Appointing receivers “over the top” of administrators

A key remedy of secured parties in Australia is the ability of holders of security interests over the whole or substantially the whole of the property of a grantor to trump an administration and the consequent moratorium upon enforcing security interests if they act to appoint receivers within 13 business days of a company entering into administration. This right exists under section 441A of the Corporations Act 2001 (Cth). This is why secured parties often take “lightweight” or “featherweight” floating charges, which are essentially “floating only” charges (and enable a grantor to continue to deal with its assets), but relate to all property of a grantor to enliven the remedy of appointing receivers over the top of administrators under section 441A.

Secured parties who hold a perfected security interest over the whole or substantially the whole of a grantor’s property should retain the right to appoint receivers over the top of administrators under the PPSA.

The fact that there may be higher-ranking security interests such as PMSIs or security interests perfected by control should not affect the right to appoint over the top. The matter of priority is different from the matter of whether a security interest attaches to all or substantially all of the property of a grantor.

The remedy of appointing receivers “over the top” of administrators remains and is largely unchanged under
the PPSA. The analysis divides between transitional (fixed and) floating charges on the one hand, and all-assets (general) security interests granted after commencement of the PPSA on the other hand.

In relation to transitional (fixed and) floating charges, the remedy of appointing receivers over the top of administrators during the 13 business day decision period under section 441A following a grantor entering administration is intended to be preserved, unchanged, following commencement of the PPSA¹. This right remains, provided that the (fixed and) floating charge:

(a) is duly perfected²; and

(b) attaches to the whole or substantially the whole of the property of the grantor, which is judged excluding collateral which the grantor does not own but has the right to possess or use under leases, consignments, retention of title purchases or other similar transactions (so-called PPSA Retention of Title Property)³.

In relation to PPSA all-assets (general) security interests (granted after commencement of the PPSA), the remedy of appointing over the top under section 441A is available if:

(a) the security interest is duly perfected; and

(b) the security interest attaches to all collateral over which the grantor can grant a PPSA security interest, which will include PPSA Retention of Title Property⁴.

The explanatory memorandum to the Personal Property Securities (Corporations and Other Amendments) Bill 2010 (EM) clearly provides that the remedy under section 441A of appointing receivers over the top of administrators is intended to remain. This EM explains that the idea of PPSA Retention of Title Property under the Corporations Act 2001 (Cth) is not designed to prejudice existing rights (paragraph 5.6). Instead, it is designed to address the PPSA's treatment of title-based transactions, such as leases, as security interests. One purpose of the PPSA retention of Title Property construct is to ensure that a lessor can enforce its security interest (lease) against the lessee company and that the leased property is "property of the company" for the purposes of that enforcement (see, for example, paragraphs 5.2, 5.3 and 5.14 of the EM).

Further, the explanatory memorandum to the Personal Property Securities (Corporations and Other Amendments) Bill 2011 (Cth), which made final amendments to the PPSA before its commencement, clarifies in paragraphs 17 to 19 that there is no intention to affect the remedy of appointing administrators under section 441B.

Secured parties must appoint to all property, including PPSA Retention of Title Property such as leased property and retention of title property, when appointing receivers over the top of administrators under section 441A⁵. This should not present a significant change to current law and practice, which is that to appoint receivers over the top of administrators under section 441A, the appointment of receivers must be to all assets and interests of the grantor (including interests in leased or retention of title property), unless there are particular assets which are excluded from the charge or security interest under which the appointment is made.

Meaning of “the whole or substantially the whole”

The phrase "substantially the whole" is normally interpreted on both a quantitative (percentage of assets) and
qualitative (nature of assets) basis. Case law (as discussed below) suggests that the qualitative element of the test is determinative.

Colwill v 601999 Saskatchewan Ltd [1999] 1 BLR 300

Re 85956 Holdings Limited and Fayerman Brothers Limited (1986) 25 DLR (4th) 119

The Court (Vancise JA) held that “if one examines the sale from a purely quantitative perspective, that is, a percentage of the total assets of the company which have been sold, it is obvious that "substantially all of the assets" have not been sold. However, in the court’s opinion, the issue could not be determined solely on a quantitative basis.

The court held that the purpose of statutes like the one under consideration [which prevented a sale of “substantially all” assets without shareholder approval] was to protect the shareholders from a fundamental change in the corporation and to ensure that the means to accomplish the object of the corporation were not impaired. The court in Fayerman Brothers held that a sale of the assets of the company in question would destroy the company's business. The phrase "substantially all" was, in the court’s opinion, intended to mean a sale which would effectively destroy the business.

Rowella Pty Ltd v Hoult [1987] 1 Qd R 386, [1988] 2 Qd R 80

Further, the court in Rowella stated that “applying the so-called qualitative test, [I] would think that the sale and accompanying terms of the joint venture agreement have created an entirely different situation so far as concerns the business of the partnership”, indicating that the disposal in Rowella did result in the transferor partnership having an entirely different business.

Hollinger, Inc. v. Hollinger Int’l, Inc., 858 A.2d 342, 376-79 (Del. Ch. 2004)

The court in Hollinger examined a series of quantitative and qualitative non-GAAP accounting metrics in relation to the assests transferred (less than 60% of assets by value) and the remaining assets (more than 40% of assets), and rejected submissions that relevant covenants that restricted disposals of “substantially all” assets were breached.

Re Australian Property Custodian Holdings Ltd (administrators appointed) (receivers and managers appointed) (2010) 80 ACSR 114

Perfection against proceeds and section 441A

Where there have been significant transfers or disposals of collateral to generate proceeds, but the security interest in question is not perfected against the proceeds (because, for example, the registration is not wide enough, or does not cover proceeds), then this may mean that the secured party does not hold a perfected security interest over the whole or substantially the whole of the grantor’s property for section 441A purposes.