Did the Receivers obtain actual or apparent possession of Retroflex's assets? If so was possession obtained by seizure?
113 Knauf's position is that it was in possession of Retroflex's assets within the meaning of the PPS Act either because of:
the existence of the right to appoint a receiver together with the exercise of that right, such that the receiver appointed may then give Knauf the power to deal exclusively with the collateral, namely, the assets of Retroflex; or
the existence of the right to appoint a receiver, the exercise of that right and the implementation of those rights by the Receivers in asserting control over the assets.
114 Retroflex submitted that the mere act of appointing a receiver does not amount to possession and that having a right to possess property is not the same as having possession of it. Retroflex noted that cl 9.1(b)(ii) of the Security Deed provides that a receiver may take immediate possession of any secured property and that s 420(2)(a) of the Corporations Act similarly provides that an appointed receiver has power to enter into possession and take control of property of the corporation. It submitted that neither the Security Deed nor the Corporations Act say that a receiver immediately takes possession. It submitted that the word "may" in cl 9.1(b)(ii) indicates that a receiver must actively take another step and seize the property from the company.
115 Retroflex contended that, accordingly, possession does not happen automatically on the mere appointment of a receiver. It further contended that this was consistent with the facts, which show that the Receivers demanded possession from it and the Liquidator. Retroflex submitted, relying on s 24(1) of the PPS Act, that it was apparent from the sequence of events and the actions of Knauf and the Receivers that it had actual and apparent possession so that Knauf and the Receivers could not have had possession.
116 Knauf maintains that it gained possession of the collateral within the meaning of s 21(2)(b) of the PPS Act and that its security was thereby perfected before the appointment of the liquidator. In order to determine whether that is so it is necessary to consider the meaning of the term "possession" as it is used in the PPS Act.
117 Knauf made extensive submissions concerning the common law meaning of possession. It referred me to the detailed treatise on possession of the learned authors Pollock F and Wright RS, An essay on possession in the common law (Clarendon Press, 1888). Knauf noted that the right to possess, though distinct from possession, is treated as equivalent to possession itself for certain purposes, relying on the following passage at page 13:
We have to add that the right to possess, though distinct from possession, is treated as equivalent to possession itself for certain purposes, more important with regard to procedure than to the substance of the law, and under the modern English practice of only historical importance, but still needful to be understood. It is then called constructive possession. Want of attention to the somewhat minute distinctions arising from this extension of the rights of a possessor to one who is not an actual possessor has led to much confusion.
118 Knauf submitted that the common law concept of possession may be equated with de facto possession, legal possession and/or the right to possess or to have legal possession. But, as is evident from the above passage, Pollock and Wright equate the right to possess with constructive possession.
119 Knauf also drew my attention to the multiple dictionary definitions of possession. It observed that in Stroud's Judicial Dictionary (4th ed, Sweet & Maxwell, 1979) there are 57 different entries for possession and that in Black's Law Dictionary (8th ed, West Group, 2004) there are 36 different types of possession listed. It suffices to say that most of those 36 types of possession are not relevant for present purposes. However, the current edition of Stroud's Judicial Dictionary (9th ed, Sweet & Maxwell, 2016) has only seven entries for possession. The opening paragraph of the definition of possession draws an extract from J A Pye (Oxford) Ltd v Graham [2002] 3 WLR 221 at 233 and provides:
… there are two elements necessary for legal possession: (1) a sufficient degree of physical custody and control ('factual possession'); (2) an intention to exercise such custody and control on one's own behalf and for one's own benefit ('intention to possess'). What is crucial to understand is that, without the requisite intention, in law there can be no possession …
120 Knauf also relied on Gamer's Motor Centre (Newcastle) Pty Limited v NatWest Wholesale Australia Pty Ltd (1987) 163 CLR 236 (Gamer's), where the High Court considered the meaning of "delivery" for the purposes of s 28(2) of the Sale of Goods Act 1923 (NSW). It referred in particular to the judgment of Dawson J, where his Honour said at 262-263:
Delivery is sometimes said to be constructive where it is symbolic as, e.g., where the keys to goods kept under lock and key are handed over. Sir Frederick Pollock doubted that in such circumstances, at least where control of the goods went with the key, there was a mere symbolic transfer of possession:… He preferred the view that there was a transfer of control in fact which constituted a change in possession. For it is control which is central to the notion that possession in law may consist of something other than physical or actual possession.
121 Finally, as to actual possession, Knauf referred to Thomas v Metropolitan Housing Corporation Ltd [1936] 1 All E.R. 210 at 216 and submitted that possession of the key to the premises in which chattels are located gives actual possession of the premises and the chattels.
122 In my opinion, the resolution of the question before me does not turn on nuances in the meaning of possession at common law. It is sufficient for present purposes to recognise that the word possession connotes a legal meaning that is wider than the ordinary meaning of that term. For example, relevantly, the legal meaning of possession at common law embraces the concept of constructive possession. But it is not necessary to exhaustively state the meaning of possession at common law to understand how that meaning may be modified for the purposes of the PPS Act.
123 Section 10 of the PPS Act provides that "possession has a meaning affected by section 24". The phrase "has a meaning affected by" is also used for the definitions of "Australia" and "jurisdiction" in s 10 of the PPS Act. It is a phrase that has been used in other Commonwealth statutes for definitional purposes.
