PPSR Alert: Get Your Processes Right or Risk Enforcement Catastrophe

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How We Can Help Navigate the PPSR Maze

Many of our clients have been struggling to come to terms with the practical implications the Personal Property Securities Register (PPSR) has on their businesses. As this PPSR Alert demonstrates, issues such as timely registration are paramount to a secured party’s ability to enforce their security interests.

Your business may be a secured party if, for example, it:

(a) sells on a retention of title basis; or

(b) has provided loans to another entity (including a related party entity).

Pointon Partners has advised a wide range of clients on a myriad of PPSR issues from creation to enforcement.

Specifically, Pointon Partners can assist you by:

(a) attending your business premises to advise you and your key staff of what the PPSR is, how it operates and to show you how to effectively register your security interests.

We offer our client’s a fixed fee to undertake this service tailored to their particular needs;

(b) prepare and / or review documentation for you to ensure that your security interests are registrable and enforceable under the Personal Property Securities Act 2009 (Cth) (PPSA); and

(c) undertake a risk assessment of your current implementation steps to ensure they are sound, in part so that you avoid your security interests ‘vesting’, as is discussed in this PPSR Alert.

Background

Recent decisions in the New South Wales Supreme Court on the timely registration of security interests registrable on the PPSR have reinforced the importance of secured parties being aware of, and complying with, the registration timeframes contained in the Corporations Act 2001 (Cth) (Act) relating to newly created security interests.

The case of Cardinia Nominees Pty Ltd [2013] NSWSC 32 (Cardinia) is the most recent example of a court taking a hard-line approach on a secured party who failed to register its security interest on the PPSR in a timely manner. The case is primarily important for its commentary in relation to ‘inadvertent’ failures to register and when a court will grant an extension of time for registration beyond the 20 business day window provided for by the Act.

Cardinia demonstrates the risks inherent in security interests registered outside the 20 business day window which commences from date the security interest comes into existence.

What the Act Says

Under section 588FL of the Act a security interest may ‘vest’ in a company (i.e. lose priority against other secured and unsecured interests) in the event that that company enters administration or liquidation, or upon that company entering into a Deed of Company Arrangement with its creditors (Insolvency Event), if the security interest is not registered within the prescribed time.

The prescribed time is defined to mean:

(a) within 20 business days of the interest coming into existence; or

(b) six months prior to an Insolvency Event occurring; or

(c) a later time determined by the Court on application (i.e. later than 20 business days, but prior to six months passing before the occurrence of an Insolvency Event).

Practically, this means that any security interest that is not registered on the PPSR within 20 business days of coming into existence will be exposed to the risk of ‘vesting’ for a 6 month period commencing on the actual date of registration. The only alternative for a secured party is to appeal to the Court’s discretion to extend the initial window.

After 6 months a security interest registered outside the 20 business day window will enjoy the same protections from an Insolvency Event as any other registered interests.

What the Court said in Cardinia

Cardinia demonstrates that courts are becoming increasingly less tolerant of secured parties who are tardy in registering their security interests.

In Cardinia a company (the Secured Party) sought an order extending the initial 20 business day window on the basis that it had ‘inadvertently’ failed to register its interest on the PPSR.

The Secured Party was aware that the security interest existed, and that it needed to be registered within 20 business days (they had been advised previously by the grantor’s solicitor). However, notwithstanding this, the Secured Party argued that it did not understand why it had to register within 20 business days (i.e. it failed to appreciate the consequences of late registration, which caused it to underestimate the urgency of obtaining registration promptly).

The Court accepted the Secured Party’s argument that it had ‘inadvertently’ failed to register its security interest due to a misunderstanding of the significance of timely registration. However, in arriving at its decision, the Court made a number of comments, which are pertinent to other secured parties seeking to rely on a similar argument, as follows:

(a) ‘inadvertence’ of itself will not be a sufficient argument (i.e. the Court must also consider whether granting further time to register will unfairly prejudice other creditors, which in many cases it will);

(b) in this case a second security interest was created during the time when the Secured Party should have registered its own interest, and the Court was unwilling to prejudice that person’s interest (the Second Secured Party) for sake of relieving the Secured Party; and

(c) in order to grant an order extending the registration window an applicant would usually need to demonstrate proof of the grantor company’s solvency. In the case at hand, the Secured Party did not satisfactorily demonstrate this.

Notwithstanding these points, the Court made a conditional order that the date of registration be deemed earlier than the actual registration date, however it said that:

(a) the Second Secured Party’s interest could not be prejudiced (i.e. whilst the Secured Party’s deemed registration date was earlier than the registration date of the Second Secured Party’s security interest, the Secured Party’s application was granted on the condition that it would have no effect against the Second Secured Party. Effectively then, the Secured Party lost its spot in the ‘queue’ of secured creditors); and

(b) it was prepared to grant the deemed date of registration, but allowed that the security could still vest within 6 months of the new deemed date (i.e. in effect, the Court reduced the 6 month risk window by back-dating its start time, but it did not remove the ‘vesting’ risk altogether).

Significance to Clients

Cardinia demonstrates that whilst ‘inadvertence’ is a basis to seek relief from section 588FL of the Act, it is not a broad-brush tool that is readily available to unwitting secured parties. An innocent failure to grasp the legal consequences of timely registration will not absolve the secured party from all risk, as in Cardinia the relief granted is likely to be less than complete.

Cardinia also represents a tougher judicial approach to granting relief. Previously, in Barclays Bank Plc [2012] NSWSC 1095 the same Court (in what was then the primary authority on ‘inadvertence’) were much more willing to grant unconditional relief based on similar factors, although in that case there were no further securities registered within the relevant times, and the grantor company was in a very strong financial position.

The message to be taken from Cardinia is that secured parties should be clearly aware of their obligations in regard to registration timeframes, and implement processes in their businesses to ensure that they are complied with. For certainty, any proposed agreement that creates a security interest should also be reviewed carefully to determine what timeframe will apply to registration, prior to it being executed.

For further information, or if you have any queries relating to the PPSR or PPSA, please contact Anthony Pointon, Nicholas Brand, Laszlo Konya of our office on 03 9614 7707.
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2014-05-02T00:40:22+00:00May 2nd, 2014|Categories: Commercial, Litigation|