What is a PMSI?

What is a Purchase Money Security Interest?

A Purchase Money Security Interest (PMSI) is defined by the PPSA as occurring where ‘collateral secures its own purchase price’.

This happens when a supplier sells their goods subject to a Retention of Title right – it also happens when goods are sold out of a Consignment Stock arrangement or Leased.

The PMSI designation is important because it allows the supplier to enjoy a ‘super priority’ over the goods they are selling that will rank higher than any bank’s general security interest even when the bank’s interest was lodged earlier.

However, the security interest is ONLY over the supplier’s unpaid stock as long as it is in their customer’s possession.  

A PMSI security right MUST be identified on the supplier’s PPSR registration if it is to achieve its maximum potential effectiveness.

PMSI registrations over goods that will form part of the buyer's inventory (eg, for on-sale, or inclusion in a product for eventual on-sale) must be lodged before the goods are delivered to the buyer although the PPSA allows an additional 14 days' grace for any other goods.

Note: Suppliers should only 'tick the PMSI box' if they have been granted PMSI rights (eg, they have a Retention of Title over their goods) - ticking the box when a PMSI right has not been granted may invalidate an otherwise effective registration.

When should a PPSR registration be lodged?

In general terms, the answer is ‘as soon as possible’ and, in this context, that means, as soon as the supplier has a reasonable belief that they may be doing business with the grantor in question and that such business will involve the granting of a security interest.

In order to avoid falling foul of the Corporations Act, the supplier’s registration should be lodged within 20 business days of their security agreement being formed. For trade credit suppliers, that security agreement will usually be represented by the signing of the initial credit application by which the supplier’s Terms & Conditions of trade are accepted (provided, of course, that those T&Cs contain the supplier’s security rights – usually in the form of a Retention of Title clause).

If the registration is not lodged within that 20 business day period, the supplier runs the risk that, if their customer falls insolvent in the next 6 months, a liquidator will be able to use section 588FL of the Corporations Act to, effectively, ignore the registration.

I’ve written at greater length on the implications of section 588FL HERE.

Obviously, if the supplier misses that 20 business days window, they should still go ahead and register on the PPSR as soon as possible, it just means that they’ll need to keep their fingers crossed that a liquidator doesn’t get appointed during the next 6 months – once 6 months have elapsed with no liquidator in sight, the supplier can relax.

If we put aside for one moment the Corporations Act provisions, the other key timing issue concerns the effectiveness of your Purchase Money Security Interest (PMSI) rights.

As we know, Retention of Title suppliers, those providing goods on a Consignment Stock basis, and long-term leasers of equipment automatically qualify for having the security arrangements that those trading practices represent designated as PMSIs, thus entitling them to a super-priority over any earlier (or later) registered general security interests.

However, in order to ensure their PMSI right is effective, the registration must be lodged within specific time frames:

Where the Collateral is Inventory	Before the grantor takes possession of the goods
Where the Collateral is not Inventory	Within 15 business days of the grantor taking possession of the goods

Any registration lodged outside of those time frames will still be valid, but it won’t benefit from the super-priority that the PMSI designation would otherwise afford.

If repeat supplies are involved, suppliers should remember that even though they may have registered too late for the first few deliveries, a registration will still be effective over later deliveries.

Protecting Your Gear On Site

February saw the collapse of WA based builder Cooper & Oxley accompanied by scenes of subcontractors climbing over fences and evading security guards in order to attempt to recover tools and equipment that they had left on project sites.  You can find an example here.

Since then, there has been an understandable increase in advice being offered to subcontractors as to how they might be able to protect themselves.  What has been less understandable, however, is the oft-repeated suggestion that a registration on the PPSR might act as some sort of golden ticket allowing a subcontractor to recover any of their gear they might have had stored on site.

If you are selling goods subject to a right to recover those goods if you’re not paid for them, then a registration on the PPSR is essential if you want to be able to exercise that right against a liquidator or administrator etc.  Similarly, if you are engaged in a long-term hire of goods (and by long, I mean at least 2 years) then, again, registration is essential to protect those goods from falling into the hands of an Insolvency Practitioner. 

