Key Takeaways

In Boulos Holdings Pty Ltd v Edwin Davey Pty Ltd (NSWSC 2021) a dispute spanning about fifteen years and involving an old flour mill in Pyrmont gave the Court an opportunity to provide some guidance about the enforcement provisions in chapter 4 of the Personal Property Securities Act 2009 (Cth) (PPSA).

Background

A developer became the registered proprietor of land in Pyrmont with an old flour mill on it (Flour Mill). The Flour Mill was subject to a mortgage and a developer contribution to the council. Under the mortgage the developer charged 'Secured Assets' to the mortgagee to secure payment of secured money. The Secured Assets included the developer's right to receive any money in respect of the Flour Mill. The mortgagee also held guarantees from the developer's directors.

The developer entered into a contract for sale of the Flour Mill with a purchaser. Under the contract the purchaser agreed to pay the developer any credit or allowance made by the council for the developer contribution. The purchaser then lodged a development application with the council.

Separately the developer entered into a short term facility with another lender. That lender appointed receivers to the developer following default. The developer then also defaulted on the mortgage and breached the contract by failing to meet the completion date.

The contract later completed, the mortgagee discharged its mortgage, and the council allowed a $661,996.86 credit for the 2000 developer contribution. The developers also entered into an agreement to resolve their outstanding guaranteed debt owed to the mortgagee. Under an Assignment Deed the mortgagee assigned to the directors 'any and all rights' it had as the former mortgagee of the Flour Mill including any right to recover development contribution credits from the purchaser.

The developer commenced court proceedings against the purchaser claiming the $661,996.86 credit. In defending the claim the purchaser relied on the enforcement provisions in chapter 4 of the PPSA and argued that the mortgagee had seized, assigned and disposed of the developer's claim to its directors. If so then the developer no longer had a claim against the purchaser. This defence was unusual in that it did not involve a secured party asserting enforcement rights under chapter 4 but instead a defendant invoking chapter 4 to avoid a contractual liability.

Judgment

The Court found in favour of the developer. The right to credit under the contract was a chose in action capable of assignment and was also a 'Secured Asset' because it was a right to receive money in respect of the Flour Mill land. However the discharge of mortgage extinguished any interest of the mortgagee in the developer's right to the credit. Therefore there was no valid assignment of that interest. Consequently the developer's directors could not acquire an interest from the mortgagee but the developer could still validly claim the credit.

As there was no valid assignment the PPSA issues did not arise. Nonetheless the Court rejected the purchaser's defence on the basis the PPSA did not apply at all. First, the mortgagee's charge over the right to credit was an interest in a right to payment in connection with an interest in land and excluded from the PPSA by s8(1)(f)(ii). Second, s116 of the PPSA excludes the operation of chapter 4 when a receiver is appointed to the property.

Guidance provided by the Court about the PPSA enforcement provisions

While it held that the PPSA did not apply, the Court still made a number of obiter remarks that provide significant guidance about the chapter 4 enforcement provisions. In summary, that guidance is:

1. Compliance with chapter 4 alone is sufficient to constitute a ‘decision’ as to whether to enforce under the PPSA instead of land law. If the same obligation is secured in both personal property and land, s117 of the PPSA permits the secured party with the highest priority to make a ‘decision’ to either enforce under chapter 4 or alternatively under land law. With this the Court expressed the view that compliance with the requirements of chapter 4 would be sufficient to reflect a ‘decision’ under s117 of the PPSA. The Court warned though that a party making a decision under s117 must act reasonably and only take into account the matters listed in s117(3) (i.e. the value of, connection between and location of the personal property and land and also matters relevant to the efficient enforcement of the security interests in the personal property and land).
2. If a receiver is validly appointed to corporate property, the Corporations Act 2001 (Cth) procedures for receivers operate and the PPSA enforcement provisions do not apply. The Court confirmed that nothing in s116 of the PPSA permits a secured party to invoke the chapter 4 enforcement rules just because a lesser ranking security holder appointed the receiver. In doing so, the Court upheld Parliament’s intention to allow the operation of the ‘comprehensive’ procedures governing receivers under the Corporations Act 2001 (Cth).
3. PPSA s123 requires agreement about what is ‘seizure’ of intangible property if there is no notice to seize it. PPSA s123 permits a secured party to seize intangible property if it gives notice or agrees to ‘another method’ with the grantor. The Court expressed the view that ‘another method’ should be construed narrowly so that an actual method must be agreed which constitutes seizure of intangible property. A security agreement that only provides that the secured party may seize the intangible property but does not identify how is insufficient.
4. PPSA s133 only forgives non-compliance with the act of disposal and otherwise requires full compliance with the chapter 4 enforcement provisions. PPSA s133 provides that when a secured party disposes of collateral the purchaser takes free of PPSA security interests and the grantor’s interests ‘even if the requirements of [chapter 4] have not been complied with’. The Court interpreted this allowance narrowly and held that it does not extend to requirements which are preconditions to a disposal of collateral. That is, the requirements the secured party need not comply with concern the act of disposal itself. The secured party though still must comply with the requirements for seizure of collateral under chapter 4.

Implications

While the Court’s remarks were not part of the reasons for the Court’s ultimate decision and are therefore obiter, they will carry persuasive force in future litigation. The remarks further provide some guidance to secured parties as to their margin for error when enforcing under chapter 4. It is also a timely reminder of the technical nature of enforcement under the PPSA and for secured parties to ensure they are within the prescriptive nature of the legislation.

Finally some secured parties may have reason to review their security agreements so that they are not frustrated when attempting to seize intangible property under s123 of the PPSA.