In potentially less than 6 months time, the Personal Property Securities Act 2009 (Cth) (“PPSA”) is scheduled to have operational effect. It is important for businesses to understand the PPSA for two reasons: one, the broad scope of the PPSA means that its effect on businesses is far-reaching and two, lessee’s rights may be affected by the operation of the PPSA.
1 What is the PPSA?
The PPSA will establish a single national system for the registration of security interests in personal property, as well as new rules for the creation, priority and enforcement of security interests in personal property. The PPSA and the personal property register will replace the 70 existing Commonwealth and State-based Acts and Regulations and 30 duplicitous registers. The new priority rules will change the way in which lessors and suppliers of goods protect their interests, and all lessees/customers should understand these issues so they can manage risk in an informed manner.
2 The facts
The PPSA came into effect on 15 December 2009, but is not proposed to have operational effect until 2012 (“PPSA Start Date”), with a two year transitional period beginning then. The Commonwealth Attorney-General will make a determination under the PPSA that will set the actual PPSA start date. Currently the proposed PPSA Start Date is 1 February 2012. The PPSA Start Date has been deferred twice, and it is possible that further deferrals may occur. However, any future deferrals are very unlikely to push the commencement out to 2013.
3 Scope of the PPSA
Given the broad definitions of “personal property” and “security interest”, the PPSA can have significant effects on how lessees contract with their suppliers. Personal property is defined broadly to include tangible and intangible property (other than land). All forms of computer hardware and telecommunications equipment qualify as items of “personal property”.
The PPSA defines a “security interest” as an “interest in relation to personal property provided for by a transaction, that in substance, secures payment or performance of an obligation”. “Interest” is defined to include “a right in personal property”. Importantly therefore, the definition looks to the substance and not the form of a transaction, extending the definition of ‘security interest’ beyond traditional forms of securities (e.g. charges and mortgages). This means that transactions such as leases, retention of title arrangements, conditional sale agreements and hire purchase agreements can all be subject to the PPSA, if, in substance, they secure payment or performance of an obligation.
Conversely, some interests are also deemed security interests under the PPSA, irrespective of whether the interest, in substance, secures payment or performance of an obligation. A Personal Property Securities Lease (“PPS Lease”) is one of these. A PPS Lease is defined as a lease or bailment of goods for an indefinite duration or a duration that exceeds a specific period (1 year or 90 days if the goods are serial numbered goods), provided that the lessor or bailor is regularly engaged in the business of leasing or bailing goods.
Given the broad definition of “security interest” under the PPSA, transactions which are not registrable under current schemes may now be registrable under the PPSA. For example, under current law, lessors and suppliers of goods on retention of title terms do not need to register these transactions to ensure they have priority against competing interests. Instead, they rely on the fact that they have title to the goods to ensure that they have priority. However, under the PPSA, the fact that the lessor or supplier has title to the goods is irrelevant; priority between competing interests is now determined under the PPSA. These transactions will generally involve security interests (the lessee or bailee is taken to have granted a security interest in favour of the lessor/supplier) and lessors and suppliers will need to register (or otherwise “perfect”) these security interests. If they do not, they may lose ownership of the goods eg to a financier who has registered a security interest over all of the lessee’s assets pursuant to a general security.
This new operating environment means that lessors and suppliers will be taking extra steps to attempt to protect their interests under a lease which is subject to the PPSA, and lessees will need to be aware of ways to protect their position.
Leases and the PPSA
4 Determining whether your lease involves a security interest for the purposes of the PPSA
As set out above, a security interest under the PPSA includes an interest in personal property provided by a lease of goods or a hire purchase agreement if the transaction, in substance, secures payment or performance of an obligation.
To the extent that a lease is for a term of less than one year (or 90 days if involving serial numbered goods), and therefore not deemed to be a PPS Lease, the PPSA provides no guidance as to when a leasing or hire purchase arrangement in substance secures payment or performance of an obligation. Whilst it can be argued that every lease of goods secures payment (in the case of a lease, the lease rental), and therefore every lease is a security interest in personal property, this interpretation would make the concept of a PPS Lease seem almost unnecessary. The better view is that a lease (despite not being a PPS Lease) that is a finance lease (rather than an operating lease) or a hire purchase agreement would more readily be seen as involving the grant of a security interest.
