FEDERAL COURT OF AUSTRALIA

Toll Energy and Marine Logistics Pty Ltd v Conlon Murphy Pty Ltd [2019] FCA 532

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 588FM and for the purposes of s 588FL(2)(b)(iv) of the Corporations Act 2001 (Cth) (“Corporations Act”), the following dates are fixed as the time for the Plaintiff to register on the Personal Property Securities Register (“PPSR”) the following registrations:

(a)    25 February 2019 – in respect of PPSR Registration number 201902250040139 (“the First Registration”); and

(b)    13 March 2019 – in respect of PPSR Registration number 2019031W 073941 (“the Second Registration”).

2.    Pursuant to s 293(1)(a) of the Personal Property Securities Act 2009 (Cth) (“PPSA”), the number of business days set out in s 62(3)(b) of the PPSA is extended by 215 business days such that each of the First Registration and the Second Registration fall within the time period prescribed by s 62(3)(b) of the PPSA as extended by this order.

3.    If, within 6 months of 25 February 2019 in respect of the First Registration or 13 March 2019 in respect of the Second Registration, a winding up of the First Defendant occurs, or an administrator is appointed to the First Defendant under ss 436A, 4368 or 436C of the Corporations Act, or the First Defendant executes a deed of company arrangement, liberty is reserved to any liquidator, administrator or deed administrator appointed to the First Defendant to apply to discharge or vary order 1.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

GLEESON J:

1    On 26 March 2019, I made orders sought by the plaintiff (“Toll Energy”) at an ex parte hearing pursuant to s 588FM of the Corporations Act 2001 (Cth) and s 293 of the Personal Property Securities Act 2009 (Cth) (“PPSA”).

2    These are my reasons for making those orders.

3    The orders concern two registrations on the Personal Property Securities Register (“PPSR”) made on behalf of Toll Energy after discovering a failure on its part to lodge or cause to be lodged any financing statement on the PPSR at any earlier time in connection with a charter of the vessel “Investigator II” (“vessel”) to the first defendant (“Conlon Murphy”).

4    The application was filed at a time when Conlon Murphy was the subject of a winding up application in the Supreme Court of Queensland. I was informed from the bar table that the winding up proceeding had recently been resolved by consent but that Toll Energy had no evidence as to the solvency of Conlon Murphy.

5    In support of the application, Toll Energy relied on the affidavits of:

(1)    Peter Jose Che Manuel Henry Neil Craney sworn 14 and 22 March 2019;

(2)    Adam Botica affirmed 14 March 2019; and

(3)    Kym Abbott affirmed 15 March 2019.

6    Mr Craney is a solicitor acting for Toll Energy.

7    Mr Botica is a “Senior Manager Commercial” employed by Toll Energy. Mr Botica worked with another employee of Toll Energy to provide the relevant financial information to ensure that the charter satisfied the company’s internal requirements, and was involved in seeking relevant internal approvals for the charter.

8    Ms Abbott is an in-house lawyer at Toll Group, the group of companies of which Toll Energy is a member, holding the title “Managing Legal Counsel – Energy, Government and Resources”.

Parties

9    Toll Energy, part of the “Global Logistics Division” of the Toll Group, provides logistics support to “Tier 1 Oil and Gas customers”, including chartering certain vessels to support its customers.

10    At all material times, Toll Energy was the owner of the vessel.

11    On or about 19 May 2018, Toll Energy and Conlon Murphy entered into an amended “BIMCO Standard Bareboat Charter (Code Name: BARECON 2001)” (“charter”) in respect of the vessel following a period of negotiation that began in December 2017. On about the same date, the vessel was delivered to Conlon Murphy to commence the charter terms.

12    Conlon Murphy consented to the relief sought.

13    The second to fourth defendants have each purported to take and hold an “all present and after-acquired personal property” (“AllPAP”) security interest over the assets of Conlon Murphy. In each case, the security interest was perfected by registration prior to either of Toll Energy’s registrations.

14    The second and third defendants stated that they did not oppose the relief sought. The fourth defendant agreed to subordinate its interests behind those of Toll Group for the asset.

Charter

Charter is a “security interest”

15    The “Charter Period” was a term defined by “Box 21” of the charter.

16    Box 21 of the charter provides that:

21.    Charter period

1 year, subject to the options in new clause 32 (as set out in Box 49 below) if the Charterers elect option a.(1) in new clause 32, the successive hire period(s) will be considered the Charter Period for the purposes of this Charter; …

17    New clause 32 provides that:

a.    Subject to a.(3) below, at the end of each 12 month period following the date that the Vessel is delivered to the Charterers, the Charterers must elect, by giving the notice in c. below, for

(1)    extend this Charter for a 12 month period; or

(2)    purchase the Vessel at the below rates (as applicable):

…

(3)    Notwithstanding the options in a.(1) and a.(2) above, the Charterers must exercise the Buy Option at the end of year 6 if it has not previously exercised a Buy Option.