However, such leasing arrangements and conditional sale agreements are specifically deemed to create security interests under the PPSA; simply storing your tools on a building site overnight is not.

When a company goes into liquidation, the liquidator is entitled to treat any property that is used as collateral in a security interest as having vested in the insolvent company and thus available to be liquidated for the benefit of creditors.  The only real exception to this is where that collateral/security interest has been registered on the PPSR.

 

Because a subcontractor’s tools are not the subject of a sale (conditional or otherwise) to the insolvent company and are not being leased to them, the liquidator has no right to treat them as if they were the property of the main contractor. If they're not collateral in a security interest, there's no danger of them vesting in the insolvent company.

If that is the case, why do we read about subcontractors and tradies being locked out of sites, unable to recover their tools?

One of the first jobs a liquidator needs to do, on arrival, is to take stock and evaluate what assets the company might hold.  They can’t do this effectively (or fairly) if there is a steady stream of people marching onto the site and walking off with whatever property they can lay their hands on – some of it may well be their own but some of it may be the company’s and some may actually belong to other subcontractors.

In this sense, the liquidator is a little like the coroner arriving at the site of a freshly discovered body in popular American TV shows.  Their first job is to protect the integrity of the crime scene and then, gradually, determine to what extent the items found in and around that scene were relevant to the body and the means by which it came to be dead.  If you happen to have lost your car keys in that area, it will be understandable if you have to wait a while before you can get them back!

And so it is with a liquidator, they’ll need to ensure they can identify what goods belonged to the company and what belonged to subcontractors and then they’ll need to ensure that the right gear is made available to the right subcontractor.  To do this properly will, unfortunately, take time.  

From subcontractors I’ve spoken to, while the delay in getting their gear back is extremely frustrating, they do eventually get their stuff back and, if they don’t, it’s invariably because it had been taken by another subcontractor trying to grab what they could, presumably, in an attempt to offset money owed to them by the company.

Not only is a registration on the PPSR not necessary and will do nothing for the rights of the subcontractor in recovering their tools, it may even create confusion, leading to further delays in the subcontractor being reunited with their gear.

There’s been a suggestion that, while it won’t be perfecting a security interest, a PPSR registration might nevertheless serve as some sort of ownership document ‘proving’ that certain tools belong to the particular subcontractor.

Given that a PPSR registration can be lodged by anyone, for anything against anybody so long as they have a credit card with an available balance of at least $6.80 and that there’s no checking or verification that its details bear any relationship to reality, there is absolutely no way that a liquidator is going to accept a PPSR registration along these lines at face value.

Liquidators spend large amounts of their time picking holes in, and generally finding fault in, PPSR registrations and will not be convinced by a registration that, effectively, says that “a box of spanners and a hammer with a red handle” are owned by a particular tradie.  Even being able to identify tools by serial numbers won’t be treated as any evidence of ownership.

If proving ownership is the issue, it will be far more effective simply to have your name inscribed/labelled on the tool than to have it registered on the PPSR.

In short, while suppliers selling goods on Retention of Title terms, and hire companies, hiring goods on a long-term basis would be foolish not to register their interests on the PPSR, it would be foolish for subcontractors and tradies, looking to protect their tools, to think that a PPSR registration would be of any help.

When does the Grantor take possession?

I recently had cause to read a helpful summary of a decision by the South Australian Supreme Court in the matter of Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd [2017] SASC 163.  While much of the background to the case is a little fiddly, I’ll give a short ‘broad strokes’ summary in order to help demonstrate why this might be a very useful decision for the hire industry.

For those wanting a more detailed look, I recommend the summary HERE  or, for those that want a real thrill, the full text of the judgment can be found HERE.

