Under the Corporations Act 2001 (Cth), there is a risk that a secured creditor’s security interest will vest in the company if it fails to register its interest on the Personal Property Securities Register within 20 business days and the company subsequently goes into administration or liquidation. The recent decision of 123 Sweden AB v Appleyard Capital Pty Limited  NSWSC 782 provides guidance as to the circumstances relevant to the Court’s discretion to grant relief to a secured creditor who has inadvertently failed to register within time.
In February 2013, 123 Sweden AB (a company registered in Sweden) (123 Sweden) agreed to provide a loan to the Appleyard Capital Pty Limited (Appleyard) on the condition that Appleyard register a ‘full and floating charge’ security interest with ASIC for the benefit of 123 Sweden. A short time later, Appleyard informed the principal of 123 Sweden that the security interest had been ‘taken care of’.
By February 2014, Appleyard was in financial difficulty and requested that 123 Sweden write off its debt. 123 Sweden refused to do so, sought legal advice and became aware that:
- it was a requirement that security interests be registered on the PPSR; and
- Appleyard had not registered the security interest in spite of its assurance to the contrary.
On 29 April 2014, 123 Sweden registered its security interest and applied, ex parte, for an order for extension of the time for registration under s588FM(1) of the Corporations Act 2001 (Cth).
The NSW Supreme Court considered that there two main questions for consideration in deciding whether it should extend the time for registration of the Security Interest:
- Was the failure to register accidental, inadvertent or was there some other reason why s588FM(2) was ‘enlivened’ on these facts?
- If the answer to the first question is yes, should the Court exercise its discretion to extend the time for registration and on what terms?
In this case, Brereton J extended the time for registration of the security interest on the condition that any unsecured creditors may apply to have the registration date varied or discharged.
In relation to the first issue, his Honour held that the term ‘inadvertence’ in s588FM(2)(a)(i) included a failure to understand the requirement of registration or the consequences of not registering and innocent error in the sense of a failure to know or understand the law. The director of 123 Sweden’s inexperience in conducting business in Australia and lack of knowledge of legislative requirements for registration, combined with Appleyard’s representation were sufficient to establish that the failure to register the interest earlier was accidental or due to inadvertence.
As to the second issue, his Honour held that the interests of unsecured creditors must be a relevant discretionary consideration because an order under s588FM operates to the detriment of those unsecured creditors. However, his Honour held that it would be contrary to the purposes of the section to treat the risk that unsecured creditors could be adversely affected by such an order as a dominant consideration against the granting of such an order. His Honour held that the necessary prejudice is not established simply because granting an extension would diminish the return to unsecured creditors if the company went into administration or liquidation.
Rather, the key question is whether the interests of unsecured creditors are likely to be prejudiced by the delay in registration — for example, where an unsecured creditor traded with the company on the basis that the Register showed no secured interests. His Honour held that such prejudice may be avoided by suspending the operation of the order or reserving leave for unsecured creditors to apply to have the order varied or discharged.
The failure to register a security interest on the PPSR in a timely manner can have a devastating impact on the position of the secured creditor. This decision confirms the courts’ readiness to grant an extension of time to register collateral interests in the PPS Register, provided that the interests of ordinary unsecured creditors are protected.