Solicitors:
Miller & Prince Lawyers (Plaintiff)
Madison Marcus (Second Defendant)
File Number(s): 2017/ 369465
[2]
Judgment (ex tempore)
The plaintiff BMW Australia Finance Limited is in the business of financing the acquisition of motor vehicles by a number of methods, including through chattel mortgage agreements. Its invariable practice when financing the acquisition of a vehicle is to pay the proceeds of the advance not to the purchaser of the vehicle, but to the dealer through whom the purchase is made.
BMW acquired security interests in collateral of the first defendant company Mehajer Brothers Pty Ltd (in its capacity as trustee of the Mehajer Brothers trust), pursuant to four chattel mortgage agreements. The first, dated 20 December 2013, is in respect of Audi motor vehicle registered number BSD66U, for a principal sum of $51,181. It may be of relevance that that chattel mortgage agreement does not refer to the company as acting in any trustee capacity. The second, dated 27 May 2014, is in respect of Rolls Royce motor vehicle, registered number NBL52N, for a principal sum of $653,581. That chattel mortgage agreement does refer to the company "as trustee for Mehajer Brothers trust". The third chattel mortgage agreement, which also identifies the borrower as the company as trustee for the trust, was dated 27 February 2015 and is in respect of Toyota motor vehicle YBQ81C. And the fourth, which yet again refers to the borrower as the company as trustee for the trust, dated 11 May 2015, is in respect of a Land Rover motor vehicle - without a specified registration number - for the sum of $151,624.96.
The security interests so created are plainly enough Purchase Money Security Interests (PMSI), although the documentation at least potentially also catches some collateral which does not fall within the definition of a PMSI.
The third chattel mortgage to which I have referred, that of 27 February 2015, was registered on the PPSR on 18 March 2015, within the 15 business day period referred to in (CTH) Personal Property Securities Act 2009 (PPSA), s 62(3)(b). It contained a statement that the relevant security interest was a PMSI. It referred only to the ACN of the company and not to the ABN of the trust. As, at least in respect of this chattel mortgage agreement, the borrower was the company as trustee for the trust, it is at least arguably defective in that respect.
The fourth chattel mortgage to which I have referred, that of 11 May 2015, was registered on 12 May 2015 - again, within the 15 day period; again, it contained a statement that it was a PMSI; and again, it was registered only against the ACN of the company, and not the ABN of the trust, and so is at least arguably defective.
The first chattel mortgage, that of 20 December 2013, was not registered until 24 May 2016, nearly two and a half years after the expiry of the 15 day period referred to in s 62(3)(b). It contained a statement that it was a PMSI. It too was registered only against the ACN of the company. Whether or not it is defective may be more doubtful, given that there was no reference to the company acting as a trustee in the chattel mortgage agreement.
Finally, the second chattel mortgage agreement, that of 27 June 2014, was also registered on 24 May 2016, nearly two years after the expiry of the s 62(3)(b) period. It contained a statement that it was a PMSI and was registered against the ACN of the company only. In this case, as I have said, the chattel mortgage did identify the borrower as the company as trustee of the trust, and the registration is, for that reason, at least arguably defective.
After the belated registrations of the first and second chattel mortgages in May 2016, no further action was then taken until, in late 2017, BMW received advice from its solicitors, who had been retained in connection with a separate matter, to the effect that where security was taken from a trust, it was necessary that the registration be against the ABN of the trust, rather than the ACN of the company; that as at least the first and second chattel mortgages had been registered late, it would be necessary to obtain an extension of time if they were to have priority as PMSIs under s 62; and that, given that the interests secured might not exclusively be PMSIs, it would be prudent to register the interests also as non-PMSIs.
