Supreme Court New South Wales Medium Neutral Citation: In the matter of Cardinia Nominees Pty Ltd [2013] NSWSC 32 Hearing dates: 29 January 2013 Decision date: 01 February 2013 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: The registration time for the security interests granted to the Plaintiff to be fixed pursuant to s 588FM Corporations Act (Cth) as 7 September 2012, subject to specified terms. Catchwords: CORPORATIONS - Registration time for security interests - Application under Corporations Act 2001 (Cth) s 588FM(1) to fix registration time for security interests registered in the register established under the Personal Property Securities Act 2009 (Cth) - Whether failure to register security interest was accidental or due to inadvertence - Relevance of financial position of company granting security interest. Legislation Cited: - Corporations Act 2001 (Cth) ss 263, 266, 266(4), 436A, 436B, 436C, 588FL, 588FL(2), 588FL(2)(b)(ii), 588FL(2)(b)(iv), 588FL(4), 588FL(7), 588FM, 588FM(2), 588FM(3) Personal Property Securities Act 2009 (Cth) s 267 Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth) Cases Cited: - Bevillesta Pty Ltd v Imagine Un Ltd [2009] VSC 50; (2009) 69 ACSR 574 - Dempsey Resources Pty Ltd v Continental Coal Ltd [2009] FCA 1157 - Queensland Company Credit Union v Na-Kuraga Ltd [2005] QSC 149; (2005) 55 ACSR 219 - Metcash Trading Ltd v 8 Nai Investments Pty Ltd [2011] FCA 1400 National Australia Bank Limited v Davis & Waddell (Vic) Pty Ltd [2003] VSC 1; (2003) 44 ACSR 296 - Re Barclays Bank Plc [2012] NSWSC 1095 - Re Flinders Trading Co Pty Ltd (1978) 20 SASR 14; (1978) 3 ACLR 218 - Re Guardian Securities Ltd [1984] 1 NSWLR 95; (1984) 8 ACLR 822 - Re Kris Cruisers Ltd [1949] 1 Ch 138; [1948] 2 All ER 1105 - Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq) [1991] 2 Qd R 456; (1990) 2 ACSR 692 Category: Principal judgment Parties: Cardinia Nominees Pty Limited (Plaintiff) Inika Pty Limited (Defendant) Representation: Counsel: A.J. Abadee (Plaintiff) Solicitors: Judd Commercial Lawyers File Number(s): 2012/394886 Judgment 1The Plaintiff, Cardinia Nominees Pty Limited ("Cardinia") applies under s 588FM(1) of the Corporations Act 2001 (Cth) to fix 7 September 2012 as the registration time for security interests granted to it in certain collateral registered in the Register ("PPS Register") established under the Personal Property Securities Act 2009 (Cth) ("PPSA"). The application is supported by two affidavits of Mr James McGilvray, who is a director of Cardinia, sworn 18 December 2012 and 29 January 2013. Factual background 2By way of background, Cardinia, as representative of eleven investors, agreed to lend the sum of $725,000 to another entity, Inika Pty Limited ("Inika") on the basis that Inika would execute a Secured Convertible Bond Deed in favour of Cardinia. 3The Secured Convertible Bond Deed was dated 3 August 2012 and provided for the issue of convertible bonds to Cardinia and also provided that the loan would be secured by a charge over the whole of Inika's assets. The Secured Convertible Bond Deed also provided, in clause 6.1, that: "Inika will grant the Charge as security for payment by Inika to the Bondholder of the aggregate Total Face Value and accrued but unpaid Interest. Promptly following the issue of convertible notes to the Bondholder, will at its cost, stamp and register the Charge with the appropriate regulatory authority." [sic] There is plainly an error in this clause. It may be that the clause was intended to specify either that Inika or Cardinia was responsible for the relevant steps, but has omitted reference to the relevant entity. Cardinia points out that the former position would be consistent with practice prior to the introduction of the PPSA regime, where s 263 of the Corporations Act required the company giving a charge, not the chargee, to lodge notice of the charge. Plainly, there was room for confusion as to which entity was responsible for those steps. In the application before me, Cardinia proceeded on the basis that it was Inika's responsibility to stamp and register the charge. 4Cardinia advanced the whole of the monies under the loan arrangement to Inika over the period from 3 August 2012 to 24 August 2012. The Commonwealth Bank of Australia, which held two prior charges over Inika's assets, consented to the registration of a second ranking charge by Cardinia. It appears that Inika had also granted a prior security in favour of St. George Motor Finance Limited, and then granted a security in favour of BMW Australia Finance Limited registered on 7 September 2012, which each appear to secure hire purchase arrangements over one motor vehicle. 