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Commercial consignments and the PPSA

July 25th, 2017

One of the great advantages of Retention of Title clauses (prior to the Personal Property Securities Act) was that registration was not required — indeed, it wasn’t even possible. Now, registration of Retention of Title (“ROT”) security interests is required, and the consequences for failing to register are severe. That is one of the reasons why the Personal Property Securities Act  (“PPSA”) was considered to be such an important reform.

I suspect that we may begin to see the emergence of consignment clauses as creditors seek to avoid the registration requirements of the PPSA. To understand why, we need to consider what a “consignment” is, what a “commercial consignment” is, and how the PPSA applies.

Understanding the terms

The PPSA applies to security interests. A security interest is defined under section 12(1) of the PPSA to mean:

“an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation.”

A consignment arrangement would not normally be considered a security interest.  As a consequence, it would not ordinarily require PPSA legislation.  It is widely accepted in both Australia and Canada that a true consignment is not a security interest because it does not secure payment or performance of an obligation.

Nonetheless, section 12(3) provides that the interest of a consignor under a commercial consignment is a security interest whether or not the arrangement, in substance, secures payment or performance of an obligation. Commercial consignments are considered further below.

Commercial consignment

Under section 10 of the PPSA a commercial consignment means a consignment in which:

  1. the consignor retains an interest in goods that the consignor delivers to the consignee;
  2. the consignor delivers the goods to the consignee for the purpose of sale, lease or other disposal; and
  3. the consignor and the consignee both deal in goods of that kind in the ordinary course of business,

but does not include an agreement under which goods are delivered to:

  1. an auctioneer for the purpose of sale; or
  2. a consignee for sale, lease or other disposal if the consignee is generally known to the creditors of the consignee to be selling or leasing goods of others.

These provisions were considered by the WA Supreme Court in Re Arcabi Pty Limited (Receivers & Managers Appointed) (in liq).  Arcabi was in the business of storing and selling rare coins and bank note under bailment and consignment arrangements with the third party owners of the goods.

The receivers appointed to Arcabi sought direction from the court in relation to the effect of these arrangements. The WA Supreme Court held, in relation to the consignment arrangements, that the consignment did not secure the payment or performance of an obligation where the obligation to pay under the consignment only arose after title in the goods had passed to a third party purchaser.

The court held that the effect of the requirement that both the consignor and consignee deal in goods of that kind in the ordinary course of business, is to exclude consignments by consumers of their property to a commercial consignee. The term “consumer” is not defined in the PPSA.

The court also considered the circumstances in which a consignee is generally known to its creditors to be selling or leasing the goods of others.  The court held that knowledge is not limited to knowledge of a particular creditor, but includes persons who may be expected to deal with the consignee as creditors. Knowledge may be established through objective evidence including signage at the consignee’s premises or proof of a general understanding in the community in which the consignee carries on business.

In this case the court placed significance on the fact that Arcabi advertised in its catalogue a category of consignment only goods, which included over 700 items. There was also a questionnaire presented to creditors, in which 84% indicated that they believed that Arcabi sold coins/notes on behalf of others.

On that evidence the court concluded that it was generally known to the creditors of Arcabi that it sold goods on consignment and therefore the arrangement was not held to be a commercial consignment.

Why does this even matter?

It matters for a number of reasons, all of which place the consignor in a privileged position.

If registration is not required, then the consignor is entitled to the return of its goods. Its rights are not affected by the claims of secured creditors. Its goods cannot be sold to fund the priority entitlements of employees, or the costs and expenses of insolvency practitioners (other than costs and expenses incurred in the care and preservation of the consigned goods themselves).

Registration is not without its benefits. Even if there is no security interest in respect of unsold consigned goods for the purposes of section 12(1) there could be an in substance security interest in relation to accounts payable by the purchasers of consigned goods once they have been sold or the proceeds of such accounts.  The terms of each consignment agreement need to be carefully considered to ascertain if this is the case.  If the agreement asserts an interest in sale proceeds, then that will amount to a security interest which is required to be registered under the PPSA.

If registration is required, it is worth noting that, under section 268(1) the vesting provisions of sections 267 and 267A do not apply to a commercial consignment if the interest:

            “does not secure the payment or performance of an obligation.”

In such cases however, consignors may still find that their interests are subject to the claims of creditors holding valid security interests.

To date, there has been very limited judicial consideration of this aspect of the PPSA. That is likely to change, as the professions adopt a more activist approach, and seek to test the limits of the legislation.

For more information or to discuss your personal circumstances, please contact Partner, Tim McGrath on 4036 9700.

