Imagine you are appointed as Administrator and according to a PPS search there are no creditors with any security. You were told by the director that there probably was at least one secured creditor, but nothing is registered on the PPSR. After taking on the appointment, you hear that there was a registration at some time, but it was removed by mistake. The creditor says that they want to take action to restore the registration and their priority. What can the creditor do?
We are all now well aware of the consequences of a defective or incorrectly removed registration for a secured creditor. Using strict legal terms, an unperfected security interest will vest in a grantor of security upon the grantor’s liquidation or the appointment of an external administrator. But there are avenues available to those secured creditors to have their registrations restored and their priority reinstated.
The Federal Court in SFS Projects Australia Pty Ltd v Registrar of Personal Property Securities FCA 846 confirmed that creditors can apply to the Registrar (under s 186 of the PPSA) for the restoration of a PPS registration that has been incorrectly removed by the secured party.For successful applicants, the effect of s 186 of the PPSA will be to restore the applicant’s priority to the collateral in question,which may be to the prejudice of later registered secured creditors or unsecured creditors (where the grantor is facing insolvency).
The Attorney General’s Department has reviewed the PPSA and made recommendations on this issue in their Final Report on the PPSA. Interestingly, the Attorney General has made a recommendation that is inconsistent with the decision of the Federal Court in SFS Projects. You will most likely have seen that ARITA has published the conflicting decisions on their website to draw practitioners’ attention to the dichotomy.
The Attorney General has taken the view that the Registrar is not the appropriate person to adjudicate applications under s 186 of the PPSA where the registration has been incorrectly removed by the secured party. Given the effect that restoration of data on the PPSR could have on third parties (including unsecured creditors) is the Attorney General correct in concluding that the Court is the more appropriate body to consider applications under s 186 of the PPSA?
Under s 186(1) of the PPSA, the Registrar has the power to register a financing change statement to restore data to the PPSR (that data may be part of a registration or the entire registration itself). The Registrar may restore data to the PPSR if it appears to the Registrar that the data was incorrectly removed. If data is restored under s 186 of the PPSA, the data is taken never to have been removed from the PPSR (s 186(2)).
Where the data was incorrectly removed by the Registrar, the matter is relatively simple- the secured party ought not to be prejudiced by an error on the part of the Registrar. But what is the case where the data has been removed by the secured party? In that scenario the matters to be considered by the Registrar are far more complex. The Registrar must then consider whether the restoration of a registration to the PPSR would result in the Registrar preferring the interests of the secured party (who is at fault, possibly inadvertently, in having incorrectly removed their registration) over the interests of third parties who would otherwise be in a better position.
In SFS Projects, the applicant had entered into an agreement for the assignment of certain registered security interests. There is a process for the assignment of security interests registered on the PPSR which facilitates the assignment of security interests without the assignee losing the perfected priority status of the registration. In SFS Projects the applicant failed to utilise that process and accidentally discharged the registrations that were meant to be assigned, thereby leaving the assignee with unregistered security interests. All of the parties consented to an application for restoration under s 186 of the PPSA; however the Registrar formed the view that he did not have the power to restore the data to the PPSR because the parties themselves had made the mistake, rather than the Registrar.
The Federal Court determined that the Registrar’s power extends to instances where registrations have been incorrectly removed because of mistakes by the lodging parties. The Court’s broader interpretation acknowledges that human errors are bound to occur when submitting forms online and gives applicants a quick and easy avenue for resolving these problems and correcting the accuracy of the register. Arguably, by allowing applicants to apply to the Registrar to resolve these matters, rather than putting applicants to the cost and time of making a Court application, the PPSR will be corrected much faster and less people are likely to be misled by inaccuracies on the PPSR.
Now, imagine the case of a credit clerk being asked by a customer to remove a registration. The clerk is told that the customer is selling its business and that the registration needs to be removed for the sale to go through.The clerk checks the file and determines that there is no debt due, so the registration is removed. But the clerk removes the registration over another ongoing customer, of a very similar name. A simple typing error!
Some year or so later, the ongoing customer defaults and the creditor hears of the imminent appointment of an Administrator. The creditor conducts a PPSR search and finds that they have no registered security interest. It was removed some year or so earlier!
We recently had involvement with an application under s 186 of the PPSA to the Registrar.
In circumstances similar to those above, the creditor immediately made an application to the Registrar, under s 186 of the PPSA, to restore the data. The creditor explained the simple mistake. The Registrar replied by providing details of the time of each search of the PPSR conducted by third parties that had been carried out by reference to Grantor since the incorrect removal of the registration (but without details of the party conducting the search). The creditor was able to dismiss a number of the searches (occurring after the date of the Administrator’s appointment), but was unable to provide any definitive comments as to the conduct of those third parties who procured a search pre-administration and found there to be no registration. Accordingly, the potential prejudice to those third parties of a restoration of the registration to the PPSR was unknown.
The Registrar expressed a concern to protect the interests of third parties and refused to register a financing change statement so as to restore the registration.
The creditor immediately filed an application with the Administrative Appeals Tribunal to review that decision. The application has not yet been heard.
The creditor could have appealed directly to the Federal Court, on points of law only, but with the ability to obtain an injunction restraining the sale of the property until the appeal is determined.
You will appreciate the complexity of this process, all to fix a simple typing error.
Notwithstanding the benefits of the Registrar being able to make the quick cheap and just decision, the effects of a decision to restore a registration on the PPSR are so wide reaching and potentially prejudicial to third parties that in our view the Courts are the more appropriate body to assess applications where the data was incorrectly removed by the secured party.
What is clear is that s 186 of the PPSA may shortly be amended and the process for review of applications for restoration of incorrectly removed data clarified. Until that time, applications can still be made to the Registrar.
We look forward to reporting to you as a resolution to this issue is developed and implemented into practice.