5Mr McGilvray acknowledges that he was aware from a solicitor acting for Inika on the loan transaction documents that the security given by Cardinia had to be stamped and registered on the PPS Register within 20 business days, although his evidence is that he did not know or understand the risk of not complying with the registration requirement in that time. An email dated 13 August 2012 from Inika's solicitor to its Chief Executive Officer, copied to Mr McGilvray, noted that: "If not already done, Cardinia will need to ... ensure that the charge document is stamped and registered under the new PPS Register within 20 business days after it is signed." This email appears to assume that the registration obligation was on Cardinia; Mr McGilvray's evidence indicates that he understood the registration obligation was on Inika; and, as I have noted above, clause 6.1 of the Secured Convertible Bond Deed is unclear in that regard. 6By email dated 6 September 2012, after the 20 day business period specified in s 588FL of the Corporations Act had expired, the solicitor for Inika responded to a request by one of the investors for a copy of the final versions of all legal documents by providing a copy of those documents and again noting that Cardinia would need to ensure that the charge was stamped and registered in the PPS Register within 20 business days after it was signed. The ambiguity in clause 6.1 of the Secured Convertible Bond Deed, to which I have referred above, means that the statement that Cardinia (as distinct from Inika) was obliged to register the charge may or may not be correct, although Cardinia was at risk so far as the consequences of any failure to register the charge. 7By email dated 6 September 2012 to Inika's solicitor, Mr McGilvray responded that: "Have been flat out on operational tasks. Could you please have the document stamped and registered with PPS asap, and charge the cost of this to Cardinia Nominees." Cardinia acknowledges that its offer to pay for the registration fee and stamping is, on one view, consistent with the obligation to register the security interest under clause 6.2 of the Secured Convertible Bond Deed falling upon Cardinia. However, it is at least equally likely that it simply reflected the immediately previous suggestion by Inika's solicitor that Cardinia was responsible for registration of the security interest. 8Cardinia's security interest in the collateral was registered on the PPS Register on 7 September 2012. 9On 10 September 2012, Inika's solicitor advised Mr McGilvray that registration of the charge had occurred in the previous week, but did not then point out that it had occurred outside the 20 business day period specified in s 588FL of the Corporations Act or refer to any possible adverse impact of that matter on the effectiveness of the security under s 588FL(4) of the Corporations Act. 10Mr McGilvray became aware of the potential consequence of late registration of Cardinia's charge on the PPS Register when discussing the operation of the PPSA with his solicitors in November 2012 in respect of an unrelated matter, and then gave instructions for this application to be brought. Whether the grounds to make the order sought are established 11Sections 588FL and 588FM of the Corporations Act were introduced by the Personal Property Securities (Corporations and Other Amendments Act 2010 (Cth). Section 588FL(2) provides that: "(2) This subsection covers a PPSA security interest if: (a) at the critical time, or, if the security interest arises after the critical time, when the security interest arises: (i) the security interest is enforceable against third parties under the law of Australia; and (ii) the security interest is perfected by registration, and by no other means; and (b) the registration time for the collateral is after the latest of the following times: (i) 6 months before the critical time; (ii) the time that is the end of 20 business days after the security agreement that gave rise to the security interest came into force, or the time that is the critical time, whichever time is earlier; (iii) if the security agreement giving rise to the security interest came into force under the law of a foreign jurisdiction, but the security interest first became enforceable against third parties under the law of Australia after the time that is 6 months before the critical time-the time that is the end of 56 days after the security interest became so enforceable, or the time that is the critical time, whichever time is earlier; (iv) a later time ordered by the Court under section 588FM." The term "critical time" is in turn defined in s 588FL(7). Broadly, the effect of s 588FL(2) is that, when a company is being wound up, an administrator is appointed, or a deed of company arrangement is executed, any PPSA security interest which was perfected, registered or enforceable against a third party after the latest of six months before the critical time, or 20 days after the security agreement came into force, or a later time ordered by the Court under s 588FM, vests in that company: see Explanatory Memorandum to the Personal Property Securities (Corporations and Other Amendments) Bill at [6.5]. (For completeness, I should note that, where the PPSA security interest has been registered as is the case here, it is not necessary to address the application of s 267 of the PPSA which would vest an unperfected security interest in the grantor in specified circumstances.) 