In the matter of Appleyard Capital Pty Limited; 123 Sweden AB v Appleyard Capital Pty Limited

Factual Background

1. The Club is a corporation limited by guarantee, which was established to promote and advance the educational and cultural interests, and the health and welfare of persons born in Cyprus or their descendants, assisting their assimilation into the Australian community. It is a registered club under the Registered Clubs Act 1976 (NSW) and has been a registered charity since December 2021.
2. Prior to the relevant dealings between Cyprus Capital and the Club, Delphi Bank had advanced funds to the Club. Delphi Bank is a division of Bendigo & Adelaide Bank Limited. The loan from Delphi Bank was secured by a real property mortgage over various properties owned by the Club which were located in Enmore and Stanmore in New South Wales, and by a general security deed granted by the Club and dated 14 July 2009. The real property mortgages were registered on the titles of the properties in question, and Delphi Bank's security interest under the general security deed was registered on the PPSR.
3. Cyprus Capital was incorporated by members of the Club for the purpose of advancing financial facilities to the Club on terms more favourable than commercial loan terms available in the market.
4. On 24 November 2019, at an extraordinary general meeting of members of the Club, a resolution was passed that the Club enter into a loan agreement with Cyprus Capital for the purposes of, inter alia, enabling the Club to refinance its indebtedness to Delphi Bank and to repay various other debts.
5. In February 2021, Cyprus Capital and the Club executed a Secured Loan Facility Deed and a General Security Deed, as well as real property mortgages over properties owned by the Club. The Secured Loan Facility Deed provided for Cyprus Capital to advance a sum of $3.56m to the Club.
6. Clause 2(a) of the General Security Deed provided, relevantly, that the Club granted Cyprus Capital a "PPSA Security Interest over all PPSA Personal Property".
7. "PPSA Personal Property" was defined as meaning "all of the [Club's] present and after-acquired property in which the [Club] can be a grantor of a PPSA Security Interest including property in which the [Club] has, or may in the future have, rights or the power to transfer rights". "PPSA Security Interest" was defined as having the meaning given to the term "security interest" in the Personal Property Securities Act 2009 (Cth) (PPSA).
8. Clause 13 of the Secured Loan Facility Deed provided as follows: "Notwithstanding any other provisions of this Deed, the Borrower shall not be entitled to any Advance under this Deed, unless the Borrower has provided the Lender with a copy of the General Security Deed duly executed by the Borrower. The General Security Deed shall be held in escrow by the Lender, and shall be released from escrow to the Lender without the necessity of any further authority from the Borrower on the earlier of: (i) the Lender gives a notice in writing to the Borrower that an Event of Default or Potential Event of Default has occurred; (ii) the Security Interest granted by the Borrower to Delphi Bank before the date of this Deed has been released."
9. The term "Security Interest" was defined as including, relevantly, a mortgage and a "security interest" as defined under the PPSA.
10. Clause 4.2 of the Secured Loan Facility Deed provided that, if at any time before the amount due to Cyprus Capital was repaid, the Club was desirous of refinancing any loan or credit, including any credit with Delphi Bank, it must give Cyprus Capital notice of its intention prior to the refinancing of the loan or credit.
11. Following the execution of these documents, Cyprus Capital advanced the loan facility of $3.56m to the Club.
12. A second set of documents was executed in March 2023, providing for Cyprus Capital to advance a further amount of $910,000 to the Club. This set of documents included a Secured Loan Facility Deed and a General Security Deed, as well as real property mortgages over properties owned by the Club. Each of those documents was in terms relevantly similar to those of the corresponding documents for the 2021 facility.
13. In particular, clause 12 of the Secured Loan Facility Deed for the March 2023 facility was in identical terms to clause 13 of the corresponding document for the February 2021 facility, which is set out in paragraph 13 above.
14. Following the execution of the second set of documents, the further loan facility of $910,000 was advanced by Cyprus Capital to the Club.
15. As set out above, each of the Secured Loan Facility Deeds provides for the corresponding General Security Deed to be released from escrow to Cyprus Capital on the earlier of two triggers: Cyprus Capital giving notice to the Club of an Event of Default or Potential Event of Default, or the Security Interest granted by the Club to Delphi Bank being released.
16. As regards the first of those triggers, Cyprus Capital has not issued to the Club any notice of an Event of Default or Potential Event of Default.
17. As regards the second of those triggers, the Security Interest granted by the Club to Delphi Bank has been released.
18. This was confirmed by an email from Bendigo and Adelaide Bank dated 24 September 2024, stating that the real property mortgages and the general security deed which had been granted by the Club to Bendigo and Adelaide Bank had been discharged.
19. The release of these securities appears to have occurred on 18 June 2024. The relevant mortgages were discharged on that date. There was also evidence that the security interest granted by the Club to Bendigo and Adelaide Bank is no longer registered on the PPSR. Evidence was not available as to when this security interest was removed from the PPSR. However, there was a search of PPSR in evidence, which reflected data contained in the PPSR as at 1 June 2024, and which showed the registration of the Bank's interest at that date. It is therefore apparent that this interest was removed from the PPSR some time thereafter. It can be inferred, for present purposes, that this occurred on or around the date that the mortgages were discharged (namely, 18 June 2024).
20. It follows that, in accordance with the terms of each of the Secured Loan Facility Deeds, each of the corresponding General Security Deeds was released from escrow on 18 June 2024.
21. Despite the requirement for the Club to give notice to Cyprus Capital of any planned refinancing, this did not occur.
22. Ms Bassil, who is a director of Cyprus Capital, gave unchallenged evidence that she did not become aware of the refinancing of the Delphi Bank loan, the discharge of the mortgages granted to Delphi Bank or the discharge of the security interest which was registered by Bendigo Bank on the PPSR until mid-August 2024. This occurred when she obtained title searches of the relevant properties and discovered that Bendigo Bank had been replaced on title by another mortgagee.
23. At this time, Ms Bassil was advised by her current solicitors that the security interests granted to Cyprus Capital had not been registered. She immediately gave instructions to her solicitors to register those interests. Due to a systems outage at the Australian Securities and Investments Commission on the day those instructions were given, this registration occurred on the next business day, 19 August 2024.
24. Ms Bassil notified the Club of Cyprus Capital's intention to bring this application on the afternoon of 24 September 2024. On the evening of the same day, Mr David Kennedy and Mr Morgan Kelly were appointed voluntary administrators of the Defendant. Cyprus Capital commenced the proceedings on the following day by way of an application before me sitting as Duty Judge.
25. The matter was adjourned for just over a week, so as to allow notice of the application to be given to creditors. No creditor appeared at the hearing to make submissions in opposition to the application, although the Court was provided with two affidavits from creditors of the Club. I have taken account of this material, to which I have referred below.

