Re Psyche Holdings Pty Limited

[2018] NSWSC 1254

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Psyche Holdings Pty Limited [2018] NSWSC 1254
Hearing dates:	27 July 2018
Date of orders:	27 July 2018
Decision date:	13 August 2018
Jurisdiction:	Equity
Before:	Ward CJ in Eq
Decision:	1. Pursuant to section 588FM of the Corporations Act, 12 July 2018 is fixed as the time for the plaintiff to lodge Personal Property Securities registration number: 201807120056182 for the purposes of section 588FL(2)(b)(iv) of the Corporations Act. 2. Liberty is reserved to any liquidator, administrator, deed administrator or unsecured creditor of the defendant to apply to discharge or vary order 1 if any winding up of the defendant occurs, or an administrator is appointed to the defendant under sections 436A, 436B or 436C of the Corporations Act, or the defendant executes a deed of company arrangement, within 6 months of 12 July 2018.
Catchwords:	CORPORATIONS – application under s 588FM of the Corporations Act 2001 (Cth) to fix registration time for security interests registered in the register established under the Personal Property Securities Act 2009 (Cth) – whether failure to register security interest was accidental or due to inadvertence – whether failure to register interest earlier prejudiced the position of creditors or shareholders
Legislation Cited:	Corporations Act 2001 (Cth) ss 436A, 436B, 436C, 588FL, 588FM Personal Property Securities Act 2009 (Cth) ss 21, 166, 293
Cases Cited:	Bevillesta Pty Ltd v Imagine UN Ltd [2009] VSC 50; (2009) 69 ACSR 574 Campbell Finance Pty Ltd v Vivstan Packaging (Aust) Pty Ltd (in liq) [1998] 2 VR 340; (1996) 22 ACSR 109 Metcash Trading Ltd v 8 Nai Investments Pty Ltd [2011] FCA 1400 National Australia Bank Limited v Davis & Waddell (Vic) Pty Ltd [2003] VSC 1; (2003) 44 ACSR 296 Re Accolade Wines Australia Limited [2016] NSWSC 1023 Re Apex Gold Pty Ltd [2013] NSWSC 881 Re Appleyard Capital Pty Limited [2014] NSWSC 782 Re Black Opal IP Pty Ltd (subject to Deed Of Company Arrangement) [2013] NSWSC 1225 Re Cardinia Nominees Pty Ltd [2013] NSWSC 32 Re Carpenter International Pty Ltd [2016] VSC 118 Re David Brown Gear Industries Pty Ltd [2017] NSWSC 907 Re Freightlines Northern Territory Pty Ltd (in liq) (1999) 32 ACSR 573 Re Guardian Securities Ltd [1984] 1 NSWLR 95; (1984) 8 ACLR 822 Re Transurban CCT Pty Limited and Transurban CCT Nominees Pty Limited in its own capacity and as Trustee of the Transurban CCT Trust [2014] NSWSC 1909 Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq) [1991] 2 Qd R 456; (1990) 2 ACSR 692
Category:	Principal judgment
Parties:	Ridgeway Finance Pty Ltd (Plaintiff) Psyche Holdings Pty Ltd (Defendant)
Representation:	Counsel: N Mirzai (Plaintiff)   Solicitors: Henry William Lawyers (Plaintiff)
File Number(s):	2018/00231236
Publication restriction:	Nil

Judgment

1. HER HONOUR: By Originating Process filed in Court on 27 July 2018, the plaintiff (Ridgeway Finance Pty Limited) seeks relief pursuant to s 588FM of the Corporations Act 2001 (Cth) for the purpose of extending the time for it to perfect, by registration on the Personal Property Securities Register (PPSR) established under the Personal Property Securities Act 2009 (Cth) (PPSA), a security interest granted to it over all of the present and after-acquired personal property of the defendant (Psyche Holdings Pty Limited).

2. The application was heard by me ex parte as the Corporations Duty Judge on 27 July 2012, in circumstances to which I will shortly refer. I was satisfied that the circumstances in which the security interest came not to be perfected by registration for the purposes of the PPSA (after an original PPSR registration in respect of the said security interest had been effected) was due to inadvertence or mistake on the part of the plaintiff (within the meaning of s 588FM(2)(a)(i), being the failure of the plaintiff to appreciate the consequences of the retrospective registration of an Australian Business Number (ABN) by the grantor of the security interest). I made the orders sought and indicated that I would publish my reasons for those orders as soon as practicable. These are the reasons for making those orders.

