Dispute is one of priority, not ownership.
The first judgment regarding a major Personal Property Securities Act ("PPSA") priority dispute between a bank with a perfected "General Security Agreement" and an equipment owner with an unperfected "PPS Lease" has been handed down.
The decision in Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors highlights three key issues for the insolvency industry:
- The lessee under a PPS Lease obtains a proprietary right in the leased property, such that the lessee can grant a security interest in that property to a third party bank.
- A later-in-time perfected General Security Agreement granted by the lessee to a bank will take priority over the unperfected earlier-in-time interest of the lessor under the PPS Lease.
- A PPS Lease created before the PPSA commencement, being a "Transitional Security Interest", that is capable of registration on a "transitional register" (being the various legacy registers) must be registered in order to protect against a later-in-time perfected security interest taking priority in the subject property. The approach taken by the Court to determination of the priority dispute between the PPS Lease holder and the bank was (unsurprisingly) consistent with the New Zealand approach - this is likely to be influential in subsequent resolution of priority issue.
In August 2010, Queensland Excavation Services ("QES") purchased three heavy vehicles used for excavation purposes. At more or less the same time, Maiden Civil (P&E) Pty Ltd ("Maiden") entered into a leasing arrangement with QES whereby they took possession of the vehicles and used them in civil construction works in the Northern Territory. In March 2012, Maiden entered into a short-term financing arrangement with Financial Solutions Pty Ltd ("Fast"), which included a General Security Deed ("GSD") that granted a security interest in, inter alia, the vehicles to Fast. However, following the occurrence of a number of events of default under the GSD, Fast exercised its rights to appoint receivers over all the assets of Maiden, including the vehicles.
Nature of Maiden's interests in the vehicles
It was not in dispute that as 'owner' of the vehicles, QES had a 'security interest' in the vehicles in this case. Specifically, the Court found that as the lease arrangements involved continuous possession for a period of more than one year and possession of serial numbered goods for a period of more than 90 days, a PPS Lease was made out under ss. 13(1)(b), 13(1)(d) and/or 13(1)(e) of the PPSA.
The key issue in the case, however, was whether rights of the lessee, Maiden, were sufficient to permit the secured creditor, Fast, to acquire rights in priority to the lessor, QES. This turned on the nature of Maiden's interest in the vehicles.
The Court relied on the leading New Zealand decision, Graham v Portacom New Zealand Ltd , which determined that, under the equivalent New Zealand legislation, a lessee has both a possessory interest and a proprietary interest in the leased property and can grant a security interest in the property itself and not just in its leasehold interest in the property. Therefore, the Court found that under the PPSA regime, Maiden's interest in the vehicles was sufficient to permit the secured creditor Fast, to acquire rights in priority to those of the lessor, QES.
Priority between existing claims
While QES had a PPSA security interest in the vehicles, it had neither registered the interest nor gained possession and therefore possessed an unperfected security interest. In contrast, Fast had a security interest through the GSD which attached upon the payment of the loan monies to Maiden and was registered, therefore achieving perfection under the PPSA.
The Court referred to the Canadian decision of Re Gitten, in emphasising that the dispute is one of priority, not ownership and ultimately finding that Fast's perfected security interest has priority over QES' unperfected security interest as per s. 55 of the PPSA.
Transitional Security Interests
The decision also provides extensive commentary on the application of the transitional security regime under the PPSA. While recognizing that QES' interest was a Transitional Security Interest per the definition in s. 308 of the PPSA, the Court held that the interest was capable of being registered on a 'transitional register' in the Northern Territory. Consequently, as per s. 322(3), the security interest was not perfected via the transitional security interest regime and did not gain priority over Fast's registered interest.
Analysis of the Court's interpretative approach to the PPSA
Although the decision is not unexpected on the face of the legislation Justice Brereton's reliance on the jurisprudence of Canadian and New Zealand courts in relation to equivalent legislation in those jurisdictions is noteworthy. Justice Brereton finds that in enacting legislation modeled on the New Zealand and Canadian legislation, the Federal Parliament intended that the well-established approach to security interests under the Canadian and New Zealand PPSA regimes should apply. In addition, the case serves as the first major application of the PPSA in a priority dispute by a court in Australia, thus setting the tone for future priority related decisions.