CATCHWORDS: CORPORATIONS - CORPORATE FINANCE - CHARGES - REGISTRATION OF CHARGES - TIME OF REGISTRATION AND ITS EXTENSION - bill of sale registered in Queensland in Register of Encumbered Vehicles - failure to give additional notice to ASIC within 45 days as required by s263 Corporations Law - application for extension of time to lodge notice of charge with ASIC - ss263, 266 Corporations Law considered - whether inadvertence or other sufficient cause shown - nature of discretion under s266(4) discussed - exceptional circumstances - whether unsecured creditors had obtained a statutory right akin to a proprietary right to the administration and distribution of assets pari passu - creditors' rights contingent upon possible exercise of court's discretion under s266(4) - whether UK decisions on this point should be followed in Australia - Douglas-Brown v Standard Chartered Finance Ltd

IN THE MATTER OF Freightlines Northern Territory Pty Ltd ACN 056 404 874

1 Beattie Transport Pty Ltd ("the applicant") advanced $100,000.00 to Freightlines Northern Territory Pty Ltd ("the company") pursuant to a bill of sale over certain motor vehicles or components thereof dated 13 April 1999. The bill of sale was registered in Queensland in the Register of Encumbered Vehicles. Formerly in this State, securities over motor vehicles were subject to the general regime of the Bills of Sale and Other Instruments Act 1955, but in 1986 securities of the present kind became subject to the Motor Vehicles Securities Act 1986. Despite some arguable irregularity in the application, registration was effected, and anyone searching the relevant register would have been able to ascertain that the company had granted a bill of sale over the items in question. Upon such registration third parties cannot complain of lack of notice and the applicant was entitled to the usual benefits and priority that the Act provides[1].

2 The applicant's problem arises from the fact that it failed to give additional notice of the bill of sale to the Australian Securities and Investment Commission ("ASIC") within 45 days as required by s263 of the Corporations Law. Section 266(1) renders a registrable charge void as against an administrator or liquidator of the company unless notice of the charge was lodged within the relevant period, which in this instance was 45 days. The bill of sale in the present case complies with the requirements of s262(1)(d) and accordingly was subject to the requirements of Chapter 2K of the Corporations Law[2].

3 The applicant's solicitor has stated that he was not aware of the legal requirement to lodge notice of the charge with the ASIC. I take this to be a reference to the adverse effects of non-lodgment of such a notice.

4 The present application is for an extension of time to lodge the necessary notice of charge with the ASIC. It is made under s266(4) of the Corporations Law. That subsection 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 [Part 2K.2 - Registration]:

(a) was accidental or due to inadvertence or some other sufficient cause; or

(b) 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."

The time for registration expired on 28 May 1999. Thereafter any extension could only be by application to the court.

5 On 21 June 1999 an application was filed to wind up the company, and eight days later administrators (Messrs Worrell & Khatri) were appointed. On 20 July 1999 a winding up order was made against the company, appointing Mr Sparks to be its liquidator. On that same day, registration of the bill of sale was effected with the ASIC. On the following day the present application was filed.

6 Some family relationship exists between the directors of the respective companies, Mr Malcolm Beattie being a director of Freightlines and his wife and brother being directors of the applicant company. The money was advanced in March 1999 in the knowledge that the company had a current financial difficulty, and it was anticipated that the additional funding would improve the company's chances of selling part of its business in order to satisfy existing creditors. The advance was interest free. The intention of both parties was that proper security would be provided in exchange for the advance.

7 The applicant's solicitor has sworn that the applicant instructed him to prepare the necessary bill of sale and that he assumed that his instructions included attending to any necessary stamping and registration of it. He stamped the document and registered it in the appropriate register pursuant to the Motor Vehicles Securities Act 1986. He was not aware of any obligation under the Corporations Law to lodge a notice with the ASIC within 45 days or at all, therefore nothing further was done. Mr Beattie (a director of the company, and manager of the applicant though not a director of it) has sworn that he told his solicitors on or about 31 March 1999 to attend to any necessary registration of the bill of sale.

8 The liquidator has deposed that between 31 March and 29 June 1999 the company incurred further debts to creditors in the sum of $728,660.00 which have not been paid. Creditors at least to a value of $218,000.00 knew of the existence of the bill of sale before granting credit to the company. The figures provided by the liquidator cover a slightly greater period than that between the signing of the bill of sale and its registration with the ASIC, presumably because only end of month figures are available. However the evidence suggests that the substantial majority of the stated total was incurred after execution of the bill of sale, and that less than half of those who granted credit to the company after the grant of the bill of sale can be shown to have done so with knowledge of its existence.

