Legal Insight Issue 16

Contents:

PPSA Update - A Security Interest By Any Other Name

Federal Court Allows Liquidator's Sale

ACCC Enforcement - Recent Examples

Take-Away Food and Fitness Industries - Franchising Audits Coming Your Way

Trusts - Shams - Bankruptcy

PPSA Update - Further Australian Developments

You have no doubt heard of the significant changes to the security landscape in Australia in light of the Personal Property Securities Act, 2009 (Cth) ("PPSA")... if nowhere else, then in prior editions of Legal Insight.  

What you may be surprised to learn is the scope of the PPSA and its reach.    A recent New Zealand High Court decision provides a perfect example.  The facts and outcome are thankfully quite simple (unlike various sections of the PPSA).  In brief:

1. Company A ("Builder") makes construction contract with Company B ("Principal");
2. The contract contains clauses allowing the Principal to "step-in" and take over the building works in certain circumstances.  For this purpose, the Principal has the right ("Rights") to use the Builder's materials and machinery ("Plant"), recover from the Builder reasonable costs incurred in carrying out the works and sell any excess Plant and appropriate the net proceeds to satisfy the Builder's liability to the Principal;
3. The Principal did not register the Rights under the NZ PPSA;
4. A receiver was appointed to the Builder and the Principal sought to rely on, and exercise, the Rights.  The Bank of New Zealand ("Bank") took issue with this; and
5. The Court found for the Bank as it had previously registered various security interests (both general and specific) over the Builder. 

The interesting aspect of the decision is the Court's finding that the Rights created a "security interest", which was therefore registrable under the NZ PPSA.  As the Principal failed to register (and did not have possession) it did not get any benefits under the NZ PPSA.  As an aside, it is unclear whether the Principal would have been better off if it registered - the Court would have needed to decide the timing of registration and type of security interests, which it didn't need to do in the circumstances.

There are subtle differences between the definition of "security interest" between the PPSA and the NZ PPSA.  However, given the Australian Court's reference to Canadian and New Zealand decisions when interpreting the PPSA (as they have had PPSA Acts in force for many years), the decision is likely to carry some weight if similar issues arose here. 

Lessons to take from this are:

1. rights akin to the Rights are not limited to construction contracts.  Other contracts which may contain Rights (or similar legal benefits) include franchise agreements, commercial leases and intellectual property license agreements.
2. each contract needs to be considered in its own right;
3. if you have a security interest, take steps quickly to "perfect" it (in most cases, by registration);
4. seizure or repossession of the Plant in this case did not amount to "possession" (as defined in the NZ PPSA). 

Time has flown since commencement of the PPSA and it is approximately 4 months until the transitional period ends.  If you have not considered the possible impacts of the PPSA on your business, we strongly encourage you to do so now.  Come 1 February 2014, you may lose the benefit of something you didn't know you had!

Hugh & Associates would be pleased to assist in reviewing your contracts and commercial arrangements with a view to advise on the effect and impact of the PPSA on your business.

The Federal Court has refused an application to prevent a liquidator from selling a substantial asset of a company in liquidation.  The Court confirmed the broad nature of liquidators' powers and their ability to make commercial decisions and exercise business judgment without "second-guessing" from the Courts. 

The facts are as follows:

1. Messrs Leigh and Owen were appointed liquidators of Bonython.  Bonython's major asset was a joint venture interest in a mining tenement near Broken Hill;
2. The liquidators took various steps to advertise the sale, negotiate with various bidders, request certain assurances and formalities in respect of bids placed, impose various entitlements as to submission of bids and conditions, rejected various offers and ultimately accepted an offer (subsequently approved by creditors); and
3. An unsuccessful bidder applied to restrain the liquidators from proceeding with the sale, however, it was refused relief by the Court… in effect allowing the liquidators to proceed with the sale. 

Amongst other things, the Court found:

1. Although the unsuccessful bidder's offer appeared to be higher:
   1. it provided for non-cash payments (with an uncertain value) and did not deal with various matters stipulated by the liquidators;
   2. there was inadequate evidence that the unsuccessful bidder had the necessary finance to complete the transaction;
   3. the liquidator had determined the appropriate course was to realise cash in the short term;
   4. there would be a more substantial benefit to creditors and members if another offer was accepted; and
   5. the successful bidder offered an indemnity from itself as well as a third party.
2. Courts should be "reluctant to interfere with decisions of liquidators where, as here, their actions attract the benefit of the business judgment rule under Section 180(2) of the [Corporations] Act";
3. The statutory powers given to liquidators are "very broad" and allow them to sell and dispose of company property "in any manner [and to] do all such things as are necessary for winding up the affairs of the company… [which] involve wide discretion and, by their nature, require the exercise of considerable business commercial judgment" and "[i]t was not for the Court to determine what was the best method of sale"; and
4. Liquidators are not under a legal duty to achieve "the best possible price" under Section 420A of the Corporations Act as they are not "controllers" as defined, although the Court acknowledged they are "subject to some relevant duties, including duties of skill and care and duties owed by fiduciaries to the company, its creditors and its contributories".

