The Granting of PPSA Security Interests in Corporate Insolvency Work Outs

Cathro, in the matter of Cubic Interiors NSW Pty Ltd (in liq) [2023] FCA 694 (Cheeseman J)

The decision explores the inherent vagueness in ss588FL and 588FM of the Corporations Act 2001 (Cth) (Act), and whether previous Court decisions imposing a requirement for liquidators, voluntary administrators, and deed administrators to obtain a Court order ‘fixing’ a later time for registration of security interests in the Personal Property Securities Register (PPSR) were correct. These decisions of the Federal Court of Australia were to the effect that the security interest granted in the insolvency administration (with the consent of the insolvency practitioner) vested in the insolvent company under s588FL of the Act without the curing effect of the Court order.

There had been differing treatment of the provisions in Federal and State Courts.

Facts in brief

The liquidator sought directions under s90-15 of the Insolvency Practice Schedule (Corporations) 2016 (IPS) that he was justified in not seeking relief under s588FM of the Act in relation to the registration of a security interest in the PPSR for a loan agreement and general security deed (GSD) as part of a corporate restructure (Registration Declaration).

Alternatively, if the Registration Declaration was not given, the liquidator sought an order under s588FM of the Act fixing a later time for registration for the purposes of s 588FL(2)(b)(iv) of the Act (Extension of Time Order).

Sections 588FL and 588FM of the Act and Inherent Uncertainty

The uncertainty can be seen by setting out parts of ss588FL and 588FM of the Act.

Section 588FL(1) stipulates the circumstances in which the section applies, namely:

1. if an order is made for the appointment of a liquidator or a resolution for winding up is passed, a voluntary administrator is appointed, a company executes a deed of company arrangement, a restructuring practitioner is appointed or a company executes a restructuring plan; and
2. a PPSA security interest granted by a company is ‘covered’ be s588FL(2) (addressing registration at the ‘critical time’, namely the commencement of the applicable insolvency administration).

Section 588FL(2) is expressed to be ‘covered’, or applicable, if the following occurs (with underlined emphasis):

(a) the PPSA security interest is enforceable against third parties under the law of Australia and it is perfected at the ‘critical time’ by registration and by no other means; and

(b) “the registration time for the collateral is after the latest of the following times:

(i) 6 months before the critical time;

(ii) the time that is the end of 20 business days after the security agreement that gave rise to the security interest came into force, or the time that is the critical time, whichever time is earlier;

(iii) … [not applicable];

(iv) a later time ordered by the Court under section 588FM.”

The inherent uncertainty in s588FL(2) is that it applies in circumstances where a registration is effected by a company (via an insolvency practitioner) after the ‘critical time’ as stipulated in sub-paragraph (b). This is a peculiar reading of the section given that the insolvency practitioner would never have had the ability to register the security interest in the PPSR within the 20 business day period in sub-paragraph (b)(ii) since it was granted after the ‘critical time’.

On this reasoning, this meant that the insolvency practitioner would need to satisfy s588FM, being the remedial provision allowing the Court to ‘fix’ a later time for registration for the purposes of s588FL(2)(b)(iv) if certain criteria are met (for example, inadvertence in the failure to register, if the position of creditors or shareholders will not be affected by the failure to register, or if it is just and equitable to grant relief).

The Previous Federal Court Decisions – Extension Applications

Cheeseman J of the Federal Court was satisfied that it was appropriate to entertain the liquidator’s application under s90-15 of the IPS for the Registration Declaration as he acted in good faith.

The liquidator entered into the loan transaction and GSD for commercial purposes to refinance facilities for the benefit of creditors.

