Australia: PPS Lease amendments – Solving one problem but leaving another

WHO SHOULD READ THIS

  • Equipment hire businesses and parties to lease or hire arrangements (including intra-group hires).

THINGS YOU NEED TO KNOW

  • The recent amendments replace the current one year threshold for deeming a commercial lease or bailment to be a PPS lease to two years.

WHAT YOU NEED TO DO

  • Consider whether any equipment and plant hire arrangements could extend beyond two years and if so, take precautions such as registering a super priority interest now.

Recent changes to the Personal Property Securities Act 2009 (Cth) (PPSA) passed by the Federal Parliament on 11 May 2017 have changed the time periods for when a hire or equipment lease arrangement will be considered a PPS lease. The new amendments which are largely considered to be in response to the Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) [2017] NSWCA 8 case provide additional clarity to leasing arrangements but leaves a potential issue for parties seeking super priority.

The amendments

The Personal Property Securities Amendment (PPS Leases) Act 2017 (Cth) among other things, amends section 13 of the PPSA to replace the current one year threshold for deeming a commercial lease or bailment to be a PPS lease to two years. The benefit of this amendment is that short term lease arrangements (such as short term hires) will not need to be registered on the PPSR for a party to protect their interest.

PPS Leases

A PPS lease is a lease or bailment that is deemed to create a 'security interest' in the property leased or bailed when the arrangement is for, now, two years or potentially more than two years. The PPSA treats these arrangements differently as there is an intention to return the leased goods to the owner at the conclusion of the rental agreement, as opposed to hire purchase arrangements where if all payments are made title changes hands at the end of the lease period.

Under the PPS lease provisions a lessor is not required to 'perfect' its interest in leased goods by registration if the lease is not considered a PPS lease under section 13.

If a party is in a leasing arrangement and the circumstances change so they now consider a PPSR registration necessary, a 'security interest' in the goods can be registered on the PPSR at any time. Such a registration will be effective if it takes place more than six months before the vesting date (the date when a lessee is placed into liquidation).

Purchase Money Security Interest (PMSI)

A PMSI gives a secured party super priority (increasing the likelihood of recovery of the relevant goods by the owner) over non-PMSI security interests, even if those non-PMSI interests were registered first. Section 14 of the PPSA provides very specific situations to which a PMSI applies. Relevantly, it includes the interest of a lessor or bailor in the goods subject to a PPS Lease.

For example, a bank may have registered a general non-PMSI security interest over all the property of MiningCo. If MiningCo then hires equipment from HireCo and HireCo subsequently registers a PMSI (within the applicable time periods as discussed below) then HireCo's PMSI security interest would have priority over the banks non-PMSI interest, and would prevent the bank taking the equipment in the event MiningCo went into liquidation.

Due to the priority status afforded to a PMSI interest there are very specific rules for the perfection of a PMSI. To 'perfect' a PMSI, where the goods are not inventory or intangible property, the interest needs to be registered either before the grantor (in the above case MiningCo) takes possession of the goods (the equipment), or within 15 business days of the grantor taking possession of the equipment. In the case of inventory or intangible property, registration is required before the grantor takes possession.

Where is the issue?

Where a non-PPS lease becomes a PPS lease due to two years of uninterrupted possession by the lessee, the time period to register the PMSI has passed. Without PMSI protection, the lessor of those goods would not be able to prevent a previously secured party from dealing with those goods (e.g selling them) if the lessee went into liquidation.

In other words, to take advantage of PMSI protection strict timeframes for registration apply. PMSI timeframes do no 'reset' if circumstances change. Once the registration period expires, the ability to register a PMSI is lost.

Although the new amendments provide an extended timeframe for PPS leases, it does not provide a mechanism for later registration of a PMSI interest. As such, if a party does decide part way into a PPS lease that registration is required, a general security interest (and not a PMSI 'super priority' interest) will only be available, reducing the level of protection available.

How to protect yourself

Even where a lease or hire arrangement is not expected to run more than two years, equipment owners should consider the potential downside (loss of equipment) if the hire does run longer (by which time it is too late for them to get a PMSI super priority registration and they will have to wait in line with other secured creditors to determine if their equipment will be returned).

Considerations when deciding whether the heightened protection of registering a PMSI upfront is necessary will include:

  • How valuable or replaceable are the leased goods?
  • What are the chances of circumstances changing, i.e. the hire running longer than expected?
  • Is there an insolvency risk of the customer?
  • Has the customer already granted other 'all asset' security interests or is the customer likely to be granting other security interests (e.g. entering into bank finance within the term of the lease)?

If an equipment owner chooses not to take a PMSI registration upfront, the 'rollover' of hires beyond the two years period should be closely monitored to consider if other action should be taken before the two years lapses to protect the owners equipment e.g. the entry into priority arrangements with other secured creditors or the re-taking of possession of the equipment.

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