The case concerned Bill’s Motorcycles – a dealer, selling and servicing Kawasaki motorcycles.  Bill’s had been financing its floor stock with one financier but then struck an agreement with another (Allied Distribution Finance – ADF).  Bill’s stock of 40 motorcycles (secured by the original financier) was bought out by Kawasaki and, effectively, sold to ADF.  Bill’s maintained possession of the motorcycles and ADF lodged a PMSI registration on the PPSR to perfect its security interest over them.

When Bill’s went into administration a couple of months later, there was a dispute concerning those 40 motorcycles between Samwise, the holder of a General Security Interest (AllPAAP) over all Bill’s assets and ADF as a PMSI holder.

While a PMSI will usually take priority over an AllPAAP, in this case, Samwise argued that because Bill’s was already in possession of the motorcycles at the time ADF lodged their PMSI registration,  ADF had failed to meet the time-scale requirements of section 62 of the PPSA.

Section 62, effectively, states that, in order to achieve PMSI priority over inventory items, a registration must be lodged before the grantor obtains possession of the property.

Samwise argued that, as Bill’s had already been in possession of the motorcycles for some time before ADF lodged their registration, ADF was not entitled to PMSI priority.

In his judgment, Justice Blue determined that, in the overall context, the implication of section 62 should be taken to mean that the registration must be lodged before the grantor obtains the type of possession that would entitle them to grant a PMSI interest in the property.

Thus it is the grantor’s possession in the role of PMSI grantor that matters, rather than their mere physical possession of the property.

While this is unlikely to be of any assistance to trade credit suppliers forgetting to perfect their Retention of Title rights in time, it may have implications for the long-term hire industry.

Last year, the Government made changes to the manner in which hires and leases were caught up by the PPSA.  In short, the changes involved leases for less than 2 years no longer needing to be registered on the PPSR.  Where a lease was established for an indefinite period that may or may not extend beyond 2 years, the new legislation only required a registration to be put in place once that 2-year limit was breached.

When I posted about the new legislation, I wrote:

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.

Justice Blue’s decision in the Bill’s Motorcycles case suggests that, while a lessee may have been in physical possession of property for 729 days, it will only be at the 2 year mark they have possession in the capacity of a grantor of a PMSI right and it should, therefore, be at that 2 year point when the PPSA’s 15 business days countdown for a PMSI eligible registration should commence.

Whether this interpretation is sufficient to also satisfy the Corporations Act’s dreaded section 588FL is another matter! 

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.

New PPSA Amendment passes its first reading

The first day of the new season saw the Government introduce the Personal Property Securities Amendment (PPS Leases) Bill 2017.

As the element in parentheses indicates, the Bill concerns an amendment to the manner in which the PPSA deals with leasing arrangements.

At present the PPSA only applies to leases that run for longer than one year, are for a shorter period but allow for extensions that would take them beyond one year, or are for an indefinite period.

The new Bill basically takes that one year qualifying period and extends it to two years.

But before anyone suggests holding off on lodging that backlog of registrations you’ve got piling up, the Bill (if enacted) isn’t intended to apply retrospectively and it’s anybody’s guess as to when it will actually come into effect given that the last amendment of this nature took 15 months to pass and another 3 months to get Royal Assent!

Clearly a lot of lobbying has been taking place behind the scenes because, at least from my point of view, this Bill is something of a surprise – there was certainly no recommendation in the official review of the PPSR to extend the PPS Lease period.

However, the Bill does incorporate an element of one of the Review’s recommendations where indefinite leases are concerned.  If passed, indefinite leases will only require registration once the goods being leased have actually been in the possession of the Grantor for the two year period. 

While this will obviously be a substantial relaxation of the rules for businesses that essentially deal in short term hires but don’t explicitly identify a maximum end date, it will be interesting to see how this ties in to the Corporations Act - s588FL of which pretty much requires registration within 20 business days of the leasing agreement being signed to avoid risking losing hired goods to any liquidator appointed within 6 months of the actual registration date.

UPDATE: This Bill was formally passed on Thursday 11th May and will come into effect as soon as it has Royal Assent.

