Receivers get their two cents worth on bailments of money

September, 2014

In Re Arcabi Pty Ltd (Receivers & Managers Appointed) (in liq) [2014] WASC 310, the Supreme Court of Western Australia delivered, on 4 September 2014, a helpful judgment regarding:

  1. the applicability of the Personal Property Securities Act 2009 (Cth) (PPSA) on, among other things:
    1. a receiver’s ability to deal with goods which may, or may not, be property of the company;
    2. the effect of bailment and consignment-type arrangements on the question of ‘ownership’ of those goods; and
  2. a receiver’s right to be indemnified for its costs and expenses in dealing with goods which, pursuant to the receiver’s investigations, are revealed to belong to parties other than the entity to which they have been appointed.

Background

Arcabi Pty Ltd (Arcabi) was in the business of storage and sale of rare coins and bank notes (Goods). Not all Goods dealt with in the business were Arcabi’s, as third parties (Investors) would provide them to Arcabi either for storage or for sale by consignment.

Receivers were appointed to the assets and undertakings of Arcabi on 17 July 2013 by the Westpac Banking Corporation (Bank). The Receivers continued to operate the business in order to preserve it, and undertook extensive investigations in order to ascertain what inventory was owned by Arcabi and what was owned by third parties.

Following their extensive investigations, the Receivers sought direction as to, among other things, whether they were justified in:

  1. returning to Investors certain Goods:
    1. stored by Arcabi (Storage Goods);
    2. held by Arcabi where the Investor had requested Arcabi to sell the Goods on consignment (Consignment Goods) but the Goods were not sold at the time of the appointment of liquidators to Arcabi; and
  2. asserting an entitlement to an indemnity for the repayment of their costs, expenses and remuneration relating to Goods that were not property of Arcabi.

Personal Property Security Act 2009 (Cth) (‘PPSA’)

The Court considered if any of the arrangements between the Investors and Arcabi gave rise to a registrable security interest under the terms of the PPSA. The result of failing to perfect such an interest would be that under section 267 of the PPSA the Investors’ interest(s) would have vested in Arcabi immediately before the appointment of the liquidators to Arcabi, therefore allowing the Bank (as a secured creditor with a perfected charge over Arcabi’s assets) to have priority over these goods.

Were the Storage Goods subject to a registrable bailment arrangement?

The Court was asked to consider if the Investors who had requested Arcabi to simply store their goods had entered into a ‘bailment’ type arrangement which was subject to the PPSA. A ‘bailment’ arrangement arises where one party (the ‘bailor’) delivers goods to another party (the ‘bailee’) upon a promise that the goods will be delivered back to the bailor or dealt with in a stipulated way.

Two types of bailments may comprise a security interest under the PPSA:

  1. firstly, an ‘in substance’ security interest under section 12(1) of the PPSA where the bailment secured payment or performance of an obligation; and
  2. secondly, on the satisfaction of certain conditions, the bailment being deemed a ‘PPS lease’ under section 13 of the PPSA.

The Court found that this was not a case where the bailment was ‘in substance’ a security interest under section 12(1) of the PPSA. With reference to overseas jurisdictional indicia relating to bailment arrangements, the Court found that this was not such an arrangement given:

  1. the bailment did not secure payment or performance of an obligation;
  2. there was no suggestion that the Goods would vest in Arcabi on the expiry of the bailment;
  3. there was no suggestion that Arcabi would have an obligation to purchase the Goods;
  4. the term of the arrangement was not likely to be part of the major economic life of the goods, as these Goods had an indefinite life subject to storage conditions; and
  5. the nominal payment for the bailment did not equate to the capital costs of the Goods.

As to the question of whether the arrangement could be deemed a PPS lease, the Court agreed with the Receiver’s position that the arrangement was not a PPS lease as there was no evidence that the Investors ‘regularly exchanged in the business of bailing Goods’ as required under section 13(2)(b) of the PPSA. In coming to this conclusion, the Court noted that for many of the Investors, dealing with the Goods was a hobby, and not a business.

Therefore, those Investors who had simply stored their Goods with Arcabi retained ownership of the Goods, as there was no security interest that could have been perfected.

Were the Consignment Goods subject to a registrable consignment arrangement?

The Court considered whether the consignment-type arrangement gave rise to a security interest under the PPSA on the basis that:

  1. it in substance, secured the payment or performance of an obligation (section 12(2)(h), PPSA); or
  2. the consignor delivered the goods to the consignee under a commercial assignment (section 12(3)(b), PPSA).

In finding that the transaction did not secure the payment or performance of an obligation, the Court noted that one must consider ‘the substance’ of the transaction and not its form. The Court found that there was no logical reason to suppose the consignment was intended to secure a debt due by Arcabi and so the consignment did not compromise security for the payment or for performance of an obligation under section 12(2)(h).

Further the arrangement was not a ‘commercial consignment’ within the meaning of section 12(3)(b) of the PPSA as this section requires the consignor and consignee to both deal ‘in goods of that kind’ in the ‘ordinary course of business’ and in the circumstances of this case (based on the Receivers’ investigations and questionnaires to the consignment creditors as well as the Court’s acceptance of the opinion of an ‘experienced insolvency practitioner’) this could not be made out.

Sale of unclaimed Goods

It is worth noting that the Receivers in this case had gone to great lengths to identify the owners of the Goods, including:

  1. going to great lengths to contact the Investors recorded in Arcabi’s books and records;
  2. publishing advertisements in The West Australian and The Australian; and
  3. contacting the Commissioner of Police to enquire whether the unclaimed goods had been reported lost or stolen.

Finding that there were no further steps that the Receivers could have taken to locate the owners of the unclaimed goods, the Court found that the Receivers were entitled to regard the Goods as abandoned and to sell them at auction.

Receivers’ indemnity

Finally, the Receivers sought an indemnity for work undertaken in relation to the Goods, expressing concern that such an indemnity may not be available for the significant work that had been undertaken by them with respect to the Goods which were then found not to be Arcabi’s assets.

The Receivers noted that they had taken possession of a wide range of Goods. In order to identify, or even attempt to identity, the assets of Arcabi they had no real option but to conduct extensive investigation relating to the claims of the Investors and preserve and protect the Goods by taking out insurance whilst the enquiries were underway.

The Court confirmed that the costs and expenses of the Receivers relating to work undertaken in identifying, insuring and eventually returning stock was work properly undertaken for the purpose of the care and preservation of the property of Arcabi. Accordingly, even if some of the Goods in question were not Arcabi’s assets the Receivers were entitled to be indemnified for their costs and expenses in dealing with these Goods.

Contact Mills Oakley

Ariel Borland |
Partner
T: +61 3 9605 0015
E: aborland@millsoakley.com.au

Nirupa Manoharan |
Special Counsel
T: +61 3 9605 0808
E: nmanoharan@millsoakley.com.au

 

Privacy Policy | Terms of Use