In a recent case a leasing company lost $23 million worth of leased equipment because it had registered the lease against the lessee company's ABN rather than its ACN – involving just two extra digits. The equipment vested in the lessee company when it went into voluntary administration. The court upheld the constitutional validity of the provision under which this occurred. Senior Finance Counsel Diccon Loxton and Partners Karla Fraser and Renee Boundy report on the case: Alleasing Pty Ltd v Onesteel Manufacturing Pty Ltd (Admins Apptd)  NSW SC 21, a decision of the New South Wales Supreme Court.
This decision shows the need for lessors and other secured parties to take great care in getting the details right in registrations under the Personal Properties Securities Act 2009 (Cth). If the secured party enters the wrong details, the registration can in certain cases be ineffective, and the security interest unperfected. If the grantor of a security interest goes into voluntary administration, bankruptcy or liquidation, any unperfected security interest automatically vests in the grantor under section 267 of the PPSA.
The decision, while harsh, is consistent with the general view in the market as to how the PPSA operates. But it is a useful reminder of the risks and the need for care.
The PPS Regulations are prescriptive as to the details which must be used in a financing statement to register a security interest. Parties are often confused by the requirements as to recording the grantor, particularly in relation to trusts. It is easy to get them wrong, and that is not uncommon.
The decision also dismisses suggestions that the provisions in the PPSA and the Corporations Act which vest unperfected security interests in grantors on insolvency are invalid because they breach constitutional bans on the acquisition of property on unjust terms.
A leasing company leased equipment and parts to a company for six years. The leases were PPS leases as defined in the PPSA, and therefore security interests. The lessor registered the leases under the PPSA, but gave as the details of the grantor its ABN (Australian Business Number) rather than its ACN (Australian Company Number). The PPS Regulations require that an Australian company grantor be recorded by its ACN.
The lessee company went into voluntary administration. Under s267 of the PPSA upon a voluntary administrator or liquidator being appointed to a company, all unperfected security interests vest in the grantor company.
The court held the registration was ineffective, and the security interest therefore unperfected, and the security interest vested in the lessee company. As the security interest was ownership of the equipment and parts, this meant that all the equipment and parts vested in the company, leaving the lessor with only an unsecured claim against the company.
The court said the following.
- The registration was ineffective under s164(1)(b) on the basis that there was a defect mentioned in s165(b) of the PPSA – a search of the register by reference to the grantor's details required to be included in the register would not discover the registration. For an Australian company the PPS Regulations require its ACN, not its ABN.
- It was also ineffective under s164(1)(a). It was seriously misleading because a search against the grantor's ACN would not disclose it.
- The vesting of the equipment was not an acquisition on unjust terms, and therefore not invalid under s51(xxxi) of the Australian Constitution and s252B of the PPSA, for a number of reasons, including the following. It is not an acquisition of property at all. Even if it were an acquisition, it is not for the application of the property for any purpose in respect of which the Commonwealth has power to make laws, and it represents the genuine adjustment of competing rights between owners of interest in personal property.
- No extension of time is available under s588FN of the Corporations Act 2001 (Cth) because the relevant security interest was unperfected at the 'critical time' (that is, when the voluntary administrator was appointed). And even if relief could be given, the security interest had already vested under s267, and an extension of time could not undo that vesting.
- Check your processes for registering security interests (don't forget these include leases and retention of title arrangements).
- If that check discloses potential possible issues for current registrations, check the registration details, and correct them if necessary (applying for extensions of time where appropriate).
- When searching the register against a company, search against its ACN. Note it is common practice to search also against its name and ABN to deal with potential issues on security interests migrated from the ASIC register.
- When conducting due diligence, check the above.