A Transaction within s 12(1)
52 I begin by identifying a number of general propositions of law which I did not understand to be in dispute.
53 The concept of a "security interest" under the PPSA is more than a mere grouping of a range of relationships arising under the general law. The effect of the PPSA is to grant a distinct security interest which the section provides is an interest in personal property "provided for" by a transaction and without regard to the form of the transaction or the identity of the person who has title to the property (Gold Valley Iron Pty Ltd (in liq) v OPS Screening & Crushing Equipment Pty Ltd [2022] WASCA 134 (Gold Valley Iron) at [251] per Vaughan JA). In Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2014] VSCA 326; (2014) 49 VR 86 (Dura), the definition was described by Santamaria JA, with whom Maxwell P and Whelan JA agreed, as a "functional" definition. I gather his Honour means by this a definition designed or adapted primarily to perform some operation or duty. Section 12(1) directs attention to two matters and they are whether there is an interest in personal property provided for by a transaction and whether, in substance, the interest in personal property secures payment or performance of an obligation (Gold Valley Iron at [189] per Buss P and Murphy JA). Whether the second element is satisfied raises a question of the characterisation of the transaction to which the parties have agreed. It is not merely a question of the intention of the parties and it is not merely a question of interpretation (Gold Valley Iron at [198] per Buss P and Murphy JA). The subsection provides that one is directed to consider whether the transaction in substance secures payment or performance of an obligation and that is to be done without regard to the form of the transaction or the identity of the person who has title to the property. The requirement is to disregard form and naturally invites consideration of the commercial or economic substance of the transaction and a consideration of the way in which the transaction works or operates (Gold Valley Iron at [197] per Buss P and Murphy JA; at [257] per Vaughan JA). Although s 12(1) refers to a transaction, where the transaction is created by a written agreement, the provision of the agreement must be construed for the purpose and in the course of ascertaining the substance of the transaction (Gold Valley Iron at [114] Per Buss P and Murphy JA).
54 The word "interest" in personal property is defined in the Dictionary in the PPSA to include a right in the personal property. The term "security agreement" is defined to mean an agreement or act by which a security interest is created, arises or is provided for, or writing evidencing such an agreement or act.
55 In order for a transaction to give rise to a security interest in substance, there must be something to create an interest that is enforceable in the event of non-payment or non-performance of the obligation (Gold Valley Iron at [263] per Vaughan JA; Dura at [107] per Santamaria JA). Ordinarily, the concept of a security interest under the PPSA covers a situation where one person (the secured party) has an interest in some personal property in another's possession to assure or support the payment or performance of an obligation (Gold Valley Iron at [259] per Vaughan JA). The requirement in s 12(1) that the interest in personal property be "provided for" by a transaction is different and wider than words such as "created" or "arising" used in other parts of the PPSA (see, for example, s 8(1)(a), (b), (c), (g), the definition of "security agreement" and s 73(1) and s 73(2) and Central Cleaning Supplies (Australia) Pty Ltd v Elkerton (in his capacity as joint and several liquidator of Swan Services Pty Ltd (in liq)) [2015] VSCA 92; (2015) 321 ALR 181 (Central Cleaning Supplies) at [27]-[20]). In Central Cleaning Supplies, the appellant was the supplier of cleaning equipment to a purchaser. The invoice contained a statement that the subject of the sale would remain the property of Central until the purchase price had been paid to Central Cleaning Supplies in full. In the course of the Full Court's reasons, the Court said (at [16]):
One of the examples given in s 12(2) - by subpara (d) - is "a conditional sale agreement (including an agreement to sell subject to retention of title)". Plainly enough, each contract between Central and Swan for the sale and supply of particular equipment was "an agreement to sell subject to retention to title". It was, moreover, a transaction of the requisite character, because in substance the retention of title by Central secured payment of the purchase price by Swan. Thus, the interest in the goods "provided by" that transaction was a "security interest" within the meaning of s 12(1).
56 In Gold Valley Iron, Vaughan JA said (at [363]):
The single most important feature is the option to purchase. When the nature and structure of the option to purchase is understood it becomes apparent that in substance the hire agreements are a secured sales transaction. The transaction takes its legal form as a title-retention device for security purposes. The implications of the option to purchase are supported by a number of other features of the hire agreement. The contrary factors are peripheral indicia which do not detract from the conclusion that the transaction serves the function of securing the payment or the performance of an obligation as inheres from the option to purchase in the circumstances of the hire agreements.
