Written by Leigh Adams 

This article was originally published on the ARITA Journal, and is re-published here with permission

Dealing with creditor priorities is part and parcel of the insolvency practitioner’s working day. That makes liens very relevant. A lien is one party’s right to retain the possession of property and hold it as security for goods or services provided until payments are made, or obligations fulfilled, by another party. This article looks at the recent cases distinguishing statutory, common law, contractual and equitable liens and demonstrates how the Personal Property Securities Act 2009 (Cth) (PPSA) deals with them.

As an opening comment, except in respect to equitable liens where possession is not generally required, it is critical that the party seeking payment has actual possession of the property. That is, a lien is possessory in nature and if possession is given up then the lien will be lost.

STATUTORY LIENS

A statutory lien arises by the operation of legislation and statutory liens have been established by each State and Territory. Examples include storage liens (e.g. Storage Liens Act 1935 (NSW)) and unpaid sellers’ liens (e.g. Sale of Goods Act 1896 (Qld)). It is paramount that the provisions in the relevant legislation that grant a statutory lien are complied with, as failing to do so may render the lien void.

An example of this is found in Commonwealth Bank of Australia v MTC Diesel Pty Ltd [2019] VCC 639. The case concerned a statutory warehouseman’s lien in respect to a vehicle in which CBA had a registered security interest. The relevant Act (Warehouseman’s Lien Act 1958 (Vic)) required the lien holder, Heavy Haulage, to provide CBA with two months’ notice of its statutory lien before the lien could be enforced. This notice was not provided and accordingly, its statutory lien was held to be unenforceable.

Further, the court rejected the argument that ss 73(1) and 73(2) PPSA were mutually exclusive. Section 73(1) PPSA inter alia determines in what circumstances a statutory interest (e.g. statutory lien) has priority over a security interest under the PPSA. However, s 73(2) further provides that the priority between the statutory interest and the security interest is to be determined under the law giving rise to the statutory interest only if the relevant Act under which the statutory interest arises expressly declares that s 73(2) PPSA applies to the statutory interest.

In MTC Diesel the court held that the characterisation of an interest as a ‘statutory interest’ under s 73(2) does not prevent the interest simultaneously being a ‘priority interest’ under s 73(1) if the provisions of s 73(1)(a)-(e) were met.

Ultimately, CBA succeeded in the case as the court concluded that Heavy Haulage had neither a statutory lien nor a general law lien (as to the latter, see below under ‘Common law liens’). The case demonstrates the stringent requirements of the PPSA, and the restrictions placed upon the operation of certain statutory liens.

The question of competition between a statutory lien and an equitable lien was addressed in Plantation Outdoor Kitchens Pty Ltd (in liquidation) [2019] NSWSC 925. Here, Plantation Outdoor Kitchens had entered voluntary administration and liquidation followed a month later. Its warehouse held goods that had been paid for by customers but not yet delivered to them. Some of the goods were subject to suppliers’ retention of title security interests.

The core tension in this case lies between the competing liens of the warehouse owner, who claimed for storage costs (under the Storage Liens Act 1935 (NSW)), and the liquidator, who claimed an equitable lien for incurring costs in identifying, caring for, preserving and distributing the goods in question.

It was held by the court that the stock paid for in full and labelled with customers’ details had been appropriated to those customers in a way that allowed the stock ownership to safely pass to the customers under the Sale of Goods Act 1923 (NSW).

This meant that the customers’ title to their respective stock had passed to them free of the suppliers’ security interests under s 46 PPSA (which provides for the taking of personal property free of security interests in the ordinary course of business). The court also highlighted that the sales to the customers had occurred well before Plantation’s administration, which meant that no issue arose as to whether the sales had not been in the ordinary course of business (i.e. the sales were in the ordinary course of business) or, alternatively, in the case of sales for $5,000 or less, that s 47 of the PPSA did not apply (i.e. s 47 PPSA did apply).

Ultimately, the court held that the title to the goods was subject to both the statutory lien of the warehouse owner and the equitable lien of the liquidator, and the court held that the amount claimed under the liens be apportioned between the various categories of stock owners (customers) and that the liquidator was entitled to require payment of a corresponding levy as part of its delivery agreement.