As a result of that advice, on 14 November 2017, BMW made four new PPSR registrations - one in respect of each of the chattel mortgages to which I have referred - but in this case against the ABN of the trust, rather than the ACN of the company. Each contained a statement that it was a PMSI. Then, on 24 November 2017, five further registrations were made. Three of them related respectively to the second, third, and fourth chattel mortgages, and were against both the ACN of the company and the ABN of the trust. These registrations described the interest as a non-PMSI, All Present and After-Acquired Property (AllPAP) security interest. The other two related to the first chattel mortgage, and were respectively against the ACN of the company and the ABN of the trust; both claimed a non-PMSI, AllPAP interest.
By originating process filed on 6 December 2017, BMW seeks relief under PPSA, s 293(1)(a), in respect of the four original PMSI registrations against the ACN, and the four registrations of 14 November 2017 against the ABN, extending time so that those registrations are within the extended time. That relief is sought in order that, regardless of when the interests created by the four chattel mortgages were perfected by registration up to 14 November 2017, they might have priority as PMSIs, pursuant to PPSA s 62. BMW also seeks relief under (CTH) Corporations Act 2001, s 588FM, fixing for the purposes of s 588FL(2)(b)(iv) the date 24 November 2017, being the date of registration of the five AllPAP registrations to which I have referred. Such relief is sought on the basis that should a critical time - that is to say an insolvency event - occur within six months after 24 November 2017, then in the absence of such an order, the security interest would, pursuant to s 588FL, vest in the company.
As will become apparent, the central concept - in both PPSA s 62(3) and in Corporations Act s 588FL, is the time within which a security interest is to be registered. Although, as has become not uncommon in this field, the relief claimed has been framed by reference to PPSR registration numbers, I think it preferable to frame the relief - at least in the context of this case - by reference to the security interests in specified collateral, rather than by reference to PPSR registration numbers.
PPSA s 293 and Corporations Act s 588FM contain criteria which at first sight are very similar, but there are important differences between them. PPSA s 293 provides that the Court may make an order extending the number of business days in a period specified in s 62(3)(b), in respect of the perfection of PMSIs if the Court is satisfied that it is just and equitable to do so, and that in doing so the Court must take into account:
1. Whether the need to extend the period arises as a result of an accident, inadvertence or some other sufficient cause;
2. Whether extending the period would prejudice the position of any other secured parties or other creditors; and
3. whether any person has acted or not acted in reliance on the period having ended.
PPSA, s 62(3), has the effect that a PMSI has priority over any other perfected security interest granted by the same grantor in the same collateral that is not a PMSI if (in the case of personal property other than inventory) the PMSI is perfected by registration before the end of 15 business days after the grantor obtains possession of the property, and the registration that perfects the PMSI states that the interest is a PMSI. PPSA, s 62, is significant only in respect of non-PMSI security interests which have been perfected before the registration of the PMSI. Its effect is that a PMSI will trump a non-PMSI as a matter of priority, even though the non-PMSI or AllPAP security interest is perfected by registration before the PMSI, so long as the conditions referred to in s 62(3) apply. If the non-PMSI or AllPAP interest is perfected by registration after the PMSI is perfected by registration, then s 62 has no work to do; the default priority rules in s 55 mean that the PMSI, having been perfected prior in time to the non-PMSI, will have priority in any event.
Corporations Act, s 588FL(2), has the effect that when a company has been wound up, or an administrator has been appointed, or a deed of company arrangement has been executed, any PPSA security interest which was perfected, registered or became enforceable against a third party after the latest of six months before the critical time or 20 days after the security agreement came into force, or such later time as the Court may fix under s 588FM, vests in the company for the benefit of creditors generally, so that the secured creditor loses the benefit of the security. Provision for fixing such a later time is made by s 588FM, which provides as follows:
Extension of time for registration
(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).
(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.
Thus it will be seen that s 588FM confers on the Court a discretion to fix a later time, if it is satisfied of the existence of any one of three grounds, namely:
1. that the failure to register the collateral earlier was accidental or due to inadvertence or some other sufficient cause, or
2. that the failure was not of such a nature as to prejudice the position of creditors or shareholders, or
3. that on other grounds it is just and equitable to do so.
