Commercial Transactions Module 10 Summer Session 0607.

Commercial Transactions

Module 10

Summer Session 0607

Registration Systems & Priorities

Registration SystemsWe will look at 3 systems which provide for registration of securities on a Public Register so as to put third parties on notice of obligations. Students should know which securities can and should be registered, those which cannot be registered, those which might be required to be registered depending on drafting/effect, formalities required, consequences of registration and non registration.Corporations Act for eligible charges by CompaniesRegistration of Interests in Goods Act (for interests in boats and MVs)Security Interests in Goods Act (charges by non-companies over tangible goods and replacing Bills of Sale Act)-commenced March 2006

PrioritiesWhen there is more than one security holder, it is often necessary to work out who has priority as there may not be enough assets to satisfy everyone.GenerallyCompeting Interests Under the same Registration SystemCompeting Interests under different Registration Systems

Registration Systems

1. Corporations Act

2. Registration of Interests in Goods Act

3. Security Interests in Goods Act

Concern with existing State and Federal registration systems

It is not possible to register interests over some classes of property e.g. many intangibles, retention of title clauses.

Coverage varies from jurisdiction to jurisdiction e.g. boats not covered in REVs in all states.

Dual registration may be necessary e.g. Corp +Revs in Tasmania. Technical compliance may affect validity e.g. agricultural mortgage in

particular form. Interaction of registration systems can deliver complex outcomes e.g. failure

to register under Corp law does not affect validity but technical non compliance with state law will.

Mandatory registration can be difficult to manage e.g. security holder must anticipate whether collateral might be moved to another state

May be a need to register in more than one state May be a need to search in more than one state Registration may be cumbersome..e.g. paper lodgement rather than

electronic Registers may not be available for searching on line May be costly for parties not involved to take proper precautions

Charges Required To Be Registered - Corporations Law

s. 262 (1) Subject to this section, the provisions of this Chapter relating to the giving of notice in relation to, the registration of, and the priorities of, charges apply in relation to the following charges (whether legal or equitable) on property of a company and do not apply in relation to any other charges:

(a) A floating charge on the whole or a part of the property, business or undertaking of the company;

(b) A charge on uncalled share capital;

(c) A charge on a call on shares made but not paid;

(d) A charge on a personal chattel, including a personal chattel that is unascertained or is to be acquired in the future, but not including a ship registered in an official register kept under an Australian law relating to title to ships;

Charges Required To Be Registered - Corporations Law cont.

(e) A charge on goodwill, on a patent or licence under a patent, on a trademark or service mark or a licence to use a trade mark or service mark, on a copyright or a licence under a copyright or on a registered design or a licence to use a registered design;

(f) A charge on a book debt;

(g) A charge on a marketable security, not being;

(i) A charge created in whole or in part by the deposit of a document of title to the marketable security; or

(ii) A mortgage under which the marketable security is registered in the name of the chargee or a person nominated by the chargee;

(h) A lien or charge on a crop, a lien or charge on wool or a stock mortgage;

(j) A charge on a negotiable instrument other than a marketable security.


s. 262 (2) The provisions of this Chapter mentioned in subsection (1) do not apply in relation to:

(a) a charge, or a lien over property, arising by operation of law;

(b) a pledge of a personal chattel or of a marketable security;(c) a charge created in relation to a negotiable instrument or a document of title to goods, being a charge by way of pledge, deposit, letter of hypothecation or trust receipt;

(d) a transfer of goods in the ordinary course of the practice of any profession or the carrying on of any trade or business; or

(e) a dealing, in the ordinary course of the practice of any profession or the carrying on of any trade or business, in respect of goods outside Australia.

Lien over property arising by operation of law

Airservices Australia v. Canadian Airlines International Ltd (1999) HCA 62

Canadian leased a plane to Compass Airlines. When the latter went into receivership, Canadian tried to take back its plane; only to discover that there was a statutory lien under the Civil Aviation Act for $2,888,740.97 for unpaid charges and penalties for landing fees, maintenance, traffic control etc. Airservices would not release the plane until they were paid. CAA had its own Statutory Lien register.


s. 262(3). The reference in paragraph (I)(d) to a charge on a personal chattel is a reference to a charge on any article capable of complete transfer by delivery, whether at the time of the creation of the charge or at some later time, and includes a reference to a charge on a fixture or a growing crop that is charged separately from the land to which it is affixed or on which it is growing, but does not include a reference to a charge on:

(a) a document evidencing title to land

(b) a chattel interest in land;

(c) a marketable security;

(d) a document evidencing a thing in action; or

(e) stock or produce on a farm or land that by virtue of a covenant or agreement ought not to be removed from the farm or land where the stock or produce is at the time of the creation of the charge.

Definition Of Charge - S.9 Corporations Law

“Charge”

Means a charge created in any way and includes a mortgage and an agreement to give or execute a charge or mortgage, whether on demand or otherwise.

