On 31 January 2017, the Supreme Court of New South Wales handed down judgment in In the matter of OneSteel Manufacturing Pty Limited (administrators appointed). This important decision highlights the severe consequences that may follow from seemingly innocuous mistakes made when registering security interests. The error that gave rise to the proceeding was the use of an Australian Business Number (ABN) instead of an Australian Company Number (ACN) to identify the grantor in the financing statement. The judgment focuses attention on the importance of strictly complying with the registration requirements of the Personal Property Securities Act 2009 (Cth) (PPSA); confirms the constitutional validity of the PPSA vesting provisions; and also illustrates the limits of the Court's powers under the Corporations Act 2001 (Cth) (Corporations Act) to extend the time for making PPSA registrations when the subject security interest has already vested in the grantor under the PPSA.
The plaintiff, Alleasing Pty Ltd (Alleasing), entered into a master lease agreement with OneSteel Manufacturing Pty Ltd (OneSteel) on 16 October 2014 (Lease). Under the Lease, OneSteel rented machinery and equipment from Alleasing. Alleasing registered its security interest on the Personal Property Securities Register (PPSR) within the permitted time. A second rental arrangement was entered between the parties for machine parts and that resulted in a second registration on the PPSR. In the circumstances, the PPSA required the registrations made by Alleasing to identify OneSteel by its ACN. However, both registrations (the original registrations) identified OneSteel by its ABN and not by its ACN.
On 7 April 2016, OneSteel entered into voluntary administration. The administrators identified the ABN defect and asserted that Alleasing's security interests had vested in OneSteel by reason of s.267 of the PPSA. Section 267 of the PPSA provides, in effect, that an unperfected security interest vests in the grantor immediately before the grantor's insolvency. The administrators argued that the original registrations were ineffective because the use of the ABN was a defect in the registration under s.164 of the PPSA by reason of s.165(b) of the PPSA. Relevantly, s.165(b) of the PPSA provides that where the collateral is not capable of being described by a serial number, a search using the grantor's ACN must be capable of disclosing the registration. The administrators argued that the original registrations did not disclose the registrations when a search was undertaken by ACN and that rendered the registrations ineffective.
OneSteel responded to the administrator by making a second set of registrations using the correct ACN information (second registrations) and amending the original registrations to include the ACN. As the security interest held by Alleasing was a PPSA Lease, it was required to be registered as a Purchase Money Security Interest (PMSI) to have priority over Onesteel's other secured creditors. However, the second registrations were made outside the permitted 15 business days for a PMSI registration, and also the usual 20 business day period allowed for non-PMSI registrations. Accordingly, the second registrations were affected by s.588FL of the Corporations Act which provides for the vesting of security interests that have been registered but not within time (within six months of the date of insolvency and outside the permitted 20 business day period unless an extension is permitted by the court). To avoid the consequences of the belated registrations vesting in OneSteel under s.588FL, Alleasing sought extension orders from the Court under s.588FM of the Corporations Act. It also sought a court extension of the time for perfecting a PMSI registration unders.293(1)(a) of the PPSA .
Issues before the Court
Alleasing's application to the Court raised three issues for determination:
- Did Alleasing's security interest vest in OneSteel pursuant to s.267 of the PPSA because of the ABN defect?
- Was s.267 of the PPSA invalid for constitutional reasons?
- Should the Court make an order under s.588FM of the Corporations Act and s.293(1)(a) of the PPSA to protect the second registrations from vesting under s.588FL of the Corporations Act?
Did the security interests vest in OneSteel?
Whether the security interests vested in OneSteel required the Court to determine whether the original registrations were valid. Alleasing argued that the use of the ABN to make the original registrations did not render the registrations ineffective because:
- the PPSA required registration be made with certain data, namely the grantor's nine digit ACN;
- the original registrations contained the required data;
- the necessary nine digits were included in the sequence of numbers that was the 11 digit ABN;
- with the use of the 11 digits, there was compliance with the registration requirements;  and
- accordingly there was no defect for the purposes of ss.164 or 165 of the Act. 
Justice Brereton rejected this argument. His Honour found that although an ABN happened to include the nine digit ACN, the two identifiers were issued by different agencies and were not the same 'data' even if some of the numbers of the ACN appeared in the same sequence in the ABN. His Honour found that under the PPSA there was a distinction between the use of an ABN identifier and an ACN identifier.
Further, his Honour found that the original registrations were 'seriously misleading' within the meaning of s.164(1)(a) of the PPSA. In doing so, his Honour dismissed Alleasing's argument that if the PPSR was searched using a third party provider, also known as a business to government channel or 'B2G', then the original registrations would have been identifiable. Justice Brereton noted that B2G platforms had additional functionality to the PPSR's search functionality and that additional functionality enabled a searcher to use either an ABN or ACN to find registrations against either identifier.
