TGIF 4 October 2024 — Failure to register a security interest within time: the primary considerations

The Federal Court has recently delivered judgment in the case of Crushing Services International Pty Ltd trading as CSI Mining Services v Lithium Developments (Grants NT) Pty Ltd [2024] FCA 1138.

Key Takeaways

• While many factors may be relevant to the exercise of the discretion in s 588FM of the Corporations Act 2001 (Cth) (Act), a primary factor remains the extent to which the order sought would cause prejudice to third parties, in particular unsecured creditors.
  
  
• Where a Court cannot be satisfied that the grantor’s insolvency risk is ‘negligible’, the extension order will likely be made, subject to a Guardian Securities condition, so that any liquidator or administrator appointed within six months may apply to set the order aside.
  
  
• Practitioners should also be alert to the period within which they may apply to have an extension of time order set aside following an appointment.

Background

Crushing Services International Pty Ltd (CSI) is a contractor providing crushing, screening and processing services to miners. Lithium Developments (Grants NT) Pty Ltd (Lithium) is the owner and operator of a lithium mining project in the Northern Territory, known as the Finniss Lithium Project (Project).

On 4 May 2022, CSI entered into an agreement with Lithium to provide, then operate and maintain, a crushing plant at the Project site (Contract).

The Contract provided that the plant, equipment and infrastructure used by CSI at the site (referred to collectively as the Crushing Plant) are and remain the property of CSI. Parts of the Crushing Plant were marked with CSI branding. Access was only permitted under the supervision of CSI personnel.

The Contract expressly created a security interest in favour of CSI. However, CSI failed to register its security interest within 20 business days.

On 22 December 2023, Lithium’s parent company made an ASX announcement that it was undertaking a strategic review of its operations to address a deterioration in lithium market conditions. It later announced that it would be suspending mining operations at the Grants NT mine. Operations also later ceased at the Project.

It was not until around 6 May 2024 that the relevant officers at CSI became aware that registration on the Personal Property Securities Register (PPSR) was required. Steps were taken to register Financing Statements at that time.

CSI then applied to the Court under s 588FM of the Act for an extension of time to register its security interests arising under the Contract. The questions for the Court were:

• Whether CSI had a security interest in the Crushing Plant, and whether this interest had been perfected by possession?
  
  
• Whether the Court could be satisfied that CSI’s failure to register the collateral earlier was due to inadvertence?
  
  
• If so, whether the Court should make the requested order (having regard to the potential prejudice to any unsecured creditors).

Decision

CSI contended that, by reason of the terms in the Contract, it had a security interest in the Crushing Plant within the meaning of the Personal Property Securities Act 2009 (Cth) (PPS Act). CSI also contended that its security interest was perfected before registration on the PPSR. This is because it was in possession of the Crushing Plant, and this possession was both actual and apparent for the purposes of s 24 of the PPS Act.

Failure to perfect a security interest when particular insolvency events occur will result in the grantee ‘losing’ the security interest. The interest will vest in the grantor immediately before the insolvency event by reason of s 267 of the PPS Act.

Existence and perfection of security interest

Feutril J accepted that, for the purposes of this proceeding, it was reasonably arguable that CSI had a security interest in the Crushing Plant. However, it must be noted that the Defendant elected not to appear on the application and there was no contradictor. In those circumstances, and considering the current uncertainty caused by the filing of an appeal of the decision in Kirkalocka Gold Pty Ltd (Recs and Mgrs Apptd) v Zenith Packif (KLK) Pty Ltd [2024] FCA 428, it was only necessary for CSI to establish the existence of a security interest was ‘reasonably arguable’.

As to whether CSI’s security interest was perfected, other than by registration, the Court held that there is at least a serious question to be tried as to whether CSI had actual and apparent possession. His Honour commented that “CSI is exposed to the risk that any security interest has not been perfected by possession." His Honour also said that “to the extent that any security interest has been perfected by possession, that diminishes the risk of prejudice to unsecured creditors if the Court exercises its discretion to fix a later time for registration.” Interestingly, His Honour also concluded on this point by noting that “both are reasons for exercising the discretion in favour of CSI, but pull in opposite directions as regards the risk of prejudice to unsecured creditors."

Should an order be made under s 588FM of the Act?

His Honour was satisfied on the evidence that the failure to register was due to inadvertence, meaning a precondition to the exercise of s 588FM of the PPS Act was met.

As to the question of prejudice, it is now well established that “the relevant prejudice is that which flows from the failure to register earlier, not from making the order” (Re Appleyard Capital Pty Ltd [2014] NSWSC 782; 101 ACSR 629).

In considering the issue of prejudice, His Honour stated that “where the grantor is clearly solvent, the risk of prejudice to unsecured creditors may be so low as to be effectively not a consideration at all.” However, where the Court cannot be satisfied that there is no risk to unsecured creditors, it will leave the door open to the order being set aside by later application in the event of a relevant insolvency appointment occurring. On this point, the financial security of the parent company was insufficient for the Court to form a view about the financial position of the subsidiary, Lithium.

Accordingly, the Court granted the order to fix a later time for registration, but subject to a Guardian Securities condition.

Comment

The Court will exercise its discretion to make an order under s 588FM of the Act, having regard to the extent to which the order sought would cause prejudice to unsecured creditors. Where the insolvency risk of the respondent company is not ‘negligible’, such an order will likely be subject to a Guardian Securities condition.

This decision provides a helpful summary of the current state of the law on the threshold questions as to whether a security interest exists and whether it is relevantly perfected. It also confirms the primacy of consideration of the prejudice to unsecured creditors when making an order for an extension of time.

Practitioners should also be alert to the period within which they may apply to have an extension of time order set aside following an appointment.