Granting yourself a security interest: worthwhile or worthless?

October, 2014

The decision of Macquarie Leasing Pty Ltd v DEQMO Pty Ltd [2014] NSWSC 1466, which was handed down on 17 October 2014, highlights that security interests under the Personal Property Securities Act 2009 (Cth) (PPSA) must have a proper foundation (i.e. secure a debt or obligation) otherwise they are liable to be removed from the Personal Property Securities Register (PPSR).

Insolvency practitioners should be alert to the fact that many persons or entities often purport to have a “security interest” in personal property (often vehicles) when in reality they have an ownership interest. Macquarie confirms that ownership interests are not registrable on the PPSR. Practitioners seeking to sell the assets should act quickly to remove the purported security interest from the PPSR under the provisions in Part 5.6 of the PPSA if the purchaser is concerned they will not receive clear title.

Facts

In August 2008 Macquarie Leasing Pty Ltd (Macquarie) entered into a chattel mortgage agreement with Elite Grains Pty Ltd (Elite) for the purchase of a Prime Mover (Truck).

In 2012 Elite defaulted under the agreement, and Macquarie demanded return of the Truck. Elite refused, so Macquarie commenced and was successful in proceedings against Elite and Rodney Culleton (Culleton), the sole shareholder and director of Elite.

On 7 August 2014 the Truck was sold at public auction, and simultaneously DEQMO Pty Ltd (DEQMO), of whom Culleton was the sole director and shareholder, registered a security interest in the Truck on the PPSR, with the effect that Macquarie could not pass clear title to the purchaser.

Macquarie then served an amendment demand on DEQMO pursuant to the PPSA demanding that DEQMO’s registration be removed. No response was received. Macquarie then initiated these proceedings seeking orders that:

  1. DEQMO’s security interest was void;
  2. DEQMO’s security interest be removed from the PPSR;
  3. DEQMO be restrained from re-registering any interest on the PPSR; and
  4. DEQMO and Culleton pay Macquarie’s costs.

Decision

Rein J granted the orders sought by Macquarie. The evidence put forward by DEQMO failed to establish the basis of the security interest, as Culleton was more concerned with the manner in which the Truck was repossessed and the conduct of its sale.

In light of this evidence (or lack of), Rein J found a number of reasons why DEQMO’s claimed interest was invalid. However, the key basis on which Rein J held the security interest was void was that the claimed interest was one given by DEQMO to DEQMO, as a person or company cannot give a security interest to itself, as per section 12 of the PPSA.

Conclusion

This decision highlights the importance of ensuring that any registration on the PPSR has a proper foundation to support it. The judgment of Rein J makes it clear that if a company or person purports to grant a security interest to itself, then such a registration will be invalid. If the security interest is in fact an ownership interest, such registrations do not secure “payment or performance of an obligation” as required by section 12, and can be removed under the provisions in Part 5.6 of the PPSA.

Contact Mills Oakley

Should you have any questions or require further information about this decision, please contact:

ariel-borland-mills-oakley

Ariel Borland, Partner
T: +61 3 9605 0015


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