“It’s the time that counts”: unperfected security interests and the vesting of security interests in a company upon insolvency
- A recent decision of the Supreme Court of Victoria (In the Matter of Carpenter International Pty Ltd (Administrators Appointed)  VSC 118 (Carpenter)) has demonstrated the importance of the timing rules for registration of security interests on the Personal Properties Securities Register (PPSR).
- Despite the existence of security interests which are registered on the PPSR, assets may still vest in a company under external administration pursuant to section 267 of the Personal Properties Securities Act 2009 (Cth) (PPSA) and section 588FL of the Corporations Act 2001 (Cth) (the Act) as a result of unperfected security interests.
- In Carpenter, an application for directions was made by the voluntary administrators to ascertain the manner in which assets, subject to various security interests registered on the PPSR, should be dealt with in the administration.
There are a range of facts and complex issues arising in a 90 page judgment and a brief summary of some (and not all) of those issues are raised in this case note.
- Carpenter was involved in the live cattle business, and it purchased cattle through its livestock agents. The agents would purchase the cattle on behalf of Carpenter and then deliver them to Carpenter for sale in the export market. The agents would pay the vendors and take an assignment of the vendors’ rights under the sale contracts.
- On 24 March 2015, administrators were appointed to Carpenter.
- The agents maintained they had perfected security interests in respect of the cattle and therefore, Carpenter did not have rights in the cattle which were in its possession.
- The administrators obtained previous orders from the Court which allowed them to sell the cattle, subject to the agent’s alleged security interest over the proceeds of sale being determined by the Court.
Issues for determination
The issues for determination by the Court were:
- whether cattle sold by Carpenter were subject to the agents’ security interests under various agreements with Carpenter;
- whether the administrators were permitted to treat the proceeds of sale as solely the property of Carpenter by reason of the security interests vesting in the administrators pursuant to section 267 of the PPSA and section 588FL of the Act; and
- whether the administrators were entitled to an equitable lien over the proceeds of sale of the cattle for Universal Distributing expenses which were incurred in the administration.
Key findings from the decision
There were several issues which were relevant to the security interests and the Court found, among other things, as follows:
- The time (not just the date) when a security interest is registered on the PPSR AND when an appointment occurs is relevant to determining whether a security interest vests in the company pursuant to section 267 of the PPSA.
- Where a security interest is registered on the same day as the appointment of the insolvency practitioner, but prior to the time of the appointment, the vesting provisions under section 267 of the PPSA are not enlivened.
- Disputes arose between the agents and Carpenter as to when the contracts came into force and this was relevant to determining whether the security interest vested in Carpenter pursuant to section 588FL of the Act. If a security interest is assigned, this does not create a new 20 business day period within which to register the security interest under section 588FL of the Act. The nature of an assignment is to transfer an existing right and not create a new right. The relevant time for ascertaining whether an assigned security interest is registered or not, is the date of the security agreement and not the date of the assignment.
- The security interests of the agents vested in Carpenter immediately prior to it entering voluntary administration and therefore, the administrators of Carpenter were permitted to treat the proceeds of sale from the cattle as the Carpenter’s property.
- The agents argued that their failure to register was, among other things, due to an accident or inadvertence but this argument was not accepted by the Court.
- The issue of the equitable lien was not resolved because there was a further dispute in relation to another security interest raised by another creditor. However, in terms of the administrators’ fees, Cameron J was of the opinion that responsible and prudent efforts had been made to ensure the wellbeing of the cattle. The administrators were responsible for assessing the ownership of the cattle and to conduct such investigations to determine the position and such costs were reasonably and responsibly incurred.
Tips for consideration
- The decision is an important reminder for all parties to ensure that they register their interests on the PPSR as soon as practicable to avoid difficulties in their enforceability. If steps had been properly taken by the agents to correctly register their security interests, they would have been permitted to enforce them.
- If a security interest is not perfected within the requisite time frames, there may be a risk that a party loses its rights in respect of the secured property. Alternatively, an insolvency practitioner can attack unperfected security interests and the assets will vest in the insolvent company.
- Insolvency practitioners should ensure that they accurately record the date and time when they are appointed. The PPSR records the date and time of registration of a security interest, and accordingly, the issue of the time of the insolvency practitioner’s appointment may become relevant in determining whether or not a security interest vests in the company.
Insolvency Law & Litigation