18    Toll Energy submitted, and I accepted, that as a consequence of Box 21 and New clause 32, it is likely that the charter falls within the definition of a “PPS lease” within the meaning of s 13 of the PPSA on the basis that, by s 13(1)(c):

A PPS lease means a lease or bailment of goods:

…

(c)    for a term of up to 2 years that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed 2 years.

19    Section 12(3)(c) of the PPSA provides that a security interest includes: “(c) the interest of a lessor or bailor of goods under a PPS lease.”

20    Thus, a PPS lease is a “security interest” within the meaning of the PPSA, with the result that Toll Energy is thereafter not only the owner and charterer of the vessel but also a “secured party” in respect of the vessel for the purposes of the PPSA.

21    As s 17 of the PPSA explains, a “perfected” security interest has priority over an unperfected security interest and the security interest that has been continuously perfected for the longest time generally has the highest priority.

Conlon Murphy is the “grantor” of the security interest

22    By s 10 of the PPSA, “grantor” means, relevantly, a lessee under a PPS lease.

23    Accordingly, Conlon Murphy is the grantor in relation to the charter within the meaning of the PPSA.

Late lodgement of financing statement on PPSR

24    Notwithstanding that the charter probably creates a security interest for the purposes of the PPSA, Toll Energy did not lodge any financing statement on the PPSR in an effort to “perfect” its security interest until 25 February 2019.

25    On any view, 25 February 2019 is beyond 15 business days from the time Conlon Murphy took possession of the vessel (for the purposes of s 62(3) of the PPSA) and well beyond 20 business days from the creation of the security agreement (for the purposes of s 588FL of the Corporations Act).

26    As explained by Gleeson JA in In the matter of 4 in 1 Wyoming Pty Ltd [2017] NSWSC 407; (2017) 120 ACSR 167 (“Wyoming”) at [28], s 588FL deals with the vesting of PPSA security interests in the grantor if collateral is not registered within the latest of certain specified times. In such circumstances, s 588FL(4) provides that:

Vesting of security interest in company

(4)    The PPSA security interest vests in the company at the following time, unless the security interest is unaffected by this section because of section 588FN:

(a)    if the security interest first becomes enforceable against third parties at or before the critical time – immediately before the event mentioned in paragraph (1)(a);

(b)    if the security interest first becomes enforceable against third parties after the critical time – at the time it first becomes so enforceable.

27    The events mentioned in s 588FL(1)(a) are:

(i)    an order is made, or a resolution is passed, for the winding up of a company;

(ii)    an administrator of a company is appointed under section 436A, 436B or 436C;

(iii)    a company executes a deed of company arrangement under Part 5.3A …

28    Thus, as explained in Wyoming at [30]:

The effect of s 588FL(2) is that when a company is being wound up, an administrator is appointed, or a deed of company arrangement executed, any PPSA security interest which was perfected, registered, or enforceable against a third party after the latest of six months before the “critical time” or 20 days after the security agreement came into force or such later time as the Court may fix under s 588FM, vests in the company, for the benefit of creditors generally, and the secured creditor loses the benefit of the security: [Re Cardina Nominees Pty Ltd [2013] NSWSC 32] at [11]; Re Black Opal IP Pty Limited [2013] NSWSC 1225 at [6]; [Re Appleyard Capital Pty Ltd; 123 Sweden AB v Appleyard Capital Pty Ltd [2014] NSWSC 782; (2014) ACSR 629] at [8].

29    Separately, although in a similar way, the failure to lodge a registration on the PPSR in respect of Toll Energy’s security interest in the vessel within 15 business days from Conlon Murphy obtaining possession of the vessel disentitled Toll Energy to a “super priority” afforded to “purchase money security interests” (“PMSI”) under the PPSA. The interest of a lessor or bailor of goods under a “PPS lease” is a PMSI by s 14(1)(c) of the PPSA. As counsel for Toll Energy, Mr Mirzai, noted, the entitlement to a “super priority” reflects the fact that, but for Toll Energy supplying the vessel to Conlon Murphy, no other competing party would have an interest in the vessel.

