Register early to avoid disappointment

It remains the case that some three years into the operation of the Personal Property Securities Act 2009 (Cth) (PPSA), many people and organisations are still unsure of the mechanics of its operation.

One of the most common areas in which advice is sought is the timing for registration of security interests under the PPSA. Unfortunately, the requests for advice in this area usually come after the appointment of an administrator or liquidator to a grantor company.

Registration

Section 588FL the Corporations Act 2001 (Cth) (Corporations Act) requires secured parties to register their security interest before the latest of the following:

• six months before the “Critical Time” (being the date of the appointment of an administrator, or an order being made, or resolution being passed, to wind up the company, or the execution of a deed of company arrangement occurs);
• 20 business days after the security agreement came into force or the Critical Time (where the Critical Time is earlier);
• 56 days after the security agreement first became enforceable in Australia if it is a foreign agreement; or
• a later time ordered by the court under section 588FM (see below).

If a secured party (under an Australian security agreement) fails to register within 20 business days, it exposes itself to a risk that its security interest will vest in the grantor company if the grantor company enters liquidation or voluntary administration in the subsequent six month period.

The 20 business day rule (and the 56 day rule in respect of foreign security agreements) only applies where a company enters liquidation or voluntary administration in the six months after the registration. That is, if a secured party registers outside 20 business days, and the grantor company does not suffer a relevant insolvency event in the six months after registration, then the late registration will not result in the security interest vesting in the grantor company upon the happening of an insolvency event.

PMSIs

While the above applies equally to Purchase Money Securities Interests (PMSIs), there are additional timing requirements in relation to PMSIs which must be met in order to obtain the super priority normally associated with PMSIs.

A guide to registration times

The below table sets out the timing for registration of security interests:

Section 588FM

If a security interest has been registered outside of the 20 business days, we recommend making an application to Court under section 588FM of the Corporations Act to extend the time for registration. Section 588FM(2) provides that the court may fix a later registration time (ie a time outside of the 20 business days) where it is satisfied that:

• the failure to register earlier:
• was accidental or due to inadvertence or some other sufficient cause; or
• is not of such a nature as to prejudice the position of creditors or shareholders; or
• on other grounds, it is just and equitable to grant relief.

Lavan Legal comment

The consequences of registering a security interest outside of the relevant time periods in section 588FL are too extreme to ignore.

We recommend that parties proceed with care when preparing and reviewing agreements which contain or may contain security interests which require registration.

If for whatever reason an agreement is not registered within the relevant time period, serious consideration should be given to an application to extend the time for registration under section 588FM of the Corporations Act. A failure to do so can result in a security interest vesting in an insolvent grantor company.