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Is a finance lease ever a PPS lease? … the first question arising from the Maiden Civil Case

Jackson McDonald

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Australia April 2 2014

Introduction

The first significant Australian judgment relating to determining priorities between competing creditors under the Personal Property Securities Act 2009 (Cth) (PPSA) sends a clear message that what matters under the PPSA is having a “perfected” security interest in personal property not “title” to the personal property.  The New South Wales Supreme Court in 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 [2013] NSWSC 852 (Maiden Civil Case) confirms that if an owner of goods leases them to someone else, then the owner:

“…cannot rely on its title to protect its interest in the goods, instead, the

owner must register its interest on the PPS register.  Failure to do so may

result in the owner losing the goods to other creditors;…”

The Maiden Civil Case confirms the (unsurprising) reality of the PPSA and highlights

the necessity for lessors who have a registrable security interest to perfect their

security interest or risk losing their ownership rights.  While the Court reached the

correct result, it overlooked an important distinction between the two types of

leases subject to the PPSA.  On different facts, the Court’s analysis would have led

to an incorrect decision.

Maiden Civil Case – the facts in brief

In 2010, prior to the PPSA coming into effect, Queensland Excavation Services

Pty Ltd (QES) purchased certain Caterpillar brand wheel loaders and excavators

(Caterpillars) and leased the Caterpillars to Maiden Civil (P&E) Pty Ltd (Maiden)

on an informal basis with no written agreement.  QES did not register its interest

on the relevant pre-PPSA Northern Territory register (Relevant NT Register).  Had

it done so, that registration would have been “migrated” across to the Personal

Property Securities Register (PPS Register) when the PPSA came into force.  In about March 2012, after the commencement of the PPSA, Maiden sought short  Contact

term finance from Fast Financial Solutions Pty Ltd (Fast).  Maiden granted security

to Fast over all its assets under a General Security Deed (GSD), and included the

Caterpillars in the list of assets to be charged under the GSD.  Fast registered its

interest on the PPS Register.  Maiden subsequently went into administration and

then liquidation and both Fast and QES claimed the Caterpillars.

Decision

The Court found that both Fast and QES had security interests in the Caterpillars. 

The arrangement between QES and Maiden satisfied the requirements of a “PPS

lease” as defined in s 13 which gave QES a security interest under s 12(3) of the

PPSA.  The Court held that by failing to register its interest in the Caterpillars on the

Relevant NT Register, QES was not afforded temporary perfection under s 322(3) of

the PPSA and regulation 9.2 of the Personal Property Securities Regulations 2010

(Cth)).  QES also failed to register its security interest on the PPS Register when

the PPSA came into force.  Therefore, it held an unperfected security interest

in the Caterpillars. Fast, on the other hand, had registered its security interest

thereby perfecting its security interest in the Caterpillars.

Under the PPSA, ownership becomes irrelevant in determining who might be

entitled to goods subject to two competing security interest.  Rather priorities are

determined based on the statutory rules – in this case, Fast’s perfected security

interest had priority over QES’s unperfected security interest.   QES essentially

“lost” its ownership rights under the lease by failing to register.  In addition,

pursuant to s 267 of the PPSA, QES’s unperfected security interest vested in

Maiden upon the company going into administration.  The Court confirmed that

the practical effect of this section is that QES’s security interest was extinguished

and Maiden held the Caterpillars subject only to Fast’s perfected security interest.

Analysis of the nature of the security interest by the Court

The PPSA distinguishes between true “in substance” security interests and

“deemed” security interests.   A true security interest is described in s 12(1) as

an interest in personal property provided for by a transaction that, in substance,

secures payment or performance of an obligation.  Any transaction creating such

an interest attracts the application of the PPSA regardless of its form. 

