This one oversight concerning security interest can result in huge losses for your business

Here’s how to prevent it.

The way you handle a security interest can determine whether you record huge loss in your books or a healthy account of your business. One company Onesteel Manufacturing Pty Limited lost $23 million because of an over-sight in their security interest! While another, Psyche Holdings Pty Limited was able to avert the situation. Anything that potentially lose your business such huge amounts of money should be taken seriously.

Definition of a security interest

A security is “Enforceable claim or lien created by a security agreement, or by the operation of law, that secures the fulfillment of a pledge. A lender or obligee has a security interest in the collateral provided by a borrower or obligor to guaranty timely payment of a debt or performance of an obligation. See also perfected security interest.” Source: Business Dictionary

Security Interest

Why you should care?

Under s 166 of the Personal Property Securities Act 2009 (Cth) (PPSA), even if a security interest is registered correctly at the time of lodgement, there is an ongoing requirement to amend the registration within 5 business days of you acquiring actual or constructive knowledge of a defect in the registration. A failure to amend the registration within this time frame will result in the registration becoming defective. A defective registration can result in substantial losses such as was the case in OneSteel Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21, in which a registration incorrectly made reference to an ABN (where an ACN should have been used), effectively resulting in a $23 million loss.

Defects of the kind covered by s 166 of the PPSA can arise where security interests are registered in respect of:

(a) an individual who changes their name after registration of the security interest;

(b) patent, plant breeder’s right, trade mark or design applications using a reference to a serial number (e.g. a patent application number) which changes upon the registration of the patent, plant breeder’s right, trade mark, or design (e.g. a patent number);

(c) a trust where the trust does not initially have an ABN and subsequently obtains one; or

a trust which has an ABN (and the security interest is registered against that ABN) but subsequently cancels the ABN;

(d) partnerships where partners leave or have ABNs cancelled or new ABNs are issued;

(f) secured property which is transferred to another party by the Grantor subject to the security interest;

(g) body corporates which after registration obtain an ARSN or have their ARSN cancelled.

The above list is not exhaustive, and the exact details required to be recorded for a particular entity are prescribed in the Personal Property Securities Regulations 2010 (Cth) (PPS Regulations).

Issues that can rise after a security interest has been registered

A case has recently highlighted the issues that can arise where a trust obtains an ABN after a security interest has been registered. In the matter of Psyche Holdings Pty Limited [2018] NSWSC 1254:

(a) A general security deed was entered into between Ridgeway Finance Pty Ltd (Secured Party) and Psyche Holdings Pty Ltd as trustee for the LH Equity Trust (Grantor) in June 2013 relating to a loan between the two parties.

(b) Pursuant to the general security deed, a security interest was registered; however, at the time of registration the trust did not have an ABN and accordingly the ACN of the trustee was used in accordance with the registration requirements of the PPS Regulations.

(c) It is important to note that in relation to trusts, the PPS Regulations require that security interests are registered as follows:

  1. If the trustee of the trust has been included on the transitional register, reference must be made to those details as recorded on the transitional register;
  2. If not recorded on the transitional register and the trust has an ABN, reference must be made to that ABN;
  3. If not recorded on the transitional register and if the trust does not have an ABN, then:
  • If the trustee is a company, reference must be made to the company’s ACN; or
  • If the trustee is an individual, the security interest must be registered against the individual.

(d) After registration of the security interest, the trust was assigned an ABN, the registration date of which was backdated to 20 June 2013.

(e) Over 5 years later a director of the Secured Party was advised of the ABN of the Grantor and became aware that the security interest would need to be updated to reference the Grantor using the Trust’s ABN.

(f) Unfortunately, the Secured Party did not amend the security interest to refer to the Grantor using the ABN within the 5 sdays provided for in s 166 of the PPSA resulting in the security interest becoming defective.

(g) Once the Secured Party realised their error, they registered a new security interest on 6 July 2018 using the Trust’s ABN details and then applied to the Court under section 588FM of the Corporations Act 2001 (Cth) (Act) to fix a later time for the registration of its interest. The basis for their application was that the failure to register the interest earlier was accidental or due to inadvertence.

(h) The Court action was necessitated due to s 588FL of the Act which would have the effect that should the Grantor become insolvent within 6 months of the date the second security interest was registered, the secured property would vest in the company for the benefit of creditors generally and the Secured Party would lose the benefit of the security interest unless the Court extended the date for registration under 588FM of the Act.

(i) Fortunately for the Secured Party, the Court was satisfied in this case, that such inadvertence had been established and granted the extension of time to register the security interest.

This case shows that secured parties need to be particularly diligent when dealing with trusts to ensure that their security interests are registered correctly and that, if it becomes aware of changes to the trust’s ABN status, amendments are made to correct the registration within the 5 days allowed for in s 166 of the PPSA. Doing so will avoid the costs incurred in lodging a new security interest and going to Court to obtain a similar order as granted in this case.

How to avoid a loss

One solution to above problem is for a secured party to register multiple security interests against both the trustee and the trust to attempt to ensure that there is at least one security interest which is valid at any point in time. Another benefit to this approach is that, if Parliament ever legislates the recommendation contained in the Whittaker Report (published in 2015) that security interests granted by trusts should always be registered against the trustee, the Secured Party will not have to amend any of its security interests. The main risk with registering multiple security interests, however, is that such registrations are potentially unjustified and may expose the secured party to civil penalties under section 151(1) of the PPSA. It is for this reason that we recommend that a clause is included in the relevant agreement providing that the trustee is acting in its own right and as trustee in order to justify the lodgement of the security interests.

If you are looking for further legal advice in respect of registering security interests, obtaining security or searching the Personal Property and Securities Register please contact us.

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