On the Case: Issue 18

Can Security Registration Errors be Fixed?

In this edition of On the Case, Adjunct Professor Philip Stern, considers the recent Accord Wines1 case which examined the ability of a Court to assist holders of security who seek to correct errors in the registration of their security interests. Adjunct Professor Philip Stern also considers the implications of the legislation and the decision for stakeholders.

Overview

The Personal Properties Securities Act 2009 (Cth) (PPSA) and the Corporations Act 2001((Cth) (CA) have very strict registration and priority requirement for security interests. Those requirements include registration time obligations. Accord Wines sets out when the Court may vary those obligations.

Legislation

Both the CA and the PPSA have time requirements for registration of non-real estate securities on the Personal Property Securities Register (PPSR). Section 588FL (2) CA requires registration within the later of 6 months of a formal insolvency event (s588FL (7)-“the critical date”); or 20 business days after the security agreement came into force or the critical date (whichever is earlier). A consequence of a failure to register in those time periods is that the security interest vests in the company (and thus is part of the company’s property for the benefit of general creditors when a liquidator, voluntary administrator or administrator of a deed of company arrangement is appointed to the company (s588FL (1)(4)). By s62 (3) PPSA, a purchase money security interest (PMSI) over non-inventory property, registered within 15 business days after acquisition of goods or, for other property, on the day when the interest attaches to the property, has priority over other security interests (s62(1)). A PMSI is defined in s14 PPSA as including a lease of goods under a’ PPS lease’, which, in turn, is defined in s13, as including a lease of goods for more than a year.

Section 588FM CA allows a Court to extend the time for registration of securities under the CA if it is satisfied that:

  1. the failure to register was:
    1. accidental, or due to inadvertence ,or some other sufficient cause;
      or
    2. is not of such a nature as to prejudice the position of creditors or shareholders; or
  2. on other grounds, it is just and equitable to grant relief -see s588FM(2)).

The Court may make orders under the section on terms or conditions (s588FM(3)).

Section 293 (1) PPSA allows the court to extend the time to register, inter alia, PMSIs if it is just and equitable to do so. By s293(3) the court must take into account whether the need to extend the time arises as a result of accident, inadvertence or some other sufficient cause; whether extending the period would prejudice the position of other secured parties or creditors; and whether any person has acted ,or not acted, in reliance on the period having ended.

Facts

The plaintiffs were leasing and asset financing companies which leased goods, the subject of PMSIs, to the Accolade Wines group of companies. The plaintiffs registered those security interests on the PPSR against the Australian Business Numbers (ABNs) of the corporate grantors (lessees). However, PPS Regulations Schedule 1 requires registration of PMSIs against the Australian Company Numbers of grantors, not against the ABNs, to be effective. Thus any person who only searched the PPSR under the ACN of a grantor would not have known of the PMSI. There were prior and subsequent registered security interests over ‘all of the present and after acquired property’ of various grantors (All PAPs). Evidence was given that it is common practice amongst financiers to search the PPSR against a grantor’s ACN, ABN and name (i.e. they do a triple search). Thus if subsequent All PAP financiers had done triple searches they would have found the plaintiffs’ registered PMSIs. Here the plaintiffs had registered their interests through a portal which allowed lodgement by ACN or ABN without adverting to the requirement of ACN registration.

The plaintiffs applied to the Supreme Court of NSW for orders to extend the times for registration both under the CA, pursuant to s588FM to a time later than the 20 day mandated period in s 588FL, and under the PPSA pursuant to s293 to a time beyond the 15 day time required by s62. They made their applications ex parte (without other parties) i.e. in the absence of the grantors, and prior and subsequent registered All PAP security holders. However the grantors were given notice of the application but failed to appear at the hearing. There were no subsequent registered PMSIs over the same assets (collateral) financed by the plaintiffs. There was no evidence to show any of the grantors was insolvent or likely to be insolvent within 6 months of the application.

