This decision is a reminder to secured creditors to register security interests pursuant to the Personal Property Securities Act 2009 (Cth) (PPSA) in a timely manner to avoid the vesting of a security interest in a voluntary administration. Unfortunately for the secured creditors in this decision, their security interests in cattle of significant worth vested in the grantor company’s voluntary administration pursuant to section 588FL of the Corporations Act 2001 (Cth) (Act).
Section 588FL(2) of the Act provides for the vesting of a security interest where a grantor company is placed into voluntary administration or liquidation and a security interest was registered outside of set time limits. For a vesting to occur, registration of a security interest must occur after 20 business days from the time the security agreement that gave rise to the security interest came into force, and the insolvency administration must commence within 6 months of registration.
Facts
Carpenter International Pty Ltd (Carpenter) was engaged in the live cattle export business. Its business involved purchasing cattle through a del credere agent, moving cattle into feedlots for quarantine and testing, and exporting the cattle. The del credere livestock agents in the sale process were Dairy Livestock Services Pty Ltd (DLS) and Charles Stewart & Company Pty Ltd (CS). As del credere agents, these parties guaranteed payment to the vendor farmers in the sale transactions. They were also entitled to an assignment of a vendor’s rights where they made payment on behalf of a purchaser. This included the benefit of retention of title provisions in the sale contracts.
Vesting of security interests
DLS and CS had paid out vendors who sold cattle to Carpenter. However, registrations were only effected under the PPSA several hours before the appointment of the voluntary administrators, although this was within 20 business days of the assignment. A key issue was therefore when the security came into force under the security agreement, because this would determine when the 20 business day period started to commence. The Court found that the interest of DLS and CS was essentially a contingent security interest which came into force when the initial agreements were entered into. It was contingent upon payment of the vendors and taking an assignment of their security interests, but this did not prevent DLS and CS from registering their interests under the PPSA.1 Similarly, an argument by DLS and CS that payment of the vendors was a condition precedent to the security agreement coming into force was rejected.
The timing of the commencement of the 20 business day period meant that the security interests of DLS and CS vested in Carpenter under section 588FL of the Act, unless the Court made an order under section 588FM of the Act extending the 20 business day period. DLS did not apply for an extension of time and lost its security interest in the cattle. CS applied for an extension of time for registration of its security interest.
Section 588FM
Section 588FM of the Act permits an extension of the 20 business day period if the failure to register was accidental, due to inadvertence or some other sufficient cause, was not of such a nature to prejudice the position of creditors or shareholders, or it was just and equitable to grant an extension.
The Court found that CS did not overcome the ‘threshold’ requirement in section 588FM of the Act by establishing inadvertence, which was necessary before the Court may exercise its discretion in determining if an extension should be granted.2 This was because senior management of CS knew of the requirement to register under the PPSA within 20 business days of a security interest becoming enforceable, but had elected not to do so on numerous occasions because Carpenter usually paid within 7 days of the end of the month in which cattle were purchased. It was only upon CS becoming aware of Carpenter’s potential appointment of voluntary administrators that it decided to register its security interests. Put another way, CS would never have registered its security interests against Carpenter under its usual practices if it did not become aware of the potential insolvency of Carpenter.3
CS therefore failed in its extension application under section 588FM of the Act, and its security interest in the cattle remained vested in Carpenter.
This article was written by Matthew Broderick, Partner.
1At [87] – [90].
2At [226] -[229].
3At [226].