A commercial solution to a re-vesting problem

This week’s TGIF considers Alleasing Pty Ltd, in the matter of OneSteel Manufacturing Pty Ltd in which the Court considered the potential prejudice to creditors in extending the time for registration of security interests

Background

This case followed on from a decision of the NSW Supreme Court in In the matter of OneSteel Manufacturing Pty Ltd (administrators appointed) [2017] NSWSC 21 (discussed in our TGIF ABN but no ACN? Your PPSR Registration may be defective) and a decision of the Federal Court in In the matter of OneSteel Manufacturing Pty Ltd [2017] FCA 325 (discussed in our TGIF Not so Perfect Solution – Court Relief Sought to Avoid Automatic Vesting).

The NSW decision involved an error in the PPSR registration of a security interest in a crushing and screening plant (Crusher) which resulted in the Lessor’s interest in the Crusher vesting in the Grantor when the Grantor went into administration.

The Lessor appealed the decision, but the parties agreed to settle the proceeding. A settlement deed was executed and provided that the deed administrators would transfer the Crusher to the Lessor and the parties would enter into a new lease which required registration on the PPSR.

The Lessor registered new financing statements on the PPSR in respect of the Crusher on 12 May 2017. The new security interests were categorised as purchase money security interests (PMSIs) under the PPSA.

Registration after the “Critical Time”

It was held in the earlier Federal Court decision that a security interest registered after the “critical time” (being the appointment of an administrator or liquidator to the Grantor) would vest in the Grantor under s 558FL(4) (irrespective of whether the registration took place within the 20 business days after the security agreement came into force) unless the Court made an order under section 588FM(2)(b) to fix a later time for registration.

Accordingly, it was a term of the settlement that application be made to the Court to fix a later time for the registration of the security interests under s588FM of the Corporations Act to ensure that the Crusher did not re-vest in the Grantor and to give effect to the parties’ intentions under the terms of settlement.

Deed administrators’ contentions

In establishing that it was just and equitable for the Court to grant relief, the deed administrators in supporting the application provided “cogent reasons” as to why the settlement deed was in the best interests of the Grantor’s creditors, being:

1. The Grantor would be prejudiced if it was unable to effect the Settlement Deed as it will be obliged to continue its defence of the appeal, exposing it to the cost and uncertainty of litigation.

2. The deed administrators were in the process of negotiating with potential purchasers for the sale of the Arrium Group’s mining, steel production, steel distribution and steel recycling business by way of a share sale to be entered into by 30 June 2017.

3. The dispute had caused uncertainty in the sale process, particularly because the Lessor sought that the Grantor deliver up the Crusher, which was a critical piece of infrastructure and could not readily be replaced.

4. As the Grantor was the current owner of the Crusher and no longer liable for rental payments on it, potential bidders were not prepared to recognise the associated increase in the value of the Grantor’s assets because of uncertainty as to whether the Lessor would be successful in its appeal.

THE DECISION

Extension of time for registration under s588FM

In making the orders sought, Davies J made the following observations:

1. The Court will fix a later date for the registration if it is satisfied that it is just and equitable to do so.

2. As the purpose and effect of an order under s588FM is to avoid the vesting of the security interest in the company and preserve the secured creditor’s security, the interests of creditors are relevant in determining whether it is just and equitable to fix a later time.

3. Relevant prejudice is not necessarily established simply by showing that the dividend to unsecured creditors will be less if the security interest does not vest in the company.

4. What must be evaluated is the prejudice suffered by creditors if an extension is granted compared with their position had there been an effective timely registration - in particular, has the delay in registration caused prejudice to creditors who have already transacted with the company to their detriment?

Her Honour was satisfied that it was just and equitable to fix 12 May 2017 as the later time for registration of the new security interests.

Extension of time for registration of PMSI 

Her Honour also made an order under s293(1) of the PPSA extending the time to perfect registration of the PMSI, to ensure that the PMSI would have priority over other security interests.

In doing so, her Honour distinguished between the prejudice to be evaluated for the purposes of s588FM and that in relation to s293(1). In relation to s293(1), what must be evaluated is the position of creditors if an extension is granted compared with their position if no extension is granted.

Although there were four security interests in ‘all of the present and after-acquired property’ registered in respect of the Grantor, these creditors had either released the Crusher from their security, or agreed to the relief sort by the parties via the settlement deed.

For those reasons, her Honour did not believe that the creditors would suffer any prejudice by extending the time for registration of the PMSI.

Comment

The decision emphasises that the Court will give considerable weight to the commercial realties of the specific case in deciding whether to extend the time for the registration of security interests under the relevant sections of the Corporations Act and PPSA.