NSW Supreme Court gives asset financiers a PPSA hurry-up
The NSW Supreme Court recently confirmed that lessors of goods or equipment are at risk of losing their property to third parties unless they properly perfect any deemed security interest arising in respect of the property. This is despite the lessor retaining title to the goods or equipment!
The Case1 also significantly narrowed the “temporary perfection” protection of transitional security interests under the Personal Property Securities Act 2009 (Cth) (PPSA). If a security interest could have been perfected on a transitional register and wasn’t then it won’t be temporarily perfected under the PPSA. Accordingly, these types of security interests remain vulnerable.
The upshot? – parties involved in leasing or bailing goods or equipment should ensure that all security interests (whether transitional or not) are registered as soon as possible.
We have summarised the Case in part 4 below. Part 5 sets out circumstances where a security interest in leased or bailed goods or equipment may arise.
2. What does this mean for parties in the leasing game?
In one sense, the decision isn’t much of a surprise as it follows the conclusion reached by the NZ High Court in Portacom2 – but it does reinforce the importance of ensuring that all security interests, transitional or otherwise, should be perfected by registration as soon as possible. In particular:
- Lessors whose interests are deemed to be security interests for the purpose of the PPSA will need to ensure that their security interests are registered. There are severe consequences for failing to do so, including potential loss of priority and title.
- The PPSA provides some protection for transitional security interests. Transitional security interests are security interests arising under a transitional security agreement - one that was in force prior to 1 February 2012 (the Effective Time) and continuing in force after the Effective Time. The PPSA provides that certain transitional security interests are perfected by force of the PPSA for 24 months after the Effective Time but, as noted below, this protection is fragile.
If a security interest could have been registered on a transitional register, but wasn’t, then that security interest may be vulnerable to other perfected security interests and potential extinguishment. Transitional registers were all those which transferred their data to the Personal Property Securities Register (PPSR) including the ASIC Register of Company Charges and the various motor vehicle registers (here’s a full list).
3. So what should lessors do?
- Review: Check whether your arrangements create security interests. As this Case demonstrates, the cost of non-compliance can be significant. We have set out some guidance on when a security interest may arise in this context in part 5, but every transaction is different so advice should be sought where appropriate.
- Register: Lessors should take immediate steps to perfect security interests in their goods or equipment by registering on the PPSR. Failure to perfect may result in loss of priority and loss of title.
There are strict time limits on registration which, in the context of most leases, will be 15 Business Days after entry into the lease (but sometimes even shorter!). For transitional security interests, you have until the end of January 2014 to register but there is a risk that your security interest could have been registered on a transitional register but wasn’t – which means you’ll be unperfected and vulnerable until you register. The better approach is to ensure that you register as soon as possible.
Registration isn’t easy and small errors can have major consequences – but don’t put it in the ‘too hard’ basket!
4. The Case
The Case was principally concerned with a dispute between the receivers of a construction contractor called Maiden Civil (P&E) Pty Ltd (Maiden) (the Receivers) (who were appointed by a secured creditor (Fast)) and Queensland Excavation Services Pty Ltd (QES) who claimed to be the true owner of Caterpillar vehicles (Caterpillars) they had leased to Maiden on and from 2010.
The Receivers claimed possession of the Caterpillars because Fast’s perfected security interest had priority over QES’ unperfected security interest in the Caterpillars.
The court held that:
- although QES was the true owner of the Caterpillars, Fast’s perfected security interest was superior to that of QES’; and
- even though QES had a transitional security interest in the Caterpillars, its failure to register that security interest back in 2010 on the NT Register of Interests in Motor Vehicles and Other Goods meant that QES’ security interest in the Caterpillars was unperfected.
The result was that the Receivers had an enforceable right to possession of the Caterpillars. Importantly, QES’ title to the Caterpillars was effectively extinguished, leaving the Receivers with broader rights to the Caterpillars that Maiden had under its lease.
5. Do I have a ‘PPS Lease’?
A PPS Lease is, in general, a lease or bailment of goods that:
- has, or may have, a term of ≥ one year; or
- for serial numbered goods (including motor vehicles, aircraft and boats) a term ≥ 90 days, including options to extend.
But it doesn’t include:
- a lease by a lessor not regularly engaged in the business of leasing goods;
- a lease of consumer property as part of a lease of land where the use of the property is incidental to the use of the land; or
- pooling arrangements.
Further information can be found here.