I was talking to a group of lawyers the other day and one posed an interesting quirk of the PPSA legislation regarding the vesting of unperfected security interests in a grantor upon an insolvency event (s267 / s 267A of the PPSA). The question was… “What happens in the event that a company in liquidation is returned to solvency and control is handed back to the directors?”
Whilst this situation isn’t common, it does occur from time to time. The occasions that I have encountered typically involve the “filing” of a Statutory Demand by someone in the debtor company and then it is only upon a Liquidator turning up at their door that this inadvertent “filing” is realised. An application to court is then quickly made together with declarations as to solvency filed and an Order made for the Liquidator to retire.
In the past this hasn’t had much of an effect upon security granted by the debtor company but now this winding up results in the vesting of security interests in the debtor company. Accordingly, as there appears no provision in the PPSA to unwind this vesting, the company (previously in liquidation) may now find itself with unencumbered assets and a previously secured party scrambling to reassert its interest over these lost goods. Arguably any reassertion of rights would require the signing of a new Security Agreement.
I’m sure this loophole isn’t one that can be easily exploited and at the end of the day, the debt owed to the former secured party is still a debt due… it’s just now the debtor company has unencumbered assets with which to raise finance (and possibility an angry credit provider who will soon cease supply!). The lesson out of this for those parties with unregistered security interests is…? REGISTER!