Bevillesta Pty Ltd v Imagine Un Ltd

Affidavit evidence and factual background

1. Eticore ST relies on the affidavits dated 15 and 16 February 2021 of Ms Goumenis, who was its solicitor acting on the securitisation transaction and an affidavit of service dated 15 February 2021 of Ms McCoy, its solicitor acting in this application.
2. Returning to the factual background to the application, Moula Money Pty Ltd and a related entity ("Moula") make loans to small and medium sized enterprises and the securitisation transaction was directed to funding its loan portfolio; Eticore SD (as trustee of the Series 1 Trust, the beneficiary of which is Moula) ("Series 1 Trust") in turn raises funds to acquire receivables from Moula by issuing notes to noteholders and has issued about $4 million of notes in respect of the Series 1 Trust which are backed by those receivables; and, as part of the securitisation transaction, Eticore SD and Eticore ST entered into a General Security Deed (Ex P1, Tab 5) by which Eticore SD granted a security interest in favour of Eticore ST over the assets it holds as trustee of the Series 1 Trust ("Security Interest") (Goumenis 15.2.21 [6]-[7], [10]-[13], [17]). Eticore ST, as security trustee, in turn holds that Security Interest on trust for all secured creditors of Eticore SD as trustee of the Series 1 Trust, including noteholders (Goumenis 15.2.21 [15]).
3. Several transaction documents, including that General Security Deed were executed on 22 December 2020 (Goumenis 15.2.21 [9]). As I noted above, the 20 business day period for Eticore ST to register that Security Interest (so as to avoid a risk of it later vesting in Eticore SD in an external administration within 6 months of it being granted, under s 588FL of the Corporations Act) expired on 29 January 2021 (Goumenis 15.2.21 [18]). Ms Goumenis' evidence is that the Security Interest was not registered on the PPSR by 29 January 2021 for several reasons. While Ms Goumenis knew that a security interest granted over collateral was required to be registered on the PPSR within that period, to avoid the risk of vesting in an external administration within that 6 months period, she assumed that an employed solicitor who was assisting her with the transaction would attend to that registration (Goumenis 15.2.21 [22]-[23]). That solicitor had limited experience in financing transactions (as do all solicitors at some point in their careers and some solicitors for all of their careers) and did not turn his mind to the requirement to register the Security Interest at the time of execution of the transaction documents on 22 December 2020 (Goumenis 15.2.21 24-(b)). That position was not assisted by the fact that, as a result of the COVID-19 pandemic and a "lockdown" of a part of Sydney at the time and the holiday period, that solicitor did not attend the solicitors' offices in that period (Goumenis 15.2.21 24). Ms Goumenis' evidence is that it did not occur to that solicitor on 22 December 2020 (or during the subsequent 20 business day period) that the Security Interest was required to be registered on the PPSR; no one raised that matter with him; and he did not appreciate the significance of not doing so (Goumenis 15.2.21 [24(d)-(e)]). Because of the holiday period, Ms Goumenis in turn omitted to check with the solicitor that the Security Interest had been registered (Goumenis 15.2.21 [25]). Since Moula and Eticore ST did not require a transaction opinion at that time, the failure to register the Security Interest was not recognised, as it might otherwise have been, in the course of preparing such an opinion (Goumenis 15.2.21 [25]).
4. On 31 January 2021, the failure to register the Security Interest emerged when the Chief Executive Officer of Eticore SD and Eticore ST emailed the solicitor and Ms Goumenis inquiring as to the status of the registration of the Security Interest (Goumenis 15.2.21 [19]; Ex P1, Tab 7) and the solicitor and Ms Goumenis then recognised that it had not been registered on the PPSR (Goumenis 15.2.21 [20]). A draft financing statement was then prepared on 1 February 2021 and promptly lodged on 2 February 2021 (Goumenis 15.2.21 [21]; Ex P1, Tab 8). This application was then brought, also relatively promptly (Goumenis 15.2.21 [27]-[28]).