12Section 588FM in turn allows the company, or an interested person, to apply to the Court for the fixing of a later time, for the purposes of s 588FL(2)(b)(iv). Section 588FM(2) relevantly provides that: "(2) On an application under this section, the Court may make the order sought if it is satisfied that: (a) the failure to register the collateral earlier: (i) was accidental or due to inadvertence or some other sufficient cause; or (ii) is not of such a nature as to prejudice the position of creditors or shareholders; or (b) on other grounds, it is just and equitable to grant relief." The Court may make such an order on terms and conditions under s 588FM(3). The terms of s 588FM are broadly similar to the circumstances in which the Court could previously extend the time for lodgement of a notice of a charge under s 266(4) of the Corporations Act. 13Mr Abadee, who appears for Cardinia, submits that the Court may properly make an order fixing a later time for the purposes of s 588FL(2)(b)(iv) on the basis that Cardinia's failure to register the security interest in the collateral earlier was accidental or due to inadvertence or some other sufficient cause. 14The concept of "inadvertence" has been considered in the case law dealing with s 266 of the Corporations Act. In the present case, there seems to me to have been a least a lack of clarity as to who was responsible for registration of the security interest and, if clause 6.1 of the Secured Convertible Bond Deed was intended to confer that responsibility on Inika, a lack of action by Inika to discharge that responsibility. However, I do not consider that lack of clarity gave rise to an actual misunderstanding as to who was responsible for registration, of the kind considered in Re Kris Cruisers Ltd [1949] 1 Ch 138; [1948] 2 All ER 1105 or Queensland Company Credit Union v Na-Kuraga Ltd [2005] QSC 149; (2005) 55 ACSR 219. The parties appear to have proceeded on the (possibly mistaken) basis that Cardinia should attend to registration of the security interest in the collateral on the PPS Register, albeit that it ultimately did so by giving instructions to Inika's solicitors in that regard. 15However, "inadvertence" may also be established where a party operates under a mistake as to the consequences of failing to register a security interest: Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq) [1991] 2 Qd R 456 at 461; (1990) 2 ACSR 692 at 695; National Australia Bank Limited v Davis & Waddell (Vic) Pty Ltd [2003] VSC 1; (2003) 44 ACSR 296; Metcash Trading Ltd v 8 Nai Investments Pty Ltd [2011] FCA 1400 at [8]. The approach adopted in the case law of treating a matter of that kind as amounting to inadvertence is consistent with the emphasis placed in the case law upon the benevolent operation of predecessor sections, at least where an error of a secured creditor in not attending to registration of its security within time is innocent and does not result from any disregard of its statutory obligations: Re Kris Cruisers Ltd above at 142; National Australia Bank v Davis & Waddell above at [67]. In the present case, Inika's solicitor had informed Mr McGilvray of the time within which registration was required, but the potentially significant consequences of a failure to register had not been communicated to Mr McGilvray. In my view, Cardinia, through Mr McGilvray, was plainly operating under a mistake as to that matter. 16Cardinia has therefore established that the failure to register the security interest in the collateral earlier in this case was at least due to inadvertence, and that is sufficient to establish the basis for the Court to make the order which Cardinia seeks under s 588FM of the Corporations Act. 17Had it been necessary to do so, I would have also held that the factors to which I have referred above, including the uncertainty as to who was responsible for registration of the security interest in the collateral under the Secured Convertible Bond Deed, also had the result that it was just and equitable to grant the extension of time sought for the purposes of s 588FM(2) of the Corporations Act: compare Bevillesta Pty Ltd v Imagine Un Ltd [2009] VSC 50; (2009) 69 ACSR 574. Discretionary factors 18It