The recent case of Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd, in the matter of Australian Gaming and Entertainment Ltd (in liq) [2014] FCA 1034 looks at the vulnerabilities that secured parties may be exposed to in the event that a debtor company becomes insolvent. The importance of this case rests on the timeliness of registration in order to perfect security interests under the Personal Property Securities Act 2009 (Cth) (PPSA).

Facts

On 24 December 2013, Pozzebon lent Australian Gaming and Entertainment Ltd (AGE) $250,000 (the loan). The terms of the loan provided a security interest in favour of Pozzebon, which was executed and attached on 24 December 2013. On 19 May 2014, almost five months later, Pozzebon registered this interest on the Personal Property Securities Register. However, on 26 May 2014, AGE entered into voluntary administration. Pozzebon sought to enforce their security interest as a secured creditor through the lodgment of a formal proof of debt. At the time of entering voluntary administration, AGE held one major asset - $860,000 in a bank account. AGE later entered into liquidation on 1 July 2014.

Upon lodging a formal proof of debt, AGE claimed that Pozzebon’s security interest was unenforceable against the company and moreover, that the relevant security interest had vested in AGE pursuant to the Corporations Act 2001 (Cth) (Corporations Act) and the PPSA.

The timeframe for the registration of a relevant security interest becomes increasingly more important where an insolvency event occurs. Section 588FL of the Corporations Act provides that where an insolvency event occurs (here the insolvency event was AGE’s entrance into voluntary administration), a PPSA security interest that was granted by a company (again, AGE) vests in the company if it was only perfected by registration. Registration of a security interest is executed where the later of the following times occur:

  • at least six months before the “critical time” of the insolvency event;
  • within 20 business days after the security agreement comes into force; or
  • a later time ordered by the Court.

Where a security interest is not registered in this timeframe, secured parties become vulnerable if a company later becomes insolvent, which was the case here.

AGE’s Position

AGE accepted that the security interest created is attached to the company’s interest the bank account, and further that the security interest was enforceable. Moreover, AGE argued that the PPSA (specifically section 21(2)(a), which deals with the main rule for perfection) applies because the security interest was registered. However, in order for the relevant security interest to be perfected, perfection must involve registration alone, and by no other means.

Pozzebon’s Position

In contrast, the substance of Pozzebon’s argument asserted that the security interest was perfected by attachment, enforceability and effective registration; therefore section 588FL of the Corporations Act was not applicable to their case. Moreover, Pozzebon argued that attachment and enforceability are not always a necessary requirement for perfection (for example in the case of temporary perfection).

Decision

In coming to their decision, the Court found that attachment and enforceability are both mandatory prerequisites for the operation of section 21 of the PPSA, unless the security interest deals with temporary perfection. The Court noted that while the relevant security interest was registered outside the 20 business day prescription, it was nonetheless registered within six months before the commencement of AGE’s voluntary administration.

However, Collier J established that:

Because of the time at which the security interest was registered relative to the commencement of the voluntary administration of the company, unless the applicant can establish that the security interest was not perfected only by means of registration, the security interest will vest in the company and the applicant will be an unsecured creditor by operation of s 588FL of the Corporations Act.

When interpreting the operation of section 21 of the PPSA, Her Honour found that once a security interest has been attached and is enforceable against the collateral, the means by which perfection of the security interest is completed may vary. These means include: registration, possession of the collateral by the secured party and control.

Moreover, Her Honour found that where section 588FL(a)(ii) of the Corporations Act refers to “the security interest [being] perfected by registration, and no other means”, that section is not distinguishing registration from attachment and/or enforceability, but rather is drawing a distinction between registration, possession and/or control.

Ultimately Pozzebon had not attempted to make a case that the relevant security interest had been perfected by possession of the collateral of control (as under section 21 of the PPSA). Her Honour found that Pozzebon’s security interest was not valid and consequently, was unenforceable against AGE.

Key Lesson

The consequence of failing to establish a valid security interest presents a major caution for all secured parties as the failure to register security interests in a timely manner can result in parties being treated as unsecured creditors when a company becomes insolvent. The ultimate effect of this is that secured parties lose their right of priority and, consequently, security for entering such arrangements in the first place.