Oct 02, 2017 term paper 2

Law: Commercial Law Assignment

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On 3 July 2014 Max Speed, who conducts a second-hand car business, purchased under a written signed contract an inventory of luxury used second hand cars. The cars comprised twelve Audi A7s purchased from Euro Prestige Pty Ltd (Euro Prestige). The contract contained a seller’s retention of title (ROT) clause whereby Euro Prestige retained title in the cars until Max made the final payment due under the contract. The total price of the inventory was $1.2 million and Max took possession of the cars on the day the contract was signed. On that same day Euro Prestige duly registered in the Personal Property Securities Register its purchase money security interest created by the ROT clause. During September 2014 Max sold six of the Audi A7s to various customers and six remained in his car yard. All sold cars were to bona fide purchasers, buying at fair market value and without notice of any financial difficulties that Max might be in. In November 2014 a creditor’s petition made by Max’s bank has led to his bankruptcy. The date of bankruptcy is 18 November 2014 and its commencement date is 15 August 2014. His bankruptcy was triggered by Max’s default under his 2007 home mortgage with the bank. The amount Max owes the bank under the loan is much greater than the value of his
home. Under the contract for the Audi A7s Max was also in default and now owes Euro Prestige over $1.2 million. At the date of bankruptcy the remaining six Audi A7s remained in Max’s possession. Max’s debt to his other creditors is vastly more than the value of his assets. His unsecured creditors are owed an amount over $2 million.
1. In the above scenario, explain the position of Max’s six customers who purchased the Audi A7s in September 2014. In particular, are their transactions with Max able to be set aside by the trustee-in-bankruptcy? Can Euro Prestige take possession of their cars without it compensating them? Do they have any remedy? What explains their treatment?

2. In the above scenario, explain how the trustee-in-bankruptcy will deal with the six Audi A7s that have remained in the bankrupt’s estate. In particular will the cars be available to meet the debt of Max’s bank, Euro Prestige’s debt or the debt of the unsecured creditors? What explains that treatment?

3. Explain the background to the Personal Property Securities Act 2009 (Cth) including the reasons why it was considered desirable to have a national registration system for personal property security interests.


1. For establishing the principle of bona fide purchaser for value without notice, there are three main elements that need to be established. First of all, the purchaser should require the legal title in good faith; secondly, the title should be acquired by the purchaser for value and thirdly, the purchaser should have acquired the title without notice of the presence of private equity. Generally, the purchaser is the person who has actually purchased a fee simple in accordance with the contract of sale (McCormack, 2004). However, it has been held in certain cases that the purchasers include mortgagees as well as the lessees of legal estate (Goodright v Moses (1774) 2 Wm Bl 1019). In this way, the bona fide purchaser principle requires that the purchaser should have given some value. This value can be established in case money or something equivalent has been paid for the transaction. However it is not required that the amount of value that has been given by the purchaser should be the full value of the property. In such a case, it is sufficient if it constitutes good consideration, although it is not necessary that it should be pecuniary in nature. For example, in R v Registrar of Titles, it was held that the allocation of certain fully paid shares constituted valuable consideration in this regard. At the same time, it also needs to be established that the purchaser had acted in good faith. Generally, good faith overlaps with the doctrine of notice. But it needs to be noted that it is a separate test and is also a much wider concept. In case it is difficult to establish that holder of estate took little notice of private equity real estate, still the priority may be deferred if it can be proven that the ensuing holder has not acted in good faith (Midland Bank Trust Co. Ltd. v Green, 1983). The concept of good faith is an extensive and equitable concept and the basis for it is in the principle of appropriate and reasonable conduct. It includes the assessment of the conduct of the purchaser before as well as on receiving the property (Latimer, 2011).

In case it can be established that the transaction was induced fraudulently, morally reprehensible or a sham, generally the holder of property may not be able to establish good faith. On the other hand, the principle of bona fide purchaser has been reiterated in property law legislation in all the States.

