20 business day registration window – Corporations Act 2001 (Cth) section 588FL

Chapter 22

Registration and the PPS Register

22.2 20 business day registration window – Corporations Act 2001 (Cth) section 588FL

22.2.1

At the outset, it is worth mentioning a very important consequential amendment that will be made to the Corporations Act 2001 (Cth) upon the implementation of the PPSA - the addition of section 588FL.

22.2.2

Section 588FL means that corporate secured parties who perfect by registration should register within 20 business days (not 45 calendar days as was the case for company charges under Chapter 2K of the Corporations Act 2001 (Cth)). Section 588FL sets up a system whereby a security interest vests in corporate grantors and is invalid if a grantor becomes insolvent (liquidation or voluntary administration) and the following conditions apply to the security interest:

(a) it is perfected by registration only;

(b) it was granted in the 6 months leading up to the grantor’s administration or liquidation; and

(c) it was not registered within 20 business days of grant.

22.2.3

If six months pass following the grant of a security interest without the grantor entering into administration or liquidation, then naturally section 588FL would have no application. Secured parties should not take this risk, and should always register within 20 business days.

22.2.4

In terms of calculating precisely when the six month period under section 588FL runs from, one does not include the day of appointment of administrators or liquidators, being the critical time referred to in section 588FL.

So in terms of process, when determines the day of appointment of administrators or liquidators - this will be the day of the “critical time” for the purposes of section 588FL, and then one counts back six months excluding that day of appointment - Overflow FNQ Pty Ltd (in liq) v Austwide Consumer Products Pty Ltd [2017] QSC 76, at paragraph [15].

22.2.5

Section 588FL will change the practice of registering security interests in Australia to ensuring that, if not pre- registered, they are registered within 20 business days of grant.

22.2.6

Section 588FL does not apply to transfers of accounts or chattel paper, commercial consignments, or PPS Leases¹.

22.2.7

Applications for extension of the 20 business day timeframe under Corporations Act section 588FL to register - section 588FM and In re Appleyard Capital Pty Ltd [2014] NSWSC 782

The requirement to register security interests granted by corporations within 20 business days of grant under Corporations Act section 588FL, can be the subject of extension by court application under section 588FM.

22.2.8

Section 588FM provides that the Court may extend the time under section 588FL if the failure to register was “accidental or due to inadvertence of some other sufficient cause” (section 588FM(2)(a)(i)), or “not of such nature as to prejudice the position of creditors or shareholders” (section 588FM(2)(a)(ii)), or “it is just and equitable to grant the relief” (section 588FM(2)(a)(iii)).

22.2.9

Assuming one of these heads of jurisdiction is established, the court may exercise its discretion to extend the 20 business day timeframe for registration under section 588FL.

22.2.10

In re Appleyard Capital Pty Ltd [2014] NSWSC 782 (Appleyard), the secured party applied for relief on the basis that the failure to register was inadvertent.

22.2.11

In re Appleyard Capital Pty Ltd

Appleyard was one of the first cases that dealt with the matter of the extension of time for the registration of a security interest under Corporations Act section 588FM.

22.2.12

In Appleyard, Brereton J reviewed the relevant authorities in relation to the equivalent concept that existed pre-PPSA in relation to registrable company charges, and stated that “inadvertence” for these purposes includes the failure to understand the legal requirement to register within the applicable timeframes, and the innocent error of failing to register due to ignorance of the legal requirements to do so².

22.2.13

The evidence was that the secured party was an overseas entity, had not conducted business in Australia before, did not take Australian legal advice on the transaction, and even though the security agreement provided for registration the grantor represented to the secured party that it had made all necessary registrations which was not the case. This evidence was accepted, creating a clear case of inadvertence, and thereby enlivening the jurisdiction of the court to extend the time for registration under section 588FL.

22.2.14

Once the jurisdiction to extend time under section 588FM was established, Brereton J turned to whether the Court should exercise its discretion to extend time.

22.2.15

The key consideration in terms of the Court exercising its discretion was identified as being whether the extension of time requested under section 588FM may operate to the detriment of unsecured creditors if the company goes into administration or liquidation within six months, because it avoids the consequence that otherwise follows under section 588FL, being that the security interest³ would otherwise vest in the company for the benefit of unsecured creditors⁴.

22.2.16

The court identified that it must balance the potential detriment to unsecured creditors if the company goes into administration or liquidation within six months, against the windfall gain that would fall to unsecured creditors in this circumstance. On this basis, the court held that any detriment to unsecured creditors is not determinative, and the court has jurisdiction to grant the extension of time even where the company is of questionable solvency, or even insolvent.

