On 24 September 2014, in Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in Liq)  FCA 1034 the Federal Court dismissed an application by a creditor of a company in liquidation seeking a declaration, amongst other things, that a security interest granted to the creditor had not vested in the company.
At issue was the interpretation of section 21 of the Personal Property Securities Act 2009 (PPSA) and section 588FL Corporations Act 2001 (Corps Act). Section 21 sets out how a security interest may be 'perfected' for the purposes of the PPSA. Section 588FL sets out the circumstances in which a security interest will vest in a company under external administration.
The applicant creditor argued that the manner in which its security interest was perfected meant that section 588FL did not apply and the security interest did not vest in the company upon it entering external administration.
The Federal Court rejected the applicant creditor's arguments and construed the relevant provisions of the PPSA and Corps Act so as to hold that section 588FL did apply to the security interest and by its operation the security interest was not valid or enforceable against the respondent company.
Facts of the case
On or about 24 December 2013, the applicant (Pozzebon) advanced the sum of $250,000 to the respondent company (AGEL). A loan agreement and security agreement were executed by the parties in respect of the advance.
On 9 May 2014, Pozzebon registered its security interest granted by the security agreement on the Personal Property Security Register (PPSR).
On 26 May 2014, some five months after the security interest was created, AGEL was placed into voluntary administration. AGEL had one relevant asset, being funds in the sum of $860,000 held in a bank account.
Pozzebon lodged a formal proof of debt with the administrators of AGEL claiming the sum of $348,713.37 in relation to the advance.
The administrators of AGEL notified Pozzebon that its security interest was unenforceable against AGEL and had vested in the AGEL pursuant to the operation of the Corps Act and PPSA.
On 1 July 2014, AGEL was placed into liquidation.
Section 21 of the PPSA stipulates the requirements for perfection as follows:
- " A security interest in particular collateral is perfected if:
- the security interest is temporarily perfected, or otherwise perfected, by force of this Act; or
- all of the following apply:
- the security interest is attached to the collateral;
- the security interest is enforceable against a third party;
- subsection (2) applies.
- This subsection applies if:
- for any collateral, a registration is effective with respect to the collateral; or
- for any collateral, the secured party has possession of the collateral (other than possession as a result of seizure or repossession); or
- for the following kinds of collateral, the secured party has control of the collateral:
- (i) ... "
Upon the advent of the PPSA, section 588FL of the Corps Act essentially replaced section 266 which had dealt with the circumstances in which a charge over a company would be void against a liquidator or administrator.
Section 588FL stipulates that a security interest in collateral will vest in a company in external administration in certain circumstances. Those circumstances are, in summary, as follows:
- the security interest is enforceable against third parties; and
- the security interest is perfected by registration, and by no other means; and
- the registration time for the collateral occurs after the latest of the following times:
- (i) 6 months before the company entered external administration;
- (ii) 20 business days after the security agreement that gave rise to the security interest came into force;
- (iii) a later time ordered by the Court under section 588FM.
As the registration of Pozzebon's security interest occurred both after:
- the date 6 months before AGEL entered external administration; as well as
- 20 business days after the date the security interest was created,
unless Pozzebon was able to establish that either of paragraphs (a) or (b) above were not satisfied, the security interest would vest in AGEL under the operation of section 588FL.
In this case, Pozzebon sought to establish that paragraph (b) above, being "the security interest is perfected by registration, and by no other means", was not satisfied.
At trial, AGEL accepted that the security interest satisfied the 'perfection' requirements of section 21 of the PPSA as it:
- attached to AGEL's interest in the bank account;
- was enforceable; and
- was registered on the PPSR.
AGEL argued that as the security interest:
- was perfected through registration; and
- was not perfected through the other methods by which a security interest may be perfected under section 21 (being through possession or control),
the requirement of section 588FL that a security interest be "perfected by registration, and no other means" was satisfied.
Pozzebon submitted that its security interest was perfected by three distinguishable elements or "means", being 'attachment' and 'enforceability' and 'registration', which meant that the requirement of perfection by registration and "by no other means" was not satisfied as 'registration' was not the only means by which its security interest was perfected. As a consequence, in Pozzebon's submission, section 588FL did not apply to its security interest.
Findings of the Court
The Court rejected Pozzebon's contentions in relation to the interpretation of section 21 of the PPSA and section 588FL of the Corps Act. The Court held that the elements of 'attachment' and 'enforceability' are necessary pre-conditions for a security interest to be perfected, which, when combined with one of the alternatives set out in subsection 21(2) of the PPSA, being either 'registration', 'possession' or 'control', results in the perfection of a security interest.
It was held that the reference in subsection 588FL(2)(a)(ii) to a security interest being perfected "by registration, and by no other means" is distinguishing 'registration' as a means of perfection from 'possession' or 'control' and is not distinguishing 'registration' from 'attachment' and/or 'enforceability'. The elements of 'attachment' and 'enforceability' were not held to be "other means" as contemplated by 588FL(2)(a)(ii).
Accordingly, the only "means" by which Pozzebon's security interest was perfected was by registration. As a consequence, section 588FL applied to the security interest and by its operation the security interest vested in AGEL.
The purpose of section 588FL is to protect against security interests being granted fraudulently with the knowledge of an imminent external administration.
Pozzebon's claim appears to be an attempt to avoid the ramifications of its failure to register its security interest within 20 business days of the security interest being created. Had Pozzebon registered the security interest within that 20 business day period, it would have retained the security interest even though that registration would have occurred within the six month period prior to AGEL entering external administration.
This case serves to reiterate the importance for parties who are granted a security interest in the property of a company to ensure that the security interest is registered on the PPSR within 20 business days of the security interest being granted in order to avoid it being subject to section 588FL of the Corps Act in the unforeseen event that the grantor enters external administration within six months of the expiry of the 20 business day period from when the security interest is granted.
For insolvency practitioners and the interests of unsecured creditors, this case serves to confirm the application of section 588FL to security interests that are perfected by registration (and caught by the relevant timeframes of the section) and thereby assist in protecting the vesting of such security interests in the company upon entering external administration.
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.