1. This paper addresses, in no particular order, some of the practical issues the authors have encountered in advising clients on the operation of the Personal Property Securities Act 2009 (Cth) (PPSA or Act) and related legislation, particularly where the perfection or priority of PPSA security interests may be questioned.
  2. There is a focus in this paper on retention of title and lease (a term which the Act sometimes uses in a way including hire and bailment) interests. These are the areas where PPSA now reaches, with its draconian1 consequences, where no security registration regime has previously gone. They are also the areas which have in our experience caused the most grief to businesses, as the case law does tend to confirm.
  3. Other articles available on our website at www.bartier.com.au deal with various aspects of the PPSA and include:
    • An Introduction to Personal Property Securities Act. This is an overview of the Act and its scope and looks at when a security interest arises both under the 'in substance' principles and the deemed security interests such as PPS leases and commercial consignments.
    • Business Acquisitions and the Personal Property Securities Register (PPSR) – which looks at the various ins and outs of searching the PPSR before acquiring an asset.
    • PPSA – Key points for IP practitioners - which looks at the operation of the Act to transactions involving intellectual property.

'PPS leases' and serial number registration – a recap on the recent amendments

  1. In response mainly to the concerns of the hire industry, some significant changes have already been made to the legislation in the area of PPS leases and to the kind of goods, interests in which may require or benefit from serial number registration on the PPSR.
  2. The 90 day time threshold for a PPS lease is now gone from the Act

  1. Leases of serial number registrable goods are no longer deemed PPS leases when they reach a 90 day time threshold. This change, by way of amendment to section 13 of the Act, took effect on 1 October, 20152 .
  2. Only a lease for a term of more than one year or for an 'indefinite' term (regardless of whether it is a lease of serial number registrable goods or not) is therefore now a 'PPS lease' for the purposes of the Act. Leases that are not PPS leases and are not otherwise functioning as security in substance3 are therefore outside the scope of the Act.
  3. Points to note:
    • An 'indefinite' lease can still be a PPS lease from inception. So the PPSA can still catch very short term leases of even a few days or hours if they don't have a contractually agreed end date of less than one year.
    • Leases of more than a year will still be caught as 'PPS leases'. Note that option periods and actual periods of possession are counted in determining whether the threshold is crossed.
    • Any lease that functions 'in substance' as a security interest will also still be caught by PPSA from inception - for example, rent to buy or hire purchase arrangements. No time threshold applies to these.
    • The abolition of the 90 day threshold will only apply to transactions entered into after 1 October 2015.
  1. Whilst the change reduces the number of leases and bailments that give rise to PPS lease security interests, it does not abolish the concept of serial number registration. So where there is a PPS lease or other security interest in respect of serial number registrable goods it is important to consider whether to make a serial number registration to gain the benefits of that kind of registration.4 Those benefits are mainly around protection against loss of ownership, which could otherwise occur through a wrongful sale or lease by a customer under the extinguishment rules in the Act.
  2. The class of serial number registrable goods (motor vehicles) has been narrowed

