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.

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.

Someone else has possession of my goods; do I need to lodge a PPSR registration against them?

Given the number of statements we’ve seen suggesting that the PPSA ‘completely changes our concept of ownership’ and the horror stories revolving around legal owners losing their property, it is quite natural to explore all the possibilities when it comes to protecting your property under the PPSA.  Should I be lodging a PPSA registration each time my property leaves my possession?

If you are renting warehouse space, if you are having your goods transported by an independent haulier, if you are locating your IT infrastructure off-site, should you be lodging a registration?

The PPSA lists a number of circumstances that may give rise to a security interest where one would not otherwise think in terms of traditional ‘security interests’.  The most common examples for us are, of course, retention of title clauses, consignment stock arrangements and leases; however, under this last category, the PPSA actually uses the term PPS Lease.

A PPS Lease may be a lease or bailment of goods for a year or more or for an indefinite period (section 13 of the Act refers).

Bailment is a common law concept where possession of personal property is transferred from one person (the bailor) to another person (the bailee) for purposes other than the transfer of ownership.  The example often given is where a restaurant or theatre (the bailee) provides an attended cloakroom free of charge to its customer (the bailor) for the safekeeping of their hats and coats.

While there are similarities with Leasing, leasing typically involves the lessee not merely taking possession of the lessor’s property but also making use of it and putting it to the lessee’s own purpose.  The concept behind bailments is more geared to safekeeping.

If we take the example of a business looking to locate their computer servers off-site at a third party’s premises, they are the bailor, placing their intellectual (and physical) property in the possession of another party, the bailee, for their safekeeping.  The arrangement is, presumably intended to be comparatively long term and thus there is, prima facie, a good case for it being treated as a PPS Lease.

However, at s13(2)(b) of the Act we are advised that a PPS Lease does not include a bailment by a bailor who is not regularly engaged in the business of bailing goods.

Our example business is a company engaged in the business of selling widgets thus ‘bailing’ its intellectual property would probably not be an activity associated with its main business.  I’d like to think that such an interpretation would stand up in court but, in the absence of legal precedent in Australia, we have to resort to querying NZ legal cases.  The closest we get in NZ seems to be the case of Rabobank New Zealand v McAnulty in 2011 where it was determined that the owners of a racehorse put out to stud with the bailee were regularly engaged in the business of profiting from their horse rather than engaged in bailments.

The final criteria for a bailment being a PPS Lease occurs at s13(3) wherein it is stated that a bailment will only be a PPS Lease where “the bailee provides value”.

While the computer storage facility will certainly be providing a valued service (that of hosting our business’s servers) I suspect that the Act is intending a much more narrow definition of ‘value’, specifically monetary payment or similar.

So, to summarise:

Our business is likely to be engaged in what might be considered, under common law, as a bailment of their intellectual property to the third party’s off-site computer facility.

This bailment would be deemed under the PPSA as a PPS Lease and thus be registrable on the PPSR provided:

1.            It is for a year or more, or for an indefinite period; and

2.            Our business is regularly engaged in bailing their property; and

3.            The off-site hosting company is providing ‘value’ (possibly payment) in their role as bailee.

While (1) above is probably satisfied, (2) and (3) are probably not, therefore, such an arrangement is unlikely to be registrable under the PPSA.  

It then follows that, if the bailment arrangement does not meet the full criteria for being a PPS Lease, a liquidator attached to the bailee would not be able to vest the bailor’s property as part of the bailee’s assets.

UPDATE: Since May 2017 the eligibility period for a lease or bailment being considered a PPS Lease has increased from 1 to 2 years.  For an indefinite lease or bailment, the PPSA will only apply once the 2 year period has elapsed.