9 The company has substantial assets and the figures currently available to the liquidator suggest that if the bill of sale is valid against the liquidator the unsecured creditors will receive about 46.3 cents in the dollar, and that if it is void against the liquidator they will receive about 47.4 cents in the dollar. From the applicant's point of view, the difference between the benefit of security and being treated as an unsecured creditor is probably less than $53,000.00.

10 In this case the lodgement of the notice with the ASIC occurred on the same day as the making of the winding up order, which was three weeks after the appointment of administrators. The hour of day when the bill of sale was lodged is not known and it cannot be determined whether or not it actually preceded the making of the winding up order. That circumstance would however seem to be immaterial in view of sections 513A and 513C of the Corporations Law which take the winding up to have commenced at least as early as the commencement of the administration.

Threshold question - Was non-lodgement due to inadvertence?

11 Counsel for the company submitted that the evidence was insufficient to justify a finding of inadvertence, pointing to the failure of the applicant's solicitor to depose to express instructions for the registration of the document, and contending that the court should infer that Mr Beattie would have been aware of the consequences of non-registration. There is however uncontradicted evidence from Mr Beattie that he instructed his solicitor to attend to any necessary registration of the bill of sale, and express evidence from the solicitor of a surprising ignorance of the requirements of the Corporations Law in this respect. The weight of authority suggests that omission to carry out such steps because of ignorance of the law may amount to inadvertence[3]. There is no doubt that the applicant desired to have all necessary protection in relation to the advance of a substantial sum of money to the company and was aware that the company was in some financial difficulty. Having regard to the actions of the applicant including those of its agent (its solicitor) I am satisfied that the failure to lodge the necessary notice with the ASIC was "due to inadvertence or some other sufficient cause" within the meaning of s266(4)(a) of the Corporations Law.

12 This however merely enlivens the discretion of the court. Other factors must now be considered.

13 The power to grant relief under s266(4) is discretionary. It is premised on the words "the Court ... [may] extend the period". The criteria upon which the discretion is to be exercised are not comprehensively expressed, and those that are mentioned are quite general. There are three bases stated in a positive way upon which the court "may" grant such relief. The third of these, "that on other grounds it is just and equitable to grant relief", is not separately numbered and may be thought to state the ultimate requirement of which the first two are mere examples. The first stated ground ("(a) was accidental or due to inadvertence or some other sufficient cause") certainly activates the power but there will surely be other matters which the court needs to consider before proceeding to exercise it in an applicant's favour. Satisfaction upon ground (a) may readily be outweighed by other factors including the time involved and the potential prejudice that may have arisen on the part of unsecured creditors in the interim. The second, and alternative, ground ("(b) is not of a nature to prejudice the position of creditors or shareholders") is less demanding of proof than might appear at first sight, because it adverts to the consequences of failure to lodge the notice rather than to the consequences of making an order extending time.[4] The difficulty with this submission-paragraph is that in one sense a failure to lodge a notice is always of a nature to prejudice the position of creditors, but perhaps particular circumstances might be shown to negate this, such as general knowledge by creditors of the charge in question. It is not however necessary to pursue this particular question further in this case. It will of course be necessary to consider in due course the rather wider question whether the prejudice to creditors from the grant of an extension of time would render it unjust for the court to make such an order. That factor arises in the ultimate exercise of the discretion.

14 The third ground which activates the discretion is that "it is just and equitable to grant relief". If a court came to that conclusion it would, I apprehend, proceed to grant relief without consideration of additional discretionary matters, as all relevant discretionary matters would already have been comprehended in the conclusion that it was just and equitable to grant the extension. As suggested earlier this would seem to be the ultimate statement of the discretion that is to be exercised.

15 For the applicant it was submitted that the purpose of the loan (which was interest free) was to maximise the prospects of selling the business of the company as a going concern. It was in a sense a friendly gesture towards the company or perhaps its contributories, and was aimed to achieve benefit for the company (and indirectly the benefit of the creditors) rather than any benefit for the applicant. I accept that submission and consider that it has some weight in the context of the critical balancing exercise that must ultimately be performed, when relevant factors are weighed against the detriment to creditors if the time for registration is to be extended.