His Honour held that for the purposes of determining whether a registration was defective, regard was only to be had to the provisions of the PPSA. As the PPSA required the registration to be identified by reference to a single search using only an ACN, and the PPSR's functionality mirrored that specific requirement, the absence of an ACN was both a seriously misleading defect and a s.165(b) defect.
Alleasing argued that the Court should follow the New Zealand approach in Rabobank New Zealand Ltd v Stockco Ltd where a misstatement of the grantor's name on a financing statement, a farmer's own name was used rather than the farming partnership's name, was not seriously misleading because to the outside world the grantor was always a farmer.
Justice Brereton declined to follow Rabobank and accepted the stricter approach of a subsequent line of New Zealand authority. Following the stricter New Zealand approach, his Honour held that in Australia the relevant test to determine whether something is 'seriously misleading' is "…whether the error would prevent a registration being disclosed by a properly formatted search in the relevant searchable field." This stricter approach, his Honour reasoned, was justified because the functionality of the Australian PPSR (like the New Zealand PPSR) was limited to return search results from information that exactly matched what had been entered on the PPSR from the financing statement.
The constitutional argument Alleasing next argued that s.267 of the PPSA was unable to vest the security interest in OneSteel because of the operation of s.252B of the PPSA. Section 252B of the PPSA states that a provision of the PPSA does not apply to the extent the provision would result in an acquisition of property from a person otherwise than on just terms within the meaning of paragraph 51(xxxi) of the Constitution. After giving the constitutional issues a thorough analysis, Justice Brereton held that the vesting provisions in the PPSA are not unconstitutional. His Honour gave two reasons for that finding: a) section 267 of the PPSA did not constitute an acquisition of property; and b) even if there was an acquisition of property, the purpose of s.267 of the PPSA was to effect a genuine adjustment of competing rights, claims and obligations between owners of an interest in personal property which brought the section outside the ambit of the constitutional prohibition.
The extension application
The final issue for the Court was whether the second registrations ought to be 'saved' by the Court making orders under s.588FM of the Corporations Act or s.293(1)(a) of the PPSA.
Section 588FM provides the Court with power to fix a later time for the registration of a security interest perfected out of time, to avoid the vesting of that security interest in the grantor upon its insolvency. In considering Alleasing's application, Justice Brereton pointed out that s.588FM had a limited scope and was only available in respect of security interests that had been perfected at the 'critical time' (that is, upon the occurrence of the relevant insolvency event). And even if relief could be given under s 588FM, it would not reverse the vesting that had already occurred by operation of s 267 of the PPSA.
The Court's attention then turned to whether s.293(1)(a) of the PPSA assisted Alleasing. Section 293(1)(a) confers upon the Court a power to make orders (for the purposes of priority) extending the registration time for PMSIs. Justice Brereton dismissed the application of s.293(1)(a) because the 15 day period was directed at preserving a PMSI's priority rather than being about the perfection of security interests. An extension of the time under s.293(1)(a) would not have changed the outcome for Alleasing because, even if an order was made, the security interest would have still vested because of the ABN defect.
Emerging from the judgment are a number of important lessons about the interaction of the PPSA registration requirements and insolvency which ought to be borne in mind by insolvency practitioners and secured parties alike. These include:
- That care must be taken when registering security interests to ensure that the financing statement contains all prescribed information and does not 'cut corners' with regard to the matters set out in s.165 of the PPSA.
- If there is an error or omission in the registration of the security interest, even if it appears minor, immediate attention should be given to addressing the error or omission. It may be necessary to seek relief from the Court to protect the security interest from vesting in insolvency.
- The search parameters of the PPSR are strict by design and they alone determine if a registration of the security interest is seriously misleading.
- The test for determining if an omission is 'seriously misleading' is whether the error would prevent a registration being disclosed by a properly formatted search in the relevant search fields of the PPSR.
- Relief is only available under s.588FM of the Corporations Act if the security interest has in fact been perfected by registration at the critical time, albeit late.. Section 588FM is not available in respect of security interests not perfected at all at the 'critical time'.
- The Court's powers to make extension orders under s.293(1)(a) of the PPSA are not directed to saving defective or vested security interests. The focus of the relief available under s.293(1)(a) is on priority rather than the perfection of security interests.
In light of the decision, insolvency practitioners should review PPSA registrations which may appear to involve 'technical' defects. Financiers, lessors and those supplying goods or services on secured terms should also take notice of the decision and immediately act to address any registrations which identify a corporate grantor by ABN rather than the ACN or contain other errors or omissions. Where a potentially defective registration has been made, a fresh registration – even though out of time – will provide a basis for court ordered relief, provided that the registration takes place before an insolvency administrator is appointed.