Case Note: Re Cardinia Nominees Pty Ltd  NSWSC 32
Facts of the case
Cardinia Nominees Pty Ltd (Cardinia) agreed to lend Inika Pty Ltd (Inika) the sum of $750,000, in exchange for the issue of convertible bonds to Cardinia. The loan was secured by a charge in favour of Cardinia over the whole of Inika’s assets.
There was confusion as to which party was responsible for registration on the PPS Register. Mr McGilvray, a director of Cardinia, was aware of the need to register within 20 business days, although he did not know or understand the risk of not registering within that time period.
Cardinia’s security interest was registered on the PPS Register on 7 September 2012, five days after the expiration of the 20-buinesss day period. Inika also granted a security interest to BMW Australia Finance Ltd, which was also registered on 7 September 2012.
Section 588FL of the Corporations Act 2001 (Cth) provides, in effect, that upon a company becoming insolvent, security interests which it has granted over its property will vest in it (in other words, be extinguished) unless the security interest was registered on the PPS Register:
- more than six months prior to the company becoming insolvent; or
- if less than six months prior to the company becoming insolvent, within 20 business days after the security agreement came into force.
If the security interest is not registered within the 20-business day period, the secured party can apply to the court under section 588FM for an order fixing a later registration time, so as to avoid the security interest being extinguished should the grantor company become insolvent within the succeeding six-month period. There are three grounds upon which the court may grant an order fixing a later registration time, namely:
- the failure to register was accidental or due to inadvertence;
- the failure to register is not of such a nature as to prejudice the position of shareholders or creditors; or
- on other grounds, if the court considers it is just and equitable to do so.
Outcome of the case
Justice Black granted an order fixing 7 September 2012 as the registration time on grounds that Cardinia’s failure to register its security interest in time was due to inadvertence; namely, Mr McGilvray’s failure to appreciate the potentially significant consequences of a failure to register within the 20-business day period. His Honour also stated that, if necessary, he would have also granted the order on grounds that it was just and equitable to do so in the circumstances.
However, given that Cardinia did not present sufficient evidence to satisfy the court of Inika’s solvency, Justice Black made the order on the basis that any liquidator, administrator or unsecured creditor of Inika could apply to the court to have the order set aside within the succeeding six-month period. Further, his Honour ordered that the extension of the registration time should not affect the priority to be afforded to the security interest granted to BMW Australia Finance Ltd.
Key messages to take away from this case
- Register early – Even if there are no concerns regarding the grantor company’s solvency, it is good practice to develop a policy of registering all security interests within 20 business days in order to avoid the potential vesting effect of section 588FL (note that in some cases, it is necessary to register your security interest sooner than this to maintain the priority of the security interest, for example, where your security interest is a purchase money security interest or ‘PMSI’). Remember, there is no need to wait until the security agreement is signed – you can register your security interest on the PPS Register as soon as you have ‘reasonable grounds’ to believe that you will become a secured party.
- Section 588FM is not a sure-fire solution – If you need to apply to the court, you will need to be able to point to an actual misunderstanding, a mistake or some other extenuating circumstances; ‘whoops, I forgot’ won’t cut the mustard. Further, be prepared to front up to court with sufficient evidence of the grantor company’s solvency. Otherwise, like Cardinia, you risk being strapped with a conditional order that can be set aside if the grantor company becomes insolvent within the succeeding six months, which takes you back to square one.