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
On 27 June 2013, the Supreme Court of NSW handed down a decision confirming that, under the provisions of the Personal Property Securities Act (PPSA), the unregistered interest of a lessor of property will vest in an insolvent lessee and may be subject to a third party financier's registered 'all assets' security interest over the lessee.
This decision is consistent with market expectations about the intended operation of the PPSA (and indeed the position in Canada and New Zealand), and is the Australian equivalent of the landmark ‘Portacom’ case in New Zealand. It serves as a timely reminder of:
- the importance for lessors of property whose interests are deemed to be 'security interests' for the purposes of the PPSA, to perfect their security interests through registration on the Personal Property Securities Register (PPSR) (and the severe consequences for failing to do so), and
- the potential 'windfall gains' for third party financiers with 'all assets' security interests in respect of leased property, who may discover that they can realise property which is owned by third parties, but which happens to be in the possession of the lessee (such as property on hire or subject to retention of title).
In this case:
- Westpac and Esanda financed the lessor, Queensland Excavation Services Pty Ltd (QES), to purchase certain items of caterpillar machinery.
- Between about May and August 2010, the machinery was leased by QES to Maiden Civil (P&E) Pty Ltd (Maiden) for civil construction work in the Northern Territory (i.e. prior to the PPSR registration commencement date of the PPSR on 30 January 2012).
- QES and its financiers, Westpac and Esanda, did not register their interests in the caterpillars on the Northern Territory register of motor vehicles, prior to the commencement of the PPSR, and subsequently failed to register their interests on the PPSR, following the registration commencement date.
- In May 2012, Maiden entered into a facility arrangement with Fast Financial Solutions Pty Ltd (Fast) and, for the purposes of securing advances under that facility, it executed a general security agreement (GSA) in favour of Fast, granting a security interest over all of its assets, including its interest in the caterpillars.
- Fast perfected it security interest under the GSA by registration on the PPSR.
- In July 2012, Fast became aware of certain events of default and appointed receivers and managers to all of Maiden's assets.
- Maiden subsequently went into administration and then liquidation.
The court held that:
- QES had a security interest in the caterpillars, as the lessor under a PPS lease - being relevantly the lease of a serial numbered good for more than 90 days (s.13 of the PPSA).
- Fast had a competing security interest in the same equipment pursuant to the GSA.
- Consistent with the policy of the PPSA, the competing security interests of QES and Fast must be resolved according to the priority principles established by the PPSA. The dispute cannot be resolved through the determination of who has 'title' to the collateral, because the dispute is one of priority, not ownership.
- Whilst QES' interest was a transitional security interest, it was registrable on a transitional register, namely the Northern Territory register, but was not so registered prior to the registration commencement time, and thus the protection afforded to transitional security interests did not assist QES (s.322(3) of the PPSA).
- Accordingly, s.55(3) of the PPSA relevantly provides that Fast's perfected security interest in the caterpillars has priority over a QES' unperfected security interest in them.
- In addition, upon Maiden going into administration, QES's unperfected security interest thereupon vested in Maiden pursuant to s.267 of the PPSA and therefore Maiden became entitled to the Caterpillars - subject to the perfected security interest of Fast.
The decision crystallised a substantial loss for QES as the lessor (and owner) of the equipment. Whilst it may seem like a harsh result, it should come as little surprise for those who are familiar with the intended operation of the PPSA.
The decision reflects the parliament's clear legislative intention:
- to increase transparency by emphasising the paramountcy of the PPSR, as an up-to-date register of security interests, which can be searched by interested lenders, banks and other secured parties, and
- to motivate property owners (and their financiers) who allow others to possess their property (e.g. pursuant to a lease or bailment etc) to register their interest on the PPSR by reason of the significant consequences if they fail to do so.
Indeed, the facts of this case are very similar to equivalent landmark cases in other jurisdictions, such as Graham v Portacom New Zealand Ltd  2 NZLR 528, where the New Zealand judiciary reached an almost identical result, based on similar provisions, in relation to a priority dispute between an unregistered lessor and a registered financier with an 'all assets' charge.
As the Supreme Court of NSW rightly noted in this case, the dispute cannot be resolved through the determination of who has 'title' to the collateral, because the dispute is one of priority, not ownership. The PPSA sets down clear rules to the effect that Fast's perfected security interest in the caterpillars has priority over a QES' unperfected security interest.
It highlights the vulnerable position that property owners (and ultimately their financiers) may find themselves in, if they allow someone else to possesses their property (e.g. by way of lease or bailment) and fail to register their interest on the PPSR.
Registration really is the key, and the case serves as a timely reminder to both property owners and their financiers. Financiers in particular will want to ensure that they not only register their own interest as financier in the property against which they have lent, but also that they impose appropriate contractual safeguards which incentivise the borrower (and owner) to register their security interests as well. For example, by including conditions in the contract which oblige the borrower to so register and, if they fail to do so (financiers may need to adopt mechanisms to routinely check the PPSR), grant the financier a power of attorney to effect the registration on their behalf.
As it turns out, QES’ financiers ultimately had recourse to a personal guarantee and mortgage provided by one of WES’ directors, in order to satisfy the debts owed to them. However, the case shows that significant trouble and heartache could have been avoided through a simple registration on the PPSR.
The case did not address the unresolved issue of whether, if the financiers had effected a serial number registration over the caterpillars, they could have been protected under s.45 of the PPSA.