The recent decision of Brereton J of the Supreme Court of New South Wales in Re OneSteel Manufacturing Pty Ltd (administrators appointed) [2017] NSWSC 21 has clarified the circumstances in which a registration on the Personal Property Securities Register (PPSR) will be ineffective and the consequences that can flow from this.

Key findings

  • A registration against a corporate grantor’s ABN rather than its ACN will be ineffective under sections 164(1)(b) and 165(b) of the Personal Property Securities Act 2009 (Cth) (PPSA).
  • Such a registration will also be ‘seriously misleading’, and therefore ineffective, for the purposes of section 164(1)(a) of the PPSA.
  • A court cannot make an order under section 588FM of the Corporations Act 2001 (Cth) (Corporations Act) to extend the time for registration for the purposes of section 588FL(2)(b)(iv) where the relevant security interest was not perfected at the time administrators were appointed to the insolvent company.
  • The vesting of an unperfected security interest under section 267(2) of the PPSA is not an acquisition of property otherwise than on just terms for the purposes of section 252B of the PPSA and paragraph 51(xxxi) of the Constitution.

Background

The dispute concerned certain crushing and screening equipment which Alleasing Pty Limited (Alleasing) rented to OneSteel Manufacturing Pty Ltd (OneSteel Manufacturing) in connection with mining operations conducted by OneSteel Manufacturing at Iron Knob in South Australia.

On 16 October 2014 Alleasing and OneSteel Manufacturing entered into a rental agreement (Rental Agreement) which contemplated that Alleasing would rent certain equipment, to be identified in rental schedules, to OneSteel Manufacturing as and when such rental schedules were entered into.

On 1 May 2015 OneSteel Manufacturing commenced renting a crushing and screening plant from Alleasing for a term of six years in return for quarterly rent payments pursuant to the terms of the Rental Agreement (including a particular rental schedule). Additionally, on or about 1 July 2015 OneSteel Manufacturing commenced renting from Alleasing certain spare parts for the crushing and screening plant for a term of six years in exchange for quarterly rent payments pursuant to the Rental Agreement (under a separate rental schedule).

Alleasing was, at all relevant times, regularly engaged in the business of leasing equipment and the parties agreed for the purposes of the proceedings that the Rental Agreement was a ‘PPS lease’ (such that it was a ‘security interest’ within the meaning of that term in section 12 of the PPSA).

Administrators were appointed to OneSteel Manufacturing on 7 April 2016. Those administrators were replaced by different administrators on 12 April 2016.

The Rental Agreement was not terminated before the appointment of the administrators and the crushing and screening equipment remained in the possession of OneSteel Manufacturing when the administrators were appointed.

Prior to the appointment of the administrators on 7 April 2016, Alleasing had registered financing statements on the PPSR in which OneSteel Manufacturing, as grantor, was described by reference to its ABN rather than its ACN. The crushing and screening equipment was not property that was required by the regulations under the PPSA to be described by serial number when a financing statement is registered in respect of a security interest claimed in that collateral.1 At all relevant times OneSteel Manufacturing had an ACN and it was not the trustee of a trust or the responsible entity of a registered scheme.2

The administrators advised Alleasing that they considered that, pursuant to section 267 of the PPSA, Alleasing’s security interest in the crushing and screening equipment had vested in OneSteel Manufacturing. The relevant effect of section 267 is that when an administrator is appointed to the grantor of the security interest, any security interest which was unperfected on the day which the administration began vests in the grantor immediately before the appointment of the administrators. The administrators’ position was that Alleasing had not perfected its security interest because it had registered it against OneSteel Manufacturing’s ABN rather than its ACN.

Alleasing subsequently registered two new financing statements against OneSteel Manufacturing, this time identifying the grantor by reference to its ACN. Alleasing also amended its earlier PPSR registrations to include the ACN of OneSteel Manufacturing.

By the time of trial, the issues that arose for determination were:

  • whether Alleasing’s original registrations were defective by virtue of being registered against OneSteel Manufacturing’s ABN rather than its ACN;
  • if so, whether those defects rendered the registrations ineffective;
  • whether relief was available to Alleasing under section 588FM of the Corporations Act or section 293 of the PPSA; and
  • whether section 267 of the PPSA was disapplied by section 252B of the PPSA which provides that a provision of the PPSA does not apply to the extent that its operation would result in an acquisition of property from a person other than on just terms (within the meaning of paragraph 51(xxxi) of the Constitution).

Alleasing’s registrations were defective

Pursuant to section 153(1) of the PPSA, a financing statement with respect to a security interest consists of certain data including the grantor’s details as prescribed by the regulations. Pursuant to the Personal Property Securities Regulations 2010 (Cth) (PPS Regulations), the relevant grantor identifier was OneSteel Manufacturing’s ACN (rather than its ABN).3 The PPS Regulations provide for registration against the grantor’s ABN only where the grantor is a partner in a partnership, a trustee, or a body politic.