124 In Vanstone v Clark (2005) 147 FCR 299 (Vanstone) a Full Court of this Court (Black CJ and Weinberg J) considered the meaning of that phrase in the context of the definition of the word "behaviour" in s 4A of the Aboriginal and Torres Strait Islander Commission Act 1989 (Cth). Weinberg J said at [132]-[133] and [135]:
132 The use of the term "has a meaning affected by" is a drafting device that is now found in a number of Commonwealth statutes. …
133 Despite the fact that there are now numerous examples of the use of this drafting device, counsel were not able to point to any authority bearing upon the question whether, as a matter of construction, this formula allows for an expanded meaning to be given to a word beyond the ordinary meaning that would otherwise be accorded to it.
…
135 If the words "affected by" are to be given any sensible interpretation, they must contemplate the expansion or contraction of the meaning that would otherwise be applicable. The word "affected", in its ordinary and natural sense, means "influenced", "altered", or "shaped". It is not merely a synonym for "touching", "relating to" or "concerning": Re Bluston (Deceased) [1967] Ch 615 at 633 per Winn LJ. It is plainly apt to include the power to modify, whether by widening or by narrowing, the ordinary meaning of any word that is "affected".
(emphasis added)
125 The meaning of "possession" in s 21(2)(b) of the PPS Act thus is an expansion or contraction of the meaning that would otherwise be applicable.
126 The meaning that would otherwise be applicable to the word possession in s 21(2)(b) is, in my opinion, the meaning of that term at common law. In Gamer's at 243, Mason CJ rejected a submission that the word "possession", as used in the definition of "delivery" under the Sale of Goods Act 1923 (NSW), would be given its common or ordinary meaning of "actual physical custody". His Honour noted that "'possession' is an established legal concept, particularly in its application to goods and chattels". The same must be said of "possession" in its application to articles of personal property covered by the PPS Act.
127 Thus, the word possession in the PPS Act has its common law meaning, modified to the extent provided for in s 24 of the PPS Act. As set out at [100] above, subss 24(1) and (2) limit the meaning of "possession" by reference to the party who has the "actual or apparent possession" of the personal property. That is, as between a secured party and a grantor or debtor, a secured party cannot have "possession" if the grantor or debtor, or someone on their behalf, has actual or apparent possession: s 24(1). Similarly, a grantor or debtor cannot have "possession" of personal property if the secured party, or someone on their behalf, has actual or apparent possession: s 24(2).
128 It is at least clear from the terms of subss 24(1) and (2) that constructive possession is not sufficient. The result is that "possession" in s 21(2)(b) has its common law meaning but limited, relevantly, for the purposes of the issue before me, by the terms of ss 24(1) and (2) to exclude constructive possession. It follows, contrary to Knauf's submission, that the right to possess does not equate to possession for the purposes of the PPS Act.
129 Knauf submitted that because s 21(2)(b) of the PPS Act refers to possession of "any collateral" and because collateral will commonly include tangible and intangible property it follows that the PPS Act postulates that both those types of property may be "possessed" for the purposes of s 21. It further submitted that this approach is consistent with the wording of s 21(2)(a), which provides for the registration of "any collateral" including tangible and intangible property, and with the fact that the PPS Act specifically provides for the seizure of intangible property at s 123(2). Knauf also relied on s 21(2)(c) of the PPS Act, which refers to six types of collateral where "control" is sufficient for perfection of a security interest. It submitted that the fact that the legislature has provided that particular forms of "control" are an alternative way of perfecting a security interest for those specified kinds of collateral also supports the conclusion that "possession" of intangibles is encompassed by s 21(2)(b).
130 Contrary to those submissions, the Replacement Explanatory Memorandum to the Personal Properties Securities Bill 2009 (Cth) says at [2.25]-[2.27] and [2.32]:
Possession and control of personal property
2.25 Possession and control of personal property would be important as two of the four ways of perfecting a security interest.
Possession
2.26 A secured party would be able to perfect a security interests (sic) in collateral by possession (other than possession as a result of seizure or repossession) (clause 21(2)(a)).
2.27 It would not be possible to perfect a security interest in an intangible by possession. However, as investment instruments, chattel paper or negotiable instruments are the physical embodiment of intangible rights, possession of these documents would perfect a security interests (sic) in the associated intangible property.
…
2.32 Possession under the Bill would not equate to the common law meaning of possession. Possession would include both apparent and actual control of the property (clause 24(2)). Even if a secured party has actual possession of collateral, if it appears to be in the possession of the grantor (or another person on behalf of the grantor), the secured party would not have possession of the collateral (clause 24(1)). It follows that when goods in the secured party's possession are transferred to the grantor's possession, the security interest becomes unperfected (unless perfected by another means, such as by registration or through temporary perfection of returned collateral (clause 36).
(emphasis added)
131 Knauf submitted that the Court would not be assisted by what is said in [2.27] of the Replacement Explanatory Memorandum in relation to the inability to perfect a security interest in an intangible by possession. It further submitted that those comments are not supported by the terms of the PPS Act, relying on Saeed v Minister for Immigration and Citizenship (2010) 241 CLR 252 at [31] where a majority of the High Court (French CJ, Gummow, Hayne, Crennan and Kiefel JJ) said that:
Statements as to legislative intention made in explanatory memoranda or by Ministers, however clear or emphatic, cannot overcome the need to carefully consider the words of the statute to ascertain its meaning.
