Court approval required for post-administration security interest grants

In a decision of the Federal Court of Australia handed down today, the Court has clarified that lenders to companies in external administration taking registered security interests under the Personal Properties Security Act 2009 (Cth) must obtain a court order fixing a later time for their registration or risk the security interests vesting in the borrower and becoming unenforceable.

Key take outs

  • The ultimate effect of this decision is that every PPSR security interest taken from a company in external administration is potentially void unless an application is made to the Court for approval of the security interest.  
  • If financiers and insolvency practitioners are considering providing secured financing to companies in, or formerly in, external administration, advice should be sought to ensure the effectiveness of PPSR security interests financiers or insolvency practitioners obtain or grant.

What you need to do

  • Notwithstanding that an external administrator has power to grant a fresh PPSR security interest, an application to the Court under section 588FM of the Corporations Act 2001 (Cth) (Corporations Act) needs to be made to ensure those security interests are enforceable if the company subsequently enters insolvency.
  • Banks and other lenders should review any recent facilities provided to companies in or which were in external administration and take advice as to whether an application under section 588FM should be made.

A summary of the matter

In K.J. Renfrey Nominees Pty Ltd (Trustee), in the matter of OneSteel Manufacturing Pty Ltd v OneSteel Manufacturing Pty Ltd [2017] FCA 325 the administrators of OneSteel Manufacturing Pty Ltd (OneSteel), a corporation that forms part of the Arrium group, entered into a new equipment hire agreement with the plaintiff (Renfrey) to resolve a dispute concerning the validity of Renfrey's pre-administration PPSR registrations. The administrators alleged that the pre-administration PPSR security interests vested in OneSteel once it entered into administration. The new agreement created PPSR security interests in favour of Renfrey, which it then registered on the PPSR.

Concerned that section 588FL(2) of the Corporations Act 2001 (Cth) (Corporations Act) might potentially operate to vest these new security interests in OneSteel, the parties sought an order from the Court under section 588FM to fix a later time for registration.

In her judgment, Justice Davies:

  • confirmed that the vesting provisions of section 588FL can operate to vest a security interest that has been granted by an external administrator after a company enters liquidation, voluntary administration, or a deed of company arrangement; and
  • granted relief under section 588FM to fix a later time for the registration of Renfrey's new registrations on the grounds that it was just and equitable to do so.

The drafting of section 588FL which has permitted this interpretation to arise is contrary to the legislative intention for the section to operate as an anti-avoidance provision designed to prevent security interest grants which are effectively a fraud on creditors. The intention for section 588FL to play a limited role in restricting external administrators from granting security interests is particularly clear when other provisions of the Corporations Act - dealing with dispositions of property after companies enter into external administration - are considered. Outside of section 588FL the Act provides an existing scheme whereby external administrators are empowered to grant security interests (for many good commercial reasons, including obtaining rescue and other finance) but any other attachment is void.

The following sections of the Corporations Act reflect this view:

  • section 468, which voids disposition of property by companies in a winding up by the Court, except to the extent that the disposition is by the liquidator acting within power;
  • sections 505(2) and 506(1), which empower a voluntary liquidator to dispose of property and validate a voluntary liquidator's dispositions of property (including security interest grants); and
  • sections 437A and 437D, which empower a voluntary administrator, and only the administrator, to deal with a company's property during an appointment.

Read the full case here

This insight was authored by Michael Catchpoole and Tom Schinckel.

Scott Atkins

I'm unapologetically determined and fearless. I pursue excellence. Always.

Scott Atkins Partner

Scott is the Chair of our Board and an internationally renowned insolvency and restructuring lawyer. He is an inaugural Fellow and a member of the Board of INSOL International. Scott is also Vice President of the Australian Restructuring Insolvency and Turnaround Association (ARITA).

Scott is a trusted adviser to Australia's leading banks and insolvency and restructuring practitioners and has acted on some of the industry's most complex and sensitive banking and insolvency advisory and dispute resolution matters.

Prior to joining HDY, Scott practiced for 7 years as in-house counsel with Commonwealth Bank Group. He is now our Client Relationship Partner for the CBA Group. He is also the co-leader of our cross-border insolvency practice and our regulatory enforcement practice. Scott is recognised by his peers for his leading expertise in cross-border insolvency, acting on both inbound engagements in Australia and advising Australian clients on outbound engagements in the USA, UK, Cayman Islands, Hong Kong and The Netherlands, among other jurisdictions.

Scott was the Australian delegate on the Advisory Committee on Comparative Law established by the American Bankruptcy Institute as part of its Commission to Study the Reform of Chapter 11 of the US Bankruptcy Code. This resulted in a landmark report for the reform of Chapter 11.

He is a published author on insolvency and cross-border insolvency. Most recently, Scott was one of the Australian contributors to the 2015 publication 'International Contributions to the reform of Chapter 11 U.S. bankruptcy code' which is volume 2 of the European and International Insolvency Law Studies series. He also authored the Australian chapter of Avoidance of Antecedent Transactions and Cross-Border Insolvency (INSOL International). Among other publications, he is the co-author, together with Professor Rosalind Mason, of the Australian chapter of Look Chan Ho's leading text: Cross-Border Insolvency: Cases and Materials (Kluwer International).