Alleasing submitted that there was no defect in its original registrations because, given that OneSteel Manufacturing’s 11-digit ABN (42 004 651 325) includedits 9-digit ACN (004 651 325), the data required to be included had in fact been included in the financing statements. The court rejected that submission, finding that the registrations were defective because including an 11-digit ABN which happens to include the same digits as appear in the grantor company’s 9-digit ACN does not amount to including the grantor’s ACN.

Alleasing’s registrations were ineffective under sections 164(1)(b) and 165(b) of the PPSA

Once it was established that Alleasing’s registrations were defective, the question became whether the defects rendered the registrations ineffective.

Section 164(1)(b) of the PPSA provides that a registration will be ineffective because of a defect in the register if there exists a defect mentioned in section 165.

Section 165 outlines several specific scenarios in which a registration will be defective for the purposes of section 164(1)(b). Section 165(b) provides as follows:

For the purposes of 164(1)(b), a defect in a registration that describes particular collateral exists at a particular time if any of the following circumstances exist:

….

(b) in a case in which collateral is not required by the regulations to be described by serial number in the register – no search of the register by reference to that time, and by reference only to the grantor’s details (required to be included in the registered financing statement under section 153), is capable of disclosing the registration;

The court found that Alleasing’s registrations against OneSteel Manufacturing’s ABN did not enable a person searching the PPSR by reference only to OneSteel Manufacturing’s ACN to find Alleasing’s registrations. In particular, the court found that, notwithstanding that the 11-digit ABN included the 9 digits which comprised OneSteel Manufacturing’s ACN, none of the platforms available for searching the PPSR were capable of locating Alleasing’s financing statements prior to the appointment of the administrators if only the ACN of OneSteel Manufacturing was used as the search criterion. Although Alleasing relied on the availability of ‘combined grantor searches’ provided by some third party PPSR search providers, the court found that such searches are not searches only by references to the grantor’s ACN. Rather, they are in fact multiple searches against various grantor identifiers including the grantor’s ACN, ABN and name.

Alleasing’s registrations were also ‘seriously misleading’ for the purposes of section 164(1)(a) of the PPSA

In addition to a registration being ineffective by virtue of a defect of the type specified in section 165 of the PPSA, section 164(1)(a) provides that a registration will be ineffective because of a defect in the register that is a ‘seriously misleading’ defect in any data relating to the registration.

The court found that Alleasing’s use of OneSteel Manufacturing’s ABN rather than its ACN as the grantor identifier in its registrations was ‘seriously misleading’ for the purposes of section 164(1)(a). Even if most searchers of the PPSR use certain types of searches provided by third party providers which searches may reveal security interests registered against the grantor’s ABN when the searcher enters only the grantor’s ACN into the search field, the registrations were nevertheless seriously misleading because a search legitimately conducted against OneSteel Manufacturing’s ACN through the official PPSR website would not have revealed the registrations.

Alleasing argued that the registrations were not seriously misleading because the administrators had in fact discovered the registrations through the searches they had conducted. However, as the court noted, section 164(2) of the PPSA provides that in order for a defect to be misleading it is unnecessary to establish that anyone was in fact misled.

Alleasing could not perfect its security interest by obtaining an order for an extension of time to register under section 588FM of the Corporations Act

Section 588FL(2) of the Corporations Act provides that a security interest is eligible for vesting under section 588FL(4) if:

  • at the critical time, or, if the security interest arises after the critical time, when the security interest arises:
    • the security interest is enforceable against third parties under the law of Australia; and
    • the security interest is perfected by registration, and by no other means; and
  • the registration time for the collateral is after the latest of the following times:
    • 6 months before the critical time;
    • the time that is the end of 20 business days after the security agreement that gave rise to the security interest came into force, or the time that is the critical time, whichever time is earlier;
    • if the security agreement giving rise to the security interest came into force under the law of a foreign jurisdiction, but the security interest first became enforceable against third parties under the law of Australia after the time that is 6 months before the critical time – the time that is the end of 56 days after the security interest became so enforceable, or the time that is the critical time, whichever time is earlier;
    • a later time ordered by the court under section 588FM.
  • The court held that where a company goes into administration:
    • section 267 of the PPSA causes security interests granted by the company that are unperfected at the time the administrator is appointed to vest in the grantor. Section 267 applies only to unperfected security interests and vesting under section 267 depends on the status of the security interests at the time the administrator is appointed;
    • section 588FL of the Corporations Act also results in security interests vesting. However, Section 588FL applies to security interests that arose before the administration and were actually perfected before the time administrators were appointed. Section 588FL also applies to security interests that arise and are perfected after the time administrators are appointed;4
    • section 588FM(1) provides that it is possible to apply for a court order ‘for the purposes of subparagraph 588FL(2)(b)(iv)’. In other words, section 588FM operates only with respect to security interests that are eligible for vesting under section 588FL. An extension of time granted under section 588FM does not operate for all purposes of the Corporations Act, and it does not extend to the PPSA to vary the operation section 267.

