Fail­ing to Reg­is­ter a PPSR Secu­ri­ty Inter­est on Time – Legal Risks and Options

Intro­duc­tion

Time­ly reg­is­tra­tion of secu­ri­ty inter­ests under the Per­son­al Prop­er­ty Secu­ri­ties Act 2009 (Cth) (PPSA) is essen­tial for secured cred­i­tors to pro­tect their rights. Fail­ure to reg­is­ter with­in the pre­scribed time­frames can result in the cred­i­tor los­ing pri­or­i­ty to unse­cured cred­i­tors in the event of insolvency.

While cred­i­tors who have failed to reg­is­ter on time, may seek an exten­sion to reg­is­tra­tion time­frames under s 588FM of the Cor­po­ra­tions Act 2001 (Cth) (Corps Act), they should be aware that such avenue is not with­out com­plex­i­ties and risks, includ­ing a pos­si­ble chal­lenge by a liq­uida­tor or admin­is­tra­tor appoint­ed to the grantor.

A recent Fed­er­al Court deci­sion, Crush­ing Ser­vices Inter­na­tion­al Pty Ltd v Lithi­um Devel­op­ments (Grants NT) Pty Ltd [2024] FCA 1138 (Crush­ing Ser­vices), dis­cuss­es the leg­isla­tive time­frames for reg­is­ter­ing secu­ri­ty inter­ests and the key fac­tors that the Court will con­sid­er when decid­ing whether to grant an extension.

This arti­cle dis­cuss­es the legal risks and options avail­able to cred­i­tors who have reg­is­tered out of time. 

PPSR Time­frames

The tim­ing of reg­is­tra­tion of secu­ri­ty inter­ests grant­ed by com­pa­ny grantors is gov­erned by time lim­its spec­i­fied in the Corps Act and the PPSA. Under s 588FL of the Corps Act, a secu­ri­ty inter­est grant­ed by com­pa­ny grantor must be reg­is­tered on the Per­son­al Prop­er­ties Secu­ri­ties Reg­is­ter (PPSR) either with­in 20 busi­ness days from the date the secu­ri­ty agree­ment takes effect, or 6 months before the date the grantor enters liq­ui­da­tion or admin­is­tra­tion. Addi­tion­al­ly, if an insol­ven­cy event occurs while the inter­est is unper­fect­ed (irre­spec­tive of whether the grantor is a com­pa­ny or indi­vid­ual), it auto­mat­i­cal­ly vests in the grantor before the event, as per sec­tions 267 and 267A of the PPSA, effec­tive­ly caus­ing the cred­i­tor to lose the ben­e­fit of a secu­ri­ty interest.

Pur­suant to s 588FM of the Act, if a secu­ri­ty inter­est is not reg­is­tered with­in the pre­scribed time­frame, the Court has the author­i­ty to pre­vent the secu­ri­ty inter­est from vest­ing in the grantor by extend­ing the reg­is­tra­tion peri­od. Specif­i­cal­ly, the Court may exer­cise their dis­cre­tion to fix a lat­er reg­is­tra­tion time if it is sat­is­fied that:

• the fail­ure to reg­is­ter was acci­den­tal or due to inad­ver­tence or some oth­er suf­fi­cient cause; or
• the delay in reg­is­tra­tion 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.

How­ev­er, the Courts can­not con­sid­er appli­ca­tions under s 588FM if an insol­ven­cy event has already occurred before the reg­is­tra­tion unless the secu­ri­ty inter­est was cre­at­ed after the insol­ven­cy event (see s 267 of the PPSA). 

Key Issues in Crush­ing Services

By way of back­ground, Crush­ing Ser­vices Inter­na­tion­al Pty Ltd (CSI) entered into an agree­ment with Lithi­um Devel­op­ments (Grants NT) Pty Ltd dat­ed 4 May 2022 (Lithi­um) to design, sup­ply, install, oper­ate and main­tain a crush­ing plant at the Finniss Lithi­um Project (Agree­ment).

The Agree­ment spec­i­fied that CSI retained own­er­ship of the crush­ing plant and oth­er facil­i­ties (Facil­i­ties) and cre­at­ed a secu­ri­ty inter­est in favour of CSI. How­ev­er, CSI failed to reg­is­ter this inter­est with­in the statu­to­ry timeframe.

In Decem­ber 2023, Lithium’s par­ent com­pa­ny announced a strate­gic review, includ­ing sus­pend­ing min­ing activ­i­ties, lead­ing to the ces­sa­tion of oper­a­tions at the Finniss Lithi­um Project. By May 2024, CSI realised it had failed to reg­is­ter the secu­ri­ty inter­est over the Facil­i­ties with­in 20 busi­ness days after the Agree­ment came into force. CSI prompt­ly reg­is­tered the secu­ri­ty inter­est on 6 May 2024 and applied to the Fed­er­al Court for an exten­sion of time to reg­is­ter its interest.

The effect of the orders sought by CSI would set the lat­est reg­is­tra­tion date as 6 May 2024 and ensure that the Facil­i­ties sub­ject to the secu­ri­ty inter­est would not vest in Lithi­um in an insol­ven­cy event.