Scott is a visiting lecturer on cross-border insolvency at the University of Sydney in its undergraduate and postgraduate law programs lead by Professor John Stumbles.

see my profile
Mark Hilton

I walk with honour in dark places. Take my hand. We've got this.

Mark Hilton Partner

Mark specialises in banking recovery, including all forms of consumer and corporate recovery and insolvency. He has acted for banks and other financial institutions, receivers, liquidators and administrators for over 28 years.

Mark is a leading insolvency lawyer who has been involved in some of Australia's largest and most complex insolvency matters over the past decade.

He is known for his solid relationships with Australia's Big 4 Banks, as well as his expertise in recovery and enforcement, and litigation and dispute resolution.

Clients call upon Mark for his industry knowledge, achieved from being exposed to businesses across a spectrum of industries such as aged care, banking and financial services, retail, property development, manufacturing, pharmaceutical and infrastructure.

His background in commercial litigation has provided a basis for a substantial practice involving the recovery of loss associated with negligent valuations in connection with securitised loans.

Mark's willingness to embrace innovation is, among other things, evidenced by his coordination of the establishment of recovery extranets to assist financial institutions to monitor the status of recovery and enforcement action on secured and unsecured lending transactions.

see my profile

Laura Johns Partner

Laura has extensive experience in insolvency and banking dispute resolution. She advises Australia's leading banks and other financial clients on complex corporate insolvency processes, litigation and recovery matters.

Laura acts for banks, insolvency practitioners, companies and creditors on issues connected with companies in financial distress and has assisted clients on a variety of insolvency and restructuring assignments. She regularly advises on security enforcement, receiverships, voluntary administrations and liquidations.

Laura has significant experience with professional negligence claims on behalf of banking clients, in particular, against valuers. She is also regularly involved in dealing with security enforcement litigation, matters involving Financial Ombudsman Service complaints, fraud related matters and general banking and insolvency related litigation in the Supreme Court and Federal Court.

Laura has recently completed a 6 month secondment in house at an Australian bank. 
She regularly presents and writes on insolvency, litigation and recovery matters.

see my profile

John Martin Partner

John is a leading lawyer in both financial sector dispute resolution (complex and regulatory) and corporate insolvency and restructuring, with a particular specialty in cross-border insolvencies. He is recognised by his clients, peers and legal directories as a leader in his field.

Domestically, John advises on large and complex insolvencies and assists in finding solutions for financial institutions with regulatory and other complex issues. His clients include several of Australia's major banks, as well as insolvency practitioners appointed to insolvent entities.

Internationally, John has advised in connection with insolvencies in England, Fiji, Bermuda, Cambodia, Cayman Islands, Brunei, and Norfolk Island. His cross-border experience includes acting for the liquidators of an insolvent bank, and various liquidators of insurance and reinsurance companies.

John is a recognised authority on insolvency issues, with articles published in media outlets such as The Australian Financial Review and the Insolvency Law Journal. He has presented at numerous domestic conferences as well as internationally in the US, England, South Africa, Singapore, Canada, New Zealand, and the Netherlands.

see my profile

Alex Mufford Partner

Alex is the Group Leader of Henry Davis York's Banking, Turnaround and Insolvency Group, which includes the legal teams for Banking & Finance and Restructuring & Insolvency.

Alex specialises in structured capital markets, restructuring and receivables finance. He often uses his structured finance expertise to assist our insolvency and restructuring clients. Alex is recognised by his clients, peers and legal directories as a leader in his field.

Alex has also advised on various aspects of the cross-border insolvency of Lehman Brothers, including advising Perpetual Limited in its proceedings in the English High Court and the Court of Appeal against Lehman Brothers to enforce priority and subordination arrangements in the Lehman $US10billion 'Dante' credit linked note program.

see my profile

Claudine Salameh Partner

Claudine has over 15 years' experience dealing with legal issues in the financial services sector.

She is a banking and insolvency litigator and regulatory expert. She acts for the major Australian financial institutions in matters involving customer disputes and litigation, fraud, regulatory and compliance issues, regulatory investigations, inquiries and enforcement matters, security enforcement and insolvency litigation. She also acts for insolvency practitioners in formal receiverships, voluntary administrations and liquidations.

Claudine is well known for her ability to manage risks posed by litigation and regulatory inquiries and investigations. She is particularly attuned to reputational and business risks. She is highly strategic and creative and is recognised by her clients for being able to achieve the perfect balance between legal arguments and commercial and practical outcomes.

Claudine has been instrumental in working with clients to provide insights into the field of behavioural economics, which over the past few years, has been of interest to policy makers and regulators as a tool to engage in 'choice architecture'. On a practical level, Claudine has worked closely with clients to design approaches to customer engagement that make use of behavioural insights.   

Claudine is an expert in the conduct of review and remediation programs and provided assistance to the regulator, by way of submissions and her involvement in an industry working group, on ASIC's regulatory guide on review and remediation programs.

Claudine is very familiar with ASIC's powers to obtain documents and information from financial institutions and is called upon by financial institutions to provide assistance in these matters. She has a style that is conducive to having a fruitful dialogue with both the regulator and the various stakeholders within a financial institution.

see my profile