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Fixing faulty registrations on the PPSR

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5 Sep 2016

The importance of secured financiers correctly registering their security interests on the Personal Property Securities Register (PPSR) cannot be overstated.

An error, say in the details of a lessee/borrower recorded on the PPSR will threaten the priority ranking the financier believes it has obtained by virtue of registration.

Recently the New South Wales Supreme Court considered whether it could rectify a registration error on the PPSR. In effect the court was being asked to backdate a corrected registration to the time from which the faulty registration began.

The court case

The case was called In the matter of Accolade Wines Australia Limited and other companies [2016] NSWSC 1023. Such was the amount at stake that the matter was heard in the NSW Supreme Court.

The financier comprised two companies of the Alleasing group (”Alleasing”). The companies applied to the court to extend the period in which a number of their equipment lease security interests could be correctly registered on the PPSR. They made this application after lodging new registration applications to rectify defects in the original lease registrations.

Faulty initial registrations

Originally, when the leasing deals closed, Alleasing staff in the normal course processed registration of the security interests arising from the companies’ leases by completing on-line the PPSR’s requisite virtual application form, called a “financing statement”.

Alleasing staff populated the relevant data fields in the financing statements with the ABN of each of the 31 grantor-lessees, rather than the ACN as required by rule 1.3 of Schedule 1 of the Regulations of the Personal Property Securities Act (“PPSA”).

Sometime afterwards the errors were discovered and Alleasing scrambled to correct them. Its staff re-registered the same security interests, but this time against the ACN of each customer lessee.

Of course these new registrations were made well outside the time periods specified by the PPSA. As they were more than 20 days after the leases originally came into force Alleasing’s security interests would fail entirely if a lessee went into administration or liquidation within six months of the new registration date.

There was a further time period problem too: because the later registrations were made more than 15 days after the equipment was delivered to the customer, the leases did not gain the super priority that they normally would as Purchase Money Security Interests (“PMSI”s).

This was a risky and embarrassing situation for a financier-lessor to be in, particularly involving as it did 31 separate leases registrations.

However, the customer – Accolade Wines, formerly BRL Hardy group - was a strong, profitable enterprise. Hence it was unlikely to get into trouble, at least in the short term. However, Accolade was under no obligation to help Alleasing out of its mess, although its robust finances turned out to be a positive for Alleasing in court.

So in a sole but unopposed, (“ex parte”) application to the court, Alleasing asked the judge to extend the time for registration of the security interests and also to extend the period to perfect those security interests as PMSIs. In effect it was asking the court to cancel its errors as if they’d never occurred.

Extensions granted

The court agreed to both Alleasing’s requests. Brereton J. exercised the court’s discretion under the Corporations Act to fix a later time for Alleasing’s PPSR registrations against Accolade. Similarly, the court reinstated the PMSI status of the leases.

The court considered that no Accolade creditors would be prejudiced by the exercise of its discretion, particularly as the Accolade companies were making their lease payments anyway and were otherwise of good financial standing.

No prejudice

Interestingly for equipment financiers, the court relied on the expertise of a PPSR expert from Alleasing’s law firm. The expert said that it was unlikely that a new or existing Accolade creditor searching the PPSR would be prejudiced by Alleasing’s incorrectly registered security interests.

The expert commented that this was because a “reasonably prudent financier” would have searched the PPSR across Accolade’s ABN, ACN and company name anyway. This approach is called the “triple check” procedure. Adopting such a procedure was recommended to all searchers of the PPSR following the ASIC charges transfer/migration fiasco at the time of the PPSA’s commencement in early 2012.

Also Alleasing’s expert claimed (and the court accepted) that subsequent general security deed (“ALLPAP”) financiers would be unconcerned about the existence (or not) of PMSIs because they could never take security over the PMSI assets as collateral anyway.

As a fall-back though the court ordered that Accolades’ ALLPAP security holders could apply to the court at any time for its decision to be reviewed, if they felt they had in fact been prejudiced.

Comment

The Accolade Wines case stands as a major set piece example of how a secured party can rectify, after the event, one or more careless registrations on the PPSR, so as not to lose their securities’ priority status. It helped that the customer group was financially strong. The court could feel comfortable in saying the potential prejudice to the customer’s other creditors was minimal.

It seems odd though that the PPSA regulations should continue to strictly require registration against a grantor’s ACN for validity, yet searchers of the PPSR can only be said to properly satisfy themselves about the status of a customer/grantor by adopting the so-called triple-check procedure.

Also the court readily accepted the proposition that ALLPAP security holders would typically uncover a defective PMSI registration anyway. And further that they would be unconcerned by PMSIs because commercially they are always considered off limits in an ALLPAP credit assessment. This all seems a bit strange.

The case illustrates further idiosyncrasies in the PPSA with which financiers and their lawyers must grapple.