The section also permits the Court to make the order on terms and conditions. However, the structure of the section is such that satisfaction of the existence of one of the three grounds - the burden of establishing which is, plainly enough, borne by the applicant for relief - is a pre-condition to the exercise of the discretion. In more colloquial terms, those grounds provide gateways, at least one of which must be opened by an applicant before the discretion to fix a later time is enlivened.
Another relevant observation about s 588FM is that the prejudice to which s 588FM(2)(a)(ii) directs attention is that arising from the failure to register the collateral earlier; thus, the relevant comparison is between the position if the collateral were registered earlier, with the position if time were extended. The comparison is not between the position if an order were or were not made, but the position between registering the collateral earlier or later.
Finally, an order fixing a later time under s 588FM does not affect priorities, but merely avoids the consequence of vesting: see Re Appleyard Capital Pty Limited (2014) 101 ACSR 629; [2014] NSWSC 782 at [15].
In distinction to Corporations Act s 588FM, PPSA s 293 provides a test or standard to be applied as distinct from gateways to be navigated, before the discretion is enlivened. The test imposed by s 293 is that the Court be satisfied that it is "just and equitable" to extend time. In making that decision, the Court is required to have regard to the three specified, mandatory, considerations, but they do not provide gateways which must be navigated or hurdles which must be surmounted before the discretion is enlivened. Nonetheless, it is clear that the Court must consider each of those mandatory considerations, form an opinion on the questions that they pose, and then weigh the justice and equity of extending time in the light of the answers.
In distinction to Corporations Act s 588FM, the prejudice to which PPSA s 293(3)(b) refers is not that arising from failure to register earlier, but that arising from "extending the period", which is not quite the same thing; it directs attention not to the impact or effect of the delay in registration, but to the impact of making an order extending the period, so that the relevant comparison is between the position of creditors and shareholders if an extension is granted, with their position if no extension is granted: see Accolade Wines Australia Ltd [2016] NSWSC 1023 at [27]. And unlike relief under Corporations Act s 588FM, relief under PPSA s 293(1)(a) does affect priorities, because it will have the consequence that a PMSI which would otherwise not prevail against an earlier non-PMSI would prevail against it.
Three defendants were joined to the originating process. Appropriately, the company was joined as first defendant, the grantor of the relevant security interests. Notice of the proceedings was served on the company at its registered office which is also the residential address of its former director, Mr Mehajer, who has acknowledged receipt of the application and indicated that the first defendant did not intend attend to appear, at least so far as he was concerned.
The second defendant Ace Demolition & Excavation Pty Ltd registered an AllPAP security interest on 19 May 2016 - relevantly, after the third and fourth chattel mortgages were registered, but before the registration of the first and second chattel mortgages, and even further before the November 2017 registrations. The second defendant has been served with notice of the proceedings and has appeared to oppose the relief sought.
The third defendant CEG Direct Securities Pty Ltd was served with notice of the proceedings by email in accordance with the Court's directions at the email address provided on the PPSR, but that does not appear to have elicited any response or appearance.
[3]
PPSA s 293 Application
I turn first to the application under PPSA s 293(1)(a) to extend the period for perfection by registration of the relevant security interests as PMSIs. The first mandatory consideration is whether the need to extend the period arises as a result of an accident, inadvertence, or some other sufficient cause.
It is now well-established that a generous view is taken of the scope of inadvertence, so that the beneficial provision for extension of time may be readily available. However, authority also establishes that the Court expects to see evidence from an appropriate responsible person of the applicant to make out the ground of inadvertence, accident, or other sufficient cause.
