At KordaMentha we focus on protecting and recovering value for creditors, but we also play a critical role in distributing that value to creditors in accordance with the law.
The recent judgement, In the matter of OneSteel Manufacturing Pty Limited (administrators appointed)1 , confirmed our decision as Administrators of OneSteel Manufacturing to reject the PPSR registrations of Alleasing Pty Limited and consequently determine that assets rented to OneSteel Manufacturing by Alleasing had vested in OneSteel Manufacturing for PPSA purposes immediately prior to the appointment of Administrators. The Court's decision provides useful guidance and confirms a number of important principles about the PPSA and the consequences of defective registrations.
In essence, the case considered whether or not Alleasing's PPSR registrations were defective on the basis the registrations used the ABN of OneSteel Manufacturing rather than the ACN, which is the identifier required by the PPSA for a company.
Many people without a deep comprehension of the PPSA may think the Court's decision is an unfair outcome for Alleasing given there was a difference of only two digits between the ACN and the ABN used in the registrations. However, the PPSA has introduced a new world for Australian creditors and insolvency practitioners. Creditors receive significant benefits from correctly registering their security interests. For example, an effective security interest will allow creditors a statutory right to trace into commingled goods or to proceeds from sale of their security interest, benefits which may have previously only been available contractually and which were practically difficult to enforce against other security interests. The PPSR also provides a comprehensive database or notice board of security interests that enables counterparties to properly assess secured claims against a grantor.
The consequences of failing to register, or registering a defective security interest, are that the security interest will be invalid, and the collateral will vest in the grantor in the event of an insolvency administration.
The changes introduced by the PPSA mean that we need to bring a different mindset to our understanding and assessment of what properly constitutes a secured creditor claim.
In 2014, to improve the operating efficiencies of its Iron Knob mine in South Australia, OneSteel Manufacturing undertook to acquire a mobile iron ore crushing plant ('the Crusher') with a capital value of approximately $25 million.
To fund that acquisition, it entered into a rental agreement with Alleasing. As the rental agreement was for a period in excess of one year, the rental agreement was deemed to be a PPS Lease and consequently Alleasing made, over time, four PPSR registrations against OneSteel Manufacturing to register its security interest in the Crusher.
Following the appointment of Administrators to Arrium Australia in April 2016, KordaMentha set up a team to manage the assessment and adjudication of over 3,000 registrations made on the PPSR against Arrium Australia companies. After investigating the registration of Alleasing, the KordaMentha PPSR team determined that the Alleasing registration against the Crusher was defective and notified Alleasing of this determination on 10 June 2016. On 14 June 2016, Alleasing made additional registrations against OneSteel Manufacturing. These registrations were also determined to be defective.
Each of these registrations was ultimately found to be defective, as Alleasing used the ABN to identify OneSteel Manufacturing. Under the PPSA Regulations, the required identifier for a company is the company's ACN. As a consequence, s267 of the PPSA applied and the Crusher vested in OneSteel Manufacturing immediately prior to the appointment of the Administrators. Alleasing, rather than having a perfected security interest in the Crusher and ongoing entitlement to rental payments during the Administration pursuant to its rental agreement, became entitled to prove for its loss and damage against OneSteel Manufacturing pursuant to s269 of the PPSA.2
3. The arguments
Alleasing's arguments against the Administrators' decision that its registrations were considered defective were:
- The initial registrations were valid as the 11 digit ABN used by Alleasing in its registrations included the 9 digit ACN and so the ACN data had been included (albeit within the ABN)
- PPSR users were able to identify the Alleasing registrations through the use of 'combined searches' provided by commercial search organisations, hence the Alleasing registrations were not defective as it was possible to locate Alleasing's registrations
- If the registrations were defective, the vesting of the Crusher was unconstitutional as it was an acquisition of property on unjust terms
- If the registrations were defective, that Alleasing should be entitled to an extension of time to enable its subsequent registrations (registered after the appointment of the Administrators) to be declared effective.
The ACN Argument
Section 165(b) of the PPSA deems registrations defective if they fail to include certain critical information that would allow a searcher of the PPSR to identify a registered security interest, its collateral or whether the security interest is or isn't a PMSI. The critical items covered by that section include the requirement to use the proper identifier for the grantor of the security interest. For a company, the proper identifier is the ACN and this is the only required identifier that need then be used for searches of the PPSR in respect to a company.
Alleasing argued that because the ABN of OneSteel Manufacturing included 9 of the same digits as the ACN, the registrations were not defective as the ACN had been included in its registration within the ABN. The Court found that an ACN is a specific number which is not the same as the ABN (notwithstanding that some of the digits may be common). As such, the registrations were defective pursuant to s165(b) as they failed to correctly include the proper identifier of OneSteel Manufacturing.
