‘OPEN SESAME’, SAYS THE COURT

Key Points:
  • The Supreme Court of NSW recently granted a secured creditor access and entry to a debtor’s property to seize collateral under s 123 of the Personal Property Securities Act 2009 (Cth).
  • Secured creditors may rely on their contractual rights to enter a debtor’s property to seize collateral.
Background

The Bank of Queensland Limited (BOQ) entered into an agreement (Agreement) with Star Trek Pty Ltd (Star Trek) to provide finance to Star Trek for the lease of business assets.

Guarantees were provided by Maria and George Papadeas (Guarantors) to BOQ in respect of the Agreement. The Guarantors were also shareholders of Star Trek.

Under the Agreement, Star Trek granted to BOQ a security interest in all property owned or subsequently acquired by Star Trek (Secured Property).

BOQ registered its security interest on the Personal Property Securities Register as required under the Personal Property Securities Act 2009 (Cth) (PPS Act).

Default

Star Trek defaulted under the Agreement on June 2018.

In September 2018, the District Court of NSW entered judgment in favour of BOQ and against Star Trek and the Guarantors under the Agreement for the sum of $678,139.78.

On the application of BOQ, the Guarantors became bankrupt by sequestration order on 18 June 2019 and a bankruptcy trustee was appointed (Trustee).

Issues with seizure

BOQ sought to seize collateral situated at Star Trek’s registered office at a property in Matraville (Matraville Property) pursuant to the Agreement.

BOQ and Star Trek could not agree on the seizure of items pursuant to the Agreement.

In November 2019, the Trustee informed BOQ of her intention to sell Star Trek as an ongoing concern and make an offer to the BOQ in respect of the Secured Property.

In these circumstances, notwithstanding that it was a term of the Agreement that upon default BOQ was entitled to “take possession of… the Secured Property and enter any premises where the Secured Property may be located”, BOQ applied to the Supreme Court seeking, inter alia:
  1. A declaration that BOQ is entitled to seize the Secured Property pursuant to section 123 of PPS Act; and
  2. An order that BOQ be granted entry and access to the Matraville Property for the purposes of seizing the Secured Property.
The Court’s decision

Section 123(1) of the PPS Act provides:
 
Secured party may seize collateral

(1)  A secured party may seize collateral, by any method permitted by law, if the debtor is in default under the security agreement.


The Court opined that granting orders requiring the Trustee to provide access and entry, and Star Trek not hindering access and entry, were appropriate to allow BOQ to enforce its security pursuant to section 123 of the PPS Act.

In arriving at this decision, the Court considered the meaning of the expression “by any method permitted by law” under section 123. The Court acknowledged academic commentary on this section to the effect that a secured creditor cannot use unlawful force to seize collateral where a grantor resists seizure and in such a case it would be appropriate to obtain a Court order.

The Court abstained from providing any view on whether BOQ could have relied on its contractual rights to seize the collateral without obtaining orders from the Court.

Impact on secured creditors

It is not uncommon for secured creditors to rely on a contractual right to enter a premises for the purposes of seizing collateral, including under a retention of title clause. However, the Supreme Court’s decision is a reminder for secured creditors to consider whether their contractual rights are in compliance with section 123 of the PPS Act and adequately protect them against any grantors’ claims in trespass.

Post by Roxanna Lam
 

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