The following factors have been accepted by overseas courts as indicia for when these arrangements secure payment or performance of an obligation, which classify the lease or hire purchase agreement as a secured sales transaction for the purpose of the PPSA:
- the lease or hiring arrangement provides that ownership of the goods will vest in the lessee on expiry of the lease or hire purchase agreement;
- the lessee has an obligation to purchase the goods, or an option to purchase the goods or extend the term of the arrangement at a “bargain” price such that it would be reasonable to expect the lessee to exercise that option;
- the lease term is for a major part of the economic life of the goods; and
- the minimum payments under the lease or hire purchase agreement amount to substantially all the capital cost of the goods.
Unless a lease is a PPS Lease (see above), the factors above need to be considered in determining whether the lease involves a security interest to which the PPSA applies.
5 Enforcement of security interests in personal property
Chapter 4 of the PPSA sets out rules on the enforcement of security interests in personal property. These rules regulate how a secured party seizes, disposes of and retains collateral. They also include obligations to give notice to the grantor (and in some cases, other secured parties) of intended actions at various stages of the enforcement process and permit recipients to object in some cases. Additional rules apply in relation to enforcement against a debtor where the security interest is in an accession, fixture or commingled good.
There are certain express exclusions from the application of Chapter 4 of the PPSA which relevantly include:
- a PPS Lease that does not secure payment or performance of an obligation (section 109(c)) - ie an operating lease, as opposed to a finance lease or hire purchase; and
- security interests provided for by security agreements made before the PPSA Start Date (ie 1 February 2012) (section 314).
To the extent that a lease secures payment or performance of an obligation and is provided for by security agreements made after the PPSA Start Date, it will be a lease to which Chapter 4 applies.
6 Contracting out of enforcement provisions of the PPSA
If the collateral is not used by the lessee predominantly for personal, domestic and household purposes, Chapter 4 allows parties to a security agreement to contract out of most of the enforcement provisions. Section 115 of the PPSA sets out those enforcement provisions under the PPSA which may be contracted out of by the parties. These affect a broad range of transaction types and the particular provisions appropriate for each transaction will depend on the facts of the scenario.
Section 115 essentially contains a shopping list of enforcement provisions which a lessee or lessor may wish to contract out of when entering into a lease. An exclusion clause may be drafted by a lessor in a fairly market standard form, such that it would generally be acceptable to most lessees, unless they had a real commercial interest in retaining the leased asset under all circumstances, such as under a finance lease or hire purchase agreement. However, a lease may contain specific agreements between the parties as to how the lease should be enforced, and the general rights of the lessor under the PPSA should not be allowed to override these.
For example, a lessor may attempt to contract out of section 142 of the PPSA which provides that the debtor, grantor and higher ranking secured parties may redeem the collateral at any time before the collateral is disposed of by (i) paying the amounts required to discharge the obligations, or by performing the obligations secured by the collateral and (ii) by paying the enforcement expenses. A lessee may wish to retain the operation of this provision on the basis that it provides an opportunity for the lessee to redeem the leased goods if it wishes. This would be particularly important in the case of a hire purchase agreement if the lessee wanted to take title to the asset.
Leading up to the commencement of the PPSA, lessees who generally enter into leases which are likely to be subject to the PPSA should consider which enforcement provisions they will be comfortable contracting out of and, perhaps more importantly, which provisions they would like to retain in future lease agreements.
Lessees should also keep in mind that financiers are also likely to be introducing PPSA clauses into their contracts with lessees, which may in fact clash with the clauses being inserted into lease agreement by lessors. Lessees will need to consider carefully how to protect its interests in each scenario.
7 Registration of leasing interests on the Personal Property Securities Register (“PPSR”)
Another issue for lessees to consider is whether to seek a contractual undertaking from a lessor that they will not seek to register any security interests against the lessee on the PPSR. As the grantor of the security interest to the lessor, the registration appears effectively as a charge against the lessee’s name on the PPSR. This could result in a lessee having multiple security interests registered against them if they have multiple leasing arrangements. Parties transacting with the lessee in unrelated transactions may in turn ask for details of these security interests, in circumstances where third parties are permitted by the PPSA to request a copy of any security agreement underpinning a registered security interest. The fact that there are multiple security interests registered against a lessee may also hold up any financing arrangements or future deals. Obviously, if the lessor views the lessee as a poor credit risk, the lessor is unlikely to accept such a request. But for lessees with financial substance routinely entering into leases for relatively low value equipment, this is a legitimate request.
Although it is unclear when the PPSA Start Date may in fact be, it is worthwhile for lessees to start considering how the PPSA will impact their business, and in particular, their leasing arrangements.