Sally Anne Horsley v. Phillips Fine Art Auctioneers Pty Ltd - SCNSW 31.07.95 No. 3211/92

Concerns gifts, bills of sale, conversion.

Anthony Spies and his brother Carl lived with their parents in The Swifts. Their company Minjar purchased this property in Darling Point from the Catholic Church in 1986. It executed a Mortgage back. In the same year Carl and Anthony as Mortgagor executed an Ordinary Bill of Sale over certain antique furniture and chattels in favour of the Church.

Anthony Spies claimed the 1986 BS was discharged in 1987. Court found it more probably than not that it was paid out (32). The evidence was slim but an inference was raised by the fact that there was a later BS granted by Carl alone (the 1990 BS) to secure unpaid interest from the mortgage over ... “all furniture and furnishings mow and hereafter situated in the premises known as The Swifts ...” ... same furniture as in the 1986 BS.

Sally Anne Horsley v. Phillips Fine Art Auctioneers Pty Ltd - SCNSW 31.07.95 No. 3211/92 cont (2)

This coincided with the principal mortgage being discharged and a refinancing by Minjar with St George. BS transferred to St George in 1992. St George seized the furniture.

Anthony claims a half interest and sues in conversion. He had to show that he had title to the furniture, that St George converted it and he suffered quantified loss and damage. St George contends that Anthony failed to establish any of these and that prior to the grant of the BS, the furniture had been gifted to their mother in 1987.

Anthony gave evidence of the gift to his mother in 1987 (33). See later paragraphs for discussion of an effective gift … delivery 53-83,84, 85, 86, 87.

The Registration System for MVs & BoatsRegistration of Interests in Goods Act (NSW)

This act provides a system in which security interests relating to prescribed goods (currently only motor vehicles and boats) can be placed on the Public Register.

The Register is maintained by the Department of Fair Trading and is known as REVS - The Register of Encumbered Vehicles. It can be accessed online and students are encouraged to look at the material provided by the Department of Fair Trading.


“Security Interest” in relation to goods means an interest or power: -

a) reserved in or over an interest in the goods; or

b) created or otherwise arising in or over an interest in the goods under a Bill of Sale, mortgage, charge, trust or power by way of security for the payment of a debt or other pecuniary obligation or the performance of any other obligation but does not include any interest or a power reserved or created or otherwise arising under a lease or hire purchase agreement or an agreement excluded by this definition by the regulations.


“Registerable Interest” in relation to goods means:

a) The interest in the goods of the person to whom is owed the obligation of which the performance is secured by a security interest to which the goods are subject.

b) The interest in the goods of the lessor of the goods.

c) The interest in the goods of the owner under a hire purchase agreement relating to the goods; or

d) Any other prescribed interest in the goods whether arising under the Law of NSW or of a participating State.

Purchase of Cars or Boats that are Subject to A Registerable Interest

Students are expected to have a good working knowledge of Sections 9 and 10 of the Act so that they are able to determine issues such as the following:

a) Whether a particular interest is a registerable interest and should be registered under the Act.

b) How a perspective purchaser of a car or boat can protect their interests and avoid purchasing a car that belongs to, or is encumbered to someone else.

c) The position of a purchaser who has purchased-from a dealer- a car or boat that belongs to someone else or is affected by a security interest of someone else.

d) The position of a purchaser who has made a private purchase of a car or boat that belongs to someone else or is encumbered.

e) The position of a financier who has an interest in a car or boat in both situations of registration and non-registration of a registerable interest.

Register Encumbered Vehiclesextract from DFT

Statistically, there is a one in five chance that a vehicle offered for private sale will be carrying a debt for which the new owner could become liable.

The Register of Encumbered Vehicles (REVS) is a service provided by the Office of Fair Trading that can tell you whether or not a vehicle is recorded as encumbered. Encumbered means that there could be money owing on the car or that the registered operator may not own the vehicle outright. REVS can also check if the vehicle is required for an RTA inspection or whether the vehicle has money owing on it, been reported as stolen, been recorded as de-registered, or been recorded as a repairable or non-repairable write-off

Always purchase a REVS search certificate when REVS tells you the vehicle is not encumbered (cost = $10). This will provide confirmation of your inquiry and offer legal protection against the vehicle being repossessed by a creditor due to a previous owners unpaid debt.

Security Interests in Goods Act

An attempt to provide registration for security interests not covered by the Corporations Act-given by individuals and partnerships

Only partial…IP, intangibles not covered

Differs from State to State

Security Interests in Goods-non companies

The Old Regime

The Security Interests in Goods Act has repealed

The Bills of Sale Act 1898This act distinguished traders bills of sale and ordinary bills of sale. Unregistered traders bills were absolutely void and conferred no security, Unregistered ordinary bills were valid as between grantor and grantee but void as against certain judgement creditors. The aim of registration was to prevent third parties from being misled into believing that the goods to which the bill related were unencumbered.