The court found that section 588FL is intended to cause otherwise enforceable security interests (that is, perfected security interests) to be ineffective where they were granted shortly before the time when the grantor company went into administration or liquidation. It does not apply to security interests that were unperfected when the grantor company goes into administration or liquidation.

The court also found that section 293 of the PPSA does not contain anything in the nature of a general power to extend time under the PPSA, nor does it confer a discretion on the court to relieve security interests from vesting under section 267. In particular, section 293 does not refer to section 267 among the sections for which an extension of time may be sought.

The outcome in this case can be contrasted with the outcome in Re Accolade Wines Australia Ltd [2016] NSWSC 1023 where Alleasing was successful in obtaining orders for an extension of time under both section 588FM of the Corporations Act and section 293 of the PPSA in relation to a number of registrations against a number of solvent lessees. It is understood the Accolade Wines proceedings were a direct result of the problem disclosed by Alleasing’s dealings with OneSteel Manufacturing.

Section 267 of the PPSA does not involve an acquisition of property from a person otherwise than on just terms within the meaning of section 252B of the PPSA and paragraph 51(xxxi) of the Constitution

Section 252B(1) of the PPSA provides that a provision of the PPSA does not apply to the extent that the operation of the provision would result in an acquisition of property from a person otherwise than on just terms (within the meaning of paragraph 51(xxxi) of the Constitution).

Alleasing argued that the application of section 267(2) of the PPSA to its unperfected security interest in the crushing and screening equipment would result in an acquisition of property from it otherwise than on just terms.

The court rejected this argument for two reasons. First, there had been no ‘acquisition’ of property at all. This was because section 267 did not effect a taking of property which Alleasing held prior to it becoming subject to the PPSA. Rather it prescribed a consequence, in certain circumstances, in respect of leases entered into subject to the PPSA. Alleasing had entered into the relevant lease against the background of the PPSA and indeed the Rental Agreement referred to the PPSA.

Second, section 267 did not effect an acquisition within the meaning of paragraph 51(xxxi) of the Constitution for the following reasons.

  • Paragraph 51(xxxi) is confined to acquisitions ‘for any purpose in respect of which the Parliament has power to make laws’. Even if property of Alleasing could be said to be ‘acquired’ pursuant to section 267 of the PPSA, it was acquired for OneSteel Manufacturing’s own purposes (that is, to enlarge its assets and the property that may be divisible among its creditors) rather than for any purpose in respect of which Parliament has power to make laws.
  • A law which is not directed towards the acquisition of property as such but which is concerned with the adjustment of the competing rights, claims or obligations of persons in a particular relationship or area of activity is unlikely to constitute a law with respect to the acquisition of property such as to fall within paragraph 51(xxxi) of the Constitution. The court found that the PPSA is directed to regulating and adjusting the relationship between true owners, the holders of security interests and apparent owners and that section 267 works a genuine adjustment of such competing rights, claims and obligations. In this regard, the court followed the decision of Le Miere J to the same effect in White v Spiers Earthworks Pty Ltd (2014) 99 ACSR 214, finding that – contrary to Alleasing’s submission that that decision was ‘plainly wrong’ – the decision was ‘plainly correct’.

Fixtures issue

Although Alleasing had initially advanced an argument that the crushing and screening plant was a fixture within the meaning of section 10 of the PPSA such that the PPSA did not apply, it ultimately did not pursue that argument at trial and accordingly that argument was not considered by the court.

The position of a secured party of a lessor where the lessor has an unperfected security interest

One issue that has not been resolved by the court’s decision is the effect of a lessor’s unperfected security interest on the position of a secured party of the lessor where that secured party’s security interest extends to the lessor’s interest in the equipment that is the subject of the lessor’s unperfected security interest.

It appears that a secured party had taken and perfected a security interest over all present and after acquired property of Alleasing before the Rental Agreement was entered into, but that secured party did not participate in the proceedings.

The better view is that a secured party of an unperfected lessor is in no better position than the lessor itself, so that where the lessor’s security interest vests a secured party holding security from the lessor also loses any entitlement to the leased equipment.

Conclusion

The court’s decision in Re OneSteel Manufacturing Pty Ltd (administrators appointed) is a timely reminder of the importance of secured parties ensuring that their security interests are properly registered on the PPSR and the potentially significant consequences of failing to do so.