Faculty of the Professions

Adelaide Law School

Receivers, Controllers and the PPSA

Associate Professor David Brown, Co-Director, Bankruptcy and Insolvency Law Scholarship Unit (BILS) Personal Property Security Law: Local and Global Perspectives, Adelaide, 20th February 2013

Life Impact The University of Adelaide

Introduction • Interface between Chapter 4 PPSA and Part 5.2 Corporations Act(“CA”) • Chapter 4 PPSA deals with Enforcement of PPSA security interests • Part 5 CA (External Administration) includes Part 5.2 (‘Receivers, and other controllers, of property of corporations) • Government policy to harmonise PPSA with Corporations Act terminology and concepts

Receivers • PPSA excludes corporate receivers from Chapter 4, since Part 5.2 CA covers them • This position is similar in NZ- Receiverships Act 1993 applies to enforcement, not PPSA – Cf. Canadian provinces where receiver is included as ‘secured party’ in PPSA remedies provisions

• Part 5.2 CA -receivers, including ‘receiver and manager’ – Irrespective of method of appointment (ie by secured party under instrument, by court, or under State property legislation)

• So PPSA Chapter 4 will only apply to receivers of individual’s property-s116 PPSA – Except that can contract out of most of it, for ‘non-consumer’ grantors- use test- personal, domestic or household

Receivers and controllers • PPSA, s116 adopts the CA definitions • ‘Receiver’ is a subset of ‘controller’ • Origins- Harmer Report- equate duties of receiver and mortgagee/agent, particularly re duty on disposal • Part 5.2 further distinctions- ‘receiver and manager’; ‘managing controller’, for certain reporting and other duties • But most provisions apply to all ‘controllers’ • Receivers (but not other controllers) owe additional duties as ‘officers’ of the company- e.g duties of care, skill and diligence, statutory ‘fiduciary’ duties- sections 180-184 CA

Statistics • 2011-2012 • ASIC, External Administrations, Annual by Type, Table 1.3: • Receiver: 58 • Receiver/Manager: 792 • Managing Controller(not receiver): 11 • Controller (not any of above): 423

PPSA amendments • PPS (Corps and other Amendments) Act 2010 – Excluded all controllers (within CA definition) from Chapter 4 PPSA- ie receivers and other controllers

• PPS (Corps and other Amendments) Act 2011 – Reinstated non-receiver controllers as within scope of Chapter 4 • Subject to contracting out

– Justification- smaller secured parties might like option to adopt some remedies provisions of Chapter 4

Summary so far • Receivership of corporate property – Part 5.2 CA • Receivership of individual property- Chapter 4 PPSA (subject to contracting out if non-consumer test met) • Controllers (defined by CA- so only corporate property)- Chapter 4 PPSA (subject to contracting out of Part 4.3) applies-s116 – Except s131 PPSA- duty on sale- does not apply to ‘controllers’

What is a ‘controller’? • • • • • • • •

CA definition- s9 In relation to property of a corporation Receiver, receiver or manager, or Anyone else who (whether or not as agent for corporation) is in possession, or has control, of that property for the purpose of enforcing a security interest Prior to PPSA, ‘for purpose of enforcing a charge’ s51A CA (as amended in 2010) defines ‘security interest’ as PPSA security interest, or a charge, lien or pledge Possession and control are not defined, therefore carry natural meaning (compare s341 PPSA) This would suggest that pretty much any SP who enforces against corporate property other than through a receiver, would be a ‘controller’, so is bound by Part 5.2 CA, and by s116 unless contracts out

A one-property controller? • Prior to the PPSA, query whether mortgagee/chargee in possession/control of one property (eg development repossession) = ‘controller’ within CA • No definitive answer- left open to doubt, but assumed to be controller- Bayblu Holdings [2011]NSWCA 39 • Unclear why that should be the case, given Harmer – Distinguish ‘managing controller’, and note s433 CA • controller with ‘charge over all or substantially all of the property’

PPSA and scope of controller • Despite pre-PPSA doubt, the definition of controller from CA, seems to encompass enforcement of PPSA security interests, whether ‘actual’ or ‘deemed’ security interests • Note that Chapter 4 PPSA does not apply at all to ‘deemed’ security interests: – Transfer of account/chattel paper – PPS lease that does not secure payment – Commercial consignment