30    The “super priority” is contained in s 62 of the PPSA, which relevantly provides:

(1)    This section sets out when a perfected purchase money security interest that is granted by a grantor in collateral or its proceeds has priority over a perfected security interest that is granted by the same grantor in the same collateral, but that is not a purchase money security interest.

…

(3)    The purchase money security interest has priority if:

(a)    the interest is in personal property, or its proceeds, other than inventory; and

(b)    the purchase money security interest is perfected by registration before the end of 15 business days after whichever of the following days applies:

(i)    or goods—the day the grantor, or another person at the request of the grantor, obtains possession of the property;

…; and

(c)    the registration that perfects the purchase money security interest states, in accordance with item 7 of the table in section 153, that the interest is a purchase money security interest.

31    Subsection 62(1) only applies where s 62(3) of the PPSA is complied with, unless extended by order of the Court pursuant to s 293(1)(a) of the PPSA.

32    Thus, because the interests of the second to fourth defendants were perfected by registration prior to either of Toll Energy’s registrations, without the making of orders under s 293 of the PPSA, Toll Energy could assert first ranking priority over the vessel.

Reason for failure to lodge registration on the PPSR

33    The evidence supports the following findings:

(1)    The Toll Group considered the implications of the PPSA on its business when the PPSA came into force, but that consideration does not appear to have crystallised into a process or protocol across business units within the Toll Group.

(2)    As a consequence of turnover in key staff who may have received some guidance about the implications of the PPSA when it first took force in Australia, Toll Energy continues not to have a PPSA process or protocol in place, although it is now looking to develop such a protocol in light of the events the subject of this proceeding.

(3)    Thus, whilst Toll Energy was aware of the PPSA in a general sense, the specifics concerning the proper characterisation of PPS leases, the requirement to register within a particular timeframe and the process of engaging with the PPSR were each issues that only came to the attention of Toll Energy relatively recently after engaging external lawyers on a separate but related matter concerning the potential arrest and possession of the vessel.

(4)    Had Toll Energy known about the specific implications of the PPSA on its first ranking entitlements to the vessel, Toll Energy would have lodged a financing statement in accordance with the prescribed requirements.

Steps taken since discovery of failure

34    After discovering the need to lodge a financing statement on the PPSR on 25 February 2019, Toll Energy attended to lodging the necessary registration that day.

35    Subsequently, advice from external legal representatives led to lodgement of a further registration in respect of the same interest in the same vessel on 12 March 2019.

36    In respect of their broader asset base (which is not the subject of this proceeding), Toll Energy noted that it is presently taking steps to address the deficiencies in its PPSR processes including notifying internal legal teams to consider the issue, engaging with external lawyers to seek guidance and setting up flags in its execution of documents process to alert relevant persons to when PPSR registrations ought to be considered.

Relief sought under section 588FM

37    Section 588FM of the Corporations Act provides that:

Extension of time for registration

(1)    A company, or any person interested, may apply to the Court (within the meaning of section 58AA) for an order fixing a later time for the purposes of subparagraph 588FL(2)(b)(iv).

Note:    If an insolvency-related event occurs in relation to a company, paragraph 588FL(2)(b) fixes a time by which a PPSA security interest granted by the company must be registered under the Personal Property Securities Act 2009, failing which the security interest may vest in the company.

(2)    On an application under this section, the Court may make the order sought if it is satisfied that:

(a)    the failure to register the collateral earlier:

(i)    was accidental or due to inadvertence or some other sufficient cause; or

(ii)    is not of such a nature as to prejudice the position of creditors or shareholders; or

(b)    on other grounds, it is just and equitable to grant relief.

(3)    The Court may make the order sought on any terms and conditions that seem just and expedient to the Court.

38    In Re Appleyard Capital Pty Ltd; 123 Sweden AB v Appleyard Capital Pty Ltd [2014] NSWSC 782; (2014) 101 ACSR 629 (“Appleyard”), Brereton J explained the purpose and effect of an order under s 588FM as follows, at [13]:

If the collateral is registered within 20 days after the security agreement comes into force, the security interest prevails over the interest of unsecured creditors, even if the company goes into liquidation or administration within six months. However, if it is not registered within that period, and the company goes into liquidation or administration within six months after it is registered, then the security interest vests in the company for the benefit of creditors generally – unless a later time is fixed under s 588FM. In other words, the effect of not registering within 20 days is to expose the secured creditor to the loss of its security if the company goes into liquidation within six months of the actual date of registration, when otherwise the security would have been effective even in the event of liquidation or administration within six months. Essentially, the purpose and effect of an order under s 588FM is to avoid the vesting of the security interest in the company if it goes into liquidation or administration within six months after the actual date of registration, and thereby preserve the secured creditor's security, to the necessary detriment of the unsecured creditors for whose benefit the security interest would otherwise vest in the company. The only utility of such an order is in the event that the company does go into liquidation or administration within six months …

