Several decisions handed down in the Personal Property Securities Act 2009 (Cth) (PPSA) space have emphasised the importance of registering security interests within the legislative timeframes and also examined the discretionary factors courts will consider in their deliberations over whether extensions of time for registration of security interests should be granted.
In particular, in determining whether an extension of time is appropriate there have been diverging views on the impact and the extent of the delay in registration, and of the imminent insolvency of the grantor.
Protecting security interests under the PPSA
The importance of registering security interests on the Personal Property Securities Register (PPSR) to create a valid and enforceable security interest is constantly emphasised in commentary and cases.
Registration of a security interest in collateral is an important step because:
- it effectively provides notice of a secured party’s interest in particular collateral
- it establishes the order of priority in relation to competing claims in the same collateral and
- an unperfected security interest vests in a grantor if the grantor enters into voluntary administration or liquidation.
Recent cases illustrate that an ineffective registration by reason of delay may be cured without the secured party losing priority.
Statutory time frame for registration on the PPSR
The registration of security interests under the PPSA are subject to time limits imposed under the Corporations Act 2001 (Cth) (Act). In essence, pursuant to section 588FL of the Act a security interest (which is perfected only by registration) must be registered on the PPSR either within 20 business days after the security agreement giving rise to the security interest comes into force, or otherwise earlier than 6 months of the grantor entering liquidation or administration.
If a security interest is not registered within the requisite timeframe, then the security interest is ineffective – it will vest in the grantor for the benefit of all creditors generally, and the secured creditor loses the benefit of its security.1
The underlying purpose of section 588FL of the Act is to incentivise secured parties to register so that their interests are visible upon a PPSR search to persons who may wish to deal with the grantor.
Application for extension of time
Where a security interest is not registered within the requisite timeframe, section 588FM of the Act confers upon courts the power to prevent the security interest from vesting by extending the timeframe for registration. Courts are afforded a discretion to fix a later time for registration if satisfied that one of the grounds within section 588FM(2) are satisfied, namely that:
- the failure to register the collateral earlier was accidental or due to inadvertence or some other sufficient cause
- the failure to register the collateral earlier was not of such a nature to prejudice the position of creditors or shareholders or
- it is otherwise just and equitable to grant relief.
Importantly, courts do not have the power to entertain an application under section 588FM of the Act if an insolvency event has occurred prior to registration (unless the relevant security interest arose after the insolvency event).
Inadvertence is readily made out provided that the party seeking the extension did not disregard their registration obligations; that is, they knew of the obligations and ignored them.
In exercising its discretion, courts will consider whether the granting of an extension is likely to prejudice the interests of unsecured creditors. Recent cases such as Re Amotran Pty Ltd  VSC 637 (Re Amotran) and Greenlight Asset Pty Ltd v WBK Ricetti Pty Ltd  WASC 278 (Greenlight) adopt a ‘practical approach’ in requiring a causal connection between the prejudice suffered by the unsecured creditor and the defective registration.
In contrast, the Court in Kaizen Global Investments Ltd v Australia New Agribusiness & Chemical Group (in liq) (2017) 120 ACSR 220 (Kaizen) has suggested that the discretion is a narrower one and must be determined having regard to the ‘continuing relevance‘ of principles established in cases prior to the introduction of the PPSA.
Re Amotran and Greenlight
In Re Amotran, a bank (the successor in law to the original bankers, the Bank of Cyprus) discovered almost 5 years after the General Security Agreement was executed that its registration on the PPSR was defective, since the security interest was registered against the ACN rather than the ABN of the grantor, Amotran in its own capacity and as trustee of the Tsetis Family Trust. There was a further delay of approximately five months between the bank identifying the defective registration and the new, corrective registration occurring.
The bank made application for an extension ex parte. The bank was apparently concerned that if Amotran was put on notice of the application it might take “invite a capricious act to undermine the value of the security to the applicant or to place an additional impediment in the path of the applicant, by a resolution to wind up Amotran or for the appointment of an administrator”. Evidently, the bank was concerned with Amotran’s ongoing financial viability. The business carried on by Amotran had been adversely affected by changes to the taxi industry.
