The importance of security holders accurately registering their interest on the Personal Property Securities Register (PPSR) to create a valid, enforceable interest is constantly emphasised in commentary and cases. It is accepted that an error in a grantor’s identifier is likely to be fatal to a PPSR registration1, often resulting in a creditor’s unperfected interest vesting in a company upon it entering administration or liquidation. However, a recent decision of the New South Wales Supreme Court illustrates that a defective registration may be cured without losing priority.
The decision of In the matter of Accolade Wines Australia Limited and other companies  NSWSC 1023 considers an application by a secured creditor to extend the period for which PMSI security interests may be perfected by registration on the PPSR.
The extension application was made after the Plaintiffs lodged new registrations to rectify defects in their original registrations.
The Plaintiffs (Alleasing Pty Ltd and Alleasing Finance Pty Limited) leased goods to customers under arrangements classified as PPS leases under the Personal Property Securities Act 2009 (Cth) (PPSA).
The Plaintiffs attempted to perfect their purchase money sercurity interest (PMSI) security interests arising from the PPS leases by lodging financial statements on the PPSR. The financial statements were registered against the ABN of the grantor body corporate, rather than the ACN as required by the Personal Property Securities Regulations 2010 (Cth)2. The Plaintiffs upon discovering their error subsequently registered their security interests against the ACN of the grantor. However, these registrations were made more than 20 days after the relevant security agreements came into force, and so the security interests arising from the PPS leases would vest in the grantor if it went into administration or liquidation within six months of the registration3. Further, because the later registrations were made more than 15 days after the goods were delivered to the grantor, they did not enjoy the super priority of a PMSI4.
The grantor was not insolvent nor was there evidence of a risk of insolvency.
In the unopposed, ex parte application, the Plaintiffs sought:
- an order pursuant to section 588FM of the Corporations Act 2001 (Cth) effectively extending the time for registration of the security interests
- an order pursuant to section 293 of the PPSA extending the period specified in section 62(3) of the PPSA for the Plaintiffs to perfect the security interests as PMSIs.
Extension of period for registration
The Plaintiffs claimed that an extension of time should be ordered as the initial registration against the grantor’s ABN rather than the ACN was accidental or inadvertent. Justice Brereton accepted that the registrations were made by employees who were not aware of the significance of the difference between an ACN and ABN, or the effect that it would have on the status of a security interest. Accordingly, Justice Brereton found that the discretion to “fix a later time” under section 588FM was enlivened.
Justice Brereton stated that the purpose of section 588FM is to relieve against the consequences of inadvertence, at least where the oversight has not caused prejudice. His Honour considered there was a powerful case that the failure to register earlier was not of such a nature as to prejudice the position of creditors.
His Honour accepted that, as explained in Appleyard Capital5, the type of prejudice that is of particular relevance is prejudice attributable to the delay in registration, rather than prejudice from making the order (which is inevitable). The period of delay in effecting registration is relevant, because the shorter the delay the less likely that the failure to register within time will have had any impact. His Honour stated, “The significance of the passage of time is mainly related to the possibility of competing interests having arisen, in particular, through others having dealt with the company on the footing that the collateral was unencumbered”.
There was evidence that the grantors were paying their debts. Further, His Honour accepted that it was unlikely that a creditor relying on a search of the PPSR in extending credit to a grantor would in fact have been unaware of the Plaintiffs’ security interests (discussed further below).
Accordingly, His Honour considered it appropriate to exercise the discretion under section 588FM to fix a later time, namely the date on which the new registrations were effected.
Extension of period for PMSI
The extension of time for registration would not, however, reinstate the PMSI status. Accordingly, an extension order was also sought under section 293(1) of the PPSA
Justice Brereton found that that need for an extension also arose due to errors caused by the inadvertence of the Plaintiffs’ employees making the registrations.
His Honour considered the prejudice that would arise from orders under section 293(3)(b) extending the period for registration.
There were no other security interests registered on the PPSR over the particular collateral in which the Plaintiffs’ PMSI interests were claimed. However, there were several All Present and After Acquired Property (AllPAP) interests registered before and after the Plaintiffs’ original registrations. The prejudice to these AllPAP holders was considered, as these interests would, in the absence of an extension being granted, have priority over the Plaintiffs later registrations.
Prejudice to secured creditors
Taking a purposive approach to section 293 of the PPSA, Justice Brereton noted that the essential purpose of the provision is to allow a priority to the PMSI holder, and any practical application would result in prejudice to AllPAP holders.
Justice Brereton held that prejudice to other security holders was relevant primarily where it was accompanied by reliance. The AllPAP holders that acquired their interest prior to the defective PMSI registration could not have acted in reliance. His Honour considered only the prejudice which might have been caused by reliance of the AllPAP holders whose security interests were granted after the defective PMSI registration.
Justice Brereton accepted, based on the evidence provided by a partner from the Plaintiff’s legal firm experienced in banking and finance, that a ‘reasonably prudent financier’ would have searched the PPSR across the grantor’s ABN, ACN and company name – the “triple check”. A search of these identifiers would have revealed the Plaintiffs’ PMSI registration. Further, His Honour accepted evidence that a potential financier is chiefly concerned with the existence of AllPAP registrations, and generally not PMSIs or other security interests over specific collateral.
Justice Brereton concluded that it was improbable that any AllPAP holder whose registration followed the Plaintiffs’ original PMSI registration would have relied on this when providing finance to the grantor.
In the result, His Honour found that it was just and equitable for the court to make an order under section 293 of the PPSA to extend the number of business days for the perfection by registration of the Plaintiffs’ PMSIs.
Joinder of secured creditors
As the application was heard ex parte, Justice Brereton considered whether it was appropriate for the orders to be made without the AllPAP holders present. His Honour observed that the orders would interfere with proprietary rights, and that the AllPAP holders should have the right to be present. However, His Honour noted that it was not uncommon in applications for extension of time for registration that orders be made first, and leave reserved to those potentially affected to vary or set aside the orders.
Accordingly, Justice Brereton ordered that the AllPAP holders be joined to the proceeding and be granted liberty to apply.
What does it all mean?
This case is a good example of how a secured party can rectify an inadvertently defective PMSI registration without losing priority. However, the potential prejudice to creditors is a key factor in the exercise of the court’s discretion.
The acceptance of expert evidence that AllPAP security holders would typically uncover a PMSI registration (regardless of any defect), but they are in any event unconcerned with PMSIs, tends to suggest that creditors with security interests in particular collateral (ie not an AllPAP holder) will continue to have good prospects of success with extension applications.
1 See s164 and 165(1) PPSA
2Schedule 1, r1.3
3Section 588FM Corporations Act 2001 (Cth)
4Section 62(3) PPSA
5(2014) 101 ACSR 629