Understanding Bona Fide Purchaser Doctrine And Security Interests In Personal Property

Elements of Bona Fide Purchaser Doctrine

Question:

(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. In order to establish the principle of bona fide purchaser for value without notice, there is a need to establish three main elements. In this regard, first of all it is required that the purchaser should take the legal title in good faith. Similarly, it is also required that the purchaser should acquire the title for value and at the same time, the title should have been acquired by the bridges or without notice of the private equity. In most of the cases, the purchaser is the person purchasing the fee simple under the contract of sale. But in some cases, it has also been stated that the purchaser also includes the mortgagee and the lessee of legal estate (Goodright v Moses, 1774). Therefore, according to the principle of bona fide purchaser, it is required that the purchaser should have given some value. It is easy to establish this value if money or something else that is equal and the money has been paid by the purchaser. But it needs to be noted that it is not necessary that the amount of value paid by the purchaser should be the full value. In this type of cases, the value needs to constitute good consideration but it is not necessary that the value needs to be pecuniary. In this regard, it has been stated by the courts in this regard that the allocation of fully paid shares amounts to valuable consideration. At the same time, it also needs to be noted that generally good faith is related with the doctrine of notice. However, it has to be noted in such cases that the doctrine of notice provides a separate test and at the same time it is a broader concept. Similarly, even if it is difficult to prove that little notice was taken by the holder of the state of private equity real estate, the priority can still be different if it is established that the subsequent holder did not act in good faith (Midland Bank Trust Co. Ltd. v Green, 1983).  The doctrine of good faith provides an equitable and extensive concept. The basis behind this doctrine is the principle of reasonable and appropriate conduct. At the same time, this concept also includes the evaluation of the purchaser's conduct before and after receiving the property (Latimer, 2011).

Relation between Bona Fide Purchaser Doctrine and Good Faith

As a result, the holder of property may not be in a position to establish good faith, if it has been established that the transaction has been induced fraudulently or the transaction was a sham or morally reprehensible. It also needs to be noted that the concept of bona fide purchaser is reiterated in the property laws of all the States.

Comprehensive changes have been made by the personal property securities law which has far-reaching consequences for all the parties involved in such transactions. The changes made in the law related with security interests in personal property have replaced the different laws implemented by the Federal and State governments in this regard as a single law has been introduced which is known as the Personal Property Securities Act. Briefly speaking, this law provides that a party that has a security interest in property and at the same time, also has the duty to put the world at notice in connection with such interest so that such party may avoid defeat related with the sale of property or avoid the loss of interest in insolvency scenario or avoid the loss of priority as against other secured parties. For achieving the 'perfection' of security interest over personal property, the party needs to have possession or control on the property or such 'perfection' can be achieved by the party if it registers its interest in the PPS Register (Loxton, 2011).

On the other hand, due diligence on the part of the parties required a search of the ASIC database for finding if a charge has been registered by a third party on the assets of the vendor. But the provisions of PPS Act provided that the secured parties are able to register their security interests online on the PPS Register. For this purpose, the parties have to file a financial statement containing the information like the identity of the parties, the end time for registration and also brief description of property (McCormack, 2004). 

While in the past, the holders of property and security interests were generally provided protection by the ownership rule according to which a person cannot give what they do not have. But the new rules that deal with taking property without any encumbrance provides that the balance has been shifted in favor of the purchasers. As a result, now generally the assets are taken free of security interest by the purchasers if the other party is not perfected its security interests. The reason behind this provision is that the secured parties always have the option to put the world at notice by perfecting their security interests. The reason behind this requirement is that the secured party is required to be at the risk of purchaser acquiring encumbered property instead of the purchaser bearing such risk. It is not considered as practical that the purchaser should be aware of the security interests if the secured party itself has not been diligent enough to protect its interest in the property (McCormack, 2002).

Personal Property Securities Act and Perfection of Security Interests

As a result, it is required that the purchaser should extensively searched the PPS register in order to make sure that they are taking the property free of any incumbents. If no security interest is registered on the sale assets, it is required that the purchaser should a certain if any other party, other than the vendor, as the possession or control on the property. The reason behind this requirement is that the possession or control of another party may also suggest that a party has perfected its security interest.

The situation in the present case is that six Audi A7 cars were purchased by customers from Max in good faith. But it cannot be said in this case that all these customers have purchased the Audi's without any notice of Euro Prestige's security interest due to the reason that after the contract was finalized, the security interest of Euro Prestige has been duly registered by the company in the PPS Register. Therefore, in this case, it can be said that it was the duty of the purchasers of the cars to inquire if any interest has been registered on the cars that were being sold by Max.  

2. The reason behind the bankruptcy of Max was the default committed by Max in case of home mortgage with his bank. As a result, the question arises if the trustee in bankruptcy can use the cars lying with Max to deal with the debt of Euro Prestige as against the debt of the bank or to repay the debt of the unsecured creditors. In the present case, the rest of the cars can be used by trustee in bankruptcy to repay the debt of Euro Prestige due to the reason that the security interests of Euro Prestige in the cars has been duly registered by the company in the PPS register. In the same way, the contract between Max and Euro Prestige had a seller's retention of title clause which provided that the title of the cars would be retained by Euro Prestige for the time Max makes final payment according to the contract. As a result, it can be set in this case that the rest of the cars lying with Max can be used first of all by the trustee in bankruptcy to repay the debt of Euro Prestige and not to pay the debt of the bank or the debt of unsecured creditors. 