132 A careful reading of the PPS Act supports the view that s 21(2)(b) permits perfection of a security interest in intangible assets, though not in the all-encompassing way contended for by Knauf. Section 21 provides for the mechanisms by which a security interest may be perfected. If resort is had to s 21(1)(b) in order to perfect a security interest then s 21(2) must apply. That subsection applies if there is: for any collateral, an effective registration of that collateral: s 21(2)(a); or, for any collateral, the secured party has possession of the collateral other than as a result of seizure or repossession: s 21(2)(b); or, for specified kinds of collateral, which, other than satellites and space objects, are intangible assets, the secured party has control of the collateral: s 21(2)(c). In turn, ss 25 to 29 set out what the secured party must do to gain control of the collateral specified in s 21(2)(c)(i) to (v).
133 I accept Knauf's submission that the phrase "any collateral" in s 21(2)(b) includes both tangible and intangible property. Subject to the definition of "collateral" in s 10 of the PPS Act, the phrase "any collateral" should be given its ordinary meaning and permitted the full breadth of the use of the word "any". It thus includes any "personal property to which a security interest is attached", whether that personal property is tangible or intangible.
134 But I am not persuaded by Knauf's ultimate submission that s 21(2)(b) can apply to all intangible assets. The collateral that may be perfected under s 21(2)(b) must also be referrable to the meaning of "possession", as affected by s 24 of the PPS Act. That possession must be actual or apparent. It cannot be constructive. Further, there is an inherent conceptual limitation to perfection by possession in s 21(2)(b) because intangible personal property cannot be physically possessed: see Duggan A and Brown D, Australian Personal Property Securities Law (2nd ed, LexisNexis Butterworths, 2016) (Duggan and Brown) at [5.2]. It follows from that conceptual limitation that, while s 21(2)(b) can apply to both tangible and intangible assets, it is not possible to have actual or apparent possession of most intangible assets.
135 Notwithstanding that, there are certain classes of intangible assets that have long been regarded as capable of physical possession at common law. Subject to the effect of s 24, they should also be regarded as capable of being perfected by possession under s 21(2)(b). This accords with the meaning of possession at common law, the operation of other sections of the PPS Act and with the Replacement Explanatory Memorandum. Relevantly, ss 24(4) to (6) contemplate possession of "a negotiable instrument that is not evidenced by an electronic record": s 24(4); possession of "chattel paper that is evidenced by an electronic record": s 24(5); and possession of "an investment instrument that is evidenced by a certificate": s 24(6). Without limiting the classes of intangible asset that might be perfected by possession under s 21(2)(b), each of those constitutes a class of intangible asset that can be perfected by possession. As for the Replacement Explanatory Memorandum, the first sentence of [2.27] emphatically states that "[i]t would not be possible to perfect a security interest in an intangible by possession". But the balance of the paragraph goes on to contemplate that security interests in certain classes of intangible property may be perfected by possession, namely, where a physical embodiment of that intangible property may be possessed. It also gives as examples investment instruments, chattel paper or negotiable instruments.
136 It follows from the above that Knauf can perfect its security interest by possession, other than seizure or repossession, in tangible assets and certain intangible assets. The question that then arises is whether that has in fact occurred on either basis contended for by Knauf.
137 The starting point to consider whether the Receivers did obtain actual or apparent possession of Retroflex's assets is the terms of the Security Deed, which governed Knauf's right to appoint the Receivers, the relevant terms of which are set out at [13] to [17] above. Notably:
(1) the Security Deed gave Knauf security over the Secured Property;
(2) it did that by granting a PPS Act security interest over all of Retroflex's "personal property" as defined in the PPS Act and a charge over the balance of the Secured Property pursuant to cl 3.1. A PPS Act security interest was granted over essentially all property that is not land;
(3) the parties agreed that if an event of default occurred then, pursuant to cl 6.1, each of Knauf's security interests would be immediately enforceable. There is no dispute between the parties that an event of default occurred;
(4) pursuant to cl 6.2, the parties agreed that, after Knauf's security interest became enforceable, Knauf could, in its absolute discretion, enforce all or any part of the Security Deed in any manner it saw fit. Clause 8.1 permitted Knauf to appoint a receiver if its security interests became enforceable;
(5) pursuant to cl 9.1, a receiver appointed would be granted all of the rights, powers and discretions set out in that clause in addition to those conferred on it by any applicable law and, except as specifically excluded by the Security Deed, would be able to do anything in respect of the Secured Property that "an absolute beneficial legal owner of the property is permitted to do under law". The rights, powers and discretions conferred by cl 9.1 include the right to:
(a) access any of Retroflex's business premises and take immediate possession of, enter and collect and manage, any Secured Property: cl 9.1(b)(ii);
(b) carry on any business of Retroflex in any manner: cl 9.1(b)(iii); and
(c) do anything to manage or obtain income or revenue from any of the Secured Property, including operating any bank account which forms part of the Secured Property or opening and operating a new bank account: cl 9.1(b)(xviii);
(6) in addition, cl 9.1(c) permitted a receiver to:
(a) do all other acts and things which it may consider desirable or necessary for realising any Secured Property or incidental or conducive to any of the rights, powers or discretions conferred on it under or by virtue of the Security Deed or law; and
(b) exercise, in relation to any Secured Property, all the powers, authorities and things which it would be capable of exercising as if it were the absolute beneficial owner of the Secured Property.
138 Section 420 of the Corporations Act confers a wide range of powers on a receiver, subject to the terms of any order or instrument under which the receiver was appointed and in addition to any powers conferred by such an order or instrument. Those powers include the power to:
(1) enter into possession and take control of the property of the corporation in accordance with the terms of the order or instrument pursuant to which the receiver was appointed: s 420(2)(a);
(2) convert property of the corporation into money: s 420(2)(g);
(3) carry on any business of the corporation: s 420(2)(h); and
(4) execute any document, bring or defend any proceedings or do any other act or thing in the name of and on behalf of the corporation: s 420(2)(k).
