This week’s TGIF considers a Federal Court decision regarding registration and perfection of a security interest, in circumstances where the grantor later became insolvent.
The Applicant loaned $250,000 to the Respondent. A security agreement which gave rise to a security interest was executed over the Respondent’s personal property. However, the Applicant failed to register the security interest on the Personal Property Securities Register until nearly five months after the security interest was created. Shortly after the security interest was registered, the Respondent entered into voluntary administration.
The Applicant sought to enforce its security interest against the Respondent.
The Respondent’s position was that as registration of the security interest occurred more than 20 days after the security interest was created and the security interest was perfected by registration only, the security interest vested in the Respondent under s588FL(2) of the Corporations Act.
The Applicant argued that their security interest was perfected not by registration only, but by a combination of attachment to the collateral and enforceability as against third parties, such that s588FL(2) did not apply to the security interest.
The Court rejected the Applicant’s argument and found that for the purposes of s588FL(2),attachment and enforceability are not other means of perfection. Rather, they are mandatory prerequisites to perfection. In other words, for the purposes of s588FL(2), once attachment and enforceability occur, a security interest may be perfected by a number of means, including registration, possession and/or control.
In this case, perfection occurred by registration only and the security interest therefore vested in the Respondent.
This decision offers a cautionary tale about the dangers of failing to register security interests in a timely manner, particularly in circumstances where the grantor ultimately entered into insolvency.