Validly appointed? Valid security interests? Timely reminder to always check the fine details

February 7, 2018

A recent decision by the Federal Court of Australia, Knauf Plasterboard Pty Ltd v Plasterboard West Pty Ltd (In Liquidation) (Receivers and Managers Appointed) [2017] FCA 866 (“Knauf v Plasterboard West“) comes as a timely reminder to liquidators and receivers/managers of potential issues that may arise regarding:

The validity of their appointments;
Claims by ‘secured parties’ that they have perfected interests under the Personal Property Securities Act 2009 (Cth) (“PPSA“).

Validity of appointment

Plasterboard West Pty Ltd (In Liquidation) (Receivers and Managers Appointed) (“Plasterboard West“) purportedly took steps pursuant to s 491 of the Corporations Act 2001 (Cth) (“Corporations Act“) to be wound up voluntarily¹.

However, Judge Markovic held at [67] that the first element required for a special resolution had not been satisfied. That is, that notice had not properly been given to the members of Plasterboard West as at the date of the meeting of members, 12 February 2016, there were three shareholders of the company and no notice of the meeting was given to one of those shareholders. Having received no notice of the meeting whatsoever, that member could not have received notice of the special resolution as set out in s 249L(1)(c) of the Corporations Act.

In addition, Judge Markovic held that members’ consent for shorter notice did not comply with s 249H(2)(b) of the Corporations Act. This section allows a company to call on short notice if members with at least 95% of the votes that may be cast at the meeting agree so beforehand. As at 12 February 2016, there were 85 shares on issue. Those members who agreed to shorter notice held a total of 55 shares, being approximately 64% of those shares, which was significantly less than the required level of 95% under the company’s Constitution. The abridgement of the notice period for the meeting was not valid.

Markovic J held at [70], despite the resolution to wind up [Plasterboard West] having been “passed by at least 75% of the votes cast by members entitled to vote on the resolution” (that is, by at least 75% of the votes actually cast… there was a failure to comply with the first requirement for a special resolution in s 9 of the Corporations Act and with the notice requirements for a meeting of the company’s members. Thus the special resolution to voluntarily wind up [Plasterboard West] was not validly passed…”.

Plasterboard West attempted to argue that it had previously effected a buy-back of the relevant shares (and hence notice had been given to the relevant members). However, Judge Markovic rejected this argument and held:

At the time of the conversation relating to the alleged agreement by Plasterboard West to buy back the relevant shares, the person acting for the counter-party, ‘Sevenoaks’, did not have authority to bind Sevenoaks;
The proposal was just that, a proposal (and conditional upon a number of steps being completed);
The director of Plasterboard West did not have authority to enter into such an agreement on behalf of Plasterboard West. To bind Plasterboard West, the agreement required shareholder approval pursuant to s 257D of the Corporations Act. That had not occurred;
Sevenoaks remained in the register of members until 24 February 2016. Clause 13.3 of the company’s Constitution provided that a transferor of shares remained the holder of shares transferred until the transfer was registered and the name of the transferee was entered into the register; and
The selective buy back was not effective as it materially prejudiced the company’s ability to pay its creditors. As at January 2016, Plasterboard West was facing financial difficulties. In those circumstances, the forgiveness of a debt of $102,000 due to it from Sevenoaks would likely affect Plasterboard West’s ability to pay its creditors; at [84]. In the absence of Plasterboard West proving to the contrary, that is, that the buy-back did not have that effect, the buy-back would be contrary to, and thus prohibited by s 257A of the Corporations Act. Plasterboard West did not discharge its onus of proof in that regard.

Alleged perfected interest by secured party

In the event that the liquidation was held to be valid, Knauf sought to argue that they had validly perfected their security interest and hence were secured creditors. Given they could not rely on perfection by way of registration on the PPSR (due to the operation of s 588FL of the Corporations Act),² Knauf attempted to argue that they had achieved perfection by way of ‘control’ or ‘possession’ pursuant to s 20 of the PPSA. However, Markovic J rejected these arguments and held that:

The mere appointment of a receiver does not mean that the secured party has possession of the property if the property remains in the actual or apparent possession of the grantor. Markovic J states that “upon their appointment the Receivers had the authority to deal with the assets the subject of the Security Deed and, in relation to those assets, could exercise the powers conferred on them by the Security Deed and s 420 of the Corporations Act. But actual or apparent possession remained with the grantor…”
The Receivers took possession of the collateral by way of seizure. Seizure is construed as the forcible taking of possession with lawful authority or by overpowering force; and
All methods of perfecting a security interest under the PPSA are aimed at notifying third parties of the secured party’s interest in the personal property. Seizure and re-possession fail to notify the public of the secured party’s interest in the property and therefore are not valid forms of taking possession.

Outcome

In the end, it did not matter that Knauf had not achieved perfection by way of control or possession because there was no valid appointment of a liquidator, and hence the registration by it of its security interest on the PPSR on 12 February 2016 did not mean that s 588FL of the Corporations Act applied. Knauf had lodged its registration on the PPSR (on 12 February 2016) and the security interest was perfected.

Lesson

Liquidators need to be conscious of the risk that their appointments may be invalid and therefore should be cautious not to incur too many costs or expenses if there are concerns regarding the same.

If Plasterboard West had validly gone into liquidation, the Liquidator would have needed to promptly deal with the Receiver and inform them that the assets had vested in the company (s 558FL of the Corporations Act).

What do liquidators do when faced with these issues? They need to be very well advised. Gavin Parsons & Associates can assist in that regard.Authored by Gavin Parsons and Dan Rappoport of Gavin Parsons and Associates

¹ This section allows for a company to be wound up voluntarily if the company so resolves by special resolution.

² For a secured party to be able to rely on s 588FL it must comply with the timing requirements under the section; that is, it must register its security interest: within 20 business days after the security agreement that created the security interest came into force or, if earlier, the time that the company goes into administration or is wound up; or; within 6 months before the company goes into administration or is wound up.