The Liens on Crops and Wool and Stock Mortgages Act 1898This act enabled the land holder to give a preferable lien over crops, an owner of sheep to grant a preferable lien over wool and an owner of sheep, cattle or horses the ability to grant a stock mortgage. Its aim was to overcome doubts at common law about the efficacy of securities granted over goods that were still in the course of production

Security Interests in Goods-non companies The New Regime

The objects of a Security Interests in Goods Act are:

a) To modify existing law by removing the outdated distinction between traders bills and ordinary bills.

b) Make registration optional rather than mandatory.

c) Remove the need for constantly renewing registration.

d) Registration will generally confer priority over unregistered interests and subsequently registered interests, but a failure to register will not result in invalidity.

e) Registration of agricultural securities will create mortgages over existing and future crops and wool, instead of liens over growing crops.

f) Agricultural mortgages are extended beyond sheep, cattle and horses.

g) Aquaculture mortgages will be permitted.


The term Security Interest in relation to goods (whether existing or future) is defined to mean interest or power:

a) reserved in or over an interest in the goods; or

b) created or otherwise arising in or over an interest in the goods under a bill of sale, mortgage, charge, trust or power by way of security for the payment of a debt or other pecuniary obligation or the performance of any other obligation but is defined not to include:

- a letting of goods with an option to purchase

- an agreement for the purchase of goods by instalment

- any other hiring agreement

- any other agreement, arrangement, instrument or circumstance prescribed by the regulations.


The location of the Register for Security Interests in Goods.

This will be located with the Registrar General in the same way that the Bills of Sale Register was kept with the Registrar General.

For more information, see the website.

What “goods”are covered?

goods" means any chattels personal, fixtures or other things capable of complete transfer by delivery (whether immediately or at any future time), but does not include any of the following:

(a) title deeds, negotiable instruments, choses in action or chattel interests in real estate,

(b) shares or interests in the stock, funds or securities of any of the following:

(i) a Government (whether of this State or otherwise),(ii) the Crown or a body representing the Crown (whether in right of this

State or otherwise),(c) shares or interests in the capital or property of a body corporate

(wherever constituted),(d) access licences in respect of water granted under the Water

Management Act 2000,(e) any other thing prescribed by the regulations for the purposes of this

definition.

"registrable security instrument"

For the purposes of this Act, a security instrument is a "registrable security instrument" if:

(a) the instrument states the name and address of each grantor and the name of the holder of the security interest concerned, and(b) the instrument includes a description of the goods to which the security interest relates to the extent to which the goods are ascertainable at the time of the execution of the instrument, and(c) the instrument has been duly executed by each grantor, and(d) in the case of an agricultural goods mortgage--the instrument otherwise complies with the requirements of Part 2.

Agriculture

(1) In this Act:"agricultural goods" means any of the following: (a) crops, (b) fish, (c) stock, (d) wool."agricultural goods mortgage" means any of the following: (a) an aquaculture fish mortgage, (b) a crop mortgage,(c) a stock mortgage (including a wool mortgage)."aquaculture" has the same meaning as in section 142 of the

Fisheries Management Act 1994."crop" includes the following: (a) wheat, maize, canola, sorghum, barley, oats, lucerne, grass

(whether for hay or grain), cotton, tobacco, rice, sugar-cane and any other kind of agricultural produce,

(b) oranges, grapes (whether as fruit or for wine or spirit) and any other kind of fruit or horticultural produce.

"crop mortgage" means a mortgage over crops that is granted as provided by section 7

"stock" includes any sheep, goats, cattle, horses, swine, poultry, alpacas, llamas, ostriches or other animals (except fish)."

Crop Mortgages

7. Creation of crop mortgages (1) A person may grant a mortgage as provided by this section (a "crop

mortgage") over any crops that grow or are grown on land by way of security for payment of a debt or other pecuniary obligation in circumstances where the person:

(a) owns the land, or(b) has exclusive possession of the land and a right to harvest crops that

grow or are grown on the land, or(c) holds a lease over the land granted under the Western Lands Act

1901 (whether or not the lease confers exclusive possession of the land) and has a right to harvest crops that grow or are grown on the land, or

(d) is entitled under a sharefarming agreement with the owner or lessee of the land to crops (or a share of the crops) that grow or are grown on the land and has obtained the written consent of the owner or lessee to grant the mortgage.

Crop Mortgages cont (2).

(2) A crop mortgage may extend to any or all of the following: (a) crops that are growing on the land concerned during the period of

the mortgage,(b) crops to be sown or planted on the land concerned by the

mortgagor during the period of the mortgage,(c) crops that grow on the land concerned in the ordinary course of

nature during the period of the mortgage.(3) A crop mortgage must: (a) be in the prescribed form, and(b) be duly executed by the mortgagor, and(c) describe or otherwise identify the crops to which the mortgage is to

apply, and(d) describe or otherwise identify the land on which the crops

concerned are growing or will grow, and(e) specify a period for its duration in accordance with subsection (5),

and(f) be registered within the period of 45 days after its execution.