39    On the issue of what constitutes “inadvertence” for the purposes of s 588FM, in Re Appleyard at [10], Brereton J noted that:

For the purpose of s 588FM(2)(a)(i), “inadvertence” includes failure to advert to or understand the requirement for registration within the specified period, and innocent error in the sense of failure to register through ignorance of the legal requirement to do so, or of the consequences of not doing so: Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq) [1991] 2 Qd R 456; (1990) 2 ACSR 692; Campbell Finance Pty Ltd v Vivstan Packaging (Aust) Pty Ltd (in liq) [1998] 2 VR 340; (1996) 22 ACSR 109; Freightlines Northern Territory Pty Ltd (1999) 32 ACSR 573, 576; In Cardinia Nominees [[2013] NSWSC 32] at [14]-[16].

40    In Re Cardinia Nominees Pty Ltd [2013] NSWSC 32 (“Cardinia Nominees”) at [15], Black J held that inadvertence goes beyond ignorance of the requirement to register entirely and “may also be established where a party operates under a mistake as to the consequences of failing to register a security interest”. His Honour continued:

The approach adopted in the case law of treating a matter of that kind as amounting to inadvertence is consistent with the emphasis placed in the case law upon the benevolent operation of predecessor sections, at least where an error of a secured creditor in not attending to registration of its security within time is innocent and does not result from any disregard of its statutory obligations: Re Kris Cruisers Ltd [[1949] 1 Ch 138]; National Australia Bank v Davis & Waddell [(Vic) Pty Ltd [2003] VSC 1; (2003) 44 ACSR 296].

41    The relevant prejudice to other creditors is that which arises from the delay in registration of the security interest rather than from the making of the order which, as Ward CJ in Eq noted in In Re Psyche Holdings Pty Ltd [2018] NSWSC 1254 at [33], is inevitable. At [40], her Honour gave, as an example, the case of an unsecured creditor who traded with the company on the faith of the register that did not show the relevant security interest.

42    In Re Accolade Wines Australia Ltd [2016] NSWSC 1023 (“Accolade Wines”) at [19], Brereton J said:

Where the grantor is shown to be financially secure, then it is unlikely that a “critical day” will arise in the foreseeable future, and the grant of relief will not likely affect any person adversely [Hewlett Packard Australia Pty Ltd v GE Capital Finance Pty Ltd [2003] FCAFC 256; (2003) 135 FCR 206]: indeed, if solvency is established that is likely to be the end of the matter [Investa Properties Pty Ltd v Westpac Property Funds Management Ltd (2001) [2001] NSWSC 1089; 187 ALR 462 at [31]]. However, if the Court is not satisfied that there is no risk that unsecured creditors could be adversely affected, the unsecured creditors (or their representatives) are entitled to be heard against the making of an order, though this may sufficiently be achieved by suspending the operation of the order, or by imposing a term reserving leave to apply to set it aside in the event of a liquidation or administration (a Guardian Securities condition) [Appleyard at [25]; Re Guardian Securities Ltd [1984] 1 NSWLR 95 at 97; see also Re Cinema Art Films [1930] NZLR 500 at 502–3; Re L H Charles & Co Ltd [1935] WN 15; Bevillesta Pty Ltd v Imagine UN Ltd [2009] VSC 50; 69 ACSR 574 at [58]].

43    Toll Energy submitted and I accepted that, in the present case, the inadvertence was two-fold, namely:

(1)    a failure to properly characterise the underlying transaction (being a potentially long-term lease arrangement) as a “security interest” for the purposes of the PPSA; and

(2)    even if so properly characterised, a failure of the responsible person(s) who caused Toll Energy to enter the transaction to then lodge a registration on the PPSR within the timing restraints provided for by s 588FL of the Corporations Act and s 62 of the PPSA.

44    On the basis of Mr Botica’s evidence I accepted that, had he known of the requirement to register earlier, he would have caused a registration to be lodged on the PPSR forthwith.

45    As I was satisfied that the failure to register the collateral earlier was accidental, it was unnecessary to consider whether Toll Energy was entitled to the relief sought on the basis of an application of either s 588M(2)(a)(ii) or s 588M(2)(b).

46    However, in considering whether to exercise the discretion conferred by s 588M, I noted that I was satisfied the order sought was not of a kind that would prejudice the position of secured creditors because the order has no effect on the priority of the underlying security interest: cf. Re Appleyard at [15]. See also In the matter of Mehajer Bros Pty Ltd [2017] NSWSC 1852 at [18] per Brereton J.

