Granting of Security Interest After the Critical Time in Insolvency

Under s 588FL of the Corporations Act, a PPSA security interest vest in an insolvent company, if the collateral is not registered within time.

There has been judicial debate as to whether the vesting event in s 588FL of the Act applies to Personal Property Securities Act 2009 (Cth) (PPSA) security interests which are granted after the ‘critical time’ (for example, after the appointment of liquidators) in s 588FL(7) of the Corporations Act 2001 (Cth) (Corporations Act). So far, there is no intermediate appellate authority which has decided the point.

The diversion of authorities is described by Cheeseman J in Cubic Interiors Interiors (see below for case summary), as follows:
‘The divergence in the authorities which is presently relevant is whether, for the purpose of s 588FL(1)(b) a PPSA security interest that is granted after the “critical time” is covered by s 588FL(2). As between the two lines of authority, it is common ground that s 588FL(2) may cover a security interest that arises after the critical time. The point of difference is as to whether s 588FL(2) can cover a security interest that is granted after the critical time. The first and earlier line of authority is to the effect that s 588FL(2) does cover securities granted after the critical time. No distinction is drawn between a security interest being “granted” and a security “arising”. The second and more recent line of authority is that security interests that are granted after the critical time are not covered by s 588FL(2) because there is a distinction between the use of “granted” in s 588FL(1)(b) and “arises” in s 588FL(2)(a). Accordingly, a security interest which “arises” after the critical time will only be covered by s 588FL(2) if it was granted at or before the critical time.’

The more recent line of authority cited with approval in Caydon Flemington (see below for case summary). We analyse these two recent Federal Court decisions as below.

Cathro in the matter of Cubic Interiors NSW Pty Ltd (in Liq) [2023] FCA 694 (Cubic Interiors)
On 26 June 2023, the Federal Court of Australia an application regarding a PPSR security interest granted to a financier after liquidators were appointed.

Background       
A liquidator was appointed on 22 November 2021 over Cubic Interiors NSW Pty Ltd (In Liquidation), Bigmig Pty Limited (In Liquidation), Cubic Interiors Sydney Pty Ltd (In Liquidation) and Cubic Contracting NSW Pty Ltd (In Liquidation) (Cubic Companies).

Then liquidator the entered into a loan agreement and general security deed with Egerton Street Pty Ltd ATF Egerton Street Trust (Egerton or Financier). Another event that happened following the liquidator’s appointment was that, NAB, as a secured creditor of the Cubic Companies, appointed receivers and managers over the Cubic Companies.

On 3 December 2021, the liquidator caused the Companies to enter into a Deed of Settlement and Release with NAB in which the Cubic Group refinanced certain of the facilities held with NAB. The ultimate effect of the this refinance was that it NAB was paid and was replaced by Egerton as a secured creditor of the Cubic Companies.

A security was then registered on the Personal Property Securities Register (PPSR) on 9 December 2021, which was within 20 business days of the day on which it was granted to Egerton (Egerton Security). However, it was registered after the liquidator’s appointment, which is the ‘critical time’ referred to in s 588FL(7)(a) of the Corporations Act.

Issue of whether an extension of time is needed to register security interests which are granted after the ‘critical time’.

The liquidator then sought a declaration from the Court pursuant to s 90-15 of the Insolvency Practice Rules (IPS) that the Liquidator did not need to seek an extension of time for registering the security interest pursuant to section 588FM, because it was granted after the ‘critical time’ specified in the Corporations Act.

In considering the proper and textual construction of sections 588FL and 588FM of the Corporations Act, the Court considered the difference between ‘granted’ pursuant to section 588FL(1)(b) and ‘arises’ in s 588FL(2)(a). The Court upheld the more recent line of authority which commenced with the decision of Brereton JA in Re Antqip and held that it was incorrect to read section 588FL to include security interests granted after the critical time as it would ‘divorce the section from its purpose to which it is directed – namely, preventing the fraudulent granting of security interests with knowledge of an imminent administration, liquidation, restructuring, deed of company arrangement or restructuring plan’ at [84].

Therefore, the court ordered that ‘to the extent necessary’, pursuant to s 588FM(1) of the Corporations Act that the registration time in respect of the Egerton Security Interest be fixed as 9 December 2021 for the purposes of s 588FL(2)(b)(iv) of the Act. This effectively extends the time for registration of the security interest to the date that the security interest was entered on PPSR even though it was not strictly ‘necessary’ to make an application for an interest granted at a later time after the ‘critical time’.

Key takeaway
The decision is another welcomed authority for liquidators, receivers and administrators to remove the administrative burden of having to seek extensions of time under section 588FM.
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Hutton, in the matter of Caydon Flemington Pty Ltd (Receivers and Managers appointed) (In Liq) [2023] FCA 796 (Caydon Flemington)

On 11 July 2023, shortly after Cubic Interiors was handed down, the same Court considered a similar application.

Background
Receivers and managers are appointed by a group of secured creditors called ‘OCP Lenders’ over companies (Companies) in the ‘Caydon Property Group’ which undertakes various medium to large scale residential and commercial development projects in Australia and USA.

The Companies went into liquidation following its receivership. Caydon Property Group’s financing arrangements were complex and needed to be restructured to enable an efficient process for the realisation of the Caydon Property Group assets.

Therefore the Receivers took steps to refinance the Companies’ borrowing arrangements, which has required the provision of replacement security over the property of the Companies by way of a general security (Receivership General Security Deed).

The lenders that required provision of the security granted by the Companies under the Receivership General Security Deed seek to avoid any prospect of that security vesting in the Companies by reason of s 588FL(2)(b)(iv) of the Act, by stipulating a condition precedent in the refinancing arrangement that an order must be obtained under s 588FM of the Act extending the time for registration of the security granted by the Companies under the Receivership General Security Deed.

To the extent it is necessary to grant an order under s 588FM

The relevant security interests were granted on 19 June 2023, being the date of the Companies’ entry into the Receivership General Security Deed.  Registration on the PPSR of those security interests occurred on 26 June 2023, which was within 20 business days of the day on which the security interests were granted.  However, the security interests were granted after the Liquidator was appointed to the Companies on 25 July 2022, which meant that the security interests were granted after the ‘critical time’.

The Receivers sought an order under s 588FM(1) of the Corporations Act fixing 17 July 2023 as the ‘later time’ for the purpose of s 588FL(2)(b)(iv) of the Act (which relates to the vesting of PPSA security interests in the event of non-registration within specified time periods). 

Anderson J decided that it was not necessary to express a concluded view as to whether the court should agree with the earlier or later line of authority.  Following Cubic Interiors, in the absence of intermediate appellate authority on the point, the court determined that there was utility in making an order under s 588FM of the Act which is expressed to be made ‘to the extent necessary’.  In this case, such an order had further utility because it was required as a condition precedent to the refinancing arrangements.

Key takeaway
While this reaffirms the Cubic Interiors position, due to the uncertainty in the law, liquidators, receivers and administrators may still need a court order under s 588FM to be made ‘to the extent necessary’ if they wish to take the prudent approach to avoid unintended vesting of security interests under s 588FL of the Corporations Act.

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Note: The information contained in this document is not legal advice. It sets out matters of general opinion and should not be applied to your particular circumstances without obtaining specific legal advice as to your position, rights and obligations.