PPSR Statistics and Transitional Registrations

AFSA (the people that operate the PPSR) released their statistics for the quarter ended 31 March 2017 this morning. 

The report, which is quite brief, only comprising seven, easy to read, tables, can be found here.

There’s nothing terribly exciting contained in the report - registrations against motor vehicles account for a little under half of all registrations and a little over half of all searches, and intangible property still appears to be substantially better protected as collateral than agricultural property.

However, what puzzled me was the fact that, during the January – March quarter, 18,686 of the half a million or so registrations lodged were designated as Transitional.

While 18,686 is not very much in percentage terms (3.7% to be precise) it still represents an awful lot of new registrations asserting that the security interest they are intended to protect arose out of an agreement put in place over 5 years earlier and remaining unchanged since that time.

When the PPSR first started, Transitional registrations were free to lodge and, regardless of the date of the registration, the perfection a Transitional registration provided was, effectively, backdated to before the PPSR’s commencement.  However, when the Transitional arrangements ended in February 2014, although still free, the perfection granted by a Transitional registration was no longer backdated and, like non-transitional registrations, only applied from the registration date.  From July 2015, Transitional registrations ceased to be free and began attracting the same charges as their non-transitional equivalents.

The only real difference now between a Transitional registration and a non-transitional registration is that section 337A of the Act states that if you identify your registration as relating to a Transitional security agreement it will be ineffective for any collateral that is not covered by a Transitional agreement. There is, of course, also that annoying section 51 of the Corporations Act that states that a Transitional security interest doesn't count as a PPSA Security Interest!

In other words, if you designate your registration as Transitional and it turns out that your security interest isn’t, your registration will be, effectively, worthless.

Importantly, there is no equivalent clause in the Act stating that non-transitional registrations would be ineffective if it turns out they concern Transitional security agreements!

Thus, mistakenly identifying your registration as non-transitional isn’t half as dangerous in its implications as mistakenly identifying it as Transitional!

While I can certainly understand lodging a Transitional registration during the first couple of years of the PPSR, and can understand the attraction of not being charged for lodging a Transitional registration up to July 2015, I’m not sure I understand the reasoning behind persisting with lodging Transitional registrations today.

18,686 represents the second highest number of Transitional registrations lodged during a quarter since the PPSA’s Transitional Arrangements came to an end and brings the total number of Transitional registrations lodged since that time to over 175,000 – of which almost 100,000 were lodged since the price differential was removed.

I can’t help worrying that there are a significant number of businesses that started following a template for registrations 5 years ago and haven’t made any moves to update it since.

My advice remains:

• If the agreement signed between you and your customer is dated after 30/01/2012 then you should register as non-transitional.
• If your applicable Terms and Conditions have been amended since 30/01/2012 you should register as non-transitional.
• If you can’t find a copy of your agreement with your customer then you should look to get a fresh one signed and register as non-transitional.
• If your signed agreement doesn't incorporate your security agreement and your retention of title clause only appears on your invoice then you should register as non-transitional.
• If you're in any doubt register as non-transitional.

Links to earlier articles relating to the Transitional vs Non-Transitional ‘debate’ can be found here.

PPS Leases – Extended to 2 years

I wrote on this issue in March when the Government’s Bill to extend the qualifying period for PPS Leases to 2 years passed its first reading.  I was sceptical at the time as to how swiftly we could expect the Bill to be enacted and come into effect but clearly, those lobbying for the changes carry some serious clout because Royal Assent took place on 19^th May and the terms of the Act are now in force.

While, superficially, the Act has merely served to double the qualifying period for leases to get caught up by the PPSA, more tellingly, the Act also keeps indefinite leases out of the PPSA’s claws until such time as the lessee’s actual possession of the leased property passes the 2 year mark. 

This is, by far, the more meaningful change and it will almost certainly be welcomed by all the small hire operations that don’t expect to hire their goods out for much more than a few days or weeks yet fail to put an expiry period on the lease. 

However, the relief that no doubt comes from not having to worry about the administrative burden of the PPSA may be offset by the corresponding loss of protection that having their leasing arrangement treated as a security interest allowed. 

Loss of protection from Preference demands

Under the PPSA, property being leased is treated as collateral in a security interest that would allow the lessor to recover their property in the event the lessee failed to continue making payments under the lease.  Up until now, a lessor will have been able to use the presence of this ‘security interest’ (provided it was properly registered) as a defence against any claim from a liquidator that monies paid under the lease should be returned as preferential payments. Under this new Act, it is difficult to see how a lessor (for an indefinite lease that has yet to run for 2 years) would be able to use that defence.

Loss of PMSI ‘super priority’

In order to be eligible for PMSI super priority where the collateral being used is designated as a non-inventory item, the perfecting registration must be lodged within 15 business days of the lessee taking possession of the property.

