The spade is what the security agreement says is the spade
- Published 22.03.2021
The Administrative Appeals Tribunal has upheld registrations on the Personal Property Securities Register (PPSR) that failed to disclose the trustee details of a trading trust debtor. The decision may assist with enforcing security interest registrations against debtors who do not disclose who they truly are in the security agreement and later claim to be someone different to what is detailed in the registration.
0 Love 0 P/L (in liq) (Company) was incorporated in May 2013. The Cooley Trust 1 (Trust) was created the next day through a deed of trust. About a month later the Company became the sole trustee of the Trust. In July 2013, the Trust was registered for GST and continued trading as a business.
On 18 January 2019, a motor vehicle dealer sold three vehicles to the Company which were evidenced by tax invoices (Sales Contracts). The Sales Contracts named the Company as the purchaser and did not provide details of the Trust even though there was a space to complete for ‘Trust details if acting in capacity of a trust’.
On the same day, security over those vehicles was granted in favour of Volkswagen under three chattel mortgages issued to the Company (Chattel Mortgages). The Chattel Mortgages named the Company as the borrower with the spaces next to ‘Complete if you are acting in capacity of a trust’, ‘Name of Trust’ and ‘Trust ABN’ left blank. The Chattel Mortgages also included direct debit requests that nominated a bank account in the name of the Company.
On 19 January 2019, Volkswagen registered the security interests granted by the Company under the Chattel Mortgages on the PPSR. With this, Volkswagen only recorded the Company’s ACN for the mandatory borrower details. The registrations did not include the Trust’s ABN.
On 28 February 2019, liquidators were appointed to the Company. The liquidators used the amendment demand process under pt 5.6 of the PPSA and applied to the Registrar of Personal Property Securities to remove the registrations because they did not include the Trust’s ABN. The Registrar however refused on the basis there was collateral described in the registrations securing obligations owed by the Company to Volkswagen and therefore reasonable grounds that removal was not authorised. The liquidators then applied to the Tribunal to review the refusal.
At issue was the capacity the Company was acting in when it contracted with Volkswagen. That issue arose because the capacity determines the rules and consequences with the registrations.
That is, if the Company was acting as a corporate trustee, then the registrations needed to record the ABN of the trust. On the other hand, the registrations required the ACN of the Company if it was only acting as a body corporate. Registering the wrong capacity would result in extinguishment of Volkswagen’s security interests and Volkswagen losing the vehicles to the liquidators.
The Tribunal found that the Chattel Mortgages provided reasonable grounds to suspect that Volkswagen had a security interest in the vehicles because those mortgages named the Company as the borrower and did not provide any details about the Trust. That suspicion was strengthened by the Sales Contracts naming as the purchaser the Company in its own capacity and not as a trustee. Accordingly, the Tribunal affirmed the decision of the Registrar and refused to remove the registrations.
The Tribunal considered that it is the contractual documentation that establishes who the contracting parties are and the capacity in which they are acting. Ascertaining who the parties to the contract were did not rest on the parties’ subjective intentions but required viewing the contracts objectively.
The failure to refer to the Trust in the Sales Contracts and Chattel Mortgages was objective evidence that the Company was not acting in its capacity as trustee. The Company would have likely given the details about the Trust in the spaces provided if it were acting as a corporate trustee.
The Tribunal rejected the liquidators’ contention that the Company’s entry into the trust deed and acting as a trustee meant that it acted as trustee under the Sales Contracts and Chattel Mortgages. The Tribunal also disagreed that bank statements naming the Company as trustee were enough to put Volkswagen on notice about the Trust.
While not definitive, the Tribunal’s findings are strongly persuasive that it is the words of the security agreement which establishes who the contracting parties are. On that basis, Volkswagen could still enforce its security interest registrations over the vehicles.
In practice, security agreements often do not precisely identify the contracting parties. This can lead to the secured party innocently recording wrong debtor details in the registration. Typically, the error only comes to light as a ‘nasty surprise’ when the debtor goes into external administration and the administrators claim the secured property.
The Tribunal’s findings provide guidance for secured parties in that situation. Consistent with the text of the PPSA that a security agreement ‘is effective according to its terms’, the findings mean that secured parties need to press their secured claim based on what the security agreement actually says. Secured parties may resist claims by the debtor that it was someone else when contracting even if that was the subjective intention or there are bona fide albeit extraneous documents verifying this.
The findings do not offer a panacea for secured parties. Security agreements come in many different forms. For example, the security agreement may arise over a course of dealings which include documents that reveal correct and incorrect descriptions of the debtor. In these circumstances, there is risk that the secured party would need to register against the ‘correct description’. Due diligence here would dictate that the secured party registers against both descriptions.
The findings also do not excuse secured parties from needing to update the debtor details in their registrations when they learn that the debtor has transferred the collateral to someone else.
Ultimately it is a timely reminder to ensure that before you enter into a security arrangement, you make sure you know who you are contracting with.