Crop Mortgage

I, [name of mortgagor] of [address of mortgagor], (the "Mortgagor") grant a mortgage as provided by the Security Interests in Goods Act 2005 in respect of the crops described in the Schedule in favour of [name of mortgagee] of [address of mortgagee] (the "Mortgagee").

This mortgage is granted as security for the payment by the Mortgagor of the following:

1 [state debt or other pecuniary obligations for which mortgage granted]2 *The provisions set out in the memorandum of covenants, registered in the

General Register of Deeds as number [specify number of memorandum], are included as part of this mortgage subject to the following:(a) *[specify any alterations to or omissions from provisions] (b) This mortgage has effect for the period specified in the Schedule commencing from the date of its registration.

Dated: [state date of execution] Signed by or on behalf of the Mortgagor: [Mortgagor's or attorney's signature] in the presence of: [witness's name] [witness's address] [witness's signature]

1 Crop to which mortgage relates [describe crops to which mortgage relates or will relate]2 Land to which mortgage relates [describe land on which the crops are growing or are to grow]3 Duration of the mortgage [specify period for duration of the mortgage, including

any renewal rights]

Stock mortgage/*Wool mortgage

I, [name of mortgagor] of [address of mortgagor], (the "Mortgagor") grant a mortgage as provided by the Security Interests in Goods Act 2005 in respect of the *stock/*wool/*stock and wool described in the Schedule in favour of [name of mortgagee] of [address of mortgagee] (the "Mortgagee").

This mortgage is granted as security for the payment by the Mortgagor of the following:1 [state debt or other pecuniary obligations for which mortgage granted]2 *The provisions set out in the memorandum of covenants, registered in the General Register of Deeds as number [specify number of memorandum], are included as part of this mortgage subject to the following:(a) *[specify any alterations to or omissions from provisions](b) This mortgage has effect for the period specified in the Schedule commencing from the date of its registration.*This mortgage *extends/*does not extend to [state any limitations on or extensions on the provisions of section 12 (5) or (6) of the Security Interests in Goods Act 2005].


1 *Stock and wool/*stock/*wool to which mortgage relates [describe stock and/or wool to which mortgage relates or will relate]

2 Land on which stock concerned to be kept [describe land on which stock concerned are being kept or are to be kept]

3 Duration of the mortgage [specify duration of mortgage, including renewal rights]

Aquaculture fish mortgage

I, [name of mortgagor] of [address of mortgagor], (the "Mortgagor") grant a mortgage as provided by the Security Interests in Goods Act 2005 in respect of the fish described in the Schedule in favour of [name of mortgagee] of [address of mortgagee] (the "Mortgagee").This mortgage is granted as security for the payment by the Mortgagor of the following:1 [state debt or other pecuniary obligations for which mortgage granted]2 *The provisions set out in the memorandum of covenants, registered in the General Register of Deeds as number [specify number of memorandum], are included as part of this mortgage subject to the following:(a) *[specify any alterations to or omissions from provisions](b) This mortgage has effect for the period specified in the Schedule commencing from the date of its registration.


1 Fish to which mortgage relates [describe fish to which mortgage relates or will relate]

2 Land or water source to which mortgage relates [describe land or water source on or in which fish are being cultivated or are to be cultivated]

3 Duration of the mortgage [specify period for duration of the mortgage, including any renewal rights]

Priorities

1. Generally

2. Within systems

3. Between systems and non-registerable securities.

Priorities

1. Equities being equal, first in time of creation prevail.

2. Equities being equal, preference given to legal over equitable.

Subject to special rules, etc., for: Purchasers without notice. Fraud, estoppel and gross negligence. Dearle v. Hall. Statutory registration rules. Bankruptcy and Liquidation Statutes. Provisions re “tacking”. Marshalling of assets.

Factors affecting priorities

Whether in or out of bankruptcy or liquidation Type of grantor of security. If Co, subject to

Corporations Act. Otherwise, State law. Form of security-possessory or non-possessory

and in case latter, whether grant or title reservation.

Type of property-tangible, intangible-statutory scheme applicable?

Where secured property is situated-law may differ from State to State.


Effect of registration under the Security Interests in Goods Act on priority of security interests.

Clause 31 sets out rules governing the determination of priority unless the holders have agreed otherwise.

A registered security interest will generally rank in priority over an unregistered security interest. However, an unregistered security interest will rank in priority if the holder of the unregistered interest takes possession of the goods before the registered interest is registered.

An earlier registered security interest ranks in priority over a later registered security interest.

s.31 Priority of security interests

(1) A registered security interest in goods ranks in priority over any unregistered security interest in the same goods with respect to all debts and other pecuniary obligations (including contingent obligations) and all other obligations secured under the registered security interest.

(2) Registered security interests in the same goods rank in priority in the order in which they are registered with respect to all debts and other pecuniary obligations (including contingent obligations) and all other obligations respectively secured under them whenever arising.

