Tesoriero v Cao Holdings Pty Ltd, in the matter of Cao Holdings Pty Ltd

INTRODUCTION 1 By an originating process filed on 27 May 2024, the plaintiffs, Mr Stephen Anthony Tesoriero and Ms Ramona Tesoriero, as trustees for the Tesoriero Family Trust, make an application under s 588FM of the Corporations Act 2001 (Cth) (Corporations Act), seeking to fix a later time for the purposes of s 588FL(2)(b)(iv) for the registration of certain security interests granted by Cao Holdings Pty Ltd (Cao Holdings). 2 The matter came before me today, 27 May 2024, as the Commercial and Corporations Duty Judge of the Court. The plaintiffs pressed for the relief in their originating process on an ex parte basis. In support of the relief claimed, the plaintiffs read the affidavit of Stephen Anthony Tesoriero, dated 20 May 2024, the affidavit of Steven John Brown, dated 20 May 2024, and a further affidavit of Steven John Brown, dated 23 May 2024. Mr Mirzai of Counsel appeared for the plaintiffs and provided an outline of written submissions which he supplemented by oral submissions before me. 3 After hearing argument, I decided to grant the relief sought by the plaintiffs. These are my reasons for doing so.

Background 4 The background facts may be shortly stated. The plaintiffs are a husband and wife. After a series of discussions in or about March to April 2016, Mr Andrew Musumeci and Ms Kathie Musumeci sought to borrow money from the plaintiffs. The borrower of such funds was to be the defendant, Cao Holdings, of which Ms Musumeci is the sole director and secretary. The plaintiffs agreed to provide funding by way of a loan on the basis that security would be provided. 5 In May 2016, documents were entered into to record the terms of the loan and the security, including a deed of secured loan between the plaintiffs and the defendant as borrower and Ms Musumeci as guarantor and a General Security Agreement (GSA) as between the plaintiffs and the defendant (both in its own capacity and as trustee for the Cao Discretionary Trust). 6 In or about July 2016, three payments amounting to $700,000 were advanced from the plaintiffs to the defendant. Those amounts have not been repaid in full. 7 At all material times, the plaintiff's solicitor, Mr Brown, had standing instructions to attend to registration of the security interests granted by the defendant in favour of the plaintiffs for the purpose of the Personal Property Securities Act 2009 (Cth) (PPSA). 8 On or about 28th September 2018, a registration was made in respect of the security interest created by the GSA on the Personal Property Securities Register (PPSR). However, this first registration was lodged in a way that expressed it to commence on 28 September 2016 but end on 28 September 2018. This was incorrect as the security granted under the GSA operates until full discharge of the loans made by the plaintiffs to the defendant. 9 The result of the incorrect first registration is that the security interest granted in favour of the plaintiffs was removed from the PPSR on or about 28 September 2020. It was not until mid-March 2024 that the expiration of the first registration was discovered by reason of the first plaintiff seeking from Mr Brown an update as to the status of the security. Having identified that there had been this error, the plaintiffs instructed Mr Brown to lodge a further financing statement to register their security on the PPSR, but this further attempt at registration also contained an error in that it identified the wrong entity as the secured party. A further registration was lodged with all the correct details on the PPSR on 17 May 2024. 10 These developments have been drawn to the defendant's attention in correspondence. The defendant has also been served with draft copies of the originating process and affidavits relied upon by the plaintiffs. On 22 May 2024, Ms Musumeci sent an email to Mr Brown in which she stated, "I have reviewed the papers you have sent to me and consent to your client's application," and that the defendant "does not intend to appear or be heard in respect to the application on the basis that your clients do not seek any costs from Cao Holdings".

