Artboard 1Icon/UI/CalendarIcons/Ionic/Social/social-pinterestIcon/UI/Video-outline

First civil penalty imposed for invalid security interest registration

19 March 2024

5 min read

#Corporate & Commercial Law

Published by:

Miles Leyden, Alexandra Stiliadis

First civil penalty imposed for invalid security interest registration

In a first of its kind decision, Sarah C Derrington J in Registrar of Personal Property Securities v Brookfield [2024] FCA 29 (Brookfield) has invoked the civil penalty provisions under section 151 of the Personal Property Securities Act 2009 (Cth) (PPSA) by ordering the Respondent Mr Brookfield to pay a penalty of $30,000 for repeatedly attempting to register a security interest, which was found to be invalid, on the Personal Property Securities Register (PPSR).

Section 151(1) of the PPSA provides that a person must not register a financing statement (i.e. make an application to register a security interest) without a reasonable belief that the secured party described in the application is in fact the secured party or will become the secured party. Further, section 151(2) also requires that a registration be removed within five business days if the secured party was never a secured party and there are no reasonable grounds to believe that the party is secured.

Under the PPSA, for a person to be a secured party, they must hold a security interest, which is defined in section 12(1) as an interest in personal property provided for by a transaction that secures payment or performance of an obligation. This generally requires that a security interest be granted by a security agreement or appropriate security clause.

What happened in this case?

Between March 2016 and March 2019, Mr Brookfield sought on seven occasions to register a security interest allegedly granted by Real Estate Now Pty Ltd (Real Estate Now), as grantor, to Mr Brookfield, as the secured party (Previous Registrations). The debt that Mr Brookfield was seeking to secure arose from a rent roll agreement between Blueprop Pty Ltd (Blueprop), as seller, and Real Estate Now, as buyer. Blueprop had assigned the purported debt owed to it by Real Estate Now to Mr Brookfield via a deed of assignment.

On each of these occasions, the Registrar issued an amendment notice informing Mr Brookfield that the Registrar did not believe he held a valid security interest that was registrable on the PPSR. The Registrar also notified Mr Brookfield that registering a financing statement on the PPSR in the absence of a valid security interest may constitute an offence.

On at least four occasions, Mr Brookfield was invited to challenge the Registrar’s conclusion before the Administrative Appeals Tribunal, which he failed to do within the prescribed time frames. While this proceeding was not commenced in relation to the Previous Registrations, they are important to the Court’s ultimate decision.

Despite Mr Brookfield’s numerous unsuccessful registration attempts, he applied to register a further two interests in relation to the same debt between 2020 and 2022, which were also removed by the Registrar on similar grounds. The Registrar then commenced proceedings in May 2023 based on these two registrations.

Did Mr Brookfield hold a security interest?

Mr Brookfield insisted that he held a security interest simply because he was owed a debt. In correspondence with the Registrar, Mr Brookfield asserted that “when an asset is sold, that asset becomes encumbered until such time as it is paid for in full”.

The Court found, in agreeance with the Registrar, that Mr Brookfield did not hold a security interest as the requirements of section 12(1) were clearly not met. Specifically, there was no security agreement between Mr Brookfield and Real Estate Now nor any appropriate security clause in the rent roll agreement or deed of assignment that granted Mr Brookfield a security interest in the personal property of Real Estate Now.

Did Mr Brookfield reasonably believe he held a security interest?

The key issue was whether Mr Brookfield had reasonable grounds to believe he held a security interest. This case highlights that a reasonable belief that a person is owed a debt is irrelevant to the question of whether there are reasonable grounds to believe a person has a security interest. The Court held that the clear correspondence from the Registrar that the Previous Registrations were invalid provides objective evidence that Mr Brookfield’s belief that he held a security interest was not reasonable.

On this basis, the Court decided that Mr Brookfield contravened sub section 151(1) and had breached sub section 151(2) by failing to amend the registrations within five business days after he did not have reasonable grounds to believe he was the secured party.

The Court imposed a total penalty of $30,000 which represents approximately 10 per cent of the maximum penalty for a breach of sub section 151(1) or 151(2), being $315,900.

A sign of what’s to come

The substantial maximum financial penalty for breaches of section 151 has been a concern for many individuals due to the uncertainty around the reasonable belief requirement. Nevertheless, the Registrar has historically sought to deal with invalid registrations via open communication rather than commencing proceedings.

Following this case, it remains to be seen whether the Registrar will be more willing to go down the civil penalty path in the future. Her Honour stated that there is no obvious reason for the Registrar’s reluctance to invoke the civil penalty provisions in the past and noted that this was a ‘clear case’ for the Registrar to do so. While the Registrar may continue to adopt a patient approach, it is possible that this decision will open the door to future section 151 proceedings that involve less severe conduct on behalf of an applicant.

What does this mean for you?

In order to reduce any risks of being liable for a civil penalty due to an invalid registration of a security interest, you should consider taking the following measures:

  • familiarise yourself with the requirements of section 151 and seek professional legal advice if you are unsure whether you hold a security interest
  • cooperate with the Registrar if you receive communication regarding the improper registration of your security interest
  • where you disagree with the Registrar’s decision, seek professional legal advice and pursue the correct avenues for appealing the decision.

If you have any questions or require assistance with your registration, please get in touch with a member of our Corporate & Commercial team below.

The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Miles Leyden, Alexandra Stiliadis

Share this