16 It was further submitted for the applicant that having regard to the small difference in dividend that will be paid to creditors (46.3 cents instead of 47.4 cents in the dollar) and to the comparatively large impact of the loss of security upon the applicant, the applicant would be a greater sufferer than the creditors. It seems to me however that the adverse impact upon the creditors as a whole if time is extended is the same as the adverse impact upon the applicant if it is refused. Furthermore, if this submission were correct, it would be easier to obtain an extension of time for registration of a small charge than for a large one, because the impact of the small charge on creditors would be less. I do not think that this is the correct way to consider the matter. To do so would be tantamount to saying that time should be extended as the creditors will not be hurt very much by extracting a small amount from funds that they would otherwise be entitled to. The question must be determined on principle, and in particular according to a wide range of relevant criteria and principles which have already been identified in cases decided under s266 or under that section's predecessors including s205 of the Companies Code.

17 It was submitted that the delay in this case was relatively short. In fact notice of the charge was lodged with the ASIC 53 days late. However the delay occurred during the critical period immediately preceding the winding up of the company. The administrator knew of the existence of the bill of sale by 8 July 1999, but that was only 12 days before the winding up order. A substantial portion (in value) of the creditors knew of the existence of the bill of sale at all material times, but it would seem that a greater portion of creditors who granted credit after the grant of the bill of sale did not.

18 It is true that the bill of sale was registered in the Register of Encumbered Vehicles and that anyone choosing to search that primary source for knowledge of existing bills of sale would have found it. There was no evidence that any creditor at any stage searched the ASIC register, or that any creditor extended credit on the faith of a belief that no such charge existed. Indeed, anyone searching that register would have discovered something far more telling, namely that the company was subject to a considerably more substantial charge, that is to say a fixed and floating charge, in favour of the National Australia Bank Limited registered on 7 October 1997. Seemingly the relevant creditors either did not search the ASIC register, or they were not deterred from dealing with the company by knowledge of the existence of that charge.

19 Counsel for the respondent submitted that where an order for extension has not been obtained prior to the date of liquidation, or where the notice has not been lodged prior to the date of commencement of the liquidation, the unsecured creditors have obtained a statutory right akin to a proprietary right to the administration of the assets and their distribution pari passu. The submission proceeds that in either event the court cannot grant any extension. These submissions are based upon views expressed in some United Kingdom decisions[5] and upon some remarks in the Western Australian case of Douglas-Brown as liquidator of De Baros Nominees Pty Ltd (In Liq) v Standard Chartered Finance Ltd[6]. With great respect for the UK courts and the court which gave the latter decision[7] I cannot accept that the discretion under s266(4) of the Corporations Law is limited in this way. The legislation in the UK decisions, s101 of the Companies Act 1948 (UK), is not materially different from s266(4) of the Corporations Law. Neither is s205 of the former Companies Code upon which Douglas-Brown proceeded. There are of course some distinctions between those provisions and the present ones, including that the obligation was formerly upon the company as creator of the charge to ensure that the required notice was lodged, whilst now the consequence of invalidity simply follows if the charge is not registered. More fundamentally however it seems to me that the invalidity created by s266(1) is subject to the power of the court in s266(4) to extend time, and the rights of creditors upon a winding up are contingent upon the possible exercise by the court of that discretion. The United Kingdom decisions which proceed upon the primacy of the trust with which the assets are impressed at the date of commencement of the liquidation, which were the foundation for the view expressed in Douglas-Brown[8], should not be permitted to shut out the wide discretion conferred by s266(4). In my respectful view those decisions place an unwarranted fetter on the statutory discretion, and to the extent that they do so they should not be followed in Australia.

20 Counsel for the respondent further submitted that unsecured creditors will be prejudiced by the proposed order. This is correct. For reasons already mentioned, it seems to me that the overall prejudice to the creditors is prima facie the same as that to the applicant if the order is refused.

21 However a special tenderness towards unsecured creditors may be discerned from the cases. A useful starting point is the statement of Menzies J[9]: "It is a deeply rooted principle of company law that, when liquidation has commenced, one creditor should not be assisted by the court to improve its position vis-a-vis other creditors". It has also been observed in a number of decisions, and I accept, that once a winding up has commenced, an order of this kind will only be granted in exceptional circumstances[10]. Different emphases however seem to have been given to the level of exceptional circumstance that is necessary. For example in Sanwa the position was summarised as follows:

"In the light of these decisions, not all of which are reconcilable, I consider that these principles emerge:

(a) The fact of winding up is relevant to the exercise of the discretion but does not require that the discretion be exercised in one way.

