The Liquidator and the Financier - Who gets the Ferrari?

Insolvency: 03 June 2021

A Ferrari was recently at the heart of a tug of war between liquidators and financiers, Aitken Partners represented the liquidators in court and we got the Ferrari. Read here to understand the implications.

Aitken Partners is proud to have been involved in a win for liquidators Richard Rohrt and Stephen Dixon in the Federal Court of Australia.

In May 2020, a Warrant under section 530C of the Corporations Act 2001 was successfully obtained on behalf of the liquidators. During the course of executing the Warrant at the offices of the Company - an accounting firm - a Ferrari registered to the Company was located. That Ferrari was owned by the Company in its capacity as trustee of a trading trust, a not uncommon circumstance given the prevalence of the use of trading trusts in Australian business. However, two interesting issues arose; first, was the Personal Property Security Registration lodged by BMW Finance against the Ferrari valid? Second, did the fact that the liquidators had disclaimed the Ferrari as onerous property mean they were not entitled to seize it?

On 13 May 2021, Justice Anderson in the Federal Court of Australia ruled in favour of the liquidators. In doing so, there are two important take home messages for insolvency practitioners.

Firstly, insolvency practitioners need to closely consider the validity of any registered PPSR security interest. While all practitioners will have this as part of a standardised process, it is critical to have strong procedures in place to ensure potential invalidity is picked up at the earliest possible time.

If those security interests can be said to be defective or suffer from a seriously misleading defect, section 267 of the Personal Properties Security Act (PPSA) provides that the secured parties interest will vest in the Company. The consequence for the secured party is disastrous; they become no more than an unsecured creditor in the external administration. The benefit to the creditors as a whole is potentially enormous - an asset which otherwise would not have been available to them can now be realised.

Secondly, a liquidator's power of disclaimer pursuant to section 568 of the Corporations Act 2001 should only be exercised in circumstances where the liquidator has formed the view (with the benefit of legal advice if necessary) that the relevant property (or contract) is too onerous, worth too little or otherwise unrealisable. It is crucial to have appropriate procedures to ensure that serious consideration should be given to (1) what is being disclaimed and (2) whether, as a result of any defects in the security interests held by the secured party, that property should indeed be disclaimed. But it is not all bad news; if a liquidator does inadvertently disclaim property which in reality it could not, this decision now stands for the principle that not only is the disclaimer ineffective, but a nullity.

The insolvency team at Aitken Partners - including Alex Nicol, Paolo Tatti and Sam Merrylees who were involved in this instance - have observed these issues in a number of external administrations. Often, for insolvency practitioners taking up such points is too costly and brings too much risk if the matter goes to Court. In light of this decision, and further clarity with respect to the consequences of defective registrations, it may well be that insolvency practitioners will be more likely to take on secured parties.

In our view, though the cases have mainly dealt with plant and equipment and motor vehicles, there is no reason that the operation of section 267 of the PPSA and the risk associated with defective registrations are so limited. If large financing corporations - such as BMW Finance in this instance - don't get their registration right, it is highly likely that smaller operations or even private financiers may have imperfect registrations.

Aitken Partners' Insolvency team is here to assist insolvency practitioners in assessing the validity of PPSR registrations and giving consideration to whether company property ought to be disclaimed and the implications of doing so.

If you need legal assistance with such matters, please contact any of our experienced insolvency team:

• Alex Nicol
• Paolo Tatti
• Michael O'Brien
• Phillip Fox
• Nicole Jee
• Sam Merrylees
• Amanda Robinson

The car pictured is not the actual Ferrari GTC4Lusso.