The Court also found that the failure to include the ACN meant that the registrations were seriously misleading and so defective pursuant to s164(1), as searchers of the PPSR who performed a search using only the required corporate identifier (being the ACN) would not have found Alleasing's registrations. In this regard, the Court followed the New Zealand decision of Polymers International.3
The Combined Search Argument
Alleasing also argued that the registrations were not defective as the registrations could have been found by any party that undertook a 'combined search' of the PPSR. Combined searches are offered by third party providers with commercial access to the PPSR. In effect these are searches that provides search results based on multiple identifiers such as the ABN, ACN and Name of a grantor.
In context, it is critical to note that a search of the PPSR using only the ACN of OneSteel Manufacturing would have not found Alleasing's registrations. This is the method of search prescribed by the PPSA. The Court found that the registrations could be found by using alternative identifiers either alone or in combination was irrelevant.
We note that the Registrar of Personal Property Securities intervened in the matter to make submissions regarding certain factual matters raised by Alleasing in its arguments. In relation to the 'combined search' argument, the Registrar confirmed that 'combined searches' do not actually involve a contemporaneous search of the PPSR using multiple search criteria, but rather are undertaken as multiple individual searches. The results of these searches are then aggregated by the third party search providers and reported as a 'combined search'. As such, a 'combined search' is not a search solely by the identifier prescribed by the PPSA.
The Constitutional Argument
Alleasing argued that any vesting of the Crusher on the basis that its registrations were defective was unconstitutional, as the vesting would be an acquisition of property on other than just terms. The argument that vesting of security subject to a defective security interest is unconstitutional has previously been run and rejected in White v Spiers Earthworks. 4
The Court specifically considered a number of reasons why the PPSA was not unconstitutional with detailed reasons in the judgement that supported the decision in White v Spiers Earthworks. In particular, the Court found:
- Section 267 of the PPSA, which provides for vesting of security interests not covered by an effective PPSR registration, does not result in an acquisition of property at all, but prescribes the consequence of failure to register an effective security interest on the PPSR.
- In addition, or alternatively, s267 of the PPSA does not provide for an acquisition of property but merely adjusts the rights of competing interests in personal property.
For these reasons the Court found that the vesting provisions of the PPSA were not constitutionally invalid as they did not result in an acquisition of property. In this regard, the Court confirmed that the decision in White v Spiers Earthworks was considered as correct.
The Extension of Time Argument
Finally, Alleasing argued that it should be provided with an extension of time for registration of the security interests made after it was notified by the Administrators that its registrations were considered to be defective.
Alleasing sought to rely on s588FM of the Corporations Act, that the registrations made after the appointment of the Administrators would be effective notwithstanding the registrations were made outside of the usual time for perfection of a security interest. The Court found that s588FM could not be relied on as this section only enables an extension of time in circumstances where the security interest had been perfected (as required by s588FL) by registration. As Alleasing's original registrations had been defective, the section could not be enlivened. Similarly, the Court found that s588FM could not be applied in relation to the subsequent registrations as the security subject to those registrations had already vested immediately prior to the appointment of the Administrators and so those registrations could never be perfected.
In essence, the Court found that s588FM is not a cure for defective registrations, but rather a cure for belated registrations that are otherwise not defective.
The Court's decision provides useful guidance regarding the operation of s165(b) and s164(1) of the PPSA, whilst also confirming the constitutional validity of the vesting rules introduced by the PPSA. In particular, the decision confirms that the PPSR is an exact match system and that the PPSA mandates the use of certain prescribed information in the PPSA. Failure to strictly comply with the provisions of the PPSA regarding the information required and, in particular, information required by s165(b), will render a registration defective.
The decision also confirms that s588FM of the Corporations Act only operates to enable an extension of time for security interests that have been perfected by registration prior to the appointment of an insolvency practitioner.
The decision reinforces the need for creditors to properly register their security interest on the PPSR if they wish to protect the value of their collateral.
1In the matter of One Steel Manufacturing Pty Ltd (administrators appointed)  NSWSC 21
2 On 15 June 2016 Alleasing also made additional registrations on the PPSA in relation to a number of other companies to which Alleasing rented or leased assets. Alleasing applied to Court on 21 June 2016 for extensions of time pursuant to s588FM of the Corporations Act to register its security interests (this decision was reported as Accolade Wines). Alleasing successfully obtained extensions of time in the Accolade Wines case to register new security interests on the PPSR although none of the companies involved in that case were subject to insolvency appointments.
3 Polymers International Ltd v Toon  NZHC 1897
4 White v Spiers Earthworks Pty Ltd  WASC 139
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.