However, where an indefinite lease is concerned and the lessor doesn’t lodge their registration until it becomes clear the lease may extend beyond the new 2 year qualifying period, that 15 business days period may long since have passed leaving the lessor’s claim to their equipment to fall behind those of other general security holders with registrations already in place.

I notice that the Hire and Rental Industry Association (HRIA) has, rather dangerously, advised its members that registration within the PPSA designated timescale won’t be necessary in order to get PMSI priority; unfortunately, its explanation as to why this might be isn’t especially convincing.

It would have been far better for the new Personal Property Securities Amendment (PPS Leases) Act to have also adjusted the PMSI designation timescales to accommodate these changes and remove any doubt.

Vesting under the Corporations Act

Regardless as to how the PPSA might be interpreted, the Corporations Act, at s588FL, clearly states that…

If a registration has been lodged during the 6 months leading up to the appointment of a liquidator, it must have been lodged within 20 business days of the security agreement coming into force in order to avoid the collateral in question being vested with the liquidator.

Basically, if a registration isn’t lodged within 20 business days of the leasing agreement being entered into, the lessor has to keep their fingers crossed that a liquidator doesn’t get appointed to the lessee during the 6 months following their eventual registration.

If anyone gets a little lost at this point, I have a visual here that should help.

The PPSR, in explaining the implications of the new Act, suggests registering at 22 or 23 months into the leasing period, but this clearly won’t help lessors avoid falling foul of s588FL.

Fortunately, the HRIA recognises the danger that those at the PPSR clearly don’t and recommend that registrations be lodged before 18 months have passed if it looks as though the lease might go on for longer than expected.  Where there is already an expectation that the lease could last longer than 2 years, they recommend registering at the outset.

This seems a sensible workaround but, with proper prior public consultation and better thought out legislation, there should be no need for ‘workarounds’!

Summary

Leases and bailments entered into after 20 May 2017 will be subject to the new definition of PPS Leases and such leases will not need to be registered on the PPSR unless they are to run for longer than 2 years.

Agreements entered into before 20 May 2017 will remain subject to the previous definition of a PPS Lease and should still be the subject of a PPSR registration if they are due to run for longer than a year, allow for extensions taking the agreement beyond a year, or are for an indefinite period.

Update: Please see my post on "When does a Grantor take possession?" for some fresh thinking on some of the issues/concerns raised in this post.

Potential PPSA Loophole Firmly Closed

We have already discussed the case of Alleasing v OneSteel Manufacturing where Alleasing’s registration on the PPSR was deemed ineffective because it was lodged against OneSteel’s ABN instead of its ACN.  You can read more about this here.

Well, last month we heard of a similar case where HP Financial Services fronted up to the NSW Supreme Court to argue that their registration against Production Printing (Aust) P/L’s ABN instead of its ACN should be deemed effective.  Although HPFS trotted out most of the same arguments that were raised in the Alleasing/OneSteel case, they did present an additional argument that I understand has been raised a few times with Insolvency Practitioners but had not previously made it to court. 

The new argument revolved around section 166 of the PPSA where, in a fairly convoluted manner, it effectively says that:

If there is a defect in a registration, the registration will be temporarily unaffected by the defect if the defect did not arise only because of an irregularity, omission or error in a registration.

“Temporarily” in this context could mean as long as 5 years after the defect occurred or as little as 5 business days after the defect was drawn to the secured party’s attention.

In short, HPFS’s argument was pretty much, yes, there was a defect but, because of s166, it doesn’t matter.

While s166 was intended to provide some protection to secured parties who had an initially effective registration rendered ineffective by events beyond their control, its application in HPFS’s context would end up creating the ludicrous situation where there might be no repercussions arising from serious mistakes in registrations and the transparency the PPSR was intended to provide would be lost.

The key in this case relied upon HPFS being able to convince the court that the defect at hand did not only arise because of an error in registration. 

HPFS argued that, in addition to the ABN/ACN error in registration, the defect was also the result of the registration not being visible in the results of a properly conducted search of the PPSR.  Thus not only was the registration defective because of s153 of the PPSA but also because of s165.

Personally, this sounds a little like trying to argue that it wasn’t just the bullet through a murder victim’s head that killed them but also the fact that their heart then stopped beating!

Fortunately, Justice Black in his decision on 2^nd May was not swayed by HPFS’s central argument and supported the intended interpretation of s166.  The rest of HPFS’s case, which was largely dependent on achieving the ‘temporarily unaffected’ status s166 might have afforded, collapsed like a row of dominoes.

In summary, this is another court judgement to remind us that, yes, the PPSA does operate as we thought it did and, no, there isn’t any easy remedy when you don’t get your registrations right.