(3) However, an unregistered security interest in goods ranks in priority over a registered security interest in the same goods if the holder of the unregistered security interest takes possession of goods before the registered security interest is registered.

(4) The order of priority of security interests established by this section is subject to any agreement between the holders of the security interests concerned.

(5) This section has effect subject to section 11 (Effect of crop mortgages on sharefarming agreements).

Companies-priorities

The usual order in case of insolvency---

1.Fixed charges, mortgages

2. Preferential creditors (including employees)

3. Floating charges

4. Unsecured creditors

5. Subordinated (unsecured) creditors

6. Equity claimants-preference shareholders

7. Equity claimants-ordinary shareholders

8. Equity claimants-deferred shareholders

Order Of Priority Of Charges - Corporations Law

General rules in relation to registered charges:A registered charge has priority over subsequent registered charge s.280(1)(a).A registered charge has priority over a prior unregistered charge s. 280(1)(b).A registered charge has priority over an unregistered charge created after the creation of the registered charge s. 280(1)(c).

Exceptions to general rule:

If subsequent charge created before the prior registered charge, and chargee of subsequent charge can prove that the prior registered chargee had notice of the subsequent registered charge at the time the prior registered charge was created s. 280(1)(a) and 280(2).

Order Of Priority Of Charges - Corporations Law

Exceptions to general rule cont.:

The holder of a floating charge will be deemed to have conceded priority to a subsequently registered fixed charge created before the crystallisation of the floating charge, unless ASIC has been notified of any term of the floating charge that prohibits or restricts the company from creating subsequent fixed charges s. 279(3).

A registered charge loses its priority over a prior unregistered charge if the prior unregistered chargee can prove that the registered chargee had notice of the earlier unregistered charge when he/she took the registered charge s. 280(1)(b) and 280(2).

s. 278(2) provides that having notice includes constructive notice. A person has constructive notice of a prior interest if the existence of that interest would have come to that person's attention upon making the inquiries and investigations that a reasonable person, acting prudently in their own interests would have made. Aust. Central Credit Union v. Commonwealth Bank of Aust. (1991) 9 ACLC 396,402.

Priorities example - Company Charges

A) Chargor Ltd borrowed $50,000 from Chargee Bank, secured by a floating charge over all its assets. The charge was registered with ASIC under s. 262. There was no negative pledge prohibiting the creation of future charges.

B) Chargor Ltd then borrowed $25,000 from Absolute Finance secured by a registered fixed charge over Asset #1.

C) Chargor Ltd then borrowed another $10,000 from Simpson Finance secured by a registered fixed charge over Assets #1,2,&3.

Chargor Ltd then goes into liquidation.

Priorities example - Company Charges (2)

The order of payment is as follows:

The floating charge in A takes priority except over a later registered fixed charge: see s. 279.

The registered fixed charge in Loan B will take priority over the prior floating charge with respect to Asset #1.

Loan B takes priority over Loan C as it is first in time. See s. 280. The fixed charge in Loan C will not defeat the prior registered fixed

charge under Loan B over Asset #1. The fixed charge in Loan C will take priority over the registered

floating charge in Loan A.


Back again to the usual order in case of insolvency-

1.Fixed charges, mortgages

2. Preferential creditors (including employees)

3. Floating charges

4. Unsecured creditors

5. Subordinated (unsecured) creditors

6. Equity claimants-preference shareholders

7. Equity claimants-ordinary shareholders

8. Equity claimants-deferred shareholders

What is the difference between fixed and floating charges?

When a charge is taken, no transfer of ownership. A particular asset is set aside so if chargor fails to pay, chargee is entitled to receive and apply proceeds of sale against the liability.

Fixed charge given over a specific piece or pieces of property.

A floating charge “floats” over the assets until it crystallises and becomes fixed in accordance with terms of charge.

A fundamental difference is right of the chargor to deal with the asset during the charge. Under a floating charge, chargor can deal with it in ordinary course of business until crystallisation. Where a fixed charge given, no right to deal with it without consent chargee.


It can be seen from previous list that creditors will make a considerable effort to be a secured creditor in order to get to top of list.

However, there is some pressure to leave a company debtor free to use secured property in the ordinary course of business-- to generate cash flow to service the debt.

A problem can sometimes arise with characterisation of charges.-e.g. book debts-is a charge over book debts fixed or floating?

Assignment of book debts-factoring

Distinguish an assignment from a charge

A Legal assignment must comply with s. 12 of the Conveyancing Act. Assignee is then the “owner” of the debt and questions of priority do not arise.

An equitable assignment for value need not satisfy notice to debtor requirement, but may lose priority to an assignment where notice has been given. It can be by way of security, but may lose priority to a registered charge.

Legal AssignmentMust be absolute assignment..outright transfer, not by way of security or

conditional.

Must be in writing under hand of assignor

Must be express notice in writing to the debtor, stating the fat of the assignment, the name of the assignee, date of assignment and amount of the debt.

