PPS Leases

Earlier this week I was asked to explain to one of our clients the position the PPSA takes on Leasing and Hiring arrangements. In particular the client wanted clarification on the duration of leasing arrangements and gave, as an example, the situation where “some customers hire our machines for 2 months but then decide to just keep them for 5 months”.

Firstly, I should probably explain that leasing and hiring arrangements fall into a similar category to Retention of Title arrangements in that they do not technically involve the creation of a security interest but rather clarify an ownership position and the rights of the hirer/supplier to recover their property in the event of any breach of contract on the part of the lessee/buyer. With the PPSA's emphasis on substance over form the rights of a leasing company to recover their property is treated as a security interest and is now covered under that Act.

PPS Leases are defined under Section 13 of the PPSA (the wording for which I’ve included at the end of this article should anyone enjoy reading that sort of thing).

Briefly, for goods that are required under the Act to be described by serial number (primarily motor vehicles, watercraft, aircraft etc) registration is appropriate where the lease is for 90 days or more or where the lease is for a shorter period but allows for being renewed or extended to such an extent that the total lease period extends beyond 90 days.

For goods that are not required to be described by serial number the cut-off requirement for registrations extends to periods of 12 months (or shorter periods that allow for extensions/renewals which would take the overall period beyond 12 months). 

Hirers (and other suppliers) should be aware that when the Act refers to serial numbered goods it is referring to specific types of goods.  Most goods have serial numbers stamped on them somewhere if you look hard enough; however, only those stamped on motor vehicles, watercraft, aircraft etc count as far as the Act is concerned.

It should also be noted that while most of us think we have a pretty good handle on what constitutes a ‘motor vehicle’ the PPSA extends the ‘normal’ interpretation to include, for example, “a piece of machinery or equipment that is equipped with wheels and designed to be attached to, or towed by, a motor vehicle” (see below for the PPSA Regulations Act's definition).

If we use our client’s example scenario, “some customers hire our machines for 2 months but then decide to just keep them for 5 months” – if the goods in question are required to be registered by serial number and the lessee is entitled under the lease agreement to extend the lease in that fashion then our client would be advised to register their security interest in the goods on the PPSA Register and should do so at the outset.  My advice in these and other situations is that it is better to have a registration you don’t need than to need a registration you don’t have.

PPS Leases are able to be registered as Purchase Money Security Interests (PMSIs) which give the lessor a greater priority in their security than holders of general security interests.  For this to be effective the registration must be lodged within 15 business days of the lessee taking possession of the goods or, where the goods will be used as inventory, before the lessee takes possession of the goods.

As I threatened at the outset, the PPSA’s definition of PPS Leases is as follows:

(1)   A PPS lease means a lease or bailment of goods:

                     (a)  for a term of more than one year; or

                     (b)  for an indefinite term (even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment); or

                     (c)  for a term of up to one year that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed one year; or

                     (d)  for a term of up to one year, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of more than one year after the day the lessee or bailee first acquired possession of the property (but not until the lessee’s or bailee’s possession extends for more than one year); or

                     (e)  for goods that may or must be described by serial number in accordance with the regulations, if the lease or bailment is:

                              (i)  for a term of 90 days or more; or

                             (ii)  for a term of less than 90 days, but is automatically renewable, or is renewable at the option of one of the parties, for one or more terms if the total of all the terms might be 90 days or more; or

                            (iii)  for a term of less than 90 days, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of 90 days or more after the day the lessee or bailee first acquired possession of the property, (but not until the lessee’s or bailee’s possession extends for 90 days or more).

             (2)  However, a PPS lease does not include:

                     (a)  a lease by a lessor who is not regularly engaged in the business of leasing goods; or

                     (b)  a bailment by a bailor who is not regularly engaged in the business of bailing goods; or

                     (c)  a lease of consumer property as part of a lease of land where the use of the property is incidental to the use and enjoyment of the land; or

                     (d)  a lease or bailment of personal property prescribed by the regulations for the purposes of this definition, regardless of the length of the term of the lease or bailment.

The PPSA Regulations (a separate act to the PPSA itself) holds the following definition of Motor Vehicle:

Meaning of motor vehicle

         (1)   For the definition of motor vehicle in section 10 of the Act, personal property described in sub regulation (2) or (3) is a motor vehicle.

