The introduction of the Personal Property Securities Act 2009 (Cth) (PPSA) has been one of the most significant law reforms in recent times. The enactment of the PPSA has attempted to streamline the operation of personal property securities laws in Australia, replacing a number of existing State and Territory laws, and creating one register for personal property securities Australia wide. The enactment of the PPSA has seen relatively little judicial consideration with respect to its operation, which has left practitioners' guessing as to how the courts would interpret its strict requirements.
The Supreme Court of New South Wales recently handed down a landmark decision concerning priority disputes arising under the PPSA. The decision is particularly helpful for those entities in the business of leasing and hiring goods.
In the matter of Maiden Civil v QES  NSWSC 852(1) Justice Brenton confirmed the position that if owners of goods enter into lease agreements, and the lease constitutes a 'Personal Property Securities Lease', the owner must register the lease on the Personal Property Securities Register (PPSR) in order to protect its interest.
The decision conforms with the positions taken by courts in Canada and New Zealand with respect to similar personal property securities laws, which now effectively dispense with the common law nemo dat rule, that 'one cannot give what he does not have'.
The first plaintiff, Maiden Civil (P&E) Pty Ltd (Maiden Civil), was a civil construction company operating in the Northern Territory. The defendant, Queensland Excavation Services Pty Ltd (QES) was a company in the business of, amongst other things, leasing excavators. In late 2010, two lending institutions financed QES's purchase of three excavators. QES then entered into an agreement whereby it leased those excavators to Maiden Civil. At the time the lease agreement was entered into, QES and the lending institutions had neglected to register their interests in the excavators on the PPSR.
In 2012, Maiden Civil and the second plaintiff, Fast Financial Solutions Pty Ltd (Fast Financial), entered into a loan agreement whereby Maiden Civil granted Fast Financial a security interest in all present and future property, which included QES's excavators, the subject of the lease agreement between QES and Maiden Civil. Fast Financial then registered its security interests on the PPSR.
Maiden Civil defaulted and Fast Financial appointed receivers and managers, as it was entitled to do under the loan agreement. Maiden Civil subsequently entered into liquidation. QES demanded that the receivers return the excavators on the basis that they were the legal owners.
The leases between QES and Maiden Civil were not in writing. This did not, however, preclude a finding that the leases came within the definition of 'PPS leases'.(2) The requirements for a PPS lease were met under the PPSA as the leases' were:
- Continuous, for a period of more than a year, and Maiden Civil had retained uninterrupted possession of the excavators for more than one year;(3) and
- For property that may or must be described by serial numbers and were in Maiden Civil's possession for more than 90 days.(4)
As the leases were characterised as PPS leases, it followed that QES's interest as a lessor was also a 'security interest' within the meaning of s 12 of the PPSA.
Section 19 of the PPSA deals with the enforceability of security interests as against the grantors' of those interests. This section was relevant in determining whether Maiden Civil had granted an enforceable interest to Fast Financial.
Attachment required for enforceability
- A security interest is enforceable against a grantor in respect of particular collateral only if the security interest has attached to the collateral.
- A security interest attaches to collateral when:
- the grantor has rights in the collateral, or the power to transfer rights in the collateral to the secured party; and
- value is given for the security interest; or
- the grantor does an act by which the security interest arises.
For the purposes of paragraph (2)(a), a grantor has rights in goods that are leased or bailed to the grantor under a PPS lease, consigned to the grantor, or sold to the grantor under a conditional sale agreement (including an agreement to sell subject to retention of title) when the grantor obtains possession of the goods.
As Maiden Civil (as PPS lessee) had rights in the excavators to which a security interest could attach, it was held that Maiden Civil had granted an enforceable security interest in the excavators to Fast Financial at the time Fast Financial gave value for the interests.(5) Fast Financial's interest was registered, and therefore perfected under the PPSA.(6)
The priority contest between Fast Financial and QES was determined in accordance with s 55(3) of the PPSA. That section provides:
- A perfected security interest in collateral has priority over an unperfected security interest in the same collateral.
QES complicated the priority contest by contending that its leases to Maiden Civil were a 'transitional security interest' (7) pursuant to s 308 of the PPSA, which would mean that its interest was perfected immediately before the commencement of the PPSA, and in the circumstances it was entitled to a priority.(8)
It was conceded by the plaintiffs that QES's lease was a transitional security interest. However, temporary perfection does not apply if the security interest was registrable under a 'transitional register', but was not registered.(9) The 'Northern Territory register of interests in motor vehicles and other goods' was such a register, and the QES's lease had not been registered on it. It was therefore not perfected.
Accordingly Fast Financial was successful in the priority contest as their security interest had been perfected first in time, by registration.
QES finally contended that despite any finding with respect to perfection of security interests, pursuant to s112 PPSA Fast Financial could only deal with the excavators' to the extent of Maiden Civil's rights under the QES lease. That is, Fast Financial's rights to deal with the excavators extended only so far as that of the lessee, Maiden Civil, and as the leases' had been terminated by QES, neither Maiden Civil nor Fast Financial had a right to possession of the excavators. Section 112 provides:
- In exercising rights and remedies provided by this Chapter, a secured party may deal with collateral only to the same extent as the grantor would be entitled to so deal with the collateral.
That argument was unsuccessful. His Honour found that it was not the intention of the legislature to effectively reinstate the nemo dat rule (ie that 'one cannot give what he does not have'). The section served the purpose of imposing other limitations on a grantors ability to deal with the collateral, his Honour providing the example of a requirement in a license that it not be assigned without the consent of the licensor.
The Court therefore allowed the receivers of Maiden Civil to take possession of the excavators to satisfy the debt it owed Fast Financial.
Lessons to be learnt
This decision sends a simple but poignant message to owners of goods who are in the business of leasing or hiring, that is, that they must consider whether their leases are Personal Property Securities Leases under the PPSA, and if they are, attend to registering their interests in those leases on the PPSR at the time the lease is entered into.
The decision confirms the position that the PPSA has replaced the common law nemo dat rule, and owners of goods can no longer rely on 'title' to goods in attempting establish their right to deal with them. The position is clear that where priority disputes arise, the outcome will be determined in favour of the party with a perfected interest under the PPSA. This case also illustrates the fact that simply entering into an oral lease agreement will not avoid the application of the PPSA.
From a lenders perspective, this case is a timely reminder that in lending agreements between themselves and secured borrowers, a condition should be added to the effect that borrowers must ensure that their interests in personal property, the subject of the loan agreement, are protected under the PPSA.