The Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 (Bill) is currently before the House of Representatives. This Bill proposes to amend the Personal Property Securities Act 2009 (Cth) (PPSA) so that leases of serial numbered goods of 90 days or more will no longer be deemed to be PPS leases for the purposes of the PPSA.
The purpose of this article is to explore the current PPSA arrangements with regard to personal property leases (i.e. leases of most forms of tangible and intangible property other than land) and the impact that the proposed changes will have on businesses, particularly small to mid-sized equipment hire businesses.
What are the "deeming provisions" of the PPSA?
Section 12 of the PPSA defines a security interest as being an interest in personal property provided for by a transaction that in substance secures payment or performance of an obligation.
The PPSA marked a change from the pre-PPSA regime by deeming certain leases of personal property (i.e. most items of tangible and intangible property other than land) to be "PPS leases" and therefore security interests for the purposes of the PPSA even though they do not secure payment or performance of an obligation.
Section 13 of the PPSA provides that a lease will be a "PPS lease" where it is:
- for an indefinite term;
- for a term of more than 12 months;
- for a term of up to 12 months but is automatically renewable or includes options to renew and the total term of such lease might exceed 12 months; or
- a lease of serial numbered goods for a period of 90 days or more.
What should a lessor be doing now under the current PPSA arrangements?
Assuming that a lessor hire company is leasing a serial numbered good such as a vehicle (which meets the requirements of the PPS Regulations) to a commercial customer, the lessor can reduce its risk exposure by registering two security interests on the PPSR.
The first registration against the customer's name will cover multiple PPS leases to the same customer. This registration will:
- protect the hire company against the potential loss of the leased goods in the event of the insolvency of the customer; and
- give the hire company an interest in the proceeds of any sale of the serial numbered goods.
A second registration would be usual where the leased goods are serial numbered goods. This registration will protect the hire company against the risk of extinguishment. Extinguishment rules determine when property is purchased free from a security interest in personal property. Extinguishment can occur when:
- the buyer or lessee takes personal property free of an unperfected security interest in that property;
- the buyer or lessee may take free of a security interest if that personal property is sold in the ordinary course of business of the lessee; or
- the buyer or lessee of serial numbered personal property may take it free of any security interest where the lessor has not registered under the PPSR using the serial number of such property.
If the first registration has been made but not the second, the PPSA provides that the first, general registration will give the hire company an interest in the sale proceeds relating to the leased goods.
Assuming that a lessor hire company is leasing a serial numbered good such as a vehicle to a non-commercial (i.e. a consumer) customer, only one registration is necessary to provide the lessor hiring company with protection i.e. a one time registration against the serial numbered good will provide maximum protection as outlined above, provided always that the serial number is correctly recorded on the PPSR.
What if a lease is for less than 90 days?
Such leases are not deemed to be PPS leases. Therefore a hire company would need to rely on proof of its ownership of the property which is the subject of the lease to avoid its loss in the event of a customer insolvency event.
What is the rationale behind the Bill?
The current regime under the PPSA is causing problems for small to medium-sized equipment hire businesses. The issues affecting such businesses include:
- Confusion given the complexity involved in determining whether a particular lease is a PPS lease requiring registration. According to the explanatory memorandum to the Bill, an average hire company may enter into as many as 400 leases per week. Therefore any confusion can have significant adverse outcomes for businesses.
- A lack of understanding regarding what a serial numbered good is and how it should be registered. According to the explanatory memorandum to the Bill, peak bodies representing the equipment hire industry estimate that more than 95% of all stock available for lease is serial numbered goods. Any confusion regarding the process for identifying and registering serial numbered goods can have significant adverse outcomes for equipment hire businesses.
- The cost of registration (currently $8 for a 7 year registration) can be prohibitive to many businesses particularly in a depressed economic pattern.
- An average hire business may not have personnel available who can be dedicated to monitoring PPSA compliance/registration. Seeking legal assistance may further eat into already stretched margins.
- There are significant risks for businesses that do not register in accordance with the requirements of the PPSA.
The above may be alienating businesses from registering in accordance with the PPSA.
What will be the impact of the Bill, if passed?
If passed, the Bill will likely repeal section 13(1)(e) of the PPSA. This means that rather than there being two deeming provisions there would be only one and it would only deem leases of a term of more than 12 months or an indefinite term to be PPS leases regardless of the type of goods leased. This will greatly simplify compliance, reduce risk and cost exposures for lessors and other businesses which will no longer need to consider making registrations in respect of leases of less than 12 months.
As above, if section 13(1)(e) is repealed, lessors leasing property (whether serial numbered goods or otherwise) would simply need to rely on proof of ownership of the property which is the subject of the lease to avoid loss of the property in the event of a customer insolvency event.
Given the Bill, what should hire businesses be doing now?
A hire business will need advice regarding the impact that the Bill may have on its business as well as existing registrations of PPS leases, particularly those of 90 days or more.
Furthermore, standard terms and conditions and other company contracts may require amending to reflect any changes to the PPSA.
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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