Simply because the grounds exist on which the extension of time may be granted did not mean that this extension would be granted in all circumstances.
In light of the recent decision in Re Octaviar Ltd; Re Octaviar Administration Pty Ltd  QSC 37 it is timely to look at the manner in which the courts will exercise their discretion to grant an extension of time to lodge a registrable charge, or a registrable variation of such a charge, with the Australian Securities and Investments Commission (ASIC).
Under section 266(1) of the Corporations Act 2001 (Cth) an ASIC registrable charge will be void as security against a liquidator, administrator or deed administrator of the relevant chargor if it is not lodged with ASIC within 45 days of the date of its creation or at least six months prior to the date on which relevant insolvency proceedings commence (being the commencement of liquidation or administration). A similar rule applies under section 266(3) in respect of the registration of a variation of a charge which increases the amount secured by the charge (though in those circumstances the charge is only void to the extent of the increase in the amount secured).
If an ASIC registrable charge is not lodged within 45 days of the date of its creation (or a registrable variation is not lodged within 45 days of the date it occurs), an extension of time may be sought under section 266(4) of the Corporations Act to avoid the consequences of the application of section 266(1) or 266(3). In Bevillesta Pty Ltd v Imagine UN Ltd (2009) 69 ACSR 574 Justice Robson of the Supreme Court of Victoria considered such an application.
In this case, the Supreme Court was satisfied that it should exercise its discretion to extend the period of time for lodgement. However, given concerns raised in relation to the solvency of the chargors, the extension was granted on the condition that any liquidator, administrator, deed administrator or creditor of a chargor would have the right to apply to discharge or vary the order in the event that winding up or administration commenced within six months of the date that registration of the charge. Therefore the chargee received little practical benefit from the extension of time granted.
Bevillesta Pty Ltd (BPL) had subscribed for $2 million in convertible notes in Imagine UN Ltd (IUL). IUL's obligations in respect of the convertible notes were secured by a charge given by IUL dated 25 March 2008. Six IUL subsidiaries also granted charges.
Under the Corporations Act, it is the chargor company itself that has the obligation to register a registrable charge with ASIC. In this case, the charge documents also imposed a contractual obligation on the chargors to register as well (unless BPL elected to do so, which did not occur). When the solicitors for BPL realised that registration had not occurred, they arranged registration. The charges were therefore not registered until 30 October 2008, well beyond the 45 day time period required for registration.
Justice Robson considered:
- Had BPL satisfied the statutory requirements to enable the court to exercise its discretion to extend the time for lodgement of the charges?
- Had BPL provided sufficient evidence of the chargors' solvency?
- Should the court exercise its discretion to extend the time for registration and, if so, on what terms?
Condition For Exercise Of Discretion
Section 266(4) of the Corporations Act states:
"The Court, if it is satisfied that the failure to lodge a notice in respect of a charge, or in respect of a variation in the terms of a charge, as required by any provision of this Part:
- was accidental or due to inadvertence or some other sufficient cause; or
- is not of a nature to prejudice the position of creditors or shareholders;
or that on other grounds it is just and equitable to grant relief, may on the application of the company or any person interested and on such terms and conditions as seem to the Court just and expedient, by order, extend the period for such further period as is specified in the order."
Therefore before the discretion to extend the time for lodgement could be exercised by a court, the applicant would need to establish that the reason for the failure to lodge within 45 days of the relevant date (either the date of the creation of the charge or the date of the variation) was due to a cause specified in section 266(4)(a), would not prejudice creditors or shareholders or that it was otherwise just and equitable to grant relief.
On the facts, the chargors had failed to lodge notice of the charges in breach of their statutory and contractual obligations to do so. The chargee had not become aware of this for some time. Justice Robson considered that this established "other grounds" which made it just and equitable to grant the application. Potentially, these facts also established that the failure to register was from "some other sufficient cause" for the purposes of section 266(4)(a).
Evidence Of Solvency And Exercise Of Discretion
Simply because the grounds exist on which the extension of time may be granted did not mean that this extension would be granted in all circumstances. Justice Robson examined the relevant authorities and summarised a number of general principles from those authorities, the most important of which were:
- A court will need to take into consideration the interests of all parties that might be impacted by the making of an order to extend the time for registration. This would include unsecured creditors (but not secured creditors, who would have the priority of their securities determined in accordance with Chapter 2K of the Corporations Act). The interests of shareholders may also be relevant.
- An extension of time will only be granted in extraordinary circumstances if winding up of the chargor has already commenced at the time the application is made.
- As a general rule, a court will give consideration to the financial position of the chargor. This leads to the following consequences:
- A court will not be persuaded that, where "mere inadvertence" led to the failure to lodge the notice, the extension of time simply puts the chargee in the position it would otherwise have been in had it not failed to register in time and therefore the interests of unsecured creditors should not be considered affected. The court will look at the interests of the unsecured creditors if there is the possibility of insolvency of the chargor.
- If there are no solvency issues, then it is more likely that a court will exercise its discretion to grant the extension of time.
- If liquidation or administration of the chargor is likely in the short term, it is more likely that an extension will not be granted or will be granted conditionally.
- If evidence of solvency is not presented, then the court may, for example, allow certain unsecured creditors to be joined to the proceedings or grant the extension but on the basis that conditions are imposed to protect the interests of unsecured creditors.
On the facts of this case, there was some concern that the chargors may have been approaching insolvency. Therefore Justice Robson granted the extension of time requested but did so on the condition that the chargors or any liquidator, administrator, deed administrator or creditor of a chargor could apply to discharge or vary the order for the extension in the event winding up or administration of a chargor commenced within six months of the date that registration actually occurred.
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.