Timing is everything- Operation of Section 588FL Corporations Act 2001 (Cth)

Carrafa, Goutzos & Lofthouse as (Liquidators of Relux Commercial Pty Ltd (In Liq) & Anor v Doka Formwork Pty Ltd [2014] VSC 570

Application of Personal Properties Securities Act 2009 (Cth) and the operation of section 588FL and section 588FN of the Corporations Act 2001 (Cth)

Background

In the course of its business, Relux Commercial Pty Ltd (in Liquidation) (“Relux”) rented formwork and associated equipment (“Formwork Equipment”) from Doka Formwork Pty Ltd (“Doka”).

There were two lease agreements between Relux and Doka dated 26 February and 14 March 2014 (Leases). Each of the Leases:

1. was initiated by an order in writing describing the Formwork Equipment;
2. commenced on the date the equipment either left the Doka warehouse or when Relux took delivery of it;
3. was for an indefinite term; and
4. incorporated the Doka General Terms and Conditions which were printed on the back of each invoice.

The Formwork Equipment was delivered to Relux by Doka prior to 21 January 2014, except for two deliveries that occurred on 26 February 2014 and on or about 31 March 2014.

On 20 February 2014, Doka registered a security interest in the Formwork Equipment held by Relux on the Personal Property Securities Register (PPSR).

On 7 April 2014, Administrators were appointed to Relux and the company was put into liquidation on 16 May 2014.

Declaratory relief was sought by the liquidators as to whether Relux or Doka had the entitlement to the Formwork Equipment.

Decision

The Court had to consider whether section 588FL of the Corporations Act 2001 (Cth) (Act) was applicable. Section 588FL of the Act ‘provides that certain interests covered by the Personal Property and Securities Act 2009 (Cth) (PPSA) that are not registered on the PPSR within a certain time, vest in the company that is being wound up or in administration.

Section 588FL provides for a PPSA security interest if it:

1. is perfected by registration (it does not apply to security interests perfected by possession or control); and
2. is enforceable against third parties;

and the registration time for the collateral is after the latest of the following times:

1. 6 months before the ‘critical time’;
2. 20 business days after the security interest was created, or the ‘critical time’ (whichever is earlier); or
3. such later time as the as the court orders

The Court held that the Leases fell within the definition of security interest as defined by s 12 of the PPSA, which includes ‘the interest of a lessor or bailor or goods under a PPS lease’ and that that each Lease was a ‘PPS lease’ under s 13 of the PPSA.

The ‘critical time’ for the purpose of s588FL was found to be 7 April 2014, which is when the administration of Relux began.

When considering the declaratory relief sought the Court noted the following dates applied in respect to the claimed registration of a PPSA security interest in the Formwork Equipment:

1. 20 business days after the security agreement that gave rise to the security interest came into force was 21 February 2014;
2. the critical time (being the appointment of the administrators) was 7 April 2014; and
3. the date six months before the critical time was 7 October 2013.

The Court held that the security interest in respect of all the Formwork Equipment delivered prior to 21 January 2014 vested in Relux on 7 April 2014, because it were not perfected by registration within 20 business days, being 19 February 2014 (rather, it had been registered on 20 February 2014).

The Court also held that the Formwork Equipment delivered on 26 February 2014 and on or about 31 March 2014 did not vest in Relux as they were subject to Doka’s registration on the PPSR within time.

Commentary

The Court confirmed the ‘draconian position’ ensure that security interests are registered within 20 business days of their creation, or risk losing them.

However, consideration should be given to the exceptions to section 588FL.

Section 588FN of the Act provides that the section 588FL vesting provisions do not apply to a PPSA security interest provided for by any of the following transactions, if the interest does not secure the payment or performance of an obligation:

1. a transfer of an account;
2. a transfer of a chattel paper;