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Changes To PPS Leases – Confusion Creates Opportunities

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By Jack Newton, Lawyer, MST Lawyers and Alicia Hill, Principal, MST Lawyers

The recent changes to the PPS lease provisions of the PPSA create yet another opportunity for insolvency practitioners to test PPSR registrations for financially distressed businesses.

On 20 May 2017, an amendment to the Personal Property Securities Act 2009 (Cth) (PPSA) came into effect. The amendment effects one change to the PPSA: for agreements entered into on or after 20 May 2017, the minimum duration of a PPS Lease has been extended from one year, to two years or more.

What was a PPS lease before the amendment?

Before the change in the PPSA, a lease or bailment of goods was only a “PPS Lease” if the lease was :

  1. for a term of up to one year that is automatically renewable or renewable at the option of one of the parties for one or more terms if the total of all terms might exceed one year; or
  2. for a term of more than one year;
  3. for a term or up to one year or an indefinite term so long as the lessee possess the goods substantially uninterrupted for more than one

In addition, a PPS lease is one of four transactions which are deemed by the PPSA to be a purchase money security interest (PMSI) those categories being:

  1. a security interest taken in collateral by a person who gives value for the purpose of enabling the grantor to acquire rights in the collateral, to the extent that the value is applied to acquire those rights;
  2. a security interest taken in collateral, to the extent that it secures all or part of its purchase price;
  3. [the transaction is a PPS lease]; and
  4. the interest of a consignor who delivers goods to a consignee under a commercial consignment.

The PMSI definitions above have not been changed by the amendments to the PPSA.

Insolvency practitioners will already be familiar with the benefits to secured parties who hold PMSI registrations, as opposed to ordinary registrations.

The amendment

The Personal Property Securities Amendment (PPS Leases) Bill 2017 (Amendment Act) was passed and came into effect on 20 May 2017.

The Amendment Act amends the definition of “PPS Lease” in the PPSA by extending the timeframe for a lease, from one year to 2 years.

The effect of the amendment is that a lease or bailment of goods will only be a PPS Lease if it is a lease:

  1. for a term of more than two years;
  2. for a term of up to two years that is automatically renewable or renewable at the option of one of the parties for one or more terms if the total of all terms might exceed two years; or
  3. for a term or up to two years, or an indefinite term so long as the lessee possess the goods substantially uninterrupted for more than two

Why is this amendment an opportunity for insolvency practitioners?

Insolvency practitioners have already obtained windfalls for creditors because of confusion or inadvertence as to the operation of the PPSA. See, for example, the cases of:

In our view, the changes to the PPS lease provisions create further confusion that insolvency practitioners will eventually be in a position to obtain the benefit of for creditors.

There are two reasons for this:

  1. a lease that happens to extend or carry over for a period of two or more years will automatically become a PPS Lease and will not (ordinarily) have been registered in time by the secured party; and
  1. many businesses and practitioners (both legal and accounting) appear to take the view that if the lease is for less than two years, there is no need to register. We disagree with this approach.

Reason 1: the registration time of the lease arrangement

Various sections of the PPSA and the Corporations Act require registrations to be completed within specific time frames.

An indefinite lease of goods commencing on say, 1 September 2017, will be deemed to be a PPS lease on 1 September 2019, so long as the borrower’s possession of the goods is substantially uninterrupted up to that date. The lessor of those goods is unlikely to have registered its security interest on the assumption or expectation that the lease is unlikely to be on foot as at 1 September 2019.

Herein lies the problem: the hirer was obliged by section 62 of the PPSA to register (depending on whether the goods are inventory or not) either before the grantor obtains possession of the goods or within 15 business days.

By the time 1 September 2019 comes around, the lessor will be well outside the 15 business day period. Without an extension of time (this subject was the focus of our last Insolvency Newsletter), the lessor’s security interest (which is unregistered as at 1 September 2019) will be unenforceable against a liquidator.

Reason 2: no registration necessary

Many businesses and practitioners take the view that if any lease transaction now falls outside the new definition of PPS lease, there is no need to register.

The persons responsible for maintaining the PPSR website share this view as outlined on the PPSR website,  the changes to the PPS lease says as follows:

“What does this mean for fixed term PPS Leases entered into after Commencement?

The changes mean that those who enter into leases (and bailments) for two years or less (including applicable  options to renew) will no longer need to register as the agreement is no longer considered a PPS Lease.”

(underlining added)

Subject to the terms of the particular security agreements in place between the relevant secured party and grantor, we consider that most hire purchase or lease agreements will still require registration, merely because the nature of the transaction is one that, in substance, secures payment or performance of an obligation.

Our corporate team continues to advise our corporate clients that they must register their security interests under lease agreements and hire purchase agreements because of the likelihood that the relevant lease or hire purchase agreement will secure payment or performance of an obligation.

This view is supported in our view by section 12(2) of the PPSA which lists example transactions which are capable of being security interests:

“(e) a hire purchase agreement;

(h) a consignment (whether or not a commercial consignment)

(i) a lease of goods (whether or not a PPS lease)”

If the substance of the transaction secures either payment or performance of an obligation, then the lease will need to be registered to be enforceable in the context of liquidations irrespective of its term.

This appears to be a significant omission which could generate substantial returns for creditors of financially distressed businesses.

Naturally, our view and the view of other advisors in the PPSR space will eventually be tested by the courts.

Another PMSI?

Although not strictly related to hire purchase and lease agreements, there is a further question as to whether the substance of the transaction could be characterised as a PMSI under a different PMSI category. Although this will need to be assessed on a case by case basis according to the terms of the relevant security agreement, it is an important issue that insolvency practitioners should bear in mind.

Section 14(b) of PPSA (the section defining PMSIs) categories the following transaction as a PMSI:

a security interest taken in collateral by a person who gives value for the purpose of enabling the grantor to acquire rights in the collateral, to the extent that the value is applied to acquire those rights;

Whether the secured party is giving value for the purpose of enabling the grantor to obtain rights in the leased goods and that issue is determined by answering the following question:

But for the value supplied by the secured party, would the grantor be able to acquire proprietary rights in the underlying goods?

There are presently no Australian reported decisions dealing with section 14(b) of the PPSA. Although this provision appears in the equivalent Canadian and New Zealand legislation, the case law in those jurisdictions does not provide any further guidance.

In our view, there are likely to be circumstances where a security interest satisfies the “but for value” test, and ought to have been registered as a PMSI.

This is yet another matter that should be included in the assessment of security interests (whether registered or not) by insolvency practitioners upon their appointment. This assessment may, in turn, result in stronger returns to creditors arising from vested unregistered security interests.

If you would like more information about the topics raised in this article, please email Alicia Hill (Disputes Resolution and Litigation) or Jack Newton (Corporate and Commercial) or call on +61 3 8540 0200.