APPLICABLE PROVISIONS 11 Section 588FL of the Corporations Act provides that a "PPSA security interest" (as defined in the Act) vests in the grantor if the grantor is placed into external administration, and the interest has not been registered under the PPSR within specified times. The effect of s 588FL has been set out in a number of cases including in Re Appleyard Capital Proprietary Limited [2014] NSWSC 782; (2014) 101 ACSR 626 at [13] per Brereton J. 12 Broadly, the effect of s 588FL(2) is that when a company is being wound up and an administrator is being appointed or a deed of company arrangement executed, any PPSA security interest which was perfected, registered, or enforceable against the 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 section 588FM, vests in the grantor company for the benefit of creditors generally, and the secured creditor loses the benefit of the security: Re Cardinia Nominees Pty Ltd [2013] NSWSC 32 at [11]; Re Black Opal IP Pty Ltd [2013] NSWSC 1225 at [6]. 13 Section 588FM of the Act seeks to, in a way, mitigate the effect of s 588FL. It does this by empowering the Court under section 588FM(1) to make an order effectively extending the time for registration of security interest. Section 588FM provides as follows: Extension of time for registration (1) A company, or any person interested, may apply to the Court (within the meaning of s 58AA) for an order fixing a later time for the purposes of subparagraph 588FL(2)(b)(iv). Note: If an insolvency-related event occurs in relation to a company, paragraph 588FL(2)(b) fixes a time by which a PPSA security interest granted by the company must be registered under the Personal Property Securities Act 2009, failing which the security interest may vest in the company. (2) On an application under this section, the Court may make the order sought if it is satisfied that: (a) the failure to register the collateral earlier: (i) was accidental or due to inadvertence or some other sufficient cause; or (ii) is not of such a nature as to prejudice the position of creditors or shareholders; or (b) on other grounds, it is just and equitable to grant relief. (3) The Court may make the order sought on any terms and conditions that seem just and expedient to the Court. 14 Section 588FM confers on the Court a discretion to fix a later time if satisfied of any one of the three grounds that are a precondition to the exercise of the Court's power exists, namely, that the failure to register the collateral earlier was accidental, or was not of such a nature to prejudice the position of creditors or shareholders, or 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.

CONSIDERATION 15 It has been held that mistakes made by lawyers and others in the lodgement of registration documents of the PPSR fall within the scope of s 588FM(2)(a)(i): Re Eticore SD Proprietary Limited (2021) NSWSC 110. 16 In the present case, the operative inadvertence appears to have been on the part of the plaintiffs' solicitor, Mr Brown, who did lodge the first registration within the period required but assumed that it had been registered as being valid and effective for something greater than the two years for which it, in fact, had been entered as being registered on the PPSR. Mr Brown's evidence, which I accept, is that he had become accustomed to assuming that a security interest would be, by default, registered for a period of seven years and not for two years, and therefore approached the registration of security interests in this case on that assumption. As it turns out, the assumption that he made gave rise to an inadvertent or accidental mistake. This failure was not discovered until mid-March 2024, and steps have now been taken to rectify the position. 17 Accordingly, I am satisfied that the failure to attend to the prescribed requirements arose due to accident or inadvertence within the meaning of s 588FM(2)(a)(i) of the Act. I am also satisfied for the purpose of s 588FM(2)(a)(ii) that the fixing of later time is not of such nature so as to prejudice the position of creditors or shareholders. As Brereton J held in Re Appleyard at [30] to [31], the type of prejudice which is relevant is "prejudice attributable to the delay in registration, rather than prejudice from making the order, (which is inevitable)". In this case I have received evidence that that the defendant was aware of the security being granted for the benefit of the plaintiffs, which is apparent from the transactional documents before me. Further, the registrations were recorded on the PPSR for at least a period of two years. The defendant has had an opportunity to be heard against the making of the order, has not elected to be heard and has not drawn the Courts attention to any other creditors that might be now prejudiced. In any event, as to potential prejudice to unsecured creditors or shareholders, I am content to make the orders sought by the plaintiffs, which are commonly referred to as "Guardian Securities Orders", taking their name from the decision of McLelland J in Re Guardian Securities Ltd [1984] 1 NSWLR 95. 18 To the extent it is necessary to do so, I also record that for the same reasons I am satisfied within the meaning of section 588FM(2)(b) that on other grounds, it is just and equitable to grant the relief sought by the plaintiffs: see, generally, KJ Renfrey Nominees Pty Limited (Trustee), in the matter of OneSteel Manufacturing Proprietary Limited v OneSteel Manufacturing Proprietary Limited [2017] FCA 325; (2017) 120 ACSR 117 at [28]. 19 There remains a question as to whether I should make orders on an ex parte basis in the absence of a contradictor and if so, on what conditions, if any. As I have indicated, the defendant has had an opportunity to be heard and has elected not to do so. Further, I am satisfied that the "Guardian Securities Orders" that I propose to make protect the interests of other unsecured creditors or shareholders by giving them an opportunity to be heard, if they so wish.

DISPOSITION 20 In all the circumstances, I propose to make the orders sought by the plaintiffs. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Shariff.