Joinder of affected parties

1. Mr Krochmalik rightly recognises that applications under s 588FM of the Corporations Act ought generally not be brought ex parte and that the grantor of the security interest (and potentially other relevantly affected parties) should be joined and given an opportunity to be heard: Re Appleyard Capital Pty Ltd; 123 Sweden AB v Appleyard Capital Pty Ltd (2014) 101 ACSR 629; [2014] NSWSC 782 at [34]; Re Transurban CCT Pty Ltd (in its own capacity and as trustee of the Transurban CCT Trust) [2014] NSWSC 1909 at [16]-[17]. He also rightly points out that an application may be heard where a relevant defendant has been joined to the proceedings, has been notified of the proceedings and has confirmed that it does not oppose the orders sought in the application: Re Psyche Holdings Pty Limited [2018] NSWSC 1254 at [16]; Re Bellerine Heights Pty Ltd [2020] VSC 874 at [17]. Here, Eticore SD, as the grantor of the Security Interest, has been joined to the application and consents to the relief sought (McCoy 16.2.21, Annexure B).
2. Mr Krochmalik submits, and I accept, that no other party is relevantly affected by the orders, provided an external administrator's rights are preserved in the manner noted below. Although Commonwealth Bank of Australia ("CBA") is another secured creditor of Eticore SD, its rights are not affected by the grant of relief under s 588FM as the Court's orders have no effect on the priority of security interests over the collateral of a grantor: Appleyard Capital at [15]; Re Accolade Wines Australia Ltd [2016] NSWSC 1023 at [10]. It is not necessary, for that reason, to address Mr Krochmalik's further submission that CBA's security interest is held over collateral of the Grantor which differs to the collateral over which the Security Interest subsists, namely Eticore SD's assets held in its capacity as trustee of the Series 1 Trust. I accept that CBA need not be joined to the application and its absence does not provide any reason for the Court not to make any orders under s 588FM of the Act.

