A timely reminder: extensions of time for registration under PPSA

The decisions of In the matter of Assta Labels Pty Ltd [2018] NSWSC 1094 (Assta), In the matter of Psyche Holdings Pty Limited [2018] NSWSC 1254 (Psyche and, In the matter of Highlake Resources Pty Ltd [2018] FCA 1292 (Highlake) have added clarity to the factors courts will consider in assessing whether to grant an extension of time for registration on the 'Personal Property Securities Act 2009 (Cth) (PPSA).[1]

The authors have published an earlier article on this topic (https://hallandwilcox.com.au/extensions-of-time-for-registration-under-ppsa/).

Key takeaways

• Where a security interest has been incorrectly recorded against an ACN or ABN of a company, courts are willing to extend the statutory time-frames for a curative registration.
• In considering whether to grant an extension of time where an insolvency has occurred, the relevant prejudice to consider is that suffered by creditors who have competing security interests registered earlier in time and those creditors who have otherwise traded with the grantor on the faith its collateral was unencumbered.

Considering the distinction between ABN and ACN registrations

The PPSA and the Regulations prescribe rules which govern how a grantor is to be described in a PPSR registration.  These rules are strict and are critical to whether the registration is valid and effective.  If the wrong grantor identifier is used in the registration, this will constitute a statutory defect and render the registration ineffective.  Accordingly, the secured party may lose any assets or other rights claimed under that registration.

Relevantly, the question of whether a party is required to refer to the ABN or ACN of the grantor in the registration[2] turns on the capacity of the grantor in the underlying security agreement.  In summary:

• If the grantor entered the agreement as a trustee of a trust which holds an ABN – the registration should be recorded over the ABN of the trust.
• If the grantor entered the agreement in its corporate capacity (ie. not as a trustee) – the registration should be recorded over the ACN of the company.

Despite defects arising, recent decisions including in Assta and Psyche indicate that Courts will permit extensions of time to cure defective registrations on the PPSR to prevent the harsh consequences of these errors.

Assta

HP Financial Services (Australia) Pty Limited (HPFS) was granted a purchase money security interest (PMSI) by three separate grantors.  On registration, HPFS mistakenly registered its PMSI against the grantors’ respective ABNs rather than their ACNs.  The mistake occurred because of inadvertence and a lack of understanding by employees of HPFS of the difference between registering against the ABN or ACN of the various grantors.  Accordingly, the registrations were defective.  Upon realising the mistake, HPFS immediately attempted to correct the error by making fresh registrations against the ACNs of the grantors.

PMSIs are afforded ‘super-priority’ over earlier security interests in collateral. [3]  To obtain ‘super-priority’ the PMSI must be registered within strict time frames, namely:

• prior to the grantor obtaining possession of the collateral (where the collateral is inventory);
• 15 days of the grantor obtaining possession of the collateral (where the collateral is not inventory); or
• 15 days of the time of attachment, or creation of the PMSI (where the collateral is intangible property).

As the subsequent registrations were made by HPSF outside of these statutory time periods, HPSF’s interest was not entitled to the benefit of ‘super priority’, resulting in HPSF’s interest being subject to the general priority rules[4].

In reliance on section 293(1)(a) of the PPSA, HPSF sought an extension of the timeframe in section 62(3)(b) of the PPSA to ensure it retained ‘super-priority’.

The Court granted the order extending the time for registrations under section 293(1)(a) of the PPSA.  In particular, the Court specified that the time for registration under section 62(3)(b) of the PPSA be extended by 389, 424 and 466 business days in accordance with the subsequent curative registrations made against each grantor.

In considering whether it was ‘just and equitable’ to grant the extension of time, the Court considered the mandatory factors prescribed in section 293(3) of the PPSA.  The Court concluded that:

• the failure to properly register the interests arose because of a misunderstanding on behalf of HPSF, such that the staff members undertaking the registrations did not comprehend the importance of registering against the ACN of the grantors;
• no other secured parties or creditors would be prejudiced by extending the time for registration; and
• HPSF’s interests would have been apparent upon a third party conducting a search of the PPSR. Accordingly, it could not be said that a third party had acted in reliance on the time-period for registering a PMSI having passed.

Psyche

Similarly, Psyche Holdings Pty Limited (Psyche) granted a security interest to Ridgeway Finance Pty Limited (Ridgeway) over all of its present and after acquired personal property.  Ridgeway registered its interest on the PPSR in respect of the grantor’s ACN.  However, at the time of making the registration, Psyche was acting in its capacity as trustee of a trust (which had not yet been assigned an ABN).  At a later stage, the trust was granted an ABN.

Although Ridgeway’s registration was correct as at the time of registration, it subsequently became defective.  Section 166 of the PPSA states that in these circumstances, the registration becomes ineffective five business days after the secured party acquires knowledge of the defective registration.

