The business of the plaintiff company is leasing and financing the purchase of computer equipment, both hardware and software. The security transactions between the plaintiff and its customers are subject to the Personal Property Securities Act 2009 (Cth) ("PPSA"), and the plaintiff has registered financing statements for those security interests on the Personal Properties Securities Register ("PPSR") to protect its priorities in accordance with the PPSA and the Corporations Act 2001 (Cth).
The plaintiff has discovered that there were errors in its internal procedures which meant that the registrations lodged by it between the inception of the PPSA system on 1 July 2012 and December 2017 may be invalid. The plaintiff has lodged fresh registrations to correct the earlier, potentially defective, ones. In these proceedings, the plaintiff seeks orders giving those fresh registrations the effect they would have had if the errors had not occurred.
There are two statutory provisions in issue. The first is the Corporations Act, s 588FL. The effect of that provision is that where a grantor goes into administration or liquidation, a secured creditor loses the benefit of its security interest if that interest was registered less than six months before the beginning of the administration or liquidation. There is an exception if the registration takes place within twenty days, or such longer period as the Court may allow, of the creation of the security interest. The plaintiff applies under s 588FM to extend the period so that its correcting registrations will have been in time.
The second relevant statutory provision is PPSA s 62. In the language of the PPSA, most of the security interests which are relevant for the purposes of these proceedings are purchase money security interests ("PMSIs"). The significance of this is that a PMSI potentially comes into conflict with an "all present and after acquired property" ("AllPAP") security interest in favour of another financier. Under PPSA s 62, a PMSI takes priority over any other perfected security if registered within fifteen days of the grantor taking possession of the property.
PPSA s 293 allows the Court to extend that period. The plaintiff applies under that provision so as to give each of its PMSIs the priority which it would have had if the later registration had been made within fifteen days of the grantor taking possession.
The error made by the plaintiff was that in lodging its financing statements, it used its ABN as part of the description of itself as the security holder. Regulations under the PPSA (Personal Property Securities Regulations 2010 (Cth), sch 1, cl 1.3) required the use of the plaintiff's ACN, not its ABN. This error was discovered on or about 18 December last year by the plaintiff's in-house counsel.
On 20 December, instructions were given to those responsible for the preparation and lodgement of the plaintiff's financing statements so as to ensure they would use the ABN in future. The plaintiff then sought advice from its solicitors, and advice was obtained, including advice from counsel, at the end of January. Following receipt of that advice, instructions were given for fresh financing statements to be lodged in some cases.
Given that the plaintiff's procedures adopted this mistaken approach over a period of more than five years, hundreds of the plaintiff's financing statements lodged on the PPSR would have been affected by the mistake. But, for practical purposes, many of the registrations are in effect spent. The debts in question may have been repaid or the property in question may have depreciated in value to the extent that it has no commercial value as a security.
Officers of the plaintiff therefore had to conduct a review of the plaintiff's records and of the PPSR for the purpose of identifying transactions which are still worth, or potentially worth, correcting. Over the period from February this year onwards, employees of the plaintiff identified over 400 transactions of potential significance, and fresh registrations were lodged for approximately 280 of those.
The process of determining whether a fresh registration was commercially necessary involved not only reviewing the plaintiff's records but considering what other securities might have been granted by the customers which could potentially conflict with the plaintiff's securities. The evidence before me shows that a total of approximately 3,000 registrations had to be reviewed as part of this process.
In the course of the review, nine of the relevant registrations were found to contain an additional error. The ABN had been used rather than the grantor's ACN, as required by the regulations. This error was corrected when the revised registration was lodged.
These proceedings were commenced in September 2018. As might be expected, they required extensive consultation between the plaintiff's in-house counsel and external legal advisers.
The proceedings were thus commenced about nine months after the error was discovered, and about seven months after instructions had been given within the plaintiff company for corrections to be made. The evidence before me acknowledges that those within the plaintiff company who worked on the task of identifying the registrations to be corrected, correcting them, and assisting with the preparation of these proceedings; were not engaged full-time on those tasks. No doubt the application could have been made earlier if they had been, but I am satisfied by the evidence that, having regard to the scale of the tasks and the need for the plaintiff's officers and employees to deal with other aspects of the plaintiff's business, the time taken by the plaintiff to lodge the fresh registrations and to bring these proceedings was reasonable.
The grantors of the security interests which are the subject of the plaintiff's applications have been joined collectively as the first defendants in the proceedings. There are forty-one of them.
