Extending time to register a security interest by over a year?

Tedesco v LVT Capital Pty Ltd as trustee for the LVT Capital Discretionary Trust [2024] FCA 601
What is the test for extending the time to register a security interest under s 588FM of the Corporations Act?

Overview

In this case, the Court set out the test for extending the time for the registration of a security interest under s 588FM of the Corporations Act. Significantly, the Court held that in applications under s 588FM the applicant need not establish the existence of a security interest — only a reasonably arguable case that such an interest exists. The Court allowed the application in this case, emphasising that the fixing of a later time for the registration was not determinative of the existence of the underlying security interest or its enforcement. Whether the registered security was effective or enforceable was a matter left for another day.

Background

The plaintiffs, Mr Francesco Tedesco and Mrs Iolanda Tedesco, are the parents of Mr Pino Tedesco. Pino is the controlling mind behind the defendants, three companies now in administration.

The plaintiffs claimed that on 10 January 2021, they entered into three loan agreements with the defendants. Each of the agreements was about half a page long and identical in its terms. These included a term that defined “security” as “entity and or assets of the borrower”, and a clause with the heading “conditions of loan”, which provided that the defendants could not refuse a lender-initiated charge over the security to the amount of what the lender is owed.

In January and February 2021, the plaintiffs advanced $1,153,000 under the loan agreements. They submitted as evidence unredacted bank statements of a joint bank account which recorded entries consistent with the advance of the loans to each of the defendants.

In December 2022, Iolanda sent a text message to Pino in which she wrote “Pino please we need our loans paid back. When can you do as we been asking long time now!”. The amounts were not repaid.

On 15 March 2024, the plaintiffs engaged lawyers and became aware of the existence of the Personal Property Securities Register (PPSR) and the significance of registering (or not registering) security interests on the PPSR. They also received advice about whether the “conditions of loan” clause could be viewed as a security interest.

On 16 March 2024, general security agreements (GSAs) were executed by the plaintiffs and each of the defendants. On 19 March 2024, the plaintiffs’ solicitor lodged PPSR registrations in respect of the defendants by reference to their respective Australian company numbers (ACNs). On 18 April 2024, after locating the Australian business numbers (ABNs) for the trusts of which two of the defendants were trustees, the plaintiffs’ solicitor also lodged PPSR registrations over the ABNs for each of the trusts.

The Court’s Decision

The Law

The plaintiffs sought orders under s 588FM of the Corporations Act 2001 (Cth) to fix a later time for the purpose of s 588FL(2)(b)(iv) for registration of the alleged security interests.

Where a security interest is registered late, and too close to the grantor’s insolvency, the security interest can be lost under s 588FL of the Corporations Act. Broadly, the effect of s 588FL(2) is that when a company is being wound up, an administrator has been appointed or a deed of company arrangement executed, any PPSA security interest which was perfected, registered, or enforceable against a third party after the latest of six months before the critical time or 20 days after the security agreement came into force or such later time as the Court may fix under s 588FM, vests in the company, for the benefit of creditors generally, and the secured creditor loses the benefit of the security.

The operation of s 588FL can be mitigated by an application for an order fixing a later time for the purposes of s 588FL. The Court has power under s 588FM(1) to make an order effectively extending the time for the registration of a security interest, which has the effect of avoiding the effect of s 588FL, and preserving the security interest in the event that the grantor later becomes insolvent.

Section 588FM confers on the Court a discretion to fix a later time if satisfied of any one of three grounds, namely that the failure to register the collateral earlier was accidental, or was not of such a nature to prejudice the position of creditors or shareholders, or that on other grounds it is just and equitable to do so. The section also permits the Court to make the order on terms and conditions.

Section 588FL(1) makes it clear that s 588FL applies if “a PPSA security interest granted by a company in collateral is covered by subsection (2)”. In turn, s 588FL(2) sets out that it covers a PPSA security interest where at, relevantly, either the critical time or when the security interest arises, it is enforceable against third parties under the law of Australia and the security interest is perfected by registration and by no other means, and the registration time for the collateral is one of those specified in s 588FL(2)(b).

Does the plaintiff need to establish the existence of a security interest?

The Court first considered the issue of whether in applications under s 588FM the applicant is required to establish the existence of a security interest or only an arguable case that it has such an interest. It found that, to date, in the limited number of cases considering the point, it has been held that it is not necessary in an application under s 588FM for the Court to determine on a final basis whether the relevant interests are PPSA security interests. An applicant only needs to establish that it has a reasonably arguable case that it has such an interest.

Accordingly, the Court approached its analysis by considering: (1) whether the plaintiffs had established a reasonably arguable case that the plaintiffs had a security interest; and (2) if so, whether the Court should exercise its discretion to fix a later time for registration under one of the grounds set out in s 588FM.