Exis­tence of Secu­ri­ty Interest

Impor­tant­ly, a cred­i­tor must first ensure that a secu­ri­ty inter­est has been estab­lished pur­suant to a secu­ri­ty agree­ment or terms in a con­tract which grant a secu­ri­ty inter­est to secure pay­ment or per­for­mance of an oblig­a­tion. In Crush­ing Ser­vices, the Court found that the Agree­ment makes pro­vi­sion for an inter­est in per­son­al prop­er­ty includ­ing the Facil­i­ties. The defen­dant elect­ed not to appear on the appli­ca­tion and there was no con­tra­dic­tor on this point. There­fore, the Court found it was only nec­es­sary for CSI to estab­lish that the exis­tence of a secu­ri­ty inter­est was ​‘rea­son­ably arguable’.

Per­fec­tion by Possession

CSI argued that it held a secu­ri­ty inter­est in the crush­ing plant, and that its inter­est was per­fect­ed not by reg­is­tra­tion but by pos­ses­sion in accor­dance with sec­tions 21(1)(b) and 21(2)(b) of the PPSA.

CSI assert­ed that Lithi­um did not have pos­ses­sion under sec­tion 24(1) of the PPSA, but rather CSI had both actu­al and appar­ent pos­ses­sion, demon­strat­ed by vis­i­ble CSI brand­ing on equip­ment, restrict­ed access to the Facil­i­ties, and the abil­i­ty to lock the Facil­i­ties and pre­vent non-CSI per­son­nel from entering.

While the Court found it was ​“rea­son­ably arguable” that CSI was in actu­al pos­ses­sion of the Facil­i­ties, it was not pre­pared to make a deter­mi­na­tion on whether actu­al and appar­ent pos­ses­sion was suf­fi­cient­ly estab­lished, not­ing that there is at least a seri­ous ques­tion to be tried, and CSI is exposed to the risk that any secu­ri­ty inter­est has not been per­fect­ed by possession.

The Court fur­ther stat­ed that,

“to the extent that any secu­ri­ty inter­est has been per­fect­ed by pos­ses­sion, that dimin­ish­es the risk of prej­u­dice to unse­cured cred­i­tors if the Court exer­cis­es its dis­cre­tion to fix a lat­er time for reg­is­tra­tion. Both are rea­sons for exer­cis­ing the dis­cre­tion in favour of CSI, but pull in oppo­site direc­tions as regards the risk of prej­u­dice to unse­cured creditors”.

This high­lights the risk that mere pos­ses­sion may not always be enough to safe­guard cred­i­tor’s rights if they fail to per­fect their inter­ests by registration.

Exten­sion of Reg­is­tra­tion Timeframes

The Court’s rea­son­ing in Crush­ing Ser­vices focused on the two key ele­ments, inad­ver­tence and prej­u­dice, which were crit­i­cal to its assess­ment of whether to grant an exten­sion under sec­tion 588FM of the Corps Act.

Inad­ver­tence

The Court found that CSI’s fail­ure to reg­is­ter the secu­ri­ty inter­est on time was due to inad­ver­tence, ful­fill­ing a key pre­con­di­tion for exer­cis­ing its dis­cre­tion under sec­tion 588FM(2)(a)(i) of the Corps Act.

The Court referred to pri­or deci­sions, such as Re App­le­yard Cap­i­tal Pty Ltd and Re Acco­lade Wines Aus­tralia Ltd, which con­firmed that inad­ver­tence com­pris­es an inno­cent error or igno­rance, where a par­ty fails to meet a dead­line due to mis­un­der­stand­ing the legal oblig­a­tions or the con­se­quences of non-com­pli­ance. It does not include inten­tion­al dis­re­gard of statu­to­ry obligations.

The Court accept­ed the affi­davit of Mr. Bar­rett the com­mer­cial man­ag­er of CSI, which deposed to the fol­low­ing facts demon­strat­ing that CSI’s fail­ure to reg­is­ter the secu­ri­ty inter­est before 6 May 2022 was inadvertent:

• that Mr. Bar­rett did not appre­ci­ate that CSI’s inter­est could be reg­is­tered on the PPSR;
• Mr. Bar­rett was focused on nego­ti­at­ing the terms of the Agree­ment, not the mechan­ics or imple­men­ta­tion of its provisions;
• after Lithi­um’s announce­ment of a strate­gic review, Mr. Bar­rett coor­di­nat­ed with mul­ti­ple teams to request the PPSR reg­is­tra­tion; and
• after no steps were fol­lowed up by those teams, Mr Bar­rett received legal advice and reg­is­tra­tions were made accordingly.

Based on these facts, the Court found that CSI met the require­ments to exer­cise dis­cre­tion under sec­tion 588FM(2) of the Corps Act, clear­ing the path for con­sid­er­ing the next stage of the analy­sis, which is whether the order sought would cause prej­u­dice to third par­ties, in par­tic­u­lar, unse­cured creditors.

