This paper was co-authored by Kellie Cook, Senior Associate
The Personal Property Securities Act 2009 (Cth) (PPSA) affects the giving and taking of security interests over assets (other than land and certain leases). It has been in force in Australia since January 2012. However, many businesses remain unaware of the PPSA and the serious implications if things go wrong.
Prior to the PPSA, a lease arrangement was not considered to be a traditional security interest. Now, a lease of equipment, for example, may give rise to a security interest. Unless that equipment is registered on the online Personal Property Securities Register (PPSR), you may lose title to the equipment if your customer becomes insolvent.
The first part of this briefing paper highlights the importance of the PPSA to the equipment hire industry by looking at the first major court decision under the PPSA in Australia. The second part seeks to address some PPSA-related scenarios that may arise in a typical equipment hire business.
PART 1 – The Maiden Civil Case
Maiden Civil (P&E) Pty Ltd (Maiden) engaged in civil construction works in the Northern Territory. Queensland Excavation Services Pty Ltd (QES) leased earthmoving vehicles. During 2010 QES leased 3 Caterpillar excavators to Maiden. QES did not register its interest in the caterpillars on the PPSR.
In March 2012, Maiden obtained a loan from Fast Financial Solutions Pty Ltd (Fast). Pursuant to a general security agreement, Maiden granted Fast a security interest in all of Maiden’s present and after-acquired property. Fast duly registered its security interest on the PPSR.
In July 2012 Maiden defaulted under the loan and Fast appointed its receivers. Maiden subsequently went into administration and then liquidation. QES claimed to be the legal owner of the Caterpillars and demanded that the receivers return the Caterpillars to them.
Did the PPSA apply?
The lease agreement between QES and Maiden was not in writing. However, because the Caterpillars were serial numbered goods and were continuously leased for a term of more than 90 days, the lease was a PPS lease and QES’s interest in the Caterpillars qualified as a security interest under the PSPA.
Who owned the Caterpillars?
The court decided that Fast’s perfected (registered) security interest had priority over QES’s unperfected (unregistered) security interest. As QES had not registered its interest in the Caterpillars, the equipment vested in Maiden once it entered administration, under PPSA s.267(2). QES’s interest in its Caterpillars was “extinguished”, meaning that Maiden held them for the benefit of Fast.
Registration on the PPSR is critical: lessors will not be able to argue that they “own” their leased equipment where a valid, competing security interest is registered against the same equipment.
PART 2 – Q&A
For the purpose of this part, let’s assume that ABC Pty Ltd (ABC) is a mining and civil equipment rental business based in Western Australia.
ABC hires equipment on the basis of its trading terms and conditions which have not been altered since 2011. What are the risks?
The trading terms and conditions will likely not be PPSA compliant. Compliant terms will usually refer to the PPSA and expressly give ABC the right to register one or more security interests in its leased equipment.
The trading terms will usually be referred to as a “security agreement” and contain provisions relating to information to be provided between the parties. Non-compliant trading terms will not usually confer the right to register a security interest on the PPSA. Any security interest registered on the basis of non-compliant trading terms may be at risk of being invalid.
Without a valid security interest, ABC may lose its equipment if it leases assets to a customer that subsequently goes into administration or insolvency.
Do ABC’s clients need to sign ABC’s trading terms?
To avoid argument as to the validity of its security interests, ABC should ensure that each customer signs a copy of its PPSA compliant trading terms. PPSA s.20 (2) requires a security agreement (such as the PPSA-compliant standard terms) to be signed by the customer.
Does ABC need to register a security interest for each supply to the same customer?
The lease of serial numbered goods, such as motor vehicles, requires a separate registration for each vehicle. The 17 digit VIN for each motor vehicle will need to be recorded on the PPSR for each registration. If no VIN is available, the chassis number and/or manufacturer’s number may be used.
ABC should note that the serial number for each vehicle needs to be accurately recorded on each corresponding registration. A mistake will likely be deemed a seriously misleading defect and render the particular registration ineffective.
When must ABC register a security interest on the PPSR?
