It is a well understood legal requirement that any time security is granted, it needs to be registered. Failure to register collateral granted as security according to the requirements of the Personal Property Securities Act 2009 (Cth) can result in the property vesting in the company in administration or liquidation. However in certain circumstances the court may make an order extending the time for registration, even after an insolvency event in respect of the grantor. Associate, Stefano Calabretta considers the decision in Re Southern Engineering Services Pty Ltd (in liq) [2014] NSWSC 1882.

The Requirement to Register

If a person or company holds a security interest (the collateral) in another company (the grantor), and the grantor of that security experiences an insolvency event, section 588FL(2)(b) of the Corporations Act 2001 (Cth) (the Act) fixes a time by which the security interest must be registered under the Personal Property Securities Act 2009 (Cth) (PPSA), failing which the security interest may vest in, i.e. remain with the grantor. Such an event would clearly be the worst possible scenario for a creditor who had taken security over a company’s property but failed to register it in time, because it means it would be forced to rank as nothing more than an unsecured creditor.

However under section 588FM of the Act, a company or interested person may apply to the court for an order fixing a later time. Under this provision, a court may make the order if it is satisfied that the failure to register the collateral was accidental, or due to inadvertence, or some other sufficient cause, or is not of such a nature as to prejudice the position of creditors or shareholders, or in the circumstances, it is just and equitable to grant relief. There are many decisions that apply this section in the context of pre-insolvency, but does it also extend to circumstances where the grantor has entered into voluntary administration or liquidation?

The Case

In Re Southern Engineering Services Pty Ltd (in liq) [2014] NSWSC 1882, Justice Brereton considered such an application to extend the time available under s 588FM. His Honour was satisfied there was a sufficiently arguable case that it was due to inadvertence. His Honour did not give much weight to the prejudice to be suffered by unsecured creditors of the company, including by employees. Rather, the more important consideration was “whether it can be shown that the absence of the registration from the register has resulted in others acting to their detriment”. For Justice Brereton, this entailed weighing the balance of convenience as to which party would suffer the greater prejudice. His Honour found in favour of the plaintiff, and extended the time available to register. The decision demonstrates that failure to register collateral under the PPSA is not necessarily fatal to a secured creditor.

Judicial Debate

There has been some conflict over what is required to satisfy s 588FM in the context of an external administrator being appointed to a grantor. In Re Flinders Trading Co Pty Ltd (1978) 3 ACLR 218 a majority of the South Australian Supreme Court held that a claim of mere inadvertence by a would-be secured party should not be permitted to defeat the claims of unsecured creditors in the event of a grantor’s insolvency or pending insolvency. Such a view found slightly modified support from a majority of the full court of the Federal Court in Hewlett Packard Australia Pty Ltd v GE Capital Finance Pty Ltd (2003) 203 ALR 51, who saw the rights of unsecured creditors as a highly relevant consideration. Justice Allsop referred to many authorities that had previously held that once winding up had begun, the discretion was to be exercised having regard to the rights of all creditors. In the context of an insolvent or potentially insolvent company, Justice Branson stated that “[a] determination that it is just and equitable to grant relief in such circumstances will require the identification of factors of sufficient significance to outweigh the adverse impact on unsecured creditors of the grant of relief”.

However in Craig Mostyn & Co Pty Ltd v Old Valley Pty Ltd (2004) 139 FCR 477, Justice French essentially moved away from Hewlett Packard, stating: “[i]n the case in which a chargee has advanced money to a failing company and has accidentally or inadvertently delayed, by a short time beyond the relevant period, to register the charge, the statutory rights of unsecured creditors, upon the commencement of the winding up, may be regarded as inflated by reason of that accident or inadvertence.”

Discussing the conflicting authority, Justice Boddice in CBFC Ltd v Corporate Consulting (Australia) Pty Ltd and anor [2010] QSC 395 noted that despite the force of Hewlett Packard, liquidation was no bar to granting the order if the requirements of the statute are met, i.e. it is just and equitable.

Key Take Away Points

Returning to the current case, in Southern Engineering, Justice Brereton found it unnecessary for the plaintiff who had failed to register their security in time to establish any kind of ‘sufficient’ or ‘exceptional’ circumstances and indeed makes no mention of the lines of conflicting authority discussed above. Instead, the important considerations are whether others have acted to their detriment, and on the balance of convenience, whether either side will suffer prejudice from the order being made.

Going forward, it appears courts are moving away from stringent requirements to be satisfied before granting an extension of time under the Act, and a plaintiff in NSW who has failed to register a security interest will be more likely to be afforded the protection of s 588FM, even if external administrators have already been appointed.