Gold Valley Iron involved an agreement for the hire of mining equipment. The hire agreements were dated 13 December 2019 and involved the respondent in that case agreeing to hire to the first appellant mining equipment owned by the respondent for at least 10 continuous months. On 17 February 2020, the first appellant was placed into voluntary administration. On 19 March 2020, the first appellant was placed into liquidation and the second and third appellants were appointed its joint and several liquidators. After the first appellant was placed into liquidation, the respondent demanded that the appellants return or release the mining equipment to the respondent. The appeal to the Western Australian Court of Appeal was allowed.
57 I note the following passage in Palmer on Bailment:
Conclusion
3-077 The law relating to the effectiveness of retention of title clauses is now reasonably clear in England and Wales. The following propositions are established by the cases:
(1) "Simple" retention of title clauses whereby a seller retains legal title until payment of the price of the goods themselves are fully effective and do not require registration. …
58 Kirkalocka's contention is that there is a security interest within s 12(1) and/or s 12(3)(c) of the PPSA. I did not understand Kirkalocka to argue that the provisions of the PPA fell within any of the examples in s 12(2) and, in particular, a conditional sale agreement (including an agreement to sell subject to retention of title) or a hire purchase agreement. As I have said, Kirkalocka's case is that, although the provisions of the PPA do not amount to these type of agreements, the examples give colour to the scope of s 12(1), particularly the reference to retention of title and the fact, on Kirkalocka's submission, the PPA operates in a very similar fashion to a hire purchase agreement.
59 In the alternative, the PPA "provided for" a further interest in the Power Plant, namely, Zenith's interest as the bailer of the Power Plant.
60 Kirkalocka submitted that the PPA conferred on it an option to purchase the Power Plant and if that option was exercised such that the purchase occurred after more than 10 years of electricity being supplied, the Buy Out Price was $0. It submitted that thus described, the PPA gave rise to a transaction which was closely akin to a hire purchase transaction. Kirkalocka submitted that the real question is whether that transaction, in substance, secured payment or performance of an obligation.
61 Kirkalocka relied on the decision in Re Arcabi Pty Ltd (in liq); ex parte Theobold [2014] WASC 310; (2014) 288 FLR 236. The business of the company in that case included the storage and sale of rare coins and bank notes. Some of the goods were owned by third parties and were held by Arcabi pursuant to bail and consignment arrangements. The receivers and managers of the company sought directions from the Court under the Court's general power in s 424 of the Corporations Act 2001 (Cth) in relation to the controllers of the company profiting. Master Sanderson referred to s 12(1) and s 12(3)(b) of the PPSA which deals with the interest of a consignor who delivers goods to a consignee under a commercial consignment and the definition of a PPS lease within s 13. The Master said (at [20]):
There are several factors accepted by overseas courts as indicia of when bailment arrangements secure payment or performance of an obligation. These include:
(a) the bailment provides that the ownership of the goods will vest in the bailee on expiry of the bailment agreement;
(b) the bailee has an obligation to purchase the goods or an option to purchase the goods or extend the term of the arrangement at a 'bargain' price such that it would be reasonable to expect the bailee to exercise the option;
(c) the term of the arrangement is for a major part of the economic life of the goods; and
(d) the minimum payments under the bailment amount to substantially all the capital cost of the goods.
62 Kirkalocka submits that the requirements in (b), (c) and (d) above are satisfied in this case. First, Kirkalocka had the option to purchase the Zenith Power Plant, including for $0 if the option was exercised after 10 years of Kirkalocka having paid the Charges. The decline in the Buy Out Price over time provided an economic incentive for Kirkalocka to see out the PPA. Secondly, the term of the PPA being 10 years, exceeded the useful economic life of the central components of the Power Plant, namely, the gas and diesel generators. Thirdly, even putting aside the adjustments to be made under the PPA, the Capacity Charges over the term of the PPA exceeded the market value of the Power Plant of $7.1 million (if relocated) or $8.2 million (if left remaining on the Site). The factual matters in the second and third propositions were asserted, but not proved with two paragraphs in Mr Stocks' affidavit being excluded.