The legal principles and their application

1. Section 588FL of the Corporations Act relevantly provides that: Scope (1) This section applies if: (a) any of the following events occurs: (i) an order is made, or a resolution is passed, for the winding up of a company; (ii) an administrator of a company is appointed under section 436A, 436B or 436C; (iii) a company executes a deed of company arrangement under Part 5.3A; and (b) a PPSA security interest granted by the company in collateral is covered by subsection (2). Note: A security interest granted by a company in relation to which paragraph (a) applies that is unperfected at the critical time may vest in the company under section 267 or 267A of the Personal Property Securities Act 2009. (2) This subsection covers a PPSA security interest if: (a) at the critical time, or, if the security interest arises after the critical time, when the security interest arises: (i) the security interest is enforceable against third parties under the law of Australia; and (ii) the security interest is perfected by registration, and by no other means; and (b) the registration time for the collateral is after the latest of the following times: (i) 6 months before the critical time; (ii) the time that is the end of 20 business days after the security agreement that gave rise to the security interest came into force, or the time that is the critical time, whichever time is earlier; (iii) if the security agreement giving rise to the security interest came into force under the law of a foreign jurisdiction, but the security interest first became enforceable against third parties under the law of Australia after the time that is 6 months before the critical time--the time that is the end of 56 days after the security interest became so enforceable, or the time that is the critical time, whichever time is earlier; (iv) a later time ordered by the Court under section 588FM. Note 1: For the meaning of critical time, see subsection (7). Note 2: For when a security interest is enforceable against third parties under the law of Australia, see section 20 of the Personal Property Securities Act 2009. Note 3: A security interest may become perfected at a particular time by a registration that is made earlier than that time, if the security interest attaches to the collateral at the later time (after registration). See section 21 of the Personal Property Securities Act 2009. Note 4: The Personal Property Securities Act 2009 provides for perfection by registration, possession or control, or by force of that Act (see section 21 of that Act). Vesting of security interest in company (4) The PPSA security interest vests in the company at the following time, unless the security interest is unaffected by this section because of section 588FN: (a) if the security interest first becomes enforceable against third parties at or before the critical time--immediately before the event mentioned in paragraph (1)(a); (b) if the security interest first becomes enforceable against third parties after the critical time--at the time it first becomes so enforceable. Note: For the meaning of critical time, see subsection (7). … (7) In this section: "critical time", in relation to a company, means: (a) if the company is being wound up--when, on a day, the event occurs by virtue of which the winding up is taken to have begun or commenced on that day under section 513A or 513B; or (b) in any other case--when, on a day, the event occurs by virtue of which the day is the section 513C day for the company.
2. In Re Appleyard Capital above at [13], Brereton J outlined the scope of this section as follows: "If the collateral is registered within 20 days after the security agreement comes into force, the security interest prevails over the interest of unsecured creditors, even if the company goes into liquidation or administration within 6 months. However, if it is not registered within that period, and the company goes into liquidation or administration within 6 months after it is registered, then the security interest vests in the company for the benefit of creditors generally - unless a later time is fixed under s 588FM. In other words, the effect of not registering within 20 days is to expose the secured creditor to the loss of its security if the company goes into liquidation within 6 months of the actual date of registration, when otherwise the security would have been effective even in the event of liquidation or administration within 6 months."
3. Section 588FM of the Corporations Act, which Eticore ST invokes, in turn provides that: (1) A company, or any person interested, may apply to the Court (within the meaning of section 58AA) for an order fixing a later time for the purposes of subparagraph 588FL(2)(b)(iv). Note: If an insolvency-related event occurs in relation to a company, paragraph 588FL(2)(b) fixes a time by which a PPSA security interest granted by the company must be registered under the Personal Property Securities Act 2009, failing which the security interest may vest in the company. (2) On an application under this section, the Court may make the order sought if it is satisfied that: (a) the failure to register the collateral earlier: (i) was accidental or due to inadvertence or some other sufficient cause; or (ii) is 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. (3) The Court may make the order sought on any terms and conditions that seem just and expedient to the Court.