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Queensland Government reforms to domestic violence laws to increase victim protection

July 18th, 2017

It is hoped that recent amendments to the Domestic and Family Violence Protection Act 2012 (Qld) (“Act”) which came into effect on 30 May 2017, will increase protection of victims of domestic and family violence.  The Domestic and Family Violence Protection and Other Legislation Bill 2016 (Qld) (“Bill”) introduces a raft of new provisions in the Act, designed to increase victim safety, in line with recommendations made by the Special Taskforce on Domestic and Family Violence in Queensland in its 28 February 2015 report “Not Now, Not Ever: Putting an End to Domestic and Family Violence in Queensland.”

This article outlines some of the important changes made to the Act to increase the power of police, and the courts to deal with the high rates of domestic and family violence in Queensland.

Extension of police powers when issuing police protection notices at the scene of the violence

Under section 101 of the Act, police have powers to issue a police protection notice (“PPN”), which is taken to be a police application for a protection order (section 112 of the Act), if the police officer reasonably believes the respondent has committed domestic violence, and, amongst other considerations, a PPN is necessary or desirable to protect the aggrieved from domestic violence (clause 19 of the Bill, section 101 of Act).

The recent changes approved to the Act enable a PPN to be made even if the respondent is not present (clause 19 of the Bill, section 101 of the Act),  and expand police powers to include orders outside of the “standard conditions” under section 106, including, under section 106A (clause 24 of the Bill), a “no‑contact condition”, and an “ouster condition” prohibiting the respondent from  entering, remaining at, or approaching within a stated distance of the aggrieved’s premises (which often is the respondent’s premises as well) (clause 26 of the Bill, section 107B of the Act).

It is hoped that the extension of police powers in issuing PPNs at the scene of domestic violence incidents, will not only increase the safety of victims, but encourage police officers to make use of these powers, when appropriate, to deal with violence incidents straight away, at the scene.

Increase in court’s powers

In terms of the court’s powers regarding protection orders, three important changes effected by the Bill include:

  1. Requiring the Magistrate to specifically consider imposing “additional” protection conditions

Magistrates are now required to specifically consider whether other conditions should be included in a protection order, outside of the mandatory conditions that the “the respondent be of good behaviour towards the aggrieved and not commit domestic violence against the aggrieved”.  Additional, specific conditions must be considered by the Magistrate to be “necessary or desirable to protect the aggrieved [or a named person] from domestic violence” (clause 7 of the Bill, section 57 of the Act).

Such additional conditions may include, for example, conditions prohibiting stated behaviour of the respondent that is likely to lead to domestic violence, and conditions prohibiting the respondent from approaching, or attempting to approach the aggrieved, or contacting or attempting to contact, or locate the aggrieved (section 58 of the Act).

  1. Broadening the Magistrate’s discretion to determine the duration of a protection order

Magistrates now have wider powers to determine the duration of a protection order “for any period the court considers is necessary or desirable to protect the aggrieved [or a named person] from domestic violence”.  A protection order is to continue in force for a period of less than five years, “…only if the court is satisfied there are reasons for doing so”.  If no end date is specified in a protection order, the order will now last five years, not two years (clause 17 of the Bill, section 97 of the Act).

  1. Automatic recognition of protection orders made in states other than Queensland

Protection orders made in other states of Australia are now automatically recognised, replacing the old system requiring orders to be registered by victims in the courts (clause 53 of the Bill, section 31 of the Act).  The old manual registration process required victims who worked in, or relocated to other states of Australia, to make application to the court in that state to register the protection order.  This is no longer required, removing yet another burden on the victims of domestic violence.

Time will tell whether these reforms will reduce violent incidents and better protect victims

Combatting the high rates of domestic and family violence has long been a top agenda item for the Queensland, and Commonwealth Governments.  2015 Australian of the Year, Rosie Batty’s May 2017 address to the Cairns Business Women’s Club, attended by over 300 guests, illustrated that there may be still be a long way to go in terms of reform of public perceptions, attitudes and support of victims of domestic and family violence.  However, it is pleasing to see that the Palaszczuk government’s 2017 reforms to the Act will give police and the courts greater power to deal with domestic and family violence situations.

For more information about this issue and all family law matters please contact our Senior Associate, Julie Hodge on 07 4036 9700.

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Recent insolvency case law developments

July 13th, 2017

In the Matter of Linc Energy Limited (In Liquidation) [2017] QSC 53

Justice Jackson of the Supreme Court of Queensland delivered his judgment in the matter of Linc Energy on 13 April 2017.

