With the introduction of the Personal Property Securities Act 2009 (PPSA) in January 2012, many unsecured creditors in liquidations who supplied goods on Reservation of Title (ROT) terms suddenly found themselves able to change their spots and become secured creditors.
Registration of security interests held by these ROT suppliers on the PPSA register resulted in many of these creditors then becoming secured and sheltered from attack by liquidators for recovery of unfair preference recoveries pursuant to Section 588A of the Corporations Act 2001.
Advice provided to these creditors and the stances that they now adopt in liquidations is also changing. In a recent matter I was involved in a supplier of goods to a company in liquidation was asked to remove its PPSA registration in preparation for a sale of business transaction. Whilst the creditor was not owed any money, they refused to discharge their security interest registered on the PPSA register. When asked why, they replied that they intended to maintain their registration in order to protect themselves from any preference recovery action that the liquidator may take.
Upon a company’s liquidation, creditors who supply on ROT terms often find that their debt far exceeds the amount of stock on held by the company in liquidation. As a result, pursuant to Section 588FA(2) “… a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security.”
In the recent case of Matthews v The Tap Inn Pty Ltd [2015] SADC 108 this section was considered and its impact upon a secured creditors security position examined. The Court held that the time at which the value of the security on hand is assessed is as at the date of the liquidation. The secured creditor in this case had argued unsuccessfully that the timing of security valuation should have been at the time when supply occurred (which would have resulted in a much higher value than that generated if the value was assessed at the date of liquidation).
The result in Matthews was that as the value of security on hand at the date of the liquidation was nil, the secured creditor became exposed to the unfair preference regime to the extent that the payments received during the six months leading up to the liquidation were in respect of a now unsecured debt.
A deeper but concise explanation of this case can be found here: Hall & Wilcox – PPSA case.
Accordingly it a creditor who initially believes themselves to be secured and immune to a attack by a liquidator for a preference recovery can soon find that their spots change to one where they become unsecured and have to repay monies past recovered.
Adrian Hunter 