Relevant Provisions

1. Section 588FL of the Act applies, relevantly, where an administrator has been appointed to a company and a PPSA security interest which has been granted by the company in collateral is covered by s 588FL(2): see s 588FL(1).
2. Subsection 588FL(2) provides, relevantly, as follows: This subsection covers a PPSA security interest if (a) at the critical time… (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 is the earlier; … (iv) a later time order by the court under s 588FM.
3. The "critical time" is defined in subs 588FL(7) and is, in the present case, 24 September 2024, being the date of the appointment of the administrators: see s 588FL(7)(b); s 513C(b).
4. Cyprus Capital contended that, for the purposes of s 588FL(2)(b), the "security agreement that gave rise to the security interest", being the two General Security Deeds, "came into force" when those Deeds were released from escrow, which did not occur until 18 June 2024.
5. On that basis, Cyprus Capital contended that the registration time for the security interests, pursuant to s 588FL(2), was 16 July 2024 (being the latest of the dates in s 588FL(2)(b)).
6. By its application, Cyprus Capital sought an order under s 588FM fixing the date for registration of those security interests, for the purposes of s 588FL(2)(b)(iv), as the date when they were in fact registered, namely, 19 August 2024.
7. Cyprus Capital submitted that the effect of such an order would be to make the "registration time" under s 588FL(2)(b) only a month later than it would be in the absence of such an order. This submission turns upon when the two General Security Deeds "came into force", which is an issue that is addressed below.
8. If no order is made fixing a later date for registration, then the effect of s 588FL(4) will be that the PPSA security interests under the General Security Deeds vested in the Club immediately before the appointment of the Administrators.
9. Section 588FM(1) provides that a company, or any person interested, may apply to the Court for an order fixing a later time for the purposes of subparagraph 588FL(2)(b)(iv).
10. Section 588FM(2) provides that the Court may make such an order if the Court 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.

