We recently had a client referred to us by their accountant, whose client received some free, no-obligation pre-insolvency advice. It was interesting to note the paragraph in this client’s free advice, which was truly concerning.
The issue that caught the accountant’s attention was regarding funds the client had lent to the business over 12 months ago. In this client’s advice, the pre-insolvency company stated in their document that they could register a security interest and structure a loan document that would make the loan “green” after 6 months prior to an insolvency event.
Further to this, they advised that the security would be perfected and withstand any action by a liquidator to deem the security unsecured, should the company enter into liquidation.
In reality, this is clearly incorrect and poor advice, but that’s why such things are free. Further I don’t know what statutory interpretation in the PPSA this pre-insolvency advisor is relying on. Still, there is nothing in those terms that classifies an imperfect security within the PPSA as a perfected security and being green, which is truly poor advice and exposes the pre-insolvency company and its advisors to legal action when it goes wrong. The client’s security is disregarded and remains an unsecured loan.
What are the implications for a creditor with an Unperfected security interest under the PPSA?
Under the Personal Property Securities Act 2009 (PPSA), a security interest can be perfected through registration, possession, or control. If a security interest is not perfected, it may vest in the grantor upon the occurrence of an insolvency event, such as the winding up of a company, the appointment of an administrator, or the execution of a deed of company arrangement.
To perfect a security interest that is not secured against a company, the creditor must ensure that the security interest is enforceable against third parties. This can be achieved by ensuring the security interest is attached to the collateral, enforceable against third parties, and perfected through one of the methods prescribed under the PPSA, such as registration, possession, or control enforceability and perfection.
If the security interest is perfected by registration, the timing of the registration is critical. Under section 588FL of the Corporations Act 2001, a PPSA security interest perfected by registration only will vest in the company if it is registered after the latest of the following times: (a) six months before the critical time (e.g., the date of insolvency); (b) 20 business days after the security agreement came into force; or (c) a later time ordered by the court under section 588FM of the Corporations Act. If the security interest is not perfected by any means at the critical time, it will vest in the grantor under section 267 of the PPSA.
In the event of insolvency, an unperfected security interest will generally vest in the grantor, and the creditor will be treated as an unsecured creditor. This means the creditor will lose the benefit of the security interest and will have to recover their debt as an unsecured creditor, which may result in a lower or nil recovery rate.
The case of Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq) highlights the importance of timely and a perfected registration. In this case, the security interest was registered more than 20 days after the security agreement was made, and the company entered voluntary administration within six months of the security interest being created. As a result, the security interest vested in the company, and the creditor was deemed an unsecured creditor.
Similarly, in Kaizen Global Investments Ltd v Australia New Agribusiness & Chemical Group Ltd (In Liq), the court confirmed that a PPSA security interest perfected by registration only, and registered after the prescribed time limits, would vest in the company upon.
The case of KJ Renfrey Nominees Pty Ltd (Trustee) v OneSteel Manufacturing Pty Ltd further clarified that an order under section 588FM of the Corporations Act could provide relief from the consequences of late registration, but only if the security interest was perfected at the critical time.
What’s the reality of unperfected Security Registrations and Insolvency?
In summary, to avoid the risk of being deemed an unsecured creditor in the event of insolvency, a creditor must ensure that their security interest is perfected in accordance with the PPSA. If the security interest is perfected by registration, it must be registered within the timeframes specified under section 588FL of the Corporations Act.
If these timeframes are not met, the creditor may apply to the court under section 588FM for an extension of time to register the security interest, provided the failure to register earlier was due to inadvertence or other sufficient cause, and the delay does not prejudice creditors or shareholders.
It also highlights the importance of speaking with a qualified legal practitioner in banking and finance or Insolvency who has the knowledge and experience in security registration interests and can provide the right advice. Those who claim “I’ve been broke before as a qualification” just won’t cut it and leave you open to much more when in financial distress.
How we assist SME’s and directors?
Corson Fiske has a comprehensive team of professionals, including experienced legal practitioners in banking, finance and insolvency, through our legal subsidiary practice. Our practice can provide extensive advice on the PPSA and how best to structure and secure loans to commercial parties.
Reach out for a confidential discussion via info@corsonfiske.au
- (CTH) PERSONAL PROPERTY SECURITIES ACT 2009 Part 8.2—Vesting of certain unperfected security interests, s 267, (CTH) CORPORATIONS ACT 2001 Division 2A—Vesting of PPSA security interests if not continuously perfected, s 588fl, Enforcing security over personal property, Enforceability and perfection.
- (CTH) PERSONAL PROPERTY SECURITIES ACT 2009 Part 2.2—Security interests: general principles, s 21,
- (CTH) PERSONAL PROPERTY SECURITIES ACT 2009 Part 8.2—Vesting of certain unperfected security interests.
- (CTH) CORPORATIONS ACT 2001 Division 2A—Vesting of PPSA security interests if not continuously perfected.
- (CTH) PERSONAL PROPERTY SECURITIES ACT 2009 Part 2.2—Security interests: general principles.
- (CTH) CORPORATIONS ACT 2001 Division 2A—Vesting of PPSA security interests if not continuously perfected.
- Tedesco v LVT Capital Pty Ltd as trustee for LVT Capital Discretionary Trust [2024] FCA 601; BC202407480
- Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq) (2014) 225 FCR 305; (2014) 102 ACSR 545; [2014] FCA 1034
- Kaizen Global Investments Ltd v Australia New Agribusiness & Chemical Group Ltd (In Liq) (2017) 120 ACSR 220; [2017] FCA 431
- KJ Renfrey Nominees Pty Ltd (Trustee) v OneSteel Manufacturing Pty Ltd (2017) 120 ACSR 117; [2017] FCA 325