Greater Clarification for Fixtures under the PPSA

No sooner has the first anniversary passed of the court's judgment in Forge Group Power Pty Limited (in liquidation (receivers and managers appointed) v General Electric International Inc & Ors (2016) than a judgment has been handed down on the first significant appeal against that decision.

I won't go into any great detail concerning the original judgment (particularly because I've already written on the subject here) but, suffice to say, it involved a lot of money ($50 million) and whether or not the leased property in question should be treated as a fixture.

The latest judgment in Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) [2017] saw the Court of Appeal being asked to reconsider whether the turbines in the original case really were the non-fixtures the court found them to be.

The appellants' argument was (largely) that the PPSA did not use common law concepts regarding fixtures but instead created its own definition (effectively, property affixed to land) and because the turbines in question were substantially 'bolted' to the ground, they had become fixtures and thus fell outside the auspices of the PPSA.

The argument, however, appeared to carry little weight with the Court of Appeal which, in dismissing the appellants' case, held that:

The definition of ‘fixtures’ in the PPSA was intended to import the common law notions of affixation that ‘a fixture is an item of tangible personal property that is annexed to real property in such as way as to become a part of the real property and that whether an item is a fixture “depends on the degree and purpose of annexation of the item as well as the rebuttable presumption that what is fixed to land is a fixture and that which is not remains a chattel”’ is the relevant test (not a bespoke test such as a fixture is a ‘non-trivial attachment’),

In short, merely being attached to land (or a building built on the land) doesn't necessarily render an item of property a fixture - it actually has to become part of the fabric of the real estate in question in order to be considered a fixture.

Although much will depend upon the purpose the property is intended to serve by being attached to a building this should still be something of an alert to suppliers who might otherwise have been too quick to assume the PPSA would not apply to goods they were supplying.

Correct Identification of the Grantor

The end of January saw the NSW Supreme Court hand down a stark reminder that failing to correctly identify a Grantor when lodging a registration on the PPSR will have serious (and potentially very expensive) repercussions.

The case concerned the lease of some $23 million or so worth of equipment from Alleasing Pty Ltd to OneSteel Manufacturing Pty Ltd. The leases in question satisfied the PPSA's definition of PPS Leases (s13 of the Act) and were duly registered on the PPSR in order to protect Alleasing's continued interest in the equipment.  Unfortunately for Alleasing, the registrations identified OneSteel as the Grantor by reference to OneSteel's ABN, whereas the PPS Regulations (via some rather convoluted wording) required that the registration identify OneSteel by their ACN.

Although it might be argued (and to some extent it was) that there was no misunderstanding concerning the legal entity that was acting as Grantor - both ABN and ACN clearly identified OneSteel Manufacturing - the issue was more focused upon the extent to which a failure to strictly adhere to the Regulations' identification rules was sufficient to render the registration ineffective.

Because a legally effective search for registrations lodged against OneSteel would need to be conducted on the PPSR against OneSteel's ACN (and thus would not reveal registrations lodged against its ABN) the court found that Alleasing's registrations were ineffective and not sufficient to prevent Alleasing's equipment from vesting in OneSteel and its administrators.

Alleasing claimed that administrators would customarily conduct searches against both ACN and ABN of a Grantor company, and would thus not have been misled by their ABN-based registration; however, this appeared to carry little weight with the court and failed to carry the day.

In this case the letter of the law clearly won out over its, alleged, spirit.

While reports of this action appear to have generated quite a bit of interest judging by blog posts and emailed newsletters, there really isn't anything particularly surprising here.  The PPSA doesn't require a great deal of information to be supplied in a registration but what is supplied must be accurate and in strict accordance with the PPSA's rules.

