A recent decision of the NSW Supreme Court, In the matter of Accolade Wines Australia Limited  NSWSC 1023, considers the circumstances in which the Court will grant extensions of time to secured parties who register security interests on the Personal Property Securities Register (PPSR) outside the time frames specified in s588FL of the Corporations Act 2001 (Cth) and s62 of the Personal Property and Securities Act 2009 (Cth) (PPSA).
The plaintiffs ran a business of leasing goods and those leases were typically for a term of more than one year. A lease of goods for a term of more than one year is deemed to be a security interest under the PPSAand is registrable on the PPSR. When the plaintiffs entered into a lease with a customer, they made registrations on the PPSR to perfect their security interest under the lease.
The plaintiffs conducted an audit of their PPSR registrations and processes and discovered that registrations against some customers were made against the customer’s Australian Business Number (ABN) rather than its Australian Company Number (ACN). There was a risk that the registrations might be ineffective as a result.
The plaintiffs made new registrations on the PPSR against the customers’ ACNs. If the original registrations were found to be ineffective, the new registrations would perfect the leases with those customers. However, the new registrations would be subject to the following limitations:
- The leases would be subject to a 6 month vesting risk because they were not registered within 20 business days after the leases came into force as required by s588FL of the Corporations Act. This meant that there was a risk that if any customers became insolvent within 6 months after the new registrations were made, the plaintiffs’ security interest would vest and they would lose ownership of the leased assets.
- Any lease which was registered as a purchase money security interest (PMSI) would not have PMSI super priority because it was not registered within the time frames required by s62 of the PPSA. This meant that there was a risk that the lease would lose priority to any earlier registered security interest over the leased assets.
The plaintiffs brought an application seeking the following orders:
- An order under s588FM of the Corporations Act extending the time to register for the purposes of s588FL of the Corporations Act and so eliminate the 6 month vesting risk in relation to the new registrations (the s588FM extension).
- An order under s293 of the PPSA extending the time to register the PMSIs and so enable the PMSIs to enjoy PMSI super-priority (the s293 extension).
Brereton J granted both orders.
The s588FM extension
Brereton J granted the s588FM extension on the basis that the registrations had inadvertently been made against the customers’ ABNs because the plaintiffs believed that they could register against either an ACN or ABN. It was not necessary for Brereton J to consider whether an extension should be granted on the alternative grounds under s588FM(2), namely that the failure to register earlier did not prejudice the position of creditors or shareholders, or that, on other grounds, it was just and equitable to grant the extension. However, Brereton J stated that there was a powerful case that the failure to register earlier would not prejudice the position of creditors or shareholders for the following reasons:
- Each of the customers was solvent and the prospects of them becoming insolvent appeared remote.
- The security interests were confined to specific collateral the subject of the leases.
- Any secured parties who had made registrations against the customers after the original registrations were not prejudiced by the delay as a s588FM extension does not affect priority.
- Financiers commonly search the ACN, ABN and company name when searching the PPSR and it is unlikely that that a creditor relying on a PPSR search in extending credit to the customers would in fact have been unaware of the plaintiffs’ interests.
The s293 extension
Brereton J granted the s293 extension on the ground that it was just and equitable to do so taking into account for the following factors.
- The need to extend the time for registration of the PMSIs arose as a result of inadvertence.
- The PMSIs were confined to specific collateral the subject of the leases.
- Extending the period of registration would prejudice other secured parties who had been granted security over all the customer’s present and after acquired property (AllPAPs) and had registered those security interests as they would lose their priority. However, this prejudice was not conclusive for the following reasons.
- If the AllPAP holder took security from the relevant customer before the original PMSI registration, the earlier AllPAP holder would only be prejudiced by losing a windfall from inadvertence.
- If the AllPAP holder took security from the relevant customer after the original PMSI registration, it is likely that they had notice of the of the original PMSI registration given that it is market practice to search across the ACN, ABN and company name when searching on the PPSR. Even if the later AllPAP holder had notice, it was unlikely that the existence of the earlier PMSI would have been material to its decision to provide financial accommodation to the customer because they would have been concerned about other AllPAP registrations rather than registrations over specific collateral. Again, a later AllPAP holder was likely only to be prejudiced by losing a windfall gain.
To alleviate any residual concerns of prejudice to the customers or the later AllPAP holders, the Court joined the customers and later AllPAP holders as defendants to the proceedings. These parties were then given liberty to apply to vary or set aside the extensions granted by the Court within 28 days of being served with the relevant orders. This liberty to apply is similar to the liberty commonly reserved for administrators and liquidators appointed to a company within 6 months of a s588FM extension being granted by the Court.
Significance of this decision
This decision will be of interest to any secured parties who identify potentially invalidating errors in their PPSR registrations, or who have made late PPSR registrations, and want to take steps to eliminate any risk arising from those registrations. While there have been several cases where the Courts have granted s588FM extensions, this is the first reported decision where extensions have been granted in respect of numerous registrations. It is also the first reported decision where a s293 extension has been granted in respect of a late PMSI registration and again, extensions were granted in respect of numerous registrations. Finally, from a legal practice perspective, the Court appears to becoming less inclined to make orders granting extensions of time to register security interests when grantors and other potentially affected secured parties are not defendants to the extension application (even when notice of the application has been given). In future applications of this nature, it will be prudent to join the grantor and any other secured parties that may be affected by the orders sought.