Although - because she has been with the company only for four and a half months or so - the evidence of Marina Ong is less than compelling in this respect, I am nonetheless prepared to accept that it establishes unawareness of or inadvertence to the requirement to specify the ABN of the trust, as distinct from the ACN of the trustee company, where the security is taken from a trust. I am also prepared to accept that her evidence establishes relevant inadvertence to the view that it is prudent to lodge a non-PMSI registration in addition to a PMSI registration, where not all of the moneys secured necessarily fell within the scope of a PMSI. While there is undoubtedly some evidence - in the form of the company's manual - that points to its being aware of the requirement to register against the ABN of a trust where a trust is the grantor, nonetheless, informed by Ms Ong's evidence, I am prepared to accept that the failure to do so must have been attributable to a failure to appreciate the need or desirability of doing so.
The need to extend the period for registration of the interests created by the third and fourth chattel mortgages arises only because of those matters, and I am therefore satisfied, in respect of the interests created by the third and fourth chattel mortgages, that the need to extend the period arises as a result of an accident, inadvertence or some other sufficient cause.
However, the need to extend the period in respect of the first and second chattel mortgages arises, first and foremost, not for those reasons but primarily because of the failure to lodge them within time - and for that matter for some years afterwards. That failure is unexplained. It was submitted that, in circumstances where there is a high turnover and where there was an automatic or semi-automatic system in place for registration, which was meant to generate error messages if a registration were not completed effectively, inadvertence should be inferred. As I have said, I am prepared to give a fairly generous ambit to the scope of inadvertence. But as has often been emphasised, where a creditor approaches the Court for relief under these provisions, it bears the onus of establishing inadvertence, through adducing appropriate evidence from its proper officer or a responsible person to that effect.
It may be that, in circumstances where there is no one available who was employed at the relevant time, some current officer could offer an explanation, even in the absence of direct knowledge, through examining the company's systems. But in this case, to my mind, no explanation for the delay in registration, which is the prime cause of the need for an extension has been provided. I should not infer that inadvertence has been established in the absence of, at least, some evidence of the nature I have described. In those circumstances I am not satisfied that the need to extend the period in respect of the first and second chattel mortgages arises because of accident, inadvertence or some other sufficient cause.
The second mandatory consideration is whether extending the period would prejudice the position of any other secured parties or other creditors. The second defendant took an AllPAP on or about 5 May 2016 securing advances of in the order of $6.2 million.
Its security interest was registered on 19 May 2016. It was registered only against the ACN, and insofar as it was not registered against the ABN it may or may not prove to be defective; that does not need to be resolved now.
The second defendant's solicitor gave evidence that, while he cannot positively recall whether he or anyone in his firm undertook a PPSR search prior to the execution of the general security deed of 5 May 2016, it has been his consistent personal practice to undertake a PPSR search whenever his firm is acting for a lender which intends to take a general security deed from a borrower or grantor, and upon receipt of such search to review the results and identify any prior registrations and inform the client of those results.
The effect of granting the relief sought under s 293(1)(a) would be to confer on BMW's interest in the collateral to which the chattel mortgages relate priority over the interest of the second defendant, which the second defendant presently enjoys - at least in respect of the vehicles the subject of the first and second chattel mortgages. In that way, it is plain that the position of the second defendant would be prejudiced if the period were extended.
As I have said elsewhere, [1] such prejudice, while not irrelevant, is not conclusive, because in any case in which an order extending time under s 62(3)(b) were of any utility, it would be for the very purpose of achieving priority over prior AllPAPs. That does not mean that the prejudice is irrelevant, only that it is not conclusive - though it will be most significant where it is coupled with reliance, referred to in s 293(3)(c).
When the second defendant took its interest under its general security deed, the collateral, the subject of the four chattel mortgages, were assets of the company to which the general security deed attached. They were not insubstantial assets, notwithstanding the overall size of the advance, and the vehicles the subject of the first and second chattel mortgages (which includes by far the most valuable of them) were not, at least on the face of the register, the subject of any security interest.
