This story is an example of how you can lose your business without even trying. It’s the “unknown unknowns” that often trip up even the most diligent of small business proprietors. Recently we helped one of our clients on the brink of insolvency due to the unscrupulous behaviour of a person who was a “trusted friend” of that client.
Fred was winding down
The trusted friend was Fred who was winding down his business. He was about to retire. Fred ran a private bus company and advertised one of his buses for sale.
Fred had known our client Barney for many years. Barney ran a tourist company. It was expanding and Barney needed a new bus.
Fred was keen to get the deal done quickly because he was going overseas for a long-overdue holiday the next week and offered a good price to Barney. Barney was tickled pink with the offer and paid for the bus the very next day. He handed over a bank cheque for $130,000 and took delivery of the bus at the same time.
Barney got a good deal – or did he?
Barney felt quite chuffed at the significant discount that Fred had offered him for the quick sale to a long-standing friend.
That was in 2009. What Barney had failed to do in his rush to take advantage of Fred’s generous offer and what he would have been told to do by us, was to check the REVS register of encumbered vehicles.
The REVS Register
At the time of sale, the REVS register showed that the bus was encumbered to ‘Sly Finance’ for $100,000. Barney was also unaware that the contract between Sly Finance and Fred was actually a hire-purchase contract and that it was Sly Finance which actually owned the bus, not Fred – even though the bus had been registered in Fred’s name.
Barney began using the bus in his business, blissfully unaware of the problems that were lurking underneath the surface.
Fred renegotiated the equipment lease
Fred had continued to make the monthly payments to Sly Finance after Fred’s so-called ‘sale’ of the bus to Barney. So Sly Finance thought that Fred was still using the bus in Fred’s business and there was nothing that had occurred to suggest to Sly Finance that anything was amiss.
Fred was enjoying his early retirement. And why not? It was being partially funded by the money Barney had paid him in 2009.
In 2013, after the Personal Property Securities Act began operation, Fred’s hire-purchase agreement with Sly Finance came to an end. Fred did not want to pay the residual and obtain title as the contract required, for obvious reasons – he had ‘sold’ the bus to Barney four years before. Instead, he tenaciously negotiated with Sly Finance to enter into another hire-purchase agreement.
Sly Finance registers its security interest
The new hire-purchase agreement that Fred entered into with Sly Finance was on terms consistent with the Personal Property Securities Act (aka the PPSA). Sly Finance registered their security interest in the bus on the Personal Property Securities Register. Their lawyers said that this would “perfect” the Sly Finance security interest in the bus. Sly Finance was told that it had nothing to worry about.
But what Sly Finance had failed to do was to check that Fred still used the bus in 2013, when the equipment lease regarding the bus was renegotiated.
Fred’s plan falls apart
In 2016, Fred’s spendthrift ways had caught up with him and he ran out of money. He fell into arrears in making the monthly payments under the second (PPSA) hire-purchase equipment lease with Sly Finance.
Sly Finance sought to repossess the bus, but of course Fred did not have it and had not had it since 2009. He told Sly Finance about the sale of the bus to Barney in 2013.
What can Barney do?
Barney came to see us. He was very distraught. Sly Finance wanted to repossess the bus (which by now was only worth $30,000) and to recover from Barney the arrears of the monthly lease payments. The lease arrears plus interest on them totalled about $90,000.
Barney had just moved his business into new business premises and he had just signed a contract for an expensive fitout. Sly Finance demanded $60,000 (being the $90,000 arrears and interest less $30,000 representing the current market value of the bus which it wanted to repossess). Barney would also have to find some money to buy or lease a replacement bus under another equipment lease. The whole situation was going to cripple his business.
We had a long discussion with Barney. We explained to him that because of Sly Finance’s first equipment lease with Fred, Barney should have checked the REVS register before he paid any money to Fred. But he didn’t. And our due diligence had confirmed that Sly Finance had indeed registered their interest in the bus in 2009 on the REVS register.
So Barney had bought nothing in 2009 because the public REVS register and Sly Finance’s equipment lease relating to the bus together indicated that ownership in the bus lay with Sly Finance. Fred could not sell what he did not own. And Barney was taken to have had notice of Sly Finance’s ownership interest because of the registration on the REVS register.
But that hire-purchase agreement came to an end in 2013. Fred then entered into the 2013 hire-purchase agreement and purported to grant a ‘security interest’ in the bus to Sly Finance. However, section 19 of the PPSA says that Fred could only grant a security interest in the bus if he had ownership of it or possession of it, and Fred had neither. Sly Finance owned it, and Barney had possession of it.
So no security interest was granted in the bus at all in 2013. That means that Sly Finance’s claim against Barney for the arrears and interest was invalid. Sly had a claim against Fred for all arrears and interest under the 2013 hire-purchase agreement. They got a judgment against Fred. Sly Finance was so incensed about Fred’s dishonesty that they pursued Fred into bankruptcy, even though they were told by their lawyers that Fred had no money and his bankruptcy would not result in any payment to Fred’s creditors.
Lesson for Sly Finance
Sly Finance had learnt through the school of hard knocks – always find out where your equipment is located before agreeing to lend any money to finance it.
Lesson for Barney
Barney had paid for a bus that he did not own. He had to give it back to Sly Finance. Nevertheless, we were able to save Barney from having to pay for all the arrears and interest under the 2013 hire-purchase agreement, and his business was saved.
Barney pursues Fred
Barney wanted to lodge a proof of debt with Fred’s bankruptcy trustee for the cost of the bus ($130,000) plus interest on that sum for the period 2009 – 2016. However we advised him that as the debt was over 6 years old, he was statute barred from recovering it. If only Barney had seen us from the start!
What if Sly Finance had not registered on REVS?
If Sly Finance had not registered its interest on REVS under the first equipment lease, then Barney would have acquired ownership of the bus when he bought it in 2009. The second hire purchase agreement in 2013 would have meant nothing because Fred had neither ownership nor possession and Sly Finance did not have ownership either at that time because Fred had sold the bus to Barney in 2009. So any registration of Sly Finance’s security interest on the PPSA could have been cancelled by Barney applying to the PPS Registrar under section 181 to delete the defective registration.
*Leigh Adams, Special Counsel and Accredited Business Law Specialist, Owen Hodge Lawyers
Ph: +61 (0)2 9570 7844
PO Box 187, Hurstville NSW BC 1481