PPSA: Lessee’s administrator retains ownership of plant and equipment against lessor of premises

Failing to register a lessor’s security interest on the PPSR over plant and equipment at leased premises can result in the lessor’s unperfected security interest passing to the administrator of the lessee.

In the recent decision of Flown Pty Ltd v Goldrange Pty Ltd [2016] WASC 419, a lessee’s administrator successfully retained ownership of plant and equipment (which were not fixtures) in the leased premises.

Background

The lessor loaned $460,000 to the lessee to enable the lessee to purchase plant and equipment to be used in the lessee’s business at the premises. The loan agreement charged the plant and equipment.

The lessor did not register its security interest in the plant and equipment on the personal securities register under the Personal Property Securities Act 2009 (Cth) (PPSA).

The lessee was placed in administration and the administrator claimed the plant and equipment on the basis that the lessor’s security interest was unperfected.

What happened?

Before the appointment of the lessee’s administrator on 15 July, the following took place:

• The lessor purported to give the lessee a notice terminating the lease. However, the notice of termination was not validly served and was insufficient to terminate the lease of the premises.
• Relying on a clause in the lease (where rent is in arrears or unpaid for seven days), the lessor purported to re-enter the leased premises, causing the lease to end.
• At about 11:30 am on 15 July, the lessor and its builder attended the premises to change the locks. However, they were denied access by the lessee and the locks were not changed.
• At about 1.00 pm on 15 July, the lessor attached a ‘notice of re-entry’ to the premises stating that the lessor has re-entered the premises and retaken possession from the lessee.
• At approximately 1.00 pm on the same day, the lessee was put in administration.
• On the day after the appointment of the administrator the lessor cut the locks and entered the premises.

The PPSA issues

Under section 267 of the PPSA, where a security interest is unperfected and the grantor enters into administration, the unperfected security interest vests in the grantor and passes to the administrator. The secured party is then only able to prove in the administration for the amount owed as an unsecured creditor.

The lessor argued that to have a perfected security interest under section 21 of the PPSA a secured party must either register the security interest on the PPSR or have possession of the relevant assets.

However, under the PPSA:

• possession of the assets cannot be as a result of seizure or repossession (section 21(2)(b)); and
• a secured party cannot have possession of personal property if the property is in the actual or apparent possession of the grantor or debtor, or another person on behalf of the grantor or debtor (section 24(1)).

Lessor’s arguments

The lessor argued that it had possession of the plant and equipment and that it was not in contravention of section 21(2)(b) because it:

• was in constructive possession of the plant and equipment from 11.30 am on 15 July when it attempted to re-enter the premises with the builder to change the locks; and
• did not seize or repossess the plant and equipment; rather, it exercised a lawful right to re-enter the premises and as a consequence came into possession of the plant and equipment.

The decision

Although the notice of termination of lease had not been validly given to the lessee, this was not determinative.

The Court held that possession of the plant and equipment means both apparent and actual physical possession by the secured party.

By placing the ‘notice of re-entry’ on the premises the lessor did not take physical possession of the premises. The notice did not equate to the lessor having actual physical possession of the premises.

It did not matter that the lessee acted contrary to the provisions of the lease by denying the lessor re-entry to the premises.

The lessor was not in actual possession of the premises at the time the administrators were appointed and, as a consequence, the lessor was not in possession of the plant and equipment. The lessor’s unperfected security interest passed to the administrator.

On the facts, the plant and equipment were not fixtures forming part of the land. The items could not be claimed by the lessor as fixtures to avoid the items passing to the administrator.

Comments

If a lessor claims a security interest in fit-out or plant and equipment, its security interest must be appropriately documented in accordance with the PPSA and correctly registered on the PPSR.

This will avoid legal disputes regarding whether the lessor has possession of the fit-out or plant and equipment and whether the relevant property is a fixture or chattel.

In this decision the ‘notice of re-entry’ was in relation to the leased premises and not the items of plant and equipment. The lessor contended it did not seize or repossess the plant and equipment, rather, it exercised a lawful right to re-enter the premises and as a consequence came into possession of the plant and equipment.

From an administrator’s perspective, it would be prudent to include details in the appointment documentation of the time the meeting of directors takes place and the time when the administrator accepts the appointment.

If you would like more information about these issues, please contact Graham Roberts on +61 7 3231 2404 or Lara Dawson on +61 7 3231 2566.