COMMON LAW LIENS

A common law lien arises by implication of law and can be ‘general’ or ‘particular’. A general lien allows a party to hold possession of goods until all due and payable amounts are paid. It arises by reference to applicable industries in which courts have previously applied general liens. In contrast, a particular lien only secures due and payable amounts in respect of the particular good held (e.g. payment for repairs performed on a car).

Common law liens are generally exempt from the PPSA and will take priority over registered security interests (ss 8(1)(c) of the PSSA) as demonstrated in MTC Diesel where the court held that MTC’s general law repairer’s lien over a vehicle would have taken priority over CBA’s registered security interest if not for MTC relinquishing its possession of the vehicle to a storage facility (Heavy Haulage) where the vehicle was stored.

The link between common law liens and security interests has also been explored in cases such as Aristocrat Technologies Australia Pty Ltd v Allam [2017] FCA 812. In that case, one party held costs orders after litigation valued at approximately $700,000 and sought to set off that sum against the opposing party’s lesser costs under a ‘certificate of taxation’ of approximately $100,000.

This was challenged by the opposing party, who claimed they held a lien over all the proceeds by virtue of their costs ‘certificate of taxation’. In an exercise of the court’s inherent jurisdiction over its own suitors, the set-off was allowed. The court relied on a well-established rule that, if there would otherwise be a set-off between the parties to the litigation, then a court would not deprive a party of that set-off because to do so (i.e. to deprive the party of the set- off) would eliminate the fund onto which the lien otherwise attaches.

The court also noted that, in any case, the PPSA would not apply to the lien, as it was likely to be a charge arising by operation of the general law and exempt the PPSA by virtue of s 8(1)(c) PPSA. (The ‘general law’ is defined in s 10 PPSA to ‘mean the principles and rules of the common law and equity’).

CONTRACTUAL LIENS

A contractual lien arises where a provision in a contract expressly grants a lien. A contractual lien can also be implied where it is consistent with the contracting parties’ intentions. A contractual lien provides the same rights and benefits as other liens (providing there is actual possession).

In Auluaulu International (PVT) Ltd v GS Logistics Pty Ltd [2017] VCC 1204, a freight company’s contractual lien over a shipment of swimwear was held, on the facts, to be a security interest in the nature of a pledge, as contemplated by s 12(1) and s 12(2)(f) PPSA. The security interest was perfected when the freight company, GS Logistics, took possession of the swimwear.

In determining this, the court looked to the ‘functional approach’ of the PPSA and the sale of goods principles under the relevant Victorian legislation. In essence, the seller (Auluaulu) sold the shipment to the buyer (Watersun), who refused to pay for GS Logistics’ costs as well as the goods themselves. GS Logistics, however, relied on their contractual lien over the goods and on-sold the swimwear, much to the chagrin of Auluaulu, and the court held that they were entitled to do so.

The interaction between contractual liens and s 73 (1) PPSA was explored in Tasman Logistics Services Pty Ltd v Seaco Global Aust Pty Ltd [2020] VSC 100.

Tasman was provided with storage containers by SKM. Some of the containers were owned by SKM but most were owned by third parties, including Seaco. Tasman stored the storage containers provided by SKM for a fee.

The other owners of the containers (including Seaco) had perfected their security interest in the containers by registration on the Personal Property Securities Register (PPSR). SKM passed into liquidation and the liquidator disclaimed all interest in the containers.

The applicable terms and conditions of trade between Tasman and SKM provided Tasman with a contractual lien.

Tasman relied on s 8(1)(c) of the PPSA which provides that the PPSA does not apply to ‘a lien … that is created, arises or is provided for by operation of the general law’.

The court held that s 73 of the PPSA applies to an interest described in s 8(1)(c).

Section 73(1) provides that an interest (the priority interest) in collateral will have priority over a security interest in the collateral if:

a) The priority interest arises:
i.    Under a law, unless the person who owns the collateral agrees to the interest; or
ii.   By operation of the general law; and

b) The priority interest arises in relation to providing goods or services in the ordinary course of business; and

c) The person who holds the priority interest provided those goods or services; and

d) No law of the Commonwealth, a State or Territory provides for the priority between the priority interest and the security interest; and

e) The person who holds the priority interest acquired the interest without actual knowledge that the acquisition constitutes a breach of the security agreement that provides for the security

The court held that the conditions of s 73(1)(a)(ii)-(e) were satisfied.