When did the General Security Deeds come into force?

1. Section 588FL(2)(b)(ii) directs attention to the point in time when "the security agreement that gave rise to the security interest came into force".
2. In the present case, it is common ground that the trigger for the release of the General Security Deeds from escrow did not occur until 18 June 2024.
3. The question is whether those General Security Deeds came into force before, or only upon, their release from escrow.
4. In Segboer v AJ Richardson Properties Pty Ltd [2012] NSWCA 253, Sackville AJA (with whom Allsop P and Campbell AJA agreed) considered the effect of delivery of a deed in escrow. His Honour made the following observations (at [72]-[73]): "A deed can be delivered in escrow. The effect is that the deed is not recallable, but equally is not operative until a particular condition is satisfied: Beesly v Hallwood Estates Ltd [1961] Ch 105, at 118, per Harman LJ (with whom Lord Evershed MR agreed): Federal Commissioner of Taxation v Taylor [1929] HCA 13; 42 CLR 80, at 87-88, per Rich, Starke and Dixon JJ; Ansett v Comptroller of Stamps, at 79. Delivery of a deed in escrow is to be distinguished from a case where the grantor's intention is not to be bound at all until some future event occurs, in which case there is no delivery. An example is where a party to a conveyancing transaction executes a deed and returns it to his or her solicitor in the expectation that, in accordance with usual conveyancing practice, the deed will not be operative until exchange: Hooker v Christian Brothers, at 118, Bradbrook, at 269. Whether a deed has been delivered unconditionally, delivered in escrow or not delivered at all depends on the executing party's intention. This question, as I have already indicated, is to be determined on the basis of the words used by and the conduct of the promisor, taking into account the circumstances attending the execution of the deed."
5. In Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62; [2020] NSWCA 344, Leeming JA (with whom Bell P and Brereton JA agreed) quoted this passage from Segboer, and continued as follows (at [73] and [75]): "There are thus three possibilities: (1) the deed may have been delivered unconditionally; (2) the document may have been delivered subject to a condition, such that it is only subsequently effective as a deed, while in the meantime there is no power to recall it: this is delivery by escrow; (3) the document may have been 'delivered' subject to a condition, and on a basis that the covenantor may recall the deed prior to the condition being complied with; this is not delivery at all. … Whether there has been delivery, and if so whether it is delivery in escrow, is a question of fact. Windeyer J explained that the fact that an instrument was delivered as an escrow can be inferred from the circumstances: Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 at 471-472; [1969] HCA 4. Windeyer J cited Bowker v Burdekin (1843) 11 M & W 128 at 147; 152 ER 744 at 751, where Parke B had said 'though it is in form an absolute delivery, if it can reasonably be inferred that it was delivered not to take effect as a deed till a certain condition was performed, it will nevertheless operate as an escrow'. Lord Wright said in Naas v Westminster Bank Ltd at 399 that '[t]he character of the act of delivery depends on intention, which must be ascertained by considering the nature and all the circumstances of the case'. …"
6. Having regard to the terms of the Secured Loan Facility Deeds, and in particular the clauses providing for each Deed to be held in escrow by Cyprus Capital and only to be released from escrow on the occurrence of the earlier of two specified events, I am satisfied that the present case does not fall into the first or third possibilities identified by Leeming JA. The General Security Deeds were not delivered unconditionally. Nor were they delivered on the basis that they were able to be recalled by the Club (and therefore not delivered at all). Instead, the present case comes falls within the second possibility identified by Leeming JA. The General Security Deeds were delivered to Cyprus Capital to be held in escrow, and were only to be released to Cyprus Capital from escrow when either of two specified triggers occurred. Accordingly, the General Security Deeds were delivered subject to a condition, such that they would only become effective as a deed upon the satisfaction of the condition (with the Club not having power to recall the deeds in the meantime).
7. Cyprus Capital was not able to assert any right under the General Security Deeds, or exercise any power granted under those Deeds, unless and until the earlier of the two specified triggers occurred. Until that point in time, the General Security Deeds, though executed and irrevocable, were not operative: Segboer at [72].
8. It follows that the security agreements which gave rise to the relevant security interests only came into force at the time when the General Security Deeds were released from escrow, which occurred when the security interests which had been granted by the Club to Delphi Bank were released. That occurred on 18 June 2024.
9. Accordingly, I accept Cyprus Capital's submission that, absent an order under s 588FM, the effect of s 588FL is that the security interests will vest in the Club by reason that they were not registered by the date twenty business days after that date (16 July 2024), but were instead registered on 19 August 2024.
10. This then leads to the issue whether, in the circumstances of this case, the Court should order, under s 588FM, that the time for the registration of the security interests should be fixed as 19 August 2024.

