By Ariel Borland, Partner

In Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq) [2014] FCA 1034, Collier J was asked to interpret s 588FL of the Corporations Act 2001 (Cth) (CA) and s 21 of the Personal Property Securities Act 2009 (Cth) (PPSA). The decision confirms that a security interest must “attach” to collateral and be “enforceable” against third parties before it can be “perfected” under the PPSA.

In Pozzebon, the applicant’s security interest vested in the respondent company pursuant to s 588FL of the CA. Although the applicant’s security interest was registered at the date of the company’s administration, the applicant had failed to: (a) register within the strict time limits under s 588FL(2)(b); or (b) perfect the security interest by “other means” as required by s 588FL(2)(a).

Facts

The applicant, Mr and Mrs Pozzebon (together, the Pozzebons), were the joint trustees of the Pozzebon Family Superannuation Fund. On or about 24 December 2013, the Pozzebons loaned to the respondent, Australian Gaming and Entertainment Ltd (AGEL), $250,000. The loan was secured against AGEL’s personal property. It was not in dispute that the underlying security agreement gave rise to a “security interest” which had “attached” to AGEL’s personal property and was “enforceable” against third parties within the meaning of the PPSA.

On 19 May 2014, the Pozzebons registered the relevant security interest on the Personal Property Securities Register (PPSR). On 26 May 2014 administrators were appointed to AGEL. Liquidators were subsequently appointed to AGEL on 6 June 2014. It was not in dispute that the Pozzebons’ registration on the PPSR perfected the relevant security interest. AGEL subsequently informed the Pozzebons that the security interest had vested in AGEL pursuant to s 588FL of the CA.

Section 588FL

Section 588FL of the CA provides that a PPSA security interest will vest in a company immediately before the appointment of a liquidator, administrator or deed administrator if:

1. under s 588FL(2)(a):
   1. at the “critical time” the security interest is enforceable against third parties under the law of Australia; and
   2. the security interest is perfected by registration and by no other means; and
2. in accordance s 588FL(2)(b), the “registration time” for the collateral the subject of the security interest is after the latest of the following times:
   1. 6 months before the critical time; or
   2. 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.

There are other criteria under s 588FL(2)(b), however, the above are the most common and were relevant in Pozzebon.

The “critical time”, is the day on which a winding up or administration is taken to have begun. Plainly, the Pozzebons’ PPSR registration fell foul of s 588FL(2)(b), as it occurred within 6 months of the appointment of administrators and in excess of 20 days after entering into the relevant security agreement. However, the Pozzebons argued that the security interest was perfected by registration and “other means” such that it did not fall foul of s 588FL(2)(a).

The Pozzebons’ arguments were novel in this regard: they argued that the security interest was “perfected by attachment and enforceability and effective registration” and that “attachment and enforceability are not always necessary for perfection, and that an example of this is in respect of temporary perfection of which attachment and enforceability are not necessarily elements”: at [35].

The Decision

Collier J did not mince words when she described the Pozzebons’ position as “wrong” and “misconceived”. Her Honour made clear that attachment and enforceability are “mandatory prerequisites” to perfection under s 21 of the PPSA. Furthermore, the PPSA lists the limited ways in which a security interest may be perfected: by registration; possession or control. The only exception under the PPSA is where the perfection is “temporary”, in which case the PPSA deems the security interest to be perfected in absence of attachment and enforceability. As the Pozzebons had only perfected the security interest by registration and “by no other means”, the security interest had vested in AGEL under s 588FL of the Corporations Act.

However, Collier J omits to note that attachment, enforceability and registration need not occur in this order – they are merely prerequisites to perfection occurring. For example, it is possible (and often advisable) to register a security interest on the PPSR prior to entering a security agreement giving rise to the relevant (and registered) security interest. In this example, registration occurs first, then attachment and enforceability (at around the same time). This confers advantages on the secured party: it gives them the earliest possible priority time and means that they will not fall foul of the requirements in s 588FL(2)(b) (as the registration will not occur 20 days after the entry of the security agreement).

Conclusion

Pozzebon confirms a simple formula: “attachment and enforceability plus one of the final means [of perfection] set out in s 21(2) of the PPSA… are necessary requirements for perfection of a security interest”: at [49]. The decision has important lessons for secured parties and insolvency practitioners alike. On the one hand, secured parties should register a security interest before (or as soon as possible after) entry into a security agreement to avoid potentially disastrous consequences under s 588FL of the Corporations Act. On the other, insolvency practitioners should be alert to secured parties who have not met the requirements of s 21 of the PPSA and s 588FL of the Corporations Act, as that party’s security interest has most likely vested in the company immediately prior to the practitioners’ appointment.