Background

3. On 20 June 2013, the plaintiff entered a General Security Deed (GSD) with the defendant in connection with the extension of credit from the plaintiff to the defendant.

4. Clause 2.1 of the GSD provides that:

The Grantor:

(a) (general security interest): grants and creates, and agrees to grant and create, a security interest, under PPSA over or in relation to; and

(b)   (equitable charge): additionally and separately, charges by way of equitable mortgage,

The Collateral to and in favour of the Secured Party as a continuing security for payment of the Secured Moneys, and the performance of any liability comprised in the Secured Moneys, by the Grantor to or for the benefit of the Secured Party ...

5. The security interest granted under the GSD was thus a continuing security for payment of the loan by the defendant for the benefit of the plaintiff.

6. On 26 June 2013, the plaintiff lodged a financing statement on the PPSR in respect of this security interest, which referred to the defendant by its Australian Company Number (ACN).

7. At the time of the original registration, the defendant was acting as trustee of the LH Equity Trust (Trust), which had not yet been assigned an ABN. In those circumstances there is no dispute that the original registration operated to perfect the plaintiff’s security interest under the PPSA.

8. The Trust was subsequently assigned an ABN, the registration date of which was backdated for taxation purposes. Under cl 1.5 of Sch 1 to the Personal Property Securities Regulations 2010 (Cth), if a corporate entity is trading as trustee of a trust, the PPSA requires the secured party to register the interest by reference to the trust’s ABN, rather than the corporate trustee’s ACN.

9. On 3 July 2013, a director of the plaintiff, Mr Gary Cohen, had a conversation with an accountant at the accountancy firm employed by the defendant, Mr Tierney, in which Mr Cohen became aware that the Trust had been issued with an ABN (see Mr Cohen’s affidavit sworn 24 July 2018). On 21 August 2013, Mr Cohen had a further conversation with Mr Tierney in which Mr Cohen became aware that the ABN was backdated to 20 June 2013.

10. Under s 166 of the PPSA, where a registration is correct at the time of lodgement but subsequently becomes incorrect, the registration becomes ineffective five business days after the secured party acquires knowledge of the defect.

11. The potential difficulty in the present case arose because the plaintiff did not take any steps to amend the registration of the security within five business days of obtaining knowledge that the registration of the security interest was defective, by virtue of the interest not being registered by reference to the Trust’s ABN. Mr Cohen’s evidence is that the plaintiff’s failure to take such steps was due to his failure to understand the significance of the Trust’s ABN registration on the enforceability of the security interest.

12. On 6 July 2018, Mr Cohen became aware that, as a result of the issuance of the Trust’s ABN back in 2013, a registration on the PPSR ought to be made recording the ABN of the Trust as the relevant grantor in the financing statement in order properly to perfect the plaintiff’s security interest. Mr Cohen then took immediate steps on behalf of the plaintiff to lodge a new financing statement on the PPSR, identifying the grantor as the “Trustee of the LH Equity Trust”, by reference to the ABN of the Trust.

13. Shortly after, the plaintiff commenced the present proceedings, the concern being that, if s 588FL of the Corporations Act is applicable, but for the grant of the relief sought in the Originating Process, the new registration would not perfect the security interest taken by the plaintiff until six months had passed between the time of making the registration and any insolvency event spoken to by s 588FL(1)(a).

14. On 24 July 2018, a solicitor in the employ of the solicitors acting for the plaintiff, Ms Sarah Harris, served on the defendant by email the Originating Process, the affidavit of Mr Cohen sworn 24 July 2018, and a letter explaining the purpose of the proceedings. On 25 July 2018, the director of the defendant responded, indicating that the defendant did not oppose the relief sought and did not seek to appear at the hearing of the application. A further email was sent the following day to the same effect. The evidence is that no competing secured creditors have lodged financing statements in the period between the plaintiff’s two registrations.