63 Kirkalocka's key submission is that the PPA, in substance, secured payment or performance of Kirkalocka's obligation to pay to Zenith the Charges, including the Capacity Charge, the fixed nature of which indicates that it was intended, at least in part, to cover the capital cost of the Power Plant. It submits that properly analysed, the PPA, in substance, gave rise to a title retention device that secured Kirkalocka's obligation to pay the Charges. The references in the PPA to registration under the Personal Properties Securities Register (PPSR) support the proposition that Zenith had a security interest.
64 Kirkalocka advanced an alternative interest in the plant and equipment comprising the Zenith Power Plant. This interest is the retention of Zenith's legal title in the Zenith Power Plant. The submission is that in circumstances where, under the PPA, Zenith agreed, in effect, to supply and instal the Zenith Power Plant at the Site controlled by Kirkalocka and to operate the Zenith Power Plant to provide electricity exclusive to Kirkalocka, clause 3.5(b) was, in substance, a retention of title device, the effect of which was that title to the Zenith Power Plant only passed to Kirkalocka if it exercised its purchase option. Kirkalocka contended that Zenith's submission that it was the Termination Payment and not the option to purchase which secured its obligations should be rejected because it neglects to take into account that the Termination Payment and the option to purchase are linked. The terms of the PPA provided that the Termination Payment was only payable if Kirkalocka elected not to exercise the option to purchase. Together with the retention of title in clause 3.5(b), the two concepts worked in unison to secure performance of Kirkalocka's obligations under the PPA and, in particular, Kirkalocka's obligation to take electricity from Zenith and to pay the Charges.
65 Zenith advanced four reasons as to why the PPA did not create a "security interest" within the meaning of s 12(1) of the PPSA.
66 First, Zenith submits that its legal title to the plant and equipment derives from them being chattels and therefore arises under the general law and not pursuant to the PPA. Zenith provided an example: Zenith's legal title to the forklift does not arise from the fact that it was brought onto the Site for the purposes of the PPA. Legal title under the general law is not an interest to which the PPSA applies. Section 8 provides, relevantly, that the Act does not apply to a lien, charge, or other interest in personal property that is created, arises or is provided for by the operation of the general law.
67 Secondly, the PPA did not constitute a bailment of the plant and equipment by Zenith that gave Kirkalocka any possessory title to it.
68 Thirdly, Zenith never gave possession in the plant and equipment to Kirkalocka and, in those circumstances, the provisions of the PPA were different from a hire purchase agreement because in contrast with a hire purchase agreement, Kirkalocka never had possession of the Zenith Power Plant. In those circumstances, Kirkalocka's obligation to make payments under the PPA was not secured by Zenith's reversionary interest because legal title and possessory title were never separated.
69 Fourthly, the option to purchase does not secure Kirkalocka's obligations under the PPA. The PPA was for a term of 10 years. Kirkalocka submits that consistent with the usual measure of contract damages, that is to say, such sum as will put the plaintiff in the position as if the contract was performed, the parties agreed that if the PPA was terminated by Kirkalocka, then Kirkalocka would pay to Zenith the Termination Payment, the Demobilisation Payment and break costs as Zenith's sole and exclusive remedy. The parties agreed that the Termination Payment was a genuine pre-estimate of Zenith's loss and damage. In those circumstances, the performance of Kirkalocka's obligations under the agreement were secured by those contractual obligations. Whilst the Purchase Right under clause 7 could only be exercised by Kirkalocka, Zenith submitted that the Purchase Right did not operate as a conditional sale or "title retention device" because none of the incidents of ownership, that is to say, possession and control, accrued to Kirkalocka prior to the exercise of that right.
70 Zenith also submitted that the references in clause 28 of the PPA concerning the PPSA, are not determinative as to whether and, if so, in what respects the PPA creates security interests within the meaning of the PPSA. Zenith submitted that parties may and frequently do agree to facilitate the registration of interests under the PPSA in order to promote certainty and avoid disputation.
71 In Gold Valley Iron, Vaughan JA, after referring to the examples in s 12(2)(d),(e),(h) and (i) of the PPSA, said the following (at [271]-[273]):
271 With each of these examples there is no immediate passing of legal title (albeit that, with some of these transactions, an eventual passing of legal title is anticipated or at least possible). However, in each case there is a transfer of possession. As between conditional seller/purchaser, owner/hirer, consignor/consignee and lessor/lessee the latter takes possession of the goods. So these are transactions where one party (the creditor/seller) retains legal title but another party (the debtor) has possession and apparent ownership.