Findings

Brereton J found as follows:

  1. The grantors should have been joined as parties. All PAP holders would also be affected by the application as the non-valid registration meant that they had priority over the PMSI interest by s62 (whereas on valid registration the PMSI has priority). It is only where the case for an extension under s293 is compelling that the other security holders not be joined and given the opportunity to be heard on the application. This was such a case (see below) but other security holders could move the court to vary or set aside the orders made within 28 days of being given notice of the orders i.e. they now had an onus of setting aside the orders made ex parte (notice of the orders was also required by Court order to be given to other security holders. Note-s588M has no effect on the priority of securities; thus the failure to give notice of the CAapplication to other security holders did not affect that application)2.
  2. “Inadvertence” for the purposes of ss 588FM and 293 meant a failure to understand the requirement for registration within the specified time and is an innocent error. That was the case here3.
  3. In an application under s588FM, relevant prejudice must be attributable to the delay in registration, rather than from prejudice in making the order, as unsecured creditors may have been in no different position had the registration been time effective. Delay in effecting registration is relevant because the shorter the delay the less likely persons dealt with the company on the basis that it’s collateral was unencumbered4.
  4. Also relevant to the exercise of s588FM discretion is whether there is evidence the company may be in an insolvency administration within 6 months (i.e. the critical date); that the plaintiffs’ securities were only over specific leased assets; it was unlikely subsequent financiers did not do triple searches; and that their priority was not affected by an order fixing a later time for registration under s588FM (but they may have been affected by an order under s293-see below)5.
  5. Unlike s588FM where prejudice is referrable to the failure to register the collateral earlier, s293 prejudice is referrable to the extension of the period for registration. Thus, one compares the position of creditors if the extension is granted with their position if no extension is granted i.e. whether priorities have been disturbed. The fact that All PAP holders may lose priorities if an extension was granted was relevant but not conclusive. Prejudice is only of significance if there is reliance on the absence of registration by a third party provider-that could not be the case for earlier All PAP holders; and if an order was not made they would gain a windfall arising from inadvertence. Here subsequent All PAP holders likely did triple searches and generally are unconcerned (according to the evidence) about registrations against specific collateral compared to registrations over all a grantor’s assets in making the decision to provide financial accommodation6.
  6. The time for registration of the securities was ordered to be the date of the Court application7.

Lessons and conclusions

  1. Financiers should ensure security registrations on the PPSR are made under ACNs if a company has an ACN and generally within the statutory time periods for that to occur. (NB: If the business, the subject of the security, is a trust there should also be registration under the ABN for the trust).
  2. If uncertain as to whether a financier has correctly registered under ACNs, searches should swiftly be undertaken to ascertain the situation .If there are errors, applications to extend times for registrations should be made under the CA and PPSA.
  3. Professional advisers who incorrectly have registered securities on behalf of clients should consider notifying professional indemnity insurers. They should also immediately correctly lodge registrations, even without an extension order, to ameliorate the possibility of third parties searching the PPSR and thereafter relying on the absence of registration in providing further financial accommodation over the subject collateral.
  4. Insolvency practitioners should re-examine their searches to see if there are ACN registrations where appropriate. If not, they should assert the creditor is unsecured .The creditor then has an onus to get extension orders after the insolvency (unlike in Accolade Wines). That may be difficult to procure. This may be of great benefit to liquidators, in particular, as security enforcement by purportedly secured creditors may be invalid, thereby possibly giving rise to damages claims including against receivers appointed by the security holders.
This article was originally published by Woodgate & Co, Level 8, 6-10 O’Connell Street, Sydney and their willingness to permit its republication is gratefully acknowledged.

1 In the matter of Accolade Wines Australia Limited [2016] NSWSC 1023
2 Ibid [9]-[11]
3 Ibid [14],[26]
4 Ibid [18]
5 Ibid [19]-[22]
6 Ibid [27],[28],[44]
7 Ibid [53]