In the matter of MC XXIV Pty Ltd (in liquidation)

The first plaintiff, J&D Damjanovic Pty Ltd (as trustee for the Damjanovic Brothers Superannuation Fund) (J&D), seeks orders pursuant to s 588FM of the Corporations Act 2001 (Cth) fixing a later registration time for the purpose of s 588FL(2)(b)(iv) of that Act in respect of six security interests.

The second plaintiff, Damjanovic Holdings Pty Ltd (DHPL) seeks orders pursuant to s 588FM fixing a later registration time for the purpose of s 588FL(2)(b)(iv) in respect of two security interests.

As referred to in more detail later in these reasons, each of the security interests in question was granted by one of the six defendants to the proceedings. The Personal Property Securities Act 2009 (Cth) (the PPSA) provides for the perfection of security interests by registration. Each security interest was perfected by registration, but this occurred more than 20 business days after the relevant security agreement came into force. Each defendant grantor went into liquidation under a creditors’ voluntary winding up after registration of the relevant security interest. In the case of three of the defendant grantors, this occurred within six months after registration of the relevant security interest. A submitting appearance was filed on behalf of each of the defendant companies in these proceedings.

Sections 588FL and 588FM of the Corporations Act provide:

The purpose and effect of ss 588FL and 588FM of the Corporations Act was explained by Brereton J (as his Honour then was) in In the matter of Appleyard Capital Pty Limited; 123 Sweden AB v Appleyard Capital Pty Limited (Appleyard): [1]

In the present case, the plaintiffs rely on s 588FM(2)(a)(i) as enlivening the Court’s power to fix a later time for registration of the securities.

It is well established that “inadvertence” includes failure to advert to or to understand the requirement for registration within 20 business days after entering into the relevant security agreement, and failure to register due to ignorance of the legal requirement to do so or of the consequences of not doing so. [2]

Although the plaintiffs do not rely on s 588FM(2)(a)(ii) as enlivening the Court’s power, the question of prejudice to creditors is relevant to the exercise of the discretion. [3]

An order under s 588FM has no effect on the priority of security interests registered before the plaintiff’s security interest. [4]

The Court has power to make an order under s 588FM in respect of a security interest that was registered before the grantor goes into liquidation, notwithstanding that the grantor is in liquidation by the time the security holder makes the application for relief. [5] In those circumstances, unsecured creditors will be affected by the relief, if granted. As Brereton J explained in Appleyard, that is because fixing a later time for registration of the security interest will avoid the vesting of that interest in the grantor for the benefit of the unsecured creditors which occurred at the “critical time” by operation of s 588FL(4). [6] It has been said that an order under s 588FM will not lightly be made where it will reduce the amount of funds available for distribution to unsecured creditors of an insolvent grantor, and that a determination that it is appropriate to grant relief in those circumstances “will require the identification of factors of sufficient significance to outweigh the adverse impact on unsecured creditors of the grant of relief”. [7] However, other cases emphasise that it is the prejudice attributable to the delay in registration, as opposed to the prejudicial effect of an order under s 588FM, that is of particular relevance to the exercise of the discretion. [8] For reasons that will become apparent, the present case does not require the resolution of the tension between those two lines of authority. Each case ultimately turns on its own facts, and the exercise of the broad discretion conferred by s 588FM is informed by what is just and equitable in the circumstances. [9] Unsecured creditors are entitled to be heard. Where they have not been joined as parties to the security holder’s application under s 588FM, the interests of unsecured creditors might be protected by reserving a right for them to apply at a later time to discharge or vary the order.

The plaintiffs relied on affidavits of Mr Joseph Damjanovic sworn on 12 August 2022 and 6 April 2023. Mr Damjanovic and his brother, Mr Daniel Damjanovic, are the two directors of each of J&D and DHPL. The plaintiffs also relied on an affidavit of their solicitor, Ms Jessica Diep, affirmed on 6 April 2023, and oral evidence adduced from Ms Diep during the hearing.