139 The appointment of a receiver under the Security Deed is at the option of the grantee, Knauf, consequent upon an event of default. However, once appointed a receiver's powers are, as can be seen from the matters set out above, wide ranging. He or she has the power to do all things necessary to secure the assets for the benefit of the secured creditor and can do anything that a beneficial legal owner of the property is permitted to do.
140 The effect at law of the appointment of a receiver is to suspend the powers of the directors of the company over the secured property. In Re Emmadart Ltd [1979] Ch 540 Brightman J said at 544:
... the appointment of a receiver for debenture holders suspends the powers of the directors over the assets in respect of which the receiver has been appointed so far as it is requisite to enable the receiver to discharge his functions: ...
And at 547:
The authority of a receiver is not, however, co-terminous with the authority of the board of directors. The powers of the receiver stem from (i) the powers contained in the memorandum and articles of association of the company to create mortgages and charges, coupled with (ii) the particular powers which have been conferred on a duly appointed receiver …
141 That is, upon appointment a receiver has the authority, subject to the terms of his or her appointment, to deal with the assets of the company over which he or she is appointed. In Oswal v Burrup Fertilisers Pty Ltd (recs and mgrs apptd) (2013) 295 ALR 708; [2013] FCAFC 9 a Full Court of this Court (Dowsett, Foster and Nicholas JJ) considered whether the appellant, Mr Oswal, was entitled to inspect certain categories of books and records of the respondent, BFPL, and of another company, BHL, that were in the possession of BFPL. Before dealing with each of the specific categories of documents sought by Mr Oswal, the Court addressed the relevant legal principles. At [54]-[55] their Honours said:
54 The appointment of a receiver to the assets and undertaking of a corporation does not strip the directors of all of their powers and duties. The directors remain in office but in the normal course have no power during the receivership over the assets in the possession and control of the receiver.
55 The powers and authority of a receiver are primarily derived from the security instrument pursuant to which he has been appointed. Those powers are supplemented by the specific powers given to a receiver of property of a corporation by s 420 of the Corporations Act.
And at [60] and [62]:
60 The powers of a receiver are ancillary to the main purpose of his appointment, which is the realisation of the secured assets …
…
62 The general position was succinctly and accurately summarised by Street J in Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1969) 2 NSWR 782 at 790 (Hawkesbury Development) where his Honour said:
Receivership and management may well dominate exclusively a company's affairs in its dealings and relations with the outside world. But it does not permeate the company's internal domestic structure. That structure continues to exist notwithstanding that the directors no longer have authority to exercise their ordinary business-management functions. A valid receivership and management will ordinarily supersede, but not destroy, the company's own organs through which it conducts its affairs. The capacity of those organs to function bears a direct inverse relationship to the validity and scope of the receivership and management.
142 Thus, upon appointment, a receiver is invested with the rights, powers and discretions associated with the control of the property that is the subject of the appointment. That includes the ability, subject to the terms of the security agreement pursuant to which he or she is appointed, to exercise rights in relation to the property as if the receiver is the absolute beneficial legal owner to the exclusion of all others. As submitted by Knauf, the immediacy of that change of control over the relevant assets of the company from the directors to the receivers is reflected by the requirement to notify affected parties of the appointment. Anyone dealing with the company who is made aware of the appointment of the receivers would be on notice that the directors were no longer able to deal with the assets that were the subject of the appointment and that any such dealings must now be with the receivers.
143 Knauf submitted that the act of appointment is the exercise of a legal right bestowed on it by Retroflex in respect of Retroflex's assets. It further submitted that this constitutes "possession" within the meaning of s 21(2)(b) of the PPS Act because Knauf is the party with actual and apparent control of the assets.
144 But in my opinion that is not sufficient to constitute possession. It is difficult to see how the mere appointment of a receiver could constitute actual or apparent possession of the collateral. The receiver upon his or her appointment has the authority to deal with the assets to which he or she is appointed, to the exclusion of the directors of the company, defined by his or her contractual and/or statutory rights to deal with those assets, but that does not amount to actual or apparent possession.
145 Without more, the exclusionary modification to the definition of possession in s 24(1) of the PPS Act prevents the appointment from constituting possession. It cannot be said that, merely by the appointment of a receiver, a secured party has possession of personal property if at that point the personal property remains in the actual or apparent possession of the grantor or debtor. That was so in this case. Upon their appointment the Receivers had the authority to deal with the assets the subject of the Security Deed and, in relation to those assets, could exercise the powers conferred on them by the Security Deed and s 420 of the Corporations Act. But actual or apparent possession remained with the grantor, Retroflex.
146 The alternative basis upon which Knauf says that it had possession for the purposes of s 21(2)(b) was by reason of the existence of the right to appoint a receiver, the exercise of that right and the added step of implementation or exercise of the rights conferred upon the receiver by the appointment.
147 The collateral over which the Receivers were appointed is described in the Form 509 - Presentation of summary of affairs of a company signed by Mr Hardy on 16 February 2016. The summary of assets and liabilities as at 12 February 2016 includes as assets:
sundry debtors, at director's valuation - $2,156,000;
cash on hand, at director's valuation - $950;
cash at bank, at director's valuation - $25,000;
stock as detailed in inventory, at director's valuation - $300,000;
plant and machinery as detailed in inventory, at director's valuation - $100,000; and
further assets, subject to specific charges, at estimated realisable value - $90,000.
