It has now been two years since the commencement of the Personal Property Securities Act 2009 (Cth) (PPSA), and much has been said and written about the PPSA during that time. Particular attention has been given to the impact of the PPSA on the rights of lessors where the lease constitutes a “PPS Lease” (effectively, a lease for a term longer than one year) and the leasing industry has devoted much time and resources in coming to grips with the new regime.
Under the regime established by the PPSA, it is of critical importance to lessors that they protect their “deemed” security interest in leased goods by registration on the PPSR. It is however crucial that such a registration is done correctly as the security interest may otherwise be ineffective. This can have significant consequences for a lessor. This article considers these consequences.
Protecting a lessor’s security interest under the PPSA
Under the PPSA, a lessor of goods is deemed to have a security interest in the leased goods. The PPSA defines a “security interest” to include the interest of a “lessor or bailor of goods under a PPS Lease”.1 A “PPS Lease” includes a lease or bailment of goods for a term of more than one year in circumstances where the lessor is regularly engaged in the business of leasing goods. This means that a lessor of goods cannot rely solely on its status as the legal owner of the leased goods to defeat the claims of third parties in respect of those goods.
To protect its security interest in the leased goods, a lessor therefore has to perfect its security interest by one of the perfection methods prescribed by the PPSA - being possession, control or registration on the PPSR. Given the nature of the collateral under the leasing arrangements, perfection by registration is the most appropriate method.
Registering on the PPSR
To perfect its security interest by registration, a lessor (as the secured party) must submit a summary of the transaction in a document known as a financing statement to the Registrar of Personal Properties Securities. The registration of a financing statement will alert searchers of the PPSR that the lessor has a security interest in the leased goods.
It is however important that a PPSR registration complies with the requirements set out in both the PPSA and the Personal Property Securities Regulations 2010 (Cth) (the “PPS Regulations”) otherwise there is a risk that the registration may be defective.2 A lessor of goods should therefore have appropriate systems in place to ensure that all its PPSR registrations comply with these requirements exactly.
A security interest registered on the PPSR may be ineffective if there is:
- seriously misleading defect in any data relating to the registration (i.e. an irregularity, omission or error in the registration)3; or
- defect which is set out in section 165 of the PPSA.4
An example of a defect referred to in section 165 of the PPSA is if a search of the PPSR by reference only to the details of the grantor of the security interest (i.e. in a leasing transaction, the lessee) that are required to be included in the financing statement under the PPSA, is not capable of disclosing the relevant registration. A financing statement should therefore correctly identify the grantor by using the information which is required to be included under the PPSA and the PPS Regulations. For example, where the grantor is an Australian company, the correct identification will be the grantor’s Australian company number (or “ACN”). Lessors should therefore be aware that in this case, registration against the Australian business number (or “ABN”) of a lessee will not be sufficient and will result in the registration being defective.
The ‘section 164 test’ has particular implications for lessors of goods in an insolvency context. To ensure that there is the largest pool of assets available for distribution amongst the unsecured creditors, the liquidator of an insolvent lessee company may be incentivised to check for potentially invalidating mistakes in financing statements which have been registered against the lessee company.
It is also important for a lessor to note that the PPSR does not identify a defective financing statement at the time of registration. A defect in a financing statement may therefore remain undetected until it's too late to rectify the defect.
Recent New Zealand case law demonstrates that similar issues arise for secured parties under the Personal Property Securities Act 1999 of New Zealand and that care is needed to ensure that all details are correct when registering a financing statement.5
Impact on a lessor’s security position if a PPSA registration is ineffective
If a PPSR registration is ineffective, a number of key issues may arise with respect to the security position of a lessor of goods.
- Loss of priority
- If a registration is defective, a lessor’s security interest in the leased goods will be unperfected.
- As a result, in a priority contest relating to the leased goods between the lessor and another perfected security interest in the leased goods (such as a financier of the lessee that holds security over all of the lessee’s assets), that perfected security interest will have priority over the lessor’s unperfected security interest.
- Vesting upon the lessee’s insolvency
- If a lessee is subject to certain insolvency proceedings, an unperfected security interest will vest in the lessee. This effectively means that the security interest will cease to exist and the lessor as the secured party will no longer have any interest in the property. The property will then be held by the lessee subject only to other perfected security interests. In other words, a lessor cannot assert its status as the owner of the property to defeat the claims of third parties.
- Extinguishment of lessor’s security interest
- If a lessee on-sells or sub-leases the leased goods to another person, for value, that buyer or sub-lessee will take the leased goods free of the lessor’s unperfected security interest.
- In such a case, the lessor’s rights in the goods will be subrogated to the rights of the lessee and the lessor would therefore be entitled to the purchase price payable or any sub-lease payments.6 However, even though the lessor would be entitled to claim a security interest in the proceeds of the sale or sub-lease (by virtue of section 32(1)(b) of the PPSA), any such security interest would be unperfected and, therefore, vulnerable to the priority of other security interests on the insolvency of the lessee.
- Loss of “super-priority” status of PMSI for leased goods
- The PPSA provides that a purchase money security interest or a “PMSI” (such as the interest of a lessor under a PPS lease) will have priority over all other security interests in the collateral (even if the non-PMSI was granted before the PMSI).
- If a lessor has failed to correctly register its security interest on the PPSR, it will therefore lose its PMSI “super priority” status on the basis that it had neither perfected its security interest nor taken all steps to correctly register its security interest as a PMSI within the strict timeframes required under the PPSA (in the context of an leasing transaction not including inventory, being within 15 business days of the lessee obtained possession of the goods).
A lessor of goods should therefore take all steps to correctly register its security interest in the goods so as not to jeopardise its security position. As the transitional period has now come to an end, it is appropriate for lessors to revisit their PPSA registration policies and practices in order to ensure that they are working correctly so as to avoid the potential outcomes discussed above.
A number of steps may be taken to rectify any irregularities and Norton Rose Fulbright Australia is well placed to assist lessors in this regard, having advised a number of lessors specifically on the implications of the PPSA on their businesses.