This case concerned an uncontested application to extend the time for registration of a security interest on the Personal Properties Securities Register (PPSR), requiring consideration of what constituted a ‘security interest’ capable of registration on the PPSR.
Take Aways
Failure to register a security interest within time will result in a loss of an ability to enforce.
Arguable ‘security interests’ now include: step-in rights, appointment as an attorney to effect novation of contracts upon termination, obligations post termination of contracts.
An application to extend time to register under section 588FM of the Corporations Act 2001 (Cth) (Corporations Act) will only be granted if the test is able to be met, that being:
the failure to register was accidental or due to inadvertence or some other sufficient cause; or
the failure to register is not of such a nature as to prejudice the position of creditors or shareholders; or
it is just and equitable to grant relief.
Background
AWE Perth Pty Ltd (AWE) entered a joint venture with Beach Energy (Perth Basin) Pty Ltd pursuant to which it was to act as the Operator to develop the Waitsia gas field in the Dongara region of Western Australia.
On 11 January 2021, AWE entered into contract with Clough Projects Australia Pty Ltd (Clough) for the construction of a 250 TJ/day onshore gas processing facility at the Waitsia gas field.
AWE argued that the contract conveyed rights which are security interests under the meaning of section 12 of the PPSA. These clauses included
the transfer of title in works to AWE when the works were paid for, are incorporated into the works or become a fixture;
the requirement that any insurance proceeds received from the damage or destruction of any of the works be paid into a bank account in the joint names of AWE and Clough;
step-in rights;
the irrevocable appointment of AWE as Clough’s attorney with authority to execute such contracts as necessary to give effect to the novation of any subcontracts if the contract was terminated;
the obligations imposed on Clough where AWE gives notice of termination of the contract;
None of these arguable security interests were registered on the PPSR within 20 business days of entry into the contract.
On 9 June 2022, AWE effected 3 registrations (First Registrations) being:
an ALLPAP with exceptions for the step-in rights, the irrevocable appointment as attorney and the post termination obligations;
a tangible property – other goods registration, for the transfer in title of works when the works were paid for;
a tangible property – general and tangible property, for the possible insurance proceeds.
On 5 December 2022, voluntary administrators were appointed. This being less than six months since the AWE PPSR registrations.
After the appointment of administrators AWE did not seek to enforce any of its rights. Instead AWE:
entered into arrangements with the Administrators which had the effect that the contract stayed on foot and works continued;
provided the Administrators interim funding to pay out pre-appointment claims of sub-contractors working on the Waitsia project; and
negotiated amendments to the contract recorded in a Deed of Amendment and Restatement dated 1 February 2023 (Deed).
On 3 February 2023, AWE effected 3 further registrations on the PPSR (Second Registrations) during the Administration to perfect arguable security interests being:
an ALLPAP with exceptions for the step-in rights with changed triggers, the irrevocable appointment as attorney as in the original contract and the post termination obligations also as in the original contract;
a tangible property – other goods registration for the transfer in title of works when the works were paid for; and
an intangible property registration for the project bank account proceeds.
On 15 February 2023, Clough executed a Deed of Company Arrangement (DOCA). The effect of the DOCA was that all unsecured claims against Clough, which existed at the date of appointment of the Administrators were extinguished. However any future rights under certain pre-administration contracts which continued post DOCA (including the Deed) were excluded from the releases contained in the DOCA.
On 16 February 2023, AWE effected 3 further registrations on the PPSR for the same security interests the subject of the Second Registrations.
Post the DOCA execution all of the ALLPAP or ALLPAP with exceptions PPSA registrations were removed save for those of AWE.
Following correspondence between solicitors AWE did not seek orders in respect of the insurance proceeds bank account but applied to the Court to extend the time for all its PPSR registrations.
The Administrators / Deed Administrators took no active part in the application informing the Court that they would be bound by whatever determination reached by the Court.