Although there were a couple of other issues raised in this case, it is perhaps timely for me to provide, at this point, a rough summary of the PPS Regulations' rules for identifying Grantors:

Grantor Type	Grantor Details Required
Sole Trader	Full Name (as per drivers licence) and date of birth
Sole Trader acting as Trustee	Trust ABN (if the Trust does not have an ABN, as per ‘normal’ Sole Trader)
Partnership	ABN
Partnership acting as Trustee	Trust ABN (if the Trust does not have an ABN, as per ‘normal’ Partnership)
Partnership without an ABN	Full name and DOB of each partner (or ACN’s of each if a corporate partnership)
Company with an ACN and no Trust involved	ACN
Company with an ACN acting as Trustee	Trust ABN (if the Trust does not have an ABN, as per ‘normal’ Company)
Corporate entity without an ACN	Full name of the business as per articles of association
Government Entity	ABN
Trust	Trust ABN (if no ABN, use rules as per the trustee)

As I've said and written in other places, 'close enough is good enough' and 'she'll be right' are expressions that should never be uttered in the context of a PPSA registration.

GE vs Forge Group (aka APR Energy vs KordaMentha)

The 11^th February saw a decision handed down in the NSW Supreme Court in the battle between the receivers of the Forge Group (KordaMentha) and the US-based, General Electric International Inc over KordaMentha’s claim to gas turbines totalling $50 million.

I've already written here concerning the outcry from US business and politics regarding the matter, now we get to hear the court's view.

In case you haven’t already read elsewhere, I won’t keep you on tenterhooks, the decision represented a victory for KordaMentha. 

Justice Hammerschlag ruled that the absence of a PPSA registration in respect of turbines leased by GE to Forge Group under an agreement in March 2013 meant that title to those turbines vested in Forge Group upon their insolvency the following March. Put simply, a win for the receivers, who get an extra $50 million in assets to play with, and a loss for the American company that actual holds (held) title to the property.

While there will no doubt be more than a few headlines hailing this as a ‘victory for the PPSA’, the legal argument was a little more nuanced.

The issue before the court concerned some technicalities of the PPSA, and the right provided by the Act for PPSA security interests to be vested in the insolvent company was never actually in dispute.

GE instead chose a two-pronged argument:

• That the goods represented fixtures (the PPSA explicitly does not apply to fixtures); and
• That GE, while having leased the turbines, was a company not regularly engaged in the business of leasing goods (the PPSA also does not apply to leases in such circumstances).

On the matter of fixtures, J Hammerschlag found that the weight of evidence made it clear that, not only was there no intention that the turbines become fixtures but, their very nature (designed to be demobilised and moved to another site, quickly and in a short time, there was an obligation for the turbines to be returned at the end of the lease period, that the turbines could be removed at a relatively low cost without damage to either the land or the turbines themselves etc) meant that they should not be deemed fixtures for the purposes of the Act.

As to whether GE was regularly engaged in the business of leasing, this was relatively easily confirmed by a simple review of GE’s leasing history.  This confirmed that from 2003 to the present time GE had been no stranger to leasing its equipment, that it was a “proper component” of their business and conducted with sufficient repetitiveness to satisfy the court that their leasing arrangement with Forge fell under the auspices of the PPSA.

Therefore, not so much a victory for the PPSA as much as it is a victory for the PPSA’s definitions.

Those wanting to read up on the case in detail can find the full judgement at this link.

PPSA Amendment Finally Passes! [UPDATED]

Back in March 2014, I wrote about a Bill being put before Parliament to do away with the two tier system the PPSA had introduced whereby leasing arrangements were treated differently depending upon whether they involved serial numbered equipment (eg, motor vehicles and watercraft) or non-serial numbered equipment (eg, everything else).

That article, giving some background to the Bill and its implications, can be found here.

Finally, towards the end of last month, that Bill, the Personal Property Securities Amendment (Deregulatory Measures) Bill 2014, was passed.  While the approximately 15 months wait to get this approved won't be good news for those looking for swift implementation of any of the 394 recommendations included in the recently completed review of the PPSA, it will be good news for those businesses regularly engaged in the of hiring vehicles for periods of less than a year.

The Government has estimated that bringing the hiring of motor vehicles into line with the hiring of any other piece of equipment will save business over $11 million a year - whether that is based purely on the saving of registration fees or also includes the administrative costs involved in preparing and lodging a registration is not clear.