  1. On and from 1 July 2014, an item of personal property (that otherwise meets the terms of the definition of 'motor vehicle' in the Regulations 5 ) is only considered a 'motor vehicle' for the purposes of the PPSA if it is also:
    • capable of travelling at a speed of at least 10km/h, and
    • has one or more motors with a total power greater than 200 watts.
  1. The former (pre-1 July 2014) definition of 'motor vehicle' covers goods that satisfy either of the above tests and so covered a very wide variety of items.
  2. The change reduces the range of mobile goods that would require serial number registration to be validly registered, or where serial number registration is optional (in the case of commercial goods) to avoid extinguishment of the security interest under the taking free rules in Part 2.5 of the Act.
  3. However, the main risk point to note is that the change also affects the collateral class in which an interest is properly registered. For example, a slow-moving piece of mobile equipment such as a scissor lift or a boom lift was in the collateral class of 'motor vehicle' before the change but belongs to the category 'other goods' after the change. Small boom lifts or scissor lifts are a good example as they are normally too slow to pass the 10 km/h speed test in the new definition, but would have been within the pre-1 July 2014 definition because they have motor power much greater than 200W. They are also widely made available on hire.
  4. A question arises as to the continued validity of registrations already made under the collateral classification as it was before the change. The change to the definition took effect on 1 July 2014 and in our view should not affect the validity of registrations made before that time for transactions entered into before that time. The PPS Registrar considers that the new definition only applies to leases and other security interests entered into on or after 1 July 2014. Unfortunately the Government did not introduce any specific transitional provisions to confirm this. The Whittaker Report6 has recommended it be clarified in the Act.
  5. Example:
    Tim's Hire only hires out boom lifts. Tim's Hire has several boom lifts on hire to JoeCo Pty Limited, a local builder. JoeCo is a repeat customer of Tim's Hire and has an agreement with Tim's Hire confirming the terms of any hire to JoeCo that may be entered into from time to time.
    The existing hires are each for 14-18 month hire terms commencing on 1 February 2014. Tim made a PPSR registration in the collateral class 'motor vehicle' on the date of commencement of the hires.
    From 1 July 2014 boom lifts of the kind hired to JoeCo by Tim no longer meet the definition of 'motor vehicle', because of the definition change. Tim considers there is no need to make a new registration in the class 'other goods' in respect of the existing hires.
    Tim and JoeCo discuss in August 2014 some new hires and before arranging delivery Tim makes a new general registration against JoeCo in the collateral class 'other goods'. On 20 August 2014 Tim delivers for hire a new boom lift to JoeCo. The new general registration in the 'other goods' class can protect that interest. The existing registrations in the 'motor vehicle' class (whether general or serial number) would not protect the new boom lift.

Searching

  1. Buyers or others acquiring an interest in personal property use the PPSR and in this capacity should note that, when searching whether particular goods are the subject of a security interest, registrations may have been validly made using either the new or the old definition of 'motor vehicle'. It would accordingly be prudent to search against both 'other goods' and 'motor vehicle' collateral classes.
  2. Example:
    Tim's Hire is looking at buying an old boom lift from Phil in August 2017 and wants to be sure that Phil hasn't granted a security interest – to a finance company for example.
    The used boom lift would be a 'motor vehicle' under the pre-1 July 2014 definition but would not be a 'motor vehicle' under the current definition.
    Tim should search in the collateral class 'other goods' as well as in the collateral class 'motor vehicle' to make sure that he finds all registrations. Valid registrations could have been made under either class depending on when any security interest was granted by Phil.

What else could change for PPS leases?

  1. The Whittaker Report did recommend that an indefinite hire not be a PPS lease until a time threshold is crossed. However the Report did not recommend any change to the one year threshold.
  2. The hire industry has continued to lobby strongly for the definition of 'PPS lease' to be abolished. The banks oppose that change, arguing it will leave no 'bright line' to delineate when PPSA applies to leases of equipment and when it doesn't. A PPS lease time threshold of significantly longer than one year may be the compromise which emerges.

PPSA's unforgiving priority and timing rules

  1. Part 2.6 of the Act contains the rules to be applied in order to determine the priority between competing security interests in the same collateral. Key priority rules under PPSA are as follows, and we will focus here on the last one below:
    1. unperfected security interests rank in order of attachment;
    2. a perfected security interest defeats an unperfected security interest;
    3. perfected security interests rank in order of priority time, usually the earlier of registration time or time of first perfection by possession or control;
    4. a security interest perfected by control defeats a security interest perfected in another way;
    5. a purchase money security interest (PMSI) has priority over a non-PMSI (super priority).
  1. Before PPSA arrived, title-based financing (e.g. leasing or retention of title arrangements) offered the owner a simple remedy when the customer became insolvent. It was really only necessary to prove continued ownership and then retrieve the personal property out of the insolvency. Subject to some statutory exceptions or impediments (for example the rights of an administrator to keep possession of the property under the Corporations Act), ownership was a powerful right.
  2. However under PPSA an owner's interest is just another security interest and the owner must compete with other parties, typically bank lenders. The special super priority status of a PMSI gives back the traditional priority accorded to ownership interests and also to security taken to secure amounts used to purchase the subject of the security. But PPSA also lays a number of traps.
  3. A 'purchase money security interest' is defined in section 14 as any of the following:
    1. a security interest taken in collateral, to the extent that it secures all or part of its purchase price;
    2. a security interest taken in collateral by a person who gives value for the purpose of enabling the grantor to acquire rights in the collateral, to the extent
    3. that the value is applied to acquire those rights;
    4. the interest of a lessor or bailor under a PPS lease – but note that a sale and lease-back is not a PMSI;
    5. the interest of a consignor who delivers goods to a consignee under a commercial consignment.
  1. The operation of PMSI super priority can be illustrated as follows:
  2. In April 2015 Grantor gives Bank a security interest over all its assets ('all present and after-acquired property' in PPSA-speak). Bank registers the security interest on the PPSR.
    In August 2015 Grantor takes a forklift on lease from Leaseco. Leaseco has registered its security interest on the PPSR as a PMSI before the truck was delivered to Grantor.
    Leaseco's security interest has priority over Bank's charge even though it was created and perfected later.