The personal property securities laws have made sweeping changes, with far-reaching consequences for the parties involved. The changes that have been made to the law regarding security interests that are present in personal property replace various laws of Federal and State by introducing only one law called the PPS Act. According to this legislation, a party having security interest and has the obligation to port the world that notice regarding its interest in order to avoid defeat regarding the sale of property or the loss of interest in case of insolvency or the loss of priority as compared to other secured parties. The `perfection` of security interest in case of personal property can be achieved by having possession of the property or control over it or by registering the interest as required in the PPS register (Calnan, 2004).

While in the past, due diligence involved a search of the database of ASIC in order to find if a third party had registered a charge over the assets of the vendor. However according to the PPS Act, the secured parties register their security interests on the PPS register online by filing financial statement which contains basic information like the identity of the secured parties, if the security interests of subordinate to any other security interest, the end time for registration and a limited description of the property.

Earlier the holders of security interests and property were generally protected by ownership under rule that provides that a `person cannot give what they do not have`. However the new rules related with taking property free of encumbrance have shifted the balance in favor of the purchasers. Generally the purchasers take the assets free of security interests if the interest has not been perfected. Due to the reason that it is always open for the secured party to put the world on notice regarding its security interests by perfecting it, the rationale behind such requirement is that the risk of a purchaser acquiring encumbered property needs to be borne by the secured party instead of the purchaser. It will not be practical for the purchaser to know regarding its security interests if the secured party has not been diligent in protecting its security interest (McCormack, 2004).

Therefore it will be essential for the purchaser to make a thorough review of the PPS register if they want to take the sailor sex free of encumbrance. In case no security interests have been registered on the sale assets, the purchaser is required to ascertain if any party, apart from the vendor is in possession of control of the property. The reason is that possession or control by third party may suggest the perfection of a security interest (Loxton, 2011).

In the present case, the six customers of Max have purchased the Audi A7s in good faith. However, in the present case it cannot be said that the six customers have purchased the cars without notice of the security interest of Euro Prestige. The reason is that soon after finalizing a contract, Euro Prestige has duly registered its purchase many security interest in the PPS Register. As a result, in the present case, it was the responsibility of the purchasers to inquire if the cars were being sold free of any encumbrance. Therefore in the present case, Euro Prestige can take possession of the cars without compensating the six customers who have purchased the cars from Max. The reason is that the security interest has been duly registered by Euro Prestige in the Personal Property Securities Register and as a result, now it was the responsibility of the purchasers to inquire if any interest was registered on the cars or not. 

2. In the present case, the creditor`s petition that was made by Max`s bank has resulted in his bankruptcy. The reason behind the bankruptcy was default of Max under the 2007 home mortgage with the bank. However in the present case, the trustee-in-bankruptcy has to use the remaining cards for dealing with the debt of Euro Prestige as compared to the debt of Max`s bank or the debt of the unsecured creditors. The reason behind this treatment is that Euro Prestige has duly registered its security interest in the PPS Register. At the same time, there was a seller`s retention of title clause present in the contract according to which the title in the cars was retained by Euro Prestige until the final payment was made by Max under the contract. Therefore in the present case, the trustee-in-bankruptcy will use the remaining cars to deal with the debt of Euro prestige first of all instead of dealing with the debt of the bank or that of the unsecured creditors (Latimer, 2011).

3. The changes that have been made in the law related with personal property and security interests replace the earlier laws by a law that is known as the Personal Property Securities Act. According to this legislation, a party having a security interest in personal property is required to give notice to the world regarding such interest, and ‘perfect’ that interest, in order to evade loss in case the property is sold or the loss of interest in case of bankruptcy or losing to other parties that are secured. A security interest can be perfected by possession or control over the property. At the same time, it can also be achieved by registering the interest on the Personal Property Securities Register. In this way, the new legislation has a significant impact on buying and selling of businesses and companies. 