Advantages

No consideration is required, Assignee can sue in their own name

Debtor can safely pay assignee, Legal interest obtained for value and without notice of earlier equitable interests will have priority ahead of them.

Disadvantages

Identity assignee known, stamp duty payable, must be whole debt (not part) and not by way of security.

Equitable assignments of book debts

Clear expression of intention to assign required

Subject matter must be identified with certainty

Where consideration, effective from time it is paid

Assignor continues to be “owner”, so assignee is trustee.

Advantages

No notice required (may be defeated by person who takes later interest but gives notice first if they have no notice of earlier interest-can protect by taking charge over legal interest retained and register with ASIC), may be conditional, by way of security, part only, writing is not required if supported by consideration, and if done correctly stamp duty not payable

Disadvantages

Assignor must be a party to any enforcement action, assignee takes interest subject to equities arising before notice (including rights of set off or counterclaim by debtor) and can lose priority to another assignee who gives notice before them.

The trouble with book debts

Effectiveness of fixed charge over book debts upheld in 1979 decision of Siebe Gorman & Co Ltd. v. Barclays Bank Ltd (1979) 2 Lloyd’s Rep 142 and later in 1986 Supreme Court Ireland Re Keenan Bros Ltd (1986) BCLC 242

PC in Agnew disagreed with Siebe decision and found charge in Agnew only a floating charge because debtor could use proceeds in ordinary course of business.

The Hof L in National Westminster Bank plc v. Spectrum Plus Limited (2005) UKHL confirmed lower decision of High Court of England-if a charge permits the chargor to deal with any proceeds of realisation of book debts in ordinary course of business until some further step is taken, charge is floating, irrespective of how parties classified it.

Although these decisions are persuasive and not binding in Australia, if applied, for a charge over book debts to be fixed, chargee must have control over book debts and proceeds.

Agnew v. Commissioner of Inland Revenue & 0rs. Re Brumark Investments Limited (2001) UKPC 28-see text extractNOTE--persuasive but not binding in Australia.

Was a charge over uncollected book debts, which left company free to collect them and use the proceeds in the ordinary course of business a fixed charge or a floating charge?

The debenture deed sought to create a fixed charge on book debts outstanding when Receivers appointed, and proceeds of debts they collected. Prior to their appointment, the company was free to collect them and use proceeds in ordinary course. However, it could not assign or factor them.

The question was whether the right to collect debts and deal with proceeds free from security meant that charge on uncollected debts, while being described as fixed was nevertheless floating until it crystallised by appointment Receivers

Agnew cont.

The Privy Council traced history floating charge paying particular attention to book debts.Useful for students as it should enable them to get good understanding of both. The extract in text is suitable for study.

Their Lordships concluded that the freedom to deal with charged assets without the consent of the holder of the charge made it a floating charge. They found it was clear from description attached that they intended to create a fixed charge over uncollected debts and floating charge over the proceeds. They had to deal with the question of whether a receivable could be separated from its proceeds-a single security interest or 2? And, whether a charge on book debts necessarily takes effect as a single and indivisible charge on the debts and proceeds, or 2 different charges.

They concluded property and its proceeds are 2 different assets.

Agnew cont

Fixed charges over book debts-various possibilities

=Lender taking assignment of each debt and perfecting the security by giving notice to third parties entitling the lender to collect the debts itself or

= The Lender taking assignment of debts but refraining from giving notice until Debtor in default.

First usually commercially impractical. Second usually effective in creating fixed charge because company not collecting debts for its own benefit but for the account of the Lender. Hence, proceeds not available to debtor free of the security.

= Where a bank is involved, a blocked collection account with a bank can be used.

SpectrumSpectrum opened an account with NatWest and obtained an overdraft of

£250,000 for working capital. By debenture 30.9.1997, Spectrum created a charge “by way of specific charge” in favour of NatWest over book debts to secure moneys due by it to NatWest.

Obligations of Spectrum were to pay the proceeds of any book debt into Spectrum’s account with

NatWest not to sell, factor, discount or otherwise charge or assign the book

debt in favour of any other person or purport to do so without the consent of the NatWest; and

if called on to do so, to execute legal assignments of such book debts. NatWest advanced £200,000 by debit to account. Proceeds of book

debts were collected and paid into account reducing overdraft an Spectrum drew on account as and when it needed to, thereby increasing overdraft.

Spectrum cont(2)

Spectrum went into voluntary liquidation owing NatWest £156,554. Liquiators collected and realised book debts £113,484, but refused to account for them to NatWest. Natwest sought declaration it was fixed charge and order for Liquidator to account.

Court considered three part test in Agnew Nature of rights and obligations parties intended-ordinary account

with no restrictions Whether it was intention of parties that charged assets should be

under the control of company or charge holder-book debts under control of and available for use by Spectrum in ordinary course

Whether such an intention was consistent with nature of transaction as describe by label parties had put on it-no specific charge not consistent with freedom to use

Therefore floating and not fixed charge

Creation of fixed charges over book debts-the practicalities.