Application under s 588FM

1. I am satisfied that this is a case where the failure to register prior to 16 July 2024 was "accidental or due to inadvertence or some other cause" within the meaning of s 588FM(2)(a).
2. In In the matter of Appleyard Capital Pty Limited; 123 Sweden AB v Appleyard Capital Pty Limited [2014] NSWSC 782 at [10], Brereton J said 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 ..."
3. In In the matter of Cardinia Nominees Pty Ltd [2013] NSWSC 32 at [15], Black J referred to the emphasis in the case law upon the benevolent operation of predecessor sections, 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.
4. Cyprus Capital's failure to register its security interest under the two General Security Deeds was innocent. It was not the result of any disregard of its statutory obligations, but instead occurred in circumstances where Cyprus Capital had not been informed by the Club, despite the terms of the Secured Loan Facility Deed, that the Delphi Loan had been refinanced and that the security interests granted to Delphi Bank had been released, such that Cyprus Capital did not know that the General Security Deeds had been released from escrow. As soon as Cyprus Capital learned of those matters, it immediately moved to register its interest.
5. A relevant consideration when exercising the discretion to make an order under s 588FM is the existence of prejudice to the interests of unsecured creditors of the Club, since the effect of the order sought is that they will be deprived of the benefit of having had the security vest in the Club immediately before the appointment of the Administrators: see In the matter of Psyche Holdings Pty Ltd [2018] NSWSC 1254 at [38].
6. In Psyche Holdings, Ward CJ in Eq made the following observations (at [40]): "the mere fact that, if the extension is granted, unsecured creditors will be deprived of the benefit of the security interest vesting in the grantor, and thus receive a lesser dividend in the event of insolvency, is no objection to making the order sought. It would be otherwise if the position of the unsecured creditors was detrimentally affected by the delay in registration, for example if they traded with the company on the faith of the register that showed no security interest. As said by Brereton J in Appleyard Capital Pty Limited above at [29]: 'In the event of insolvency this necessarily involves detriment to unsecured creditors who would otherwise benefit from the vesting of the security in the company. It would be contrary to the purpose of the section to treat the risk that unsecured creditors could be adversely affected by making an order as a dominant consideration. The fact that absence of prejudice to creditors is an alternative ground for relief [s 588FM(2)(a)(ii)] indicates that it was not intended that relief from accident or inadvertence be granted only where there is no prejudice to creditors, as Bray CJ observed in Re Flinders Trading Co (at 220).'"
7. In Appleyard at [30], Brereton JA (after making the observations quoted in the passage from Psyche Holdings set out above) continued as follows (at [30]): "although I accept, as the authorities make clear, that the presence or absence of prejudice to unsecured creditors is a relevant discretionary consideration, relevant prejudice is not necessarily established merely by showing that the dividend to unsecured creditors will be less if the security interest does not vest in the company; the unsecured creditors may well have been in no different a position had the security interest been timely registered. The type of prejudice that is of particular relevance is prejudice attributable to the delay in registration, rather than prejudice from making the order (which is inevitable). This is the type of prejudice contemplated by the legislation (see s 588FM(2)(a)(ii), which refers to prejudice from the failure to register earlier, not from making the order), and referred to by Buckley J in In re Cardiff Workmen's Cottage Co Ltd; by Long Innes J in Re a Limited Company (see also Re Flinders Trading Co, 225 (Bray CJ); 234 (Mitchell J)); and by McLelland J in Re Guardian Securities (at 98). The period of delay in effecting registration is relevant, because the shorter the delay the less likely that the failure to register within time will have had any impact. The significance of the passage of time is mainly related to the possibility of competing interests having arisen, in particular through others having dealt with the company on the footing that the collateral was unencumbered."
