Extension of time to register a security interest pursuant to section 588FM of the Corporations Act 2001 (Cth)

Thursday, 20 July 2017

Kaizen Global Investments Ltd v Australia New Agribusiness & Chemical Group Ltd (In Liq) [2017] FCA 43, a decision of the Federal Court of Australia, is yet another decision where a secured party was unsuccessful in an application to the Court under section 588FM of the Corporations Act 2001 (Cth) (Act) to extend the time for registration of a security interest to avoid it vesting upon the voluntary administration of a grantor company.

While the significant length of the delay ultimately defeated the applicant's claim to an extension, this decision suggests that the Court's discretion to extend time is not merely restricted to "exceptional circumstances" where a company is in voluntary administration.

Background 

Kaizen, a foreign company, lent $5,000,000 to ANB, an Australian Company. ANB provided a share mortgage as security. The agreement came into force on 11 December 2015. Kaizen ignored recommendations to seek Australian legal advice on registration of its security interest.

On 10 March 2016, Kaizen became aware that the share mortgage needed to be registered on the Personal Property Securities Register (PPSR). The security interest was registered on 12 April 2016, and in that same month ANB went into voluntary administration. Due to the time limits imposed by Section 588FL(2) of the Act, Kaizen's tardy registration on the PPSR meant its security interest vested in ANB.

Section 588FL(2) of the Act provides that a secured party must register a security interest within 20 business days after the security agreement comes into force. If the registration is effected outside of this time period, and a grantor company enters into voluntary administration or liquidation within 6 months from the time of registration, the security interest vests in the grantor.1

A secured party may apply to the Court pursuant to section 588FM of the Act for an extension of time to register the security interest if the failure to register in a timely fashion:

  • Was accidental or inadvertent; or
  • Does not prejudice the position of creditors or shareholders.

Even if one of the above is satisfied, it is ultimately up to the Court to decide whether or not to exercise its discretion to extend time.

"Accidental or Inadvertent"

This case clearly shows that the threshold for "inadvertence" is very low in this context. All Kaizen needed to show was that its directors did not understand the requirement for registration in the PPSR at the time. It was successful in this regard, despite the obvious carelessness in neglecting to obtain Australian legal advice.

When is an extension granted?

Where the grantor of the security interest is in voluntary administration or liquidation, courts have previously been very reluctant to extend the time for registration, only doing so "in exceptional circumstances".

In the current case, Justice Moshinsky assessed the relevant authorities on this issue, and noted the following:

  • An order fixing a later time where the grantor is an insolvent company is not lightly made, and generally only upon conditions which minimise the risk of prejudice to creditors;
  • There is nothing that constrains the exercise of the Court's discretion to only cases where "exceptional circumstances" can be found; and
  • An order to fix a later time for registration can be made even after liquidation, and even if the order will defeat the rights of unsecured creditors.

The test applied by the Court was an assessment of whether there were factors of sufficient significance to outweigh the adverse impact on unsecured creditors of the grant of relief.

The decision

Unfortunately for Kaizen, its delay in registering the security interest, even once it became aware of the requirement to register, resulted in the Court refusing to exercise its discretion to extend the time for registration. The Court noted that once Kaizen was aware of the need to register, it was incumbent on it to do so, even if it was unaware of the time limit.

This decision does however suggest that if Kaizen had been swifter in registering the share mortgage it may have been successful, despite the prejudice to unsecured creditors whose claims arose prior to the time Kaizen belatedly registered its security interest.

Key takeaways

It is of vital importance that secured parties register their security interests in a timely manner, to avoid security vesting in a voluntary administration or liquidation.

Applicants pursuant to section 588FM of the Act need to show that they were previously unaware of the requirement to register their interest in the PPSR (or other sufficient grounds of inadvertence), and moreover, that upon subsequently becoming aware of their obligations, prompt action was taken to effect registration.

This article was written by Matthew Broderick, Partner and Luke Gallant, Trainee Solicitor, in our Brisbane office. Publication Editor: Grant Whatley.

Important disclaimer: The material contained in this publication is of a general nature only and is based on the law as at 20 July 2017. It is not, nor is intended to be, legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.

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It is noteworthy that the 20 business day time limit can be illusory in one sense, because where there is a complete failure to perfect (or register) a security interest before a voluntary administration or liquidation, Section 267 of Personal Property Securities Act 2009 (Cth) provides for the vesting of the security interest.