In the first significant judgment by an Australian court under the Personal Property Securities Act 2009 (PPSA), the NSW Supreme Court has found that a dispute between competing security interests in personal property “cannot be resolved through determination of who has title to the collateral because the dispute is one of priority, not ownership”. As such, a failure to register a registrable interest on the Personal Property Securities Register (PPSR) can lead to the legal owner losing its right in the property.
The background to the proceedings in Albarran (as recs and managers of Maiden Civil (P&E) Pty Ltd) (Maiden) v Queensland Excavation Services Pty Ltd (QES) is as follows:
- in or about August 2010, QES paid the deposits for three Caterpillar vehicles and had secured financing for the three vehicles from Esanda finance and Westpac
- more or less concurrently with the payment of the deposits for the vehicles, QES received funds from Maiden for the amount of the deposits
- thereafter QES invoiced Maiden for amounts that corresponded with the finance charges payable by QES for the equipment plus 10%
- one of the loans for the three vehicles was fully paid out by QES in March 2011 and from that time, QES did not submit any further invoices to Maiden and Maiden did not make any further payments to QES in respect for the vehicles
- neither QES nor its financier (Westpac) registered any security interest in the vehicles on the PPSR
- in March 2012, Maiden obtain short term financing by way of a Loan Agreement and General Security Deed from Fast (Fast). The General Security Deed identified the three vehicles as being the property of Maiden and thereby granted a “security interest” in all three vehicles to Fast. Fast’s security interest was perfected by virtue of registration of its interest on the PPSR
- as a result of a number of defaults under the General Security Deed, the Financier appointed receivers and managers over the assets of Maiden and Maiden subsequently entered into liquidation, and
- shortly after the appointment of the receivers and managers, QES terminated the leases with Maiden and entered into alternative hire arrangements for the vehicles.
The court found that Maiden was the true owner of one of the vehicles (being the one that had been fully paid off) but that QES was the true owner of the other two vehicles, notwithstanding Maiden’s representations to Fast that it was the legal and beneficial owner of those vehicles. However, as both Fast and QES had registrable “security interests” (in QES’s case the security interest was a PPS lease) in the vehicles, ownership was not determinative of who was entitled to the vehicles and the principles in relation to the priority given to competing security interests set out in the PPSA needed to be applied.
The priority rules provided by the PPSA include that perfected security interests take priority over unperfected security interests. In this case, as QES registrable security interest in the form of a PPS lease had not “perfected” by registration, Fast’s security interest was superior to that of QES and Fast was entitled to possession of the vehicles.
The case is also important because it highlights that a security interest which would otherwise have the protection of being a transitional security interest and have its priority preserved notwithstanding it has not registered on the PPS register may be defeated because it failed to register on an equivalent state based transitional register prior to the commencement of the PPS register on 30 January 2012.
A transitional security interest is an interest under a security agreement which was entered into before 30 January 2012 when the PPS register commenced and continues after that date. Such interests have the protection of being enforceable against a third party but only for the first two years of the PPSA’s operation.
Specifically, it was held that QES’s interest as lessor was registrable on a state based REVs register at the time it was created and the failure to so register at the time meant that it lost any protection which would otherwise have been afforded to it.
The lesson is, if you should have registered on a state based REVs vehicle register (or indeed any other number of such registers which have now migrated across to the PPS register) before the PPS register commenced on 30 January 2012, you should ensure that you immediately do so on the PPS register to protect your priority. The related lesson is a timely reminder that such protection afforded to transitional security interests expires on 30 January 2014 and you should carefully consider whether registration should now be done.
The court also rejected QES’s submissions that Fast could have no better entitlement to the vehicles than that of Maiden and, since Maiden’s right to possession of the vehicles had ended with the leases being terminated, Fast therefore had no right to possession. In doing so, the court relied upon s267 of the PPSA to find that an unperfected security interest vests in the grantor which in this case was Maiden, subject to the perfected security interest of Fast, and therefore QES’s security interest was extinguished. In this respect, the PPSA would appear to differ from the legislation in force in other countries which render an unperfected security interest ineffective against a grantor’s trustee in bankruptcy or a liquidator.
The decision serves as a timely reminder of the importance of considering whether you do have any security interests and if so, ensuring that your security interests are registered under the PPSA. A failure to register a security interest may otherwise result in your interest in the property being extinguished.
Also of interest, the New Zealand Courts have confirmed, in the context of the New Zealand PPSA legislation, that a developer’s step in rights are a security interest and ought be registered under the PPSA to enable the developer to utilise the plant and equipment of the insolvent contractor (assuming the plant and equipment is actually owned by the insolvent contractor and not already the subject of an earlier security interest) and unfixed materials. Consideration needs to be given to the terms of individual contracts as to whether the step in rights under specific contracts should be registered.