         (2)   The personal property:

                (a)    is built to be propelled, wholly on land, by a motor that forms part of the property; and

               (b)    either:

                          (i)    is capable of a speed of at least 10 km/h; or

                         (ii)    has 1 or more motors that have a total power greater than 200 W; and

                (c)    has any of the following:

                          (i)    a vehicle identification number;

                         (ii)    a chassis number;

                        (iii)    the manufacturer’s number; and

               (d)    does not run on rails, tram lines or other fixed path.

         (3)   The personal property:

                (a)    is capable, when being towed by, or attached to, a motor vehicle, of travelling at a speed greater than 10 km/h; and

               (b)    is a piece of machinery or equipment that is equipped with wheels and designed to be attached to, or towed by, a motor vehicle; and

                (c)    has any of the following:

                          (i)    a vehicle identification number;

                         (ii)    a chassis number;

                        (iii)    the manufacturer’s number.

The PPSA and Retention of Title

There are a whole heap of introductory articles written about the Personal Property Securities Act (PPSA) and the Personal Property Securities Register it created. Most start off by telling you that it is “one of the most significant commercial law reforms in recent times” and that it has “changed the concept of ownership as we know it”.

Hyperbole aside, the PPSA certainly does shake things up a bit, but if your concept of ownership is built around the old maxim of possession being nine tenths of the law then you may find that you're not quite as wrong now as you used to be.

Under a Retention of Title clause (sometimes referred to as a Romalpa clause by people who like to show off their knowledge of UK insolvency law cases from the seventies) a seller writes into their contractual terms that they will retain ownership of the goods being sold until the purchaser finishes paying for them. The purchaser may take possession of the goods and make use of them but legal ownership will not pass to the purchaser until they have fulfilled their payment obligations to the seller.

Should the purchaser go into receivership or liquidation while the Retention of Title (RoT) is still in play then, in a pre-PPSA world, the receiver should respect the seller's title to the unpaid goods and allow the seller to recover the unpaid-for portion of the goods before the receiver then goes on to dispose of the remaining assets of the purchaser as they see fit.

Now that the PPSA is in play, however, the RoT is no longer treated as a mechanism of ownership but as one of security. The logic being that retaining title was merely a means to protect the seller's position with regards getting paid and as such it should be dealt with as an instrument of security and compete with all the other security interests other creditors may have against the purchaser.

So far so good; but how does the RoT seller's security interest compete with the interests of other creditors?

The traditional approach would be to adopt a 'first in time' principle. But to do that would be to give all the priority to, say, the purchaser's bank that has probably had a general security interest in place attaching to all of the purchaser's assets since the purchaser first came into being. A 'first in time' approach would seriously disadvantage the seller in this instance and, indeed, if the seller had been aware of the bank's existing interest the seller may well have decided not to conduct business on credit terms with the purchaser in the first place.

In order to get around the problem of an early security holder stifling future trade and to try and ensure some parity between pre and post PPSA environments, a special category of security interest was invented – the Purchase Money Security Interest (PMSI – it rhymes with 'flimsy' if you feel like using the term in conversation).

A PMSI applies when a security interest is taken in collateral to the extent that it secures all or part of its purchase price; i.e. if you don't pay me for this widget I get to take the widget back; eg, goods sold under a Retention of Title clause.

While the 'first in time' approach applies to most security interests, those with a PMSI designation effectively leapfrog all others and certainly rank ahead of more general security interest holders such as the purchaser's bank. Thus a receiver now has to ensure that a PMSI holder's security interest is dealt with first before they go on to dispose of the remaining assets of the purchaser as they see fit.

All well and good. The particularly prolix PPSA has, at great expense, returned us to the position we were in before it was enacted. We can now give one last admiring shake of the head as we contemplate the intellectual powerhouse that is our Government and promptly forget about the whole thing and get back to simply doing business. Or not.

Unfortunately for those of us who are happiest when they don't actually have to do anything, the PPSA also brought in the idea of 'perfection'. Note: There are a whole load of little jokes and ironies that will go through your mind at this point; don't worry, it's inevitable when the term 'perfection' is used in the context of Government legislation - just take a moment and then we'll carry on.

Under PPSA it's not enough that a security interest exists, in order to be effective against other security interests it needs to be perfected.

The most common form of perfection as time goes by will be by registration. For this purpose the PPSA created the Personal Property Securities Register (PPSR). The PPSR exists as computer servers in air-cooled splendour somewhere in the bowels of Canberra although a call-centre operating out of Adelaide lends it a more human aspect. The PPSR serves as both a place for security holders to register their interests and a facility for interested parties to search to see what registrations exist either for a specific purchaser or for specific goods (such as motor vehicles and aircraft).

