Australia: Liquidator's interest trumps that of an unperfected security interest

Since the introduction of the Personal Property Securities Act 2009 (Cth) (PPSA), there has been very little case law concerning the interpretation of its provisions. Many of the reported decisions have involved creditors trying to frame their claims as falling outside the PPSA. This is probably because the priority rules which apply are quite simple – for example, a perfected interest trumps an unperfected interest. So, whenever a new case is decided, it is usually worthy of attention.

On Wednesday, 24 September 2014, the Federal Court of Australia delivered a decision confirming that a failure to properly perfect a security interest in the shadow of insolvency, will result in the vesting of the personal property in the insolvent estate.¹

Brief review of the PPSA

The PPSA introduced concepts of attachment and perfection. The interest of a creditor in personal property 'attaches' to the property when the relevant financing transaction occurs. However, the security interest is not 'perfected' until a financing statement is registered (or some other form of perfection, such as possession, applies). Attachment is a significantly lower level of protection for a creditor than perfection.

The case

The applicant had lent $250,000 to Australian Gaming and Entertainment Ltd (in liq) (AGE) on 24 December 2013. The money was paid over and a security agreement was executed that day. Therefore the security interest 'attached' to the personal property on that day. However, the security interest was not registered until 19 May 2014. Seven days later, on 26 May 2014, five months after attachment of the security interest, AGE was placed into voluntary administration. It was placed into liquidation on 1 July 2014.

Section 588FL of the Corporations Act 2001 (Cth) (Corporations Act) relevantly provides that if a company is placed into administration or liquidation (insolvency event) and a security interest may be perfected by registration (and by no other means), then if registration did not occur within twenty business days of attachment and an insolvency event occurs within six months thereof, the interest in the personal property vests in the company in administration or liquidation. Practitioners will recall a very similar regime was in place in relation to fixed and floating charges under the previous Corporations Act provisions.

The principal issue in these proceedings is immediately apparent: unless the lender could demonstrate 'perfection' of its security interest by means other than registration, then the personal property sought to be secured would vest in the liquidator because it was not 'perfected' in time.

Other means of perfection available to a security interest holder are possession of collateral and control of collateral. There is also the prospect of temporary perfection of security interests. None of these means were available to the applicant. The applicant was left to argue that the relevant transaction did not fall foul of Section 588FL because their interest was perfected by attachment and enforceability and registration (and not merely registration).

Decision

Unsurprisingly, the Court found that such a statutory construction was not open, and that although the applicant's security interest attached, it was not perfected within twenty business days thereof. Given that it was created within six months prior to the administration of AGE, it was unenforceable against the liquidator and the personal property vested in the insolvent estate.

Conclusion

The decision is a practical reminder to insolvency practitioners (and lenders) that:

1. Attachment is but one step under the PPSA regime. Perfection of an interest is also required in order to fully protect one's interest in property;
2. In an impending insolvency situation, those with security interests need to perfect their interests within time;
3. Perfection can occur in a number of ways, but most commonly (in a lender/borrower scenario) by way of registration of the security interest in accordance with the PPSA; and
4. A failure to do so will render any such interest voidable against an administrator or liquidator.

Of course, a lender who realises their error may apply to the Court to extend time for registration of their security interest. As a rule of thumb however, in circumstances where a creditor cannot demonstrate solvency of the borrower, such an application will face significant hurdles.

Footnote

¹Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd, in the matter of Australian Gaming and Entertainment Ltd (in liq) [2014] FCA 1034.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.