(b) The probable detrimental effect of the making of the order on unsecured creditors is a relevant but not overriding consideration.

(c) The discretion is sparingly exercised and if a company is obviously insolvent or already in liquidation it will be exercised only in circumstances which may properly be regarded as exceptional."[11]

22 On the other hand in Douglas-Brown it was said that "the authorities ... would suggest that an extension of time will almost invariably be refused after the commencement of a winding up and will only be granted in exceptional circumstances"[12]. The latter view seems to be heavily influenced by the approach in the United Kingdom in such cases as Ashpurton in which the starting point is recognition of something tantamount to a vested right in creditors from the moment of the winding up. I do not think it is correct to take this view under the Australian legislation. The position of unsecured creditors and the effect upon them of the making of the order is of course a very important matter, and I have no difficulty with the principle that after the commencement of the winding up exceptional circumstances need to be shown before making any order which will adversely effect the overall interests of the unsecured creditors. But the discretion remains, and a balancing exercise is necessary.

23 I have noted the favourable exercise of the discretion in Sanwa, and the decisions against its exercise in Douglas-Brown, Campbell Finance and Re Lloyd Anthony Furniture Pty Ltd[13] above. Points of distinction exist between the present case and each of the above cases, and there is little purpose in making a point by point comparison with other cases which in the end reveal a particular exercise of discretion on a different combination of facts. I find it difficult to reconcile the results of those cases, and note that in the ex tempore decision of Campbell Finance the refusal to extend time was based upon numerous alternative grounds.

24 I find the present case finely balanced, and in the end have concluded that the circumstances are sufficiently exceptional to justify an extension of time. The main negative factor is the probability that a substantial amount (in value) of the creditors who granted credit after the grant of the bill of sale were not aware of it, and the fact that the necessary notice was not lodged with the ASIC until the date of liquidation. As against this, a relatively substantial body of creditors were aware of this bill of sale, and all creditors either were aware or had the means of being aware of the existence of the far more substantial floating charge held by the bank. There are the further circumstances that the money was advanced without the possibility of any direct profit or gain by the applicant, and that it represented a transaction primarily for the potential benefit of the company and indirectly its creditors. The applicant at all times intended to obtain security and due protection of the loan, and through the misadventure of engaging a solicitor who was unaware of the relevant provision under the Corporations Law failed to obtain the protection which it entrusted him to obtain. When the picture is looked at as a whole I am satisfied that the extension should be granted.

25 There is evidence of some dealings between the company (or its administrator or liquidator) and third parties with respect to some of the units the subject of the bill of sale prior to the present application. It may well be that arrangements between the parties will permit those transactions to be completed and the proceeds thereof to be made available to the applicant in lieu of the security. However, third party rights having intervened, it is appropriate that a reservation be made in the order which will ensure that such parties are not disadvantaged.

26 Counsel for the respondent submitted that an order should be made with the "usual proviso" referred to in Gough's text on company charges[14]. The form of that order is:

"That the time for registering the charge be extended until the ... day of ... 19...; and this order is to be without prejudice to the rights of the parties acquired during the period between the date of creation of the said charge and the date of its actual registration".

That seems to me to be a reasonable addendum to the order in the present case. However counsel for the respondent went on to submit that unsecured creditors obtained something analogous to a proprietary right upon liquidation and that they too would be parties whose rights would be protected by the proviso. Reference was made to In Re Spiral Globe Limited[15] and to Gough[16]. In Re Spiral Globe Swinfen Eady J recognised that the necessary protection was not limited to those cases in which ownership of the goods had actually changed but that it extended to cases in which the rights of third persons "have actually accrued". I do not consider however that this is a reference to the rights of unsecured creditors under a winding-up or that the usual proviso either expressly or impliedly refers to such rights. Indeed, Romer CJ has commented with respect to such an order:

"[T]he true effect of that condition is that it was only intended to protect rights acquired against or affecting the property charged..."[17].

To the extent to which the learned author in Gough suggests otherwise at p772 I would respectfully disagree.