Mr Damjanovic gave evidence to the effect that he was introduced to Mr Mitchell Atkins in about 2017. Mr Atkins is the sole director of each of the six defendants:

Mr Damjanovic refers to the defendants as the Magnolia entities. He gave evidence that, from 2017, he “did some lending transactions through Magnolia” which “involved me lending funds to a Magnolia entity who would then on lend those funds to their customers”. The security interests that are the subject of the present proceedings were granted in 2018 and 2019 as security for loans made by J&D or DHPL to Magnolia entities. Mr Atkins was Mr Damjanovic’s point of contact at the Magnolia entities during that period of time.

Mr Damjanovic gave evidence that, at the time that he caused J&D and DHPL to execute the relevant transaction documents and to advance the loans to the relevant Magnolia entity, he did not know that a security interest in respect of personal property needed to be registered on the Personal Property Securities Register (PPSR), he did not know the potential consequences of failing to register such a security interest, and he thought that he did not need to do anything further after executing the transaction documents and advancing the funds.

Mr Damjanovic acknowledges that he did receive a letter from his solicitors in November 2018 which contained general advice concerning proposed loan structures and which did not pertain to any specific transaction. The letter referred to the need for the proposed lender to “perfect its security” by lodging a financing statement on the PPSR “within the timeframes of the PPSA” in respect of security interests proposed to be created under a form of general security agreement and specific security agreement. The letter did not explain the concept of perfecting a security by registration, did not identify the timeframes for registration, and did not explain the consequences of failing to register a security interest within those timeframes. Mr Damjanovic gave evidence that he did not recall reading those parts of the letter in November 2018, and that he did not understand that he needed to lodge a financing statement on the PPSR in order to protect the interests of J&D and DHPL under any security documents. Ms Diep gave evidence that no further advice was given to Mr Damjanovic in relation to these matters — either generally or in relation to specific transactions — until about late June 2022.

Mr Damjanovic has given evidence that he trusted Mr Atkins. Based on his discussions with Mr Atkins, Mr Damjanovic believed that the loans that he caused J&D and DHPL to make to Magnolia entities were secured by registered first mortgage over land. The Magnolia entities ceased making interest payments to J&D and DHPL in about May 2022, following which Mr Damjanovic sought advice from Ms Diep’s firm in about late June or early July 2022. Ms Diep then undertook various searches, which revealed that only the Magnolia entities had registered first mortgages over the ultimate borrower’s land, and that the securities granted by the Magnolia entities to J&D and DHPL had not been registered on the PPSR. Ms Diep advised Mr Damjanovic accordingly on about 6 or 7 July 2022, and he immediately instructed her to register the security interests.

The security interests described below were then registered.

A security interest granted by Magnolia PM in favour of J&D in all present and after acquired property of Magnolia PM was registered on 8 July 2022 (PPSR registration number 202207080056727). According to the evidence of Ms Diep, and Mr Damjanovic, this security interest was created by a general security deed entered into in January 2019 between J&D (as the secured party) and Magnolia PM (as grantor, under its former name MC XLI Pty Ltd) in connection with loan of $1,200,000 made by J&D to Magnolia PM to fund a loan to be made by Magnolia PM to its client, Valpak Australia. Magnolia Lending guaranteed the repayment of that loan by Magnolia PM to J&D. The precise date of execution of the general security deed is unclear, but Mr Damjanovic has given evidence that J&D advanced the funds to Magnolia PM on or about 4 January 2019, and contemporaneous documents establish that the grantor had executed the deed by 25 January 2019. Accordingly, the general security deed came into force no later than 25 January 2019. Magnolia PM went in liquidation on 16 August 2022. That date is the “critical time” for the purpose of s 588FL, as it is the date on which the winding up is taken to have commenced pursuant to s 513B. The latest date for registration of the security interest for the purpose of s 588FL(2)(b)(i)-(iii) is six months prior to the “critical time”, being 15 February 2022. The security interest was registered after that date, and will therefore remain vested in Magnolia PM for the benefit of its unsecured creditors pursuant to s 588FL(4), unless the Court fixes a later time for registration pursuant to s 588FM for the purpose of s 588FL(2)(b)(iv).

