In the recent case of AWE Perth Pty Ltd -V- Clough Projects Australia Pty Ltd  WASC 20, the Supreme Court of Western Australia considered an application by AWE Perth Pty Ltd (AWE) to fix a later time to register security interests under the Personal Property Securities Act 2009 (Cth) (PPSA).
The case raised a number of interesting questions as to whether rights arising under a contract between AWE and Clough Projects Australia Pty Ltd (Company) gave rise to registrable security interests, including step in rights, powers of attorney, rights conferred on notice of termination, and rights in relation to a project bank account. The case also raised interesting temporal questions, given that there were three sets of registrations to be considered:
- registrations made outside of the 20 business day period and within 6 months of the Company going into voluntary administration;
- registrations made during the administration of the Company; and
- registrations made after the administration of the Company had concluded.
In considering AWE’s application for orders under section 588FM of the Corporations Act 2001 (Cth) (Act) to fix a later time under section 588FL(2)(b)(iv) of the Act for registration of its security interests on the Personal Property Securities Register (PPSR), Justice Hill carefully considered the state of the authorities on when contractual rights give rise to security interests and the grounds on which section 588FM relief can be granted before making the orders sought by AWE.
AWE is the operator of Waitsia Joint Venture.
On 11 January 2021, AWE entered into an engineering, procurement and construction contract with the Company for the construction of a 250 TJ/day onshore gas processing facility at the Waitsia gas field site (EPC Contract).
Subsequently, AWE formed the view that it was arguable that certain of its rights under the EPC Contract gave rise to security interests within the meaning of s 12 of the PPSA. In broad terms, the relevant rights were as follows:
- AWE’s step-in rights in the event of a default in performance by the Company (Step-In Rights);
- AWE’s right’s to have certain monies paid into a controlled/project bank account where future access to those monies secured performance obligations by the Company (Project Bank Account Rights);
- the appointment by the Company of AWE to be its attorney to execute novations of subcontracts if the EPC Contract was terminated (Power of Attorney Rights);
- obligations imposed on the Company where AWE issued a notice to terminate the EPC Contract (Rights on Termination); and
- AWE’s rights to a transfer of title in the works upon certain milestones or events (Transfer of Title Rights),
(together, the Contract Rights).
On 9 June 2022, AWE effected three registrations on the PPSR in respect of the Contract Rights (First Registrations). The First Registrations were made after 20 business days of entry into the EPC Contract.
Then, on 5 December 2022, less than 6 months after the First Registrations were effected, the Company went into voluntary administration.
Following the administrators’ appointment, AWE and the administrators negotiated an agreement whereby:
- AWE did not enforce its rights under the EPC Contract;
- the Company continued to perform the works under the EPC Contract;
- AWE provided funding to the administrators to facilitate payment of pre-appointment claims by subcontractors on the project; and
- AWE and the Company entered into certain amendments to the EPC Contract (Amended EPC Contract), which would only come into effect if a DOCA proposed in relation to the Company by WeBuild SPA was approved and completed.
While the Contract Rights were affected by the amendments, it is sufficient for the purposes of this article to proceed on the basis that those rights remained substantially the same under the Amended EPC Contract (or to put it another way, that despite the amendments the Contract Rights still gave rise to the same or similar security interests in favour of AWE).
On 3 February 2023, within 20 days of entry into the Amended EPC Contract but while the administration of the Company was still ongoing, AWE effected three registrations on the PPSR against the Company in respect of the Contract Rights as they arose under the Amended EPC Contract (Second Registrations).
On 15 February 2023, the Company executed the WeBuild SPA DOCA. The DOCA effectuated on 16 February 2023. The Amended EPC Contract was excluded from the releases contained in the DOCA.
On 16 February 2023, after being notified that the DOCA had effectuated, AWE effected three further registrations on the PPSR against the Company in respect of the Contract Rights as they arose under the Amended EPC Contract (Third Registrations).
AWE then applied to the Court for orders under section 588FM of the Act to fix a later time under section 588FL(2)(b)(iv) for registration of each of the First, Second and Third Registrations.
The application was made on notice to the Company, and the Company was joined as a defendant to the application.
Framework for the decision
In disposing of the application, Justice Hill considered the general principles applicable to the case, before considering the following matters:
- did the Contract Rights create registrable security interests;
- are each of the Registrations necessary;
- is there a basis for the Court to grant section 588FM relief; and
- should the Court exercise its discretion to grant the section 588FM relief.
Her Honour considered the legislation and various authorities in some detail, and noted the following key points relevant to the application:
- In considering whether an interest is a ‘security interest’ under section 12 of the PPSA, it is necessary to consider whether the transaction provides for ‘an interest in personal property’, and whether the transaction ‘in substance, secures payment or performance of an obligation’.
- A security interest needs to be perfected. A security interest is perfected if it has attached to collateral, is enforceable against third parties, and certain extra steps (possession or control of the collateral, or registration on the PPSR) have been taken to protect the interest.
- There are a number of consequences for failing to perfect a security interest. If a security interest is not properly perfected before the appointment of an external administrator, it vests in the grantor of the interest. This vesting is irreversible.
- Further, pursuant to section 588FL of the Act, a security interest also vests in the company on the appointment of a voluntary administrator if the security interest is enforceable and was perfected by registration within the six months preceding the administration or liquidation but it was not registered within 20 business days after the grant, unless it was registered within such later time as is ordered by the court under section 588FM.