Readers should note that this was an interlocutory hearing. 

These cases must be considered on their own facts, however, this is yet another decision which confirms that Courts are reluctant to interfere with and scrutinise liquidators' commercial decisions when winding up the affairs of a company.  The Court suggested this would be "enter[ing] upon a slippery and uncertain field" and more than mere dissatisfaction or a lower sale price of an asset than would ordinarily be expected will be required to invoke the Court's assistance. 

Citation: Wentworth Metals Group Pty Ltd –v- Leigh & Owen (as Liquidators of Bonython Metals Group Pty Ltd); In the matter of Bonython Metals Group Ltd (In liq) [2013] FCA 349.

The ACCC has commenced proceedings in the Federal Court of Australia against Origin Energy and representatives of its marketing company agent (SalesForce) for door?to?door selling practices, including alleged breaches of various provisions of the Australian Consumer Law ("ACL"), false and/or misleading statements, unconscionable conduct, undue harassment and/or coercion. 

The ACCC alleges the conduct occurred across New South Wales, Victoria, Queensland and South Australia between September 2011 and December 2012 and relates to the following alleged conduct:

1. representations that there was a government requirement for consumers to change electricity providers, consumers had been overcharged by their current electricity provider and Origin had approval of, or was affiliated with, the Electricity Trust of South Australia;
2. failure to inform consumers of their cooling-off rights;
3. attending on consumers' houses outside permitted hours;
4. failing to clearly advise consumers that they were seeking to make an agreement for the supply of electricity and/or gas; and
5. failing to leave consumers' premises upon request.

Further examples of proceedings brought (some still current) by the ACCC regarding utilities providers and their conduct:

1. Federal Court proceedings against Neighbourhood Energy and Australian Green Credits for unlawful door-to-door marketing practices.  By consent, penalties totalling $1,000,000.00 ordered;
2. AGL ordered to pay $1,500,000.00 by consent for false and misleading representations and breaches of the Unsolicited Consumer Agreement ("UCA") provision of the ACL.  AGL's marketing company (CPM Australia Pty Limited) also ordered to pay $200,000.00 for its role;
3. Proceedings against EnergyAustralia Pty Limited (formerly TRUenergy Pty Limited) and associated marketing companies in regard to alleged false and misleading conduct and breaches of the UCA.  The proceedings are still on foot; and
4. Proceedings commenced against Australian Power & Gas Company regarding alleged false and misleading conduct, unconscionable conduct and alleged breaches of the UCA.  The proceedings are also still on foot.

Safety Standards Breach

The ACCC has accepted a Court enforceable undertaking from Bunnings Group Limited for an alleged failure to comply with the safety warnings provisions of the ACL.  The ACCC alleged Bunnings sold blinds between January and March 2013 which did not carry the requisite safety warnings on the packaging of the associated dangers with the blind cords (including risks to young children).  The ACCC has indicated it discovered this conduct during routine market surveillance.

The Deputy Chairman of the ACCC, in late October 2013 indicated that the ACCC's audit power will be engaged to audit record keeping and compliance by franchisors in the take-away food and fitness industries.

We understand that the ACCC has targeted these two sectors as having a disproportionate number of complaints.

Readers may recall from prior editions of Legal Insight that the ACCC's audit powers were introduced in 2011.  The ACCC has been looking into the franchising industry for some period of time.  Prior ACCC reports have suggested that the majority of franchisors do comply with mandatory requirements for record keeping, disclosure documents, publishing marketing fund statements and incorporating required provisions into franchise agreements.

It will be interesting to see the outcome of the ACCC's audit.  When the results are to hand publicly, we will further report to readers of Legal Insight.

John Vohralik (our Consultant Director) is a mediator on the Panel of Mediators of the Office of the Franchising Mediation Adviser and is a Nationally Accredited Mediator and has expertise in consumer law and franchising disputes.

The New South Wales Court of Appeal has declared that a piece of land which was registered in the name of a bankrupt is held upon trust (with the result that it is not available for creditors generally in the bankruptcy) – see Louis v Condon [2013] NSWCA 204.  This decision involved many and varied complex legal and procedural issues.  It is beyond the scope of this article to canvass all these issues.  The salient facts and issues (only) have been covered here.  

