In the years following the commencement of the Personal Property Securities Act 2012 (Cth) (PPSA) and the associated changes made to the Corporations Act 2001 (Cth) market practice has been to make an application to the Court under section 588FM to effectively validate the grant of security by a company in external administration. That practice developed following earlier case law on section 588FL of the Corporations Act. However, a recent decision of the Supreme Court of New South Wales turns that practice on its head, and may pave the way for lenders to take security from an externally administered company without the need for a Court to validate it.
In Re Antqip Hire Pty Ltd (in liq)  NSWSC 1122, Justice Brereton held that section 588FL of the Corporations Act does not invalidate a security interest granted after the grantor enters a voluntary administration, deed administration or winding up. The judgment departs from a number of previous decisions that held that a Court application was necessary to validate the security interest (by allowing a later time for registration) to prevent it from vesting.
Antqip refinances while in external administration
Antqip Hire Pty Ltd entered voluntary administration in February 2014 and then executed a deed of company arrangement. Antqip refinanced its secured debt while in deed administration and granted an all-assets security interest in October 2014 to the incoming financier. While still subject to a deed of company arrangement, Antqip went into voluntary liquidation in May 2019.
Did the new financier's security interest "vest" in Antqip when it was granted in October 2014, pursuant to section 588FL, because it was granted after Antqip had entered external administration in February 2014? Section 588FL has been understood to cause a security interest to vest if granted after the beginning of the grantor's voluntary administration, deed administration or winding up (defined in section 588FL(7) as the "critical time").
In Antqip's case, the "critical time" was the beginning of its voluntary administration in February 2014. The new financier's security interest was granted and arose in October 2014. The new financier therefore applied to Court pursuant to section 588FM to validate the security interest.
What section 588FL of the Corporations Act does, according to Justice Brereton
Justice Brereton found that the new financier's security interest did not vest. Departing from earlier cases to the effect that a security interest vests if it is granted and arises after the "critical time", he held section 588FL was intended to apply to security interests granted before the critical time and attaching after the critical time, but not to security interests granted after the critical time.
Although the cases had previously said that it was "well established" that section 588FL applies to the grant of a security interest by a company under external administration, doubt has now been cast on the earlier decisions. Justice Brereton's decision departs from what had become the accepted understanding of section 588FL. With respect, this construction has much to commend it. Justice Brereton departed from the earlier decisions by process of construction of section 588FL, by looking at analogous Corporations Act provisions in relation to dispositions of property before and after external administration. He observed that the genesis of the earlier decisions was a judgment in which the remedial order under section 588FM was made "for abundant caution".
What lenders to externally administered companies should do now
Previously, a party taking security from an externally administered company would have made an application to the Court pursuant to section 588FM. Re Antqip Hire Pty Ltd (in liq) has now opened the door to the possibility that this will not be necessary in the future.
Justice Brereton's construction is, however, directly contrary to a number of Federal Court and NSW Supreme Court cases, stemming from K J Renfrey Nominees Pty Ltd v OneSteel Manufacturing Pty Ltd, holding that section 588FL applies to a security interest granted after the critical time. Therefore, until the matter is considered at appellate level, or via legislative intervention, the prudent course for a party taking security from an externally administered company would be to make a Court application. The application could seek a declaration that section 588FL does not apply to the security interest and, in the alternative, seek relief under section 588FM.
Whatever the correct construction of section 588FL, Court applications for rescue finance will not be completely avoidable. Voluntary administrators who cause a company to borrow money will continue to go to Court to seek relief from the personal liability imposed by section 443A of the Corporations Act. In those circumstances, the incremental costs of also seeking section 588FM relief would be modest. Moreover, such relief is likely to remain a condition precedent to funding until the section 588FL construction divergence is resolved.
How can the differences in the authorities be resolved to clarify section 588FL's operation once the grantor is in external administration??
Future judgments will need to decide whether the correct understanding of section 588FL is the one in Re Antqip Hire Pty Ltd (in liq) or the one in K J Renfrey Nominees. In the meantime, the position is uncertain.
The quickest solution would be for Parliament to repeal section 588FL, as recommended by the Whittaker Report in 2015. Section 588FL does not achieve very much, if anything. It arguably incentivises timely registration, but the PPSA already does that with its priority, taking free and vesting rules. The additional, arbitrary registration deadline in section 588FL only serves to burden a secured party who has forgotten to register within 20 business days, as well as lenders to externally administered companies, with the need to make a Court application.
The next best solution is to wait for the Courts to come to a consensus on whether section 588FL applies to a security interest granted after the critical time, or for an appellate Court to resolve the differences in the authorities. A lender could then take security from an externally administered company without needing to make a Court application. That would be a positive step in facilitating restructurings, particularly given that funding provided to an externally administered company is usually provided on terms that it be secured, and section 588FM applications require time and resources but do not serve any real policy purpose.