June 16, 2014

Rouse Lawyers Secures a Second Chance for Secured Creditors

PERFECTING YOUR SECURITY INTERESTS, DON’T WAIT UNTIL IT’S TOO LATE

On 29 May 2014, Rouse Lawyers successfully represented 123 Sweden AB, a foreign Swedish corporation, in its Supreme Court (NSW) application under s 588FM of the Corporations Act 2001 (Cth), for an order fixing a later date for registering and perfecting 123 Sweden’s security interest on the Personal Property Securities Register (PPSR).

His Honour Justice Brereton delivered his judgment on 12 June 2014.  In the judgment, His Honour provides greater certainty for secured creditors as to the relevant factors for consideration and the circumstances in which a s 588FM order ought to be granted.  The judgment also provides increased protection for secured creditors and offers secured creditors who have not registered their security interests against a company within the required 20 business days a second chance to perfect their security interest.

Registering Security Interests

 

Pursuant to s 588FL of the Corporations Act, the relevant time for registering and perfecting a security interest against a company on the PPSR for the purposes of the Personal Property Securities Act 2009 (Cth) (PPSA) is 20 business days after the security agreement granting the interest comes into force.

In circumstances where a secured creditor fails to register its security interest within the required 20 business days, the secured creditor’s security interest will not be perfected.

Failure to Register and Perfect a Security Interest

 

The consequences for a secured creditor failing to perfect its security interest can be fatal to the creditor’s interest.

For example, without notice of any security interests, third party creditors may enter into further security agreements or arrangements with the grantor in relation to the same security.  In that circumstance, if the third party creditor successfully registers its security interests, although acquired later in time, the third party’s security interest may have priority over any earlier acquired but unregistered security interests.

Furthermore, if the grantor company becomes insolvent and the secured party has not registered and perfected its security interest, the security may vest back in the grantor company.  The result is that – the secured party may lose any priority in the security and may rank alongside all other unsecured creditors.

Extension of Time for Registration

Section 588FM confers on the Court a discretion to a fix a later time for the registration of a security interest.  The discretion relates to three main grounds, namely, where the failure to register the collateral was accidental, inadvertent or due to some other sufficient cause; is not of a nature as to prejudice the position of creditors or shareholders; or that on other grounds is it is just and equitable to do so.

The Judgment

 

In the case of 123 Sweden, the company had failed to register its security interest for a period of approximately 14 months.

The Court was satisfied that the reason for 123 Sweden’s failure to register its security interest within the required 20 business days was due to inadvertence.

It was held that although the delay in registering its security interest was considerable, the delay was almost entirely attributable to:

123 Swedens ignorance of the requirement for registration and the effect of non-registration.  Accordingly, the Court held that there seems to be no good reason why the unsecured creditors should enjoy a windfall through the vesting of the security interest, on account of the plaintiffs inadvertence…” [at 10].

In the judgment, His Honour acknowledged that consideration of prejudice to unsecured creditors is a relevant consideration in Australia.  Notwithstanding this, His Honour stressed that the prejudice to unsecured creditors is only a relevant discretionary consideration and is only one of the multitude of discretionary factors that may be taken into account.  Other factors which the Court found compelling were the purpose of s 588FM, which is to assist secured creditors in avoiding the consequence of having their security vest back in the grantor company where the grantor company is at risk of becoming insolvent.

Accordingly, it would appear that the Court may even entertain s 588FM applications in circumstances where the grantor company has been placed into administration or declared insolvent.

Takeaways

 

  • It is critical that secured creditors take inventory of their security interests and ensure that they have taken steps to register and perfect their security interests in accordance with the PPSA and the Corporations Act.
  • If you are a secured creditor of a company who has not registered your security interest within the 20 business days required under the Corporations Act, and there is a risk that you may lose priority in relation to your security, or a risk of the grantor company going into administration or insolvency, you may still be able to perfect your security by bringing a s 588FM application.