The traps

  1. It is important to be aware that PMSI status is not itself a guarantee of super priority unless other steps are taken.
  2. When registering a security interest as a PMSI, the financing statement must state that it is a PMSI.
  3. In addition, under section 62 of the Act, a PMSI only has super priority for:
    • inventory that is goods, if registered as a PMSI prior to the grantor obtaining possession and for other kinds of inventory if registered prior to attachment;
    • for personal property that is not inventory, in the case of goods, if registered as a PMSI within 15 business days after the grantor (or someone on the grantor's request) obtains possession and for any other property within 15 business days after the interest attaches.
  1. Note that 'inventory' has a wide definition in section 10. It seems safest not to rely on the 'extra' 15 business days to register. This is not just because of the width of the definition of 'inventory' but because there is always a possibility of grantor insolvency or wrongful sale during that period and the extra 15 business days does not apply to defer the operation of vesting or extinguishment rules, which are separate perils of life under PPSA.

What to do about a late registration

  1. We commonly encounter registrations by hire businesses and retention of title sellers that don't meet the requirements for PMSI super priority. This may be because they have been made (or could only be made) outside the timeframe required by section 62. Or it may be that they are timely, but the PMSI box has not been ticked in the PPSR registration or there is some other defect that means that the registration does not perfect the interest.
  2. The wording of section 62 gives the secured party only one shot at obtaining PMSI super priority within the timeframes stated in section 62. Whilst the interest is still going to be a PMSI it will lack PMSI super priority unless section 62 has been satisfied. In these cases it is necessary to consider what steps can be taken to gain the necessary priority.
  3. A search of the PPSR may well disclose no interest that would have priority over the client's interest. In that case nothing further usually need be done. More often however, there is a bank with general security over the lessee/purchaser/grantor and that prior registered interest will trump any subsequent interest that doesn't have PMSI super priority – even if the subsequent interest is ownership. It may be possible to negotiate with the bank(s) for a priority agreement to address the problem.
  4. Another solution may be to terminate the financing, lease or sale and start over again this time with a PMSI registration in place. This will require the agreement of the customer unless there is a particularly strong PPSA provision in the agreement. It would also at least require the secured party to regain possession and to enter into a fresh contract. Even then, if the process is started again in the context of the same goods being made the subject of a fresh contract and re-delivered, in the case of a lease there are some concerns that this may not sufficiently break the nexus with the earlier PPS lease. It is not clear whether the lease or bailment referred to in section 13's definition of 'PPS lease' is a concept of a discrete contract or whether possession (including broken possession) under any number of contracts, is what is being targeted.
  5. Sometimes a supplier business can easily 'swap in' another unit under a new contract once the correct registration is in place and address the problem that way. But in other cases it may be impracticable, or at any rate difficult, to regain possession - for example the collateral may be a piece of hired equipment deep within a remote mine.
  6. The Act does offer a possibility which is somewhat more expensive. Under section 293, the Court may grant an extension of the time for registration of the PMSI in such a way that it will gain PMSI super priority.
  7. Before moving on to discuss section 293 it is useful to mention also that where the grantor is a company, a related but different problem arises, not under the PPSA per se, but under section 588FL of the Corporations Act where there is a late registration. Section 588FL is concerned with the case where a PPSA security interest has been perfected by registration but where this occurs more than 20 business days after the relevant security agreement comes 'into force'.
  8. Section 588FL applies if a company suffers an insolvency event of voluntary administration, winding up or execution of a deed of company arrangement and there is a security interest covered by section 588FL(2). Section 588FL (2) covers the security interest if it is perfected by registration 'and no other means'. The key requirement is in section 588FL(2)(b). It will cause the security interest to be covered if:
    1. the registration time for the collateral is after the latest of the following times:
      1. 6 months before the critical time;
      2. the time that is the end of 20 business days after the security agreement that gave rise to the security interest came into force, or the time that is the critical time, whichever time is earlier
  1. The 'critical time' is the time of the relevant insolvency event. In effect a security interest granted by a company will be vulnerable for six months following its registration. If the grantor goes into a relevant insolvency proceeding in that time the interest vests in the company grantor. For an example of a hire business falling foul of s.588FL see Carrafa & Others v Doka Formwork Pty Ltd [2014] VSC 570.