Successful strategies include:

A prohibition in the charge against the company realising debts itself whether by assignment or collection without consent of chargeholder.

More realistically commercially, the chargeholder appoint the company its agent to collect the debts for its account and on its behalf.

Pay into blocked account so money not available as a source of cashflow. However, blocked account must operate in substance as well as in name to be effective-chargor must be denied right of access for withdrawals, any payment out of the account must be at chargee’s discretion and to be safe a separate decision by the bank on a case by case basis whether or not to release monies.

Sample problem-Orbis Communications

Orbis Communications Limited (Orbis) provides internet services to businesses. Nibelheim Industrial Bank (Nibelheim) holds a floating charge over all business assets. Principal assets comprise telecommunications and computer equipment, accounts receivable and cash in an NAB account. The floating charge contains a restrictive covenant prohibiting Orbis from creating subsequent security interests ranking equally, or ahead, without consent Nibelheim. An automatic crystallisation clause in the event of any breach. Menard Finance Limited has agreed to advance funds to Orbis and take a fixed charge over receivables and floating charge over bank account-requires Orbis to deal with receivables in accordance with instructions of Menard. In absence instructions, Orbis must collect them in ordinary course business and pay them into their bank account but is otherwise prohibited from dealing with them. Orbis may deal freely with proceeds in the ordinary course of business prior to the crystallisation of the Menard floating charge over the bank account. Orbis is experiencing difficulties. Menard has requested your advice on legal status of its security interest and its priority vis a vis Nibelheim.

Australian Central Credit Union V. Commonwealth Bank Of Australia No 566 of 1989 (1991) SASC 2724

2 people claimed a vehicle owned by KP Randall P/L (KPR P/L)

Mr. R living with Miss L, who was member of Credit Union and eligible to borrow. Miss L agreed to obtain a loan for Mr. R who authorised her to use vehicle as security. Miss L disclosed all this to the Credit Union and obtained a loan of $12,000, paid it to Mr. R who used it for the company. Miss L signed a Bill of Sale dated 18th September 1987 over vehicle as security. It named Miss L as grantor and made no reference to company. Vehicle remained in possession of KPR P/L.

A charge within CCode 1987 s.203 required to be registered . Notice of a charge required by s. 201(1). KPR P/L did not give notice of Bill of Sale; nor did credit union pursuant to s. 208 (interested person can give notice). It did register 22.9.87 on Vehicles Securities Register pursuant to Goods Securities Act 1986. On 24.11.87 KPR P/L executed Deed of Equitable Mortgage giving Bank floating charge. Registered as charge under Co

Code. On 10.2.89, company defaulted. Bank took possession.

Securities over IP

Is registration of a security interest granted by a company over IP under Corporations Act sufficient to create a valid security interest?

Compare and contrast:Copyright

Trademarks

Patents

Security interest in a Patent

If a company is granting a charge over a Patent, the Corporations Act requires it to be registered on the Australian Register of Company Charges and the Patents Act allows it to be registered.

Should it be registered on both?Yes, because in many cases the Patents Act provisions will determine

priority.e.g. if there is a priority dispute between an assignment of a patent and a security interest over the patent, then the Patents Act would apply because the priority sections of the Corporations Act only apply to disputes between security interests.

If Ptents Act silent (e.g. in relation to priority disputes not involving a patentee or between 2 interests not registered anywhere, the priority rules of the Corporations Act will apply.

Notice

Is registration on one system (incorrectly) notice to a chargor who registers on another (the correct register)?

A Patent example

X grants a charge over a Patent to A, and the charge is registered under the Corporations Act but not in the Patent Office in accordance with the Patents Act. Later, X assigns the Patent to B who searches the Patent Register, but not the Corporations Register.

Would A’s security interest take priority over B?Probably not. Under s. 189 of the Patents Act, X is the patentee and can deal

with the patent as absolute owner and give good title to B provided that B is ”a purchaser in good faith for value and without notice of any fraud on the part of the patentee”. B had no actual notice because he did not search the Corporations Register. The Parliament intended that the Patents Register be the one and only place to look to determine ownership of and whether security interests exist in Patents, so registration on the Corporations Register would not be constructive notice.

Prudent course for a person taking security or purchasing a Patent, is of course, to search both.

Copyright

In Australia, the Copyright Act applies. No formalities are required to obtain copyright and there is no copyright register. This creates certain problems in being sure who is the owner and capable of transferring title or granting a licence.

An assignment has no effect unless in writing and signed by the assignor s. 196 CA.

If X transfers a copyright to A and then grants a security interest in the same copyright to B, B gets nothing because the prior legal interest of A prevails over the subsequent legal or equitable interest to B.

If X grants a license to A and then a security interest to B, B takes subject to A’s license.