The good news, however, won't be felt just yet.  The Act needs to receive Royal Assent before it can be introduced and such introduction may take up to a further 6 months from that point.  

[UPDATE: An announcement by the PPSR today (28/08/15) advises that "The Government is working toward commencement of the amendment on 1 October 2015."]

Any leasing arrangements entered into before the, yet to be announced, amendment commencement date will still need to be registered in accordance with the 'old' rules but after that date, a great many small and medium sized businesses will have found themselves released from an annoying strand of red tape.

Just to reiterate - at present, if you are leasing a motor vehicle (or equipment that might fall under the Act's rather broad definition of motor vehicle) where the period of the lease falls into one of the following categories:

a) a term of more than 90 days; 
b) for an undefined period that may be construed as allowing for a hire extending beyond 90 days; or 
c) for any other period that allows, via automatic or optional renewal, extension to a total period exceeding 90 days.

A PPSR registration is necessary to prevent your property being taken as part of your customer's estate in the event a liquidator is appointed.

After the new amendment comes into force, the rules for motor vehicles will be just the same as for any other hired equipment:

a) a term of more than 12 months; 
b) for an undefined period that may be construed as allowing for a hire extending beyond 12 months; or 
c) for any other period that allows, via automatic or optional renewal, extension to a total period exceeding 12 months.

Any standard leasing arrangement that falls outside of any of the above situations need not register and need not run the risk of a liquidator taking possession of your equipment.

PPSA – The Americans don’t like it!

Many will have heard by now of the action being taken by KordaMentha, as receivers of Forge Group, against the US Company, APR Energy. 

The Forge Group had been leasing two power generators worth $50 million from APR Energy on a long-term basis.  Once Forge went into administration, this lease was deemed to be a security interest under the PPSA and, because it had not been registered on the PPSR, considered vested in Forge for the administrators to do with as they will.  APR is, understandably, not best pleased with this prospect and the argument is going to be heard in court.

However, my interest in this article is not so much with the ins and outs of the legal case so much as it is with the extent to which US interests, supportive of APR’s position, have been so prominent in the submissions given to Bruce Whittaker’s statutory review of the PPS Act.  The following are a few choice extracts from some of the contributions:

APR is currently being caused severe economic hardship as a result of an illegal seizure of its property by a major Australian financial institution and the liquidators for an Australian power generation company. …

At the heart of the dispute is a most unfortunate claim under color of the PPS Act by Forge and ANZ Bank to possess and take title to APR’s Gas Turbines, valued at US$64 million, without due process of law and without compensation of any kind to APR…

Forge’s largest creditor, ANZ Bank, through its appointed managers and receivers, is seeking to illegally convert APR’s Gas Turbines as payment for a substantial debt owed by Forge to ANZ Bank. 

Former member of the US Congress, Lincoln Diaz-Balart.

I have recently learned about your review of the Personal Property Security Act (PPSA) and would like to urge you to take into consideration the devastating effects of Section 13 of the PPSA for American companies doing business in Australia.

As you know, Section 13 allows certain entities to make false claims against property that is owned by American companies and being leased to Australian individuals and businesses. Under this law, American companies can loose hundreds of thousands of dollars in equipment to the Australian government in the event of bankruptcy. This is extremely troubling and Section 13 should be modified to prevent this.

The City of South Houston Chamber of Commerce. (Note: Section 13 of the Act provides a definition of what constitutes a PPS Lease).

We are consistently looking to expand into new markets where there is stability and opportunity.

I am, therefore, concerned about what I have learned about Australia's recent Personal Property Securities Act 2009 (PPS Act). As I understand it, Australia's PPS Act is being used by unscrupulous entities to illegally seize American-owned property and hold it for ransom. Failure by the owner to record its ownership interest can lead to the loss of everything from

vehicles and plant machinery to shares, intellectual property and contractual rights. 