Ex parte nature of the application

15. As already noted, the application was made ex parte. In Re Appleyard Capital Pty Limited [2014] NSWSC 782, Brereton J explained that applications seeking relief pursuant to s 588FM of the Corporations Act generally should not be brought ex parte, as “the effect of the order made is to take away from the company concerned the potential of having the security vest in it in certain events”. This view was reiterated by his Honour in Re Transurban CCT Pty Limited and Transurban CCT Nominees Pty Limited in its own capacity and as Trustee of the Transurban CCT Trust [2014] NSWSC 1909.

16. There are, however, cases where the Court has been content to proceed ex parte, namely where a defendant has been joined to the originating process, has been notified of the proceedings and has confirmed that it does not oppose the orders sought in the application (see Re David Brown Gear Industries Pty Ltd [2017] NSWSC 907; Re Appleyard Capital Pty Limited). Those circumstances are applicable in the present case (as outlined above), having regard to the evidence of Ms Harris.

17. Furthermore, no relief is sought pursuant to s 293 of the PPSA and, as such, there is no party other than the defendant and its creditors that might be affected by the relief sought in the application (cf. Re Accolade Wines Australia Limited [2016] NSWSC 1023). Accordingly, I considered it appropriate to proceed to consider and determine the application on an ex parte basis.

Sections 588FL and 588FM of the Corporations Act

18. Section 588FL of the Corporations Act applies where “a PPSA security interest granted by the company in collateral is covered by subsection (2)” [emphasis added]. On the hearing of the plaintiff’s application, the plaintiff raised the question as to whether s 588FL will apply where the grantor of the security interest is a corporation acting as trustee of a trust (here, the “Trustee of the LH Equity Trust”), and the grantor has no interest in the collateral other than as trustee of the trust (here, a trading trust).

19. In Re Transurban CCT Pty Ltd above, Brereton J addressed the circumstance where, as here, a security was registered against a corporate trustee, but not against the ABN of the trust over which it was acting. His Honour did not explicitly address whether s 588FL applied to the security registered against that corporate trustee, but proceeded on the basis that it did.

20. The plaintiff submits that where the grantor is exclusively referred to by the ABN of a trust, of which the trustee is a corporation, s 588FL is applicable since the grantor is the corporate trustee and, as a matter of law, a trust is not a separate legal entity. That submission should be accepted. The entity which granted the interest, albeit in its capacity as corporate trustee, is the defendant and hence I concluded that s 588FL applies in the present case.

21. Section 588FL(2)(a)(ii) of the Corporations Act provides that the section applies if the security interest is “perfected by registration, and by no other means”. The term “perfected by registration” is not defined in the Corporations Act (neither generally, nor specifically in Ch 1, Div 6A dealing with “Security interests”). In context, it must mean perfected by registration within the meaning of s 21 of the PPSA.

22. The effect of s 588FL(2) is that, when a company is being wound up, an administrator has been appointed, or a deed of company arrangement executed, any PPSA security interest which was perfected, registered or 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 and the secured creditor loses the benefit of the security (Re Transurban CCT Pty Ltd at [7], Re Cardinia Nominees Pty Ltd [2013] NSWSC 32 at [11]; Re Black Opal IP Pty Ltd (subject to Deed Of Company Arrangement) [2013] NSWSC 1225 at [6]; Re Appleyard Capital Pty Ltd). The term “critical time” is in turn defined in s 588FL(7) as the day on which the winding up or administration of the company commences.

23. It is to avoid the possibility of losing the benefit of the security in the event that the defendant becomes insolvent that the plaintiff in the present application sought to fix the time for registration of the interest under s 588FM to 12 July 2018.

24. Section 588FM(2) of the Corporations Act provides that

(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.

25. Section 588FM thus confers a discretion to fix a later time if the Court is satisfied of any one of three specified grounds, namely: that the failure to register the collateral earlier was either 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 Court may make such an order on terms and conditions under s 588FM(3).