His Honour Justice Judd of the Supreme Court of Victoria granted the extension of time on the basis:
- that the application had been brought promptly following discovery of the defect
- it appeared there were no other known unsecured creditors which may be impacted by the court’s decision to grant the extension of time.
In his reasoning, Justice Judd said at  that:
‘the relevance of delay reflects the possibility that competing interests may have arisen during the period of delay, and there might be dealings with the company on the footing that the collateral was unencumbered’. On the facts there was no evidence of this and therefore his Honour was satisfied that his discretion to grant the extension should be exercised.
Similarly, in Greenlight, where the secured creditors lodged a new registration on the PPSR to cure an earlier registration (understood to be defective), the Court exercised its discretion to grant the extension. In doing so the Court applied a ‘practical approach to a real world situation’, noting that ‘an over technical approach’ to the ‘complex’ PPSA ‘is in no one’s interest’.
On the issue of delay, the Court said:
‘The length of delay to registration is also relevant although the significance of the delay is related to the possibility of competing security interests arising during that time.’
On the question of prejudice to unsecured creditors, the Court further emphasised that:
‘Prejudice is not established by showing that the dividend to unsecured creditors would be reduced if the security interests were not vested in the company… The type of prejudice that is of particular relevance is prejudice attributable to delay in registration rather than prejudice from making the order… [t]here is a need for a causal connection between the failure to perfect the security interest by registration and the incurring of a debt by an unsecured creditor in the period during which the security interest remained unperfected.’
Without such a causal connection – such as a creditor showing that they extended credit or advanced money to the company after searching the register and proceeding on the footing that the collateral was unencumbered – there was clearly no prejudice suffered, a factor that was effectively determinative to the extensions being granted in both Re Amotran and Greenlight.
Re Amotran and Greenlight followed a similar approach of Justice Brereton in Re Appleyard Capital Pty Ltd (2014) 101 ASCR 629 (Re Appleyard) in which his Honour stated that the relevant prejudice is that caused to unsecured creditors by reason of the delay in registration and not because they may receive a smaller dividend in the liquidation. In Re Appleyard an extension was granted despite the high degree of likelihood that the grantor was insolvent and would go into liquidation or administration within six months.
Kaizen Global Investments
In Kaizen, Kaizen Global Investments Ltd (the grantee), located in the United Arab Emirates, loaned a sum of $5 million to an Australian company, Australian New Agribusiness (ANB) secured by a share mortgage. Kaizen failed to register its security interest within 20 days of the share mortgage. Kaizen did not seek advice from lawyers in Australia when taking its security. Kaizen first discovered that there was a requirement to register its security interest about three months after the due date. Kaizen then took steps to obtain legal advice and register its interest on the PPSR. One week later ANB had administrators appointed, the effect of which was to render the registration invalid. Kaizen applied for an extension of time to cure its defective registration.
Relevantly, there was no evidence presented by the parties that any unsecured creditors searched the PPSR and relied on the absence of any registration in their continuing dealings with ANB. Justice Moshinsky accepted that no ‘unsecured creditor was prejudiced by the delay in registration’ but considered this to be but ‘one factor’ relevant to his discretion.
Justice Moshinsky refused to exercise his discretion in favour of Kaizen and dismissed the application. As ANB had become insolvent, this meant that Kaizen became an unsecured creditor in the liquidation.
His Honour said that a determination to grant relief in circumstances where the company has gone into liquidation or administration “will require the identification of factors of sufficient weight to outweigh the adverse impact on unsecured creditors of the grant of relief”.
In the exercise of his decision, His Honour observed that:
- the delay in registration of approximately 3 months being ‘significant’
- Kaizen failed to ‘move quickly to rectify the situation’ on learning of the requirement to register, taking a further 33 days
- ANB was insolvent.
In the result, His Honour did not consider that the circumstances were sufficient to make an order fixing a later time.
It is difficult to reconcile the reasoning and the emphasis placed upon delay and the imminent insolvency of ANB in Kaizen with other recent authorities.