A security interest granted by Magnolia Lending in favour of J&D in certain securities was registered on 13 July 2022 (PPSR registration number 202207130035668). According to the evidence of Ms Diep and Mr Damjanovic, this security interest was created by a specific security deed entered into in January 2019 between J&D (as the secured party) and Magnolia Lending (as grantor) in connection with the $1,200,000 loan made by J&D to Magnolia PM to fund Magnolia PM’s loan to its client, Valpak Australia. The collateral identified in the specific security deed is all of Magnolia Lending’s shares in Magnolia PM and all dividends and other rights and interests associated with those shares. Magnolia Lending is the sole shareholder of Magnolia PM. The specific security deed provided that the collateral was security for the payment of “the Moneys Owing”, which I infer included any moneys owing by Magnolia Lending to J&D under its guarantee of the $1,200,000 loan made by J&D to Magnolia PM. Contemporaneous documents establish that the specific security deed was executed by Magnolia Lending no later than 25 January 2019. Magnolia Lending went into liquidation on 19 April 2023. That date is the “critical time” for the purpose of s 588FL, as it is the date on which the winding up is taken to have commenced pursuant to s 513B. Accordingly, the latest date for registration of the security interest for the purpose of s 588FL(2)(b)(i)-(iii) is six months prior to the “critical time”, being 18 October 2022. The security interest was registered before that date.

A security interest granted by MA SOF 54 in favour of DHPL in all present and after acquired property of MA SOF 54 was registered on 13 July 2022 (PPSR registration number 202207130040250). According to the evidence of Ms Diep and Mr Damjanovic, this security interest was created by a general security deed entered into in November 2019 between DHPL (as the secured party) and MA SOF 54 (as grantor) in connection with a loan of $500,000 made by DHPL to MA SOF 54 to fund a loan by MA SOF 54 to its client, Holland Farms Pty Ltd. Magnolia Funding guaranteed the repayment of that loan by MA SOF 54 to DHPL. The general security deed was executed by MA SOF 54 on or about 21 November 2019. DHPL advanced the funds to MA SOF 54 on 25 November 2019. Accordingly, the general security deed came into force no later than 25 November 2019. MA SOF 54 went into liquidation on 16 August 2022. That date is the “critical time” for the purpose of s 588FL, as it is the date on which the winding up is taken to have commenced pursuant to s 513B. The latest date for registration of the security interest for the purpose of s 588FL(2)(b)(i)-(iii) is six months prior to the “critical time”, being 15 February 2022. The security interest was registered after that date and will therefore remain vested in MA SOF 54 for the benefit of its unsecured creditors pursuant to s 588FL(4), unless the Court fixes a later time for registration pursuant to s 588FM for the purpose of s 588FL(2)(b)(iv).

A security interest granted by Magnolia Funding in favour of DHPL in certain securities was registered on 13 July 2022 (PPSR registration number 202207130039851). According to the evidence of Ms Diep and Mr Damjanovic, this security interest was created by a specific security deed entered into in November 2019 between DHPL (as the secured party) and Magnolia Funding (as grantor) in connection with DHPL’s $500,000 loan to MA SOF 54 referred to above. The collateral identified in the specific security deed is all of Magnolia Funding’s shares in MA SOF 54 and all dividends and other rights and interests associated with those shares. Magnolia Funding is the sole shareholder of MA SOF 54. The specific security deed provided that the collateral was security for the payment of all debts and monetary liabilities of Magnolia Funding to DHPL. Those debts and liabilities would include any debt or liability arising under Magnolia Funding’s guarantee of the $500,000 loan made by DHPL to MA SOF 54. The specific security deed was executed by Magnolia Funding on or about 21 November 2019. Magnolia Funding went into liquidation on 19 April 2023. That date is the “critical time” for the purpose of s 588FL, as it is the date on which the winding up is taken to have commenced pursuant to s 513B. Accordingly, the latest date for registration of the security interest for the purpose of s 588FL(2)(b)(i)-(iii) is six months prior to the “critical time”, being 18 October 2022. The security interest was registered before that date.