26. For the purposes of s 588FM(2)(a)(i), “inadvertence” has been interpreted to include failure to advert to or understand the requirement for registration within the specified period; an 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 (Appleyard Capital Pty Ltd at [10]; Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq) [1991] 2 Qd R 456; (1990) 2 ACSR 692; Campbell Finance Pty Ltd v Vivstan Packaging (Aust) Pty Ltd (in liq) [1998] 2 VR 340; (1996) 22 ACSR 109; Re Freightlines Northern Territory Pty Ltd (in liq) (1999) 32 ACSR 573 at 576; Re Cardinia Nominees Pty Ltd at [14]-[16]).

27. “Inadvertence” may also be established where a party operates under a mistake as to the consequences of failing to register a security interest (Re Cardinia Nominees Pty Ltd; Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq) [1991] 2 Qd R 456 at 461; (1990) 2 ACSR 692 at 695; National Australia Bank Limited v Davis & Waddell (Vic) Pty Ltd [2003] VSC 1; (2003) 44 ACSR 296; Metcash Trading Ltd v 8 Nai Investments Pty Ltd [2011] FCA 1400 at [8]). In Re Cardinia Nominees Pty Ltd above, Black J held at [15] that:

The approach adopted in the case law of treating a matter of that kind as amounting to inadvertence is consistent with the emphasis placed 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.

28. In Transurban CCT Pty Ltd above, the secured party became aware that the financing statements initially lodged contained potential defects, in that (while they were properly registered against the ACN of each relevant corporate entity) they were not also registered against the ABN of the trust of which one of the corporate grantors was a trustee. When this potential defect was discovered, the secured party lodged a further financing statement referring to the ABN of the trust, and applied for an extension of time pursuant to s 588FM. The application was granted, it being said at [8] that:

it is apparent that a bona fide attempt to register the security interests was made on 4 July 2014 and that the potential deficiencies — which, as I have said, are not clearly deficiencies — came to notice of the plaintiff’s solicitors on about 13 August 2014 when the consultant who had carriage of the matter learnt of his firm’s preferred practices in respect of such registrations. I am amply satisfied that the failure to register earlier was due to inadvertence or some other sufficient cause.

29. In the present case, the plaintiff did not appreciate that, upon obtaining knowledge that the trust in respect of which the corporate trustee was acting obtained an ABN, it was required to lodge a financing statement on the PPSR within five days of receiving that knowledge or otherwise that the interest would not be properly perfected. Once Mr Cohen did become aware of the defect in the registration, he took immediate steps to lodge a new financing statement on the PPSR. That is sufficient to show that the plaintiff, acting through Mr Cohen, was operating under a mistake as to the matter.

30. I was therefore satisfied that the plaintiff had established that the failure to register the security interest earlier was accidental or due to inadvertence, which was sufficient to establish the basis for the Court to make the order sought under s 588FM of the Corporations Act, enlivening the discretion to fix a later time under s 588FM.

31. It was therefore unnecessary to rely on the alternative grounds under s 588FM(2) (namely, that the failure to register earlier was not of such a nature as to prejudice the position of creditors or shareholders; or that it is just and equitable to grant relief). Of course, whether the failure to register earlier was of such a nature as to prejudice the position of creditors or shareholders is relevant to the exercise of the discretion (as discussed below).

Discretionary factors

32. Turning to the question whether this was an appropriate case to exercise the discretion in favour of making the order sought under s 588FM of the Corporations Act, for the following reasons I was satisfied that it was.

33. It is well established that the presence or absence of prejudice to creditors or shareholders is a relevant consideration in the exercise of the Court’s discretion in assessing whether to make the order sought. 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) (Re Accolade Wines Australia Limited above).

34. The significance of the passage of time is relevant to the possibility of competing interests having arisen; in particular, through others having dealt with the grantor on the footing that the collateral was unencumbered (Re Appleyard Capital Pty Limited at [30]; Re Accolade Wines Australia Limited at [29]).

35. In the present case, while the five year delay between the plaintiff’s respective registrations is not insignificant, there were no competing secured creditors who had lodged their financing statements in that period. Furthermore, even if a creditor had, since the initial registration, registered a security interest in respect of the grantor, that creditor would not have been prejudiced by the delay, as its priority would not have been disturbed by an order fixing a later time under s 588FM (ReAppleyard Capital Pty Limited at [15], Re Accolade Wines Australia Limited at [21]).

36. There is one other secured creditor of the defendant, against whom a purchase money security interest had been registered. However, this creditor has priority over the plaintiff’s interest in any event and therefore has no interest in this application.

