A controversial boost for restructuring promoters: Court limits security interest vesting rule

In his recent decision in Antqip Hire[1], Brereton JA of the Supreme Court of New South Wales concluded that section 588FL of the Corporations Act 2001 (Cth) does not operate to result in the vesting of security interests which are “granted” after the critical time.

Key Takeaways

• The Antqip Hire decision controversially diverges from a number Federal Court decisions which have held, or proceeded on the basis, that the vesting rule in s 588FL(1)(a) extends to security interests that are granted after the critical time.[2] Such a departure, if ultimately adopted by other courts, will serve as a positive signal to “rescue financiers” involved in Part 5.3A DOCAs or Part 5.3B restructuring plans that they face minimal risk of their security interest vesting in the event that the attempted restructure fails and the company is put into liquidation.
• However, until the conflicting authorities are resolved, rescue financiers taking security and registering after the critical time should seek a court-ordered extension of time under s 588FM.

Background

On 3 February 2014, Antqip Hire Pty Ltd and Antqip Pty Ltd (the Antqip Companies) entered into voluntary administration under Part 5.3A of the Corporations Act and the Companies subsequently entered into Deeds of Company Arrangement (DOCAs) on 8 May 2014.

On 26 October 2014, the Antqip Companies executed a deed of charge in favour of National Funding Group Pty Ltd (National) to refinance an existing debt owed by the Antqip Companies to Bibby Financial Services Pty Ltd (Bibby). Bibby was an excluded secured creditor under the DOCAs and was not entitled to share in the deed fund. 

The security interests registered on the PPSR by National included a security interest on the PPSR in respect of “all present and after-acquired property” (AllPAP) with a start time of 27 October 2014 and, inadvertently, with an end time of 27 October 2017. In December 2014, the Antqip DOCA was also varied to, amongst other things, substitute National for Bibby as the ‘excluded secured creditor’.

In April 2019, National realised that the security interest had lapsed and registered two further AllPAP security interests on 24 April 2019.

On 27 May 2019, the Antqip Companies went into voluntary liquidation.

On 22 October 2019, National applied under s 588FM for an order fixing 23 April 2019 as the “later time” for the purposes of s 588FL(2)(b)(iv) so that its security interest would not vest in the companies for the benefit of unsecured creditors. The application was opposed by the Deputy Commissioner of Taxation.

National did not immediately apply for an extension of time because it thought there was no risk of the security interest vesting under s 588FL, as it did not think the companies would be placed into liquidation or administration as both were subject to a DOCA and not trading.

National did not make the application until it became aware of a proceeding commenced by the Liquidators seeking to set aside the DOCAs. If the DOCAs were set aside, the deed funds would became assets of the Antqip Companies and caught by the deed of charge.

The “critical time”

The plaintiffs argued that the “critical time” for the purposes of the vesting rule in s 588FL was when the winding up resolution was passed on 27 May 2019. However, the Court concluded that the “critical time” for the purposes of s 588FL was 3 February 2014 (being the date that the administrations began).[3]

“Grant” of a security interest versus when a security interest “arises”

Despite having found that National’s security interest was granted (and arose after) the “critical time” of 3 February 2014 and accepting prior Federal Court authority that s 588FL(2) can cover a security interest that arises after the critical time, Brereton JA nevertheless disagreed that the vesting rule covers a security interest granted after the critical time.[4] In expressing this view, Brereton JA cited numerous matters which included the following:

• the use of the past tense “granted” in s 588FL(1)(b) connotes a security interest that had already been granted when the relevant insolvency event in s 588FL(1)(a) occurred;[5]
• the concepts of “grant” in s 588FL(1)(b) and “arises” in s 588FL(2)(a) are distinct;[6]
• applying s 588FL only to security interests arising after the critical time but registered before they arise (and not to security interests arising after the critical time but registered after they arise) is consistent with the vesting rules in ss 267 and 267A of the PPSA;[7]
• the time “when the security interest arises” for the purposes of s 588FL(2)(a) is a different concept from the time when “the security agreement that gave rise to the security interest came into force” as referred to in s 588FL(2)(b)(ii).[8] A security interest only arises once it has “attached” to the collateral.[9] In the absence of an agreement between the parties for attachment of the security interest at a later time, “attachment to collateral” occurs when a grantor with rights in the collateral either accepts value for the security interest or otherwise commits an act by which the security interest arises.[10]
• the note to s 588FL(1) provides that a security interest granted by a company that is unperfected at the critical time, may vest in the company under ss 267 and 267A of the PPSA;[11]
• s 588FM is not concerned with unperfected interests[12], as an unperfected security interest vests under s 267 of the PPSA and s 588FM provides no means for mitigating that consequence;[13]
• s 267A of the PPSA supplements s 267 by providing for the situation where, although a security agreement was entered into before one of the critical times referred to in s 267, the security interest only attaches to collateral after that time;[14] and
• Part 5.7B (voidable transactions) of the Corporations Act, which includes s 588FL, is concerned with transactions commencing before the commencement of the winding-up and security interests granted after the “critical date” fall to be determined by s 468 of the Corporations Act (which deals with dispositions of property made after the commencement of a court-ordered winding-up).[15]

Consequently, Brereton JA concluded that the phrase “if the security interest arises after the critical time” in s 588FL(2)(a) captures the situation where a security interest granted before the “critical time” and perfected by registration does not arise (by attachment, upon which it also becomes enforceable against third parties) until after the “critical time”, whereupon it vests in the grantor.[16] Consequently, s 588FL does not apply to a security interest granted by a security agreement granted after the critical time and, as a result, s 588FL(2) did not apply to National’s security interest.[17] Accordingly, there was no need for an order under s 588FM fixing a later time for the purposes of s 588FL(2)(b)(iv).[18]

Brereton JA then indicated that in the event that his conclusion regarding s 588FL’s operation was wrong, his Honour would have been prepared to make an order under s 588FM fixing 24 April 2019 as the later time for registration of National’s security interest.[19]   

Conclusion

While Brereton JA’s narrow approach to construction of s 588FL is likely to engender controversy (including because of his Honour’s departure from prior Federal Court authorities), such an approach, if adopted by other superior courts, will provide greater certainty to “rescue financiers”, a welcome development in a currently difficult restructuring market.

However, until the tension in the authorities is resolved, a rescue financier taking security and registering after the critical time should consider seeking a court order for an extension of time under s 588FM.

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