Potentially competing security holders have been joined collectively as the second defendants in the proceedings. As I will describe in more detail below, the potential issue so far as some of those other security holders is concerned has fallen away. There remain fifty potentially competing security holders whose interests are affected by the orders sought.
Pursuant to directions made by Black J, notice was given to both classes of defendants of the proceedings in the form of circular correspondence. Some of the second defendants have consented to the orders sought under s 293. Other defendants have taken no action. No defendant has appeared at any stage to oppose the relief sought by the plaintiff.
The application came before me on 22 October. I indicated that I would make orders granting relief under Corporations Act s 588FM, but raised some questions about relief under PPSA s 293. On 26 October I made orders in chambers granting the relief sought under s 588FM. Subsequently, I was provided by further evidence and submissions concerning relief under s 293. This has been the subject of a further hearing today.
I have decided to grant relief under s 293 in the form now sought which is somewhat less extensive than before. My reasons for the orders that I made on 26 October and will make today are as follows.
The circumstances in this case closely resemble those considered by Brereton J (as his Honour then was) in Re Accolade Wines Australia Ltd [2016] NSWSC 1023. That case also involved financiers (a group of companies) who made the error of using ABNs rather than ACNs in financing statements. The financiers sought relief, as in this case, under Corporations Act, s 588FM, and PPSA, s 293.
In Accolade, the error was to use the grantor's ABN rather its ACN. As I have mentioned, that is the case for only nine of the financing statements in issue here. For most of the financing statements in issue in these proceedings, the error lies only in the use of the security holder's ABN rather than its ACN. This is a less serious error because the focus of a search on the PPSR will be the identity of the grantor, not the security holder.
In Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd (2013) 283 FLR 122; [2013] NSWSC 1741, Brereton J made a declaration that an error of this type did not render the registration ineffective. On that view, the error which led to the institution of these proceedings was a harmless one, but the plaintiff seeks relief under both Corporations Act s 588FM and PPSA s 293 as a matter of abundant caution. I consider that I should not refuse relief just because it will probably be unnecessary for most of the financing statements in question.
The Court's power under the Corporations Act s 588M depends on the Court being satisfied that the failure to make the registration at an earlier point in time was "accidental or due to inadvertence or some other sufficient cause". That requirement was analysed in Accolade at [12]-[16]. Brereton J concluded that the error in that case, which, as this case, was an administrative one, satisfied the statutory requirement.
His Honour discussed the discretionary considerations at [18]-[22]. There was no evidence before his Honour that the grantors were or would likely become insolvent, and it was unlikely that other financiers would be affected. In any event, the applicants in that case were prepared to accept a term being attached to the grant of leave which provided, in the event of a subsequent liquidation or administration within the six month period, an application could be made by the administrator or liquidator to set the order aside (the term was referred to by his Honour as a Guardian Securities condition: see Re Guardian Securities Limited [1984] 1 NSWLR 95).
The circumstances of the present case are relevantly the same. In particular, the plaintiff accepted the imposition of a Guardian Securities condition on the grant of any relief that might be made under s 588M. The grant of such relief was therefore appropriate in the circumstances of the case.
The power to grant relief under PPSA s 293 is somewhat different. The Court is required to take into account three factors under s 293(3):
(a) whether the need to extend the period arises as a result of an accident, inadvertence or some other sufficient cause;
(b) whether extending the period would prejudice the position of any other secured parties or other creditors;
(c) whether any person has acted, or not acted, in reliance on the period having ended.
These matters were also analysed by Brereton J in Accolade at [26]-[37]. The first element, namely that the need to extend the period arise as a result of accident, inadvertence or some other sufficient cause was the same as the requirement of s 588FM.
So far as prejudice was concerned, his Honour concluded that the relevant prejudice is not the loss of what might be seen as a windfall benefit resulting from the invalidity of the PMSI, assumed for the purpose of the present argument, but rather the prejudice arising from failure to register it properly in time. As his Honour observed at [29], such prejudice is relevant but not conclusive.
For practical purposes it is extremely unlikely that there would be any prejudice of the relevant type to an AllPAP holder whose security pre-dated the plaintiff's PMSI; a lender who lends money on AllPAP terms is hardly likely to expect the security to apply to post-acquired property purchased with the assistance of fresh finance.
A subsequent AllPAP financier may be prejudiced but it is difficult to think of any circumstance where that would happen unless such a creditor had searched the register and either not detected the PMSI or had reviewed the registration and concluded that the registration was invalid. Thus the dispositive requirement is the third relevant factor, which is reliance.