It was an application filed by the liquidators pursuant to section 511 of the Corporations Act seeking directions that Linc was justified in not complying with environmental protection orders which were issued by the Department of Environment and Heritage Protection.   Not surprisingly, the Department opposed the directions.

By way of background, Linc owned and operated an underground coal gasification project at Chinchilla.  It was the owner of a large parcel of land, held a mineral development licence in respect of the land and a petroleum facility licence for its production operations.  In association with the two licences, the company also held environmental protection authorities.

On 15 April 2016 the applicants were appointed administrators to the company.  Less than one month later, the respondent issued an environmental protection order to the company in administration.  The order essentially required Linc to continue to conduct groundwater testing as well as maintain certain monitoring and land rehabilitation equipment.  Ten days following the receipt of the order, the company’s creditors resolved that the company be wound up and the applicants were appointed liquidators.

Five weeks later the applicants vacated the site and gave notice disclaiming the land, the mineral development licence, the petroleum facility licence and the environmental authorities pursuant to section 568(1) of the Corporations Act.  Soon thereafter the respondent went into possession of the land and facilities and contended that, notwithstanding the disclaimer, the company was obliged to comply with the environmental protection order.  The respondent also submitted that the liquidators were obliged, under section 493 of the Environmental Protection Act, to ensure that the company complied with the order where there were funds available in the winding up to do so.

As a result the liquidators applied to the court for directions as to their obligations.

Central to the litigation was the question as to whether the disclaimer of the land, licences and the environmental protection authorities had the effect of discharging the company from future compliance with any obligations under the environmental protection order. To determine this, it was necessary to examine whether the items purported to be disclaimed in the notice were in fact property.

The court looked at section 9 of the Corporations Act and the definition of property contained therein, and noted that the land, as well as the mineral development and petroleum fuel licences, were property that came within the scope of section 568 of the Corporations Act.  The question that remained was whether the environmental protection authorities were property.

The liquidators submitted that the authorities were property because a holder who satisfies certain conditions is entitled to carry out relevant mining activities, it is transferrable, it has value because it affects the value of the associated mining authority and because the Chief Executive is entitled to charge substantial fees for the authority.

The respondent submitted that the authorities were not property because they do not confer any property rights.  Instead, they confer a freedom from liability for carrying out an otherwise prohibited activity.  In any event, the respondent submitted that the company’s liabilities under the environmental protection orders were not liabilities in respect of any disclaimer of property because the environmental protection orders were issued under section 358 of the Environmental Protection Act to secure compliance with the company’s general environmental duties under that Act.  His Honour observed that if that submission was accepted it may not be necessary to resolve the dispute as to whether the environmental protection authorities were property at all.

Justice Jackson looked at the terms of the environmental protection orders which provided that the company must not, without the respondent’s prior written approval “materially alter, or dispose of any infrastructure on the site that is necessary to ensure compliance with the requirements of the EPO and that may be required for the ongoing management of environmental risks and/or site rehabilitation”.  In addition it provided that “all infrastructure that is necessary to ensure compliance with the requirements of the EPO and that may be required for the ongoing management of environmental risks and/or site rehabilitation must be maintained in a functional and operable manner”.

The trial judge also looked at the notice of disclaimer which was issued by the liquidators which provided that they disclaimed the land, the mineral development licence, the petroleum fuel licence and the environmental protection authorities.  It also provided that they disclaimed a number of other items including various tanks, compressors, pumps, computers, electrical installations, water quality tester, water sampler, consumables, a low pressure flare, a shipping container of electrical distributions for the plant and a trailer.  Although the evidence did not confirm, the trial judge inferred that some of the site infrastructure consisted of the fixtures and other items of property in the notice of the disclaimer.   It followed, in his view, that the environmental protection order purported to prohibit any disposal of, and to oblige the company to continue to maintain property which the liquidators had attempted to disclaim in the notice.

Given the terms of the environmental protection orders the trial judge found that sections 358 and 361 of the Environmental Protection Act impaired the liquidators’ right to disclaim the site infrastructure under the Corporations Act.  As a result, the trial judge concluded that it was not necessary to answer the question as to whether the environmental protection authorities were property in order to give a direction that the liquidators were not justified in failing to cause the company to comply with the environmental protection orders.

After concluding that the company remained liable to comply with the environmental protection orders, the trial judge went on to consider whether the liquidators were personally liable to see that it did so under section 493 of the Environmental Protection Act.   This section provides that the executive officers of a corporation must ensure that the corporation complies with the Act.

Not surprisingly, the liquidators submitted that section 493 did not apply to them on the basis that they were not members of the governing body of the company because the governing body was the board of directors.  Additionally, they submitted that they were not concerned with, and did not take part in the company’s management.  Instead, their powers are derived from their office for the purposes of winding up the affairs of the company.

