TGIF 4 August 2023 –Practitioners should continue to seek court assistance with security interests granted after ‘critical time’

In this week’s TGIF, we consider Hutton, in the matter of Caydon Flemington Pty Ltd (Receivers and Managers appointed) (In liq) [2023] FCA 796, a Federal Court decision concerning the grant of an extension after the ‘critical time’ for the vesting of a security interest.

Key takeaways

• While the difference between when a security interest is ‘granted’ and ‘arises’ may seem trivial, Australian courts have not yet settled on a way forward when interpreting section 588FL of the Corporations Act 2001 (Cth).
  
  
• In the absence of a decision from an intermediate appellate court, courts are likely to still entertain applications to protect a security interest granted after the ‘critical time’ under section 588FL.
  
  
• Until such a decision, caution should be taken including consideration of applying for orders fixing a later time ‘to the extent necessary’ to protect security interests registered after the ‘critical time’.

Background

On 29 July 2022, receivers were appointed by secured creditors to a number of companies within the Caydon Property Group (the Companies). The Companies were also in liquidation, with liquidators appointed on 25 July 2022.

Since 1 August 2022, the receivers had been carrying on the business of the Companies and had effective control of their operations. The receivers identified a need to restructure the Caydon Group’s complex financing arrangements to enable an orderly and efficient process for the realisation of the Caydon Group assets.

The receivers were able to agree to terms with proposed lenders, however one of the requirements of a new lender was cross-collateralisation of the security to be granted by the Companies under the proposed refinancing arrangements, which required the Companies to enter a General Security Deed.

The agreements giving effect to the new finance arrangements were entered into on 19 June 2023 and the security interests arising from the General Security Deed were registered on the Personal Property Securities Register on 26 June 2023. Accordingly, the security interests were registered after the ‘critical time’ when the liquidator was appointed the previous year.

The receivers brought an application in circumstances where they were concerned that, in the absence of an order under section 588FM(1) of the Corporations Act 2001 (Cth), the security granted by the Companies under the General Security Deed would, regardless of registration, automatically vest in the companies pursuant to section 588FL of the Act.

Relevant provisions and the state of the law

Where a relevant insolvency-related event occurs, section 588FL of the Corporations Act states that certain PPSR security interests granted by the 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’, which is defined in section 588FL(7), is different depending on whether the company is being wound up, is under administration or the subject of restructure but is generally the date of the relevant insolvency event.

Section 588FM of the Corporations Act allows an interested party to seek an extension from a court to register their security interests before they vest in the granting company pursuant to section 588FL.

Re Caydon is the third case in three months to consider such a request for an extension, with the others being the decision of Cheeseman J in Re Cubic Interiors [2023] FCA 694 and Jackman J in Re Revroof [2023] FCA 543.

The receivers’ application was made in the context of these recent Federal Court authorities which suggest it may not be strictly necessary to apply to a court in circumstances where the security interest is granted after the ‘critical time’.

As explained in each of the recent Federal Court authorities on this topic, there is presently a divergence in the caselaw on the question of whether section 588FL(2) can cover a security interest that is granted after the ‘critical time’ as that section refers to a security interest that arises after the critical time.

An earlier line of authority draws no distinction between a security interest ‘granted’ or ‘arising’ for the purposes of section 588FL(2). On that line of authority, it would be necessary in every case to apply to a court for an order extending the date for registration under section 588FM because it would not be possible for the security to be registered at the critical time (i.e. at a time before it is granted).

However, a second line of authority is that if a security interest is ‘granted’ after the critical time, section 588FL(2) does not apply (and there is therefore no need for a court order). This ‘second line of authority’ commenced with the decision of Brereton JA in Re Antqip Pty Ltd (in liq) [2021] NSWSC 1122 in which his Honour concluded that there was no need for, nor utility in, an order under section 588FM fixing a later time in respect of security interests granted after the ‘critical time’.

Brereton JA drew a distinction between a scenario where security interests were granted after the critical time and a scenario in which security interests were granted before the critical time but arose after the critical time. His Honour determined that section 588FL applied to the latter but not the former scenario.

The Courts in Re Cubic Interiors and Re Revroof favoured the approach adopted by Brereton JA, and Anderson J in Re Caydon endorsed his Honour’s analysis and conclusions in Re Antqip as compelling.

In each of these recent Federal Court cases, the Court has noted that there is presently no intermediate appellate authority which addresses whether an order under section 588FM fixing a later time for the purposes of section 588FL(2)(b)(iv) is required where a security interest is granted after the critical time.

In each of the recent cases, the Court has opted to grant an extension which is expressed to be made “to the extent necessary”.

Given the prevailing uncertainty on this issue, and also because the making of an order was a condition precedent to the new financing agreements, the receivers in Re Caydon applied for an order to be made “to the extent necessary”.

As in Cubic Interiors and Revroof, Anderson J made the order in the absence of any higher authority, considering there was still ‘utility’ in making the order.

Comment

The Federal Court has now agreed with Brereton JA’s position on three occasions but at each time still made an order ‘to the extent necessary’. Jackman J in Re Revoof stated, while he found his Honour’s analysis compelling, that reasoning is inconsistent with a considerable body of Federal Court authorities which preceded Brereton JA’s decision and was also inconsistent with subsequent decisions where the Court was not referred to Re Antqip.

Until the position is considered by a higher court, the position will remain unclear. However, three recent decisions of the Federal Court have favoured the analysis of Brereton JA and this trend may well continue.

Until the position is clarified, practitioners may wish to adopt a cautious approach and seek orders “to the extent necessary” in circumstances where a security interest is granted after the ‘critical time’.