47    I also noted that the potential competing secured creditors had been joined to the proceeding and did not oppose the relief sought.

48    Liberty for an external administrator to apply to vary or set aside any order extending time to register is preserved to protect the interests of any unsecured creditor who might be adversely affected by the orders made.

Relief under section 293

49    When considering whether or not to grant relief under s 293(1)(a) of the PPSA, the Court must take into account the following matters in accordance with s 293(3):

In making an order to extend a period under subsection (1), the court must take into account the following:

(a)    whether the need to extend the period arises as a result of an accident, inadvertence or some other sufficient cause;

(b)    whether extending the period would prejudice the position of any other secured parties or other creditors;

(c)    whether any person has acted, or not acted, in reliance on the period having ended.

Accidental or due to inadvertence or some other sufficient cause

50    In respect of what constitutes “accident” or “inadvertence” for the purposes of s 293(3)(a) of the PPSA, the concept of accident or inadvertence for the purposes of s 588FM of the Corporations Act is the same as that for the purposes of s 293(3)(a) of the PPSA: Accolade Wines at [26]; Wyoming at [63].

51    For the reasons set out above, I was satisfied that the need to extend the relevant period arose as a result of an accident or inadvertence.

Prejudice and reliance

52    Under the PPSA, a PMSI holder ordinarily has the benefit of priority as against competing perfected security interests in the same collateral, in accordance with s 62(1), irrespective of a competing security interest holder’s awareness, consent or otherwise in respect of the grant of the PMSI, provided that s 62(2) or s 62(3), as the case may be, has been complied with.

53    In Accolade Wines at [27], Brereton J noted that the prejudice referred to in s 293(3)(b) is distinct from the prejudice considered under s 588M, stating:

[T]he prejudice referred to in s 293(3)(b) is prejudice from “extending the period”. This directs attention not to the impact on other secured parties or creditors of the delay in registration, but to the impact of making an order extending the period; to evaluate prejudice for that purpose, one compares the position of creditors if an extension is granted, with their position if no extension is granted, and usually there will be a difference because priorities will be disturbed.

54    At [28] and [29], Brereton J considered the position of an AllPAP security interest holder in the following terms:

Although no competing security interests have been granted to other secured parties specifically over any particular collateral in which the Plaintiffs have a PMSI, some of the Grantors have granted AllPAP security interests to other secured parties, in some cases before (“Earlier AllPAPs”) and in others after (“Later AllPAPs”) the date on which the Plaintiffs made their initial registrations. Whether granted before or after the initial registrations, those AllPAP security interests are now entitled to priority over the Plaintiffs’ PMSIs. If an order is made under s 293(1) extending the period for registration of the Plaintiffs’ PMSIs, the AllPAP holders will lose that priority in respect of the particular collateral which is the subject of the Plaintiffs’ PMSIs. It follows that they will be prejudiced by extending the period.

However, such prejudice, while not irrelevant, is not conclusive. Appleyard Capital explained that in the context of s 588FM, prejudice to other creditors could not be conclusive because otherwise an order would never be made in any case in which it mattered: in any case where an extension was of utility, there would inevitably be prejudice by removing the collateral from the pool available to satisfy unsecured creditors generally, and enabling that result was the fundamental purpose of the provision. The same applies here: the essential purpose of granting an extension is to reinstate the priority to which a PMSI would otherwise be entitled over prior AllPAPs (as it will in any event have priority over later AllPAPs), and thus in any case in which the remedy is of any practical utility, there will be prejudice to a prior AllPAP holder.

55    None of the second to fourth defendants have sought to demonstrate any relevant prejudice, or to contend that they have acted, or not acted, in reliance on the relevant period having ended.

56    Toll Energy submitted that if an AllPAP security interest holder could demonstrate that they took their interest over Conlon Murphy relying on what appeared on the PPSR, and having found no registration by Toll Energy, then that may cause the Court to refuse the relief sought under s 293 of the PPSA. However, there is no such suggestion in this case.

57    Whatever identifiable interest any competing secured party might have otherwise had, they have voluntarily disclaimed it in favour of Toll Energy (in the case of the fourth defendant) or indicated that they did not oppose the relief being sought (in the case of the second and third defendants).

58    Thus, taking into account the matters specified in s 293(3), I was satisfied that it was just and equitable to make the relief sought pursuant to s 293(1)(a) of the PPSA.

Associate:

Dated:    16 April 2019

SCHEDULE OF PARTIES