Assignments, late registration and vesting of security interests under the Personal Property Securities Act

The decision in Re Carpenter International Pty Ltd (Administrators Appointed) [2016] VSC 118 again highlights the importance of registering security interests on the Personal Property Securities Register (PPSR) within the prescribed timeframes.

The case considers the requirement to register security interests under contracts which are assigned and also the circumstances upon which the Court may exercise its discretion to extend the time for registration.

Facts

Carpenter International Pty Ltd (Carpenter) was in the live cattle export business. Its business involved purchasing cattle through del credere agents then moving the cattle to a feedlot for quarantine and testing and then, subject to those checks, exporting the cattle. Carpenter went into voluntary administration in March 2015.

The Administrators challenged claims by three livestock agents (Agents) that they each had perfected security interests in the cattle. The Court made orders in September 2015 giving the Administrators leave to dispose of the cattle. Consequently, the proceedings concerned the parties’ entitlements to the $4m in proceeds of sale.

The Agents acted as del credere agents for vendor farmers by guaranteeing the purchasers’ payment of the purchase price. The Agents would receive a commission, and if they paid the vendors, they would take assignment of the vendors’ rights under the sale contracts. The Agents contended that they held security interests in cattle on the basis of retention of title clauses in both their own contracts with Carpenter and also the contracts between the vendors and Carpenter which were assigned to them.

In circumstances where the Agents took an assignment of the contracts made between Carpenter and the vendors, the Agents failed to register their security interests within 20 days of those contracts.

Fundamentally, the Court was required to determine whether the Agents had security agreements for the purposes of section 20 of the Personal Property Securities Act 2009 (Cth) (PPSA) and whether their security interests were registered within the prescribed time frame. This involved determination of a “battle of the forms” and whether the Agents’ terms including their retention of title clauses were incorporated into their dealings with Carpenter. There are well settled principles dealing these issues and so this article does not discuss them.

Instead, this article focuses on the Court’s consideration of two important issues, namely:

• Whether an assignment of a security agreement affects the calculation of time under section 588FL of the Corporations Act 2001 (Cth) (CA); and
• The grounds upon which a Court will exercise its discretion to extend the time for registering a security interest under section 588FM.

Decision

The Honourable Justice Cameron of the Supreme Court of Victoria upheld some of the Agents’ claims (which are not the subject of this article) but also ruled that other security interests in the sale proceeds vested in Carpenter pursuant to section 588FL of the CA.

Vesting of Security Interests

Pursuant to section 588FL CA, where a creditor fails to register a security interest:

• six months before the critical time – in this case, the appointment of the Administrators; or
• within 20 days after the security agreement that gave rise to the security interest came into force;or
• within such later time fixed by the Court (under section 588FM); or
• the security interest vests in the company, effectively extinguishing the creditor’s claims to the collateral.

Effect of assignments

The Court considered the proper construction of the words ‘the security agreement that gave rise to the security interest came into force’ found in section 588FL.

The Court found that the contract between a vendor and Carpenter constituted a security agreement for the purposes of section 20 PPSA since the contract ‘created, gave rise to or provided for’ the relevant security interest. The Court rejected the Agents’ argument that the security interest arose only upon the payment of the purchase price to the vendors and assignment of the contracts to the Agents, and determined that the existing security interest was merely transferred to the Agents and that a new security interest was not created.

The Court held that the assignment of a contract (giving rise to the security interest) does not alter the requirement to register within 20 days of the original contract coming into force. The Court reasoned that it was untenable to permit a new 20 day period each time a security interest was assigned or became enforceable, as this would permit an abuse of the registration system, create uncertainty and the increased vulnerability of vendors.

The Court found that the 20 day period for registration set out under section 588FL commenced from the date of the execution of the contracts. Accordingly, where the Agents had failed to register the security interest within the prescribed timeframe, they vested in Carpenter upon the appointment of the Administrators.

The Court stated that it was the Agents’ responsibility to ensure their security interests were registered and noted that they could have either required the vendor to register the security interests, sought an extension of time for registration under section 588FM, or alternatively, registered a security interest themselves, observing that a creditor could register a finance statement in circumstances where they believed on reasonable grounds that they will become a secured creditor (section 151 PPSA).

Extension of time

Under section 588FM, a Court may extend the time to register a security interest if it is satisfied that the failure to register was accidental or due to inadvertence, and is not of such a nature to prejudice creditors or is otherwise just and equitable to grant relief.

The Agents submitted that its failure to register in time was due to inadvertence because it failed to understand the registration requirements and the effects of an assignment of the contracts. It was argued that the Agents believed it was not required to register the security interest until the contracts had become unconditional (when the cattle had passed quarantine and testing).

The Court considered earlier authorities noting that section 588FM had been applied liberally.

The Court found that the Agents were aware of the registration requirement and of the effects of vesting under section 588FL, but was mistaken as to when the 20 day period commenced. However, the Court determined that the Agents’ failure to register on time was not due to inadvertence. Rather, the evidence showed that the Agents did not have any intention of registering its security interests because it believed that Carpenter could and would pay its debts in the ordinary course.

The Court also considered whether it would have exercised its discretion to grant an extension if the discretion had been enlivened. As to the discretionary factors, the Court stated:-

• Delay in registration – Even if the delay in registration is substantial, it will not itself preclude an extension, because the significance of the passage of time is mainly related to the possibility of competing interests over the same collateral having arisen. There was no evidence of any competing interests having arisen during the delay.
• Prejudice to creditors – The mere fact that an extension would reduce the dividend of other unsecured creditors is not itself sufficient to prevent an extension being granted. Reduction in dividend was the only relevant prejudice that unsecured creditors would suffer, which they would also have suffered if the Agent had registered in time. If some prejudice to unsecured creditors other than a reduced dividend can be shown, the Court may decline to exercise its discretion under section 588FM. The prejudice that must be shown is prejudice from the failure to register in time, not prejudice from the granting of an extension.
• Delay in application – Little weight would be placed on the fact that the extension application was made some months after the appointment of the administrators. The Agent believed that they registered in time to avoid vesting under section 588FL. In its view, there was no need to apply for an extension. Until it was clear that the Administrators were going to argue that the security interest vested in Carpenter, it would not have been necessary for the Agent to seek an extension.
• Timing of Registration – Neither the timing of registration, only hours prior to the appointment of the Administrators, nor the fact it occurred after learning of Carpenter’s potential insolvency precluded the Court from exercising its discretion.
• In the result, the Court determined that even if its discretion had been enlivened, it would not have exercised it due to the reasons behind the Agent’s decision to delay registering their security interests.

Practical implications

• An assignment of a security agreement does not necessarily create a new security interest.
• Upon taking an assignment of a security agreement, assignees must be aware that they may be taking on an unperfected security interest and that they are at risk. Accordingly, a prospective assignee should first ascertain whether the assignor has registered its security interest.
• Where the performance of a contract is conditional upon the happening of an event, the time to register a security interest provided for by the security agreement starts when the contract comes into force and not when it becomes unconditional.
• When considering the granting of an application for an extension of time, the prejudice that must be shown is prejudice from the failure to register in time, not prejudice from the granting of an extension.