Determination
The Supreme Court of Western Australia determined that it was satisfied that it was appropriate pursuant to exercise its power under section 588M of the Corporations Act to fix a later time under section 588FL(2)(b)(iv) of the Corporations Act for each of three original registrations sought in the proceeding.
In reaching this determination the Court first considered whether:
the rights relied on by AWE created a security interest; and then
whether there was a basis for the Court to grant the relief sought to fix later dates for the registration of any identified security interests.
Were the rights security interests?
The Court reviewed the relevant legislation and cases and made the following observations:
The PPSA is defined to apply to ‘personal property’. This being any property other than land, a right entitlement or authority granted by a law of the Commonwealth, State or Territory, or property that is declared not to be personal property for the purpose of the PPSA.
If an interest in personal property falls within the meaning of ‘security interest’ under section 12 of the PPSA then it is an interest to which the PPSA applies. That is:
“A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).”
Where a security interest is not perfected in the manner prescribed by the PPSA prior to the appointment of an external administrator to the grantor of the interest, the security interest vests in the grantor pursuant to section 267 of the PPSA. Any such vesting is irreversible[1].
Section 588FL of the Corporations Act provides that a security interest under the PPSA vests in the grantor company on the appointment of a voluntary administrator if:
the security interest is enforceable and was perfected by registration; and
it was registered within the six months preceding the administration or liquidation; but
it was not registered within 20 business days after the grant, unless it was registered within such later time as was ordered by the Court.
As the First Registrations were not registered within 20 business days only being registered within 6 months of the appointment of Administrators these interests would have vested, unless a later date was fixed by the Court for their registration.
The Second Registrations were registered within 20 business days however these related to interests granted in the contract which were subsequently re-affirmed in the Deed. As such there was a strong argument that these interests would also vest.
The Third Registrations were registered within time and were enforceable but were prospective and did not address the pre-administration works.
The Court also observed that:
a security interest is perfected according to section 21 of the PPSA if it has attached to collateral, is enforceable against third parties, and certain extra steps (possession or control of collateral, or registration on the PPSR) have been taken to protect the interest;
whether a transaction secured payment or performance of an obligation is a question of characterisation. It is not merely the intention of the parties nor a question of interpretation[2].
In respect of each of the claimed ‘security interests’ the Court considered the characterisation of the rights and determined that:
Step-in rights – the step-in rights are provided for the purpose of remedying a default under the contract. It was satisfied that it is reasonably arguable that these rights were security interests;
Power of attorney – the grant of the attorney is required to ensure in the event of termination that novation of contracts are effected. It was satisfied that it is reasonably arguable that these rights were security interests;
Obligations post termination – these obligations include the requirement to make arrangements to enable AWE to take possession of all plant, materials and things comprising the work on the date of termination, to make arrangements to assign to AWE all rights and benefits of Clough under any existing commitments with any third party and to ensure assignments are complete and effective. It was satisfied that it is reasonably arguable that these rights were security interests;
Passage of title and ownership – the contract provided that title in the works or any part of the works passed from Clough to AWE when the works are paid for, incorporated into works on site or become a fixture. It was not satisfied that the unpaid seller’s reservation of title clause constituted a security interest citing Reel Action Sports Pty Ltd v Marine Engineering Consultants Pty Ltd (in liq)[3];
Project bank account – established for the sole purpose for payments by AWE to Clough for performance of works under the Deed. It was satisfied that it is reasonably arguable that these rights were security interests citing a similar determination in Dalian Huarui Heavy Industry International Company Ltd v Clyde & Co Australia (a firm)[4].
Is there a basis to grant relief?
Where a security interest has been registered outside the 20 business days but before the appointment of an external administrator, then an application can be brought under section 588M of the Corporations Act to extend the time for registration and therefore avoid the automatic vesting of any interest in interest.
