Court lowers the costs for registering previously insolvent corporate debtors on the PPSR
- Published 08.12.2020
The Federal Court of Australia has clarified that the vesting of PPSA security interest provisions in the Corporations Act 2001 (Cth) (Corps Act) do not require that secured parties obtain court orders when they register against corporate debtors who have exited external administration and have returned to usual business. The decision in Re Blayney Crane Services is a welcome result that facilitates secured lending and also provides some useful judicial perspective on serial number errors in registrations under the Personal Property Securities Act 2009 (Cth) (PPSA).
Three debtor companies entered into voluntary administration and executed deeds of company arrangement (DOCAs). Those DOCAs were all terminated when they achieved their purposes.
The debtors then granted purchase money security interests (PMSIs) in motor vehicles to the secured party. The secured party registered these PMSIs on the Personal Property Securities Register (PPSR) and described the vehicle identification numbers (VINs) in the registrations. However, it mistakenly recorded the VINs as though they were chassis numbers instead of VINs.
When the error came to light, the secured party registered afresh and correctly described the VINs as VINs. The secured party also applied to the Court for orders to protect its PMSI priorities.
The two issues
The first issue was whether the secured party required an order under s588FM of the Corps Act to extend the time to register effectively. This issue arose because all three debtor companies had previously entered external administration and there was an uncertain risk over whether that meant the security interests had been extinguished under s588FL of the Corps Act.
The second issue was whether the secured party was entitled to an order under s293 of the PPSA to extend the time for registering its PMSIs. That order was necessary because a PMSI can only obtain its highest possible priority status if the time limits in PPSA s62 are met. To make this order, the court must take into account among other things whether the need to extend arises as a result of inadvertence and whether extending would prejudice the position of other creditors.
The Court rejected that s588FL applied and that an order under s588FM was required. Based on the words and context of the Corps Act provisions, there is no ‘critical time’ if a company is not currently under administration. Further, the purpose of s588FL is the protection of creditors during the external administration of a company. Applying s588FL to companies restored to corporate health after administration would disadvantage them from companies that had never entered external administration for no apparent purpose. It would also subvert the object with DOCAs providing for the administration of an insolvent company in a way that maximises the chances of the company continuing in existence.
The Court granted the extension of time for registering the PMSIs under s293 of the PPSA. There was inadvertence because the registration errors were ‘plainly a mistake in the course of attempts to lodge registrations for the purpose of securing priority.’ There was also no prejudice because while the registrations were ‘arguably defective’, a third party would have still found the original registrations if it searched the names of the debtors.
The Court’s approach to s588FL is a good outcome for business. Had the Court held that s588FL applied, secured creditors would have needed court orders under s588FM every time they dealt with corporate debtors who had returned to usual business operations after their administrations had ended. Requiring s588FM orders in these circumstances would have forced significant additional cost on secured creditors and provided real barriers to both secured lending and DOCAs.
The Court’s attitude towards serial number errors in registrations is also helpful. The inclusion of the VINs here was optional because the motor vehicles were ‘commercial property’ under s10 of the PPSA. Therefore, in a second future administration of the corporate debtor, the security interests would only be lost if under s164(1)(a) of the PPSA the serial number errors were a ‘seriously misleading defect’.
This serial number issue has been extensively litigated in Canada. It also arises frequently in Australian practice. However, in the absence of an Australian court decision confirming the position, the issue is usually resolved over commercial negotiations.
The Court’s findings that the registration errors were ‘arguably defective’ and ‘plainly a mistake…for the purpose of securing priority’ recognise that the errors may potentially trigger the ‘defect’ element of PPSA s164. However, they do not go as far as finding that there was a ‘seriously misleading defect’. Therefore, it remains open in Australia to bargain that errors with optional serial numbers are not fatal to registrations.