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”).
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  WASC 419.
The Court started by considering what the law, outside
of the PPSA, generally regards as constituting possession of goods:
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;
legally entitled to take physical possession of the goods immediately.
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.
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.
This is general information only, and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.