A security interest granted by MC XXIV in favour of DHPL in all present and after acquired property of MC XXIV was registered on 13 July 2022 (PPSR registration number 202207130041026). According to the evidence of Ms Diep and Mr Damjanovic, this security interest was created by a general security deed that was entered into in about June 2018 between DHPL (as the secured party) and MC XXIV (as grantor). The general security deed secured all money that MC XXIV may become liable at any time to pay to DHPL, including a loan of $6,500,000 made by DHPL to MC XXIV on about 3 October 2018 for the purpose of funding a loan or loans by MC XXIV to its clients Qartaba Homes Pty Ltd and Schofields Developers Pty Ltd. Magnolia Capital Holdings guaranteed the due and punctual repayment of that loan by MC XXIV to DHPL. MC XXIV went into liquidation on 16 August 2022. That date is the “critical time” for the purpose of s 588FL, as it is the date on which the winding up is taken to have commenced pursuant to s 513B. The latest date for registration of the security interest for the purpose of s 588FL(2)(b)(i)-(iii) is six months prior to the “critical time”, being 15 February 2022. The security interest was registered after that date and will therefore remain vested in MC XXIV for the benefit of its unsecured creditors pursuant to s 588FL(4), unless the Court fixes a later time for registration pursuant to s 588FM for the purpose of s 588FL(2)(b)(iv).

A security interest granted by MC XXIV in favour of DHPL in all present and after acquired property of MC XXIV was registered on 12 August 2022 (PPSR registration number 202208120056479). According to the evidence of Ms Diep and Mr Damjanovic, this security interest was created by the same general security deed entered into in about June 2018 that is referred to above, which also applied to moneys owing by MC XXIV to DHPL in respect of a $3,800,000 loan made by DHPL to MC XXIV on about 20 November 2018 for the purpose of funding a loan by MC XXIV to its client Tan & Huang Pty Ltd. Magnolia Capital Holdings guaranteed the due and punctual repayment of that loan by MC XXIV to DHPL. As stated above, MC XXIV went into liquidation on 16 August 2022 and that date is the “critical time” for the purpose of s 588FL. It is not clear why a second financing statement was registered on 12 August 2022 in respect of the security interest created by this general security deed in addition to the financing statement registered on 13 July 2022 that is referred to above. In any event, as stated above, 15 February 2022 is the latest date for registration of the security interest for the purpose of s 588FL(2)(b)(i)-(iii), being six months prior to the “critical time”. The security interest was first registered after that date and will therefore remain vested in MC XXIV for the benefit of its unsecured creditors pursuant to s 588FL(4), unless the Court fixes a later time for registration pursuant to s 588FM for the purpose of s 588FL(2)(b)(iv).

On 12 August 2022, two financing statements were registered in respect of a security interest granted by Magnolia Capital Holdings in favour of DHPL in certain securities (being PPSR registration numbers 202208120055568 and 202208120054034). According to the evidence of Ms Diep and Mr Damjanovic, the security interest was created by a specific security deed entered into in June 2018 between DHPL (as the secured party) and Magnolia Capital Holdings (as grantor), at the same time as the general security deed between DHPL and MC XXIV referred to at [22]-[23] above. The collateral identified in the specific security deed is all of Magnolia Capital Holdings’ shares in MC XXIV and all dividends and other rights and interests associated with those shares. Magnolia Capital Holdings is the sole shareholder of MC XXIV. The specific security deed provided that the collateral was security for the payment of all debts and monetary liabilities of Magnolia Capital Holdings to DHPL. Those debts and liabilities would include any debt or liability arising under Magnolia Capital Holdings’ guarantees of the $6,500,000 loan and $3,800,000 loan made by DHPL to MC XXIV to which I have referred to above. Magnolia Capital Holdings went into liquidation on 19 April 2023. That date is the “critical time” for the purpose of s 588FL, as it is the date on which the winding up is taken to have commenced pursuant to s 513B. Accordingly, the latest date for registration of the security interest for the purpose of s 588FL(2)(b)(i)-(iii) is six months prior to the “critical time”, being 18 October 2022. The security interest was registered before that date.

The financing statements in respect of the security interests granted by Magnolia Lending, Magnolia Funding, and Magnolia Capital Holdings (being PPSR registration numbers 202207130035668, 202207130039851, 202208120055568 and 202208120054034) were registered before the latest date for registration specified in s 588FL(2)(b)(i)-(iii). It follows that s 588FL does not apply by reason of s 588FL(1)(b). Accordingly, s 588FL(4) did not operate to vest those security interests in the grantors when they went into liquidation. There is no occasion to consider further the applications for s 588FM relief in respect of the security interest granted to J&D by Magnolia Lending and the security interests granted to DHPL by Magnolia Funding and Magnolia Capital Holdings.

