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Court supports step-in rights as registerable security interests under PPSA

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By Benjamin Caddaye, Law Clerk and Alicia Hill, Principal, MST Lawyers

The Supreme Court of Western Australian decision in Bluewaters Power 1 Pty Ltd v Griffin Coal Mining Company Pty Ltd [2019] WASC 438 provides the first guidance from an Australian Court as to whether contractual step-in rights are considered a registerable security interest under the Personal Properties Securities Register (PPSR). The Court in Bluewaters Power exercised its statutory power under s 588FM of the Corporations Act 2001 (Cth) (Act) to extend the time for the registration of step-in rights the Bluewaters power station held in a contract with Griffin Coal (its supplier of coal) on the PPSR. This decision highlights the need for franchisors to register their step-in rights in franchise agreements on the PPSR or risk losing those rights if a franchisee goes into liquidation.

Background

The plaintiffs in this proceeding were Bluewaters Power 1 Pty Ltd and Bluewaters Power 2 Pty Ltd (Bluewaters), which operate the Bluewaters coal-fired power station east of Bunbury in Western Australia. The defendant was Griffin Coal Mining Company Pty Ltd (Griffin), which operated the Ewington Coal Mine adjacent to the Bluewaters power station. The power station and the coal mine were originally related entities owned by the Griffin Energy Group, but went through a restructure in 2010. As a result of the restructure, Bluewaters was acquired by The Kansai Electric Power Corporation and the Sumitomo Corporation and the coal mine was acquired by Indian company Lanco Infratech Ltd.

In 2013 after the new entities took over, the two coal supply agreements between Bluewaters and Griffin were amended to include step-in rights in favour of Bluewaters. The step-in rights permitted Bluewaters or its nominee to take possession of all plant, material, equipment, documents and information of Griffin as it reasonably considered necessary to operate, maintain and manage the Ewington Mine if a step-in event (such as insolvency) occurred.

At the time the amendments were made to the supply agreements it was not obvious that the step-in rights were registerable security interests. In 2019 after becoming aware of the potential for the step-in rights to be a security interest, Bluewaters initiated proceedings under s 588FM of the Corporations Act 2001 (Cth) seeking an extension in the time for registration of their step-in rights on the PPSR. The proceedings were initiated because Bluewaters had doubts as to the solvency of Griffin, as its parent entities in Singapore and India had become insolvent.

Legal Framework

The Personal Property Securities Act 2009 (Cth) (PPSA) is the federal framework for the registration of security interests in personal property on a central register, the PPSR.

A security interest in defined in section 12 of the PPSA to mean an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation. Where a creditor holds a perfected security interest, that interest is given priority over any unsecured creditors in respect of the collateral.

Importantly however, under section 588FL of the Act a security interest may vest with the company if the company is wound up, administrators are appointed or the company executes a deed of company arrangement and the security interest is one covered by section 588FL(2).

Section 588FL(2) broadly aims to make security interests which were not registered in the 20 days after the security agreement entered into force vest with the company, but only if they were registered instead in the six months preceding the company becoming insolvent. This section was potentially of vital importance to Bluewaters’ step-in rights.

On 1 October 2019, Bluewaters had registered their step-in rights on the PPSR. However, due to s 588FL(2), if Griffin was to become insolvent within the six months from registration (which was a real possibility), the security interest would vest with the company and be unenforceable.

However, 588FM of the Act allows an interested party to make an application to the Court for an extension in the time for registration of the security interest, essentially getting around the six month risk window for Bluewaters. This was the provision under which Bluewaters brought their application to the Supreme Court of Western Australia.

Findings

Vaughan J in dealing with the question of whether step-in rights were a security interest was reluctant to provide an authoritative determination of the issue. This was because he had not heard full argument on the issue, as Griffin did not appear in the proceeding, and the only authority that he had been directed to by Bluewaters was the New Zealand decision of McCloy v Manukau Institute of Technology [2013] 3 NZLR 390 which had confirmed that under the New Zealand personal property securities regime step-in rights in a construction contract constituted a security interest.

For these reasons, Vaughan J only held that it was reasonably arguable that the step-in rights under the two coal supply agreements constituted registerable security interests under the PPSA.

The step-in rights allowed Bluewaters to enter and take possession of Griffin’s personal property to operate, maintain and manage the Ewington Coal mine for the purpose of remedying the step-in event in the coal supply agreement. In that sense, it secured the performance of an obligation within the meaning of the section 12 definition.

Vaughan J noted the purpose of section 588FM of the Act was to avoid the vesting of a security interest in a company if it enters administration or liquidation within six months after the actual date of registration, with there not having been resignation within the 20 business days after the security agreement comes into force. As such, there were only three circumstances where the Court could extend the time for registration under s 588FM, being if:

(a)          the failure to register the collateral earlier was accidental or due to inadvertence or some other sufficient cause;

(b)          the failure to register the collateral is not of such a nature as to prejudice the position of creditors or shareholders; or

(c)           it is just and equitable to grant relief.

Only one of the three grounds need be established. In this proceeding, Bluewaters argued all three. However, the Court was satisfied that Bluewaters had made out the ground that their failure to register was accidental and due to inadvertence, and as such that was the only ground dealt with by the Court.

The Court noted that a lack of legal understanding as to the requirements for registration may amount to inadvertence. Furthermore, inadvertence will be readily found where an error of a secured creditor in not attending to registration within the allotted time is innocent and does not result from any disregard of statutory obligation.

Vaughan J found that Bluewaters were not lenders and with the exception of the coal supply agreements, did not hold any other step-in rights. The plaintiffs were not aware, nor did they get legal advice about whether the step-in rights could constitute a security interest which ought to be registered on the PPSR.

Bluewaters and Griffin were both represented by two large commercial law firms, and it is likely that if they had of been aware that the step-in rights might require registration (or otherwise fail in the event of voluntary administration or liquidation) they would have been registered. Therefore, the Court was satisfied that there was a lack of legal understanding as to the requirement of registration. That error was innocent, in the sense that it was the result of the ignorance of the requirement to do so.

However, even where a ground is satisfied the granting of an extension is still at the discretion of the Court. There were two factors which militated against granting an extension in this case, being the considerable delay of six and a half years, and the problematic financial position of Griffin.

The Court found however that the delay was ameliorated because the delay since the plaintiffs became aware of the registration requirement had been minimal, and there was at all material times an all after present and after acquired property security interest over Griffin which was apparent to all unsecured creditors.

The Court was also satisfied that the interests of unsecured creditors could be accommodated by reserving leave in the order permitting a future administrator or liquidator of Griffin to apply to the Courts to vary the order extending the period for registration.

Commercial Considerations

The important issue that arises from this decision is that anyone holding a step-in right, such as the right to operate a franchise business if the franchisee becomes insolvent, should register that interest on the PPSR if they do not want to risk losing the right if the franchisee becomes insolvent.

If you have any questions regarding the matters raised by this article or the personal property securities register, please feel free to get in contact with Alicia Hill.