- At present, there is some divergence regarding whether security interests registered after the critical time (the start of administration) but within 20 business days immediately vest in the grantor or if they can be saved by an order under section 588FM.
- Section 588FM empowers the court to fix a later date for registration under certain circumstances.
- An order can be made under section 588FM of the Act where the court is satisfied that the failure to register in time was accidental or due to inadvertence or some other sufficient cause or the failure to register in time is not of such a nature as to prejudice the position of creditors or shareholders or it is just and equitable to grant relief.
- It is only necessary for a party to establish one of these grounds.
- Section 588FM(3) of the Act empowers the court to make the order on ‘any terms and conditions that seem just and expedient to the court’.
- For the purposes of an application under section 588FM, it is not necessary for the court to determine on a final basis whether the interests the subject of this application are registrable security interests. It is sufficient for the court to be satisfied that it is reasonably arguable that the interests the subject of the application are registrable security interests.
- In considering whether orders should be made under section 588FM, the court will take into account any prejudice that may be suffered by third parties such as unsecured creditors, the length of the delay in registration, and the financial position of the company.
- When applying for orders under section 588FM, the company that granted the security interest should be joined as a defendant, but other secured creditors do not need to be joined.
Did the Contract Rights give rise to registrable security interests
Noting the test to be applied, the Court found that it was reasonably arguable that each of the Contract Rights other than the Transfer of Title Rights gave rise to a registrable security interest for the following reasons:
- as to the Step-In Rights, the Court noted the previous authority that found that it was reasonably arguable that a step-in right constituted a registrable security interest, and was otherwise satisfied it was arguable that the Step-In Rights gave AWE the right to take possession of personal property (such as plant and equipment, materials and information) to secure the Company’s performance of its obligations under the EPC Contract or Amended EPC Contract;
- as to the Power of Attorney Rights, the Court was satisfied that it was arguable that the Power of Attorney Rights gave AWE the right to take possession of personal property (such as the relevant subcontracts and any deeds of novation) to secure the particular obligation of the Company to deliver signed deeds of novation to AWE in the event the contract was terminated;
- as to the Rights on Termination, the Court was satisfied that it was arguable that the Rights on Termination, which allowed AWE to take all plant, materials and things comprising the works on termination under the relevant clause, secured the Company’s obligations to enable AWE or its nominee to take over performance of the works in the relevant event of termination;
- as to the Project Bank Account Rights, the Court noted the previous authority that found that the beneficial interests arising in a project bank account was a registrable security interest, and was otherwise satisfied that it was arguable that the money to be paid into the account was personal property, would not be legally owned by AWE after payment into the account, but was being paid into the account to secure the future performance of the contract; and
- as to the Transfer of Title Rights, the Court noted the previous authority that held such a clause does not give rise to a security interest, and otherwise found that the clause in question operated simply as an unpaid seller’s reservation of title clause.
Were each of the registrations necessary
The Court was satisfied that each of the Registrations was necessary as:
- it was at least reasonably arguable that the EPC Contract and the Amended EPC Contract potentially provided different sources of the Contract Rights;
- it was also unclear whether the Contract Rights as they arose under the Amended EPC Contract arose on execution of the Amended EPC Contract or on completion of the DOCA, and each possibility was reasonably arguable; and
- therefore, each of the First, Second and Third Registrations was necessary to protect the Contract Rights under at least one of the possible permutations arising from the above.
Is there a basis for the grant of section 588FM relief
The Court was satisfied that relief could be granted either on the basis that the failure to register had not prejudiced any creditors or on the basis that it would be just and equitable to grant relief. The Court found that:
- two creditors of the Company had registered AllPAP security interests shortly after AWE should have registered its interests arising from the EPC Contract. It was therefore unlikely that any unsecured creditors dealing with the Company would have done so on the basis that the collateral affected by the Contract Rights was unencumbered;
- the Second and Third Registrations were registered promptly. It was unlikely that any unsecured creditors dealing with the Company post the DOCA would have done so on the basis that the collateral affected by the Contract Rights was unencumbered; and
- following the Company going into administration, AWE had kept the EPC Contract on foot, had provided funding to the administrators and had taken other steps that contributed to the DOCA (and therefore the eventual solvency of the Company), in apparent reliance on AWE being able to continue to enjoy the benefits of the Contract Rights under the EPC Contract and Amended EPC Contract.
Should the Court exercise its discretion
The Court held that:
- the relevant factors to the exercise of the Court’s discretion were the delay in registering the Contract Rights under the EPC Contract, the interests of the unsecured creditors, and the solvency of the Company; and
- while there had clearly been a delay by AWE in making the First Registrations, there was no evidence that this has resulted in any real prejudice to the unsecured creditors (because of the AllPAPs registered by other creditors at or around the time that the Contract Rights should have been registered), plus there was no suggestion that the Company post DOCA was not solvent or would not remain solvent for at least six months.
Having regard to all of the above matters, the Court granted relief under section 588FM to extend and fix the time for registration of each of the First, Second and Third Registrations as sought by AWE.
The case provides a very useful summary of the matters that are taken into account by the court in considering an application under section 588FM of the Act.
It also adds to the judicial consideration of when commonly encountered contractual rights such as step-in rights, rights on termination or even project bank account arrangements can give rise to registrable security interests.
If you have any questions about this decision or about the operation of the PPSA in the context of sections 588FL and 588FM of the Act, the experienced Lavan team is here to help.
Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.