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PPSA survey – mid 2017

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1 Aug 2017

The courts continue to interpret and amend the provisions of the still relatively new Personal Property Securities Act 2009 (PPSA). Even the legislature has weighed in with small but significant amendments following the law’s commencement in early 2012. This is occurring in the context of mistakes and misfortunes borne by commercial parties grappling with the PPSA’s novelty and intricacies.

From 20 May 2017, the PPSA’s definition of PPS Lease was amended. Basically, leases of goods for an indefinite term are no longer automatically defined to be PPS Leases, and hence require registration to perfect their validity.  Secondly the minimum leasing period for a lease to be deemed a PPS Lease is increased from I year to 2.

Both of these amendments are intended to lessen the administrative burden on business. Also they give some breathing space to internal leases within corporate groups, which are often uncertain and/or undocumented.

However, being the PPSA the devil is very much in the detail. Firstly, the new definition of PPS Lease does not guarantee that a particular lease transaction (say of less than 2 years) is not a security interest requiring registration for ultimate validity. In other words you might still have to register.

Secondly, the amendments do not ‘re-set’ the super priority status afforded PPS Leases as Purchase Money Security Interests (‘PMSI’s). To properly register (‘perfect’) a PPS Lease as a PMSI, registration must take place within 15 business days of the grantor/lessee taking possession of the goods.

A lessee may take possession of goods under what was originally intended to be a short term hire (not requiring registration), but the parties subsequently decide upon a fixed term in excess of 2 years. The lease’s ensuing perfection by registration will only achieve general security interest status, not a superior PMSI status. So, despite the favourable practical effect of the amendments,  the level of legal protection is not as great as might otherwise be assumed.

Case law paints a sorry picture of lessor groups which have run foul of the PPSA. In the case of Duke Contracting Australia Pty Ltd [2017] NSWSC 2017, the financier inadvertently registered its PMSI against only the grantor/lessee’s ACN, not the ABN of the trust of which the lessee was the trustee. This meant that the registration was defective, and hence open to challenge if a liquidator of the lessee was ever appointed.

The financier applied to the court for an extension of time in which to register against the trust’s ABN, such that the registration’s overall PMSI status would be preserved. The court agreed to a 70 day extension of time, deciding that there would be no ensuing prejudice to the position of the lessee’s other creditors.

No such luck for the financier in HP Financial Services (Australia) Pty Ltd v Production Printing (Aust) Pty Ltd [2017] NSWSC 505, where the converse did not apply. In that case the financer incorrectly registered against the grantor/lessee’s ABN, not the ACN. The registration was therefore ineffective. By the time the financier realised its mistake it was too late to do anything, the lessee/grantor having been placed into administration.

This case may be contrasted with another, contemporaneous decision in 4 in 1 Wyoming Pty Ltd & Others [2017] NSWSC 407. There, the court granted the financier an extension of time in which to correct 200 registrations. The financier had not only wrongly registered against customer ABNs, rather than ACNs, but had also classified all the leases as ‘transitional’ security interests when they were not. Doing either of these things renders the security interest registrations ineffective.

 As with the Duke Contracting case above, the court in Wyoming found that there would be no prejudice to other creditors of the customers if the financier was permitted to correct its PPS security registrations.

An earlier major case which echoed the HP Financial Services case above was OneSteel Manufacturing Pty Ltd (administrators appointed) [2017] NSWSC 21. There the court held that PPS registrations which did not include the customer’s ACN was defective. There could be no extension of time to permit correction of the registrations because the administrators’ appointment precluded it. The decision, which has major economic consequences for the financier, is being appealed to the High Court.

The burden of the PPSA and the courts’ ‘letter of the law’ approach is being born by financier clerical staff who are at the front line of the new law’s implementation. In the Wyoming case the court was sympathetic to the plight of financier employees not understanding the legal significance of the registration deficiencies. However there were no creditors to be prejudiced by taking this approach.

In OneSteel on the other hand it was the same scenario – clerical staff making innocent errors, not resulting from any deliberate disregard of statutory obligations. But it was too late to permit rectification of the register, because someone else would be prejudiced, being the administrators (and hence the grantor’s other creditors).

 

Summary

  1. The definition of PPS Lease has been relaxed but the accompanying loss of priority was not addressed.
  2. You can rectify a defective PPS Lease registration but if you want to preserve its priority you must apply to the court.
  3. It is not a given that you will be allowed to rectify, as other creditors or an administrator may object.
  4. For the PPSA at least, the distinction between ABNs and ACNs remains important. If you use the wrong one, your registration could be defective.