In Commonwealth Bank of Australia v HM Aircraft Holdings Pty Ltd,1 the Federal Court considered an application by the Commonwealth Bank of Australia (CBA) to rectify a number of defects in registrations on the Personal Property Securities Register (PPSR) over aircraft belonging to HM Aircraft Holdings Pty Ltd (HM Aircraft).
The defects impacted registrations over 29 aircraft, and CBA applied for orders under the Corporations Act 2001 (Cth) (Act) and the Personal Property Securities Act 2009 (Cth) (PPSA) to extend time not just to register the security interests but also to protect CBA’s claim for a super priority in respect of the security interests.
HM Aircraft and its related entities operate a regional Australian airline based in Darwin and Western Australia. CBA provided HM Aircraft with finance facilities which HM Aircraft used to finance (amongst other things) the acquisition or refurbishment of aircraft or specific equipment.
HM Aircraft secured its obligations under these facilities by granting to CBA:
- a general security interest over all of its present and after-acquired property; and
- specific security interests over each aircraft or item of equipment acquired or refurbished.
Most of the specific security interests granted over the acquired or refurbished aircraft and equipment constituted purchase money security interests (PMSIs).
However, CBA subsequently identified a number of defects in the registrations of certain specific security interests over 29 aircraft acquired or refurbished by HM Aircraft and financed by CBA.
The defects included:
- failures to include the serial number of the relevant collateral;
- failures to specify the correct serial number of the relevant collateral;
- failures to specify the correct ‘collateral class’ of the relevant collateral; and
- in one instance, failure to register any financing statement.
CBA filed substantial evidence regarding the CBA’s automated asset finance software platform which interfaces directly with the PPSR and which automatically generates and registers financing statements once an asset finance loan facility is settled. It was clear from the evidence that the defects had been caused by 3 main problems:
- inadvertent mistakes by CBA staff in identifying and inputting asset classes or categories into the CBA system;
- inadvertent mistakes by CBA staff in failing to understand the requirements for registering security interests against aircraft and serial numbers, including in relation to refurbished aircraft or equipment; and
- a defect in the CBA software platform that caused errors when generating financing statements for certain types of helicopters, and which appeared to have been the result of inadvertent error during the software development process.
After identifying the defects, CBA filed fresh corrected financing statements in respect of all of the affected aircraft. No competing security interests in the same collateral were registered during the period between the registration of the original defective financing statements and the subsequent registration of the corrected financing statements.
Nonetheless, CBA brought an application to extend time to protect it from the potential operation of the vesting provisions in section 588FL of the Act. CBA also applied for an extension of time under section 293 of the PPSA to preserve CBA’s super priority arising from its PMSIs.
Justice Beach noted that given the PPSA requires security interests in aircraft to be registered against the aircraft serial number, the defects meant that the original registrations were likely to be ineffective pursuant to sections 164 and 165 of the PPSA. His Honour also noted that where the defects had involved incorrect marking of the PMSI field on the registration form, CBA would not have been afforded the super priority that would otherwise have been enjoyed pursuant to sections 62 and 63 of the PPSA.
Justice Beach then separately considered the two limbs of CBA’s application.
As to the application to extend time for the registration of CBA’s security interests pursuant to sections 588FL and 588FM of the Act, Justice Beach held that:
- section 588FL(2)(b)(ii) requires a security interest to be registered within 20 business days of the security agreement that gave rise to the security interest. If this is done, then the security interest will prevail over unsecured creditors even if the grantor goes into external administration within 6 months of registration. However, if this is not done, and if the grantor goes into external administration within 6 months of registration, then the security interest will vest in the grantor and will be lost;
- the 20 business day period can be extended under section 588FM if the Court is satisfied that the failure to register the security interest earlier was due to inadvertence or would not prejudice creditors or shareholders, or that it is otherwise just and equitable to grant the extension;
- section 588FM is a remedial provision which has been given a wide interpretation. In particular, the authorities confirm that inadvertence can include the results of innocent failures to understand the requirements for registration and/or the consequences of failing to meet these requirements;
- the causes of the defects in the original registrations constituted inadvertence for the purposes of section 588FM;
- however, even though there was no actual prejudice to any creditors (as there were no competing registrations), there was a degree of potential prejudice to unsecured creditors in the event that HM Aircraft went into external administration within 6 months of the new corrected registrations; and
- in the circumstances, the application to extend the registration period under section 588FL(2)(b)(ii) up to the date of the new corrected registrations should be granted, but this was subject to an order that if HM Aircraft went into external administration within 6 months of the date of the new registrations then any administrator or liquidator would have liberty to apply to set aside or vary the extension.
As to the application to extend time for the registration of the relevant security interests as PMSIs pursuant to section 293(1)(a) of the PPSA, Justice Beach held that:
- section 62 of the PPSA sets out the timing requirements for registration of a PMSI, and sections 62 and 63 confirm that if the timing and other requirements are met, then the PMSI will enjoy a super priority over other perfected but non PMSI security interests;
- if the requirements for registering a PMSI are not met, then the registered (but non PMSI) security interest will be subject to the default priority rules set out in section 55 of the PPSA;
- the time period for registering a PMSI can be extended under section 293(1)(a) of the PPSA if the Court is satisfied that it is just and equitable to do so, having regard to the matters set out in section 293(3) which include whether the need to extend the period arises as a result of accident or inadvertence or whether extending the period would prejudice any other secured parties or creditors;
- the meaning of inadvertence in section 293(3) of the PPSA has the same meaning as in section 588FM of the Act;
- the causes of the defects in the original registrations therefore also constituted inadvertence for the purposes of section 293(3) of the PPSA;
- there was no evidence of any prejudice to or reliance on the absence of any pre-existing PMSIs by any other parties; and
- in the circumstances, the application to extend the period under section 62 of the PPSA for the relevant CBA registrations to be effective as PMSIs should be granted.
This case is a useful reminder of the complexities of the PPSA and PPSR, the dangers of defective registrations, and the options available to parties to seek the assistance of the Court in correcting defective registrations.
It is also a good example of the practical approach taken by the courts to these issues, particularly the reservation of liberty to apply for any potential future administrators or liquidators to challenge the extension.
Secured creditors should take care to ensure that their security interests are properly registered and, in the event that they identify a defect in any of their registrations, take immediate steps to register corrected financing statements and urgently consider whether it is necessary or advisable to apply for appropriate court orders.
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.