The PPSA vs The Corporations Act

September’s court judgement in Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq) has brought to the fore a butting of heads between the Personal Property Securities Act and the Corporations Act.

Much of our concern with the PPSA has been to do with interpreting it in such a way as to ensure that our security interests are as effective as possible.  The issue can be seen as twofold:

• Ensuring our security interests benefit from as high a ranking as possible when compared with those interests of other creditors; and
• Protecting ourselves against the risk that an unperfected security interest will vest in our debtor’s insolvent estate.

Part 2.6 of the PPSA (sections 54 to 77) concerns itself with addressing the various scenarios that might rank one creditor’s interest above another’s while section 267 provides liquidators with the incentive to try to invalidate your registration by allowing them to take ‘ownership’ of any security interests that have not been properly perfected.

For now, we’re going to look a little more closely at section 267.

Section 267 effectively states that, when an ‘external administration event’ takes place, any security interest that has not been perfected at that point will vest in the grantor.  In other words, if an insolvency practitioner is appointed to your debtor before you’ve had the opportunity to register your security interest on the PPSR, you will lose your rights to whatever collateral you had under that interest.  In fact, the PPSA appears, almost, to be supporting a ‘nick of time’ registration approach.  Providing you get your registration lodged before the administrator is appointed (or the application for winding up submitted, or the sequestration order given etc) your interest should be perfected and thus protected from the nasty section 267.

Unfortunately, buried within s267 is a little bit of small print as follows:

Note 2:   See also Division 2A of Part 5.7B of the Corporations Act 2001.

Surely that’s not going to be too important?  After all, Note 1 was pretty innocuous (Note 1: For the meaning of company, see section 10).  How bad could Division 2A of Part 5.7B of the Corporations Act be?

Well, it turns out that Division 2A can be pretty bad!

The meat of Division 2A is in section 588FL, entitled “Vesting of PPSA security interests if collateral not registered within time”.  It turns out that, contrary to the apparent ‘nick of time’ support of the PPSA, there is, in fact, a much more tangible deadline by which a registration needs to be lodged in order to keep your collateral out of the hands of a liquidator.

If your registration was not lodged within 20 business days of your security interest coming into force and was lodged during the 6 months leading up to the liquidator’s appointment, then “The PPSA security interest vests in the company” and you lose your collateral to the liquidator!

So, even though you have a properly perfected security interest, registered correctly, within the deadlines set under the PPSA, the liquidator may still be able to ignore that registration and take your goods anyway by virtue of the Corporations Act.

And if, for a moment, you are thinking that this must just be a theoretical argument that wouldn’t apply in real life, then let me remind you that this piece started with reference to Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq).

• In December 2013 the Pozzebons loaned Australian Gaming and Entertainment Ltd (AGEL) $250,000 with the loan secured against AGEL’s personal property.
• On 19 May 2014 the Pozzebons registered their security interest on the PPSR.
• On 26 May 2014 Administrators were appointed to AGEL with liquidators following some 2 weeks later.

While the Pozzebons may have beaten the clock in terms of the PPSA they fell foul of the Corporations Act and breached the 20 business days’ time limit under 588FL as well as the registration being within 6 months of the external administration ‘event’.  Such was the judgement of Justice Collier towards the end of September in rejecting the Pozzebon claim that their security interest be honoured.

By way of summary, I've drawn up the following flow chart to show how important the timing of a PPSR registration will be under the Corporations Act:

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.

PPSA Statutory Review - Interim Report

Under the terms of the Personal Property Securities Act (2009) a review of the performance of the act is required to be completed by the end of January 2015.

That review has already started and, following an initial consultation exercise completed in July, an interim report has been issued.  

The review is being conducted by Bruce Whittaker, a lawyer specialising in financial services and commercial financing arrangements.  His interim report runs for 53 pages and says:

• Not enough people are aware of the PPSA; and
• Those that are aware of it tend not to understand it.

Radical stuff!

Mr Whittaker also advises that he is "not minded at this stage to recommend any specific amendments to the Act, the Regulations or the operation of the register." Instead, he wants to focus on further consultations that, in addition to representing a continued information gathering exercise, would also serve to further spread understanding and enlightenment on the subject of the PPSA and increase industry's sense of ownership of the Act.

So, instead of suggesting taking a scalpel (knife, axe, bludgeon) to those parts of the Act responsible for generating so much confusion in the trade credit and finance industry and debate between opposing teams of lawyers, we will be treated to some questionnaires?

If you want your own copy of the interim report it can be found at the Attorney General's website at:

http://www.ag.gov.au/Consultations/Pages/StatutoryreviewofthePersonalPropertySecuritiesAct2009.aspx