remains necessary for the Court to exercise its discretion as to whether to make the order sought and whether such an order should be made on terms and conditions under s 588FM(3) of the Corporations Act. The length of delay prior to registration of the security interest in the collateral has been treated as a relevant factor of the exercise of the Court's discretion in the predecessor sections to s 588FM of the Corporations Act and it seems to me that it remains relevant in respect of the exercise of discretion under s 588FM: Dempsey Resources Pty Ltd v Continental Coal Ltd [2009] FCA 1157; Re Barclays Bank Plc [2012] NSWSC 1095 at [14]. Cardinia submits, and I accept, that the 5 day period of delay in this case between the end of the 20 day period specified in s 588FL(2)(b)(ii) and the date of registration of the security interest in the collateral is not lengthy. 19Two other issues are potentially relevant to the exercise of the Court's discretion in this case. The first issue is the relevance, if any, of the fact that Inika granted a security interest, apparently over a motor vehicle, to a financier which was registered prior to the expiry of the 20 business day period for Cardinia's registration of its security interest under s 588FL(2)(b)(ii) of the Corporations Act. An order made under s 588FM of the Corporations Act to fix a later time applies for the purposes of s 588FL(2)(b)(iv) of the Corporations Act, so as to avoid the vesting of a security interest in the company which granted it under s 588FL(4) of the Act in the specified circumstances. It appears that such an order should not impact on priorities as between Cardinia and the financier that registered its security interest in that 20 business day period, because the extension of time under s 588FM does not affect the date of registration of the security interest in the collateral and a security interest that was previously perfected by registration on the PPS Register would generally have priority over a later registered interest under s 55 of the PPSA. I note, however, that notice of this application was not given to the financier which has not had an opportunity to be heard as to that matter, and Cardinia indicated that it accepted that its application should have no effect on the priority of that financier in respect of the relevant motor vehicle. I consider that it is therefore appropriate to impose a condition on the order, under s 588FM(3) of the Corporations Act, preserving the position of that financier. 20A second question arises in respect of the impact of such an order on the vesting which could otherwise occur on an insolvency of Inika under s 588FL(4) of the Corporations Act. That order would remove the possibility of vesting by reason that the registration time for the security interest in the collateral was after the 20 business day period specified in s 588FL(2)(b)(ii), and is therefore to the potential disadvantage of unsecured creditors of Inika if an insolvency intervenes. The Courts have emphasised, in respect of predecessor sections, that unless an applicant leads evidence of the company's solvency and the likelihood of its solvency being maintained into the foreseeable future, an extension should not be granted unless steps are taken to protect the interest of unsecured creditors: Re Guardian Securities Ltd [1984] 1 NSWLR 95 at 97; (1984) 8 ACLR 822 at 823. Steps that might be taken to achieve that result include joining one or more unsecured creditors as representative parties; directing that notification of the application be given to unsecured creditors with a view to their being heard in opposition to it, if they wished to do so; or granting an extension of time reserving a right to the company or any unsecured creditor or any person representing the interests of unsecured creditors to apply at a later time to discharge or vary the order: Re Guardian Securities above at NSWLR 97-98, ACLR 824; Bevillesta Pty Ltd v Imagine Un Ltd above at [28]. 21An order for extension would not generally be made, even where it would merely put the secured creditor in the position it would have been had there been no inadvertence, if there was a danger that claims of unsecured creditors would not be met owing to the insolvency or likely insolvency of the company: Re Flinders Trading Co Pty Ltd (1978) 20 SASR 14 at 49; (1978) 3 ACLR 218 at 233. In Bevillesta, the Court granted such an extension on terms that it reserved liberty to the company, any liquidator, administrator, deed administrator or creditor of a company to apply the discharge or vary the order if any winding up of the company commenced, or an administrator of the company was appointed under ss 436A, 436B or 436C, or the company executed a deed of company arrangement within 6 months of the date on which the notice of charge was lodged. In my view, the rationale supporting that approach remains applicable in respect of applications under s 588FM of the Corporations Act. I considered whether such a condition should be imposed, in an application under s 588FM of the Corporations Act, in Re Barclays Bank above, but held that it was not necessary to do so in that case given the demonstrated solvency of the company that had given the security. 