For (e), the court was satisfied that when Tasman took possession of the containers, it was not aware of the terms of the security arrangements between any of their owners and SKM. The court also stated that even if it was possible for Tasman to identify other security interest holders (such as by performing a search of the PPSR), it was not obliged to do so. In essence, a failure to enquire further does not override the fact that Tasman did not have actual knowledge that the terms of its storage agreement with SKM may have constituted a breach of any of the security agreements.

In Ship ‘Sam Hawk’ v Reiter Petroleum Inc [2016] FCAFC 26 a charterer of the ship ‘Sam Hawk’ purchased bunker fuel from Reiter. It was unclear whether the contractual agreement for this fuel between the charterer and Reiter caused the ship to be subject to a US law maritime lien to secure payment for the fuel. No maritime lien existed under Australian law. To enforce the lien, the ship was arrested by Reiter in Western Australia.

The majority of the Federal Court decided that the mere existence and priority of such a maritime law needs to be recognised by the law of the forum (Australia). Australian law (excluding private international law) did not recognise such maritime law in the present circumstances, which meant that the maritime law could not be relied upon in Australian proceedings.

Significantly, the PPSA was not held to be relevant, because maritime liens that arose by operation of law fell outside the scope of the PPSA (s 8(1)(c)), and there was no question of priority issues as contemplated in s 73(1) PPSA.

This ruling nevertheless aligns with the key choice of law rule that is expressed in the PPSA as applying to consensual security interests. That is, the applicable law that governs the validity of a security interest is ‘the law of the jurisdiction … in which goods are located when the security interest attaches, under that law, to the goods’ (s 238(1)).

It is important to keep in mind that this rule is subject to exceptions, including s 238(4) that applies to ships.

EQUITABLE LIENS

An equitable lien arises ‘where a person conducts work or incurs expenditure for the benefit of a person with a legal right in circumstances where it would be unconscientious for that party to assert its strict legal rights’: (Kirman v RWE Robinson & Sons Pty Ltd (in liquidation)[2019] FCA 372 at [73].

That is, an equitable lien arises when the law of equity determines that in a particular case, the general considerations of justice and fairness combined with the conduct and relationship of the parties, call for an equitable lien to be implied. As mentioned earlier, an equitable lien can arise regardless of actual possession and/or a contractual provision providing for a lien.

While an express or implied agreement between the parties may void an equitable lien, this will often be determined on a case-by-case basis. For example, in Tasmanian Bluefin Pty Ltd v Bald [2013] QDC 297, despite an express clause in the contract identifying a lien over a boat being granted to Tasmanian Bluefin as security for unpaid instalments, the court nonetheless concluded that on the facts the lien was actually an equitable charge, and the court subsequently ordered that Tasmanian Bluefin sell the boat under s 99(7) of the Property Law Act 1974 (Qld).

In the Kirman case above, RWE borrowed money from ANZ and had granted security to ANZ to secure the borrowings. RWE subsequently defaulted on its loan.

As RWE entered liquidation, ANZ appointed receivers to collect the funds owing to it. The receivers held funds from their asset realisation process. The funds were subject to circulating security interests of which the ANZ was the grantee.

A contest arose between the receivers and the liquidators as to whether s 561 of the Corporations Act 2000 (Cth) (dealing with the priority of employees’ claims over circulating security interests) applies to receivers as well as liquidators; the court found it applied to both.

In addition, the Commonwealth had made certain payments to the liquidator for the purpose of making priority payments to the employees of RWE. It now claimed an entitlement to priority payment by statutory subrogation. The court ultimately held that s 561 required the receivers to pay the Commonwealth in priority to the claims of the secured creditor ANZ out of the property comprising or subject to the circulating security interests.

The court noted that an equitable lien is not transactional and does not therefore fall within the definition of ‘security interest’ in s 12 of the PPSA. Moreover, the court noted that s 8(1)(c) provides that the PPSA does not apply to liens arising under the ‘general law’, which is defined (as mentioned earlier) in s 10 of the PPSA to mean the principles and rules of the common law and equity.

WINNING OR LOSING PRIORITY

The correct characterisation of a lien will determine winning or losing priority within the context of the PPSA. The above cases demonstrate how the PPSA can apply to liens in the unique Australian legal environment.