Assuming ABC is entitled to register a security interest, it should do so within 15 business days of its customer obtaining possession of the equipment.
What does registration on the PPSR cost?
This depends on the length of registration. The online fees payable are currently:
(a) $8 for a registration of 7 years or less
(b) $40 for a registration of more than 7 years but less than or equal to 25 years
(c) $140 for a registration with no stated end time
Will the lease of equipment be a purchase money security interest? Does it matter?
A purchase money security interest (PMSI) is defined in PPSA s.14 as including the interest of a lessor or bailor of goods under a PPS lease. Relevant to ABC, a PPS lease is defined in PPSA s.13 as a lease or bailment of:
(a) goods for a term of more than one year or
(b) serial numbered goods for a term of 90 days or more
Therefore, the lease of a motor vehicle for less than 90 days will generally not fall under the PPSA.
If the particular lease or bailment is a PPS lease, ABC should identify this on the PPSR by selecting and marking the purchase money security interest box. This is important as a PMSI in the equipment ranks above a general security interest in the same equipment. Although the failure to record a registration as a PMSI will not be fatal to a registration, it should be remembered that stating that a registration is a PMSI when it is not will render that registration invalid.
The lease of assets that are not able to be registered by serial number (for example, generators) will require the customer’s (as grantor) details to be included on the PPSR. ABC should capture full and accurate customer details needed to complete a PPSA registration.
ABC is aware that its customer will be using/erecting/leaving the leased equipment on a third party’s site for a period of time. Is this a risk for ABC?
Possibly. This is a bailment scenario. In the event that the third party becomes insolvent, ABC/the customer can retake possession of the equipment unless the bailment is properly characterised as a security interest.
If the bailment falls under the PPSA as a security interest and the customer fails to register its security interest on the PPSR, a secured third party may be able to assert a greater right to ABC’s equipment than ABC itself. Whether the bailment falls under the PPSA requires careful consideration of s.13 (2) and (3) of the PPSA.
ABC can mitigate its risk by expressly requiring customers to register back-to-back security interests whenever a PPSA security interest may arise. This puts the onus on the customer to properly characterise and document its arrangements with the third party. If it fails to do so and the equipment is lost to a secured third party, ABC may have an action against customer for breach of contract.
ABC’s customer leases equipment from ABC and subsequently obtains finance. What are the risks to ABC?
Prior to the PPSA, a lessee of goods could not grant an interest in equipment it did not own. This position has fundamentally changed under the PPSA. Section 19(5) of the PPSA provides that a grantor has rights in goods that are leased to it. Therefore, ABC’s customer can grant a security interest in equipment owned by ABC and leased to customer.
(a) ABC does not register a security interest against the leased equipment
(b) the financier registers a security interest against the business of customer to secure its loan to customer and
(c) customer defaults under its arrangements with the financier
the financier may be able to assert a greater claim to the leased equipment than ABC. If ABC’s leased equipment was significant in terms of ABC’s overall asset base, then the loss could greatly affect ABC’s cash flow and balance sheet. It may also expose ABC’s directors to a claim by the company for breach of their fiduciary duties (i.e. by not acting in the best interests of the company in not registering a security interest).
See the Maiden case summary above for further details.
ABC is seeking to obtain finance to purchase new equipment. What should it be aware of?
The financier will probably want security. This may be by way of a first ranking security with director/parent company guarantees. It would be usual for ABC to have to covenant with the financier in relation to risk mitigation (i.e. that ABC will register security interests on the PPSR whenever they arise). Subsequently, if ABC leases equipment but fails to register a security interest the financier will be at risk of loss of that asset from the asset pool over which it has security. This may be a breach of contract by ABC and director guarantees could be triggered.
ABC could minimise its risk in a number of ways, including:
- engaging lawyers to review any such banking arrangements
- ensuring its trading terms are PPSA compliant
- ensuring staff are aware of the PPSA, when a registration may be required and what information is required from customers to effect a valid registration and
- ensure security interests are registered timely and accurately
For more information on this article or on any other commercial and financial law matters please contact partner Emma Leys on (08) 9321 3755.
The information published on this website is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.