Willy Wonky

Last week we considered the impact of the PPSA on certain leases which do not secure the payment or performance of an obligation. This week we consider some of the issues that might arise where numerous PMSI interests have competing claims to a fund created by the sale of co-mingled goods.

Question

Willy Wonka Pty Ltd is a vendor of premium sugary treats including the world famous “Marshmallow and Nuts Super Crazy Combo” ice-cream. Whilst the recipe for this summery treat is closely guarded, it is known to contain only milk, cream, nuts and marshmallow.

Each ingredient is supplied by a different supplier under retention of title arrangements. Each of these suppliers perfect their interest by registering it on the PPS Register as a PMSI.

With summer just around the corner, things are looking up for Willy Wonka. The ice-cream has been manufactured (with each of the ingredients becoming co-mingled), but due to mismanagement, the directors appoint an administrator to the company a few hours after the electricity supplier turns off supply. The administrator hastily arranges the reconnection of power, and agrees to become personally liable for electricity charges so that she can preserve the ice-cream for sale.

The ice-cream is sold over a number of months and a sale fund of $200,000 is created. The administrator proposes to pay the various suppliers on a proportional basis (they are owed $50k, $60k, $75k and $100k respectively), but disputes between the suppliers become intractable. Moreover, they each contend that the administrator should not be able to deduct the cost of electricity and other reasonable costs associated with the sale of the ice-cream from the available fund.

What should the administrator do and what is she entitled to deduct from the fund?

Answer

There is no obligation upon the administrator to adjudicate the dispute between the suppliers. She should apply to pay the moneys into court, notify the suppliers of such a payment in, and leave them to “battle it out” before a judge. Furthermore, the administrator is entitled to deduct the costs of the electricity and associated expenses with selling the ice-cream, corresponding with the suppliers and paying money into court. Reading the Corporations Act and PPSA together, it is clear that the administrator’s lien has priority over any claims of the suppliers (or any other unsecured creditors). The administrator is therefore entitled to pay that amount as a priority from the fund.

The Lesson: The PPSA makes it explicit that security interests can be traced to a fund created following the sale of the relevant property. Where there are numerous claimants with registered PMSI’s, each is entitled to share in the fund according to the ratio that the amount secured bears to the total obligations secured by the various perfected security interests. For example, in this case, the marshmallow supplier would be entitled to 35% of the net proceeds. However, where an administrator (or, indeed, any external administrator) is required to preserve assets or a fund for the benefit of others, they will be entitled to deduct their reasonable expenses referable to the fund prior to payment out.