For small businesses like mine, the loss of even one machine under such a scenario could be catastrophic. You tack on subsequent legal fees and companies like mine can find themselves in a hole from which they cannot remove themselves. In short, the PPS Act has turned the idea of doing business in Australia from an appealing to a dangerous gamble.

Barbara Woerner, Vice President of James Woerner Inc, New York.

Section 13 of the PPS Act will allow unscrupulous entities to register bogus security interests in leased property owned by companies doing business with BD Global. Treatment of lease agreements as security interests under the PPS Act allows Australian companies to improperly list leased property as security for a commercial loan. If the loan is in default, the lessor, which is often an American company has lost all rights to the property.

Blaine D. Hone, CEO of BD Global, Utah.

The PPSA has created an opportunity for dishonest entities in Australia to seize American-owned property and hold it hostage. By registering bogus "security interests" in property that is owned by American companies and leased in Australia, these entities are attempting to secure the property and quash the ownership rights of American companies. This has created a very dangerous and unstable situation for local companies that export valuable equipment to Australia pursuant to short-term lease agreements.

Thaddeus M Jones, Illinois House of Representatives, 29^th District.

Needless to say, these submissions all include a reminder of the important contribution US companies make to Australia and the extent to which that will be jeopardised without some special treatment being extended to US/foreign companies under the PPSA.

The full text of these submissions can be found at the following link: http://www.ag.gov.au/Consultations/Pages/StatutoryreviewofthePersonalPropertySecuritiesAct2009-SecondRound.aspx

While it would be easy to be snide about the characterisation of what is happening in the APR Energy case as ‘dishonest’, ‘bogus, ‘improper’, ‘illegally seize’, ‘hold for ransom’ etc, and to be cynical about what could be interpreted as veiled threats, there is, nonetheless, the very real issue that the Australian Government introduced the PPSA and then kept (relatively) quiet about its implications. 

Where were the press, TV, and radio advertisements announcing that if you didn’t register your credit sale or lease of goods you ran the risk of losing your property?  Where were the massive billboards saying ‘register it or lose it’?

PPSA – Changes proposed for those hiring serial numbered goods.

19^th March saw the tabling of the Personal Property Securities amendment (Deregulatory measures) Bill 2014 in parliament.  Not the most helpfully titled Bill, its contents are nevertheless pleasantly short and to the point and concern themselves with making life easier for small and medium sized businesses hiring out equipment that can be classified as either motor vehicles, watercraft or aircraft.

The Current Position

At the moment if you are leasing goods to another business for a period of 12 months or more (or for an indefinite period) you need to register that lease as a security interest on the PPSR in order to protect your ownership rights in the event that the business leasing your goods goes into administration. 

However, if the goods you are leasing can be defined as motor vehicles, watercraft or aircraft, then the qualifying criteria that the leasing period be at least 12 months is reduced to 90 days and hirers need to lodge registrations on the PPSR for comparatively short term leases in order to protect their ownership.

The Proposition

This Bill proposes to amend the Personal Property Securities Act 2009 (PPSA) so that leases of motor vehicles, watercraft and aircraft of 90 days or more will no longer be deemed to be PPS leases for the purposes of the PPSA.  This will minimise the need for small and medium hire businesses to make registrations in respect of leases of a term of less than 12 months.

The change will bring the PPSA into alignment with personal property securities (PPS) regimes in other common law countries (such as New Zealand and Canada) where a lease is deemed to be subject to PPS laws where the lease is for more than 12 months or an indefinite term. 

By reducing the number of transactions giving rise to PPS leases, the Bill should substantially reduce the compliance cost born by small and medium hire businesses.

Conclusion

The original decision in the PPSA to operate a two tier system for leased goods, one for serial numbered goods (motor vehicles etc) and another for everything else, seemed an unnecessary complication that provided no obvious benefit to anyone and a lot of pain for anyone unfortunate enough to have their equipment fall under the very broad definition of ‘motor vehicle’.

The decision to rectify this should be welcomed.

The provisions of the Bill will take effect not later than 6 months from it receiving Royal Assent.