22.2.17

Indeed, in Appleyard the evidence was that the grantor was likely insolvent, given other creditors were serving default notices and making demands for payment which it could not meet.

22.2.18

A further key consideration in Appleyard was that unsecured creditors in question had likely not traded with the grantor company on the basis that it had not granted any security interests, given that other security interests were granted and registered on PPSR in favour of other secured creditors. Accordingly, the possibility that unsecured creditors could have traded with the grantor having searched PPSR and obtained clear searches, and therefore on the understanding that no security interests had been granted, did not arise.

22.2.19

In addition, the Court in Appleyard protected the interests of unsecured creditors by imposing a “guardian provision”, being that the court orders extending time under section 588FM could, should the grantor company enter administration or liquidation within six months, be the subject of application by any unsecured creditors, the administrator or the liquidator, to be set side or varied (Guardian Provision).

22.2.20

On these bases, namely inadvertence as to the legal requirement to register, no reliance by unsecured creditors on a clear PPSR register for the grantor, but in circumstances where the grantor was likely insolvent, the court in Appleyard granted the extension of time under section 588FM but subject to a Guardian Provision to protect unsecured creditors should the company enter administration or liquidation within six months.

22.2.21

Section 588FM - Inadvertence; intervening security interests

Inadvertence can include “not being properly attentive”, administrative errors in the input of information to make registrations, and ignorance as to the requirements of registration of the consequences of not making registrations - In re Barclays Bank Plc [2012] NSWSC 1095; Re Enviro Pallets (NSW) Pty Ltd [2013] QSC 220.

22.2.22

When making orders under section 588FM, if intervening security interests have been registered in the time between grant and registration of the security interests the subject of the section 588FM application, the court can make orders subject to the priority of those intervening security interests, such that their priority not be affected. This was done in In re Apex Gold Pty Ltd [2013] NSWSC 881.

22.2.23

Orders under section 588FM and grantor companies that have entered administration or liquidation

Re Appleyard and the principles there discussed regarding granting orders for extension of time to register security interests pursuant to section 588FM was considered with approval in Kaizen Global Investments Ltd v Australia New Agribusiness & Chemical Group Ltd [2017] FCA 431 (Kaizen Global).

22.2.24

Kaizen Global considered the situation of granting an extension of time under section 588FM to a secured creditor that failed to registered its security interests due to inadvertence, but at a time when the grantor company had already entered administration and then liquidation. In Re Appleyard, orders were made under section 588FM at a time when the grantor company was likely insolvent or in a distressed financial position, but had not yet entered administration or liquidation.

22.2.25

Kaizen Global found that the court’s jurisdiction had arisen due to the secured creditor’s inadvertence in not making PPSR registrations, but the court refused to exercise its discretion to make orders extending the time for registration under section 588FM. In refusing to make the orders, the court followed the position set down in Re Appleyard that the fact of distress, or entry into administration of liquidation, does not preclude the court making orders under section 588FM. Naturally though, these matters do weigh against the court making orders under section 588FM because it is either highly conceivable (in the case of financial distress) or certain (in the case of entry into administration or liquidation) that orders under section 588FM will prejudice the body of unsecured creditors who will no longer take the benefit of the pool of secured assets that will be secured for the secured creditor by orders being made under section 588FM.

22.2.26

In Kaizen Global the court focussed on the delay and tardiness displayed by the secured creditor in question in making PPSR registrations once they were alerted to the need to do so. The secured creditor in question took 33 days to action PPSR registrations following being made aware of the need to make them (see paragraph [90] of the judgment). Further, there was a period of three months’ delay from the end of the relevant 20 business day period during which the security interests should have been registered under section 588FL, and the time they were actually registered. This period of delay in registration naturally creates the opportunity for creditors to search the PPSR register and find no registration and then potentially rely on that fact to their detriment by dealing with the grantor. Albeit in Kaizen Global, there was no evidence that creditors had searched the PPSR register and relied on search results during this three month period.

22.2.27

The lessons from Kaizen Global appear to be twofold:

First, courts will readily entertain applications for extension of time pursuant to section 588FM, even where the grantor has entered administration or liquidation.

Second, the secured creditor seeking orders under section 588FM must do themselves a favour and action any required registrations as quickly as possible upon learning of the need to registger.

Notes:

1 Corporations Act 2001 (Cth) section 588FN (link)

2 at paragraph 10 of the judgement

3 registered out of the 20 business day timeframe under section 588FL

4 at paragraph 16 of the judgement

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22.1 Registration

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22.3 Financing statements

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