4. Mr Krochmalik submits, and it is well established that, s 588FM(2)(a)(i) of the Act permits the Court to make orders fixing a later date for the registration on the PPSR of a security interest where, relevantly, the failure to register the security interest earlier was "due to inadvertence". Mr Krochmalik refers to my judgment in Re Cardinia Nominees Pty Ltd [2013] NSWSC 32 at [15], where I noted that inadvertence goes beyond ignorance of the requirement to register entirely and "may also be established where a party operates under a mistake as to the consequences of failing to register a security interest", and also noted that that interpretation was consistent with the emphasis placed in the case law upon the benevolent operation of these provisions, "at least where an error of a secured creditor in not attending to registration of its security within time is innocent and does not result from any disregard of its statutory obligations". He also refers to Brereton J's consideration of that concept in Re Appleyard Capital, where his Honour observed (at [10]) that, for the purpose of that paragraph, "inadvertence" includes a "failure to advert to or understand the requirement for registration within the specified period, and innocent error in the sense of failure to register through ignorance of the legal requirement to do so, or of the consequences of not doing so."
5. In Re Accolade Wines at [14], his Honour similarly noted that: "For the purpose of s 588FM(2)(a)(i), 'inadvertence' includes failure to advert to or understand the requirement for registration within the specified period, and innocent error in the sense of failure to register through ignorance of the legal requirement to do so, or of the consequences of not doing so. Inadvertence will readily be found where an error of a secured creditor in not attending to registration of its security within time is innocent and does not result from any disregard of its statutory obligations. In Transurban CCT [Pty Ltd (in its own capacity and as trustee of the Transurban CCT Trust) above], the secured party became aware that the financing statements initially lodged contained potential defects ... When this potential defect was discovered (more than 20 business days after the security interest was created), the secured party lodged a further financing statement referring to the ABN of the trust, and applied for an extension of time pursuant to CORPA, s 588FM. In granting that application, the Court held: 'For the purposes of s 588FM(2)(a)(i), "inadvertence" has been interpreted to include failure to advert to or understand the requirement for registration within the specified period, an innocent error in the sense of failure to register through ignorance of the legal requirement to do so, or of the consequences of not doing so [Appleyard Capital, [10], and the cases there cited]. In this case, it is apparent that a bona fide attempt to register the security interests was made on 4 July 2014 and that the potential deficiencies - which, as I have said, are not clearly deficiencies - came to notice of the plaintiff's solicitors on about 13 August 2014 when the consultant who had carriage of the matter learnt of his firm's preferred practices in respect of such registrations.'
6. As Mr Krochmalik points out, these principles are well established and have been applied in subsequent cases including Re 4 in 1 Wyoming Pty Ltd & the companies listed in Schedule A to the Originating Process [2017] NSWSC 407; Re Psyche Holdings Pty Limited above; Squadron Resources Pty Ltd v Highlake Resources Pty Ltd, in the matter of Highlake Resources Pty Ltd [2018] FCA 1292; FC Securities Pty Ltd v Menilden Creek Farming Pty Ltd [2018] NSWSC 1681 and Toll Energy and Marine Logistics Pty Ltd v Conlon Murphy Pty Ltd (2019) 137 ACSR 328; [2019] FCA 532. In Bluewaters Power 1 Pty Ltd v The Griffin Coal Mining Company Pty Ltd [2019] WASC 438, Vaughan J in turn observed (at [40]-[41]) that inadvertence is concerned with human error or oversight or not being properly attentive and "will readily be found where an error of a secured creditor in not attending to registration of its security within time is innocent and does not result from any disregard of statutory obligations".
7. Mr Krochmalik submits, and I accept, that the delay in registration was here caused by accident or inadvertence, resulting from oversights and error of the solicitors acting on the transaction, and the case law has treated matters of this kind as a proper basis for the application of s 588FM(2)(b)(i): Re Barclays Bank Plc [2012] NSWSC 1095 at [9]-[10]; Re David Brown Gear Industries Pty Ltd [2017] NSWSC 907 at [4]; Re Amotran Pty Ltd [2017] VSC 637 at [13]-[15]. He also submits, and I accept, that there was no disregard by Eticore ST of its obligations as security trustee in this regard. As Mr Krochmalik points out, the fact that Eticore SD consents to the relief sought is a relevant factor and supports the order sought: Re Black Opal IP Pty Limited (Subject to Deed of Company Arrangement) [2013] NSWSC 1225 at [9]. Second, there was only a short delay between the end of the 20 business day period (29 January) and the date on which the registration was made (2 February), and this is also a relevant factor that supports the order sought: Greenlight Asset Pty Ltd v WBK Ricetti Pty Ltd [2017] WASC 278 at [18].
8. Mr Krochmalik also submits that "there is at least some evidence" of Eticore SD's solvency (McCoy Affidavit, Annexure B) or at least no indication of any imminent risk of its winding up or administration and that there is therefore less risk that late registration of the Security Interest would disturb or adversely affect the rights of unsecured creditors in an external administration within the six month period, because that event is less likely to arise: Re Barclays Bank above at [15]; Re Black Opal above at [10]. I give limited weight to that evidence, because of its lack of detail. However, it seems to me that the position of unsecured creditors of Eticore SD in any external administration within the six month period would be sufficiently protected by making an order of the kind made in Re Guardian Securities Ltd [1984] 1 NSWLR 95 at 97; (1984) 8 ACLR 822 at 823, which reserves liberty to an external administrator appointed within six months of the registration date to apply to set aside these orders: see also Bevillesta Pty Ltd v Imagine Un Ltd (2009) 69 ACSR 574; [2009] VSC 50 at [28]; Re Psyche Holdings Pty Limited above at [41]-[42].

Orders

1. For these reasons, I made the orders sought by Eticore ST at the conclusion of the hearing on 16 February 2021.

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