Jonathon McRostie
Special Counsel •
Melbourne
Section 588FL and security interests granted after the "critical time": what insolvency practitioners should do now
5 minutes
Until the divergence between the approaches in OneSteel and Re Antqip applying sections 588FM and 588FL of the Corporations Act is resolved by an appellate court, the safest course remains to apply for an order under section 588FM of the Corporations Act fixing a later time for registration for any security interest granted after the critical time.
Security interests in personal property granted before the “critical time” will vest in the grantor company if they are not registered within certain time limits. The consequences are significant: a secured party will lose its security and rank as an ordinary unsecured creditor of the grantor.
In recent years, the Courts have developed divergent jurisprudence on the question of whether a security interest granted after the critical time will automatically vest in the grantor.
One line of authority, commencing with KJ Renfrey Nominees Pty Ltd v OneSteel Manufacturing Pty Ltd (2017) 120 ACSR 117 (OneSteel), held that section 588FL of the Corporations Act 2001 (Cth) applies to security interests granted after the critical time. As a result, those security interests immediately vest in the grantor if an order under section 588FM fixing a later time for its registration is not obtained.
The alternative approach in Re Antqip Hire Pty Ltd (in liq) [2021] NSWSC 1122 held that section 588FL does not apply to security interests granted after the critical time. That means an order under section 588FM fixing a later time is unnecessary.
Recent cases show a clear trend away from OneSteel and towards Re Antqip. However, to date, there is no binding appellate authority resolving the difference in the approach. For the reasons set out below, we consider the Re Antqip construction to be the preferable interpretation of section 588FL. Nevertheless, given the absence of binding appellate authority, insolvency practitioners ought to adopt a cautious approach in the interim and continue to seek orders under section 588FM as a precautionary measure – the practical implications of which are discussed in detail below.
The legislative framework and diverging lines of authority
Section 588FL has the effect that security interests in personal property granted by a company vest in the company if:
a relevant insolvency event occurs (an order or resolution for winding up, the appointment of administrators, or the execution of a deed of company arrangement); and
the security interest has not been registered on the Personal Property Securities Register earlier than six months before the date of the relevant insolvency event or within 20 business days after it was granted.
Section 588FM empowers the Court to fix a later time for the registration of the collateral in certain circumstances, to avoid the vesting of the security interest in a company if it is within the scope of section 588FL.
A question has arisen as to whether section 588FL applies to security interests arising after the "critical time" – the date of the relevant insolvency event – and thus whether such security interests automatically vest without an order fixing a later time for registration under section 588FM.
OneSteel
One approach, illustrated by her Honour Justice Davies in OneSteel, holds that section 588FL(2) does cover security interests granted after the critical time. Her Honour's reasoning relies on the emphasised text of section 588FL(2)(a):
(2) This subsection covers a PPSA security interest if:
(a) at the critical time, or, if the security interest arises after the critical time, when the security interest arises [the security interest is enforceable and registered]... [emphasis added]
Justice Davies reasoned that "the words of section 588FL(2)(a) expressly and unambiguously extend the scope of that subsection to cover a PPSA security interest that "arises after the critical time". A security interest that "arises after the critical time" is congruent with a security interest that is "granted" after the critical time. The time at which it vests will then depend on when it becomes enforceable. If it is enforceable at or before the critical time, it will vest immediately. If it becomes enforceable after the critical time, it will vest at the time it becomes enforceable.
Re Antqip
The second approach, illustrated by Justice Brereton in Re Antqip, holds that while section 588FL applies to security interests that arise after the critical time, it does not apply to security interests granted after the critical time. Accordingly, there is no need for, nor utility in, an order under section 588FM fixing a later time for registration for security interests granted after the critical time.