148 Following their appointment:
(1) on 10 February 2016 the Receivers:
(a) attended Retroflex's premises and found them to be locked with no one present; and
(b) notified each of the major banks of their appointment and requested that the banks advise them of any accounts in Retroflex's name and freeze any such accounts;
(2) on 11 February 2016 the Receivers:
(a) attended Retroflex's premises at approximately 7.30 am. At that time they were taken into an office and provided with information about Retroflex's debtors, employees, its accountant, recent trading results, computer arrangements and who held keys to the premises;
(b) provided notice of their appointment to Mr Hardy;
(c) arranged for an IT expert to attend Retroflex's premises to back up the server, but that proved difficult due to lack of cooperation from Retroflex; and
(d) arranged for the locks of Retroflex's premises to be changed;
(3) on 12 February 2016 an employee of the Receivers attended Retroflex's premises to unlock them and, with the assistance of Mr Norris, who had been told by Mr Hardy to cooperate with the Receivers, was taken around the premises and took photographs; and
(4) the Receivers instructed Gregsons auctioneers to attend the premises and conduct an inspection of Retroflex's physical assets, which they did on 12 February 2016. Their valuation report dated 16 February 2016 provides a brief description and valuation of assets located at 521 Abernethy Road, Forrestfield, the premises of Retroflex.
149 The question is whether those steps taken by the Receivers constituted "possession" other than by way of seizure or repossession such that Knauf's security interest, at least in those assets that were capable of being possessed, was perfected.
150 Retroflex submitted that the Receivers took possession by way of seizure. It contended that a receiver takes possession of property by disposing a company and its directors of control of that property and that forcibly denying a company control of its assets amounts to seizure according to an ordinary definition and understanding of that word. In support of that submission it relied on three decisions: a decision of the Tax Court of Canada in Sun Life Trust Co. v The Queen [1998] GSTC 63 (Sun Life); a decision of the High Court of New Zealand in McCloy v Manukau Institute of Technology [2013] 3 NZLR 390 (McCloy); and a recent decision of Master Sanderson in the Supreme Court of Western Australia in Flown Pty Ltd (Administrators Appointed) v Goldrange Pty Ltd (2016) 316 FLR 81; [2016] WASC 419 (Flown).
151 Knauf submitted that the conduct of the Receivers did not constitute seizure or repossession in either a practical or legal sense. It submitted that seizure is a well-known concept in a court's enforcement process, specifically, to effect the seizure of property of a debtor by an enforcement officer and that repossession is a concept associated with the recovery of possession to which a secured party had some prior right to possession. It further submitted that seizure is a forcible taking of possession, referring to Johnston & Co v Hogg (1883) 10 QBD 432. Knauf also referred to Cory & Sons v Burr (1883) 8 App Cas 393 (Cory v Burr), where Fitzgerald LJ said at 405:
"Seizure" seems to be a larger term than "capture" and goes beyond it, and may reasonably be interpreted to embrace every act of taking forcible possession either by a lawful authority or by overpowering force."
152 Knauf contended that it and Retroflex, as parties to the Security Deed, agreed upon a consensual process for a change of control of the secured property and that it had duly followed that process. It contended that the fact that a director or employee of Retroflex may have been uncooperative did not change the nature of Knauf's conduct or that of the Receivers in following the agreed process. The appointment of the Receivers and the subsequent acts of the Receivers were said to be pursuant to the parties' contractual agreement and distinct from the use of coercive powers that might have constituted seizure. Accordingly, it submitted that the acquiring of possession by the Receivers did not constitute seizure.
153 Sun Life was an appeal from an assessment under Pt IX of the Canadian Excise Tax Act, RSC 1985, c E-15. In making the assessment the Minister of National Revenue had denied an input tax credit claimed by the appellant pursuant to s 183(7) of the Excise Tax Act for a particular period in relation to "the seizure or repossession" of certain real property. There was no dispute between the parties as to whether there had been seizure or repossession. The issue before the court was the timing of the seizure or repossession. Retroflex referred in particular to [10]-[11], where Lamarre J.T.C.C. said:
10 Since the application of the provisions of section 183 depends upon whether or not there has been seizure or repossession, it is important to determine what constitutes seizure or repossession and when it occurs. The issue in the present appeal has to do specifically with this point.
11 According to Policy Statement P-102, Seizures and Repossessions (Goods and Services Tax Reporter, March 1998 release), for the purposes of section 183, seizure and repossession occur in the following circumstances:
Seizure or repossession has occurred at that point in the execution process when the creditor, who has lawful authority to deprive the debtor of control of the property and sufficient lawful authority over the property to transfer rights in the property to a third party, has taken sufficient actions to exercise control over such property, whether real or personal, thereby depriving the debtor of such control.
154 To the extent that the court considered the meaning of seizure or repossession, whether there was seizure and repossession and, if so, at what point in time, it did so in the context of and by direct reference to policy documents concerning the legislation in which that term appeared. Accordingly, the comments of the court in Sun Life are of little, if any, assistance.
155 McCloy concerned a dispute between the receivers of Mainzeal Property and Construction Ltd (Mainzeal) and Hobson Gardens about whether Hobson Gardens had any interest in two hoists which were owned by Mainzeal but located at a building owned by Hobson Gardens. Relevantly, Mainzeal had entered into a general security agreement and two specific security agreements in relation to the two hoists with the Bank of New Zealand (BNZ). The BNZ registered three financing statements with the Registrar of Personal Property Securities under s 41 of the Personal Property Securities Act 1999 (NZ) (New Zealand Act).
