixation to the leased premises that they were not fixtures but merely removable chattels. As such, it was not owned by the landlord and termination of the lease did not enliven any rights of possession of the plant and equipment in the landlord.
Outcome and points to consider
The administrators were appointed before the landlord validly terminated the lease. As a result, the landlord’s security interest in the plant and equipment vested in Flown.
The situation might have been otherwise if the landlord had validly terminated the lease before the administrators’ appointment and gained ‘possession’ of the plant and equipment.
In this case, the timing of the events was critical. Unhelpfully, the administrators’ appointment documents did not disclose the time of their appointment. Administrators would be well advised to ensure appointment documents reflect the time of the passing of directors’ resolutions.
Administrators will need to have regard to numerous PPSA and other issues in assessing landlord’s secured creditor claims to a company’s assets.
At Scoglio Law, we can assist in working through these issues and providing effective and timely advice. If you require any such assistance, please contact Tony Scoglio or David Tooth at Scoglio Law.
[1] Section 267 of the PPSA
[2] Section 24(1) PPSA
[3] Section 21(2)(b) PPSA
FOR MORE INFORMATION
For more information, contact Tony Scoglio or David Tooth at Scoglio Law on (07) 3833 2100 or email tony@scogliolaw.com.au or david@scogliolaw.com.au.
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