In the recent decision, In the matter of Accolade Wines Australia Limited [2016] NSWSC 1023 (Accolade Wines), the Supreme Court of New South Wales has provided some comfort to secured parties who inadvertently fail to register valid security interests within the prescribed time limits.

It is well accepted that pursuant to the Personal Property Securities Act 2009 (Cth) (PPSA) and the Corporations Act 2001 (Cth) (Corporations Act) that time is of the essence when it comes to registering effective security interests on the Personal Property Securities Register (PPSR). Failure to validly register within time can have serious ramifications, including with respect to the priority afforded to security interests and vesting of security interests in circumstances where the grantor company (i.e. the party granting the security interest) enters into administration or liquidation.

For example:

• Pursuant to section 62 of the PPSA, in order to obtain “super” priority, a purchase money security interest (PMSI) in personal property other than inventory, must be, among other things, perfected by registration:
  • If relating to goods – within 15 business days after the day the grantor obtains possession of the goods; and
  • If any other personal property – within 15 business days after the day the security interest attaches to the property; and
• Pursuant to section 588FL of the Corporations Act, when a company is being wound up or an administrator appointed, any PPSA security interest which was perfected by registration after the latest of 6 months after the critical time or 20 days after the security agreement came into force or such later time as the Court may fix under section 588FM, vests in the company the subject of the insolvency event.

Facts

In Accolade Wines, Alleasing Pty Limited and Alleasing Finance Pty Ltd (collectively, Alleasing) attempted to perfect their PMSI security interests by lodging financial statements on the PPSR against the grantor companies.  Inadvertently, Alleasing registered their security interests against the ABNs of the grantors rather than the ACNs. The error meant that the registrations were likely defective and subsequently may have been liable to vest in the grantors pursuant to section 588FL of the Corporations Act if the companies became insolvent, meaning Alleasing would not have enjoyed the PMSI super priority status pursuant to section 62 of the PPSA.

Following an audit of their PPSR registrations, Alleasing realised the issue and sought to register new financing statements against the grantors’ ACNs – the issue was however that they were out of time to be afforded priority status and / or protected from the pitfalls of section 588FL of the Corporations Act. To overcome the issue, Alleasing make an application for:

• an order pursuant to section 588FM of the Corporations Act to extend the time for registering a security interest to after 20 business days for the purposes of section 588FL; and
• an order pursuant to section 293 of the PPSA extending the period of 15 business days to perfect the security interests as PMSIs for the purposes of section 62.

Alleasing made the submission that the relief should be granted as the initial registrations against the ABNs were inadvertent.

Section 588FM

Pursuant to section 588FM, a court has the discretion to fix a later time by which the interest has to be registered if it is satisfied that the failure to register the interest earlier was accidental, due to some inadvertence or other sufficient cause, was not of such a nature as to prejudice creditors or shareholders, or on other grounds it is just and equitable to do so.

In Accolade Wines, Justice Brereton accepted that Alleasing’s registration against the grantors’ ABNs as opposed to the ACNs was inadvertent and, importantly, that Alleasing did not appreciate that the mistake meant that the registrations might be defective. Having enlivened the requirements of section 588FM, his Honour considered it in the circumstances appropriate to exercise the court’s discretion to fix a later time for the purposes of section 588FL.

Justice Brereton made this order, having regard to the fact that Alleasing’s oversight was unlikely to prejudice the position of creditors or shareholders as:

1. at the time of the application, the grantors were paying their debts and the likelihood of the grantors becoming insolvent appeared remote;
2. the security interests the subject of the application were confined to specific collateral (and were not security interests over all of the grantors’ present and after acquired property);
3. the delay in the registration (if the order was to be made) would not have affected the priority of creditors who had subsequently registered security interests; and
4. it was likely that a creditor relying on a search of the PPSR would have been aware of Alleasing’s security interest as it was best practice and any ‘reasonably prudent financier’ would search the PPSR using other identifiers such as a grantor’s ABN and company name and would just not rely on a search of a grantor’s ACN.

Section 293

Similar to section 588FM of the Corporations Act, pursuant to section 293(1)(a) of the PPSA, the court has the discretion to make an order extending the number of business days (i.e. more than 15 business days) to perfect a PMSI by registration if it satisfied that it is just and equitable to do so, and may do so even if the period has ended. In making such an order the court must take into account whether the need to extend the period arises as a result of an accident, inadvertence or some other sufficient cause, whether extending the period would prejudice creditors or shareholders, and whether any person has acted, or not acted, in reliance on the period having ended.

In Accolade Wines, Justice Brereton granted the section 293 extension after accepting that Alleasing’s registration against the grantors ABNs as opposed to the ACNs was inadvertent and after considering the prejudicial nature of the order and the reliance issue.

His Honour granted the extension after taking into account the following:

1. the PMSI’s were confined to specific collateral;
2. although any holders of security interests registered over all of the grantors’ present and after acquired property would lose priority to the later registered PMSI’s (if the order was to be made), this would not be sufficient prejudice for the purposes of section 293(3) as:
   1. Alleasing registered a PMSI within the prescribed time, albeit a defective one;
   2. if an earlier security holder with an interest in all of the grantors’ present and after acquired property took security from the grantor before the PMSI registration then while the holder would be prejudiced, it is only by losing a windfall arising from inadvertence of a defective registration – a registered security interest over all of a grantor’s present and after acquired property is always liable to be trumped by a PMSI in respect of specific collateral; and
   3. in respect of any later security holder, it is likely that it had notice of Alleasing’s PMSI as His Honour accepted evidence that it was best practice and that any ‘reasonably prudent financier’ would search the PPSR using other identifiers such as a grantor’s ABN and company name and would just not rely on a search of an ACN.

Joinder

Notwithstanding the above decision, Justice Brereton was anxious about making orders which would disturb priority to which the other security holders were entitled without affording them an opportunity to be heard.

His Honour held that where an application is made:

• pursuant to section 588FM of the Corporations Act then the relevant grantors should be joined to the application; and
• pursuant to section 293 of the PPSA, it would be prudent to join any secured party whose interests may be affected or postponed if the orders were to be made.

Take Away Thoughts

The decision is a good reminder of some of the pitfalls of failing to register a security interest in the timeframes imposed by the legislative framework and to take extra care to register security interests in accordance with the PPSA and PPSA regulations. If a mistake has been made however, the case provides some clear guidance on the factors the court will take into consideration when an application is made pursuant to section 588FM of the Corporations Act and / or section 293 of the PPSA.

In our view, it is good practice to regularly audit PPSR registrations so that if there is an issue, a prompt application can be brought if necessary. Further, given the reasoning in Accolade Wines, we reiterate our comments in the article ‘Seek and you shall find: Pro Tips for an Effective PPSR Search’ to the extent that before taking security from a grantor, you should undertake additional searches on the PPSR to ascertain all interests (even the defective interests).