Details of the judgement (that I've probably simplified out of all recognition) can be found here:

https://www.caselaw.nsw.gov.au/decision/5906e0eee4b0e71e17f592cc

PPSR - Requesting an Amendment or Discharge

Recent posts have concerned themselves with how to conduct searches of the PPSR and how to set up an alert to be notified when a new registration has been lodged against you.

It seems a natural follow on to now look at your options should you find that someone has lodged a registration against you that you don’t believe should be there.

The most likely scenarios are where:

• Trading that had given rise to a security interest has been fully concluded with no reasonable expectation of further trading in the foreseeable future; or
• A trading partner (or indeed, anyone) is asserting a security right to which you have never agreed.

While a registration without a solid underlying security interest is, effectively, worthless it nevertheless has the potential to cause problems – particularly should you find yourself having to negotiate a loan with a fussy financier or deal with an overly cautious conveyancer when trying to sell some property. 

Your first course of action should be to write to the Secured Party that lodged the registration. 

While, for the sake of the legislation, you need to write to the person/contact point identified in the registration as the Address for Service, there is no harm in also involving a more familiar contact in the correspondence if you feel that might be helpful to your cause.

However, I would strongly discourage adopting an overly aggressive stance and threats of legal action and penalties should definitely be avoided.  I’ve had a number of such approaches referred to me and have found that, rather than intimidate the recipient, they have invariably provoked a desire on their part to dig their heels in and devote unnecessary time and effort into trying to find fault with the demand!

All that is needed is a short, polite letter, referencing the registration number in question, suggesting that the registration is no longer required/valid and requesting its discharge.  Importantly, the letter should also add that it is being sent in accordance with section 178 of the PPSA.

Something along the following lines should suffice:

Dear Sirs,

REQUEST TO DISCHARGE REGISTRATION 201401010007553

It has come to our attention that you have lodged the above registration against us on the Personal Property Securities Register.

We have reviewed our dealings with you and find them to have been fully concluded with no outstanding obligations; consequently we request that you effect the discharge of this registration at your earliest convenience.

We will review the situation in 5 business days’ time.

Please note that this letter has been sent in accordance with section 178 of the Personal Property Securities Act.

Yours faithfully… etc

Or, depending on the circumstances, the red text could be replaced with something along the following lines:

We have reviewed our dealings with you and find that no security interest of the nature described in your registration has been agreed by us

If your section 178 request to the Secured Party fails to elicit a satisfactory response, your next step is a section 180 request to the PPSR.

While the PPSA does not stipulate the length of time that should be available to a Secured Party to attend to your request, taking the next step of approaching the PPSR directly requires that they have had at least 5 business days to deal with your request.

To assist you in making your s180 request, the PPSR has a specially designed form for you to complete.  This can be found at:

Amendment Statement download

The form is comparatively straightforward although I’ll quickly run through the essentials.

All this information can be taken from the details of the registration itself.  If more than one Secured Party was listed on the registration (as may often be the case), you’ll need to complete one of these forms for each.

The form is asking for your details here – you are the applicant and, certainly in the context of this post, you are the ‘person’ identified as the Grantor in the registration.

Depending upon the circumstances, the response to the final question in this section:

Will depend upon whether you still have ownership of the goods in question or have used them up or on-sold them.

• If you still have ownership then your interest is an ‘Other Interest’,
• if you have on-sold them on terms that mean you still have a right to them in the event of non-payment then you have a ‘Security Interest’,
• but if you have used them up or on-sold them and have been paid in full, you have neither a ‘Security Interest’ nor ‘Other Interest’.

The amendment demand to which the first tick box refers will be the letter you sent to the secured party asking for the discharge – as you can gather, this box should be ticked and you should attach a copy of the letter.

In the circumstances we’ve been looking at in this post, box (a) should be ticked.  However, if you are seeking an amendment to a registration in respect of a legitimate security interest and merely wish to ensure certain specific collateral is excluded from its terms then (b) would be more appropriate.

The amendment demanded will, invariably, be the discharge of the registration.

Following the relatively self-explanatory declaration on the final page(s) the completed form should be sent to forms@ppsr.gov.au.

Once the form is processed by the PPSR, it will write to the Secured Party inviting them to comment on your demand.  The Secured Party has 5 business days to comment and, in the absence of any response, the PPSR will discharge the registration (or amend it) as per your request.

If the Secured Party responds, within the 5 business days permitted, to the effect that the registration should stay in place as per its current terms then, unless the Secured Party’s explanation is transparently spurious to the PPSR Registrar, your only remaining recourse will be to the Courts (section 182) – it would be exceedingly unusual if this became necessary.  But if it did, you’ll need to get professional legal assistance.

UPDATE 30th July 2021: The PPSR has revised its Amendment Demand form and issued its own guidance as to the amendment demand process.  Please see my more recent post HERE.