Until the advent of the PPSA legislation banks which held a charge “over the whole or substantially the whole of a company’s property” were entitled to appoint a voluntary administrator over the company (S436C). Banks choosing to take this approach rather than appointing a receiver and manager often obtained the advantage of not needing to indemnify the appointee. Further, the unsecured creditors became involved in the insolvency process and the directors retained the right to propose a deed of company arrangement. The result was that a more inclusive process was followed and the bank was not seen as acting in a way which was detrimental to the interests of the unsecured creditors and employees. And of course the insolvency of the company was addressed and remedied in accordance with the wishes of creditors.
Historically there was little practical difficulty in assessing whether a bank held security “over the whole or substantially the whole of a company’s property”. Stock or chattels held by the company which were subject to “retention of title” claims were effectively excluded from any consideration as it was considered that they were not assets of the company.
Section 436C has now been reworded to take account of the PPSA legislation. The revised section retains the same broad intention as the old wording but uses term “security interest” rather than “charge”. A security interest includes an interest registered in relation to retention of title goods (see section 51F of the Corporations Act.
The effect of these changes is that banks will now need to assess the value stock and chattels which are held by the company subject to retention of title security interest, when assessing whether the bank holds a security interest over the “whole or substantially the whole” of a company’s property.
Incidentally, the Victorian Supreme Court of Appeal decided last year that a charge over 68% of the assets of a company did not represent “the whole or substantially the whole” of the company’s assets. Our guess (and that is all that it is) is that a security interest over less than say 85% of the assets of a company might render section 436C inoperable.