Australia's relatively lenient attitude to tardy lenders
may be about to change.
The Federal Court has questioned the use of judicial
discretion to validate the late registration of debentures and
other charges. If other courts adopt the same attitude, lenders
(and other secured creditors) will have to tighten up their
back office procedures.
Australia's Corporations Act requires the public
registration of charges over company property. When a company
goes into liquidation, priority between secured creditors is
determined by the chronological order in which they registered
Public registration allows other potential creditors to
determine the extent to which the company's assets are
pledged to the payment of particular secured creditors. In
general terms, unsecured creditors are only entitled to be paid
out of those assets - if any - left over after secured
creditors have taken their cut. A company which has given
charges over all or most of its assets may be seen a greater
credit risk for unsecured creditors than a company which has no
charges over its property.
This straightforward position is subject to some important
A charge must be registered within 45 days of its creation.
Late registration of charges has a number of consequences. The
most important of these is that the charge will be voided if
the company goes into liquidation within six months of the late
The second important qualification is that the Court has the
power to extend the time for registration of a charge. This can
work in the following way:
1 January - company grants charge
14 February - time for registration expires
28 February - charge is registered
14 March - chargeholder successfully applies to court to
extend time for registration of charge until 28 February
1 May - company goes into liquidation.
In practice, it's relatively common for chargeholders to
lodge a charge late but not to apply for an extension of time.
It's only when the company goes into liquidation that the
creditor realises that the late registration will be useless
without a court order to validate it.
Australian courts will hear extension applications made
after the company has gone into liquidation. Although
reluctantly, the courts will tend to grant an extension if they
can be convinced that the late lodgement was a genuine accident
and that other creditors' interests will not be
However, that may be about to change.
"The better view"
A Full Court of the Federal Court recently expressed strong
doubts about whether courts actually have the power to hear
extension applications after the company has gone into
All three judges said that, when read correctly, the
relevant statutory provision only allows applications before
the date of winding up. Once winding up has begun, a court has
no power to grant an extension. However, two of the judges also
acknowledged that their reading of the statute was at odds with
the prevailing line of cases. Faced with this, they opted to
follow the existing authorities, rather than their own
The third judge, Whitlam J, held that the existing
authorities were plainly wrong and should not be
Although the Federal Court ended up granting this particular
extension application, its comments will provide significant
ammunition for unsecured creditors and liquidators.
It's now reasonable to expect that, sooner or later,
this issue will be taken to the High Court for final
pronouncement. Although it's impossible to predict how the
High Court would rule, history shows that it doesn't
hesitate to overturn entrenched authorities if it thinks that
those authorities were incorrect.
A High Court ruling that extensions can't be granted
after winding up has begun would not be a disaster for secured
creditors. On the other hand, it would highlight the need for
effective procedures for handling charges.
Many financial institutions already have compliance
processes for ensuring timely registration. Nevertheless, the
fact that applications for extensions regularly appear in court
suggests that there may still be room for improvement across
the industry as a whole.
Outside the finance industry, trade creditors who take a
charge as a one-off transaction will have to rely on their
professional advisers to avoid late registration and the risk
of completely losing their security.
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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