A Fundamental Problem with Taking Security from a Company in External Administration
In a series of recent decisions1, the Federal Court of Australia has held that section 588FL of the Corporations Act 2001 (Cth) (Corporations Act) operates such that any new security granted by a company in external administration2. that could only be perfected by registration on the Personal Property Securities Register (PPSR), and which is not the subject of an effective registration made before the appointment of the external administrator, will be ineffective3. in the absence of a Court order extending the time for registration.
This has been confirmed again recently by Justice Markovic in Re Ten Network Holdings Ltd (Administrators Appointed)(Receivers & Managers Appointed)  FCA 1144 (Ten Network). This decision arose from an application by Mark Korda, Jenny Nettleton and Jarrod Villani of KordaMentha (Administrators) as the administrators of various entities in the Network Ten group of companies (Ten) to extend the time for registration on the PPSR of collateral subject to security interests granted by Ten during the administration in favour of CBS Studios Inc.
These decisions have broad implications for anyone considering providing new secured debt finance to a company in external administration (for example, as part of a recapitalisation) or any supplier or owner of goods considering entering into new supply or lease arrangements with a company in external administration.
Parties seeking to enter into a security agreement with a company in external administration (or even a company that has been) will need to give careful consideration as to whether an application will be required to be made under section 588FM of the Corporations Act to ensure that the security interests arising under the security agreement are effective and have the priority that they would otherwise have under the Personal Property Securities Act 2009 (Cth) (PPSA).
These recent decisions only consider the position where the security has been granted by the company during the external administration. It remains to be seen whether the Courts will interpret section 588FL of the Corporations Act in such a way that it also renders ineffective security interests granted by a company after it has successfully been rehabilitated and is no longer in any form of external administration.
The Corporations Act vesting provision: section 588FL
Section 588FL of the Corporations Act applies if an external administrator4. has been appointed to a company, with the date of the appointment of the external administrator as deemed by Division 1A of Part 5.6 of the Corporations Act the "critical time" for the purposes of the section.
It is well known that this section operates to vest certain registered security interests in the company that arose before the critical time (most notably when the registration on the PPSR took place more than 20 business days after the security agreement was entered into but less than 6 months before the critical time).
It is perhaps less well known that certain security interests that arise after the critical time are also vulnerable and will vest in the grantor company if the following criteria are met:
- the security interest that arises after the critical time is enforceable against third parties;
- that security interest is perfected by registration on the PPSR and no other means;
- the registration time for the collateral (being the time it was registered on the PPSR) is after the critical time or a later time ordered by the Court under section 588FM of the Corporations Act; and
- that security interest is not of the kind excluded from the operation of section 588FL by section 588FN.
In those circumstances, sections 588FL(2) and (4) of the Corporations Act have the effect that the security interest will vest in the grantor company (and therefore be ineffective) at the time it becomes enforceable against third parties under section 19 of the PPSA.
Therefore the only way to ensure that a security interest that was granted by a company in external administration, and which is not covered by an effective registration made on the PPSR before the critical time, does not immediately vest in the company and is effective, is if a Court makes an order under section 588FM extending the time for registration.
Extending the time for registration under section 588FM
The Court is empowered to extend the time for registration on the PPSR under section 588FM(2) of the Corporations Act, on the application of the company or any interested person, if the Court is satisfied that:
- the failure to register the collateral earlier was accidental, due to inadvertence or some other sufficient cause or is not of such a nature as to prejudice the position of creditors or shareholders; or
- on other grounds, it is just and equitable.
Where the relevant security interest arises after the critical time and there has not been a failure to register the collateral earlier, the appropriate limb is the just and equitable ground.
In the Ten Network decision, Justice Markovic concluded that it was just and equitable to fix a later date for the purposes of section 588FL(2)(b) of the Corporations Act because the security interests created were part of the broader transaction (the CBS Transaction) between Ten and CBS International Television Australia Pty Ltd (CBS), both the Administrators as well as the receivers of Ten were of the opinion that the CBS Transaction did not adversely prejudice any creditors of Ten and the new secured debt provided by CBS facilitated the recapitalisation of Ten's existing secured debt ensuring that Ten was able to trade until the CBS Transaction was completed, maximising the return to creditors.
Although the circumstances which would justify an order being made on the just and equitable ground will depend on the circumstances of each case (as recognised by Justice Davies in Renfrey), the decisions of Justices Davies and Markovic give some guidance as to the factors that the Court considers relevant including:
- any delay in registering the security interest or seeking the order and the impact of such delay (if the application is brought promptly this should not be applicable);
- the prejudice to the secured party if the order is not made;
- whether the interests of creditors will be relevantly prejudiced;
- whether the order is in the best interests of creditors and, if the company is in administration or deed administration, in furtherance of the objects of Part 5.3A of the Corporations Act (which requires an examination of the underlying transaction and its implications).
We acted for the Administrators in the application before Justice Markovic; counsel were Ian Jackman SC and Tiffany Wong.
1. Being the decision of Justice Davies in K.J. Renfrey Nominees Pty Ltd (Trustee) v OneSteel Manufacturing Pty Ltd  FCA 325 (Renfrey) and subsequently the decisions of Justice Davies in Alleasing Pty Ltd v OneSteel Manufacturing Pty Ltd  FCA 656 and Justice Markovic J in Re Ten Network Holdings Ltd (Administrators Appointed)(Receivers & Managers Appointed)  FCA 1144.
2. being a company in administration, deed administration or liquidation.
3. in that the security interest will vest in the company when it becomes enforceable.
4. being any one of an administrator, deed administrator or liquidator.