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    1300 MST LAW

  • Opposing An Application For The Extension Of Time To Register A Personal Property Security Interest

    By Alicia Hill, Principal, MST Lawyers

    Section 588FL of the Corporations Act 2001 (Cth) (Act) provides that where a company is being wound up, any PPS interest is ineffective, and the secured assets will vest in the company (the liquidators) where it is registered:

    (a) after 20 business days of it coming into effect; or

    (b) within six months of the company being wound up; or

    (c) after a later time ordered by the court.

    Section 588FM of the Act provides a mechanism to apply to the courts to extend the time by which registration was to have been made to make the PPS interest effective against the company (liquidator). This extension will enable the secured creditor to recover their interest ahead of other creditors, subject to the priority rules contained in the PPS Act.

    In the case of Kaizen Global Investments Ltd, in the matter of Australia New Agribusiness & Chemical Group Limited (in liq)(ANB) v Australia New Agribusiness & Chemical Group Ltd (in liq) [2017] FCA 431 (Kaizen), the Federal Court was asked to fix a later time for the registration of a Personal Property Security (PPS) interest (a share mortgage) on the Personal Property Security Register (PPSR). Kaizen had failed to lodge the interest on the PPSR within 20 business days, and a liquidator had been appointed within the six months period of the late registration of the share mortgage on the PPSR.

    Where applications of this nature occur, the liquidators should consider:

    Whether they wish to take an active part in the court proceeding, or simply inform the court that they do not wish to be active participants but they will abide by the determination of the Court.

    If the liquidators take an active role and are considered a ‘party’ to the proceeding, then they will be liable for costs orders should they be unsuccessful in the proceeding being heard.

    If the liquidators take a passive role, which can range from:

    1. not tendering any material to the court and seeking to be excused from appearing,
    2. to filing affidavits of evidence to ensure the court has relevant information to make its determination, having legal representatives present, but making no submissions in active opposition to the application and informing the court that is the approach proposed to be taken.

    In this case, the liquidators took an active role in opposing an application for fixing a later time for registration of the share mortgage and filed affidavits of evidence as well as engaging lawyers to make active submissions on their behalf.

    What evidence is available to oppose the application addressing the factors that the court has said is relevant to determining these type of applications.

    In this instance, the liquidators referred to:

    1. the length of delay in registering the share mortgage outside the stipulated statutory time period of 20 business days. The share mortgage was registered approximately three months after it should have been and some 33 days after Kaizen became aware that to be effective, the share mortgage should have been registered within 20 days of coming into effect;
    2. ANB was now insolvent and in liquidation. The liquidators provided evidence of the potential effect that an effective PPS security registration would have on the funds available for potential return for unsecured creditors of ANB;
    3. unsecured creditors whose claims arose before and after the date of registration ought to have occurred would be significantly prejudiced. This was a matter of submissions only as there was no evidence put before the court as to this having occurred which the court noted adversely to the liquidators when considering the weight of this submission;
    4. the share mortgage being registered at a time that ANB was insolvent and after concerns had arisen about ANB’s financial viability;
    5. an officer of ANB assisted Kaizen register the share mortgage, which they argued was a breach of fiduciary and statutory duties; and
    6. the conduct of ANB’s officer was uncommercial, unreasonable and preferential from the perspective of ANB.

    The Court considered the existing case law and had specific reference to the predecessor provisions section 266(4) of the Act. Moshinsky J said at [87] that the relevant factors for the Court to consider were:

    1. an order can be granted after a company goes into liquidation or enters a DOCA;
    2. the discretion exercised by the court is based on what is just and equitable which needs to be read liberally;
    3. the principles developed concerning section 266(4) of the Act continue to have relevance in relation to the discretion to be exercised;
    4. where a company has gone into liquidation, there is no rule that constrains the exercise of the discretion to cases of ‘exceptional circumstances’ only;
    5. to grant relief will require the identification of factors of sufficient significance to outweigh the adverse impact on secured creditors of the grant of relief; and
    6. an order made for fixing a later time in the case of an insolvent company or a company in liquidation is not lightly made and generally upon conditions designed to minimise the risk of an unfair prejudice to any creditor.

    The court found based on the circumstances  that it would not fix a later time for the registration of the share mortgage because:

    1. the period of delay of approximately three months was significant;
    2. Kaizen did not move quickly once it became aware of the requirement to register on the PPSR giving no satisfactory explanation as to why it failed to do so;
    3. the foreign legal advisers recommended to Kaizen that it obtain Australian legal advice on the share mortgage, but it chose not to do so;
    4. ANB is now in liquidation, and an order fixing a later date would reduce the amount available to unsecured creditors of ANB for distribution;
    5. Kaizen did not establish that the amount available for unsecured creditors of ANB had been enhanced by the loan; and
    6. there was no evidence that any unsecured creditor searched the PPSR and relied on the absence of registration during the relevant period. No unsecured creditor had been shown to be prejudiced by the delay in

    The court determined that the first three factors justified refusing the application to fix a later time for registration.This resulted in the shares which would otherwise have been secured by the share mortgage in favour of Kaizen vesting in the liquidator as part of the assets of the company available to creditors for the winding up.

    How is this proposed to be funded and by whom if there are insufficient assets available to the liquidators to run this themselves? Also, is it in the best interests of the creditors to engage in an active way in the proceedings?

    1. Is a better outcome for creditors achieved if an active opposition is successful?
    2. Are the legal proceedings narrowly defined, with limited factual disputes and evidence to be filed thus, capping legal costs and potential adverse orders?
    3. Is funding from creditors or litigation funders available?  Alternatively, a speculative action on behalf of the liquidator and its lawyers may be options to permit an active engagement by liquidators for these type of PPSR issues.

    Please contact Alicia Hill on (03) 8540 0292 or email, if you would like to discuss any aspect of this article further.