The Arguments

The plaintiffs’ primary position was that the “conditions of loan” clause gave them an immediate security interest when the loan agreements were entered into. Their alternative position was that the clause gave them a security interest on either: (a) them making a demand for the loan amounts; or (b) the due date specified in each loan agreement. If either position were accepted, the PPSR registrations that occurred in March and April 2024 were out of time and a later time would need to be fixed, as otherwise those security interests would vest in the defendants or the trusts.

The plaintiffs’ further alternative position was that they held security interests pursuant to the GSAs that were entered into on 16 March 2024. If this were the case, the PPSR registrations that occurred on 19 March 2024 were within time, but those that occurred on 18 April 2024 as against the trusts were one day out of time.

Two of the defendants’ administrators did not take a position on the application. The third contended that the Court should not accept the plaintiffs’ primary or first alternative position, but accepted that it would be open to the Court to accept the plaintiffs’ further alternative position as to the security interests created by the GSAs, but does so on the basis that it does not prejudice the rights of the administrator or any subsequent liquidator to seek to set aside the security interests on any of the grounds provided for under the Corporations Act.

Ms Kathlene Campbell, Pino’s former spouse and the former daughter-in-law of the plaintiffs, was granted leave to intervene in the proceedings to oppose the relief sought. She was involved in family law proceedings with Pino and was an unsecured creditor of each of the defendants. She argued that Pino had not provided any documents to support an indebtedness to his parents in the family law proceedings, despite being requested to do so. Ms Campbell did not positively allege that the documents and transactions were fraudulent, but raised concerns that the belated production of the loan agreements, entry into the GSAs, the PPSR registrations, the voluntary administrations of each of the defendants, and other steps may have been taken to defeat her interests as an unsecured creditor. Ms Campbell further argued that a failure to previously seek legal representation should not be grounds for granting a retrospective secured interest in a company.

Did the plaintiffs establish a reasonably arguable case that they had a security interest?

Given the wording of the “conditions of loan” clauses in the loan agreements, the Court was not satisfied that the clauses gave rise to an immediate security interest in favour of the plaintiffs. However, the Court considered it reasonably arguable that the clauses gave rise to a “springing” security that would arise in the event that one or more of the conditions were satisfied, being (a) request by the plaintiffs; (b) demand for repayment; or (c) default by the defendants. Similarly, and although far from being a model of clarity, it was reasonably arguable that the security provided under the loan agreements was in the nature of a charge over all assets of the defendants.

In any event, it did not matter to the determination of the present application whether the loan agreements gave rise to security interests or not. This is because the Court was satisfied that the GSAs granted such interests. This was not in contest in the proceedings, other than by reason of the matters raised by Ms Campbell.

Should the Court exercise its discretion to fix a later time for registration under one of the grounds set out in s 588FM?

The Court then considered whether it should exercise its discretion to grant the orders sought by the plaintiffs. One of the grounds to fix a later time for registration listed in s 588FM(2) is “inadvertence” ((a)(i)), which includes failure to advert to or understand the requirement for registration within the specified period, and innocent error in the sense of failure to register through ignorance of the legal requirement to do so, or of the consequences of not doing so.

Here, it was not until 15 March 2024 that the plaintiffs learned of the existence of the PPSR, the requirements for registration and the significance of registration vis-a-vis enforceability. The delay in registrations as against the two trusts was attributable to an error in failing to locate the ABNs for the trusts. It has been held that mistakes made by lawyers and others in the lodgement of registration documents on the PPSR fall within the scope of 588FM(2)(a)(i). As a result, the Court was satisfied that the delayed registrations arose due to inadvertence within the meaning of 588FM(2)(a)(i) of the Corporations Act.

Turning to the issue of prejudice, the Court found that the only prejudice that arose was to the position of unsecured creditors, but such a prejudice arose from the delay in registration and not from the making of the orders. Further, the proposed orders took the form of “Guardian Securities orders”, meaning interested parties will have a right to seek to set aside or vary the orders if they are adversely affected.

Ms Campbell had contended that if the requested orders were granted, the plaintiffs would become secured creditors and have priority over her as an unsecured creditor. The Court stated that the reality was more subtle than that. To the extent that orders are made by the Court under s 588FM, they are orders that fix a later time for the registration of the security interests. In the present case, at the very least, the GSAs granted security interests to the plaintiffs on 15 March 2024 and registrations were made in respect of the defendants on 16 March 2024 and in respect of the trusts on 18 April 2024. The plaintiffs sought the fixing of later time to be 18 April 2024. The Court was satisfied that this short period of time did not prejudice Ms Campbell’s interests as an unsecured creditor.

Further, that registration of a security interest, and the fixing of a later time for the registration of a security interest, was not determinative of the existence of the underlying interest or its enforcement. Whether a registered security is effective or enforceable is a matter that may be separately determined.

Conclusion

Accordingly, the Court granted the plaintiffs’ application.

Judge: Shariff J

Counsel for the Plaintiffs: John Anderson of Eight Selborne

Solicitor for the Plaintiffs: Bridges Lawyers

Solicitor for the First Defendant: PJ Hegarty of Hegarty Legal