156 Mainzeal entered into a construction contract with Hobson Gardens to carry out certain work. Clause 16.7.1 of the contract provided, among other things, that if Hobson Gardens ended the contract pursuant to cl 16.5.1 then it was deemed to be in possession of the contract works and that Mainzeal's interest in the contract works and in the materials, fittings and construction machinery on site was transferred to Hobson Gardens. Mainzeal commenced work pursuant to the contract and in doing so placed two hoists at the site. The receivers appointed to Mainzeal by BNZ gave notice that they would not continue the construction work and thereafter Hobson Gardens gave notice to the receivers pursuant to cl 16.5.1 that the contract was at an end and that it was now lawfully in possession of the hoists.
157 BNZ had an enforceable security interest by reason of registration. One of the questions for the court was whether it had priority over any other interest in relation to the two hoists. Collins J observed that for an attached security interest to have priority over another it must be perfected. Section 41 of the New Zealand Act provided that an attached security is "perfected" when a financing statement recording the security is registered or the secured party has possession of the collateral. In considering the issue Collins J said at [70]-[71]:
70 In the present case, it is arguable that Hobson Gardens perfected its security interest by acquiring physical possession of the hoists on 21 February 2013. However, I also think it more likely that Hobson Gardens did not in fact perfect its security interest because if it did acquire physical possession of the hoists, it did so by seizing them.
71 Possession is recognised as a form of perfection because it gives publicity to the existence of that party's security interest. In determining what is meant by "perfection by possession", regard must be had to that underlying policy rationale. In this case, Hobson Gardens were not in possession of the hoists prior to Mainzeal's default. Mainzeal had apparent control of the hoists up until that point, even though they were on Hobson Gardens' building. Hobson Gardens then secured apparent control or possession upon Mainzeal's default. That amounts to seizure. Section 41(1)(b)(ii) of the Act excludes seizures or repossessions from actions which constitute acquiring possession of collateral.
(footnotes omitted)
158 Knauf submitted that it was not readily apparent how Hobson Gardens' conduct amounted to seizure on the face of the judgment. It noted that the facts disclose that Hobson Gardens gave a notice to the receivers, which was difficult to equate to the acquiring of physical possession referred to by Collins J at [70]. Collins J seems to have considered the issue from the perspective of control, noting that Mainzeal had control of the hoists even though they were on Hobson Gardens' property and that it was only upon default by Mainzeal that Hobson Gardens obtained apparent control or possession. That is, possession only passed on default and, it seems, upon the service of a notice. Collins J characterised the taking of possession in this way as seizure.
159 In Flown the court was concerned with the ownership of certain plant and equipment in leased premises. It identified three questions for determination at [1]:
(1) was the plaintiff or the first defendant the owner of the plant and equipment in the leased premises;
(2) did the plaintiff have ownership of the plant and equipment by virtue of the provisions of the PPS Act; and
(3) was the plant and equipment to be regarded as fixtures so that ownership of the plant and equipment remained with the first defendant as owner of the premises.
160 The facts were not in dispute. Relevantly, on or about 25 July 2015 the plaintiff entered into an asset sale agreement to acquire some stock, a business name and certain assets. On or about 1 August 2015 the plaintiff entered into a loan agreement with the first defendant pursuant to which the first defendant loaned the funds required to purchase the plant and equipment. The plaintiff also entered into a lease with the first defendant for premises at which the plant and equipment were located. The plaintiff defaulted in its lease payments and on 14 July 2016 at about 3.45 pm a Mr Jackson, on behalf of the first defendant, served a termination notice on two directors of the plaintiff, Messrs King and Forrest, and a few minutes later he served the same termination notice on Mrs Forrest.
161 That afternoon the plaintiff paid the outstanding rent, but the first defendant confirmed that it had terminated the lease and offered the plaintiff a licence to occupy the premises, which offer was open for acceptance until 11.30 am on 15 July 2016. The offer of the licence was not accepted so the first defendant arranged, unsuccessfully, for the locks to be changed on the premises. The plaintiff's staff obstructed the first defendant's access to the premises. Mr Jackson returned to the premises shortly thereafter to find the police there. They told him that he had no right to enter the premises.
162 At about 1.00 pm on 15 July 2016 Mr Jackson attached notices to the doors of the premises and stayed close to the premises in case he could gain access. At about 4.00 pm he was informed that the plaintiff was in liquidation, that the liquidator was now in control and that the first defendant's termination notice was invalid. Mr Jackson returned to the premises the next morning at 7.00 am. His notices had been removed. Mr Jackson met with the director of the second defendant and entered into a licence agreement authorising the second defendant to enter into the premises and commence trading. Mr Jackson arranged for the locks to be removed from the door and at about 7.15 am entered the premises.
163 The plaintiff was in fact put into administration. Master Sanderson assumed that this occurred at about 1.00 pm on 15 July 2016.
164 At [26] Master Sanderson observed that it was common ground between the parties that pursuant to cl 5.1 of the loan agreement the first defendant had a security interest over the plant and equipment, which it could have registered on the PPSR pursuant to the provisions of the PPS Act but did not do so. Therefore its interest in the plant and equipment was unperfected. Master Sanderson continued as follows at [26]-[27]:
26 … Pursuant to s 267 of the PPSA where a security interest is unperfected and a grantor enters into administration the unperfected security interest vests in the grantor. The secured party is then able to prove in the administration for the owed amount as an unsecured creditor. That is what the plaintiff says happened here.