Deemed security interests, however, are brought within the PPSA by s 12(3)

“whether or not the transaction concerned, in substance, secures payment or

performance of an obligation”.  One such deemed security interest is the interest

of a lessor or bailor of goods under a PPS lease.  Section 13 provides an extensive

definition of PPS lease which essentially includes any lease or bailment of goods:

a)         by a person who is regularly engaged in the business of leasing or bailing;

and for a term of more than one year (90 days for serial numbered goods) or

capable of extension to one year (or 90 days) by renewals or agreement

between the parties.

1

Under the PPSA, therefore, a lease of goods can be either a true security interest

or a deemed security interest.  A finance lease secures payment of the goods

and, therefore, is a true security interest.  The hallmark of most finance leases

is that the parties intend for the lessee to become the owner of the goods once

the terms of the lease have been fulfilled.  From an economic perspective, it is

equivalent to having made a loan for an amount equal to the purchase price which

is then paid back over time (the payments composing the purchase price or the

“principal” plus a return or “interest”).  In contrast, the lessee under an operating

lease does not intend to become the owner of the goods but merely contracts for

the use of the goods for a period that is generally less than the useful life of the

goods.  The lessor expects to get the goods back and re-lease them to the next

lessee.  As a result, an operating lease is not a transaction that secures payment

or performance of an obligation.  However, an operating lease will nevertheless

be subject to the PPSA if it falls within the definition of PPS lease. The definition

of PPS lease is needed to create and maintain a distinction between a lease that

is a true security interest and a lease that is deemed to be a security interest.

Operating leases are not secured financings and may seem out of place in

legislation dealing with securities.  Nevertheless, deeming them to be security

interests lines up with the philosophy of the PPSA which considers the assumptions

that a reasonable financier or buyer would be entitled to make about property

in possession of a party other than the owner.  A reasonable financier or buyer is

less likely to assume that a lessee or bailee under a short term lease of goods is

the owner of the goods.  However, ownership becomes less clear with leases or

bailments for longer terms.  For that reason, the length of time of the lease or

bailment is critical in determining whether or not a transaction should be subject

to the PPSA. 

In contrast, the length of time of a financing transaction creating a true security

interest, even though in the form of a lease, is (quite rightly) irrelevant.  Similarly

the PPSA should apply to a lease that creates a true security interest even if the

lessor is not regularly engaged in the business of leasing goods.  As a result, the

definition of PPS lease should be interpreted to include only leases that do not

secure payment or performance of an obligation.

The Court in Maiden Civil, however, held that the arrangement between QES and

Maiden was a PPS lease even though the facts presented indicated the transaction

was a true security interest either a finance lease or hire purchase arrangement. The Court concluded that the parties intended that Maiden would own the

Caterpillars once it paid the last instalment.  These facts give the transaction

the hallmarks characteristic of a true security interest.  The Court stated that

the “arrangements between QES and Maiden were not a mere lease, but included

an agreement to transfer title on discharge of the finance.”

2

   Nevertheless, the

Court proceeded to analyse the arrangement on the basis that it must satisfy the

elements of a PPS lease before it was subject to the Act. 

The Court applied the definition of PPS lease:

The hire was continuous, for a period of more than one year, and Maiden

retained uninterrupted possession of the Caterpillars for more than 1 year. 

Accordingly PPSA, sub-section 13(1)(b) and/or 13(1)(d) was satisfied.  … It

was not suggested that any of the exclusions in sub-section 13(2) applied.  …

it was not established that QES was not regularly engaged in the business of

leasing goods.  It follows that the leases of the Caterpillars by QES to Maiden

were PPS leases within the meaning of PPSA, s 13, and – as was ultimately not

in dispute – that QES’ interest in the Caterpillars, as lessor, was a “security

interest” within PPSA, s 12(3)(c).

3

If a leasing arrangement is a true security interest, as was the one in this case,

the elements of the definition of PPS lease in s 13 do not apply.  In analysing the

security interest, the Court failed to appreciate the distinction between a lease

that is a true security interest and one that is a deemed security interest.  The

better analysis is that the transaction was brought within the scope of the Act as

a true security interest under s 12(1) of the PPSA.  

