The recent case of Re Arcabi Pty Ltd; ex parte Theobald  WASC 310, is an interesting insight as to how the Courts will interpret the interaction between the rights of secured creditors under the Personal Property Securities Act 2009 (the Act) and the rights of an external controller to a lien over property (whether or not the subject of such a security). It also clarifies the application of the Act to bailments and consignments.
Arcabi stored and sold rare coins and bank notes (Goods). They were stored in Albany WA (the Premises). The Goods were owned by third parties (Investors).
Arcabi defaulted on its loan from Westpac (the Bank) and the question for consideration was whether the Bank's receiver could take the Investor's Goods and sell them and apply the proceeds to reduce the indebtedness of Arcabi to the Bank.
The Goods were of two types. Firstly "Mixed Storage Goods": the arrangement here was that these Goods were stored only, and the Investors owning the Mixed Storage Goods were charged a storage fee and issued with an invoice.
The second type were "Consignment only Goods". These Goods were part of an arrangement between Arcabi and some Investors whereby the Investor in each instance requested Arcabi to sell the Goods on consignment to third parties.
The Court concluded that the arrangement in relation to the Mixed Storage Goods was a bailment. By way of background, a bailment is where a bailor delivers goods to a bailee upon a promise, express or implied, that they will be delivered back to the bailor, or dealt with in a stipulated way. If the bailment secured payment or performance of an obligation, then it gave rise to a security interest under s 12 of the Act and enlivened the operation of its priority provisions.
The Court accepted that there are four factors indicative of a bailment arrangement securing payment or performance of an obligation, those factors being:
(i) Where the bailment provides that the ownership of Goods would vest in the bailee on the expiry of the bailment;
(ii) Where the bailee would have an option or obligation (at any time) to purchase the Goods;
(iii) Where the term of the arrangement was likely to be for the major part of the economic life of the Goods;
(iv) Where the minimum payments under the bailment amount substantially to the cost of the Goods.
None of these indicia applied in this case.
But if the bailment was a PPS lease under s13, then it would be deemed to give rise to a security interest, and the provisions of the Act would therefore apply.
One of the requirements for a bailment to be a PPS lease is that the bailor must be regularly engaged in the business of bailing goods. However, the Investors were not regularly engaged in the business of bailing goods. They were in the business of profiting from the exchange of rare coins and bank notes. The issue of the bailment was merely incidental to this main purpose.
The Court then turned to the Consignment Only Goods. Generally, consignments are to be distinguished from retention of title (RoT) arrangements. RoT arrangements provide for title to pass only when full payment has been received. RoT arrangements do secure payment or performance of an obligation.
Nevertheless, if the consignment in substance secured the payment or performance of an obligation, then the operation of the priority provisions of the Act would be enlivened.
The Court looked at the 15 indicators relevant to determining whether a consignment exists. They are:
(a) the merchant is the agent of the supplier;
(b) title to the goods remains in the supplier;
(c) title passes directly from the supplier to the ultimate purchaser and does not pass through the merchant;
(d) the merchant has no obligation to pay for the goods until they are sold to a third party;
(e) the supplier has the right to demand the return of the goods at any time;
(f) the merchant has the right to return unsold goods to the supplier;
(g) the merchant is required to segregate the supplier’s goods from his own;
(h) the merchant is required to maintain separate records;
(i) the merchant is required to hold sale proceeds on trust for the supplier;
(j) the goods are shown as an asset in the books and records of the supplier and are not shown in the books and records of the merchant as an asset; and
(k) the supplier has the right to stipulate a fixed or floor price.
The Court held that there was a consignment. But the consignment did not in substance secure payment or performance of an obligation because:
(i) the Goods were not held as security for a debt as no moneys were payable by Arcabi unless or until it sold the Goods, but title by that time would have passed to the third party purchaser;
(ii) if an item was not sold then title would remain with the Investor and there was no obligation on the part of Arcabi to pay the Investor;
(iii) the Investor remained entitled to take back its consigned Goods – even in circumstances where all that was involved was a change of mind on behalf of the Investor.
Conclusion for bailments and consignments
The Act did not apply and the Investors were allowed to keep their Goods, subject to some riders explained in more detail below.
The case confirms that businesses offering storage services including businesses storing for example, furniture for travellers, old & completed files for professionals, and other similar businesses like those running bus depots, or indeed retaining rare coins and notes of investors for subsequent sale, will likely not be subject to the provisions of the Act.
It is interesting that the Court did not consider the meaning of “value” in s 13(3). Section 13(3) provides that a bailment is only a PPS lease (and therefore, a deemed security interest) if the bailee provides “value” and value is defined in s 10 to include any consideration sufficient to support a contract. To be consistent with the Arcabi conclusion, “value” should just mean ‘money’. In the Arcabi case, it was the bailor who provided the money. The bailee provided the services. However, this issue is still unresolved for the time being.
The Court then considered whether the Receivers were entitled to an indemnity in the form of a lien over the Goods for the work undertaken by them in relation to the Goods.
The Court noted the long established legal principle that whenever an external controller is appointed, they have a right of indemnity out of the company’s property for their remuneration and expenses. These principles extend to an out of court receiver.
The Court also noted the Universal Distributing case which established that where an external controller expends a material part of his time and energy in recovering assets enuring for priority creditors, and where the controller’s duties must be performed before a surplus might arise to which the unsecured creditors may participate, then the cost of the work should be thrown upon the proceeds of the assets and even if no benefit to unsecured creditors eventuates, a lien is not denied to the controller.
On this basis, the Court held that the Receivers were entitled to an indemnity in the form of a lien over the Goods for their work despite the fact that a substantial amount of that work related to identifying Goods which were eventually held not to be part of Arcabi’s assets.
The Court also held that the Receivers were entitled to an indemnity in respect to their costs and expenses in arranging insurance in relation to all Goods including those owned by the Investors.
As for any unclaimed Goods, the Court considered that the Receivers were justified in treating them as property of the Company to which their lien would attach if after appropriate advertising of the intended sale and writing to the relevant Investors, no relevant response had been received.
Conclusion for Receiver’s lien
It is interesting that whilst the Court clearly accepted the principle that the Receivers were entitled to exercise a lien over the Goods of the Investors in respect to (i) their costs of and incidental to identifying those Goods and (ii) their costs and expenses referrable to insuring the Investors’ Goods, the orders only fully implemented this principle in respect to ‘(ii)’ but not ‘(i)’, in that the Receivers’ lien for ‘(i)’ was applied to the company’s assets (including Investors’ Goods which were unclaimed), but not to the Investor’s Goods which were claimed.
One can only presume from this result that there were enough funds available to pay the Receivers without having to further white-ant the equity in the Investor’s Goods.
Leigh Adams Lawyers North Sydney Ph: (02) 99640022
December 2014 - FNSCRD402 - Establish and maintain appropriate security - FNS51520 Diploma of Credit Management and BSBINN601 - Lead and manage organisational change - FNS51520 Diploma of Credit Management and BSBCUS501 - Manage quality customer service - FNS51520 Diploma of Credit Management