32. As a result, there was no evidence that any creditor is prejudiced by the delay between the original creation of the security interest and the later PPSR registration.

33. A further relevant consideration is the existence of prejudice to the interests of unsecured creditors of the grantor, since the effect of the order sought is that in the event of a liquidation or administration of the grantor, they will be deprived of the benefit of having the security vest in the company (Transurban CCT Pty Ltd above at [10]).

34. It is therefore relevant to consider the financial position of the defendant. If the defendant is shown to be financially secure and it is unlikely that a “critical time” will arise in the foreseeable future, then prejudice to the position of unsecured creditors will not arise. On the other hand, where the Court cannot be satisfied that there is no risk that unsecured creditors could be adversely affected, they would be entitled to be heard against the making of the order.

35. However, 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).

41. The Courts have therefore emphasised that, in order for the extension of time sought to be granted, the applicant must either lead evidence of the company’s solvency and the likelihood of its solvency being maintained into the foreseeable future, or steps must be taken to protect the interest of unsecured creditors (Re Guardian Securities Ltd [1984] 1 NSWLR 95 at 97; (1984) 8 ACLR 822 at 823; Re Cardinia Nominees Pty Ltd at [20]). Such a step may include granting the order sought whilst reserving liberty to the company, any liquidator, administrator, deed administrator or unsecured creditor of a company to apply to discharge or vary the order if any winding up of the company commenced, or an administrator of the company was appointed under ss 436A, 436B or 436C of the Corporations Act, or the company executed a deed of company arrangement within six months of the date on which registration for the security interest is fixed (referred to as a Guardian Securities condition) (see Re Guardian Securities Ltd [1984] 1 NSWLR 95 at 97-98; Bevillesta Pty Ltd v Imagine UN Ltd [2009] VSC 50; (2009) 69 ACSR 574 at [28]; Re Appleyard Capital Pty Ltd at [25], Re Accolade Wines Australia Limited at [19]).

42. In this case, there is no evidence of the financial position of the defendant. However, even if the defendant is facing imminent insolvency or is actually insolvent, this will not be determinative of the exercise of the Court’s discretion (Re Apex Gold Pty Ltd [2013] NSWSC 881; Re Carpenter International Pty Ltd [2016] VSC 118 at [217]). It has been said that a “dominant factor” in favour of the Court exercising its discretion is that a search of the register in respect of the grantor, after the initial defective registration, would have disclosed the relevant security interest (Transurban CCT Pty Ltd at [14]). This is true of the present case, where no creditors could have dealt with the defendant on the faith of the register believing that the plaintiff's security interest did not exist or had not been registered. Accordingly, I considered that it was sufficient, in order to protect the interests of the unsecured creditors, for the relief sought to be granted but to reserve leave to enable them to be heard in the event of an insolvency event transpiring within the six month period (in other words to impose a Guardian Securities condition on the grant of relief).

Conclusion

43. For those reasons, orders were made on 27 July 2018, to be entered forthwith, that, pursuant to section 588FM of the Corporations Act 2001 (Cth), 12 July 2018 be fixed as the time for the plaintiff to lodge Personal Property Securities registration number: 201807120056182 for the purposes of section 588FL(2)(b)(iv) of the Corporations Act; and reserving liberty to any liquidator, administrator or deed administrator of the defendant to apply to discharge or vary that order if, within 6 months of 12 July 2018, any winding up of the defendant occurs, or an administrator is appointed to the defendant under sections 436A, 436B or 436C of the Corporations Act, or the defendant executes a deed of company arrangement.

44. On reflection since then, I consider that order 2 of the orders made should be amended to grant liberty also to an unsecured creditor of the defendant to make such an application in the events there specified. This is consistent with previous Guardian Securities conditions and with the purpose of such a condition being to protect the interests of unsecured creditors. It does not seem to me to be inconsistent with the position for which the plaintiff advocated at the ex parte hearing of the application for relief. However, if the plaintiff wishes to make any submissions as to that amendment then I give leave for the plaintiff’s legal representatives to forward any such brief submissions to my Associate within 7 days.

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Decision last updated: 13 August 2018