When is an owner not an owner? Previously, a lessor’s ownership of goods leased was enough to successfully assert a superior right to those leased goods when a lessee’s creditors came knocking on the door. Not anymore! Failing to register your security interests on the Personal Property Securities Register (PPSR) can have some significant consequences for lessors (not to mention everyone else).
A recent New South Wales Supreme Court decision has, for the first time, considered some of the key provisions of the Personal Property Securities Act 2009 (Cth) (PPSA): see In the matter of Maiden Civil (P&E) Pty Ltd; 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  NSWSC 852 (Maiden Case).
In that case the legal owner of property lost out to a creditor of the lessee.
The matter concerned competing claims to Caterpillar excavator and earthmoving vehicles (Caterpillars) used by Maiden Civil (P&E) Pty Ltd (Maiden) under a lease arrangement.
In 2010 the Caterpillars were acquired by Queensland Excavation Services Pty Ltd (QES) who, in turn, provided the Caterpillars to Maiden.
When the PPSA commenced, the QES/Maiden arrangement constituted a “PPS lease”. That includes a lease of goods for more than one year or a lease of goods for a term of up to one year that is automatically renewable (assuming the lessor is regularly engaged in the business of leasing goods) unless an exception applies. The interest of a lessor in a PPS lease is a security interest under the PPSA. However, QES didn't register its security interest on the PPSR.
In May 2012, Maiden needed short term finance and entered into a loan including a general security deed (GSD) with Fast Financial Solutions Pty Ltd (Fast). Under the GSD, Maiden granted a security interest over all its personal property, including the Caterpillars. Fast then took the smart step of registering its security interests under the PPSA (and thus perfected its security interest).
Maiden ultimately went into liquidation. The Court was required to determine whether QES or Maiden should get the Caterpillars.
In determining the claims, Fast’s registration of a security interest on the PPSR was a crucial determining factor.
Under the PPSA,disputes between parties seeking to enforce their rights in personal property (ie. most property excluding land and statutory licences) is determined by a “priority” system. To make sure your security interest has the best priority against other parties, a security interest needs to be “perfected”. Perfected? Yes, perfected … that not only means registering a security interest on the PPSR (unless an exception applies) but also making sure the security interest satisfies two other PPSA criteria:
- Attachment – huh?
In the PPS Lease example, the lessee needs to have rights in the goods (which it is deemed to have under section 19(5) of the PPSA) and the secured party must give something in return for the benefit of the security interest (ie. a loan (Fast) or the Caterpillars (QES); and
- Enforceable against third parties –how?
Usually a security interest is only enforceable against a third party (in relation to the relevant good) if you have a valid security agreement that creates a security interest over the relevant goods.
QES argued that it had a “transitional security interest” which was automatically good to go (ie. perfected) on commencement of the PPSA. This argument failed because QES failed to register its interest on a pre-PPSA register (which in this case would have included the Northern Territory Register of Interests in Motor Vehicles and Other Goods).
QES also argued that following its termination of the Caterpillar leases, Maiden no longer had any right to possession of the Caterpillars and therefore the rights of Fast were no greater than Maiden's rights in relation to the Caterpillars. QES (as lessor) argued that on lease termination, both Maiden's and Fast's interests in the Caterpillars ended and it was entitled to the return of the Caterpillars. The Court ultimately disagreed.
The Court decided that Fast had priority to the Caterpillars, and that the receivers were entitled to possession of the Caterpillars. Further, QES was held to have an “unperfected” security interest in the Caterpillars (that is, in this example, QES should have taken proactive steps to register a security interest; because QES didn’t, it held an unperfected security interest which vested, in Maiden, on Maiden going into administration and/or liquidation).
Justice Brereton confirmed the operation of section 267(2) of the PPSA (aka the vesting rule on insolvency) which states thatunperfected interests (at the time of administration/liquidation of a grantor) vest in the grantor of the security interest:
“The practical effect is that QES’s security interest is extinguished; QES has no further interest in the Caterpillars; and Maiden holds them subject only to the perfected security interest of Fast.”
The Court confirmed that a lessee of goods under a PPS lease does have rights, by virtue of section 19(5) of the PPSA, sufficient for the lessee to grant a security interest in the goods themselves. As a result, Fast's GSD attached to the leased Caterpillars, and it obtained priority to the goods ahead of the unperfected QES despite the Court holding that QES owned the unpaid Caterpillars.
This case emphasises the importance of registering your security interests in accordance with the PPSA, even if you own the property: lessors … think priority of security interest, not I have a proprietary interest! This extends to leasing arrangements that meet the definition of a PPS lease.
Taking the step of registering a security interest (or perfecting the security interest by other means) is the best way to shield against priority claims or disputes which might emerge in the future.
The decision is also a timely reminder that 31 January 2014 is fast approaching: the holders of otherwise unperfected transitional security interests should ensure they are perfected by registration or other means by this date.