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  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.