Introduction
A recent decision of the Victorian Court of Appeal has found that a charge which secured 68 per cent of the assets of a company did not represent "the whole or substantially the whole" of the assets of that company, and the secured creditor was therefore not entitled to appoint an administrator.
This decision has implications for secured creditors wanting to appoint an administrator to a company once a charge becomes enforceable: section 436C of the Corporations Act 2001 (Cth) (CA), or a receiver and manager during the decision period: section 441A CA, if the charge held by them is over less than 68 per cent of the assets of the company.
Facts
Australian Property Custodian Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) (Company) was the responsible entity of the Prime Retirement and Aged Care Property Trust (Trust), and controlled 18 subsidiaries, or subsidiaries of those subsidiaries (Subsidiaries).
On 18 October 2010 a secured creditor appointed administrators to the Company. The charge pursuant to which the administrator was appointed (Charge), secured 68 per cent of the Company's assets by value. Other assets of the Company not caught by the terms of the Charge included the Trust property, and $5 million deposited with National Australia Bank Ltd (NAB) to satisfy a legislative requirement for the Company to hold an Australian Financial Services Licence.
The directors of the Subsidiaries subsequently appointed administrators to each of those companies also.
The directors of the Company would have appointed administrators to it, had the secured creditor not already done so.
The NAB challenged the appointment of the administrators to the Company on the basis that the charge relied on was not over "the whole or substantially the whole" of the assets of a Company, as required by section 436C CA.
Decision at first instance
Ex parte Horne Re Australian Property Custodian Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2010] VSC 492.
Sifris J sitting in the Supreme Court of Victoria held that the Charge was not over "the whole or substantially the whole" of the assets of the Company, saying that, although 68 per cent of the Company's assets was a "significant part of the Company's assets, [it was] certainly not the whole and ... certainly not substantially the whole. In this context, substantially refers to almost all of the assets but certainly not 68 per cent of the assets".
His Honour therefore found the appointment of the administrators invalid and refused to make an order pursuant to section 447A CA to validate the appointment. His Honour did, however, make an order pursuant to section 447A CA that Pt5.3A CA was to operate in relation to the Company as if the appointment of the administrators had been made by its directors, pursuant to section 436A CA.
Decision on appeal
NAB v Horne and Vrsecky as joint and several administrators of Australian Property Custodian Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2011] VSCA 280.
Almond AJA (with whom Mandie and Buchanan JJA agreed) agreed with Sifris J that a charge over 68 per cent of the assets of the Company did not represent "the whole or substantially the whole" of the assets of the Company, and that the appointment of the administrators was therefore invalid.
However, the Court of Appeal, noting the likelihood that administrators would have been appointed by the directors in any event, and that to validate the appointment of administrators by the secured creditor would ensure administrators were appointed from the same date as each of the Subsidiaries and ensure creditors would be treated equally, ordered that Pt5.3A CA was to operate in relation to the Company in such a way that the appointment of administrators on 18 October 2010 pursuant to section 436A CA, was valid.
Are trust assets to be taken into consideration when calculating "the whole or substantially the whole" of the assets of a company?
From the definition of "property" in section 9 CA it appears trust assets are to be taken into consideration when calculating what is "the whole or substantially the whole" of the assets of a company.
At [4] of Sifris J's reasons his Honour refers to the assets of the Trust being excluded from the operation of the Charge. Trust assets are thereafter not expressly referred to in Sifris J's judgment, nor the calculation of the net asset and liability position of the Company. From the wording of Sifris J's judgment this may have been because the Charge did not purport to include the assets of the Trust. Section 9 CA however appears to have required him to take the Trust's assets into account for the purposes of section 436C CA nevertheless.
On appeal, Almond AJA said, "Having regard to the value of the assets excluded from the ...Charge relative to the total value of the Company's assets, it is clear that ... [the secured creditor] was not 'entitled to enforce a charge on the whole or substantially the whole' of the Company's property. ... In my opinion, there is no error revealed in the reasons for judgment on this issue, nor in the conclusions reached", thereby appearing to affirm Sifris J's treatment of Trust assets.
It is unclear what the outcome would have been had the Company been trustee of more than one trust, and whether the Court would have been required to take into account the assets of a trust over which security was not held.
Effect of the Personal Properties Securities Act 2009 (Cth) (PPSA)
The PPSA as currently drafted should have a limited effect on the risks highlighted by this decision, provided:
- a general security agreement held by a secured creditor (the equivalent of a fixed and floating charge) is over all present and after-acquired property including PPSA retention of title property, and is registered pursuant to the PPSA; and
- secured creditors are aware a security interest under a general security agreement will rank after a retention of title security interest under a retention of title provision that is, and is registered as, a Purchase Money Security Interest.
The recent insertion of section 1501A CA however provides that, for fixed and floating charges that are transitional security interests, PPSA retention of title property is to be disregarded in determining whether there is a charge over the whole or substantially the whole of the assets of a company.
Effect of decision generally
From the foregoing, it is apparent that:
- 68 per cent by value of the assets of a company do not represent "the whole or substantially the whole" of the assets of a Company pursuant to section 436C CA, and possibly section 441A CA also;
- assets held by a company as trustee generally must be regarded as forming part of the assets of the company for the purposes of sections 436C and 441A CA; and
- implementation of the PPSA will require Courts to take into account PPSA retention of title property when calculating "the whole or substantially the whole" of the property of a company in relation to security interests under a general security interest, however, for transitional security interests, PPSA retention of title property is to be disregarded.
Lessons for secured creditors
Neither the decision at first instance nor that on appeal refers to Paragraph 536 of the Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth) which introduced Part 5.3A into the then Corporations Law and indicated that section 441A was intended to operate where a person "will be in a position, by appointing a receiver over all of the property, to achieve the same kind of orderly administration of the company's affairs that will be made possible by the appointment of an administrator".
When taking a fixed and floating charge or general security agreement, secured creditors should, if the secured creditor wishes to preserve its ability to appoint an administrator to a company, or a receiver and manager over its assets in respect of a company in administration:
- ensure where possible, that the charge they are taking is over all of the assets of a company including PPSA retention of title property and trust property, and that significant assets of the company, such as statutory bank deposits, are, if possible, included within the scope of the charge, and
- be mindful when acceding to an arrangement with another secured creditor, that assets are not removed from the ambit of the secured creditors' security. If the other secured creditor is to have first access to certain assets this should be regulated by a priority agreement, and not by a release of those assets from the security.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
