Legal Insight Issue 19

In The Creditor (Trustee) -v- Australian Gaming and Entertainment Ltd (In Liq) [2014] FCA 1034, Pozzebon ("Creditor") argued that its security interest did not vest in the company in liquidation ("Grantor") under the Corporations Act.  The Federal Court of Australia rejected the Creditor's contention.

A quick re-cap on perfection and vesting.  The effectiveness of a "security interest" under the PPSA is determined by reference to whether the security interest has:

1. attached to the relevant personal property (collateral);
2. been recorded in writing and is enforceable against third parties (security agreement); and
3. been "perfected" within certain times.  In the case of the majority of collateral, perfection refers to registration on the Personal Property Securities Register ("PPSR").

If any of these elements is missing, certain types of security interests can potentially be rendered ineffective by being "vested in the Grantor".  In simple terms, "vesting" means extinguished. 

Vesting can occur in certain circumstances such as the Grantor appointing an administrator, executing a deed of company arrangement, passing a resolution for winding up or an order is made to wind up if the Grantor is a company or, in case of a natural person, that person becoming a bankrupt ("Event").  In the case of a company, vesting operates by virtue of the PPSA and the Corporations Act upon the occurrence of an Event if any one of the elements listed above is missing.  Most commonly, the missing element is the failure to register the security interest within  prescribed times being either 6 months before the relevant Event or more than 20 business days after the security agreement that gave rise to the security interest came into force.  The practical effect of this is:

1. a security interest does not vest if it is:
   1. perfected by means other than registration (e.g. temporary perfection under the PPSA or by control or possession); or
   2. a deemed security interest, such as a transfer of account, commercial consignment or certain types of PPS Lease provided it does not secure the payment or performance of an obligation;
2. a security interest perfected by registration will vest (subject to a Court order to the contrary) if it is not perfected:
   1. within 20 business days after the security agreement came into force; or
   2. more than 6 months before the relevant Event.

In summary, if a security interest is registered out of time, a creditor who subsequently registers the security interest will be "on risk" until 6 months has elapsed without an Event occurring in respect of the Grantor.

The Facts

The Creditor lent $250,000.00 to the Grantor in December 2013.  Various agreements recording the agreement, including the security granted by the Grantor to the Creditor, were executed at the time.  In May 2014 (approximately 5 months later), the Creditor registered its interest on the PPSR.  Approximately 2 weeks later, the Grantor was placed into voluntary administration and approximately 2 months later into liquidation.  The only relevant asset of the Grantor was cash at bank of approximately $860,000.00.  The administrators of the Grantor indicated to the Creditor that its security interest was not enforceable, prompting The Creditor to approach the Court. 

The Creditor's primary argument was that the proper construction of the PPSA and Corporations Act meant that "and by no other means" included reference to the attachment and enforceability against third parties of a security interest, not simply to the methods of perfection.  Unsurprisingly, the Court rejected the Creditor's argument. 

The argument mounted was subtle and the intricacies of the argument are beyond the scope of this article.  However, the lesson to be learnt (which we continue to see being learnt the hard way!) is to act promptly to protect a security interest. 

Comment

Although the language used in the Corporations Act is "vest" (i.e. bestowed on or owned by) the Court found that the security interest "is not valid and enforceable against the Grantor".  The language of the PPSA and the Corporations Act (which mirror each other) do not seem to invalidate a security interest, but rather contemplates a transfer of the security interest from the secured party to the grantor.  Although the practical effect is the same, namely extinguishment of the security interest from the secured party's point of view,  there may be situations where the status, owner and characterisation of how the interest is dealt with becomes important.  

Hugh & Associates is a Sydney based legal firm with extensive experience in commercial, finance and insolvency law and litigation. If you require legal advice in these areas, we would be pleased to assist you.

Legal Insight ("newsletter") contains information which is the copyright of Hughlaw Pty Limited ("Hughlaw"). It should not be copied, disclosed or distributed without the authority of Hughlaw. All reasonable efforts have been made to ensure the accuracy of the newsletter and Hughlaw does not represent, warrant and/or guarantee that the newsletter is free of error.

Legal Insight is not intended to be a comprehensive publication and is not a substitute for legal advice. The newsletter and any document attached to it are confidential and intended solely for the use of the party to whom it is addressed. If you wish to remove yourself from our Legal Insight database, please reply to this email with "UNSUBSCRIBE" in the subject line.