27 The defendants view matters differently. In order to perfect a security interest under s 21 of the PPSA a secured party must either register a secured interest on the PPSR or have possession of the collateral. Under s 21(2)(b) of the PPSA the possession of the collateral cannot be as a result of seizure or repossession. It is the defendants' position they were in constructive possession of the collateral from 11.30 am on 15 July 2016. Furthermore, they did not seize or repossess the collateral. Rather they exercised a lawful right to re-enter the premises and as a consequence came into possession of the collateral. So they are not disqualified by the provisions of s 21(2)(b).
165 At [28] Master Sanderson noted that the plaintiff had two answers to the defendants' submission. First, it submitted that the first defendant was not actually in possession of the leased premises, and therefore of the plant and equipment, and that by the time it did obtain possession the administrators had been appointed; and, secondly, it relied on s 24(2) of the PPS Act.
166 Master Sanderson noted that it was against those background facts and legislative framework that the issue of possession had to be resolved. He said that the starting point was cl 2.32 of the Replacement Explanatory Memorandum attached to the Personal Property Securities Bill 2009 (Cth) (see [130] above). At [30]-[34] Master Sanderson said:
30 The relevance of possession to the ownership of a chattel was considered by Pritchard J in Strange Investments (WA) Pty Ltd v Coretrack Ltd (2014) 107 IR 102. Her Honour said:
Possession of a chattel is evidence of ownership of that chattel - so much so that possession of a chattel is regarded as generating a rebuttable presumption of ownership. Consequently, it is generally accepted that possession is the most important of the incidents of ownership of a chattel. The law of possession "is ancient and fairly complicated", and the meaning of possession varies in different areas of the law. In the case of tangible chattels, possession (which is sometimes called actual or de facto possession) usually requires physical possession of the good, plus the intention to possess that good (that is, to exclude others from the exercise of control over it). However, a person who does not actually have physical possession of a good may nevertheless be held to be in possession of the good if he or she has control over that good, together with the requisite intention. This is sometimes referred to as legal possession or constructive possession. Alternatively, a party may not have actual possession but may have a right to immediately acquire physical possession, which is referred to as a right to possession [76].
(Footnotes omitted.)
31 It is not generally the case in Australian jurisprudence that a party benefits from not observing the provisions of a contract. But that does seem to be the effect of the law in this case. The fact is the plaintiff retained possession of the plant and equipment. A stranger visiting the Drovers Marketplace sometime after 11.30 am on 15 July 2016 and walking passed (sic) the leased premises would have seen nothing out of the ordinary. The person would have said the tenant was apparently in possession of the fixture and fittings. They were not to know the first defendant was as a matter of law entitled to be in possession of the premises and as a consequence to be in possession of the fixtures and fittings.
32 The position changed from around 1.00 pm. Mr Jackson had attached to the premises the document entitled "Notice of Re-entry". That notice included the following:
TAKE NOTICE that Goldrange Pty Ltd has re-entered this premises (sic) and retaken possession from Flown Pty Ltd.
33 In fact that statement is factually incorrect. As I have indicated possession of the premises was actually retaken around 7.15 am the following day. By placing the notice on the premises as he did, Mr Jackson could not and did not take possession of the leased premises. Thus he could not have possession of the fixtures and fittings within the meaning of s 24(2) of the PPSA.
34 Counsel referred to a number of Canadian and New Zealand authorities none of which really deal with the issues raised in this action. Perhaps the most relevant of these authorities is the decision of MacPhee Chevrolet Buick GMC Cadillac Ltd v SWS Fuels Ltd [2011] NSCA 35. This was a decision of the Court of Appeal in Nova Scotia. The court did quote with approval a section entitled "What Constitutes Possession" from a text by Cuming, Personal Property Security Law (Irwin Law) (212 - 13):
Perfection by possession requires actual physical possession by the secured party or an agent or bailee of the secured party other than the debtor or debtor's agent. The Act provides that a secured party does not have possession of collateral that is in the actual or apparent possession or control of the debtor or debtor's agent. Consequently, the common law concept of constructive possession has not been imported into the Act since it permits a debtor to be in apparent possession or control of the collateral.
167 At [35] Master Sanderson concluded that it was clear that the first defendant was not in actual possession of the fixtures and fittings at the time of the appointment of the administrator. Therefore the unperfected security interest passed to the administrator and did not provide any entitlement to the first defendant to actual possession of the fixtures and fittings.
168 Retroflex submitted that, applying the principles in Flown, the Receivers did not have possession of its assets, such that Knauf's security interest vests in Retroflex pursuant to s 588FL of the Corporations Act. Knauf submitted that the decision in Flown could be distinguished because it was a fundamentally different factual situation giving rise to different legal considerations and outcomes. That is so. But the principles set out by Master Sanderson at [29]-[31] and [34] are of general application and do not differ from my own view of the applicable principles. That is, perfection by possession requires actual or apparent possession and not constructive possession.
169 That then brings me to the present facts. In my opinion, the Receivers did have actual or apparent possession of the collateral of which they were able to take possession prior to the appointment of the liquidator. They notified the director, Mr Hardy, of their appointment, attended the premises and obtained information about the business and, critically, changed the locks, thus giving them actual possession. In Flown the chronology of events was different. The defendant attached a notice to the premises but that was not sufficient to give it possession. Master Sanderson found that the defendant only had possession the following morning when it changed the locks. In the meantime, administrators had been appointed. In this case the locks were changed and actual possession taken prior to the appointment of the liquidator.