J&D seeks an order pursuant to s 588FM of the Corporations Act fixing 8 July 2022 as the time for J&D to register the security interest that is now PPSR registration number 202207080056727 for the purposes of s 588FL(2)(b)(iv) of the Corporations Act.

On the basis of Mr Damjanovic’s evidence summarised at [13]-[16] above, I am satisfied that J&D’s failure to register the security interest granted by Magnolia PM until 8 July 2022 — approximately three and a half years after the security agreement came into force in January 2019 — was inadvertent. I note that the terms of the general security deed between J&D (as the secured party) and Magnolia PM (as grantor) referred to and contemplated compliance with registration requirements of the PPSA. However, in circumstances where Mr Damjanovic caused J&D to enter into the transaction without legal advice and mistakenly believing that J&D was to have the security of a first mortgage registered against the title to the ultimate borrower’s land, I do not consider that the terms of the deed outweigh or cast doubt on the credibility of Mr Damjanovic’s evidence that he did not understand that registration was required. Accordingly, the Court has power under s 588FM to fix a later time for registration of this particular security interest for the purpose of s 588FL(2)(b)(iv).

The liquidators’ reports to creditors of Magnolia PM record that J&D is the only secured creditor of that company. Accordingly, there are no secured creditors who have registered security interests after 8 July 2022 who might be affected by the order sought by J&D under s 588FM.

The liquidators estimate that Magnolia PM owes $225,822 to unsecured creditors, of which $3,751 relates to priority employee entitlements, $160,061 is owed to the Australian Taxation Office (the ATO), $61,069 is owed to related party unsecured creditors, and $941 is owed to unrelated unsecured creditors.

Based on their investigations to date, the liquidators’ estimate of the realisable value of Magnolia PM’s assets is $33,086, comprising $62 cash at bank, trade debtors totalling $21,023, and a debt of $12,000 owing by Magnolia PM’s related company, Magnolia Capital Pty Ltd.

Thus, although the security interest was granted in respect of J&D’s loan of $1,200,000 to Magnolia PM, the evidence presently before the Court is that the value of the collateral is only $33,086. It follows that there is no realistic prospect of any distribution to unsecured creditors in the winding up of Magnolia PM, irrespective of whether the security interest remains vested in that company for the benefit of unsecured creditors by reason of s 588FL(4) or whether J&D has the benefit of the security as a consequence of the Court making the order sought under s 588FM. In the former scenario, it is highly unlikely that anything would remain for distribution to unsecured creditors after payment of the liquidators’ remuneration and expenses. In other words, although an order under s 588FM will avoid the vesting of J&D’s security interest in Magnolia PM for the benefit of unsecured creditors, that does not result in any prejudice to unsecured creditors in the circumstances of this particular case.

I accept Mr Damjanovic’s evidence summarised at [13]-[16] above that he took steps to cause the security interest to be registered promptly after he became aware of the need to register the interest, and the consequences of failing to do so. There is no evidence to suggest that any of the unsecured creditors relied on Magnolia PM having no secured creditors, or that they would not have dealt with Magnolia PM if they had been on notice of J&D’s security interest prior to 8 July 2022. I infer that the related party creditors did know about J&D’s security interest. The ATO, being the largest unsecured creditor, is an involuntary creditor in the sense that it had no choice whether to become a creditor by reason of Magnolia PM’s non-payment of tax. The position of the ATO does not differ merely because J&D’s security interest would have been apparent from a search of the PPSR at an earlier stage if the security had been registered prior to 8 July 2022. [11]

For those reasons, I consider that it is appropriate in the circumstances of this case to make the order sought by J&D fixing 8 July 2022 as the latest time for registration of this security interest, subject to orders requiring J&D to cause the liquidators of Magnolia PM to notify its unsecured creditors of the order and reserving liberty to those unsecured creditors to apply to vary or discharge the order. That affords unsecured creditors a right to be heard in the event that they consider that they are prejudiced by the order (for example, if the liquidators of Magnolia PM have identified additional assets of that company since issuing their most recent report to creditors in November 2022).