In Re Carpenter International Pty Limited (2016) 307 FLR 37 (Carpenter) there were a number of security interests arising under various contracts for which the delays in registration ranged between 7 days to 130 days, with the average delay being 32 days. There was also a delay in bringing the application for extension. In this case, Justice Cameron surveyed the relevant authorities and observed that extensions of time were granted in cases where:
- a two month delay was held to be not particularly long3 and
- a delay of approximately eleven months was held to be a relatively long time, but not a bar to an extension of time being granted.4
Although the Court in Carpenter found against the applicant on grounds that the failure to register did not amount to inadvertence or mistake, her Honour considered that the delays were not substantial and, even if they were, they would not have precluded an extension being granted.
Other cases also reveal that delays have not been a bar to an extension of time, for example in Re Appleyard, where the delay was 12 months, and in Northern Managed Finance Pty Ltd v 4in1 Wyoming Pty Ltd  NSWSC 407 where the delay was 15 months.
Given that no unsecured creditors in Kaizen were affected by the delay in registration, in the writer’s view there should have been no bar to the granting of a time extension. Further, whilst it may be said that the extent of delay was ‘careless’, as was noted in Greenlight the PPSA is ‘complex’ and Kaizen had no knowledge of the Australian registration requirements.
It is difficult to see why the impending insolvency of a grantor is a material factor weighing against the exercise of the discretion.
The purpose of section 588FM of the Act is to avoid the consequences of a security interest vesting in an insolvency event. Accordingly, if the relevant prejudice to creditors is to be measured by whether they will receive less by way of dividend, then section 588FM of the Act would have little utility – since that prejudice is likely to always arise – given that these applications are often made in the shadows of a company being wound up.
In Carpenter, the secured party registered its security interest on the same day as, but prior to, administrators being appointed to the grantor. Yet, sensibly, the Court found that the timing of the registration in the face of the grantor’s imminent insolvency, and the fact that the registration was lodged only after the secured party learned of the grantor’s potential insolvency, did not preclude the court from exercising its discretion.
In Amotran, the insolvency of the grantor was considered likely to be imminent, but this did not act as a bar to extension.
Although Appleyard was not a case in which the company was in administration or liquidation, there was a high degree of likelihood that the company was insolvent and would go into liquidation or administration within six months.
The decision in Kaizen reflects a ‘continuing relevance’ of authorities that existed prior to the commencement of the PPSA (concerning the predecessor provision of the Corporations Act, this being section 266(4) of the Corporations Act 2001 (Cth))5, which strongly caution against extending time where the grantor is insolvent except in ‘exceptional circumstances’.
In the writer’s view, the approach adopted by the Court in Kaizen is unreasonably narrow; it should not be preferred in favour of the practical approach taken in recent cases including Re Appleyard, Amotran and Greenlight.
The discretion to extend should be based materially on whether there has been prejudice caused to unsecured creditors. If the interests of unsecured creditors have not been impacted by the delay in registration, it is not clear why their interests should be elevated above those of secured parties.
The approach adopted in Kazien resulted in unsecured creditors, who were not in fact prejudiced by the delays, effectively obtaining a windfall gain.
The decision in Kaizen therefore may encourage grantors (who are aware of the defect in a registration) to subvert the rights of the secured creditor by appointing an administrator or liquidator to defeat the legitimate security interest of a secured party prior to a valid registration or extension application being made.
The practical approach applied in Re Appleyard, Amotran and Greenlight reduces uncertainty and allows the PPSA to operate in an equitable and commercial manner, as its drafters intended. In the writer’s view, this reasoning better reflects the underlying purpose of section 588FM of the Act which seeks to avoid the consequences of a security interest vesting in an insolvency event.
Given the apparent divergence in the authorities, it is apparent that there exists uncertainty as to the importance and weight placed upon the delay, imminence of the grantor suffering an insolvency event and potential prejudice to unsecured creditors.
The varying approaches taken by courts illustrate the inconsistent application of the extension of time principles under the intersecting provisions of the PPSA and the Act. It appears that this issue must eventually come before an appellate court for clarity.