Curing late or defective registrations by Court order – the approach in Accolade Wines7 .

  1. The PPSA provides in section 293 for the Court to extend the period for compliance with section 62 where it is 'just and equitable' to do so. Section 293 provides that in making an order to extend a period under subsection (1), the court must take into account the following:
    1. whether the need to extend the period arises as a result of an accident, inadvertence or some other sufficient cause;
    2. whether extending the period would prejudice the position of any other secured parties or other creditors;
    3. whether any person has acted, or not acted, in reliance on the period having ended.
  1. The Corporations Act provides in section 588FM a similar curative power to the Court where the timing requirements of section 588FL have not been met for a company grantor.
  2. The Accolade Wines decision is an excellent illustration of how these provisions can be used, perhaps as a last resort, to remedy the otherwise difficult problems of late or defective registrations.
  3. In the case, the plaintiffs were two Alleasing Group companies (Alleasing), who had tried to perfect their security interests by registration on the PPSR. However, Alleasing's financing statements were registered against the corporate ABN of each of many lessee grantors rather than the ACN, a defect which potentially invalidated the registrations given the grantors were not operating as a trust. Had they been trustees, the registrations could only have been validly made against the trust ABN (and not the corporate ABN) in any event.
  4. Having realized the mistake, Alleasing sought to remedy the situation by the registration of new financing statements on the PPSR (correctly referring to ACNs) and made an application to Court seeking:
    1. an order pursuant to section 293 of the PPSA extending time beyond the requisite 15 business day period stipulated in the PPSA to perfect the interests with PMSI super priority.
    2. an order pursuant to section 588FM of the Corporations Act, fixing a time later than the requisite 20 business days after entry into the relevant security agreement for the registration of the security interests.
  1. Alleasing made the application ex parte arguing this was appropriate because of the large number of grantors (Accolade was just one of many lessees) who would otherwise have to be joined as a party. Justice Brereton disagreed and found that the fact that there had been earlier (though ineffective) registrations over the collateral was no reason to deprive the grantors of an opportunity to be heard. His Honour did acknowledge that Alleasing had given all grantors notice of the application and because no grantor had indicated opposition or sought to appear, that significantly mitigated the objections to proceeding ex parte. His Honour agreed to hear the application ex parte but warned that it should not be assumed the same approach would be acceptable to the Court in future cases.
  2. Alleasing led evidence from their CEO that the employees who effected the initial registrations utilised a third party service provider platform which provided no alert as to the significance of the choice between a grantor's ABN and ACN and those employees were not aware that this made any difference to the status of the security interest. On that evidence, his Honour was satisfied that the discretion to fix a later time in the case of inadvertence had been enlivened.
  3. In considering the factors that the Court should take into account in determining whether to make an order under section 293, his Honour noted that:
    • the need to extend time must arise as a result of inadvertence (the same issue as pursuant to section 588FM); and
    • although any holders of general security (a registration over all of the entity's assets) will lose priority to the later registered PMSIs, that was not conclusive evidence of prejudice in the present circumstances as:
      1. there was already a PMSI registration on the PPSR (albeit a defective one against corporate ABN);
      2. a general security is always liable to be trumped, in respect of specific after-acquired collateral, by a PMSI in respect of that specific collateral;
      3. to the extent that an earlier general security holder will be prejudiced, it is only by losing a 'windfall' it had obtained by another secured party's inadvertence; and
      4. notice that there was an earlier PMSI in respect of specific collateral is unlikely to have been material to a secured party's decision to provide financial accommodation in the first place.
  1. His Honour also confirmed that where an application is made under section 293, any secured party whose interest is liable to be postponed ought ideally to be joined as a party to the application. In this case he ordered they be given notice and liberty to apply.
