Failure to properly consider all relevant issues and address the relevant requirements to ensure that the registration of the security interest on the PPSR is valid could be fundamental – one small mistake could mean that the party loses its ability to enforce a security interest and recover its goods, particularly in circumstances where a company goes into liquidation and the security interest may vest in the company under section 588FL of the Corporations Act.
There may be circumstances where a creditor has failed to register its security interest within the requisite timeframe prescribed by the PPSA. This may require an application to be made to the Court pursuant to section 588FM of the Corporations Act 2001 (Cth) (the Corporations Act) for an order that fixes a later time for registration of the security interest in order to prevent the security interest, which should have been registered in respect of the assets of a company, vesting in the company under section 588FL of the Act upon the occurrence of an insolvency event .
There are specific grounds which must be satisfied by an applicant in a section 588FM application where a security interest has not been registered on time:
- The failure to register on time was accidental, inadvertent or some other sufficient cause. The Court is only required to be satisfied as to one of the grounds but the cases demonstrate that the Court will consider all three grounds when determining the application. For example, “inadvertence” includes the failure to understand the requirement for registration within the specified period and an innocent error has occurred by a failure to register through ignorance of the legal requirement to do so (and discloses a lack of legal understanding).
- Consideration must also be given to any prejudice which may arise in extending time for registration. Therefore, the interests of creditors and shareholders as well as other security holders will be considered in determining whether there is a sufficient reason to prefer the position of security holders to the interests of creditors. The type of prejudice which is relevant is the prejudice which has occurred by the failure to register the security interest within time and the length of delay in the registration.
- Upon the basis that there are “other grounds”, the Court will consider whether it is just and equitable to grant the relief sought in the application. Relevant considerations will be the solvency of the company because if there is no risk that the company is likely to become insolvent within 6 months, it may be just and equitable to grant the order. If the insolvency position of the company is uncertain, the Court will assess whether an order is likely to affect any person. In such circumstances, the Court may include a term in the order that it may be set aside in the event of liquidation or voluntary administration.
There are a range of cases which have considered an application under section 588FM of the Corporations Act and not all have been successful: for example, see Appleyard Capital Pty Ltd; 123 Sweden AB v Appleyard Capital Pty Ltd (2014) NSWSC 782; Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (In Liq) (1991) 2 Qd R 456; Cardinia Nominees Pty Ltd (2014) NSWSC 32; Re Accolade Wines Australia (2016) NSWSC 1023. In the case of Kaizen Global Investments Ltd v Australia New Agribusiness & Chemical Group Pty Ltd (In Liq) p2017 FCA 43, the length of the delay was significant and resulted in the application being unsuccessful. The test that was adopted by the Court was a determination as to whether there were factors of such significance which outweighed the adverse effect on the unsecured creditors if the orders were made by the Court. There is nothing that constrains the exercise of the Court’s discretion to only cases where “exceptional circumstances” can be found.
In the recent case of AWE Perth Pty Ltd v Clough Projects Australia Pty Ltd (20230 WASC 20, the Court was satisfied that the failure to register had not prejudiced any creditors or on the basis that it was just and equitable to make the orders sought. This case provides a useful summary of the issues which must be taken into account by a Court in an application under section 588FM of the Corporations Act.
Catherine Pulverman of FCW Lawyers has considerable experience in respect of the PPSA and registration of security interests on the PPSR and we regularly provide advice on issues including whether a security interest is valid and capable of enforcement, whether a security interest is invalid and should be withdrawn or whether a security interest vests under section 588FL of the Corporations Act. Several applications have been made by FCW recently for clients seeking orders under section 588FM of the Corporations Act and our solicitors appreciate the relevant criteria which must be established to obtain orders to extend the time for registration of a security interest. We would be happy to provide any necessary advice on PPSA issues and, where necessary, issue an application to the Court if required under section 588FM of the Corporations Act.