PPS and ASIC Prosecution

WELCOME TO 2014

The first half of 2014 has almost drawn to a close – how time flies. The PPSA transitional provisions have finished, and business in NSW continues to be patchy.

NEW DIRECTOR

We are pleased to announce the arrival to the firm of Martin Walsh as a Director.

Martin has had extensive insolvency experience, previously working at major accounting firms. During his time with a previous employer he was seconded to a major bank in the Asset Recovery and Restructuring area.

Martin has wide ranging experience with enterprises of all sizes, from publicly listed companies to those operating in the SME market across a number of industry sectors.

We welcome Martin to the Smith Hancock team.

PERSONAL PROPERTY SECURITIES ACT (“PPSA”) – TRANSITIONAL PERIOD ENDED 31 JANUARY 2014

We have devoted a number of our earlier newsletters to matters arising in relation to the PPSA.

The PPSA generally applies to security interests in goods located in Australia. With the introduction of the PPSA, the legislators made provision to protect secured parties, by allowing them two (2) years (the “transitional period”) to register their interests, including Retention of Title, leases etc., on the Personal Property Securities Register (“PPSR”). The PPSA transitional provisions expired at midnight on 31 January 2014. For example, a Retention of Title agreement created prior to 31 January 2012 needed to be registered by 31 January 2014 if the supplier wished to rely on the terms of that agreement after 31 January 2014.

Temporary perfection for transitional security interests will not apply from 1 February 2014.

Those who did not register a transitional security interest on the PPSR before midnight 31 January 2014, lost the benefit of the transitional provisions.

If, by non registration, a security interest lost its “perfected” status, its priority ranking in an insolvency is not preserved. This means that in the event that the grantor (ie. the entity who has possession of the secured creditors assets) defaults, another person with a security interest in the same property with a higher priority ranking will be paid out ahead of any lower ranking secured parties.

The “ perfected” status of the security interest will only begin from the time of registration on the PPSR if the security interest was not registered during the transitional period.

If your clients have not registered their interest on the PPSR, particularly for Retention of Title, then they should seriously consider doing so, as any claims in respect of property over which there is no registration will be rejected by insolvency appointees.

PPSA AND CONSTRUCTION CONTRACTS

A case decided by the High Court of New Zealand highlights the necessity to obtain proper legal advice to adequately protect your interests in relation to property used in the construction industry and registration of security interests on the PPSR.

Contracts in the construction industry generally contain clauses setting out “step in rights”.

“Step in Rights” typically provide that, where an Administrator, Liquidator or a Receiver is appointed to the contractor and the appointee declines to complete the contracted works:

i) the party for whom the work is being carried out may terminate the contract; and

ii) the contractors’ equipment becomes the property of the injured party.

In the case of McCloy v Manukau Institute of Technology [2013] NZHC 936 Mainzeal Property and Construction Ltd (In Receivership and In Liquidation) (“Mainzeal”) entered into a contract to carry out works for Body Corporate 177519 (Hobson Gardens) (“Hobson”).

The contract contained step in rights similar to those described above.

The Receiver appointed to Mainzeal declined to complete the contract works.

Hobson terminated the contract and declared it was lawfully in possession of the equipment. The Receiver claimed he was entitled to return of the Mainzeal equipment.

The Receiver argued that the step in rights were a security interest and subject to registration on the NZPPSR.

Hobson had not registered its security interest.

The Court held that step in rights are a security interest and subject to registration. The security interest created in favour of Hobson by the contract was not perfected.

The Court further held that perfection of a security interest by possession would not apply in this instance as possession resulting from seizure or repossession did not comply with the provisions of the NZPPSA.

The Court held that the Receiver was entitled to recover the equipment.

Whilst this is a decision of the New Zealand High Court, there are similar provisions in the Australian PPSA.

FORMER FINANCIAL CONTROLLER SENTENCED FOR FALSIFYING COMPANY BOOKS

In a recent ASIC media release, ASIC advised that they successfully prosecuted a former Financial Controller of an Information Technology company on five (5) charges of falsifying the books of companies in the group in which he was employed.

It was found that between January and August 2009, the Financial Controller submitted duplicated and/or falsely inflated invoices to a debtor factoring financier totaling approximately $4.38 million.

According to the media release no allegations were made against the Financial Controller that he received any direct personal financial benefit from his conduct. The Financial Controller was sentenced to twelve (12) months jail, suspended for two (2) years. (ASIC media release 13-315MR Former Financial Controller Sentenced for Falsifying Company Books).

The charges against the Financial Controller were in relation to the contravention of Section 1307 of the Corporations Act, 2001 (Cth) (“the Act”) “Falsification of Books”. The Section reads:

1. (Offending Conduct) “An officer, former officer, employee, former employee, member or former member of a company who engages in conduct that results in the concealment, destruction, mutilation or falsification of any securities of or belonging to the company or any books affecting or relating to affairs of the company is guilty of an offence.”

The scope of this Section is wide ranging and affects those not only who may be seen to be acting as a director of the Company, but also employees.