• Even if a ‘controller’ within CA enforces these, Chapter 4 cannot apply, despite s116

PPSA ROT • But that leaves other ‘new’ types of post-PPSA ‘security interest’, e.g finance leases, security consignments, retention of title • Leaving aside earlier judicial doubt about ‘one-property’ controllers, can ROT suppliers and their agents be ‘controllers’ within Part 5.2 CA, and thus within s116 PPSA? • Importance- what statutory duty, if any, applies to them on disposal/sale of collateral?

The problem- ‘property of a corporation’ • A controller (including a receiver) is only governed by Part 5.2CA in relation to ‘property of a corporation’ • If not ‘property of a corporation’, not a ‘controller’ • CA amendments carve out ‘PPSA Retention of Title Property’ as NOT ‘property of a corporation’- s51F(2) unless provided otherwise expressly or by necessary implication

PPSA ROT property • Includes not just ROT, but any property used, occupied or in possession of corporation where – Corporation does not have ‘title’ to property and – PPSA security interest attaches and – Corporation is grantor

• Examples, ROT, PPS leases/consignments (whether or not secure payment)

A lacuna? • If PPSA ROT Property falls outside ‘property of a corporation’, enforcing SP cannot be ‘controller’ • This means that Part 5.2 CA does not apply, as there is nothing to the contrary, so general rule in s51F applies – Unless ‘necessary implication’

• Pre-PPSA, lessors, ROT suppliers, consignors, would not have been ‘enforcing a charge’, hence not controllers • However, if not a ‘controller’, then s116(2) does not apply, so s131 does apply- duty on sale – Of course, this is only the case if the SI secures payment

The duty on sale/disposal • S131 PPSA mirrors the language of s420A CA • This provides symmetry, but s420A has been problematicmodifies the general law duty of good faith on disposal • History of legislation from Harmer report, 1988 -Best price reasonably obtainable • But s420A included ‘market value ‘-meaning? – Case law- summarised in Florgale Uniforms, GE Capital – Definite or ascertainable value, as opposed to no unique or rare

• In practice, testing the market- s420A risk for receivers • Extension to s131 PPSA extends that uncertainty • Caution in use of overseas cases on sale/disposal duty, because ‘good faith’ duty broader

s420A CA vs s131 PPSA • Guarantors? • Remedy- s420A did not provide a damages remedy – Courts have had to use other means, e.g equitable account, supervisory power over receivers/controllers in s423- e.g Florgale Uniforms Pty Ltd v Orders [2004]VSC 65

• Contrast PPSA, s271 provides remedy for those owed duty or suffer foreseeable loss from any breach of PPSA duties or provisions – a ‘cleaner’ solution than s420A jurisprudence – Cumulative with statutory and common law/equitable liability

A question of timing? • Equity- timing of sale was a matter for the secured party (receiver/mortgagee), • Fundamental limitation of equitable ‘good faith’ standard accepted in Australia – Contrast with UK modern approach-

• s420A ‘when it is sold’ , ‘at the time of sale’ • S131 PPSA – ‘at the time of disposal’

Reasonable procrastination • SP who seizes collateral must dispose or retain –s125 • SP entitled to reasonable period to secure, store, value collateral and determine how to deal with it • SP may delayb eyond reasonable period, but delay either: – In accordance with security agreement or – Be reasonable in the circumstances

• Can SP now choose time of sale? • S111 applies ‘good faith and commercially reasonable’ standard • Possibly s111 would colour s125 where not commercially reasonable to postpone -look at industry practice

Conclusions • Objective of seamless harmonisation if PPSA and Part 5 CA is admirable • But distinctions between receivers, controllers, and individual/corporate receivers confusing • s420A was already problematic, now compounded by s131 PPSA – Though s131 has clearer relief provisions

• Confusion about whether ROT suppliers/lessors etc can be ‘controllers’- my view s131 PPSA applies • Is SP’s right to decide timing now more restricted under PPSA Chapter 4?