The evidence before Brereton J in Accolade showed that the customary market practice amongst financiers was to conduct what is known as a triple search by reference to the prospective borrower's ACN, ABN and company name. In the light of this evidence, his Honour was able to conclude that the error which involved the use of the ABN rather than the ACN was unlikely to make any practical difference to an enquiring potential AllPAP security holder.
In Accolade, the other security holders had not been joined when the case came on for hearing. At [38]-[44], Brereton J considered whether orders should be made, which would affect the interests of other security holders without them being heard. The applicants did accept that if orders were made there should be a reservation which would allow an affected party to come back to the Court and have the order set aside within a reasonable period of time. His Honour considered that, as a matter of principle, an order under PPSA s 293 should not be made ex parte reserving liberty to apply in this way except where the case for an extension appeared prima facie to be a very compelling one, but he concluded (at [44]):
Ultimately, however, I have been persuaded that this is such a case. First, it is not as if there was no registration of the PMSI within the prescribed period; there was a registration, which was recorded on the PPSR, albeit a defective one because it was against the Grantors' ABN, not ACN. Secondly, the PMSIs are each in respect only of the specific collateral to which the relevant lease relates. Thirdly, an AllPAP is always liable to be trumped, in respect of specific after-acquired collateral, by a PMSI in respect of that collateral. Fourthly, to the extent that an Earlier AllPAP holder will be prejudiced, it is only by losing a windfall arising from inadvertence. Fifthly, for the reasons given above, it is very likely that any Later AllPAP holder in fact had notice of the Plaintiffs' PMSI when acquiring its security interest; and in any event, notice that there was an earlier PMSI in respect of specific collateral is unlikely to have been material to its decision to provide financial accommodation and take the AllPAP security. In those circumstances, it is not unreasonable that the forensic burden of moving the Court to vary or set aside the extension be cast upon any of the AllPAP holders who might wish to contend that they will be unacceptably prejudiced by the extension.
In the present case, the holders of potentially competing securities have been joined. No question of granting relief ex parte therefore arises. At the hearing on 20 October, I was nevertheless concerned that a defendant presented with an application such as this would have to conduct its own enquiries to find out which of the security interests it held might be affected and what advantage relief under s 293 might deprive it of.
This could be a particular issue for holders of other securities which are not AllPAP securities. Some of the second defendants in these proceedings hold fixed securities which, from the descriptions, may or may not cover property of the same nature as that which is the subject of the plaintiff's security interest. If the plaintiff's security interest is invalid, then depending on the description of the property, the equipment supplied by the plaintiff might go to swell the security taken by that other security holder. But in order to find out whether this was so, the other security holder would have to consider specifically what security interest existed, how much was outstanding on that security, what prospects it had of repayment and the extent to which, if at all, it might have been misled by the error in the plaintiff's initial registration before such a security holder would know whether contesting the relief sought by the plaintiff would be worthwhile. I considered it arguable that the exercise of the Court's discretion, especially where, as here, there has been some delay, is a fact-specific exercise; and I wondered about the propriety of shifting the forensic onus to the defendant in the way the plaintiff's approach does in this case.
The plaintiff's legal advisors have subsequently sought to address this concern. They have identified all of the second defendants who hold fixed, rather than AllPAP, securities. There are 19 of them. In each case the solicitors for the plaintiff wrote to the potentially competing security holder seeking details of that party's security interest. This is a procedure provided for by PPSA s 275. The plaintiff's solicitors sought this information so that they could themselves make a judgment about the likelihood of conflict between the fixed securities held by those financiers and the security interest of the plaintiff, but they offered the defendants the opportunity to consent to the relief sought by the plaintiff rather than supply the details requested under s 275 which they would otherwise be obliged to do. As a result of this process, some of the defendants in question have removed their competing registrations; some have formally consented to, or indicated that they will not oppose, the relief sought by the plaintiff; and one has confirmed that there is no conflict between the collateral over which it holds security and the plaintiff's security interest. This has accounted for 13 of the defendants in question. None of the remaining six responded to the plaintiff's correspondence.
Upon further reflection, and in the light of this evidence, I consider that the shift of the forensic burden to the defendants is not an obstacle for the grant of relief under PPSA s 293.
So far as the defendants hold AllPAP securities, the degree of potential prejudice is markedly less than that in Accolade because of the unlikelihood that the error made by the plaintiff would affect the validity of its original security registration. Only the nine cases where the grantor's ABN was used fall directly within Accolade.