The earlier law had more than 70 legislations under which the registration and search was based on jurisdiction, the type of collateral and also on the type of security. At the same time, in case of certain interests, they have to be registered on several registers in order to achieve protection while in some cases, there was no register present. On the other hand, a single national register for security interests would allow extensive coverage of these interests in all types of personal property and there will be only a few exceptions. Similarly, single regime of security interests also allows the applicability of clear guidelines for ordering priorities in case of opposing interests in such property, defending security holders against loss or subordination of their interests to the probable purchasers and in the same way, protecting third parties like the purchasers of major assets who do not have any knowledge of existing security interests. It was also believed that the compliance costs for the lenders can be reduced by providing clear priority rules (McCormack, 2002). For example, similar reforms that have been introduced in New Zealand have decreased various loan contract forms from 32 to 2 in case of a major bank. In the same way it allows the bank to process a large number of transactions internally without the need of solicitors. Similarly, the lenders are also expected to profit by the ability which allows them to compare interest rates and fees more accurately with the risk profiles of the borrowers, reduced costs required for evaluating and monitoring the capacity to pay of the borrowers and better certainty regarding which assets can be used to meet the loan in case of a default by the borrower. In the same way as this simplification process reduces the entry barriers to financing business, it is expected that the combination will increase in the financing sector and it may result in more innovation in financing products and at the same time, it will reduce the cost of borrowing.

In this way, the Personal Property Securities Act replaces more than 70 Federal, State and Territory legislations with a single law that is applicable throughout the nation. It also introduces the national online register which is known as the Personal Property Securities Register and can be used for registering all security interests. On the other hand, the failure to comply with personal property securities law can have severe consequences which include the inability to recover the goods sold by the party or recover the payment for such goods by realizing secured assets. At the same time, the personal property securities regime may also prove to be beneficial for the business as it gives a better chance to enforce security interests and at the same time to recover payments that have been difficult to recover and sometimes even impossible (Gillooly, 1994).

In this regard, it needs to be noted that the personal property securities act applies to the security interests in the personal property. The term personal property includes frangible as well as intangible property. As a result, stock, motor vehicles, machinery, plant, raw materials, receivables, intellectual property etc. are included in the term tangible and intangible property. However the term property as used in this legislation does not include land. In the same way, security interests include the retention of title causes, chattel mortgages, fixed/floating charges, consignment agreements, our purchase agreements and some leases of goods.

The personal property securities register is an online registered and it allows secured parties and potential secured parties to look for and also to register security interest that are present in personal property. The registration of security interest takes place by uploading a financial statement. Depending on the nature of security interest that is being claimed, generally a financial statement contains information like the details of the secured party, the collateral details, the grantor`s details and some registration details. It also needs to be noted that the financial statement is only a notice of the security agreement and it is not the actual arrangement that creates the security interest. Therefore it is still required to have a written contract documentation that underlies the registration. In the same way, the Personal Property Securities Register is not the register of ownership and it is only a notification of the security interests. In case no interest is present over an asset, it will not be present on the PPS Register.

In this regard, it also needs to be noted that it is not compulsory to register a security interest on the PPS Register. But if the security interests have not been registered, in such a case a party may find that it is not able to enforce its rights against third parties like liquidators/administrators and other people who are competing with the party for a payout. Therefore by `perfecting` the security interest (we generally takes place by registering on the PPS Register), the security interests of the party has priority over an `unperfected` security interest or over a general security interest. Similarly it survives the bankruptcy/insolvency of the grantor while the unperfected security interest does not. Similarly, in some cases, the perfected security interest survives the sale of the collateral while the unperfected security interest does not. In the same way, if the party choses, it may also cover the proceeds of sale of the collateral.

In this regard is also provides that in case an ‘inventory’ is being supplied by a party to its customer, in such a case, the party is required to register the retention of title (ROT) before the goods have been delivered to the customer


Diccon Loxton, 2011, The Australian Personal Property Securities Act, the net closes on quasi-securities, 6 Journal of International Business Law and Finance

Gerard McCormack, 2004, Personal Property Security Law Reform in Comparative Perspective –Antipodean Insights? Common Law World Review 331(3) 1 March

Gerard McCormack, 2004, Secured Credit under English and American Law, Cambridge University Press

Gerard McCormack, 2002, Personal property security law reform in England and Canada, Journal of Business Law

Michael Gillooly, 1994, Securities over Personalty, Published in Sydney Australia, the Federation Press

Paul Latimer, 2011, Australian Business Law, CCH Australia Limited

Richard Calnan, 2004, The Reform of the Law of Security, Journal of International Business Law and Finance.

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