Under section 588M of the Corporations Act an order can be made where the Court is satisfied that:
the failure to register was accidental or due to inadvertence or some other sufficient cause; or
the failure to register is not of such a nature as to prejudice the position of creditors or shareholders; or
it is just and equitable to grant relief.
A party only has to establish one of these grounds.
An order under section 588FM of the Corporations Act does not have any effect on the priority of a security interest; it simply preserves the security to the detriment of the unsecured creditors. In the absence of an order being made under s588FM of the Corporations Act, a security holder who registers their security interest late is exposed to the risk that its security will be ineffective and will vest in the grantor of that interest if the grantor company goes into administration or liquidation with in the six month period after any late registration[5].
In order to apply to register a security interest under the PPSA, it is only necessary that the person believes on reasonable grounds that they are or will become a secured party in relation to the collateral[6].
In considering whether to exercise its discretion to make the orders sought, the Court will take into account:
any prejudice that may be suffered by third parties from the orders;
the length of the delay in registration; and
the financial position of the company[7].
The type of prejudice that is of particular relevance attributable to the delay in registration, rather than prejudice from the making of the order (which is inevitable)[8].
In this case the question was whether all the registrations were necessary as they covered same or similar security interests.
It is not necessary for a court to determine on a final basis whether the interests the subject of this application are registrable security interests. It is sufficient that a court is satisfied that it is reasonably arguable that the interests the subject of the application are registrable security interests[9].
The Court held that:
by virtue of the continued operation of the contract, the Second Registrations and the Third Registrations were strictly unnecessary[10];
on the no prejudice ground the Court was satisfied on AWE’s submissions that this ground was made out[11] as:
the failure to register the First Registrations in compliance with the PPSA did not prejudice the position of creditors or shareholders as there were 5 ALLPAP or ALLPAP with exceptions registrations which would have been apparent to any unsecured creditor of Clough at the time which meant it was unlikely any unsecured creditor of Clough would have thought that the collateral sought to be secured by AWE was unencumbered[12]; and
the First and Second Registrations were in place prior to the DOCA being effected and the Third Registrations were done immediately after the DOCA;
On the just and equitable ground the Court was satisfied on AWE’s submissions that this ground was also made out as:
AWE did not exercise any of its rights and kept the contract on foot, funded ongoing works and paid substantial pre-appointment claims of employees and sub-contractors and agreed to convert the contract from a lump sum contract to a cost plus contract;
as a result of the DOCA Clough had recapitalised and there was no suggesting that it was not solvent or that it will not remain solvent. All historic liabilities have been released;
it was appropriate to make orders fixing a later time for the PPSR registrations which have found to been arguable security interests and for which it was appropriate to exercise the discretion for a later registration time.
If you have any questions please feel free to contact Alicia Hill or Kelvin Tay at the contact details below.
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
Kelvin Tay
Senior Associate
T: +61 3 9611 0148 | M: +61 413 557 157
E: ktay@sladen.com.au
[1] Re One Steel Manufacturing Pty Ltd (Administrators Apptd)[2017] NSWSC 21; (2017) 93 NSWLR 611[82]
[2] Ibid at 24 citing Buss P and Murphy JA in Gold Valley Iron Pty Ltd (in liq) v OPS Screening and Crushing Equipment [2022] WASCA 134 [189]
[3] [2022] QSC 271 [78]
[4] [2020] WASC 132 [210]-[219]
[5] Supra n1 [39] citing Bluewaters Power 1 Pty Ltd v The Griffen Coal Mining Company Pty Ltd [2019] WASC 438 [34]-[35] (Bluewaters)
[6] Section 151(1) PPSA
[7] Supra n 1 citing
[8] Supra n 1 citing RE Appleyard Capital Pty Ltd [2014] NSWSC 782
[9] Supra n1 [41] Bluewaters [51], Re Cardinia Nominees Pty Ltd [2013] NSWSC 32 [18], and Bluewaters [54]
[10] Supra n 1 [74].
[11] Supra n 1 [88]
[12] Supra n 1 [91]