To qualify as a PPS lease, the contract for the hire of the Caterpillars would have

needed to have a term of at least 90 days.  This test was satisfied in this case

causing the Court to find that the PPSA applied so nothing actually turned on the

Court’s failure to recognise the distinction.  If, however, the lease had been for a

period of two months,

4

  then based on the reasoning applied in the Maiden Civil

Case, the Court would have concluded that QES did not have a security interest

and the PPSA did not apply.  That conclusion would be in error.

Admittedly the definition of PPS lease appears capable of being interpreted

to include all leases for a term of more than one year (even if they are true

security interests), but this would not produce the intended result.  The correct

interpretation is even more elusive because s 12(2) lists examples of true security

interests including in s 12(2)(i) a “lease of goods (whether or not a PPS lease)”. 

The words in parentheses are confusing and unfortunate.  Perhaps the drafters

merely wished to confirm that a lease that is a true security interest will be

subject to the PPSA regardless of the fact that it is for a term of less than one

year.  The words suggest, however, that a lease that is a true security interest is

capable of a dual character as both a true security interest and a PPS lease if it is for a term of more than one year.  This interpretation could lead to applying the

elements of the definition of PPS lease to a lease that is a true security interest.

Section 12(3) has equally unfortunate language.  The sole purpose of s 12(3) is

to bring the deemed security interests within the PPSA’s scope because they do

not otherwise fall within the definition of security interest in s 12(1).  However,

s 12(3) states that a security interest also includes the interest of a lessor or

bailor of goods under a PPS lease  “whether or not” the transaction concerned, in

substance secures payment or performance of an obligation.  The words “whether

or not” again suggest that the interest of a lessor or bailor of goods under a PPS

lease could include a true security interest. 

The unfortunate drafting in ss 12(2)(i) and 12(3) should be read down to clarify that

a true security interest cannot be a PPS lease and that a PPS lease includes only

leases that do not in substance secure payment or performance of an obligation. 

Any other interpretation will lead to the errors in analysis undertaken by the Court

in Maiden Civil whereby the elements of the definition of PPS lease were applied

to a true security interest.   Since the Court held that the arrangement between

QES and Maiden was a PPS lease, the Court analysed whether QES, the lessor,

“was regularly engaged in the business of leasing”.  The analysis is completely

unnecessary when the lease is a true security interest and could lead to a true

security interest being excluded from the scope of the PPSA.

The Court’s mischaracterisation of the lease led to further analysis problems

in connection with the PPSA’s attachment rules.  Section 19(2) provides that a

security interest will not attach to collateral unless the grantor has “rights in the

collateral”.  Drawing on well established New Zealand and Canadian authority,

the Court confirmed that under the PPSA, a lessee under a PPS lease, upon taking

possession of the goods, has a proprietary interest in the goods that satisfies the

attachment rule.  Again, however, the New Zealand and Canadian authority related

to leases that were deemed security interests which create conceptual problems

under the PPSA as to the whether the lessee has sufficient proprietary rights to

support the attachment of a security interest.  These conceptual problems do

not arise in respect of the rights of a lessee under a lease that is a true security

interest and, therefore, the New Zealand and Canadian authority are not on point.

Conclusion

The Court in the Maiden Civil Case came to the correct conclusion.  QES lost its

ownership rights in the Caterpillars because its interest under the lease was a

security interest for purposes of the PPSA and, by failing to perfect its security

interest, QES lost priority to another secured party who did perfect its security

interest.  The Court failed, however, to appreciate the distinction between a lease

that is a true security interest and a lease that is deemed to be a security interest. 

On different facts, the Court’s analysis would have returned the wrong result. 

To view all formatting for this article (eg, tables, footnotes), please access the original here.
Jackson McDonald - Hilary Hunt and Linda Widdup

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