Notwithstanding that a director of Ridgeway became aware that the trust had been issued with an ABN, Ridgeway failed to take any steps to amend the registration within the time-frame imposed by section 166 of the PPSA.  Ridgeway reasoned that it had not taken any steps within the requisite time-frame because it did not understand the significance the trust holding an ABN had on the validity of the security interest.  It was not until five years later that the director of Ridgeway understood its significance and at this point, took immediate steps to lodge a fresh registration which identified the ABN of the trust.

Section 588FL of the Corporations Act 2001 (Cth) (Act) provides that a security interest (which is perfected only by registration) must be registered on the PPSR either within 20 business days after the security agreement giving rise to the security interest comes into force, or otherwise earlier than 6 months of the grantor entering liquidation or administration.  Because of the mistake, Ridgeway fell afoul of this provision.

Accordingly, the security interest was ineffective and Ridgeway was at risk of its interest vesting and losing the benefit of its security upon Psyche being wound up.

Where an insolvency event has occurred, as long as the original registration was made on the PPSR prior to the insolvency event, an application for an extension of time is available.  Accordingly, Ridgeway applied to the Court under section 588FM  in order to prevent the security interest from vesting by extending the timeframe for registration.

The Court agreed to extend the time for registration and fixed the time for registration as at the date the director of Ridgeway understood that the registration was defective and the new financing statement was registered.

Section 588FM of the act affords the Court the power to grant an extension of time if the Court is satisfied that the failure to register the collateral earlier was:

• was accidental or due to inadvertence;
• is not of such a nature as to prejudice creditors; or
• is otherwise just and equitable to do so.

The Court was satisfied that the failure to properly register was accidental and caused by inadvertence. The Court found it persuasive that on realising the mistake, the director acted immediately.

Turning to the question of the discretionary factors, the Court concluded that:

• the delay of five years between the registrations whilst not insignificant, was not a bar to an extension of time, as no competing secured creditors had lodged financing statements in this period and were not prejudiced by the delay; and
• although there was no evidence of the financial position of Pysche available, even if Psyche was insolvent (or insolvency was imminent), this would not be determinative of the Court exercising its discretion.

The application was brought ex parte.  However, Psyche had been joined to the originating process, had been notified of the proceedings and had confirmed that it did not oppose the orders sought by Ridgeway.

Highlake

An application was made by Squadron Resources Pty Ltd (Squadron) under section 588FM of the act to extend the registration time by which it could perfect its ALLPAAP security interests granted by Highlake and two other defendants on the PPSR.

The Court accepted that on all of the evidence presented, it appeared that the failure to register by Squadron was due to inadvertence and miscommunication between the employees of Squadron and its solicitors.  Through a series of communications, it was evident that although Squadron intended for registrations to be made, this did not occur.  Upon realising that the registrations had not been perfected, Squadron promptly registered its interests (this being outside of the statutory 20 day period after the security agreement came into force).

The Court held that by reason of this accidental or inadvertent failure to register, it was just and equitable to grant the order extending the period of time for registration. In doing so, the Court gave further considerations to the factors to be taken into account including that although there was a delay of two years, following the approach in Re Appleyard[5], this delay had not caused prejudice to secured creditors who had transacted with the company on the basis of a pre-existing priority security interest.  Further, each of the other secured parties would not be prejudiced by losing their priority, as they either held a PMSI or priority as a bank (by virtue of section 75 of the PPSA).[6]

Our thoughts

The Courts continue to take a sensible, practical approach to applications by secured parties to extend the time for registration when there has been an honest error in the original registration rendering it ineffective.

Relevantly, the Courts have regard to whether prejudice has been suffered by creditors who have traded with the grantor company on the faith its collateral was unencumbered, and whether any creditor with a registered interest would be prejudiced by the extension order.   Where there is no evidence of prejudice, Courts will tend to grant extensions of time.

Both Psyche and Hill involved insolvency events.  The insolvency of the grantor will be a factor for the Court to consider in an extension application.  But, in the authors’ view, if the threshold inadvertence or error has been established in failing to properly register, the Court should not prefer the interests of ordinary unsecured creditors who stand to gain a windfall advantage from a defective registration.

[1] See also FC Securities Pty Ltd v Menilden Creek Farming Pty Ltd [2018] NSWSC 1681, IBM Global Financing Australia v Applied Business Technology Pty Ltd [2018] NSWSC 1984 and Toll Energy and Marine Logistics Pty Ltd v Conlon Murphy Pty Ltd [2019] FCA 532.

[2] As required by section 153 of the PPSA and Schedule 1.3, 2 and 3 of the Regulations

[3] Section 62(3)(b) of the PPSA

[4] Section 55 of the PPSA

[5] Re Appleyard Capital Pty Ltd (2014) 101 ACSR 629

[6] The perfected interest held by an ADI (a bank) has priority over any other interest in an ADI account.