I do not accept that reliance for the purposes of s 293(3)(c) is limited to the notion of "but for" causation, in the sense that a person claiming reliance must establish that had the security interests been known, they would not have proceeded with the transaction, or would not have done so on the same terms. Nor do I accept that s 293(3)(c) imposes an onus on a person who claims to have relied on the period having ended to make good that proposition; the onus of showing that it is just and reasonable to extend time is borne by the application for an extension, having regard to the three mandatory considerations. The evidence of the second defendant's solicitor, to which I have referred, though it is evidence of practice, is nonetheless evidence from which it may be inferred that according to his ordinary practice, he would have performed such a search and would have reported the results in the present case. That means that when it took its general security deed, the second defendant acted, or at least was entitled to act, on the basis that the vehicles the subject of the first and second chattel mortgages were not affected by an encumbrance.
The point was made that the second defendant could not have searched the ABN as it did not register against the ABN, and that may well be correct. But as in Accolade Wines, [2] so in this case the plaintiff properly points to the circumstances that the albeit arguably defective registration referring to the ACN is nonetheless notice on the register to persons making the searches that are normally made of the existence of the relevant interest. The corollary is that if the second defendant made the same mistake as the plaintiff in not adverting to the need to register against the ABN, nonetheless had the first and second chattel mortgages being registered in time, even if defectively against the ACN, they would likely have been discovered on search. I am not satisfied that the second defendant did not rely on the state of the register when it took its general security deed.
On the other hand, the second defendant does not claim to have relied on the absence of any registration of the third and fourth chattel mortgages when it did so. In respect of the third and fourth chattel mortgages, I am therefore satisfied that the need to extend the period as arises as a result of accident, inadvertence, or some other sufficient cause; and that although extending the period might prejudice the position of the second defendant if the existing registrations are defective, it has not acted in reliance on the period having ended. On balance, I am satisfied that, it is just and equitable to extend time in respect of the third and fourth chattel mortgages.
However, in respect of the first and second chattel mortgages I am not satisfied that the need to extend the period arises as a result of accident, inadvertence or some other sufficient cause. I am satisfied that extending the period would prejudice the position of the second defendant, and I am not satisfied that the second defendant did not act in reliance on the period having ended. On balance, it is not just and equitable to extend the period in respect of the first and second chattel mortgages.
[4]
Corporations Act Section 588FM Application
I turn then to the claim for relief under Corporations Act, s 588FM. As I have said, the question of prejudice needs to be considered in a different way under this provision. The third and fourth mortgages, as I have said, were registered in a timely manner, but defectively due to inadvertence. I am satisfied, for the purposes of s 588FM(2)(a), that failure to register the collateral earlier in respect of them was accidental or due to inadvertence or some other sufficient cause.
As to the first and second chattel mortgages, again, I cannot be satisfied, in the absence of any evidence from a responsible person to that effect, that failure to register the collateral earlier was accidental or due to inadvertence or some other sufficient cause. The evidence is silent. However, the failure to register the collateral earlier did not prejudice and was not of such a nature as to prejudice other secured creditors who may have become registered subsequently. They have, if anything, achieved priority in that way, and their interest has not been prejudiced by the failure to register the collateral earlier.
So far as concerns unsecured creditors, the solvency of the grantor company is not established, and there may be grounds for doubting its solvency - although the evidence is very slight and speculative in that respect. It suffices to say that I am unable to find that it is solvent. Nonetheless, comparing the position if the first and second mortgages were registered more than six months ago with the position that the registration time be edited, it is not apparent how the failure to register earlier was of such a nature as to prejudice the position even of unsecured creditors. Had they been registered in a timely manner, then the consequence would be that the security interest would not vest in the company in the event of an insolvency event. Should a later registration time now be fixed, the practical consequence will be the same.
So far as I can see, the only theoretical possibility of prejudice is that unsecured creditors may have extended credit to the company during the period of non-registration on the faith that the security interests did not exist. Given the nature of these security interests - as PMSIs limited to particular motor vehicles - that seems to me an unlikely scenario. But in any event, the position of such creditors is sufficiently protected by the Guardian Securities condition, to which the plaintiff submits. It is less clear to me that the same considerations would apply in respect of an AllPAP security interest as distinct from a PMSI. The second defendant accepts that it is not prejudiced by relief under s 588FM.