DHPL seeks an order pursuant to s 588FM of the Corporations Act fixing 13 July 2022 as the time for DHPL to register the security interest that is now PPSR registration number 202207130040250 for the purposes of s 588FL(2)(b)(iv) of the Corporations Act.

On the basis of Mr Damjanovic’s evidence summarised at [13]-[16] above, I am satisfied that DHPL’s failure to register the security interest granted by MA SOF 54 until 13 July 2022 — a little more than two and half years after the security agreement came into force in about November 2019 — was inadvertent. My observations at [27] above concerning the general security deed between J&D and Magnolia PM apply equally to the general security deed between DHPL and MA SOF 54. Accordingly, the Court has power under s 588FM to fix a later time for registration of that security interest for the purpose of s 588FL(2)(b)(iv).

According to their statutory report to the creditors dated 14 November 2022, the liquidators of MA SOF 54 have not identified any assets of the company of any realisable value. The liquidators have identified DHPL as the only secured creditor, and the ATO as the only unsecured creditor, of MA SOF 54. The amount owing to the ATO is unknown. The Court was informed that the 14 November 2022 report is the most recent report to creditors.

It follows from the nil realisable value of the assets of MA SOF 54 that the collateral secured by DHPL’s security interest has no value. Accordingly, the ATO will not be prejudiced by the order sought by DHPL. For that reason, and for the further reason explained at [32] above, the lengthy delay between the general security deed coming into force and the security interest being registered has not prejudiced the ATO. I accept Mr Damjanovic’s evidence summarised at [13]-[16] above that he took steps to cause the security interest to be registered promptly after he became aware of the need to register the interest, and of the consequences of failing to do so.

For those reasons, I consider that it is appropriate in the circumstances of this case to make the order sought by DHPL fixing 13 July 2022 as the latest time for the registration of this security interest. There will also be an order requiring DHPL to cause the liquidators of MA SOF 54 to notify the ATO (and any other unsecured creditor that the liquidators may have identified since their most recent report to creditors in November 2022) of the order, and an order reserving liberty to unsecured creditors to apply to vary or discharge the order.

DHPL seeks orders pursuant to s 588FM of the Corporations Act:

On the basis of Mr Damjanovic’s evidence summarised at [13]-[16] above, I am satisfied that DHPL’s failure to register the security interest granted by MC XXIV until 13 July 2022 — almost four years after the security interest was created in October 2018 — was inadvertent. My observations at [27] above concerning the general security deed between J&D and Magnolia PM apply equally to the general security deed between DHPL and MC XXIV. Accordingly, the Court has power under s 588FM to fix a later time for registration of that security interest for the purpose of s 588FL(2)(b)(iv).

According to their statutory report to creditors dated 16 November 2022, the liquidators of MC XXIV have not identified any assets of the company of any realisable value. The liquidators have identified DHPL as the only secured creditor, and the ATO as the only unsecured creditor, of MC XXIV. The amount owing to the ATO is unknown. The Court was informed that the 16 November 2022 report is the most recent report to creditors.

It follows from the nil realisable value of the assets of MC XXIV that the collateral secured by DHPL’s security interest has no value. Accordingly, the ATO will not be prejudiced by the order sought by DHPL. For that reason, and for the further reason explained at [32] above, the lengthy delay between the general security deed coming into force and the security interest being registered has not prejudiced the ATO. I accept Mr Damjanovic’s evidence summarised at [13]-[16] above that he took steps to cause the security interest to be registered promptly after he became aware of the need to register the interest, and of the consequences of failing to do so.

For those reasons, I consider that it is appropriate in the circumstances of this case to make an order under s 588FM of the Corporations Act fixing a later time for registration of this security interest. As I have mentioned above, it is not clear why there are two registrations in respect of this security interest. For abundant caution, the date fixed will be 12 August 2022, being the later date of the two registrations. There will also be an order requiring DHPL to cause the liquidators of MC XXIV to notify the ATO (and any other unsecured creditor that the liquidators may have identified since their most recent report to creditors in November 2022) of the order, and an order reserving liberty to unsecured creditors to apply to vary or discharge the order.

For all of the reasons above, the orders of the Court are as follows: