A defect in a PPSA registration may render the security interest ineffective which may be disastrous for a secured party. The PPSR does not identify defective financing statements at the time of registration. As such, a defect in a financing statement may remain undetected until it's too late. The responsibility falls to the secured party alone to ensure that there are no defects in a financing statement which may render the registration ineffective.
What is a defect?
"Defect" is defined in the PPSA as including "an irregularity, omission or error in the registration".
Section 164(1) sets out the general rule as to defects under the PPSA:
"A registration with respect to a security interest that describes particular collateral is ineffective because of a defect in the register if, and only if, there exists:
- a seriously misleading defect in any data relating to the registration, other than a defect of a kind prescribed by the regulations; or
- a defect mentioned in section 165."
For the purposes of section 164(1)(b) section 165 provides that "a defect in a registration that describes particular collateral exists at a particular time if any of the following circumstances exist:
- in a case in which the collateral is required by the regulations to be described by serial number in the register – no search of the register by reference to that time, and by reference only to the serial number of the collateral, is capable of disclosing the registration;
- in a case in which the collateral is not required by the regulations to be described by serial number in the register – no search of the register by reference to that time, and by reference only to the grantor's details (required to be included in the registered financing statement under section 153), is capable of disclosing the registration;
- if the registered financing statement (as amended, if at all) indicates that a security interest in the collateral is a purchase money security interest (to any extent) – the security interest is not a purchase money security interest (to any extent) in the collateral;
- in any case – circumstances in relation to the data related to the registration that are prescribed by the regulations."
What is a seriously misleading defect?
For the purposes of section 164(1)(a), the term "seriously misleading defect" is not defined in the PPSA.
However, section 164(2) of the PPSA provides that "in order to establish that a defect is seriously misleading, it is not necessary to prove that anyone was actually misled by it." Accordingly the test is an objective one (as is the case in Canada and New Zealand) rather than subjective.
The question of what is seriously misleading in relation to a financing statement has yet to be decided by an Australian court.
Defects in migrated security interests
More than 4.7 million registrations on transitional registers (eg the ASIC Register of Company Charges, REVs, the Fisheries Register, the Australian Register of Ships etc) were migrated to the PPSR before its commencement on 30 January 2012. The transitional registers are now closed.
Some of the data transferred will have defects because the information will not comply with the information required by section 153 (requirements for financing statements) and the PPS Regulations 2010. The absence of required information such as serial numbers may have consequences and secured parties should check all migrated security interests and where necessary, re-register.
Pursuant to section 337(4), a migrated registration is temporarily unaffected by a defect for the period starting at the registration time and ending at an end time stated in the financing statement or, if no end time, 60 months after the commencement time. Therefore during this period the migrated registration will not run foul of sections 164 and 165.
However, the absence of certain required data in migrated registrations may have serious consequences under other PPSA provisions such as section 44(1). For example, every registration has to identify whether the collateral is consumer or commercial.
- If it's consumer property the serial number must be used for registration.
- If it's commercial property the serial number may be used (except in the case of an aircraft engine, airframe, helicopter or small aircraft).
- If the collateral is consumer property and required to be described by serial number you don't include the grantor's details on the registration.
Section 44(1) provides that (subject to certain exceptions) a buyer or lessee of personal property takes the personal property free of a security interest in the property if:
- the regulations provide that personal property of that kind may, or must, be described by serial number in a registration; and
- searching the register, immediately before the time of the sale or lease, by reference only to the serial number of the property, would not disclose a registration that perfected the security interest.
If a security interest is not registered in this manner a buyer or lessee may take the collateral free of the security interest under section 44.
The PPSR website contains some useful information regarding migrated registrations under tabs headed "known issues resolved" and "known issues being progressed". There are two key problems that currently relate to the migration of ASIC charges that may not be protected by section 337(4) of the PPSA.
The first issue relates to "phantom charges". According to a report prepared by ASIC, as at 5 May 2013, there were 5,471 security interests on the ASIC Register of Company Charges that had not been migrated to the PPSR due to technical issues arising in the migration. These phantom charges are subject to special priority rules. Practitioners should check this list and advise affected clients accordingly.
The second issue relates to certain migrated ASIC registrations with multiple secured parties which have been migrated with only one secured party listed in the secured party group. Approximately 27,000 registrations have been affected by this issue, according to a report prepared by ASIC. These migrated registrations are still effective. Although not all the secured parties are listed in the secured party group, the additional secured parties can be identified by examining the underlying security documents in the migrated attachment. Affected registrations can be found on Govdex (www.govdex.com.au). This issue is on-going. Practitioners should check this list and advise affected clients accordingly.
Temporary effectiveness of certain defects
Despite sections 164 (general rule) and 165 (particular defects) a registration may be temporarily effective if the defect is in relation to:
- a change in the serial number under which the collateral is required to be described in the register.
- a change in grantor details.
With regard to the first bullet point, the first note to section 166(1) gives the example of a patent which may be required to be described by serial number (a Patent Application Number or a Patent Number). The Patent Application Number may change to a Patent Number when the patent is registered on the patents register.
