The PPSA vs The Corporations Act

September’s court judgement in Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq) has brought to the fore a butting of heads between the Personal Property Securities Act and the Corporations Act.

Much of our concern with the PPSA has been to do with interpreting it in such a way as to ensure that our security interests are as effective as possible.  The issue can be seen as twofold:

• Ensuring our security interests benefit from as high a ranking as possible when compared with those interests of other creditors; and
• Protecting ourselves against the risk that an unperfected security interest will vest in our debtor’s insolvent estate.

Part 2.6 of the PPSA (sections 54 to 77) concerns itself with addressing the various scenarios that might rank one creditor’s interest above another’s while section 267 provides liquidators with the incentive to try to invalidate your registration by allowing them to take ‘ownership’ of any security interests that have not been properly perfected.

For now, we’re going to look a little more closely at section 267.

Section 267 effectively states that, when an ‘external administration event’ takes place, any security interest that has not been perfected at that point will vest in the grantor.  In other words, if an insolvency practitioner is appointed to your debtor before you’ve had the opportunity to register your security interest on the PPSR, you will lose your rights to whatever collateral you had under that interest.  In fact, the PPSA appears, almost, to be supporting a ‘nick of time’ registration approach.  Providing you get your registration lodged before the administrator is appointed (or the application for winding up submitted, or the sequestration order given etc) your interest should be perfected and thus protected from the nasty section 267.

Unfortunately, buried within s267 is a little bit of small print as follows:

Note 2:   See also Division 2A of Part 5.7B of the Corporations Act 2001.

Surely that’s not going to be too important?  After all, Note 1 was pretty innocuous (Note 1: For the meaning of company, see section 10).  How bad could Division 2A of Part 5.7B of the Corporations Act be?

Well, it turns out that Division 2A can be pretty bad!

The meat of Division 2A is in section 588FL, entitled “Vesting of PPSA security interests if collateral not registered within time”.  It turns out that, contrary to the apparent ‘nick of time’ support of the PPSA, there is, in fact, a much more tangible deadline by which a registration needs to be lodged in order to keep your collateral out of the hands of a liquidator.

If your registration was not lodged within 20 business days of your security interest coming into force and was lodged during the 6 months leading up to the liquidator’s appointment, then “The PPSA security interest vests in the company” and you lose your collateral to the liquidator!

So, even though you have a properly perfected security interest, registered correctly, within the deadlines set under the PPSA, the liquidator may still be able to ignore that registration and take your goods anyway by virtue of the Corporations Act.

And if, for a moment, you are thinking that this must just be a theoretical argument that wouldn’t apply in real life, then let me remind you that this piece started with reference to Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq).

• In December 2013 the Pozzebons loaned Australian Gaming and Entertainment Ltd (AGEL) $250,000 with the loan secured against AGEL’s personal property.
• On 19 May 2014 the Pozzebons registered their security interest on the PPSR.
• On 26 May 2014 Administrators were appointed to AGEL with liquidators following some 2 weeks later.

While the Pozzebons may have beaten the clock in terms of the PPSA they fell foul of the Corporations Act and breached the 20 business days’ time limit under 588FL as well as the registration being within 6 months of the external administration ‘event’.  Such was the judgement of Justice Collier towards the end of September in rejecting the Pozzebon claim that their security interest be honoured.

By way of summary, I've drawn up the following flow chart to show how important the timing of a PPSR registration will be under the Corporations Act: