Mere contractual promises are not security interests

In two linked cases, Beach J of the Federal Court has unsurprisingly held that:

  • a contractual indemnity is not a security interest, and
  • an undertaking as to damages given to a court is not a security interest.

Unjustified financing statements

The two cases are National Australia Bank Ltd v Garrett [2016] FCA 714 and Treasury Wine Estates Vintners Ltd v Garrett [2016] FCA 715. They concerned financing statements registered by Mr Garrett, claiming security interests over all assets of Treasury Wine Estates and NAB. Mr Garrett had also purported to appoint himself as ‘managing controller’ of both companies under his security interest.

TWE had signed an indemnity for certain costs and expenses in Mr Garrett’s favour. Beach J held that this was a mere contractual promise, not a security interest.

NAB had given an undertaking as to damages (that is, an undertaking to abide by any order as to damages that the court may make) in litigation with Mr Garrett’s companies. Beach J held that this undertaking was not a security interest, saying that an undertaking as to damages was given to the relevant court, not a litigant, and so could not be said to arise from a consensual transaction.

It is perhaps interesting that Beach J’s primary reason for this unsurprising conclusion focused on the implicit requirement for a consensual transaction, rather than the failure to satisfy the central requirement for a security interest that there be an interest in personal property (PPSA, s12).

Mr Garrett also sought to rely on a deed of security over all NAB’s assets. But, since this document existed only as a draft that Mr Garrett had emailed to NAB – NAB had not actually signed it – it did not assist him.

Fun with bills of exchange

The court also rejected Mr Garrett’s scheme to obtain payments from NAB by:

  • drawing up bills of exchange, sometimes for large amounts (in one case, $25 billion),
  • handing them to unsuspecting NAB bank tellers, and then refusing to take them away again, and
  • claiming that NAB had thereby ‘accepted’ them and was bound to make the payments.

Aspects of this conduct and Mr Garrett’s reasons for it were described as ‘vexations’, ‘fanciful’, ‘misleading’, ‘deceptive’ and ‘misconceived’, and the court ordered him to desist.

Digest of PPSA cases

I have added the cases to my digest of reported Australian cases – please go to PPS cases for a link to the digest.

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