Extension of a Vesting Security Interest

Written by Shelby Sommerfeld

Practitioners in the insolvency and banking and finance spaces may embrace the court’s finding of the application of sections 588FM and 588FL Corporations Act 2001 (Cth) (the Corporations Act) at common law following the decision in Re Antqip Hire Pty Ltd (in liq) [2021] NSWSC 1122 (Antquip). This  key precedent assessed whether a security interest vests in the grantor if the interest is perfected after the critical time (in this case, after an administrator had been appointed) and found that sections 588FM and 588FL of the Corporations Act were not applicable in the particular circumstances. Moreover, despite the security interest being perfected after the critical time, the security interest did not vest in the grantor. The practical effect of vesting is significant. If a secured party’s interest is deemed to have vested in the grantor, the secured party loses the benefit of its security and is left to participate in an insolvency event as an unsecured creditor.

Section 588FL of the Corporations Act

Section 588FL of the Corporations Act  provides that where a security interest has not been perfected (usually by registering it on the Personal Property and Securities Register (PPSR)) within the required statutory timeframe, ie perfection occurred after the critical time, it vests in the Grantor. Where vesting occurs in insolvency events, the secured party loses the benefit of its security and the collateral forms part of the pool of assets available to secured creditors and the appointed administrators or liquidators.

For the purposes of the Corporations Act and cases involving security interests being granted after an insolvency event, the “critical time” in relation to a company means; the date at which an event occurs to cause the company’s winding up, the date at which the event occurs to cause the company to enter administration or execute a Deed of Company Arrangement, or the time at which the event occurs that establishes a restructuring event. A security interest must be registered on the PPSR by the latest of the following time, within 20 business days from the date the security agreement came into force (or the time that is the Critical Time – whichever is the earlier); or 6 months before the date that is the critical time.

Section 588FM of the Corporations Act

Section 588FM of the Corporations Act provides a statutory avenue for a secured party to seek judicial relief where registration and perfection of the security interest did not occur before the critical time. The Court may make an order specifying a later date by which the security interest may be registered, thereby preventing the security interest from vesting in the grantor company under section 588FL.

In determining whether to grant relief, the Court may consider whether:

• The failure was accidental or inadvertent: The security interest was not registered within time due to an unintended error, oversight or other circumstances demonstrating that the failure was not deliberate.
• There has been no prejudice: The delay in registration has not adversely affected the interests or position of the company’s creditors or shareholders.
• It is just and equitable to grant relief: Having regard to all relevant circumstances, the Court considers it appropriate and fair to allow the secured party additional time to register its security interest.

This avenue can be onerous on the applying party in respect of costs and timeframes: often when such applications are being made the applicant is under time constraint and is facing financial pressure.

Evolving Common Law Approach

A different interpretation was adopted by Justice Brereton in Re Antqip in specific circumstances of a company’s administration. His Honour found that section 588FL of the Corporations Act does not apply to a security interest that is granted after the critical time. Consequently, section 588FM relief is not required in those circumstances.

Antqip specifically clarifies that the vesting provisions in section 588FL do not apply to security interests granted by a company where the relevant security agreement is made after the “critical time”—in this context, after the company has entered administration. The court found that such a security interest is not susceptible to vesting, and it may be validated and effective if appropriately documented and registered.

The Court’s reasoning has subsequently been adopted in cases such as Cubic Interiors NSW Pty Ltd (In Liq), Re [2023] FCA 694 and Copper Resources Australia Pty Ltd (Admins Apptd) (ABN 64 108 344 528); Ex Parte Birch as joint and several Administrators of Copper Resources Australia, Re [2024] WASC 508.

In the case of Cubic Interiors NSW Pty Ltd (In Liq) [2023] FCA 694, Justice Cheeseman held that the operation of s588FL is designed to target pre-appointment transactions to prevent fraudulent or unfair granting of security before insolvency. It does not capture security interests or refinancing arrangements entered into post-appointment by an administrator or liquidator, and insolvency practitioners should not have to bear he administrative time and costs burden of seeking relief from the court under s588FM of the Corporations Act.

Practical Application

A company may be subject to a Deed of Company Arrangement (DOCA) and may be required to obtain finance to refinance or restructure under time constraint. With the Deed Administrator’s consent to grant a further security interest, the decision in Antqip provides an avenue for the company to increase cashflow and continue to trade, potentially avoiding lengthy and costly expenses in obtaining statutory relief. The provisions in Antqip can provide comfort to the lender in that their security interest will not vest in the grantor due to its security being granted after the critical time being fixed at the date the company entered into administration or executed the DOCA. Where the circumstances point towards the application of the approach at common law, Antqip it can be used as a tool to move quickly without additional expense and provide an outcome that otherwise may not have been available for the company seeking to trade out of administration events.

In another instances, a security agreement may have been entered into before the insolvency event, but the relevant security interest may not attach to particular property until a later date. This could occur where a grantor newly acquires inventory and the Lender is receiving repayments through invoice financing for use of the new acquired collateral. On this basis, the reference in section 588FL to a security interest that “arises after the critical time” is directed to a security interest that was already granted before the critical time, but which subsequently attaches to particular collateral after the fact.

Moving forward

Ultimately, Antqip should not be regarded as removing the importance of timely PPSR registration. Rather, it provides a valuable distinction between a security interest that is improperly perfected before an insolvency event and a genuinely new security interest granted after the critical time. For financiers, understanding that distinction can be critical to determining whether security will survive an insolvency event and, where new finance is required during an administration or DOCA, may provide a commercially valuable pathway to preserve secured funding without the requirement to resort to the Court.