In the matter of Qenos Pty Ltd (Administrators Appointed) [2024] NSWSC 483
In the matter of Qenos Pty Ltd (Administrators Appointed) [2024] NSWSC 483 is a helpful case which analyses when a security interest may or may not arise under the Personal Property Securities Act 2009 (Cth) (PPSA).
Facts of the Case
Ethylene is a petrochemical used to produce polymers, industrial chemicals and to ripen fruit.
Under a formal supply agreement, Qenos manufactured and supplied Indorama with ethylene for many years. Indorama used that ethylene to manufacture industrial chemicals.
In February 2023, Qenos shut down its ethylene production following a major failure in a cooling water pipe.
To allow Indroama to continue manufacturing industrial chemicals, Indorama purchased ethylene from other sources. Indorama stored the ethylene purchased from other sources in a storage tank leased by Indorama and subleased by Qenos. The storage tank was connected to Indorama’s factory by underground pipes which allowed Indorama to access the ethylene on demand. The storage tank was managed by Qenos.
The “agreement” which governed this storage arrangement was not formally documented. Instead, the terms were set out in a series of emails over several days between Qenos and Indorama. Importantly, there was no obligation in the formal supply agreement or the informal storage agreement for Indorama to pay additional costs to Qenos to store the outsourced ethylene in the storage tank.
Soon after the informal storage arrangement was agreed, Indorama imported five shipments of ethylene ranging between 2,900 and 3,400 metric tonnes, costing between $4.3 million and $7 million. Those shipments were placed in the storage tank and drawn on by Indorama progressively at its factory.
On 17 April 2024, Jason Ireland, Matthew Caddy, Damien Pasfield and Jason Preston were appointed as joint and several administrators of Qenos. The administrators asserted that the ethylene remaining in the tank vested in them under section 267(2) of the PPSA.
Who owns the ethylene?
The primary question in the case was who owned the ethylene remaining in the storage tank, Indorama or Qenos?
The question turned on whether Indorama’s legal title in the ethylene had vested, or in other words transferred, to the administrators of Qenos pursuant to section 267 of the PPSA.
In substance and deemed security interests
In order to assess whether Indorama’s title had vested in Qenos, the Court first investigated whether a security interest under the PPSA existed or not. There are two kinds of security interests:
- in substance security interests (defined in section 12(1) of the PPSA); and
- ‘deemed’ security interests (defined in section 12(3) of the PPSA and further expanded on in section 13 of the PPSA).
In Substance Security Interest
Under section 12(1) of the PPSA, a security interest arises where:
- there is a transaction;
- the transaction provides for an interest in personal property; and
- the transaction in substance secures:
- payment; or
- performance of an obligation.
Section 12(2) of the PPSA provides a non-exhaustive list of PPSA security interest examples such as a fixed charge, floating charge and retention of title.
Deemed Security Interests
Section 12(3) of the PPSA specifically provides for ‘deemed’ security interests.
Unlike an in substance security interest, a deemed security interest can arise where the transaction involving personal property does not, in substance, secure payment or performance of an obligation.
Examples of deemed security interests are a commercial consignment, a lease or a bailment.
PPS Lease
Section 13 of the PPSA further expands on the characteristics of a ‘deemed’ security interest.
Section 13 of the PPSA states:
(1) A PPS lease means a lease or bailment of goods:
(a) for a term of more than 2 years; or
(b) [repealed;]
(c) for a term of up to 2 years that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed 2 years; or
(d) for a term of up to 2 years, or a lease for an indefinite term, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of more than 2 years after the day the lessee or bailee first acquired possession of the property (but not until the lessee’s or bailee’s possession extends for more than 2 years).
(2) However, a PPS lease does not include:
(a) a lease by a lessor who is not regularly engaged in the business of leasing goods; or
(b) a bailment by a bailor who is not regularly engaged in the business of bailing goods; or
(c) a lease of consumer property as part of a lease of land where the use of the property is incidental to the use and enjoyment of the land; or
(d) a lease or bailment of personal property prescribed by the regulations for the purposes of this definition, regardless of the length of the term of the lease or bailment
Bailments for value only
(3) This section only applies to a bailment for which the bailee provides value.
Was there a section 12(1) of the PPSA (i.e. an in substance security interest) in the Case?
No, the storage of the ethylene did not give rise to a section 12(1) PPSA security interest as the storage arrangement did not in substance secure any payment or performance of an obligation from Indorama to Qenos. This was because Indorama was not required to make any payment to Qenos for storing the ethylene in the storage tank.
Was there a section 12(3) of the PPSA (i.e. a deemed security interest)?
No, the storage of the ethylene in Qenos’ tanks did not give rise to a PPS Lease as all three subsections of section 13 were not satisfied. This is because:
- the storage arrangement was not for a period of over 2 years;
- Indorama was not regularly engaged in the business of bailing goods as the storage of ethylene was an ad hoc arrangement; and
- Indorama did not provide any value to Qenos for storing the ethylene.
Therefore, the storage arrangement did not give rise to a deemed security interest under the PPSA.
Outcome of the Case
The Court decided that the storage arrangement/bailment between Indorama and Qenos was an ad hoc arrangement which did not meet the requirements under section 13 of the PPSA to be deemed a PPS lease.
Accordingly, no security interest under section 12 of the PPSA arises and the vesting rules under section 267(2) of the PPSA does not operate. This meant that legal title to the ethylene remained with Indorama and Indorama was able to take the ethylene out of Qenos’ possession.
If the storage arrangement gave rise to a PPSA security interest, the ethylene would have vested in Qenos as Indorama did not take steps to perfect its interest in the ethylene. Further, Indorama could no longer perfect its security interest after Qenos went into administration due to the PPSA’s strict timing registration rules and other restrictions such as section 588FL of the Corporations Act 2001 (Cth).
Key takeaway
It is critical in any commercial negotiation to consider whether the arrangement might give rise to a PPSA security interest (including a deemed security interest). As this case demonstrates, it may not always be immediately obvious that a PPSA security interest has arisen. It is important to seek advice early to make sure you obtain the protection offered by the PPSA.
If the PPSA does apply, you must take the necessary steps to perfect your security interest in a timely manner to protect your business and its position. Perfecting your security interest will avoid vesting of your personal property in the event a counterparty company goes into administration or liquidation. When in any doubt, make a registration on the PPSR to perfect your interest. The cost and time of making a registration will always be less than the cost incurred in either losing title or fighting a contested litigation.
We are happy to assist if you have any concerns about whether you may be impacted by the PPSA.
If you would like to discuss this article with us further, please contact David Greenberg, partner on (02) 9261 5900.