To vest the security interest or not to vest the security interest after a restructuring?

In a welcome decision for Australian restructuring, the Federal Court has confirmed that companies which have emerged from restructuring will be able to grant new security interests without needing a court order to ensure that the interest does not vest in itself (De Lage Landen Pty Ltd v Blayney Crane Services Pty Ltd, in the matter of Blayney Crane Services Pty Ltd [2020] FCA 1692; Clayton Utz acted for the successful third respondent, OneSteel Recycling Pty Ltd).

New security interests during liquidation, administration, or a DOCA

There are some curbs on a company in external administration; one of them is on its ability to grant new security interests.

Section 588FL of the Corporations Act 2001 (Cth) provides that any new security interest granted by a company under the Personal Property and Securities Act 2009 (Cth) (PPSA) which is not registered will, in specified circumstances, vest in the company grantor that is being wound up or in administration.

A new security interest granted by a company in external administration which:

• could only be perfected by registration; and
• was not the subject of an effective registration made prior to the appointment of the external administrator,

will only be in effective if a Court order is obtained extending the time for registration.

As a consequence of the decision of K.J. Renfrey Nominees Pty Ltd (Trustee), in the matter of OneSteel Manufacturing Pty Ltd v OneSteel Manufacturing Pty Ltd [2017] FCA 325, there have been several applications where relief pursuant to section 588FM of the Corporations Act 2001 has been sought, and granted, in respect of security interests granted following the appointment of an external administrator to the grantor.

The present case however, asked Justice Gleeson to consider the unique question of whether the scope of section 588FL of the Act extended to circumstances where the grantor company was previously in a form of external administration or subject to a deed of company arrangement, had since successfully recovered from the restructuring process and the grantor subsequently granted a security interest over its property.

… and after them

Distinguishing the present proceedings from prior case law, Justice Gleeson said that if companies post-restructuring were still subject to section 588FL :

"each and every security interest granted by the grantor companies immediately falls foul of s 588FL and requires relief from the Court pursuant to s 588FM from the time that security interest is first enforceable against their parties. DLL submitted that this cannot be the intended effect of ss 588FL and 588FM. I agree. Further, the proper interpretation of s 588 FL does not support such a construction, and KJ Renfrey is not authority for the broad proposition suggested by DLL, either expressly or impliedly."

Justice Gleeson also considered the context in which section 588FL of the Act is located: Part 5.7B, “Recovering property or compensation for the benefit of creditors of insolvent company”. In light of this location, she concluded that the intended operation of the vesting rule under section 588FL is to protect creditors where a company is under external administration. If it applied after a company ceases to be in external administration, it would not operate to protect creditors but would instead lead to the vesting of PPSA security interests in the company operating as a going concern. Extending the application of the vesting rule in such a way would, Justice Gleeson noted, treat recovered companies differently from those which had never been in administration and in a disadvantageous manner for no apparent purpose.

It would require that every company previously under external administration wishing to grant a security interest would unnecessarily and inconveniently need to validate such interests via a Court order under section 588FM of the Act in order to avoid the immediate vesting of the security interest in the company. Doing so, Justice Gleeson concluded, would undermine the objective of the Act which is to provide for the administration of an insolvent company in a way that maximises the chances of the company continuing in existence.