His Honour noted that the purpose of section 493 is to secure compliance with the corporation’s liabilities/obligations under the Environmental Protection Act.  He considered that by definition, the company appointed the applicants as liquidators “for the purposes of winding up the affairs and distributing the property of the company”.  The liquidators’ powers in this case include “to carry on the business of the company so far as, in the opinion of the liquidators, required for the beneficial disposal and winding up of that business” and the particular powers to do the many things set out in section 477(2) of the Corporations Act.  His Honour noted some restrictions in subsection 477(6), being “subject to this part, the liquidator must use his or her own discretion in the management of the affairs and property of the company and the distribution of its property”.

His Honour rejected the submission by the liquidators that they were not executive officers.  He found that to limit the exercise of the liquidators’ power to the purpose of winding up the affairs and distributing the property of a company does not relieve the company from its obligations.  Further, the extension by statute of an obligation of a corporation to an executive officer does not, per se, differentiate between obligations incurred before the commencement of the winding up, and post commencement obligations.  Additionally, it does not differentiate between an obligation that is beneficial to the winding up process and one that might not assist in that process.

His Honour found that to limit the operation of section 493 by construing the definition of executive officer to exclude a liquidator would be unwarranted.  There is no support for it in the text, or in the context of the rest of the Environmental Protection Act or any other relevant materials that may be taken into account in interpreting section 493.

In making orders, Justice Jackson was careful to confine his findings to the specific set of facts and the disclaimer of property in the site infrastructure discussed above.  He did not find it necessary to decide whether the environmental protection authorities were disclaimer property and he did not extend his conclusions to any environmental protection orders which might be issued in the future.

It is also important to note that this decision deals with the pre CoRA amendments to the Environmental Protection Act which widened the scope of persons who can receive an environmental protection order.  It is also important to note that this decision is, on its facts, limited to a situation where there are funds available in the liquidation to comply with the order.

Although limited in its scope, this decision has significant implications for insolvency practitioners because it is a serious offence to contravene an environmental protection order.  Executive officers, and by this decision, the company’s liquidators, must also ensure the company complies and where the company commits an offence under the Act, each executive officer is also deemed to have committed an offence.

Not surprisingly, this decision is currently under appeal.

Re Amerind Pty Ltd (in liq) [2017] VSC 127

Amerind Pty Ltd carried on business as trustee of the Panel Veneer Processes Trading Trust, manufacturing and distributing decorative and architectural finishes.  Its sole activity was to act as trading trustee.  It had no assets of its own and the liabilities were incurred by it in its capacity as trustee only.

Amerind had a number of secured debenture facilities with Bendigo and Adelaide bank.  On 6 March 2014, the bank sent a letter to Amerind demanding repayment of and terminating its existing facilities.  Five days later the sole director appointed administrators pursuant to section 436A of the Corporations Act.  On that same day the bank appointed receivers and managers.  Two days later, creditors resolved to have the company wound up and the administrators were appointed liquidators.

Receivers traded on for about one month after their appointment and after ceasing operations, realised the assets.   The bank was paid out some $20M.   After making allowance for the receivers’ remuneration there was a surplus of just over $1.6M available for distribution.

The receivers applied to the Supreme Court for directions after the Commonwealth sought to recover priority payment of the former employee wages and entitlements pursuant to sections 433, 556 and 560 of the Corporations Act.

The receivers and liquidators supported the priority payment to the Commonwealth however a secured creditor rejected it.  One of the issues therefore was whether property which is held on trust by a corporate trustee is ‘property of the company’ for the purposes of the Corporations Act.  If so, then it may be subject to the priorities regime.  If not, the assets will be distributed according to the usual trust principles.

Justice Robson followed the decision of Justice Brereton in Re Independent Contractors over the decision of Re Enhill and Re Sugo Gold and determined that where a company acts solely as trustee and has no assets of its own, the trustee’s right of indemnity does not constitute property of a company for the purposes of section 556 and 433 of the Corporations Act.

In doing so, he reasoned that to be property of the company, it cannot simply be property in the name of the company that belongs to another person.  To do so would be to overturn centuries of law recognising the distinction between legal and beneficial ownership of assets.

His honour felt bound by the decision of Justice Brereton as opposed to the earlier Full Court decisions on the basis that the earlier decisions were handed down based on the Victorian and South Australian Companies Acts as opposed to the Corporations Act.  He was keen to see a uniformity across the states in the interpretation of Commonwealth legislation.

