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.

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.

PPSA - Parting with Possession & Bailments

It is funny to think that it wasn’t so very long ago that PPSA experts were trying their hardest to expand everyone’s thinking when it came to security interests – it wasn’t just charges, liens and guarantees, it was also Retentions of Title and Leases.  Well, perhaps the message has been getting home because we’re now seeing requests for advice regarding the registration of collateral whenever it may spend time out of its owner’s possession.

Scenario

LUMBERJACKS have legal title of recently felled trees, they then transfer possession (but not ownership) of those trees to PLANKERS who saw the trees into usable planks of wood and then transfer possession of the wood back to LUMBERJACKS.

LUMBERJACKS have a contractual obligation to make payment to PLANKERS for their value added services.

While it is likely, depending upon the Terms & Conditions agreed to by both parties, that PLANKERS may have a valid security interest in the wood to protect themselves against the possibility that LUMBERJACKS default on their obligation to make payment for PLANKERS’ value added services the question arises as to whether LUMBERJACKS have a PPSA security interest in the wood to protect themselves from the possibility of the wood, while in the possession of PLANKERS, being swept up by a receiver/liquidator appointed to PLANKERS.

In addressing this issue it is useful to set the context by reminding ourselves that the PPSA was established, in large part, to ensure an equitable treatment of security interests.  An applicable security interest under the PPSA is one that uses personal property to secure a payment obligation.

While, for example, a Retention of Title clause included in a supply agreement technically constitutes a statement of ownership, because its effect is to secure a payment obligation it is treated as a security interest and is brought under the auspices of the PPSA.  Similar inclusions have been made for leasing arrangements where a lessor has the right to recover goods in the possession of a lessee in the event of default of the lessee’s payment obligations.

However, in the scenario defined above there is no payment obligation on the part of PLANKERS to LUMBERJACKS and, whilst the goods may be in the possession of PLANKERS their recovery by LUMBERJACKS would be conducted purely on the grounds of ownership rather than as collateral under a security interest and therefore outside the bounds of the PPSA.

A more typical day to day example might be to think of having to lodge a PPSA registration every time you park your car in a car park against the possibility that the car park owners go bust while you are doing your shopping and the liquidators sweep up your car in the process.

Similarly, because the wood in question cannot be deemed a security interest under the terms of the PPSA, any receiver/liquidator appointed to PLANKERS would be unable to use the PPSA to harvest that collateral for the benefit of other creditors.  LUMBERJACKS should thus be able to rely on common law to repossess their own property just as they would have been able to do in a pre-PPSA environment.

Having stated the above, there is provision under the PPSA for a security interest to be created in the case of Bailments. 

A Bailment is formed by delivery of personal property without transfer of title by a bailor to a bailee for a particular purpose giving rise to a duty of care.  Upon completion of the particular purpose the bailee is obliged to return the bailed property (or deal with it as directed).

It could be argued that the arrangement between LUMBERJACKS and PLANKERS constitutes just such an arrangement.

Bailments are included in the PPSA under Section 13 of the act wherein it describes the meaning of a PPS Lease.  I’ve included the relevant section at the end of this article for reference.

In summary, PPS Leases are covered under the PPSA so long as the lease (or bailment) exceeds a defined length of time or, if for a shorter time, can be optionally extended to exceed that defined length of time.

In the case of serial numbered goods (motor vehicles, watercraft, aircraft etc) that defined length of time is 90 days and in all other cases (such as coil steel) is 12 months.

Where the lease or bailment is for a shorter period of time the PPSA does not apply.

Thus, it would appear that in the event of LUMBERJACKS common law rights being 

challenged in this regard there is the additional fall-back position of the PPSA’s applicability being ruled out by the length of the LUMBERJACKS/PLANKERS bailment (presuming PLANKERS take significantly less than 12 months to add their value).

Extract from the Personal Property Securities Act 2009, Chapter 1, Part 1.3, Division 3.

13 Meaning of PPS lease

             (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.

Bailments for value only

             (3)  This section only applies to a bailment for which the bailee provides value.

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.