The Disappearing Liquidator Disclaimer - Dude, Where’s My Ferrari?
A liquidator's notice of disclaimer was held to be a nullity and of no effect in the recent Federal Court decision of Rohrt, in the matter of Rose Guerin and Partners Pty Ltd (in liq) v Princes Square W24NY Pty Ltd.
As a result, a secured creditor lost its security – another victim of failure to register properly under the Personal Property Securities Act 2009 (Cth) (PPSA) and Personal Property Securities Regulation 2010 (Cth) (Regulation).
In June 2018, Rose Guerin and Partners Pty Ltd (in liquidation) (Company) as trustee for the Rose Guerin and Partners Trust (Trading Trust) entered into a mortgage (Mortgage) with BMW Australia Finance Ltd (BMW) to finance the purchase of a 2017 Ferrari GTC4 Lusso.
On 26 June 2018, BMW registered its security interest in the Ferrari on the Personal Property Securities Register (PPSR) using the Company’s ACN.
The Company went into administration on 19 December 2019 and then ultimately liquidation on 5 February 2020, with Richard Rohrt and Stephen Dixon being appointed liquidators (Liquidators). The amount owing to BMW at the time was $465,633.73.
On 10 February 2020, the Liquidators told BMW to proceed to repossess the Ferrari after the vehicle was disclaimed by the Liquidators.
A notice of disclaimer of onerous property (NOD) pursuant to section 568(1)(d) of the Corporations Act 2001 (Cth) (Corporations Act) was issued to BMW and lodged with ASIC by the Liquidators on 11 February 2020. It stated that the Ferrari was “property that may give rise to a liability to pay money or some other onerous obligation”. The covering letter explained that the Liquidators had “conducted a review of [BMW’s] security and have formed a view that there is unlikely to be any equity in respect of the Company’s motor vehicle financed by your company...”
BMW began taking steps to repossess the vehicle but paused this process as the director of the Company was trying to refinance the loan from BMW.
In the meantime, and unbeknown to BMW, the Liquidators approached the Federal Court in May 2020 to obtain a warrant for search and seizure of the property and books of the Company.
The Liquidators seized the Ferrari on 27 May 2020 without having set aside the NOD or informing BMW that the Liquidators now believed the NOD to be ineffective or that they intended to seize the Ferrari.
The Liquidators seized the vehicle on the basis that:
BMW’s registration on the PPSR was defective because the security interest should have been registered against the ABN associated with the Trading Trust and not the ACN of the Company, as required by item 2 of cl 1.5 of Schedule 1 of the Regulation;
As a result of the defective registration, section 267 of the PPSA provides that upon an administrator or liquidator being appointed, any unperfected security interest vests in the grantor (in this case, the Company); and
therefore, at the time the NOD was issued in February 2020, the security interest vested in the Company and not BMW and the NOD was either ineffective or able to be set aside by the Court.
Was the PPSR registration defective?
In accordance with what has become the position accepted by the courts, the Liquidators argued that under section 164 of the PPSA, the registration was ineffective due to a defect in the PPSR under section 165 of the PPSA (registration under the ACN instead of the ABN), or that the use of the wrong identifier was “seriously misleading” under section 164(1)(a) of the PPSA.
BMW conceded that the registration was defective for these reasons and that its security interest was “unperfected” for the purpose of section 267 of the PPSA.
Did the Ferrari vest in the Company?
BMW also ultimately conceded that by reason of the operation of s 267(2) of the PPSA, BMW no longer had a security interest in the Ferrari and that, at the time the Liquidators issued the NOD, the Ferrari was an unencumbered asset of the Company and BMW was an unsecured creditor of the Company.
However, the question then became whether the Liquidators’ NOD affected that position.
Was the NOD a nullity?
The Liquidators argued that the NOD was a nullity because it involved two types of property, namely the Ferrari itself and the Mortgage under which the Ferrari was financed, and:
as BMW did not have any claim to or interest in the Ferrari at the time the NOD was issued, the Ferrari was not “property that may give rise to a liability to pay money or some other onerous obligation” under section 568(1)(d) of the Corporations Act; and
in respect of the Mortgage, as it is a contract, section 568(1A) of the Corporations Act applies and has the effect that the Liquidators were required to seek leave of the Court before disclaiming the Mortgage.
In the alternative, the Liquidators said that if the Court found the NOD not to be a nullity, then the Court has the power to set it aside pursuant to section 568E of the Corporations Act (which provides a person who has an interest in disclaimed property to apply to the Court to set the disclaimer aside after it has taken effect).
BMW argued that that the NOD was not a nullity because a liquidator could disclaim onerous contracts to maximise surplus for creditors and on the facts, the Mortgage was unprofitable for the Company and was disclaimed. Further, BMW argued that it cannot be said that the obligations in respect of the Ferrari were not capable of being regarded as potentially onerous because, for example, the Liquidators were required to maintain the car, provide regular servicing, pay insurance and store the vehicle.
The Court ultimately decided that the NOD was “void, of no effect and is a nullity”.
Firstly, the NOD plainly disclaimed only the Ferrari, and not the Mortgage.
Next, BMW had conceded at the hearing that there was no relevant liability to pay money associated with the property pursuant to section 568(1)(d) of the Corporations Act as BMW was an unsecured creditor of the Company only. So, the Ferrari didn’t give rise to an obligation to pay money – that obligation arose pursuant to the personal contract between the Company and BMW.
Lastly, as to whether the Ferrari gave rise to “some other onerous obligation” under section 568(1)(d), the Court found that as at the time of the NOD, the Ferrari was an unencumbered asset of the Company to the value of more than $300,000, and having possession of such an asset is not an “onerous obligation”. In light of the value of the Ferrari to the Company, obligations such as storage and regular servicing did not outweigh that value such that they could be described as “onerous”.
Therefore, in summary, the Liquidators’ power to disclaim the Ferrari under section 568(1)(d) was not enlivened or exercised by the NOD, with the effect that the NOD was void.
This decision is important for both creditors and liquidators.
It is yet another stark reminder for creditors that PPSR registrations must be strictly compliant with the PPSA and the Regulation in order to be perfected. If a security interest is not perfected and a company goes into administration or liquidation, the subject property will vest in that company rather than the creditor.
For liquidators, this decision reaffirms that you must examine PPSR registrations carefully before disclaiming any ‘onerous property’. However, even if you fail to do this before disclaiming the property, it is possible for a disclaimer to be nullified if a creditor’s security interest has not been perfected and the basis of the disclaimer under section 568 of the Corporations Act was in fact not enlivened.
If you require any advice regarding the status of a security interest or the effect of a notice of disclaimer, Bartier Perry can help.
Authors: David Creais & Rebecca Renshaw