Although His Honour concluded that the right of indemnity was not property of the company, he still went on to examine whether the right of indemnity is a circulating asset for the purposes of section 433(3) of the Corporations Act.  His Honour determined that the trustee’s indemnity or lien:

  1. is not an ‘account’, and therefore not a circulating asset under section 340(5) of the Personal Property Securities Act; and
  2. is not a floating charge under section 51C of the Corporations Act because:
    • there is no chargor or chargee which is necessary for the creation of a charge. It is simply a case of a trustee incurring debts on behalf of a trust; and
    • a floating charge only fixes on some event of crystallisation whereas the trustee’s right of indemnity is fixed. It attaches on the incurring of the debt to all trust assets and does not require any act of crystallisation, as is required with a floating charge.

It is important to note that Justice Robson emphasised the fact these findings were made on the basis that the company acted solely as trustee and did not have any assets of its own.   He also emphasises that his examination was confined to the present circumstances, where the trustee’s right is that of exoneration and not recoupment.

This decision is also under appeal.

Killarnee Civil and Concrete ContractorsPty Ltd (in liquidation)

This matter currently playing out in Western Australia is of very similar facts to Re Amerind.

It involves an application filed by the liquidators of Killarnee Civil and Concrete Contractors Pty Ltd which acted as a trading trust.  Similar to Amerind, it has no assets of its own and its liabilities were incurred in its capacity as trustee only.  The liquidators have applied for orders that the company be permitted to sell the assets of the trust and pay the secured creditor in priority to the extent of the employee entitlements which have been paid.

This matter was originally mentioned before a single judge of the Federal Court but following the decision of Re Amerind, the judge has ordered that the matter be heard by the Full Federal Court.  Put simply, there is a very strong view that the decisions of Independent Contractors and Re Amerind are wrong and that there is a need for a Full Federal Court to make a decision to put some certainty in place for matters where the company in liquidation has simply acted as trustee.

For more information, please contact Senior Associate, Melanie Husband on 4036 9700.

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PPSA retention of title property

July 13th, 2017

Retention of title property, in general terms, describes any property which is in the possession of one party (pursuant to the terms of some agreement) but where the title to the property does not pass to the possessor either at all, or until some precondition is met (for example payment of a supply invoice).

Click here to read the full article.

For more information or to discuss your personal circumstances, please contact Partner, Tim McGrath on 4036 9700.

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Do you need to comply with a dispute resolution clause in your contract before commencing proceedings?

July 5th, 2017

Many contracts contain clauses requiring the parties to participate in an alternative dispute resolution process before commencing court proceedings.  When a contractual relationship between the parties falls apart, the aggrieved party will often prefer to commence proceedings without complying with the prescribed alternative resolution procedure first.  So the question is, do you need to comply?

A recent decision of the Supreme Court of Queensland of Hooks Enterprises Pty Ltd v Sonnenberg Pty Ltd & Others [2017] QSC 69 has examined this issue.

The parties entered into a Development Management Agreement in December 2012 for the construction of a fast food/convenience store on the plaintiff’s property.  By mid 2016 no tenancies had been secured and the design for construction of the project had not been finalised.  As a result, the plaintiff terminated the agreement in September 2016.

In November of that year, the plaintiff filed a claim and statement of claim seeking damages for breach of contract in excess of $2M.  The same day as being served with the claim, the defendants served a Notice of Dispute pursuant to the dispute resolution clause in the Development Management Agreement and filed an application seeking a stay of the court proceeding pending completion of that process.  It is important to note that the clause provided that it would survive regardless of the termination or validity of the agreement.  It also provided that upon receipt of a Notice of Dispute, a party must respond and must take reasonable steps to resolve the dispute.

One of the main issues for the judge was whether the wording of the dispute resolution clause provided that it was a mandatory process which precluded a court proceeding being commenced before undertaking that process.  On examination of the clause, the judge determined that the clause did not expressly provide a bar to the commencement of legal proceedings prior to the determination of alternative dispute resolution processes, but because the plaintiff had been served with a valid Notice of Dispute, it was required to comply with its contractual obligation to engage in that process before continuing with its proceeding.  As a result, the court proceeding was stayed pending completion of the dispute resolution process.

This decision reinforces the position that where a contract contains a dispute resolution clause, its effect will depend on the terms of the clause and the nature of the dispute.  Simply commencing proceedings without having regard to the dispute resolution procedure in your contract could easily put you in a position whereby you are required to defend a stay of proceedings application, wasting both time, and money.

For advice in relation to your individual circumstances, please do not hesitate to contact our Senior Associate, Melanie Husband on 07 4036 9700.

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