Under the Personal Property Securities Act 2009, goods owned by one party but held by another can be seized and sold by a liquidator or trustee in bankruptcy if the owner’s security interest is not properly registered on the PPSR. The Flown Pty Ltd v Goldrange Pty Ltd case confirmed that actual physical possession is critical, and ownership alone may not protect assets during an insolvency. Businesses that allow others to possess their goods through credit sales, consignment, storage, or similar arrangements should register their security interests as early as possible. Failing to do so may result in losing valuable assets to satisfy the debts of the insolvent party.
How can businesses protect their goods if a customer, tenant, or other party holding those goods becomes insolvent or bankrupt?
Our Commercial Team explores this topic
Summary
This article explains how the Personal Property Securities Act 2009 can affect businesses whose goods are held by another person or entity that becomes insolvent. It highlights the importance of registering security interests on the PPSR and examines how the Court interpreted possession in Flown Pty Ltd v Goldrange Pty Ltd.
What happens to your goods if another business becomes insolvent while holding them?
Does your business involve sales on credit, deferred payments, lay-by, hire-purchase, consignment or storage? If so, other people or entities will have physical possession of assets that belong to you or your company. What if that other person or entity becomes bankrupt on insolvent whilst in possession of your assets? In that case, the assets that you own may be seized and sold to pay out debts owed to other creditors simply because those assets were in the possession of the bankrupt/insolvent entity at the time of their bankruptcy/insolvency. This is the effect of the Personal Property Securities Act 2009 (“PPSA”) where owners of goods placed in the hands of others in the course of trade do not protect their rights over those goods by registering security interests on the Personal Property Securities Register (“PPSR”).
Why is possession important under the PPSA?
This makes the idea of possession so important under PPSA that the WA Supreme Court was asked to determine what “possession” means for PPSA purposes in Flown Pty Ltd v Goldrange Pty Ltd [2016] WASC 419.
What does possession of goods mean?
The Court started by considering what the law, outside of the PPSA, generally regards as constituting possession of goods:
(a) having the goods in your physical possession (actual possession);
(b) having control over the goods in the sense of being legally entitled to decide what is to be done to or with the goods, together with the intention to exercise that control;
(c) being legally entitled to take physical possession of the goods immediately.
What did the Court decide in Flown Pty Ltd v Goldrange Pty Ltd?
The Court then found that under the PPSA, nothing short of actual possession by the owner would suffice to prevent a liquidator or trustee in bankruptcy from seizing goods not protected on the PPSR, selling them and distributing the proceeds in favour of priority creditors, which may not include their legal owner. In Flown, the collateral was held by the owner’s insolvent tenant. In these circumstances, the owner lost its goods to the tenant’s liquidators even though the tenant had acted unlawfully in preventing the owner from taking physical possession of the goods prior to the tenant’s insolvency. In other words, it did not even matter that the owner would have had possession of its own property prior to the tenant’s insolvency if the tenant had not broken the law. All that mattered was that, as a matter of fact, the owner did not physically possess the goods when the tenant (which did possess the goods) became insolvent.
How can businesses protect their property under the PPSA?
The lesson is: if you enter into any transaction where someone else comes into physical possession of your property, even if it is only to hold it in storage, register your security interest in that property as soon as possible. Do not rely on other theoretical grounds under the PPSA to try and keep your property out of the hands of the other party’s liquidator or trustee in bankruptcy should that other party become insolvent. So far, the Courts have interpreted these other “escape routes” very narrowly. Consequently, if you rely on grounds other than a security interest, registered properly and early, you are very unlikely to defeat the claims of a liquidator in actual possession of collateral. This means that your goods are likely to be taken by the liquidator and sold to pay out other creditors of the insolvent party that possesses your goods, even though you own them.