The essential departure in Justice Brereton's reasoning from that in OneSteel is his Honour's distinction between when a security interest is granted and when it may arise. While Justice Davies in OneSteel considered these terms to be "congruent", Justice Brereton reasoned that the effect of the words “if the security interest arises after the critical time” in section 588FL(2)(a) is to capture a case in which a security interest granted before the critical time, and perfected by registration, does not arise (by attachment, upon which it also becomes enforceable against third parties) until after the critical time. This may occur when a security agreement comes into force upon its execution, but does not attach to particular collateral until the grantor obtains rights in that collateral (eg. inventory acquired at a later time).
The weight of authority favours the OneSteel approach; however, since Re Antqip was decided in 2021, recent cases have tended to prefer Justice Brereton's reasoning.
Practical implications and recommended approach for insolvency practitioners
For insolvency practitioners considering granting security interests in the course of an external administration, the OneSteel construction necessitates an application under section 588FM to extend the time for registration for any security interest they propose to grant to prevent it vesting in the grantor company, because those security interests will invariably be after the critical time. By contrast, the Re Antqip construction does not require an application.
The Re Antqip approach removes the administrative burden and costs on practitioners having to seek relief under section 588FM, and significantly simplifies an aspect of debt restructuring undertaken as part of the administration of a company.
It may be argued that the commercial efficiency of Re Antqip comes at the price of removing the comfort that the judicial supervision under section 588FL provides. In considering applications under section 588FM, the Court is required to be satisfied of certain matters, such as whether extending time to register the security interest will prejudice other creditors, or whether it is just and equitable to do so. There may be good policy reasons for such a supervisory role for the Courts.
In our view, the Re Antqip construction is to be preferred for two primary reasons:
it better reflects the legislative drafting of section 588FL. The use of the past tense “granted” in section 588FL(1)(b) connotes a security interest that has already been granted when the insolvency event occurs. Therefore, the use of the word "arises" in section 588FL(2)(a) must be considered as a deliberate decision by the legislature to capture a scenario in which a security interest has been granted by the critical time but has not yet arisen; and
more importantly for practical and commercial reasons, the OneSteel approach unnecessarily encroaches upon an insolvency practitioner's role and duty in acting in the best interests of creditors, risks time-pressured restructuring proposals, and adds costs.
Notwithstanding our preference for the Re Antqip construction, insolvency practitioners who do not seek an order under section 588FM for security interests granted after the critical time remain exposed to material risk. If an intermediate appellate court were to affirm the OneSteel construction, any such security interest would vest in the grantor company with potentially severe consequences for the secured party and the overall viability of the restructuring. Until appellate authority resolves the divergence, we recommend that practitioners adopt the following practical approach:
Continue to seek section 588FM orders as a precaution. The safest course remains to apply for an order under section 588FM fixing a later time for registration for any security interest granted after the critical time. The cost and administrative burden of such an application is modest compared with the risk of vesting that would arise if the OneSteel construction is ultimately affirmed.
Register on the PPSR promptly. Regardless of which construction ultimately prevails at appellate level, security interests should be registered on the Personal Property Securities Register as soon as reasonably practicable after they are granted. Prompt registration reduces the window of exposure under either approach.
Seek specialist legal advice early. Given the unsettled state of the law, practitioners should obtain legal advice at the earliest stage of any administration in which security interests are to be granted after the critical time, particularly in time‑sensitive restructuring situations where delay in seeking section 588FM relief could itself be prejudicial.
Document all decisions carefully. If, after taking legal advice, a practitioner decides to rely on the Re Antqip construction and not to seek an order under section 588FM, that decision and its underlying reasoning should be contemporaneously documented. Clear documentation will be important if the position is subsequently challenged, particularly in the event of a future appellate decision in favour of OneSteel.
Monitor developing case law. Practitioners should remain alert to any appellate decision that resolves the position between OneSteel and Re Antqip. Any such decision will materially alter the preferred approach: either confirming that section 588FM applications are unnecessary for post-critical time security interests, or confirming that they remain essential.
If you have questions about how the current state of the law may affect a particular administration or restructuring, please do not hesitate to contact us.
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Jackson Macaulay
Senior Associate •
Melbourne
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