No more s 588FL vesting for security interests granted post appointment: Cubic Interiors NSW & Ors

A decision which insolvency practitioners will welcome in, Cathro, in the matter of Cubic Interiors NSW Pty Ltd (In Liq) [2023] FCA 694, the Federal Court clarified that s588FL of the Corporations Act 2001 (Cth) (the Act) does not cover security interests granted by a security agreement made after the “critical time” as defined in s588FL(7) of the Act.

This is an important decision for insolvency practitioners because it is a significant step towards resolving the divergent views of single judge decisions of the Supreme and Federal Courts on the application of s588FL.  Justice Cheeseman’s judgment confirms that:

• Insolvency practitioners no longer have the administrative burden of seeking relief from the court under s588FM of the Act in respect of PPSA security interests granted after the “critical time” (being either the commencement of the winding up, the administration or the restructuring);
• For example, a liquidator or administrator who grants a security interest in connection with a refinance will no longer have to apply to the court to extend the time for registration in order to prevent the vesting of the affected security interests in the company; and
• The time and costs burden involved in seeking relief under s588FM to cure any vesting of a security interest can be avoided.

Background

On 22 November 2021, a liquidator was appointed over Cubic Interiors NSW Pty Ltd (In Liquidation), Bigmig Pty Limited (In Liquidation), Cubic Interiors Sydney Pty Ltd (In Liquidation) and Cubic Contracting NSW Pty Ltd (In Liquidation) (collectively, the Companies).

The wider Cubic Group (which includes the Companies) was in the business of providing interior fit outs. Prior to their liquidation the Companies (and other members of the Cubic Group) were party to financing arrangements with the National Australia Bank (NAB) and had granted securities to the NAB.

Following the appointment of the liquidator, the NAB appointed receivers and managers over the Companies (Receivers). Assetinsure, a creditor of the Companies, who had issued various bonds on behalf of the Companies and the Cubic Group, held a second ranking security interest.  

Following the appointment of the Receivers, the liquidator refinanced the NAB’s debt with the aim to retire the Receivers and to increase the efficiency of the liquidation, reduce the costs and increase the return to creditors. The effect of the refinance was that the NAB was replaced by 33-37 Egerton Street Pty Ltd (an entity associated with the director of the Cubic Group) (Egerton) as a secured creditor of the Companies.

As a consequence of the opaque text in s588FL of the Act and the divergent views of the Federal and Supreme Courts, it was unclear whether the security interest granted to Egerton vested in the Companies.  This application was brought by the liquidator to first, seek clarity on whether s588FL applies to a security interest granted after the “critical time” and second and in the alternative, to seek remedial relief under s588FM if necessary.

Key Issues

The liquidator’s application was made in the context of a security registered on the PPSR which was granted to Egerton (Egerton Security) after the liquidator’s appointment, which is the “critical time” referred to in s 588FL(7(a) of the Act.  The Egerton Security was registered on the PPSR on 9 December 2021, which was within 20 business days of the day on which it was granted but was after the “critical time”.

The primary relief sought was a direction pursuant to s90-15 of the Insolvency Practice Schedule (Corporations) 2016 (IPS) that the liquidator was justified in not seeking an extension of the time for registration of the Egerton Security under s588FM of the Act. The alternative claim for relief was an order under s588FM extending the time for registration of the security interest to 9 December 2021, being the date the Egerton Security was registered.

The key issue before the Court was the proper textual and contextual construction of s588FL and s588FM of the Act.

Textual and contextual construction of s588FL

Textually, the Court considered Brereton JA’s analysis in Re Antqip, that the use of the past tense “granted” in s588FL(1)(b) connotes a security interest that has already been granted when the relevant insolvency event in s588FL(1)(a) occurs. The concepts of “grant” in s588FL(1)(b) and “arises” in s588FL(2)(a) are not congruent but distinct. Further, it was considered that if s588FL applies to security interests granted after the critical time, it creates an off result in that a security interest would vest in the grantor at a time prior to the creation of the security interest.

Similar observations were made with respect to the difference in operation of s588FM in respect of a security interest granted after the critical time. Section 588FM effectively provides a means for avoiding the vesting of a security interest by fixing a later registration time reinforcing the view that s588FL does not catch security interests granted after the critical date.

Contextually, having regard to the Explanatory Memorandum to the Personal Personal Property Securities (Corporations and Other Amendments) Bill 2010 (Cth), s588FL was not intended to apply to security interests granted after the critical time. The Court considered that the structure of the Act supports the view that the powers of a liquidator under Part 5.4B to wind up a company (rather than s588FL) is intended to govern the granting of a security after a liquidator has been appointed.

For example it would be inconsistent with Part 5.7B (voidable transactions) for s588FL to apply to security interests granted after the critical time by agreement, as such agreements could be voided under section 468 of the Act.

Findings

Having considered the two competing lines of authority from K. J. Renfrey[1] and Re Antqip[2], the Court reached the conclusion that s588FL of the Act does not cover security interests granted after the critical time. Adopting Justice Jackman’s views in Revroof[3] which followed the Re Antqip reasoning, her Honour found the analysis in Re Antqip “compelling”.

The Court determined that it was incorrect to read s588FL as applying to security interests granted after the critical time, particularly by an appointed liquidator, administrator, restructuring practitioner, as it would, “divorce the section from its purpose to which it is directed – namely, preventing the fraudulent granting of security interests with knowledge of an imminent administration, liquidation, restructuring, deed of company arrangement or restructuring plan.”[4]

The Court accordingly granted all the relief sought by the liquidator.

The matter was argued by Joseph Scarcella and Emily Barrett.

The decision serves as a welcome authority to insolvency practitioners, liquidators and administrators that removes the administrative burden to run up to the Court to seek s588FM relief in respect of PPSA security interests that were granted after the critical time, being the date of appointment. Insolvency practitioners will be relieved to know that they can enter into loan agreements and general security deeds following the date of appointment, without having to seek remedial relief.

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