But, Your Honour, I Didn’t Know: Avoiding Liability Under S 588FL

August, 2016

By Nirupa Manoharan, Special Counsel and Jennifer O’Farrell, Associate

Introduction

The decision of Caason Investments Pty Ltd v Ausroc Metals Ltd [2016] WASC 267 provides guidance on when a Court will extend the time for a creditor to register their security interest on the Personal Property Securities Register (PPSR) thereby avoiding the harsh vesting rule in s 588FL of the Corporations Act 2001 (Cth) (Corporations Act). Put simply: if the creditor can show ignorance of the rule’s operation and there is no prejudice to other creditors, a Court is more likely to grant that creditor an extension of time to register its security interest on the PPSR.

Facts

Caason Investments Pty Ltd (Caason) provided short term financial accommodation to Ausroc Metals Pty Ltd (Ausroc). On 28 November 2014, Ausroc granted Caason a general security interest over all of its present and after acquired property (AllPAAP). The Court accepted that Caason was not usually engaged in the business of lending and taking security.

Caason did not register its AllPAAP security interest on the PPSR until May 2016, some 18 months after the original security interest arose. The impact of the late registration was that if an administrator or liquidator were appointed to Ausroc within 6 months of Caason’s registration, Caason’s AllPAAP security interest would vest in Ausroc as the registration time would be after the latest of the times set out in s588FL(2)(b)(i) or (ii), being:

(i) 6 months before the critical time; or

(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 critical time, whichever time is earlier.

“Critical time” is defined in s 588FL(7) to include, the time of the winding up or appointment of an administrator to the grantor of the security interest. Therefore, if s 588FL were triggered, Caason would rank as an unsecured creditor of Ausroc.

We have previously considered the harsh consequences of the rule in s588FL in our examination of the following two cases:  Re Carpenter International Pty Ltd [2016] VSC 118 and in Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq) [2014] FCA 1034.

However, secured creditors can be granted a reprieve from the harshness of s588FL by applying to the Court for an order extending the time for registration on the PPSR. The application is made under s588FM of the Corporations Act, and will be made if the Court is satisfied that:

(a) a failure to register the collateral earlier:

(i) was accidental or due to inadvertence or some other sufficient cause; or

(ii) is not of such a nature as to prejudice the position of creditors or shareholders; or

(b) on other grounds, if it is just and equitable to grant relief.

Decision 

The Court mainly focused on the first two grounds, under subsection (a). Helpfully, the Court referred to a series of cases which have considered that “inadvertence” in the context of s588FM (and analogous contexts) requires evidence that the creditor:

(a) was inadvertent in the sense of being “not properly attentive”;

(b) made administrative errors in the registration; or

(c) was ignorant of the law or failed to understand the legal implications of a failure to register.

The last ground is particularly interesting as, in many other areas of the law, ignorance of the law is no excuse.

The Court also found that “prejudice” in s588FM is not necessarily established by showing that the dividend to unsecured creditors would otherwise be reduced by granting an extension of time to a secured creditor. What is relevant to the concept of prejudice is the passage of time and how many other secured creditors have registered against the grantor (here, Ausroc). In this case, only one other creditor had registered against Ausroc in the interim. That creditor requested (by letter, shown to the Court) that any order made by the Court have no effect on that creditor. The Court declined to make such an order but left it open for any creditor to apply to the Court to remedy any prejudice which might be suffered by as a result of the extension.

Take Away Points

The Court in Caason Investments granted the extension of time sought by Caason largely because there was clear evidence before the Court that Caason was ignorant of the requirement to register on the PPSR in order to protect itself against the vesting rule in s588FL. Prejudice was a secondary consideration, but was not a contentious issue as only one creditor had registered against Ausroc in the intervening period.

The decision is of relevance to practitioners who operate in the advisory, restructuring and turnaround space, and those who advise secured creditors on their rights and obligations. If you have a client who has advanced funds in exchange for security without fully understanding the implications of the PPSR and/or who has failed to comply with the strict timeframes for registration, you should advise them to obtain further legal advice. Taking prompt action will be critical to any application under s588FM of the Corporations Act to extend the time for registering a security interest on the PPSR.

Contact Mills Oakley

Nirupa Manoharan |
Special Counsel
T: +61 3 9605 0808
E: nmanoharan@millsoakley.com.au

 

 

Privacy Policy | Terms of Use