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Insolvency Law Update: To Vex Or Not To Vest, That Is The Question

Insolvency: 13 July 2023

Author: Amanda Robinson and Paolo Tatti - Our People

A Recent Case Study of Cathro, in the matter of Cubic Interiors NSW Pty Ltd (in liq) [2023] FCA 694

On 26 June 2023, the Federal Court handed down a decision on a question which has vexed insolvency practitioners and their legal advisors for some time given inconsistent decisions being handed down by the Federal Court and State Supreme Courts; namely, does s 588FL of the Corporations Act 2001 (Cth) apply to security interests granted after the ‘critical time’ (in general, being the date on which an insolvency practitioner is appointed).

The big question; are the days of uncertainty over?

For now, at least, insolvency practitioners may be able to take some comfort in the decision of Cheeseman J in Cathro, in the matter of Cubic Interiors NSW Pty Ltd (in liq) [2023] FCA 694 (Cathro) which after considering various decisions going each way, has answered the question as ‘no’.

Vesting of PPSA Security Interests

In almost every instance where this has arisen, the issue posed for an insolvency practitioner is this; can an insolvency practitioner enter into an arrangement where the Company, whilst in liquidation, grants a PPSA security interest to a third party.

In Cathro, this arose because the liquidator entered into a Deed of Settlement and Release with a secured creditor (being the National Australia Bank) and simultaneously with a third party who would advance sufficient funds to discharge the deal done with the NAB. As part of this, the liquidator granted the third party an ‘all present and after-acquired property’ – known as an ALLPAP - security interest.

In this instance, the security interest was clearly being granted after the critical time (s 588FL(1)(b)) and Cheeseman J ultimately held that s 588FL does not cover security interests granted after the critical time.

If that was the end of the enquiry, liquidators could have confidence that the provision would no longer be interpreted as to vest the security interest in the insolvent company -- but we all know better than to speak too soon.

The diverging views

At [9] of Cathro, Cheeseman J helpful summarised the divergence in existing case law as follows:

The divergence in the authorities which is presently relevant is whether, for the purpose of s 588FL(1)(b) a PPSA security interest that is granted after the “critical time” is covered by s 588FL(2). As between the two lines of authority, it is common ground that s 588FL(2) may cover a security interest that arises after the critical time. The point of difference is as to whether s 588FL(2) can cover a security interest that is granted after the critical time. The first and earlier line of authority is to the effect that s 588FL(2) does cover securities granted after the critical time. No distinction is drawn between a security interest being “granted” and a security “arising”. The second and more recent line of authority is that security interests that are granted after the critical time are not covered by s 588FL(2) because there is a distinction between the use of “granted” in s 588FL(1)(b) and “arises” in s 588FL(2)(a). Accordingly, a security interest which “arises” after the critical time will only be covered by s 588FL(2) if it was granted at or before the critical time.

The cases which have plagued insolvency practitioners commenced with the decision of Davies J in K.J. Renfrey Nominees Pty Ltd (Trustee), in the matter of OneSteel Manufacturing Pty Ltd v OneSteel Manufacturing Pty Ltd [2017] FCA 325 – which appears to have been followed in at least four other decisions of the Federal Court.

Then came along the decision of Brereton JA in Re Antqip Pty Ltd (in liquidation) [2021] NSWSC 1122, which joyfully for insolvency practitioners, held that the previous decisions were wrongly decided. A further decision of the Federal Court earlier this year agreed with Re Antqip.

In a detailed decision analysing the competing interpretations, Cheeseman J concluded at [55]:

Having considered the two competing lines of authority, I have respectfully reached the conclusion that s 588FL does not cover security interests granted after the critical time. Like Jackman J in Revroof, I find the analysis in Re Antqip compelling. The approach accords with the well-established principles of statutory construction.

But what does this really mean?

Where issues like this have a national effect, and different Courts can reach different views, the case law provides that Judges must follow each other’s decisions unless they are ‘plainly wrong’. Justice Cheeseman said the following at [17]:

In this case I am confronted by a divergence in the single judge authorities in co-ordinate Australian courts on the interpretation of uniform national legislation. The competing approaches are best illustrated by the decisions in K.J. Renfrey and Re Antqip. Notwithstanding that there are more decisions in the K.J. Renfrey line of authority, there is not a preponderance of authority either way — in substance, although not numerically, on the particular point the single judge decisions are fairly evenly balanced, the critical analysis on the point being undertaken in K.J. Renfrey and Re Antqip. The emergence of two distinct lines of authority on the interpretation of s 588FL speaks to the opacity of the text of the section. That is particularly so when, if I may borrow from Brereton JA’s observation, the competing decisions are made by learned judges well versed in Corporations law.

The big issue is what the next case decides. Conceivably, a different Judge could say that the decisions in Re Antqip and Cathro were wrongly decided and should have followed the earlier decisions (commencing with OneSteel). Alternatively, a judge might determine that it is better to follow the more recent decisions, even if they are not sure they are correct.

One thing is for certain (death and taxes aside); until this issue is determined by an appellate Court – be it the Full Federal Court or a State Court of Appeal – there will be no certainty as to the approach. However, insolvency practitioners and lawyers alike will hopefully find some comfort in the more recent decisions which, as Cheeseman J observed, combats some of the practical ramifications which have arisen since this question was first decided and will hopefully alleviate the burdens faced by insolvency practitioners – for now…

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