Dangers for the Unwary when Trading with an Administrator

While this post might be of passing interest to those wanting to refresh their knowledge regarding the Corporations Act’s intersection with the PPSA, it’s main import is for those who may be invited to trade with a company under administration.

I wrote on the subject of late registrations being vulnerable to vesting by insolvency practitioners in The PPSA vs The Corporations Act, but a new spin on the issue has arisen following a judgement in Re Ten Network Holdings Ltd (Administrators Appointed)(Receivers & Managers Appointed) [2017] FCA 1144 that highlights a further problem with this aspect of the Corporations Act.

By way of a very brief recap, if you fail to register your security interest within 20 business days of your security agreement being entered into AND your buyer goes into external administration within the following 6 months, Section 588FL of the Corporations Act allows the insolvency practitioner to ignore your security interest.

However, 588FL also provides for vesting of a supplier’s security interest where it arises (and is subject to a registration) AFTER the appointment of an insolvency practitioner.

While it might be understandable for clearly late registrations to be ignored, what about those situations where a supplier is invited to supply goods to the buyer after it has been placed into administration?

Not all companies that go into administration end up being liquidated, many, given some temporary relief by the appointment of an administrator, are able to trade out of their problems, perhaps subject to a Deed of Company Arrangement (DOCA).  However, under the provisions of s588FL any supplier entering into an agreement to supply won’t be able to lodge an effective PPSR registration to perfect their Retention of Title (ROT) rights because such rights (and registration) arose after the appointment of the insolvency practitioner.  Thus, if the company turns out to be unable to trade out of its problems, and the administrator becomes a liquidator, the supplier’s ROT rights will end up being vested with the insolvent estate.

Not exactly a ‘fair’ outcome for the supplier.

However, all is not lost as the Corporations Act (section 588FM) allows the Courts to extend the date beyond the ‘critical date’ for a valid PPSR registration provided it would be “just and equitable” to do so.

The recent Ten Network judgement suggests that the Courts will be prepared to grant such an extension provided they can be reassured that to do so would be in the best interests of both the other creditors and the company in administration. 

It has also been suggested that the timing of the application for the order will be relevant, in that the time to apply for the extension (and lodge the registration) should be a great deal closer to the commencement of trading than to any eventual liquidation.