What can be more frustrating than to register a security interest on the PPSR but still lose out?
In the case of Doka Formwork Pty Ltd, the loss was in the region of $1 million.
As credit professionals we need to understand how this happened and how to avoid the same fate. For those who want a very detailed explanation, we recommend you read the full judgement: Relux Commercial Pty Ltd (In liquidation) v Doka Formwork Pty Ltd.
In this article we will give a simplified overview of the case and focus on the commercial implications of the judgement. The background facts are as follows:
- Doka is in the business of leasing formwork equipment and had an ongoing trading relationship with Relux.
- Most of the equipment in question was delivered into Relux’s possession before 1 January 2014.
- On 20 February 2014 Doka registered a security interest in its goods on the PPSR.
- There were two subsequent deliveries of equipment on 26 February 2014 and 31 March 2014. z On 7 April 2014 Relux went into administration and 16 May 2014 was placed in liquidation.
Dates are critically important
As knowledge of the PPSA grows, most businesses are becoming aware of PMSI’s and the super priority that a supplier of goods may obtain if it registers within specified time limits. But this case had nothing to do with PMSIs or even the PPSA itself.
Doka was tripped up by the Corporations Act 2001, which has been amended to harmonise with the new Act. The abridged version of section 588FL is as follows:
- if a secured creditor fails to register its interest on the PPSR within 20 business days of the security agreement being created, and
- the debtor company (grantor) has administrators or liquidators appointed, or enters into a DOCA within six months of registration on the PPSR, then
- the security interest will vest in the insolvent company and the secured creditor loses its goods.
The appointment of administrators on 7 April 2014 was clearly within six months of the date on which Doka registered its security interest, so it was at risk. The cut-off date in the Doka case was 21 January 2014, being 20 business days before the registration of its security interest on 20 February 2014. Accordingly Doka lost all equipment provided prior to 21 January 2014 – which represented the bulk of equipment supplied. However, it was protected for the equipment delivered on 26 February and 31 March 2014.
Caught out by something the law never intended
This is an unintended consequence of the law and even the judgement notes that this is a “seemingly draconian result”, with Doka bearing the consequences.
When the PPSA first came into effect it was accompanied by an explanatory memorandum that explained the thinking behind the provisions of the Act and which included comment on the Corporations Act amendment. The intent of the amendment was to prevent companies with knowledge of actual or impending insolvency from granting security over assets to friendly parties.
It was never intended to catch companies like Doka, but the law is very clear and there is no room for discretion. Even if we feel the law may be unfair, we need to accept it for what it is and take appropriate steps to protect our businesses.
While every business is unique and circumstances will differ, there are three broad courses of action:
- Choose to take the ‘six month risk’, but register everything on the PPSR as soon as possible so the risk is contained and the clock starts ticking. Do not wait until you have concerns about the financial stability of a customer.
- If you have a single or primary transaction, such as in the case of Doka, you can apply to the Court under section 588FM of the Corporations Act to have a later time fixed for registration so that you are no longer at risk. This is of course expensive and there is no certainty that the Court will allow a later date to be fixed, particularly if it may prejudice the rights of other creditors.
- For businesses with an ongoing trading relationship, such as suppliers of goods with retention of title, there is a third alternative. This is to update and re-issue PPS compliant terms of trade as a new security agreement to all customers and make sure that registration is completed within 20 business days. You will not be protected for past supplies but the future will be secure.
If you believe your business is at risk and would like to discuss options for protecting your interest in goods or equipment supplied, please get in touch.
Timing is everything
Make sure you understand the cut-off dates for goods registered on the PPSR.
Note: Doka was not a member of the AICM or a client of EDX at the time of this decision.
Kim Powell is co-founder of EDX, a national firm specialising in PPS registration and consulting. EDX has its roots in New Zealand where similar legislation was enacted in 2002. In his earlier career, Kim has been an insolvency practitioner, headed the commercial credit recovery division of a major bank, as well as a period as a business banker advancing funds on a secured basis. This background made the PPSA a natural area of interest. Kim moved to Australia in 2010 to lead EDX’s entry in to the local market and is based in Melbourne
Contact Kim: firstname.lastname@example.org or phone 0410 475 100.
To discuss your registration policy or any other PPS matter, call head office on: T: (03) 9866 4559, E:email@example.com
We will arrange for one of our consultants to contact you for an obligation free discussion about your business.
DISCLAIMER: This article is provided for general guidance only and should not be construed as legal or professional advice. In particular, it should be noted that the Personal Property Securities Act 2009 (Cth) is relatively new law in Australia and as such has produced little case law precedent. The application of the Act will be subject to interpretation in the fullness of time and may well supersede or contradict the observations made herein. To the maximum extent permissible by law EDX Australia Pty Ltd, EDX Software Ltd and their respective officers, employees and agents, disclaim all liability in respect of the content to any reader or anyone else who comes to learn of its content. No person is entitled to rely upon or act on any comments made, but instead should seek appropriately qualified opinion prior to taking or refraining from taking any action.