272 The operation of the PPSA in relation to such transactions is awkward and, to some extent, counter intuitive. It might be thought anomalous that the party in possession through a transaction by way of conditional sale, hire purchase, consignment or lease may provide for a security interest in the relevant goods in favour of the legal title holder. A non-owner debtor is providing for an interest in personal property in favour of the owner. So too it may seem anomalous to say that the secured party's interest in the goods (the secured party being the creditor/seller) is provided for by the transaction where the secured party owned the goods before the transaction and continues to hold legal title after the transaction.
273 One must, however, put aside preconceived notions based on the operation of the general law and instead apply oneself to the text and structure of the PPSA.
Counsel referred to this passage whilst at the same time acknowledged that the concept that the owner of goods could be granted an interest in its own goods seem "counterintuitive".
72 The provisions of the PPA do not give rise to a conditional sale because Kirkalocka does not agree to purchase the goods, it has only an option to purchase the goods. The other matter is that possession of the Zenith Power Plant vested with Zenith and Kirkalocka never possessed the Zenith Power Plant. Nor do the provisions of the PPA give rise to a hire purchase agreement because it cannot be said that in a real sense Kirkalocka was using the Zenith Power Plant for the term of the PPA (see Bridge MG , Personal Property Law, (3rd ed, Oxford University Press, 2002) pp 40, 121, 135). There is also the matter already mentioned that I have found that Kirkalocka never had possession of the Zenith Power Plant.
73 The case involves some unusual circumstances. Had the Zenith Power Plant been in the possession of Kirkalocka, then subject to one matter, the case would have been relatively straightforward. There would have been a security interest in personal property being Zenith's legal title in the Zenith Power Plant and its ability to reclaim the plant on default by Kirkalocka in the performance of its obligations under the PPA or the exercise by Kirkalocka of its option to purchase.
74 The one matter is the argument that the claimed security interest is based on Zenith's legal title and this has the consequence that the PPSA does not apply because the interest in personal property "is created, arises or is provided for by operation of the general law" (see s 8(1)(c) of the PSSA). I reject this argument. The provision in the PPA which deals with title to the Zenith Power Plant (i.e., clause 3.5) is based on the assumption that Zenith retained the title and interest in the Works and the Zenith Power Plant, subject to Kirkalocka's exercise of the option to purchase and an assumption that Kirkalocka retains the title and interest in the "Buyer's [i.e., Kirkalocka] Infrastructure". I reject the argument because I consider that the words in s 12(1) "provided for" should be given a broad construction and Zenith's legal interest was not created or arose or provided for by operation of the general law. There were no Works or Zenith Power Plant prior to the PPA and by reason of the provisions of the general law. It was the PPA which provided that the Zenith Power Plant was not to be considered a fixture on the Site and that there was to be demobilisation of the Zenith Power Plant and its return to Perth, Western Australia should Kirkalocka not exercise the right to purchase. The legal interest did not precede the performance of the Works and therefore the construction of the Zenith Power Plant.
75 The question then comes down to whether the fact that at all times Zenith retained possession of the Zenith Power Plant means that it did not have a security interest within s 12(1) of the PPSA. I have given this matter anxious consideration. I was not referred to any authority directly on the point. I have concluded that possession or not, s 12(1) is wide enough to cover a situation such as the present, particularly where Kirkalocka by the end of the term, and assuming no early termination, would have paid off a substantial proportion of the value of the Zenith Power Plant and possibly more.
76 Zenith's interest in personal property is the legal interest with a retention of title clause which can be engaged should Kirkalocka not perform its obligations under the PPA, including its obligation to make payment of the Capacity Charges and the Energy Charges. I do not consider that the fact that the Termination Payment for Kirkalocka's default and which the parties agreed was a genuine pre-estimate of the loss and damage that would be suffered by Zenith for the early termination of the PPA makes any difference to the conclusion I have reached, particularly as I consider it clear that there would be a security interest had Kirkalocka had possession of the Zenith Power Plant and there is no apparent link between the issue of possession and the agreed quantum for loss and damage suffered as a result of a breach of the PPA.
77 In conclusion, Zenith had a security interest by reason of s 12(1) of the PPSA.