TGIF 24 September 2021 – Lucky lenders: security interests granted after critical time might not vest

This week’s TGIF considers a recent decision of the Supreme Court of New South Wales, Re Antqip Pty Ltd (in liq) [2021] NSWSC 1122, concerning whether section 588FL of the Corporations Act 2001 (Cth) applied to vest a security interest in the company that was granted after the ‘critical time’.

Key Takeaways

• Security interests granted after the ‘critical time’ of an insolvency-related event will not vest in the granting company under section 588FL of the Corporations Act 2001 (Cth).
  
  
• According to the Court, previous decisions which supported the vesting of security interests did not consider the difference between a security interest ‘arising’ after the critical time compared to being ‘granted’.
  
  
• This decision provides some comfort to funders of companies subject to a restructure plan or DOCA that any security interest granted to them after the ‘critical time’ with not vest in the company if it is wound up within six months.

What happened?

One 3 February 2014, Antqip Hire Pty Ltd and Antqip Pty Ltd (the Companies) went into voluntary administration and subsequently entered into Deeds of Company Arrangement (DOCAs). On 26 October 2014, while subject to the DOCA, the Companies refinanced their existing debt and executed a deed of charge in favour of the new funder, National Funding Group Pty Ltd (National).

A security interest over ‘all present and after-acquired property’ (AllPAP) was registered on 27 October 2014 but was mistakenly listed with an end date of three years later. The security interest therefore lapsed on 27 October 2017.  

In April 2019, National realised that its registration had lapsed and re-registered its AllPAP security on 23 April 2019. The Companies subsequently went into voluntary liquidation on 27 May 2019. 

National then applied to the Court for an extension of time under section 588FM of the Corporations Act to prevent its security interest from vesting under section 588FL. 

Relevant statutory provisions

If a relevant insolvency-related event occurs, section 588FL of the Corporations Act provides that certain Personal Property and Securities Act 2009 (Cth) security interests granted by that company will generally vest in the company if they were not registered within 20 business days of the security agreement coming into force, or within six months of the ‘critical time’.   

The ‘critical time’ as defined by section 588FL(7) is different for companies being wound up, under administration or the subject of a restructure, but is generally the date of the insolvency event.

Section 588FM of the Corporations Act provides that interested parties may apply to the court for an extension to register their security interests before they vest in the granting company under section 588FL. A court can grant such an extension where it is just and equitable or where the failure to register the collateral earlier is not prejudicial to creditors or shareholders. 

Decision

Justice Brereton found that section 588FL of the Corporations Act would not apply to security interests which were granted after the critical time. His Honour found that such cases should be distinguished from those where the security interest was granted before the critical time, but arose after it.

Justice Brereton did not feel bound or persuaded by Federal Court decisions which had previously held that section 588FL applied to security interests granted after the critical time. For his Honour, those cases had not considered the difference between the terms ‘grant’ and ‘arises’ in applying section 588FL.

In the alternative, Justice Brereton held that he would also have granted relief under section 588FM on just and equitable grounds, as he could not identify any prejudice for creditors arising from the AllPAP security being re-registered after it had lapsed. 

Here, the Court reinforced the position that the relevant ‘prejudice’ to creditors to consider, for the purposes of an order under section 588FM, was prejudice arising as a result of the later registration and not whether removing assets from the divisible pool in favour of the secured creditor to the detriment of the unsecured creditors. The later will be the effect of granting relief in any case under section 588FM. 

Comment

This decision will be welcome news to funders of companies under a restructuring plan or DOCA, with some comfort that any security interest granted after the ‘critical time’ will not vest if the restructure is unsuccessful and the company subsequently wound up.  

However, in the absence of an appellate court decision on this point, and divergent lines of authority coming out of the state and federal courts, funders will need to wait and see how Brereton J’s decision is applied in future before they have greater certainty on this issue.