22In the present case, the evidence as to Inika's financial position and its ability to pay its debts as and when they fall due is somewhat incomplete. The Plaintiffs relied on unaudited balance sheets that form part of Inika's monthly management accounts for the period ending 30 November 2012. That information is two months out of date, unaudited and not otherwise verified by evidence of any officer of Inika. Cardinia concedes that the balance sheets for the two ledgers relating to the UK and Australian operations of Inika together show negative net equity. The weight of that evidence is also limited by reason that no profit and loss information was provided and it is difficult to form any view as to Inika's solvency without access to at least that information and probably also cashflow information. While Cardinia's solicitors have written to Inika requesting further information, Cardinia has not yet been provided within Inika's latest monthly financial statement. 23Mr McGilvray's evidence is that, when Cardinia entered into the convertible note and was granted the charge, so far as he was aware, Inika was solvent and able to pay its debts as and when they fell due. Mr McGilvray's evidence is also that, since 3 August 2012 (the date of the Secured Convertible Bond Deed) and up to and including 7 September 2012 (the date of registration of the security interest in the collateral), so far as he was aware, Inika was solvent and able to pay its debts as and when they fell due. Mr McGilvray also gives evidence that he was not aware of any substantial borrowing by Inika since the loan and that, at the date of swearing his further affidavit dated 29 January 2013, he believes that Inika is able to pay its debts as and when they fall due and is not aware of any circumstances which would cause it to be wound up within 6 months of the date of registration of Cardinia's charge on the PPS Register. This evidence is qualified by the extent of Mr McGilvray's knowledge of these matters, although it might be expected that he would have knowledge of these matters since he was appointed as a director of Inika on 3 August 2012. 24Although the evidence as to Inika's financial position is incomplete in these respects, it seems to me that an order under s 588FM should be made but only on a basis that reserves the ability of a liquidator, administrator, deed administrator or other unsecured creditor to apply to discharge it within a six month period from the date of registration of the security interest in the collateral. Cardinia has accepted that an order might be made subject to a condition of that character. Orders 25Accordingly, I propose to make the following orders: 1. Subject to the terms set out in order 2, pursuant to s 588FM of the Corporations Act 2001 (Cth), fix 7 September 2012 as the registration time for the security interests granted to the Plaintiff in the collateral being all present and after-acquired property referred to in registration number 201209070055669 in the register established under the Personal Property Securities Act 2009 (Cth) (the "Register"). 2 Order 1 be subject to terms that: (a) The order have no effect on the priority to be afforded to the security interest granted to BMW Australia Finance Limited in the collateral referred to in registration number 201208280059812 in the Register; and (b) Reserve liberty to any liquidator, administrator, deed administrator or unsecured creditor of the Defendant to apply to discharge or vary this order if any winding up of the Defendant commences, or an administrator of the Defendant is appointed under ss 436A, 436B or 436C of the Corporations Act, or the Defendant executes a deed of company arrangement, within 6 months of 7 September 2012. 26I will hear Cardinia further as to the terms of that order. I also note that Cardinia also sought such an order in respect of an earlier registration number 201204040113609 in the PPS Register. There was, so far as I am aware, no evidence before me as to the circumstances of that earlier registration, as distinct from the later registration. I will not make that order at this stage but will grant liberty to Cardinia to renew its application for that order if it considers it necessary given the order to which I have referred above. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 February 2013