170 However, in my opinion, the Receivers took possession by way of seizure. The PPS Act does not define "seizure" but, as noted at [101] above, it includes, at ss 123 and 124, mechanisms by which a secured party may seize collateral if a debtor is in default under the security agreement. Those sections provide only limited assistance in understanding the meaning of "seizure" as that term is used in s 21(2)(b) but, notably:
(1) the word "seizure" in s 21(2)(b), which operates to exclude seizure as a means of perfecting a security interest, would have no work to do if it referred only to the mechanisms in ss 123 and 124. Both of those sections, in their own terms, exclude seizure as a method of perfecting a security interest. A secured party who seizes collateral under s 123 does not perfect its security interest in the collateral by force of s 123(4). As to s 124, it presupposes that a security interest has already been perfected by possession (other than as a result of repossession or seizure) or control before a secured party may rely on it to seize collateral. The general exclusion of "seizure" in s 21(2)(b) would thus have no work to do if it were taken to mean "seizure under either ss 123 or 124". It follows that "seizure" has a wider meaning, beyond those mechanisms set out in ss 123 and 124;
(2) s 123(1) provides that seizure, for the purposes of that s 123, may be "by any method permitted by law"; and
(3) both ss 123 and 124 are available once the debtor, who will usually be identical to the grantor, is in default under the security agreement.
171 Seizure is the forcible taking of possession and, as Knauf submitted by reference to Cory v Burr, "may reasonably be interpreted to embrace every act of taking forcible possession either by lawful authority or by overpowering force" (emphasis added). Black's Law Dictionary (10th ed, West Group, 2014) similarly defines "seizure" as "[t]he act or an instance of taking possession of a person or property by legal right or process" (emphasis added). As the term appears in s 21(2)(b) of the PPS Act, seizure, along with repossession, is an exception to the ability of a secured party to perfect its security interest by possession. The reason for that exception is articulated at [2.18]-[2.19] of the Replacement Explanatory Memorandum:
2.18 Under the Bill, perfection of security interests would be important to obtain priority over competing security interests in the same collateral.
2.19 A security interest would be perfected once the security interest attaches to the collateral (clause 21(1)) and the secured party provides public notice of its security interest by either:
• registering an interest in any collateral;
• taking possession of goods;
• temporarily perfecting a security interest in the collateral; or
• taking control of an investment instrument; an ADI account; a right evidenced by letters of credit; an investment entitlement or a negotiable instrument (clause 20(2)).
(emphasis added)
172 The methods for perfecting a security interest under the PPS Act are all directed to the objective of a secured party giving public notice of its security interest. One available method is for the secured party to take possession of the collateral and, in that way, notify third parties of its interest in the collateral. Seizure and repossession are unacceptable forms of taking possession in order to perfect a security interest under s 21(2)(b) because they fail to meet the public notice requirement: see the discussion in Duggan and Brown at [5.8]-[5.9]. One of the principal, if not the principal, purposes of the PPS Act is to give notice of security interests in personal property to third parties. To allow a secured party to avoid the consequences of failing to publicise its security interest before a grantor's default, at which time a secured party may have a right to seize or repossess the collateral pursuant to the terms of its security agreement, runs contrary to that purpose.
173 Knauf argued that, because the Receivers took possession pursuant to the consensual agreement of the parties and not by the use of coercive powers, the Receivers' taking of possession could not constitute seizure. For the following reasons I do not accept that submission. First, it is significant that the term "seizure" appears along with the term "repossession". The phrase "seizure and repossession", being the exception to the ability of a secured party to perfect its security interest under s 21(2)(b), should be read so that the concepts of "seizure" and "repossession" operate consistently to the extent permitted by the text of the PPS Act. As to "repossession", it could not be suggested that s 21(2)(b) would permit a secured party to perfect its security interest in collateral by repossessing that collateral pursuant to a consensual agreement between it and the grantor. That situation would clearly fall within the meaning of "repossession". Indeed, repossession will almost always be pursuant to a legal right to repossess, be it contractual or otherwise. In order to give the phrase "seizure and repossession" a consistent operation the term "seizure" should be similarly understood, such that it may include acts of taking possession that are undertaken pursuant to a consensual agreement. An act of taking possession pursuant to a consensual agreement should not fall outside the scope of the phrase "seizure or repossession" merely because the secured party has not possessed the collateral previously.
174 Secondly, the definitions at [171] above recognise that the act of taking forcible possession may be "by lawful authority" or "by legal right". Although that lawful authority or legal right of seizure may be pursuant to a court's enforcement process, there is nothing in the PPS Act to suggest that the meaning of seizure in s 21(2)(b) should be so limited. To the contrary, seizure pursuant to s 123(1) may be "by any method permitted by law". The lawful authority or legal right of a person to seize property may be pursuant to a consensual agreement with another person. A receiver's appointment, which will usually follow a default by the grantor, and the receiver's subsequent actions should in this context be understood as a forcible taking of possession within the meaning of the term "seizure" in s 21(2)(b).
175 Thirdly, for the reasons outlined at [172] above, the meaning of "seizure" in s 21(2)(b) is informed by the significant purpose of the PPS Act to give notice of security interests to third parties. The appointment and conduct of a receiver in taking possession of collateral falls short of satisfying that purpose. The appointment and grant of powers to a receiver is consensual as between parties to a security agreement but, because that arrangement does not concern third parties, they are not notified of the existence of a security interest until after the grantor defaults under the security agreement and the secured party exercises its rights under that agreement. A third party is not put on notice of the security interest until after the grantor has experienced financial difficulty and, as a result, cannot make informed commercial decisions in its dealings with the grantor. It follows that there are sound policy reasons to understand "seizure" as including actions taken by a receiver pursuant to a security agreement.