This week’s TGIF considers a recent Federal Court decision in which relief was sought under section 588FM of the Corporations Act to ensure a security interest perfected after the ‘critical time’ did not automatically vest.

What happened?

On 7 April 2016, administrators were appointed to OneSteel. OneSteel, a member of the Arrium Group of Companies, subsequently entered into a deed of company arrangement.

Prior to entering administration, OneSteel used plant and equipment hired from K.J Renfrey Nominees Pty Ltd atf The Renfrey Family Trust (hereinafter referred to as ‘Renfrey’). After OneSteel was placed into administration, Renfrey discovered that it had incorrectly registered its security interest under a hire services agreement against OneSteel’s parent company, Arrium Limited.

A dispute arose as to whether the security interest had vested in OneSteel due to the ineffective registration under the Personal Property Securities Act 2009 (Cth) (PPSA).

A way forward?

The OneSteel administrators did not pursue their claim that the security interest had vested under s 267 of the PPSA. Instead, the parties entered into a new agreement whereby Renfrey would be granted “new” security interests over the existing plant and equipment.

Furthermore, the administrators agreed they would relinquish any interest in the collateral and do all things necessary to ensure an effective registration for the purposes of the PPSA.

On 13 December 2016, within 20 days of the security interest arising, Renfrey registered its security interest in the plant and equipment on the PPSA.

Problem – a not so perfect solution

Despite the agreement reached between the parties, and the subsequent perfection on the PPSR, the parties approached the Court due to a concern that the new security interest may have automatically vested in OneSteel by reason of s 588FL(4)(b) of the Corporations Act 2001 (Cth).

That section provides that a security interest will vest in the company [OneSteel] if it first becomes enforceable against third parties after the date of the winding up (or the ‘critical time’). The ‘critical time’, in this instance, was the date the administration began i.e. 15 April 2016.

The parties contended it was unclear as to whether s 588FL(4)(b) was engaged because of the uncertain language of s 588FL(2).

Davies J considered this case to be an appropriate vehicle to grapple with the construction of s 588FL in relation to its application to a security interest granted and registered after the insolvency event. This was particularly so in light of the reasons of Brereton J In the matter of OneSteel Manufacturing Pty Ltd (administrators appointed) [2017] NSWSC 21 (OneSteel) and, specifically, his Honour’s remarks at [70] that s 588FL applied only to a security interest that was perfected at the ‘critical time’.

The true construction of s 588FL

Davies J held that section 588FL read as a whole covered security interests granted after the ‘critical time’. In his Honour’s view, this construction avoided the anomalous result that s 588FL would only apply to security interests arising after the critical time but registered before they arise and not to security interests arising after the critical time but registered after they arise.

In respect of the remarks of Brereton J at [70] in OneSteel, Davies J observed that his Honour was there concerned with whether s 588FL applied to a security interest that had been defectively registered before the critical time and not a security interest arising after the critical time.

In support of his construction, his Honour considered the word ‘when’ in s 588FL(2)(a) did not import the requirement that, for s 588FL to apply, the security interest must be enforceable and perfected at the time it arises. Rather, ‘when’ included the meaning of “upon or after which; and then” such that for s588FL(2)(a) to apply, enforceability and perfection could apply after the ‘critical time’.

Was s 588FL engaged in the circumstances?

As a consequence of this construction, his Honour held that s 588FL was engaged by reason of s 588FL(2)(b)(ii).

Pursuant to that section, if a security interest is registered after the insolvency event, the interest will vest irrespective of whether it is registered within 20 business days after the security agreement came into force. As such, but for an order under s 588FM, the security interest would vest in OneSteel.

Was s 588FM available?

An order under s 588FM, to avoid the operation of s 588FL on ‘just and equitable grounds’, will depend on the factual context and the interests of creditors.

In circumstances where there had been no delay in registration, and no prejudice caused to creditors who transacted with the company without notice of the interest, his Honour considered it just and equitable to fix a later time for the purposes of s 588FL(2)(b)(iv) such that the vesting provisions were not engaged.

Extensions of time to register under section 588FM are more commonly sought in circumstances where a creditor has failed to perfect their interest within a certain time prior to the winding up.

Following this decision, administrators, and those whose assets are necessary for the continued operation of the business, should be mindful of making an application for such an order to avoid automatic vesting of a security interest which arises under a new security agreement entered into post-appointment.

In such circumstances, the court may make an order that the commercial arrangement is in furtherance of the objects of Part 5.3 of the Act and, as such, an order to avoid automatic vesting may be just and equitable.