With regard to the change in grantor details, section 166(1)(a)(ii) states that this is other than a defect resulting from a change of the grantor in relation to the collateral. The second note to section 166(1) states that "a change of the grantor may occur if the collateral described in the registration is transferred. In this case, the secured party's security interest may be temporarily perfected for a certain period. See section 34."
If collateral is transferred, and at the time of the transfer a secured party held a perfected security interest in the collateral, the security interest is temporarily perfected for the period starting at the time of the transfer and ending at the earlier of the times stated in section 34(1).
Note that temporary effectiveness is only available if "the defect does not arise only because of an irregularity, omission or error in a financing statement or financing change statement" (s166(1)(b)) (i.e. protects secured party's from changes of name or number (of a SNG) or from defects in the operation of the PPSR that occur/arise after registration over which the secured party could have no control).
Extending time for registration
Security interests should be registered within 20 business days after the relevant security agreement comes into force.
There are potentially serious consequences if a security interest is not registered within the 20 business day period – i.e. it may be void against a liquidator if it was registered more than 20 business days after creation of the security interest and less than 6 months before the winding up of the company granting the charge.
Under section 588FM of the Corporations Act 2001 a court may extend the time for registration if it is satisfied that:
- the failure to register the collateral earlier:
- was accidental or due to inadvertence or some other sufficient cause; or
- is not of such a nature as to prejudice the position of creditors or shareholders; or
- on other grounds, it is just and equitable to grant relief.
Re Barclays Bank plc
In Australia's second PPSA judgement, Re Barclays Bank plc  NSWSC 1095, the New South Wales Supreme Court considered in what circumstances the time period to register a security interest may be extended. Barclays Bank provided a loan facility for GBP8 million to Sportingbet plc, a UK company. Under the loan, companies in the Sportingbet group, including the Australian company Centrebet International Pty Ltd, granted additional security including a general Security deed which was executed on 24 April 2012.
Despite receiving PPSA training and advice from Australian lawyers about the 20 business day registration period (which expired on 23 May 2012) the solicitor acting for Barclays registered the security interest late, on 9 August 2012. As a result of this oversight, Barclays applied (unopposed) for an extension of time under section 588FM.
Black J confirmed that the authorities on the former s266(4) will assist in guiding the court's exercise of discretion under s588FM. The length of delay prior to registration of the security interest is a relevant factor in the exercise of the discretion.
Black J was satisfied that the failure to register was "accidental or inadvertent". He also noted the fact that Barclays UK counsel had limited experience in finance transactions and received limited training on the PPSA regime.
In considering whether it was an appropriate exercise of the court's discretion, Black J noted that:
- the delay of 2 months between the last day of the 20 business day period and the date of registration was not a particularly long period;
- Centrebet was in a strong financial position;
- Centrebet did not oppose the application;
- there had been no material change in Centrebet's financial position during the delay period;
- no security had been granted to third parties during the delay period; and
- no material debt had been incurred during the delay period.
Accordingly, Black J was satisfied that late registration would not prejudice the position of Centrebet's creditors or disturb or affect any accrued or accruing rights.
Given the financial strength of Centrebet, Barclays application for the extension was probably motivated more by caution than actual need. However, the court's decision could have been different:
- if there were several secured parties;
- if the application for extension was opposed;
- if Sportingbet was at risk of winding up or administration;
- if the solicitor had been experienced;
- if the delay was longer; and
- if the delay occurred now (towards the end of the transitional period) rather than in April 2012.
Cardinia Nominees Pty Ltd
The facts in Cardinia Nominees Pty Ltd  NSWSC 32 were that Cardinia Nominees Pty Ltd registered a security interest over the assets of Inika Pty Ltd. However the security interest was registered 25 business days after the date of the security agreement. The sole director of Cardinia was made aware of the need to register within 20 business days by a solicitor acting for Inika. The security documents were ambiguous as to which party had the obligation to register the security interest.
The court found that Cardinia's failure to register within time as at least due to inadvertence which was sufficient for the court to make the order under section 588FM of the Corporations Act. The court accepted Cardinia's argument that the 5 day delay was not lengthy.
The court then considered whether any grant of extension would prejudice the unsecured creditors of Inika because Cardinia's security interest may no longer vest in the grantor if the extension is granted. The court decided that it would be fair to grant the extension order if Cardinia could show that Inika was solvent at the time of entry into the security agreement and for the foreseeable future, so as to eliminate the potential of injustice to the unsecured creditors. However, evidence of solvency was not provided. Therefore, the court granted a conditional extension order in that any liquidator, administrator, deed administrator or unsecured creditor of Inika could apply to discharge or vary the order if any winding up (or similar event) of Inika commenced within 6 months of the date of the security agreement.
The Cardinia case is important in highlighting the fact that registering within the 20 business day registration period is critical. Any failure to register within time may leave the "secured" party facing the solvency risk of the grantor for 6 months, as in Cardinia. In this regard it may have been a better approach for Cardinia and Inika to execute a new security agreement and register within time.
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.