Section 588FL(2)(b)(ii) of the Corporations Act 2001 (Cth) (‘the Act’) provides a time frame for registering a security interest under the PPSA, being either 20 business days after the relevant security agreement came into force, or by the ‘critical time’, that is, before the date of the appointment of an administrator or liquidator.
The potential risk, therefore, is that if a security interest is not registered within the time frame provided for by the Act – the security interest may be ineffective and the collateral may vest in in the administrator or liquidator.
The recent Federal Court decision in the case of Mentha, in the matter of Arrium Limited (administrators appointed) (‘Mentha’) shows that in certain circumstances a Court may extend the time to register a security interest where a company has been placed in administration.
Under s 588FM(2) of the Act, the Court has the power to extend or fix a later date for the registration of a security interest. In order to do so, the Court must be satisfied that:
(a) the failure to register the security interest earlier:
(i) was accidental or due to inadvertence or some other sufficient cause; or
(ii) not of such a nature as to prejudice the position of creditors or shareholders; or
(b) on other grounds, it is just and equitable to grant relief.
In the case of Mentha, the administrators needed to fund an installation at one of Arrium’s iron ore sites in South Australia for the purpose of recapitalising and improving the sale value of the Arrium Group. In order to do so, the administrations needed to secure finance. The Commonwealth’s Export Finance and Insurance Corp (‘EFIC’) agreed to finance the project subject to the loan being secured.
The concern was that the potential operation of s 588FL of the Act and the risk that the funding may vest in favour of the administrators.
The Court decided that the circumstances justified an extension of time for the registration of EFIC’s security interest. The Court noted that the administrators’ were of the view that the transaction was in the best interests of the creditors and considered it appropriate to extend the time by which the security interest could be registered.
The point for credit managers is that where their company has not registered its security interest in accordance with s 588FL and the customer has been placed in administration, their company may seek an extension of time to do so in accordance with s 588FM(2) to preserve the validity of its security interest in the collateral supplied.
By Frank Gambera
McMahon Fearnley Lawyers Pty Ltd