3. As a result of the changes made in the law of personal property and security interest, the earlier laws have been replaced by a legislation called the Personal Property Securities Act. This law provides that a party that has a security interest in property is required to put the world at notice in case of such interest and in this way, the party has to 'perfect' its interest so that it does not incur a loss if the property is sold or loses an interest in the event of bankruptcy or loses to other creditors who have secured their interest (McCormack, 2004). Possession or control over the property is one way of 'perfecting' a security interest. In the same way, an interest in personal property can be perfected by registering the same on PPS Register. As a result, it is apparent that the new law related with security interest on property has considerable impact on buying and selling.

New Rules for Taking Property without Encumbrance

Before the introduction of the current law, there were nearly 70 laws under which the registration and search of secured interests need to be made. This was based on jurisdiction as well as on the type of collateral and the nature of security. Another problem was that there were certain interests which are required to be registered on many different registers for achieving perfection. At the same time, there were some interests for which no register was present. As against this scenario, the single national register with provided for registration of security interests allows comprehensive coverage of such interests in all types of property and only a few exceptions are present. In the same way, due to the presence of a single regime of security interests, clear guidelines can be applied while ordering priorities if opposing interests are present in the property. It also provides protection tool security holders against subordination or loss of their interests. Similarly, this single regime also provides protection to third parties, for example the purchasers of major assets were not aware of the present security interests of other parties. In this regard, it is also believed that the cost of compliance for the lenders can also be decreased significantly if clear priority rules are present (Calnan, 2004). An example in this regard can be given of the introduction of similar reforms in New Zealand after which, the number of different loan contract forms used by a major bank was reduced from 32 to only 2. At the same time, such single regime also allows the bank to process more transactions internally and therefore the services of external solicitors are not required which in turn saves money. It is also expected that the lenders will also be profited by the ability provided by the new legislation due to which they can compare the rate of interest and fees more accurately along with the risk profile of the borrowers. Another benefit for the lenders could be decreased costs that are required for assessing and monitoring the capability of the borrowers to repay. It will also result in better certainty in case of the assets that can be used to repaint the loan in case there is a default committed by the borrower. Similarly due to the fact that the new regime simplifies the process and in turn the entry barriers to financing business are reduced, it can also be expected that the combination will provide a boost to the financing sector and it will also result in more innovative financial products while at the same time, the cost of borrowing will also be reduced.

Therefore nearly 70 Federal and State legislations have been replaced by the Personal Property Securities Act which applies throughout the country. At the same time, it has also introduced the national online register that can be used for reducing the security interests. At the same time, this law also provides that the failure to comply with this law can have severe consequences including the inability of the party to recover the goods sold and all of the inability to recover the payment for these goods by realizing secured assets. In the same way, it is expected that the personal property securities law will provide significant advantages to the business as it will provide better chance to enforce security interests as well as provide a chance to the parties to recover payments that were earlier difficult to recover and in some cases, nearly impossible (Gillooly, 1994).

Using Audi A7 Cars to Deal with Debt of Euro Prestige

At the same time, it also needs to be noted that the new legislation is applicable only to security interests that are present in personal property. Tangible as well as intangible property can be included in the term personal property. Therefore, stock, raw materials, motor vehicles, intellectual property, machinery, plant and receivables etc. can be included in the term property. But in case of this legislation, it needs to be noted that the term property does not include land. On the other hand, the retention of title causes, fixed or floating charges, purchase agreements, chattel mortgages, consignment agreements and some leases of goods are included in security interests. The PPS Register is an online registered and with the help of this register, secured parties as well as the potential secured parties can register security interests and also look for such interests in personal property. In order to register a security interest, a financial statement needs to be uploaded. On the basis of the nature of security interest being claimed, usually the information like the details of the secured party, collateral details, grantors details and certain details of registration are required to be contained in the financial statement. In this regard however it needs to be noted that this financial statement is only a notice regarding the security agreement. Therefore, this financial statement is not actual arrangement that results in the creation of security interest. As a result, it is still necessary for the parties to have a written contract which underlies the registration. Similarly the PPS Register cannot be considered as the ownership register but it only contains a notification of security interests. Therefore if no interest is present in the property, the same cannot be registered on the PPS Register.

Another important thing that needs to be noted in this regard that it is not compulsory for the parties to register their security interests in property on the PPS Register. However if the parties have not registered their security interest, such parties may not be able to enforce their rights against third parties like administrators are liquidators and also the other parties who are competing with them for a payout. As a result, by 'perfecting' their security interest, such interest gets priority over the 'unperfected' security interest of other parties and also over general security interest. In the same way, such interest survives insolvency or bankruptcy of the grantor which is not the case with unperfected security interests. In the same way, sometimes the perfected security interests are able to survive the sale of collateral but the unperfected security interests do not survive. Similarly, if the party wants, it can also cover the proceeds of sale of the collateral. Another significant thing that needs to be noted is that when an 'inventory' is being supplied by one party to another, such party also has to register the detention of title clause before delivering the goods to the customer. 

References

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

Goodright v Moses (1774) 2 Wm Bl 1019

Midland Bank Trust Co. Ltd. v Green, 1983 1 AC 646