Background

1. In 2001, C purchased land ("Land") as trustee of the Kenthurst Investments Trust ("Trust"), a discretionary trust in favour of C and various members of her family. 
2. The trial judge (and the Court of Appeal) held that at various stages C and companies associated with her made decisions and took actions, including utilising the Trust, with the purpose of deceiving C's ex-husband, the Family Court and to avoid tax. 
3. In 2005, C disclaimed her interest in the Trust, purported to change the appointor of the Trust (being the person with the power to remove and appoint the trustee) and appoint herself as trustee. 
4. In 2006, proceedings between C and her ex-husband were settled and a declaration was made that C held the Land as trustee on the terms of the Trust. 
5. In 2009, C borrowed money using the Land as security.  Incidentally, most of the money was used for her personal purposes.  
6. C was made bankrupt in 2012.

The Legal Issues

1. The Court declared that the Land was an asset of the Trust and was held on trust for the benefit of the beneficiaries in accordance with the trust deed… therefore it wasn't available for the benefit of C's creditors generally in her bankruptcy.
2. The issues we believe would be of interest to our readers are as follows:
   1. the Trust was not "a sham", finding that merely because actions are taken with an improper motive (including deceiving others, the Family Court and tax obligations), so long as the intention is to create a discretionary trust and it to bear its usual legal consequences it is not a sham;
   2. if a person holds property as trustee of a trust, the person holds title subject to the terms of the instrument creating the trust (i.e. the trust deed);
   3. a trustee of a trust holds office from the time of their appointment, not from the time trust property is transferred to them;
   4. a sequestration order (i.e. a bankruptcy order) does not destroy a trust; and
   5. a power vested in a person who is made bankrupt, such as the powers of an appointor under a trust, does not vest in the person's trustee in bankruptcy.

On 11 October 2013, the Administrative Appeals Tribunal of Australia ("AATA") affirmed a decision of the Registrar of Personal Property Securities ("Registrar") who had refused a debtor's request for amendment of the Personal Property Securities Register ("PPSR") – Cirillo and Registrar of Personal Property Securities [2013] AATA 733.

The Facts

1. Mr Cirillo purchased a motor vehicle with financing from GE Personal Finance Pty Limited ("GE"). 
2. GE registered its interest on the NSW Register of Encumbered Vehicles ("REVS").  (GE's interest on REVS was subsequently migrated to the PPSR in January 2012 when the Personal Property Securities Act ("PPSA") commenced.) 
3. Mr Cirillo borrowed further funds from GE and consolidates his loan.
4. GE assigned various debts (including Mr Cirillo's) to Lion Finance Pty Limited ("Lion Finance").  Under the agreement, GE was required to register financial statements on the PPSR to record the transfer of security interests to parties nominated by Lion Finance. 
5. GE registered a financing change statement varying the secured party to Lion Finance and Collection House Limited ("Collection House"). 
6. Mr Cirillo issued an amendment demand ("Demand") under the PPSA to Lion Finance and Collection House demanding they vary the registration to bring it to an end (ie discharge) or omit the vehicle from the subject registration (ie exclude the vehicle from the security). 
7. Under the PPSA procedure, the Demand was subsequently sent to the Registrar.  The Registrar sought comment from the secured parties.  Collection House (on its own behalf and on behalf of Lion Finance) responded, including by providing various documents. 
8. The Registrar refused to amend the registration and the AATA affirmed the decision.   

The Law

1. The PPSA allows a party claiming an interest in collateral which is subject to a registered security interest to demand that a secured party amend the registration.  Importantly, this is limited to two circumstances and to be an "authorised demand" you need to show:
   1. no collateral described in the registration secures any obligation owed by the debtor to the secured party; or
   2. the particular collateral in which the person has an interest does not secure any obligation owed by a debtor to the secured party. 
2. On the evidence, the Registrar "suspected that the [Demand] was not authorised under [the PPSA]". 
3. Mr Cirillo made wide ranging arguments as to why the vehicle did not secure a debt owed by him to Lion Finance or Collection House, including that some of the agreements were not signed, parties were not authorised to execute agreements, he did not understand the nature of the agreement, the registration was not "legitimate", the assignment from GE was invalid or unlawful and the amounts claimed were inaccurate.  It appears there was little (or no) evidence to support these contentions.  Conversely, the reasons for Judgment suggest there was ample evidence showing the vehicle secured Mr Cirillo's debt and the debt was validly assigned. 

Careful attention to the relevant sections of the PPSA is warranted!  Whilst the relevant provisions are somewhat vague and clearly discretionary, the Registrar "must" amend a registration (after following the procedure of allowing the prescribed time for a secured party to respond etc) but "need not" if he/she "suspects on reasonable grounds that the amendment is not authorised…" (our emphasis).    

This seems to be the first Australian decision dealing with the procedure and enforcement of amendment demands under the PPSR.