The Personal Property Securities Act 2009 (Cth) (often abbreviated to its acronym, the "PPSA") has been in force across Australia for approximately 18 months now. Nearly all of the commentary on its application and scope has been qualified by a crucial question needing clarification: can you, as an owner of personal property, lose your ownership rights in a secured asset for not registering your interest on the PPSR, when another creditor has had the foresight to register their interest ahead of yours? In legal terms, will Australian Courts follow approach of New Zealand and Canadian decisions such as Graham v Portacom New Zealand Ltd and International Harvester Credit Corp of Canada v Touche Ross Ltd?
The answer seems to be a resounding "yes" following the recent decision of Brereton J in the NSW Supreme Court, In the matter of Maiden Civil (P&E) Pty Ltd; Pleash and Albarran as receivers and managers of Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd  NSWSC 852 ("Maiden Civil").
Maiden Civil also concerned the "transitional" provisions for "migrating" security interests from local State registers across to the singular Personal Property Securities Register (or "PPSR"). This is the involved process by which nearly all of the interests on individual State and Commonwealth registers are being phased out over a 2-year transitional period and, in most cases, migrated across to the universal PPSR. The idea behind the PPSR was to have a single online portal at which all security interests in Australia can instantly be registered, searched and identified. The approach was implemented to facilitate consistency, accessibility and uniformity in the application of PPS laws across Australia. The PPSR was designed to eliminate the previous difficulties in having to coordinate duplicate registrations in different States for the same asset and having to reconcile potential conflicts in the application of different, and often inconsistent, State laws regarding priority.
Maiden Civil neatly illustrates the kinds of specific problems the PPSR was designed to overcome. With differing registration requirements for different registers in different States and Territories, achieving a valid security could frequently be problematic and uncertain. With a broader diversity of requirements across different jurisdictions, the elementary aspects of "perfecting" a valid and enforceable security interest in each specific instance are more open to being overlooked.
In Maiden Civil, a civil construction company Maiden Civil (P&E) P/L went into receivership, voluntary administration and then liquidation. Receivers and managers were appointed by Maiden Civil's secured creditor, Fast Financial Solutions P/L, under a General Security Deed ("the Receivers"). The Receivers sought to enforce Maiden Civil's interests as a leaseholder of three civil construction vehicles (the "Caterpillars") ahead of the Caterpillars' respective owners ("the Owners"). Whilst the Court determined that Maiden Civil was the legal owner of one of the three Caterpillars (because the company had paid out the full amount of outstanding finance on that vehicle to the Owners), it was agreed the company only held leases in respect of the two remaining Caterpillars ("the Leases"). Because the Leases were equipment leases of vehicles which lasted longer than 90 days, they met the prescriptive requirements of a "PPS Lease" under the PPSA; a point that had significant legal repercussions for the Owners.
The Receivers argued that because the Leases were PPS Leases, the Owners were obliged to register their interests on the PPSR, which they didn't do. However the secured creditor had registered its interest under the General Security Deed. The Receivers argued that the reasoning in the Portacom New Zealand decision should be applied, and that their registered interests on the PPSR took priority. The consequence of this argument would be that the Receivers (or, more specifically, Maiden Civil's secured creditor) were entitled to be paid out first from the proceeds of the sale of the Caterpillars, ahead of the Owners, on Maiden Civil's insolvency. This would be the case even though the Caterpillars were still the property of the Owners.
Justice Brereton agreed with the Receivers, deciding that the Leases were "PPS Leases" and therefore capable of giving rise to a deemed security interest which could be perfected by the Receivers to defeat the unperfected security interests of the Owners. The Owners were unsuccessful in arguing that the Leases created "transitional" security interests (and thereby came within an exception under the PPSA which would have "deemed" the Owners' interests to be perfected), because when the PPSA came into effect, the Owners had not registered their interests on the local Northern Territory register for leased vehicles (which the PPSR had been designed to replace, and which was in the process of being phased out over the transitional period to make way for the PPSR).
If the Owners could have shown they enjoyed a temporary "transitional interest" in the Caterpillars, they would have had a priority interest to defeat the Receivers, albeit only a temporary one that would have lasted until January 2014 (by which time, any interest would need to have been perfected under the PPSA to remain effective). Ultimately, any safeguard afforded by the transitional provisions will offer progressively less protection as the 2-year transitional period comes to its end in six months' time. Once this period expires, it will not be possible to point to any "transitional interest" in assets as providing perfection. Any and all security interests will have to be perfected under the terms of the PPSA to be effective against third parties.
The Court, dismissing the Owners' arguments and holding that no "transitional interest" arose, held the Receivers were successful in demonstrating their superior priority and were entitled to possession of the Caterpillars. In doing so, they rejected a further argument from the Owners that because Maiden Civil had breached its obligations under the Leases by going into default, the Receivers were not entitled under the Leases to possession. The Court rationalised this approach by finding that the entitlement to possession for the Receivers arose under the terms of the General Security Deed, not the terminated Leases, and was thereby unaffected by any breach of termination of the Leases.
Given the outcome, without a clear understanding of the PPSA's operation, it is hard not to feel sympathy for the Owners. Not only did they lose their property as a result of Maiden Civil's insolvency; one of the Defendant directors had also personally guaranteed the obligations of one of the Owner companies in respect of the "lost" Caterpillars to that company's secured creditors.
This case reinforces the significance of ensuring that any security interests arising in personal property are validly perfected under the PPSA. If you are the secured owner of personal property which has been leased or which is in possession of another party, you must ensure that you have validly complied with the perfection requirements. A failure to do so may cause any ownership rights in those assets to become vulnerable to any secured creditor of that party who has an "all assets" general security agreement and has proactively taken steps to perfect their interests. This assumes particular significance on a debtor's insolvency, where any "unperfected" interests will immediately be taken to vest in the debtor under the PPSA.
Given the Commonwealth's decision to model the PPSA on New Zealand and Canadian legislation, the likelihood of these risks affecting personal property securitisation in Australia (following a well-developed body of caselaw in each of those jurisdictions) had been looming since the PPSA's enactment. The outcome in Maiden Civil was not unexpected, but affirms beyond doubt that those perceived risks are real in Australia and should be taken seriously by any business dealing with matters arising under the PPSA.
That is the case whether a business deals in equipment leases, commercial consignments, retention of title sales, other forms of personal property securitisation (including intangible assets such as IP or financial instruments) or any aspects relating to the potential external administration or insolvency of such businesses. The issues of priority decided on in Maiden Civil are likely to assume the greatest degree of significance for all parties concerned when issues of actual or potential insolvency arise. In these instances, effective preparation can often make the difference between catching the Caterpillars (as above), or catching little more than butterflies in the stomach, at best.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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