Registrations are encouraged to be made via the PPSR's own web site (www.ppsr.gov.au) and the registration process is claimed to be comparatively straightforward (presumably the comparison is with completing a combined tax return and insurance claim) although there are third-party providers who can make this process much easier. NCI (www.nci.com.au) probably provides the most user friendly facility primarily by focusing to a large extent on RoT security holders and simply not bothering at all with consumer securities.

So what happens if you don't register?

I mentioned earlier that PMSI security holders automatically jumped to the top of the heap when it came to the ranking of security interests. Bottom of that heap, however, are all those security interests that have not been perfected. An RoT clause may have been drafted by the legal profession's equivalent of Shakespeare but if the security interest isn't perfected it could end up ranking behind something scribbled out on the back of a beer mat.

So if you want an RoT you put in place today to provide you with the same strength of security you would have had with it pre-PPSA then you must register it on the PPSR.

There is a safety net for security interests that were already in place by the time the PPSR came into operation (30^th January 2012). These are termed 'transitional' security interests and are deemed to be perfected by legislation until 30^th January 2014.

At the time of writing there is an assertion by the receivers of Wow Audio Visual that transitional security interests perfected by legislation don't apply to deliveries made after 30^th January 2012 but this is clearly a nonsense and will undoubtedly be challenged in the courts if the receivers fail to take a more sensible line.

Although I'm reluctant to make a rod for my own back, coming up we'll have discussions on the application of the PPSA to RoT All Monies clauses, proceeds and commingling as well as PPS Leases, consignment stock and lenders PMSIs among other things.

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All a bit of a mess

When the Personal Property Securities Act was passed in late 2009 it was intended that the  National Register it needed to create would be introduced in May 2011.  It therefore seems strange to suggest that its eventual introduction on 30th January 2012 (after an earlier extension to October 2011) showed all the hallmarks of a rushed affair.


Aside from all the little cosmetic issues with the Register (links not working, Help buttons that popped up with useful guidance such as "insert help text here") the Register simply did not work for much of its first week. 


I remember the fun we had in our office early in February calling out from our cubicles "Is the Register up yet?", "No",  "Hang-on, it's up now!", "Oh no, it's down again". Happy times.


It was only later we realised that it wasn't just us members of the public and business community that were having problems.  The intra-governmental transfer of registered charges from ASIC's database to the PPSR had also hit something of a snag.  It wasn't until mid-March that we discovered that some 38,000 satisfied charges wrongly appeared on the PPSR as current charges with an additional 6,000 charges not appearing at all!  A further 25,878 company charges with multiple secured parties did make it across to the new register but with many of them only showing a single secured party.


Even when details of a company charge have made it across to the new register in one piece we find that some identify the chargee or grantor by ACN, some by ABN and others by company name even though the PPSA rules require grantors with an ACN to be registered solely by that number.  This will virtually necessitate interested parties to conduct at least three searches (by ACN, ABN and Name) for every grantor they are curious about (each search will, of course, attract its own fee from the Register).


While it is easy to get distracted by the practical problems the Register is having in applying their registration rules we shouldn't lose sight of the fact that those rules laid down in the Act itself look pretty flawed in the first place!


If a grantor has an ACN then the security interest registered against it should identify the grantor by that ACN.  That is clear and understood.  


If the charge is against a partnership then that partnership should be identified by their ABN.  That is also clear and makes sense.  


If, however, the charge is against an organisation such as co-operative, a strata plan, sports association, charity, church group or any organisation incorporated under state law (rather than under the Corporations Act) that does not have an ACN but does have an ABN then one would think that the ABN should be used to identify that organisation.  Unfortunately, the answer is 'No'; in such cases the grantor needs to be identified by Name only.


I suppose there could be an argument suggesting that the organisation could use more than one ABN or that the ABN does not sufficiently 'define' the organisation in the same way as an ACN defines a company, but does that same argument not also apply to partnerships?


Last (for this blog entry) but not least,the PPSA also encourages registrations to be made against Trusts which, as most people in business probably know, do not have the legal capacity to enter into contracts nor, indeed, to grant security interests!  


So, to recap briefly, we have a mess of a Register administering rules laid down by a mess of an Act.  


In any other circumstance I'd recommend we all avert our gaze and ignore the whole embarrassing thing; unfortunately, mess or not, the PPSA is not going to go away and will have way too much impact on the manner in which business is conducted in this country for the foreseeable future for us not to pay it a great deal of attention.


In further blog posts I hope to be able to help clarify many of the twists and turns of the PPSA that may trip the unwary and try and make sense of what, in many ways, is all a bit of a mess.


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