Copyright and notice

If an Australian work is registered in the US Copyright Office, are the details on the US Register (which notes assignments and security interests) notice to Australian lenders?

e.g.An Australian Co,D, creates a computer game.It registeres this work in the US Copyright Register and obtains a loan from a US bank, securityed against all copyright owned by D. USBank regsiters its security interest in the US Copyright Register but not in the Australian Register of Company Charges. Later, D grans a similar security interest to OZbank, who searches the Australian Register of Company Charges, finds nothing and registers its security interest. Is OXbanks security interest subject to USBanks security interest?

Possible answers: OZbank taken to have constructive notice of the security interest recorded in the US and so USBank’s charge has priority. Alternatively OZbank taken to have constructive notice only of security inteests recorded in Australia. Or, because copyright is territorial, USBank has priority over US copyright and OZbank has priority over Australian copyright. Result uncertain.

A prudent Australian lender would search the US register and the local company register. If they were clear, they would require D to register any significant works with the US Copyright Office and then record the security agreement with the US Copyright Office against each work, require future works to have the same treatment.

Trademarks

See s. 22…The registered owner of a TM may, subject only to the register, deal with the TM as absolute owner.

One should register/search in both Company Register and TM Register because registration in the former may provide no protection against a person with a prior right to the TM as recorded in the TM register….unless it can act as notice, or fraud exists.

Australian Central Credit Union V. Commonwealth Bank Of Australia No 566 of 1989 (1991) SASC 2724 cont (2)

Who is entitled to proceeds of sale of vehicle? Valid Bill of Sale and effective to transfer title? No lack of formality…miss L agent for KPR P/L….Bill of Sale purported to transfer legal title subject to right to possession and equity redemption…consumer mortgage (Consumer Credit Act). Nothing to prevent passing of title. Is Bill of Sale a charge within Companies Code? Was it a charge on a personal chattel..i.e. article capable of complete transfer by delivery? Yes, neither Motor Vehicles Act (scheme for registration ownership) nor other statute deprive a MV capacity of being transferred by delivery.Therefore a charge and should have been registered under Co Code. A registered charge has priority over unregistered charge created before it, unless chargee of unregistered charge proves chargee of registered charge had notice of unregistered charge at time registered charge created. Was registration under Goods Securities Act notice?Would reasonable person, acting prudently in own interests have searched the register? No said majority. Yes, said dissenting Judge.

BLUECORP PTY LTD (IN LIQUIDATION) V. ANZ(1995) QCA 487 (3.11.95)

This case concerns a fight between Trustee in Bankruptcy of Bluecorp ( formerly Lloyds Ships, a maker of luxury boats) and ANZ, Trustee of Mirage resorts-for proceeds of sale of Mirage III ($5.3m) Bluecorp sued ANZ in conversionMirage III was a vessel built for Mirage resorts and Qintex. The Contract for construction between Hover (part of Qintex) and Lloyds 21.6.85. At that stage they were independent companies. While under construction Qintex bought around 45% interest in Lloyds31.7.86 ANZ acquired all but one in the issued units in Port Douglas Resort Trust and Gold Coast Resort Trust21.10.86 Lloyds had applied to register Hover as owner but registration did not proceed25.5.87 boat completed and handed over to Hover. Normally title would pass under Sale of Goods Act at this point, but because it was a ship, needed to be registered under the Shipping Registration Act.After boat handed over, no attempt to register because of sales tax worries

BLUECORP PTY LTD (IN LIQUIDATION) V. ANZ(1995) QCA 487 (3.11.95)Cont.

3.8.87 charges executed by Hover in favour of Operations and by Operations in favour of ANZ. Charges registered

May/June 88 “rescission”of sale of ship. 31.8.88 Lloyds issued credit advice and notified Registrar of Ships it had no interest

Boat registered in name of Lloyds.Lloyds never repaid Hover

13.9.88 boat registered in name of Lloyds

Lloyds mortgaged boat to Partnership Pacific 16.9.88

Bill of sale in blank 20.6.89 to ANZ-filled it in post insolvency.

Decision

Boat being held by Lloyds on trust for whatever entity in the Qintex group it was decided on. Equitable title to ANZ via the registered charges. Legal title during 1989 on the facts. Voidable title because of the preference provisions relating to insolvency, but before avoidance, transfer to ANZ.

Trade Finance and SecuritiesThe import scenario

Bankers Lien

Pledge

Unpaid seller’s lien

Unpaid seller’s right of stoppage in transit

Carriers lien for unpaid freight

Bankers right of set off

Fixed and floating charges over importers assets

Company? 262 charge? Registered?Yes Yes

No

Goods? MV or boat?RIGA?

Yes Yes

No YesSIGA

Book debts? Yes Assignment or

security?

IP Yes Relevant IP law?

Other Liens Pledges

No Lien, pledge etc

Ships/Aircraft

Commercial Transactions Module 10 Summer Session 0607.

Documents

state registration

registration of securities

dual registration

consequences of registration

mandatory registration

different registration

federal registration

goods act charges