[5]
Conclusions
Accordingly, I have reached the following conclusions:
1. The defective registration of the third and fourth chattel mortgages was attributable to inadvertence. In circumstances where there was a timely though defective registration, which would likely have been discovered on usual searches, it is just and equitable to extend the time referred to in PPSA s 62(3)(b), under s 293(1)(a), so that the registrations made against the ABN on 14 November 2017 are within the extended time, with the consequence that those securities will have priority as PMSIs over earlier as well as later AllPAP's.
2. The late registration of the first and second chattel mortgages is unexplained. The delay both before and after their registration is substantial. The register changed in the period of delay before their registration - in particular, by reason of the second defendant becoming registered during that period. The second defendant would be prejudiced by an extension. It is not just and equitable to make an order extending time under PPSA s 62(3)(b) in respect of those chattel mortgages. The consequence is that they will not be entitled to priority as PMSIs over AllPAPs perfected before they were perfected, but they will still be entitled to priority as first in time over AllPAPs perfected after they were perfected.
3. I am satisfied that the failure to register the third and fourth chattel mortgages earlier was due to inadvertence, but I am not so satisfied in respect of the first and second chattel mortgages. However, despite the length of the delay in their registration, I am satisfied that the delay was not of such a nature as to prejudice the interests of creditors or shareholders, at least to the extent that that is not sufficiently addressed by a Guardian Securities condition. In particular, that is, because they are PMSIs, and it may well be otherwise if they were AllPAP securities.
[6]
Orders
The Court therefore orders that:
1. Pursuant to PPSA s 293(1)(a), the number of business days in the period specified in s 62(3)(b) for perfection by registration of the purchase money security interests created by the chattel mortgage between the first defendant as borrower and the plaintiff, number 2357258, dated 27 February 2015, in respect of collateral being Toyota Kluger motor vehicle YBQ81C, and by chattel mortgage agreement between the first defendant and the plaintiff number 2376605, dated 11 May 2015, in respect of collateral being 2015 Land Rover motor vehicle chassis number SALGA2JE3FA20834, be extended to 24 November 2017.
2. Pursuant to Corporations Act s 588FM, 24 November 2017 be fixed for the purposes of sub-paragraph 588FL(2)(b)(iv) in respect of the security interests created by the chattel mortgage between the first defendant as borrower and the plaintiff, number 2357258, dated 27 February 2015, in respect of collateral being Toyota Kluger motor vehicle YBQ81C, and by chattel mortgage agreement between the first defendant and the plaintiff, number 2376605, dated 11 May 2015, in respect of collateral, being 2015 Land Rover motor vehicle, chassis number SALGA2JE3FA20834, and chattel mortgage between the first defendant and the plaintiff number 2228707, dated 20 December 2013, in respect of collateral being Audi motor vehicle registered number BSD66U, and the chattel mortgage between the first defendant and the plaintiff number 2285526, dated 27 June 2014, in respect of collateral being 2013 Rolls Royce motor vehicle NBL52N.
3. Liberty is reserved to any liquidator, administrator, or deed administrator appointed to the first defendant within six months of 24 November 2017 to apply to discharge or vary order 2.
[7]
Costs
First, the plaintiff needed an indulgence, attributable to its own failure to comply with the statutory requirements. Secondly, the second defendant's intervention in the proceedings was successful in large part, particularly if one looks at the value of the relevant securities involved. Thirdly, the second defendant's intervention to the extent it was unsuccessful has increased the overall costs of the proceedings - although not in a very large way. On balance, it seems to me that the plaintiff should pay two-thirds of the second defendant's costs.
The Court orders that the plaintiff pay two-thirds of second defendant's costs.
[8]
Endnotes
Accolade Wines Australia Ltd [2016] NSWSC 1023 at [29].
[2016] NSWSC 1023
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Decision last updated: 16 April 2018