The Self-Storage Business and The PPSA

The facts in this scenario are very loosely based on some of the facts in Carson, in the matter of Hastie Group Limited (No 3) (2012) APPSR 701-001; [2012] FCA 719 (Hastie).

The Tenant Business had a loan from the Bank to assist in establishing its restaurant business. The Bank secured that loan against all the real and personal property of the Tenant Business and registered that interest on the Personal Property Securities Register (PPSR). After registration of the security interest was effected by the Bank, it provided notice of that registration to the Tenant Business, as per s 157(1 ) of the PPSA.

Under the security agreement between the Bank and the Tenant Business, it would be a breach for the Tenant Business to move the secured items without giving notice to, and obtaining permission, from the Bank. It would also be an event of default under the agreement which would enable the Bank to call in the outstanding portion of the loan.

The Tenant Business stored some of its goods in premises owned by a third party, a self-storage company. The Self-Storage Company had a contractual right of entry to the premises when money was owing on the storage.

The Self-Storage Company secured its interest under the contract with the Tenant Business against all personal and real property of the Tenant Business. In so contracting with the Tenant Business, it was aware of the earlier security interest granted by the Tenant Business to the Bank. After the security interest was registered by the Self-Storage Company, it provided notice of that registration to the Tenant Business, as per s 157 (1) of the PPSA.

The Self-Storage Company privately acknowledged that the security interest of the Bank had higher priority than that of the Self-Storage Company, as it was created earlier in time and was perfected by registration.

Hard times hit the Tenant Business and its restaurant business folded. In breach of the agreement with the Bank, the Tenant Business moved some of the property from the restaurant business premises to the self-storage premises. Subsequently, as a result of an application made to the court by the Bank, the Administrators were appointed to take control of the affairs of the Tenant Business.

The Administrators were responsible for identifying property that was subject to third party security interests. The PPSR proved extremely difficult for the Administrators to rely upon for that purpose:

• where the registration in the PPSR was general, rather than specific, and
• because many transitional security interests were not registered.

Once they commenced their task proper in respect of the Tenant Business, the Administrators discovered there were many registrations noted against the Tenant Business in the PPSR.

On 28 May 2012, the Administrators wrote to all creditors who had an interest recorded against the Tenant Business in the PPSR . Enclosed with each letter was a Pro Forma Security Interest Summary that each creditor was requested to complete in respect of each security interest the creditor held. Each creditor was requested to provide notification of its interest as a matter of urgency and, in any event, by no later than 31 May 2012. Those secured creditors who failed to respond to that correspondence would be taken as waiving any interest in the subject property.

In order for the Administrators to understand the identity of the property in which a security interest was claimed, the response from the creditors should have adequately particularised:

• the property, or
• the security agreement under which the security interest was said to arise.

On 26 June 2012, the Administrators wrote to several financiers who appeared from the books and records of the Tenant Business to have a secured claim in respect of plant and equipment. The financiers were asked to consent to the sale of the plant and equipment referable to their interests or give notice that they did not consent to such sale before 2 July 2012. They were also asked to advise, on or before 2 July 2012, whether, to the best of their knowledge, any of the listed items of plant and equipment formed a key component of another piece of plant or equipment and whether that plant and equipment was recorded on the lists that had been provided to them. In each case the letter stated that if no response was received on or before 2 July 2012, the Administrators would assume that the rights of the relevant financier (with respect to the Tenant Business) did not include any interest in any of the items in the listed plant and equipment; or, alternatively, that the financier waived that interest.

On 28 June 2012, the Administrators caused an advertisement to appear in The Australian newspaper. The advertisement requested that creditors notify the Administrators of claims concerning assets, plant and equipment, stock, inventory, leased assets or other items in the possession of the Tenant Business by 4 July 2012. The advertisement contained the following statement:

“If you do not contact the Administrators within this time frame, the Administrators will assume that:
•    any rights you may have regarding the Tenant Business do not include any interest or claims in any of the items currently in the possession of the Tenant Business; or alternatively
•    you waive and do not pursue that interest which may result in their sale.” (cf Hastie, [12])

Seizure of Collateral
As a result of this property identification exercise by the Administrators on behalf of the Bank, the Self-Storage Company became aware of the situation in which the Tenant Business found itself. The Self-Storage Company also noticed that money was owing to it by the Tenant Business under their agreement.

The Self-Storage Business exercised its rights under its agreement with the Tenant Business and gained access to the subject premises. Once it did so it took an inventory of all the contents of the premises and subsequently conducted a search of the PPSR in respect of any of the property that looked like it may have been the subject of a security interest.

Both the Bank and the Self-Storage Company sought to seize the property of the Tenant Business as collateral under their respective security agreements (see s 123 of the PPSA). Section 127 of the PPSA requires the Self-Storage Company to give notice to the Bank of the collateral it has seized from the Tenant Business, because the Bank has a higher priority security interest under the PPSA and the Self-Storage Company was aware of that higher priority at the time it contracted with the Tenant Business.

In the process of their negotiations, the Bank agreed with the Self-Storage Company that the goods would be stored at the premises of the Self-Storage Company until the matter was resolved.

Disposing of The Seized Collateral
When disposing of the seized collateral both the Bank and the Self-Storage Company have a duty to obtain market value (see s 131 of the PPSA). The question arises as to whether that entitles the Bank to entertain a fire sale of the seized collateral.

It is submitted that a fire sale would not be entertained because of:

• the obligation on a secured party to act honestly and in a commercially reasonable manner: s 111 of the PPSA; and
• the obligation to obtain market value: s 131 of the PPSA.

Section 131 is very similar to s 420A (Controller’s duty of care in exercising power of sale) of the Corporations Act, which has been interpreted as requiring a controller to take reasonable steps to obtain market value, including appropriate advertising, engaging an experienced agent, undertaking an adequate marketing campaign and obtaining a valuation.

Conclusion
Registration of security interests is a significant step in the process of dealing with personal property in the commercial world. The introduction of the PPSA has made that commercial world significantly larger, in the author’s view. Enforcing rights under the PPSA involves a process. The extent to which one complies with that process can affect the outcome of the matter.

This scenario speaks of the self-storage industry, but much of the process is applicable to other industries and can be a useful reminder of the prudence required in commercial dealings with personal property now that the PPSA is a part of our lives.