Prej­u­dice

The Court clar­i­fied that prej­u­dice does not arise from mere­ly demon­strat­ing that the return to unse­cured cred­i­tors in the event of liq­ui­da­tion or admin­is­tra­tion would be dimin­ished if the secu­ri­ty inter­est does not vest in the grantor. Instead, the focus is on any prej­u­dice attrib­ut­able to the delay in reg­is­tra­tion, rather than prej­u­dice from mak­ing the order (which is inevitable).

The Court fur­ther explained that prej­u­dice aris­ing from delay is pri­mar­i­ly con­cerned with whether any com­pet­ing inter­ests had emerged dur­ing the peri­od of delay. For instance, if third par­ties had dealt with the grantor under the assump­tion that the col­lat­er­al was unen­cum­bered, this could lead to prej­u­dice. To this end, the length of the delay.

plays a sig­nif­i­cant role in deter­min­ing the impact of this prej­u­dice. A short­er delay is less like­ly to result in sig­nif­i­cant harm to unse­cured cred­i­tors. The Court also empha­sised that if the grantor is clear­ly sol­vent, the risk of prej­u­dice to unse­cured cred­i­tors might be negligible.

How­ev­er, in this case, the finan­cial con­di­tion of Lithi­um’s par­ent com­pa­ny was suf­fi­cient to con­clude that the risk to unse­cured cred­i­tors was min­i­mal. As such, the Court grant­ed the exten­sion fix­ing the time for reg­is­tra­tion of the col­lat­er­al at 6 May 2024 sub­ject to a ​“Guardian Secu­ri­ties” con­di­tion, allow­ing any sub­se­quent liq­uida­tor or admin­is­tra­tor appoint­ed to chal­lenge the order.

Fur­ther­more, as dis­cussed, the risk of prej­u­dice result­ing from the delay in reg­is­tra­tion is mit­i­gat­ed to the extent that any secu­ri­ty inter­est was per­fect­ed by CSI being in pos­ses­sion of the col­lat­er­al. If any secu­ri­ty inter­est was so per­fect­ed, unse­cured cred­i­tors would be in no worse posi­tion because s 588FL of the Corps Act applies where the secu­ri­ty inter­est is per­fect­ed by reg­is­tra­tion and no oth­er means and s 267 of the PPSA would also not apply because the secu­ri­ty inter­est would be per­fect­ed oth­er than by registration.

Options for Cred­i­tors Fac­ing Delayed PPSR Registration

This case high­lights sev­er­al impor­tant con­sid­er­a­tions for those deal­ing with delayed PPSR reg­is­tra­tion issues:

1. Time­li­ness in Reg­is­tra­tion: Cred­i­tors must ensure that they reg­is­ter their secu­ri­ty inter­ests with­in the statu­to­ry 20-busi­ness-day peri­od. Miss­ing this dead­line can expose them to sig­nif­i­cant legal risks, includ­ing the loss of pri­or­i­ty over unse­cured cred­i­tors in the event of insolvency.
2. Seek­ing Exten­sions: If a cred­i­tor miss­es the reg­is­tra­tion dead­line, they can apply for an exten­sion under s 588FM of the Cor­po­ra­tions Act. The Court will assess whether the delay prej­u­dices unse­cured cred­i­tors, par­tic­u­lar­ly if the grantor is at risk of insol­ven­cy. Cred­i­tors should be pre­pared to demon­strate that the delay was inad­ver­tent, and that the grantor’s sol­ven­cy risk is low.
3. Secur­ing Con­di­tions: When request­ing an exten­sion, cred­i­tors should be aware that the court may impose con­di­tions includ­ing that the exten­sion could be sub­ject to chal­lenge by a future liq­uida­tor or administrator.
4. Review­ing Risk Expo­sure: Cred­i­tors should reg­u­lar­ly assess the risk of insol­ven­cy in their deal­ings with grantors. If the grantor’s finan­cial sit­u­a­tion is dete­ri­o­rat­ing, fail­ing to per­fect a secu­ri­ty inter­est can leave the cred­i­tor exposed to claims from oth­er unse­cured creditors.
5. Act­ing Quick­ly: Prac­ti­tion­ers should act swift­ly if they realise an inter­est has not been reg­is­tered. The longer the delay, the high­er the risk of prej­u­dice to unse­cured cred­i­tors, which may influ­ence the Court’s deci­sion to grant an extension.

Con­clu­sion

The Crush­ing Ser­vices case pro­vides a use­ful sum­ma­ry of the cur­rent state of the law as it relates to per­fec­tion of secu­ri­ty inter­ests and time­ly reg­is­tra­tion of secu­ri­ty inter­ests under the PPSA. Delays in reg­is­tra­tion may cre­ate sig­nif­i­cant legal and finan­cial risks for creditors.

Cred­i­tors or oth­er rel­e­vant par­ties such as receivers, liq­uida­tors or admin­is­tra­tors, should seek legal advice to ful­ly under­stand the options avail­able to them involv­ing delayed PPSR reg­is­tra­tions. As this case shows, the bal­anc­ing of inter­ests between secured cred­i­tors and unse­cured cred­i­tors remains a cen­tral con­cern for the Courts when con­sid­er­ing PPSR time­frames and legal remedies.