It’s over!  The temporary perfection period for transitional security interests is gone.  Secured parties must now without fail determine their priority and take all necessary steps to protect it.

Thankfully, this quarter has also provided us with a little more clarity as it has produced a potentially substantial amendment to the way PPS leases are defined and a Federal Circuit Court of Australia decision on the operation of the transitional provisions and statutory interests.

  1. Hire businesses welcome proposed changes to the PPSA

Provided the amendments introduced to Parliament on 19 March 2014 are passed, leases and bailments of serial numbered goods (such as motor vehicles, boats and aircraft) of 90 days or more will no longer be deemed to be ‘PPS leases’.

This will significantly reduce the administrative burden on small and medium sized hire businesses to make registrations in respect of leases of serial numbered goods of less than 12 months.  Currently you should register if the lease is longer than 90 days in respect of serial numbered goods.

What is a PPS lease?

In general, a PPS lease is a lease or bailment of goods for:

  • an indefinite period;
  • a term or terms of one year or more for most goods; or
  • in the case of motor vehicles, boats or aircraft, a term or terms of 90 days or more.

How does a PPS lease impact businesses?

Under the PPSA:

  • in certain circumstances, possession of goods alone is sufficient for a party to grant a security interest in those goods as a person in possession is considered to have rights in those goods. 
  • a PPS lease causes the bailor’s or lessor’s legal interest (whether or not it secures a debt) to be classified as a security interest. 

As a result, if a lessor or bailor does not register its interest in the goods, its interest is similar to an unsecured creditor and, even though it is the owner, secured interests registered on the PPSR will take priority. This includes secured interests granted by persons in possession of the goods. 

Proper registration helps to ensure a lessor’s or bailor’s legal interest has priority over any other interest even if those interests were registered earlier.

Other proposed changes

The Government is also considering modifying the definition of ‘motor vehicle’ to further limit the scope of transactions which would be deemed to be a PPS lease.  The lease of an item that no longer fell within the scope of the definition of motor vehicle would only be a PPS lease if the lease was for more than 12 months or an indefinite term, rather than the shorter timeframe of 90 days or more.

  1. NCO Finance Australia Pty Ltd v Australian Pacific Airports(Melbourne) Pty Ltd [2013] FCCA 2274

The recent decision of NCO Finance Australia Pty Ltd v Australian Pacific Airports (Melbourne) Pty Ltd [2013] FCCA 2274 is a reminder to creditors that the PPSA is more than a race to the register.  It also serves as a silent caution to secured parties looking to rely on priority given to certain statutory liens.

Facts

In this case, NCO Finance Australia Pty Ltd (NCO) held a registered transitional security interest over the grantor’s motor vehicle to secure a sum of money owed to NCO as a result of financing the purchase of the motor vehicle. 

Prior to the commencement of the PPSA, the grantor had driven the motor vehicle to an airport in Melbourne and never picked it up.  Australian Pacific Airports (Melbourne) Pty Ltd (APA), the proprietor of the airport, declared the motor vehicle abandoned and moved it to the long term carpark.

Decision

The court held that both APA’s security interest and NCO’s security interest were transitional security interests and were continuously perfected from the registration commencement time of the PPSA. 

NCO’s security interest was continuously perfected by way of a migrated registration as it had previously registered its security on the Queensland Register of Encumbered Vehicles, which was a transitional register that migrated to the Personal Property Securities Register (PPSR) on the registration commencement date of 30 January 2012.

It was decided that APA’s security interest arose as a repairer’s lien under the Chattel Securities Act 1987 (VIC) because that Act defined a “repairer’s lien” to be a lien on goods in the possession of a person as security for payment for services or materials furnished in respect of those goods by that person in the ordinary course of business.  Since APA provided a service (ie storage) in respect of the motor vehicle and it held a possessory lien from the fact the motor vehicle continuously remained in the carpark since 4 October 2011, it was decided that APA had a perfected transitional security interest.

As a result, since both parties held a security interest with the same time of perfection and the PPSA could not determine who had priority between the two transitional security interests the pre-PPSA law would apply to the priority dispute.  On that basis, it was determined that APA’s security interest ranked ahead of NCO’s security interest.

PPSA and Statutory Interests

Under s73(1) certain interests, often called “statutory interests”, are given a ‘super priority’ where the secured party provides goods or services in the ordinary course of business to the grantor and this transaction gives rise to a security interest that is provided for by a law of the Commonwealth, a state or a territory.

One exception to this ‘super priority’ is where any law of the Commonwealth, a state or a territory provides for the priority between the relevant security interests.  If this is the case, in order for the statutory interest to have a ‘super priority’, a statute or instrument must declare that s73(2) of the PPSA applies to that particular law.

When relying on statutory interests that are given ‘super priority’ by a s73(2) declaration, secured parties should be aware that only statutory interests that arise after such declaration was made are to be given the ‘super priority’ under the PPSA. 

What to take away:

  • This case is a good example of the operation of s323.  In particular, where the PPSA cannot determine a priority dispute, the law will apply as it was prior to the PPSA. 
  • This case serves as a reminder that registration is not the only mode of perfection.  As control or possession of the collateral also provide perfection of security interests, it is important to take these into consideration when assessing one’s security and priority position, rather than solely relying on PPSR search results.
  • Before relying on the super priority of a statutory interest, secured parties should check whether any statute (including the statute creating the interest) other than the PPSA provides for the applicable priorities between the competing security interests.  For example, the Chattel Securities Act 1987 (VIC) in the above case and the Warehousemen’s Lien Act 1985 (NSW) both contain the requisite declaration under s73(2) of the PPSA to ensure security interests that arise under the statutes have priority over all other security interests.

Moving forward

Although the PPSA has been in force for 2 years now, it is still a relatively new piece of legislation and many kinks continue to be ironed out.  As a result, secured parties must keep up to date with any significant changes being made, such as the potential changes to the definition of ‘PPS lease’ and/or ‘motor vehicle’, to avoid losing protection or priority due to technicalities.

In addition, secured parties that have successfully registered their transitional security interests prior to the end of the temporary perfection period (being 30 January of this year) should be aware of the many complex priority rules in the PPSA which could impact on their priority position.  As the above cases demonstrate, having the earliest possible registration time may not always give you first priority.  It is important to know that competing registered transitional security interests will have priority determined by the pre-PPSA law and that ‘super priority’ interests such as statutory interests exist and may trump any registered security interest, transitional or otherwise.

As a secured party, you should keep your ear to the ground in case any new changes or decisions in relation to the PPSA arise.  If you are not aware of such changes or decisions, or simply would like someone to explain them to you, give us a call and we will be happy to help.