Determining the value of security interests – a timely reminder on unfair preference claims
The recent authority of Trenfield & Ors v HAG Import Corporation (Australia) Pty Ltd  QDC 107 called numerous points in relation to unfair preference claims into contention including whether:
- payments made in relation to an unperfected security interest can still be considered to be payments in relation to a secured debt;
- payments received can be applied to unsecured portions of debt first, making them recoverable as an unfair preference; and
- the value of the security can be determined in reference to the retail price of goods, or whether it will be determined in reference to the price actually paid to the creditor.
The plaintiff liquidators sought to recover payments made by Lineville Pty Ltd (the Company) to HAG Import Corporation (Australia) Pty Ltd (the Creditor) for the supply of goods pursuant to a credit agreement. The goods were supplied on terms which included a retention of title clause, and a security interest over the goods. Of note, the total debt exceeded the value of the security.
Was the security interest perfected?
In determining whether the Creditor was in fact a secured creditor, the Court considered whether the security interest had indeed been perfected. Ultimately, it was held that perfection of the security interest had not occurred, as the Creditor had incorrectly categorised the agreement as a transitional security agreement. In the absence of any further argument by the Creditor that the registration was valid for some other reason, the Court concluded that as the security interest had not been perfected, the interest vested in the Company upon the appointment of the administrators. Of note, the Court held that though unregistered, the security interest was not void. This serves to be of particular interest to creditors, as it may be possible to argue that payments made to creditors are in relation to a secured debt and are not recoverable by liquidators as an unfair preference, regardless of whether the security interest has been perfected.
When will security of the debt be assessed?
Section 267 of the Personal Property Securities Act 2009 (Cth) states that where unperfected, security interests will vest in the grantor immediately prior to the appointment of administrators. On this point, the Creditor submitted that as the payments had been made prior to the administrators being appointed, the payments were made prior to the security interest vesting in the Company. Further, the Creditor argued that at the time of the payments, the debt had been secured.
The liquidators presented the argument that whether the debt was secured was to be assessed at the time of the winding up of the Company. The natural consequence of this argument was that no security would exist, as by the time the Company was wound up, the security had vested in the Company.
The liquidators’ argument was three-fold, being:
- The structure of section 588FA of the Corporations Act 2001 (Cth) is that a preference is identified by the difference in outcome between what occurred and what would have occurred in a winding up; and
- The purpose of the word “unsecured” in section 588FA is to identify a class of creditors that exist at the time of the winding up, and is aimed at securing an equality of distribution among this class of creditors; and
- An interpretation should be preferred which would give effect to the intention of parliament, being that preference should not be given to a creditor with a defective security interest.
Adopting the Creditor’s submissions, the Court held that the relevant time for determining whether the debt was secured was the time of each payment. This conclusion may prove problematic, as it means that had the payments not been made, the Creditor would have been considered an unsecured creditor, and would not receive the priority otherwise afforded over the class of other unsecured creditors.
Can payments received be applied to unsecured portions of debt first?
The liquidators submitted to the Court that the payments made by the Company were recoverable, as the amount of the debt which was secured at the time of the payments was greater than the value of the security. What flowed from this argument was that the payments made would be taken to first discharge the portion of the debt that was unsecured. On this point, the Court adopted the liquidators submissions.
How is the value of the security determined?
Finally, the Creditor argued that:
- the value of the goods supplied should be determined in relation to their retail value, as opposed to the value they were sold to the Company; and
- the security interest applied to both the goods supplied and to the proceeds of sale.
The Court ultimately determined that the goods were to be valued at the price paid by the Company, and that, in light of the liquidators’ evidence that the proceeds of sale were not readily identifiable, that no security existed over the proceeds of sale.
As a result, the liquidators were successful in recovering the payments made by the Company to the Creditor as an unfair preference.