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Lachlan Commins, Patterson Houen ComminsBy Lachlan Commins, Patterson Houen & Commins, Lawyers, Sydney.

Is your business regularly engaged in the business of leasing or hiring out goods, equipment or other items of personal property[i] which you own? If so, are you aware of the Personal Property Securities Act 2009 (Cth) (‘PPSA’ or ‘the Act’) and how it affects your business?

Red Alert for lessors – Personal Properties Securities Act (PPSA)

If not, your property may disappear like a thief in the night as the following three salutary cases highlight:

  • Maiden Civil (P&E) Pty Ltd (in liquidation) (receivers and managers appointed) v Queensland Excavation Services Pty Ltd (“Maiden”);[ii]
  • White v Spiers Earthworks Pty Ltd (“Spiers”); and[iii]
  • Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) v General Electric International Inc. (“Forge”).[iv]

If you stop reading and take nothing else from this article at least remember this:

YOU SHOULD IMMEDIATELY AFTER ENTERING EACH AND EVERY LEASE TRANSACTION REGISTER A FORMAL FINANCING STATEMENT ON THE PERSONAL PROPERTIES SECURITIES REGISTER.

If you do this you will have ‘perfected’ your security interest under the Act and accordingly will have taken steps to effectively protect yourself and your ownership interest from the dire consequences the Act could otherwise dish out.

The lessors in the three cases mentioned above failed to register a formal financing statement in accordance with the Act and in each case lost their interest and title to their leased goods. To put the matter another way, because of this failure, the Act stripped them of their ownership of the goods.

The terms of the Act incorporate various bespoke and specific definitions to achieve the Act’s purposes. Two of the more important ones are ‘security interest’ and ‘perfection’. As a lessor, think of your ‘security interest’ in goods which you have leased or hired out as being your ownership claim and your ‘title’ over those goods; think of ‘perfection’ as the regulatory process you have to go through to protect your security interest and to make sure that other parties can’t defeat your title by staking their own claim in the goods ahead of yours.

Put simply, if you are a lessor of goods and the nature of the lease transaction is such that you are deemed to be the holder of a ‘security interest’ under the Act, and you fail to ‘perfect’ that security interest by registration on the Personal Property Securities Register (‘the Register’) you are at risk in at least two scenarios:

  • If the lessee becomes insolvent, your ‘unperfected security interest’ is said to ‘vest’ in the lessee upon the lessee’s insolvency. This means that your interest in the leased goods vests in the lessee and may be used to pay the lessee’s creditors;
  • If the lessee grants to another party a ‘security interest’ over the leased goods (which it may do) and that other party ‘perfects’ its security interest before you perfect yours, that other party has priority (to use a slang terms it has ‘first dibs’) to those leased goods over you in the event that the lessee defaults in the performance of its obligations to that other party which have been secured by their security interest (by for instance failing to repay a loan);

These scenarios can occur DESPITE THE FACT that upon entering the lease transaction and during its term you owned the goods.

Registration and the PPS Register

Registering a formal financing statement on the Register is a straightforward and relatively painless process. Information can be found on how to register a formal financing statement and what to include in one on the Register’s website at www.ppsr.gov.au.

Having said this, it is imperative that the information included in your financing statement is correct, accurate and compliant. It may be prudent and worthwhile to seek specialist legal advice at least with regards to the first few financing statements that you register in order to make sure that you are adequately protected from the dire consequences of the Act alluded to above.

Without going into any detail in relation to what must be included on a financing statement (which the author will deal with in a subsequent article) you should at least know that the particular lease transaction itself with respect to which the financing statement has to be registered must:

  • be a written agreement covering the leased goods;
  • be signed by the lessee;
  • include a description of the leased goods (referred to for the purposes of the Act as ‘collateral’).

There are numerous pitfalls in the registration process awaiting lessors who register an incorrect, inaccurate or otherwise non-compliant financing statement. To take one glaring example from a recent case , if your financing statement references the ABN of the lessee company instead of its ACN, your registration may well be deemed defective and will accordingly be ineffective to protect you.

Take-out for lessors:

  • Register a financing statement immediately;
  • Make sure that it is correct, accurate and compliant;
  • If in any doubt seek legal advice immediately.

If you would like to find out a little more about why and how the Act operates to deprive lessors of their ownership in their leased goods, see Part 2 of this article.

About the Author:  Lachlan holds a First Class Honours degree in Building Construction Management from the University of Technology Sydney

Contact the author directly by email or by telephone

[i] That is property other than land or a fixture to land.
[ii] [2013] NSWSC 852 (30,31 October 2012).
[iii] [2014] WASC 139 (16 April 2014).
[iv] [2016] NSWSC 52 (11 February 2016).

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