  2. The comment mentioned in paragraph 42(a) reinforces that, despite the fact that a valid registration could have been made solely against the ACN of each grantor company, the Court felt it relevant that a search against an ABN would have shown the registration (albeit wrongly made). This comment is interesting as in no case would a registration against the corporate ABN have been valid – as we will see below. The plaintiffs introduced evidence that standard practice amongst lawyers advising banks would be to do a search against corporate ABN, ACN and name, as well as against any trust ABN. This provided some assurance to the Court that no general security holder was likely to have been led astray by the lack of a correct registration against the ACN of the companies concerned.
  3. The comments mentioned in paras (b), (c) and (d) are in our view somewhat telling in terms of the policy justification of the necessity for PPSA, when put up against the harsh consequences of getting a registration wrong particularly in the context of PPS leases. In effect the Court seems to be saying that general security holders such as banks don't really assume that they will get security over hired or leased assets. This is consistent with the submissions the hire industry has made to the Government about the PPS lease and the ability of the vesting and priority rules in the PPSA to damage or even destroy hire businesses that fail to make correct and timely registrations.
  4. The closer that the grantor gets to insolvency, the harder it will be to obtain any order. Prospects will almost certainly vanish once formal insolvency supervenes. An adviser to a company that has an issue under section 588FL or section 62 undoubtedly has a duty to raise with his or her client the ways that these defects might be cured including by an approach to the Court before any opportunity to cure is lost. A very recent decision (again concerning Alleasing's defective practice of registering against corporate ABNs) drives the point home.
  5. In the matter of OneSteel Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21, Alleasing had leased to OneSteel Manufacturing Pty Limited plant and equipment said to be worth $23million. The fact that the lease was covered by PPSA was not in dispute. Registrations were lodged notifying Alleasing's interest in the goods, but by reference to OneSteel's ABN, not the ACN.
  6. Alleasing first argued that the security interest had in fact been perfected on the bases that:
    1. by making the first registrations with reference to the ABN, the nine digit ACN had in fact been included on the Register. The ABN contained the ACN as its last nine digits.
    2. a belated post-adminstration registration could in effect be backdated to be effective prior to the date of appointment of the administrators.
  1. The Court found for the administrators on the basis that a search of the Register by ACN alone would not reveal the registrations, and so they were defective. The Court also refused to perfect the security interest retrospectively, as the subsequent registration was done after the critical date on which the administrators were appointed to OneSteel. It seems Alleasing's interest in the Onesteel equipment missed the lifeboat Alleasing found for Accolade Wines and other leases.
  2. Allleasing also raised a Constitutional argument, essentially that Alleasing's property had been acquired on unjust terms in a manner not permitted by the Constitution. Fans of Australian film will remember this principle as 'the vibe' raised by the suburban solicitor Dennis Denuto in the film The Castle. Unfortunately for Allleasing the Court found no 'vibe' and the argument was rejected essentially because the Court held that the relevant part of the PPSA is a law for adjusting right of creditors in insolvencies and not a kind of law that the Constitution will strike down. Statements made by an Alleasing spokesman and reported in the press suggest that the issue may well be appealed all the way to the High Court.

Limitations on section 293

  1. An application under section 293 to extend the time for PMSI registration enabling super priority can only be made in respect of section 62(3). It is therefore not available when the collateral is 'inventory' (as defined in section 10). So for example, it will not it seems be available when the grantor has been supplied stock in trade or is a hire business, as collateral on-hired appears to be 'inventory' under that definition.

'Overclaiming' PMSI status

  1. Another trap the Act lays is that a registration will be ineffective8:
  2. if the registered financing statement (as amended, if at all) indicates that a security interest in the collateral is a purchase money security interest (to any extent)— [and] the security interest is not a purchase money security interest (to any extent) in the collateral

    A failure to appreciate that a sale and lease-back is not a PMSI could spring this trap, for example.

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.