Admittedly there is no evidence before the Court of the general practice in the financing industry concerning the triple search as there was before Brereton J in Accolade, but it would have been open to any of the defendants affected to oppose relief on the ground that they did not conduct such a search. The Accolade decision is now almost two and a half years old and I expect it would be well-known in the finance industry. Although a forensic burden is cast upon the AllPAP security holders, it is a slight one.
So far as the fixed security holders are concerned, I consider that the plaintiff has done all that is reasonable to bring the issue to their attention and to provide them with the starting point for any enquiries they would need to make. Again, they bear some forensic burden but it has been significantly lightened by the approach taken by the plaintiff's solicitors. In the circumstances, I think it is not unreasonable to proceed on the basis that the remaining six fixed security interest holders have had a fair opportunity to contest the plaintiff's relief and have not done so.
Finally, I should mention that the s 293 orders will contain a reservation which will permit any party affected by the orders but who has not so far been joined as a defendant to apply to set the orders aside. There is no reason to think that any such party exists but the making of such an order follows the usual practice in applications of this sort: see Re 4 in 1 Wyoming Pty Ltd [2017] NSWSC 407 at [75].
The orders of the Court are:
Pursuant to r 6.29 of the Uniform Civil Procedure Rules 2005 (NSW):
(a) Elgas Limited;
(b) Hydraulink Australia Pty Limited;
(c) Latent Petroleum Pty Ltd;
(d) Latitude Automotive Financial Services;
(e) Moneytech Finance Pty Ltd;
(f) Onsite Rental Group Operations Pty Ltd;
(g) Redstar Equipment Pty Ltd;
(h) Regain Services Pty Ltd;
(i) Regain Technologies Pty Ltd;
(j) Robert Bosch (Australia) Proprietary Limited; and
(k) Tempo (Aust) Pty Ltd,
being the 36th, 45th, 56th, 57th, 66th, 72nd, 80th, 81st, 82nd, 84th and 89th listed Second Defendants, respectively, to the Originating Process, are removed from the proceedings.
Pursuant to section 293(1)(a) of the Personal Property Securities Act 2009 (Cth) (PPSA), the number of business days set out in section 62(3)(b) of the PPSA is extended by the necessary number of business days such that each of the registrations made on the Personal Property Security Register referred to in Schedule A to these orders fall within the time period prescribed by s 62(3)(b) of the PPSA as extended by this order.
Any person or entity who has a perfected security interest over collateral the subject of any of the registrations set out in Schedule A to these orders, other than any of the Second Defendants to these proceedings, has liberty to apply to set aside, amend or vary any of order 2 on three days' written notice to the Plaintiff and to the Court.
The Plaintiff has liberty to apply on three days' written notice.
No order as to costs.
Schedule A
No. Number of First Defendant PPSR Registration Number Date of PPSR Registration
1 201803120013699 12 March 2018
2 201803130037102 13 March 2018
5 201803130017366 13 March 2018
6 201803120052298 12 March 2018
7 201803120017412 12 March 2018
11 201803130019713 13 March 2018
12 201803090075189 9 March 2018
14 201803130052770 13 March 2018
15 201803130053722 13 March 2018
16 201803130054049 13 March 2018
19 201803130016825 13 March 2018
20 201803140062330 14 March 2018
21 201803150000212 15 March 2018
25 201803150002764 15 March 2018
26 201803150008943 15 March 2018
27 201803150051237 15 March 2018
28 201803150051568 15 March 2018
29 201803150057514 15 March 2018
30 201803150058277 15 March 2018
32 201803090076713 9 March 2018
33 201803100009052 10 March 2018
35 201803130064350 13 March 2018
36 201803130064619 13 March 2018
38 201803140038665 14 March 2018
41 201804110065058 11 April 2018
42 201802130060499 13 February 2018
201803140068349 14 March 2018
43 201803140069145 14 March 2018
49 201803130025444 13 March 2018
51 201803150000283 15 March 2018
52 201803150008422 15 March 2018
54 201803090076587 9 March 2018
55 201803100008660 10 March 2018
56 201803140068515 14 March 2018
57 201803150003193 15 March 2018
61 201803150002890 15 March 2018
62 201803140068799 14 March 2018
66 201803130063079 13 March 2018
67 201803140036227 14 March 2018
71 201804300088447 30 April 2018
201803120015768 12 March 2018
76 201804300041469 30 April 2018
201804300041827 30 April 2018
201805240068029 24 May 2018
78 201803130038578 31 March 2018
[2]
Amendments
19 December 2018 - Corrected formatting issues.
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Decision last updated: 19 December 2018