Cheeseman J traversed the previous decisions commencing with K.J. Renfrey Nominees (Trustee), in the matter of OneSteel Manufacturing Pty Ltd v OneSteel Manufacturing Pty Ltd,¹ a decision involving a security interest granted while a company was in voluntary administration. In that case, Davies J of the Federal Court held that s588FL(2) covered PPSA security interests granted after the critical time.²  This approach was followed by Besanko J in Mentha, in the matter of Arrium Finance Limited v National Australia Bank Limited³ and in numerous other Federal Court decisions.⁴

Brereton JA and the Contrary View

In contrast, Brereton JA of the Supreme Court of New South Wales took a different view of s588FL in Re Antqip Pty Ltd (in liq) [2021] NSWSC 1122 by concluding that s588FL did not apply to companies in voluntary administration which granted PPSA security interests.

His Honour distinguished between two different scenarios.

The first scenario was where the security interest was granted after the critical time, in which case s588FL did not apply.

The second scenario was where the security interest was granted before the critical time but arose after such time, in which case s588FL did apply.⁵

Brereton JA declined to follow K.J. Renfrey and the ensuing cases which in his view did not reflect the significance of the word ‘granted’ in s588FL(1)(b), as compared to the use of the word ‘arises’ in the chapeau of s588FL(2)(a).

Cheeseman J’s decision

Her Honour considered both lines of authority in reaching the conclusion that s588FL does not cover security interests granted after the critical time (following the approach of Brereton JA which had also been followed in another Federal Court decision).⁶ This view also accorded with well-established principles of statutory construction of the text itself.

Further, Cheeseman J acknowledged that if s588FL applies to security interests granted after the critical time, it creates an odd result as a security interest would vest in a grantor at a time prior to the granting of the security interest. ⁷ Her Honour also acknowledged the presumption that Parliament does not intend to enact legislation with anomalous consequences.⁸

In support of this view of s588FL, Cheeseman J identified other provisions in the Act which favoured the view of Brereton JA, such as s468 which voids any disposition of property of a company after the commencement of a court ordered winding up.⁹  There were also similar provisions addressing transactions occurring after the appointment of a voluntary administrator,¹⁰ deed administrator¹¹ or restructuring practitioner.¹²

Section 267 of the Personal Property Securities Act 2009 (Cth) (PPSA)

It is important to remember that s588FL of the Act applies where there is perfection by registration at the critical time (and by no other means, such as possession or control). Where a security interest is unperfected at the critical time, s267 of the PPSA mandates that the security interest vests. There is no ability to obtain an extension.

Conclusion

Insolvency practitioners and advisers wait in anticipation of an appellate Court decision following the Brereton JA view, as endorsed by Cheeseman J in the Cubic Interiors NSW decision, in order to save costs in corporate restructures.

¹ [2017] FCA 325; 120 ACSR 117.
² Renfrey at [20] and [24].
³ [2017] FCA 818.
⁴[4] Korda, in the matter of Ten Network Holdings Ltd (admins appted) (recs and mgrs. Appted) [2017] FCA 1144; 35 ACLC 17-044 (Markovic J), Hill (admin) in the matter of Flow Systems Pty Ltd (admins apptd) [2019] FCA 35 (Greenwood J), Dickerson, in the matter of McWilliam’s Wines Group Ltd (admins appd) (No 2) [2020] FCA 417 (Gleeson J), Birch, in the matter of Geelong Fire Services Pty Ltd (Administrators Appointed) [2022] FCA 963 (Moshinsky J) and Re Antqip: Park (Administrator), in the matter of Ellume Limited (Administrators Appointed) v Evangayle Pty Ltd (Trustee) [2022] FCA 1102 (Downes J).
⁵ At [51], as referred to by Cheeseman J.
⁶ At [55]. The other decision was Revroof Pty Ltd (receivers and managers appointed) (administrators appointed) v Taminga Street Investments Pty Ltd [2023] FCA 543 (Jackman J).
⁷ At [56].
⁸ At [56].
⁹ At [60].
¹⁰ Sections 437D and 440B.
¹¹ Sections 444D and 444F.
¹² Sections 453L(3) and 453R.