Out Of The Paddock - Vesting Rules Held Not To Apply To Security Agreements Entered Into After The Critical Time

In the recent decision in Re Yeeda Pastoral Company Pty Ltd [2004] WASC 120, the WA Supreme Court considered the interesting and ongoing question of whether the vesting rules in section 588FL of the Corporations Act 2001 (Cth) (Act) apply to a security interest that is created after the time at which administrators are appointed, and the associated question as to whether the secured party in these circumstances must obtain an order extending time for registration of the security interest under section 588FM of the Act.

In this case, administrators (Administrators) were appointed to Kimberly Meat Company Pty Ltd (KMC) on 27 February 2024, and then to KMC’s parent company Yeeda Pastoral Company Pty Ltd (Yeeda) and other companies in the group on 29 February 2024.  The Administrators then entered into a funding agreement with ADM Capital Investments Pte Ltd (ADM) which was guaranteed by KMC.  The KMC guarantee was supported by an all-assets security agreement in favour of ADM.

The Administrators then sought orders to confirm that they would be justified in not seeking an extension of time under section 588FM to register the security interest in favour of ADM given it was a post appointment security interest, or alternatively and to the extent necessary, that an extension of time be granted under section 588FM.

BACKGROUND

Yeeda was established in June 2006 and operates a pastoral operation in the Kimberley region of Western Australia.  It is the parent company of a number of wholly owned subsidiaries including KMC, and the group owns and operates a number of assets and businesses including:

• KMC’s Colourstone Abbatoir, which processes cattle from the group’s landholdings as well as other landholders in the Kimberly region;
• two cattle stations;
• cattle;
• 8 residential properties; and
• an interest in the Yeeda Station Carbon Project.

KMC is the primary operating subsidiary of the group.

Following their appointment, the Administrators identified that the group has:

• secured debts of approximately $50.4 million;
• employee entitlements of about $840,000; and
• unsecured creditors totalling approximately $53 million.

The Administrators subsequently formed the view that all of the entities to which they had been appointed (including Yeeda and KMC) entities are insolvent, save for one company which appears to be a dormant company.

The Administrators also formed the view (in light of the limited cash available in the administration) that in order to preserve the value of the assets of the group, it was necessary for the Administrators to secure appropriate funding to pay for the care and maintenance of the assets.

On 26 March 2024, after a review of potential funding options, the Administrators entered into a funding agreement with ADM (Loan Agreement) with the following key terms:

• facility for $5m, to be provided in three tranches;
• available to the Administrators in their capacity as the administrators of four specified group entities including Yeeda and KMC; and
• as KMC is the primary operating subsidiary, KMC to guarantee the performance of the Administrators’ obligations under the Loan Agreement; and
• as security for the guarantee, KMC to provide an all-assets general security agreement (GSA) in favour of ADM.

The Administrators then applied, in their capacity as administrators of KMC, for:

• an order pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) (forming schedule 2 to the Act) (IPS) that they would be justified in not seeking relief under section 588FM of the Act in respect of the time for registration of the ADM security interest on the Personal Properties Securities Register (PPSR); or
• to the extent necessary, an order pursuant to section 588FM of the Act that the registration time for the ADM security interest be fixed as the date that is 20 business days after the GSA came into force for the purposes of section 588FL(2)(b)(iv) of the Act.

DECISION

In dealing with this issue, Justice Hill noted the following preliminary matters:

• there is no question that the ADM security interest under the GSA is a security interest within the meaning of section 12 of the Personal Properties Securities Act 2009 (Cth) (PPSA);
• however, the GSA was created after the appointment of the Administrators, and the registration of the ADM security interest will be after the “critical time” referred to section 588FL(7)(a) of the Act; and
• at present there is a divergence in the authorities as to the extent to which section 588FL applies to security interests that arise after the “critical time” and before the company is no longer subject to external administration.

Justice Hill then made the following observations as to the state of the authorities:

• on the one hand, Davies J held in KJ Renfrey Nominees Pty Ltd (Trustee) in the matter of OneSteel v OneSteel Manufacturing Pty Ltd [2017] FCA 325 that where a security interest is registered after the commencement of a winding up or the appointment of an administrator, then the security interest will be taken to have vested on creation even if it was registered within 20 business days of the security agreement unless an order is made under section 588FM extending the time for registration.  This approach has been adopted by other judges at first instance in at least three other published judgments;
• however, this construction was rejected by Brereton JA (sitting at first instance) in Re Antqip Hire Pty Ltd (in liq) [2021] NSWSC 1122, who held that on its proper construction, section 588FL does not apply to security interests arising from security agreements entered into after the “critical time”, and to the extent that the section refers to security interests “arising” after the “critical time” this should be read to mean security interests arising after the critical time under a security agreement entered into before the critical time.  This view has been adopted by other judges at first instance; and
• in particular, Cheeseman J considered the two lines of competing authority in Re Cubic Interiors NSW Pty Ltd (in liq) [2023] FCA 694 (Re Cubic Interiors) before concluding that Brereton JA’s construction of section 588FL should be preferred due to the clear distinction between the use of “granted” vs “arises” in the various relevant sections of the Act as well as the interrelationship between section 588FL and the broader legislative framework set out in the Act and in the PPSA.

Having considered all of these matters, Justice Hill adopted the reasons of Cheeseman J at [55] to [84] of Re Cubic Interiors in preferring the analysis of Brereton JA, and in finding that section 588FL did not apply to the ADM security interest as it arose from a security agreement (the GSA) which had been entered into after the critical time.

Justice Hill granted the relief sought under section 90-15 of the IPS, making a direction that the Administrators are justified in not seeking relief under section 588FM of the Act.

However, as there is no intermediate appellate authority on the proper construction of section 588FL, and out of what appears to be an abundance of caution, Justice Hill also made an additional order (conditional on there being a requirement for an extension of time for registration under section 588FM of the Act) to also grant the section 588FM extension of time for registration of the ADM security interest.

LAVAN COMMENTS

This case provides further support for the proposition that section 588FL does not apply to security interests arising under security agreements entered into after the critical time.

It also highlights the relative dearth of authority, let alone intermediate appellate authority, on the proper construction and operation of the PPSA despite how long that act has now been in operation.

If you have any questions about this case or about the operation of the vesting rules in section 588FL, the experienced Lavan team is here to help.