8. It is difficult to see that the failure of Cyprus Capital to register its security interest before 19 August 2024 can properly be described as "delay" on its part, since it was, through no fault of its own, ignorant that the condition for the General Security Deeds to be released from escrow had been satisfied.
9. In any case, if one were to consider the period of delay in registration, it would be the period from 16 July 2024 to 19 August 2024. That is because, if the security interests had been registered by 16 July 2024, they would not have vested in the Club upon the appointment of Administrators, and would be enforceable in accordance with their terms, and there would not have been a need for a s 588FM order.
10. There is no evidence that any creditor has been prejudiced by reason of dealing with the Club in the period from 16 July 2024 until 19 August 2024, when the security interests were registered.
11. The creditors of the Club have been notified of this application. None has given evidence of dealing with the Club in this period.
12. The Administrators have led evidence on this application. The Administrators did not point to any unsecured creditor who dealt with the Club in this period.
13. There was evidence before the Court from two unsecured creditors, who are also members of the Club.
14. Each of those persons gave evidence of events prior to 2024. Neither gave evidence of any transaction entered with the Club in 2024.
15. Mr Michael Kyriacou is a former director of Cyprus Capital. He gave evidence of conversations between the directors of Cyprus Capital in 2021, around the time when the first of the loan facility arrangements was put in place. In particular, he deposed that there was discussion between the directors regarding whether or not Cyprus Capital should take a charge over the Club's assets, and a concern was expressed that Delphi Bank, which already had a charge over the assets of the Club, was "not keen to have anyone else with a charge over the Club". This may explain why, as noted above, the terms of the arrangement between Cyprus Capital and the Club provided that the General Security Deed would only be released from escrow upon either the security interests held by Delphi Bank being released or Cyprus Capital giving notice of an Event of Default.
16. Mr Alex Veryinis is an honorary director of the Club. He gave evidence that he transferred money to Cyprus Capital in April and May 2023, in order that those funds would be advanced to the Club. He said that he had discovered that not all of the funds which he had provided to Cyprus Capital in 2023 had been advanced to the Club, and that some of those funds had been used to pay interest. Those matters are not relevant to the question whether the unsecured creditors will suffer prejudice by the proposed order under s 588FM of the Act.
17. There was evidence before the Court that the current market value of the Club's real property assets is $57m. The Administrators have identified, to date, unsecured creditors of around $3.8m, although this is a preliminary figure given that the Administrators were appointed only last week. On the basis of this evidence, it appears that the value of the real property of the Club significantly exceeds the amount of its secured and unsecured creditors.
18. As noted above, the Administrators confirmed that, if I accepted Cyprus Capital's contention that the General Security Deeds only came into force on 16 July 2024 (and I have done so), then the Administrators did not advance any submissions in opposition to the order sought by Cyprus Capital under s 588FM.
19. Having regard to those matters, I am satisfied not only that the failure to register the security interests under the General Security Deeds by 16 July 2024 was accidental, or due to inadvertence or some other sufficient cause, but also that the failure to register those interests earlier was not of such a nature as to prejudice the position of creditors or shareholders of the Club, and that it is just and equitable to grant the relief sought.
20. Cyprus Capital proposed that there be no order as to costs. I am satisfied that this is appropriate in the circumstances of this case.

Orders

1. For those reasons, I make the following orders. 1. An order, pursuant to section 588FM of the Corporations Act 2001 (Cth), fixing 19 August 2024 as the time, for the purposes of section 588FL(2)(b)(iv), for the Plaintiff to register any of registrations 202408190009908 and 202408190010304 on the Personal Property Securities Register 2. There be no order as to costs.

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