When Transitional Arrangements Don’t Apply

The PPSA and its transitional provisions got another run through the courts in the case of The Receivers of Maiden Civil (P&E) Pty Ltd & Others v Queensland Excavation Services Pty Ltd & Others NSWSC 852 in which a decision was handed down last week.

In many ways the case is not especially noteworthy (other than by virtue of involving the PPSA) and is mainly being cited as confirming what was pretty much accepted anyway:

That the supplier of unpaid for goods will lose them to the liquidator of the company to which they had been supplied unless the supplier holds a perfected security interest over them.  (Section 267 of the PPSA refers).

This will apply whether the goods have been supplied under a contract of sale, leasing arrangement, consignment stock agreement etc.

In the case of Maiden Civil v QES the supply was under a long term leasing arrangement.

Leasing arrangements are deemed by the PPSA to automatically qualify for security interest status by their very nature (sections 12 and 13 of the PPSA refer).

What was particularly interesting to me; however, was why the court determined that the lessor’s security interest had not been perfected by the PPSA’s transitional rules.  The leasing arrangement had been put in place long before the start date of the PPSR and there was nothing about the lease that exempted it from the purview of the PPSA so why no transitional protection?

The answer appears to lie in section 322(3) of the PPSA. 

322(1) covers when the perfection of a transitional security interest begins, 322(2) covers when that perfection ends and 322(3) covers exceptions as follows:

(3)               Subsections (1) and (2) do not apply to a transitional security interest in collateral if the interest is of a class prescribed by regulations made for the purposes of this subsection.

Unfortunately, this didn’t make things much clearer to me until I opened up the Personal Property Securities Regulations 2010.  This is a formal legislative instrument that, among other things, provides a definition of Motor Vehicle and Watercraft and provides some rules relating to access to the PPS Register.

It also, at regulation 9.2, clarifies what is meant at 322(3) of the PPSA, by stating:

         (1)   For subsection 322 (3) of the Act, a transitional security interest is prescribed if, before the registration commencement time it was:

               (a)    registrable on a transitional register, under legislation that conferred priority on security interests that are registered; and

               (b)    not registered.

What this means in practice is that, because at the time of entering into the Leasing arrangement there was already a perfectly good pre-PPSR register in place for registering such interests (in this instance the NT Register of Interests in Motor Vehicles and Other Goods) that was not used, the PPSA’s transitional rules will not apply.

Basically, if you didn’t have your act sufficiently together to register your security interests on the appropriate register before the PPSR was introduced then you can’t rely on the PPSA’s transitional rules to save you when things go wrong!

There’s an excellent overview of the full circumstances of the Maiden Civil case to be found at http://www.herbertsmithfreehills.com/insights/legal-briefings/key-ppsa-decision-nswsc-confirms-vesting-of-unperfected for anyone interested in reading further.

PPSR Facts n Figures

The PPSR’s Registrar, David Bergman provided the following statistics for the PPSR’s first 9 months of operation:

Security Interests currently registered on the PPSR = 7.5 million

Migrated or pre-loaded security interests = 6.3 million

Registrations lodged since 30^th January 2012 = 1.2 million

As far as Collateral Class is concerned, the vast majority of registrations are in respect of Motor Vehicles accounting for a massive 4.1 million registrations.  Next up are AllPAP (All Present and After Acquired Property) registrations at 2.3 million with ROT and Leasing registrations combining in third place at 864,000.

2.3 million searches have been undertaken so far on the PPSR – just over 60% searching for specific serial numbered goods, a little under 10% searching by registration number and the remaining third searching by grantor name.

Interestingly, in the July to September quarter, there were nearly twice as many amendments and discharges undertaken on the PPSR than new registrations!

New Registrations            579,424

Amendments                    730,885

Discharges                       358,489

Statistics for the July to September 2012 quarter can be found at http://www.ppsr.gov.au/NewsRoom/News/Pages/StatisticsJulytoSeptember2012.aspx

P

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.