27 Counsel for the respondent went on to submit that the form of the usual proviso should be modified in order to make it clear that it includes the protection of what he referred to as the "statutory right of the unsecured creditors". It is immediately apparent that to do so would render nugatory the whole order and render pointless such contests as the present under s266(4). I am prepared to include a proviso in this or some similar form but hold that the submission that it operates in favour of unsecured creditors is misconceived.

28 I shall hear submissions on form of order and on costs.

[After further submissions his Honour continued]:

29 In this case the applicant has succeeded after a hard-fought opposition mounted by the liquidator against an extension of time. The liquidator was unsuccessful on various issues including the question of inadvertence. A number of affidavits on factual issues made the dispute rather wider than it needed to be, and of course the liquidator was unsuccessful overall.

30 Notwithstanding this, I think that prima facie where an applicant obtains an indulgence in respect of non-lodgment of a charge the liquidator is entitled to his reasonable costs of being brought to court and of placing reasonable submissions before the court.

31 In all the circumstances of this case, I will order the applicant to pay two-thirds of the taxed costs of the liquidator in the matter.

1. The period for lodging with the Australian Securities and Investments Commission the Bill of Sale dated 13 April 1999 granted by the company in favour of Beattie Transport Pty Ltd ACN 065 360 090 be extended pursuant to s266(4) of the Corporations Law until 21 July 1999.

2. Such order be without prejudice to the rights of any person in consequence of any dealings with any property the subject of the said charge between the date of creation of the Bill of Sale and the date of notice to the Australian Securities and Investments Commission of the said charge.

3. The applicant Beattie Transport Pty Ltd ACN 065 360 090 pay two thirds of the taxed costs of the respondent liquidator Simms Lockwood.

[1] Re Douglas ex parte Starkey (1987) 75 ALR 97, (1987) 15 FCR 475, (1987) 87 ATC 4651.

[2] Sections 261 to 282. Chapter 2K was formerly Part 3.5.

[3] Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (In Liq) [1991] 2 Qd R 456 at 461, (1990) 2 ACSR 692 at 695, (1990) 8 ACLC 852 at 855-856; Re Dudley Engineering Pty Ltd (1967) 87 WN (Pt 1) NSW 326 at 328-329, [1968] 1 NSWR 483 at 485; Campbell Finance Pty Ltd v Vivstan Packaging (Aust) Pty Ltd (In Liq) (1996) 14 ACLC 1686 at 1692, (1996) 22 ACSR 109 at 115-116, [1998] 2 VR 340 at 347-348.

[4] Sanwa above [1991] 2 Qd R 456 at 462, (1990) 2 ACSR 692 at 696-697, (1990) 8 ACLC 852 at 856.

[5] In Re Spiral Globe Limited [1902] 1 Ch 396; Re Ashpurton Estates Ltd [1983] Ch 110 at 130.

[6] (1990) 8 ACLC 993, (1990) 2 ACSR 737.

[7] Full Court of Western Australia, Malcolm CJ, Roland and Wallwork JJ.

[8] Ibid at p997 (ACLC), at p742-743 (ACSR).

[9] The Commercial Banking Company of Sydney Limited v George Hudson Pty Ltd (In Liq) (1973) 131 CLR 605 at 613.

[10] Sanwa [1991] 2 Qd R 456 at 465, (1990) 2 ACSR 692 at 699, (1990) 8 ACLC 852 at 858; Campbell Finance v Vivstan Packaging (1996) 14 ACLC 1686 at 1693, (1996) 22 ACSR 109 at 116; Douglas-Brown v Standard Chartered Finance (1990) 8 ACLC 993 at 998, (1990) 2 ACSR 737 at 743; Vector Capital Ltd v SNS Software Network Systems Pty Ltd (1988) 6 ACLC 280, (1988) 12 ACLR 723, (1988) 12 NSWLR 1.

[11] [1991] 2 Qd R 456 at 464-5, (1990) 2 ACSR 692 at 699, (1990) 8 ACLC 852 at 858.

[12] Douglas-Brown (1990) 8 ACLC 993 at 998, (1990) 2 ACSR 737 at 743-744.

[13] (1996) 14 ACLC 540, (1996) 19 ACSR 478.

[14] Company Charges, 2nd edn, London: Butterworths, 1996, at pp768-769.

[15] [1902] 1 Ch 396.

[16] Company Charges above at pp771-773 and 787-788.

[17] In Re Ehrmann Brothers Limited, Albert v Ehrmann Brothers Limited [1906] 2 Ch 697 at 707.